Kimberley N Z I Finance Ltd v Eazzy Meal (Int) Pty Ltd and Ors [see also Theissbacher]

[1992] QCA 366

IN THE COURT OF APPEAL

[1992] QCA 366

QUEENSLAND

Appeal No. 95 of 1992

BETWEEN:

KIMBERLEY N.Z.I. FINANCE LTD.

(Plaintiff)

- and -

EAZZY MEALS (INT) PTY. LTD.

(First Defendant)

- and -

HERBERT KOSTKA

(Second Defendant)

- and -

JOSEPH THEISSBACHER and

CHRISTINE THEISSBACHER

(Second Defendants) Appellants

- and -

MACGREGOR GARRICK & CO. (a firm) First

(First Third Party) Respondent

- and -

ROSS DOUGLAS MACGREGOR Second

(Second Third Party) Respondent

JUDGMENT OF FITZGERALD P.

Delivered the twenty-sixth day of October 1992

The circumstances and issues are set out in the reasons for judgment of the other members of the Court and I will not repeat them.

It is not in dispute that, between the date of the sequestration order and the date of the annulment order, a notice complying with sub-s.60(3) of the Bankruptcy Act was served on the appellants' trustee in bankruptcy and that he did not, within the prescribed period, make an election to prosecute or discontinue the action which had earlier been commenced by the appellants against the respondent in the District Court by a third party notice. Other considerations aside, the trustee was, by sub-s.60(3), thereupon "deemed to have abandoned the action". It is unnecessary to consider whether any, and if so what, order by the District Court was appropriate to formalise the position thus arisen. The notion of abandonment of a claim is well recognized (see, for example, Renowden v. McMullin (1970) 123 CLR 584), and it was probably the position that, although the cause of action had not been lost or destroyed, it could no longer be asserted in that action except by an order of the District Court which permitted it to be re- introduced. Whether such an order would properly have been made might have turned upon a variety of considerations, including the possible expiration of any applicable period of limitation.

This being the situation which existed prior to the annulment order, the issue for determination concerns the effect of s.154 of the Bankruptcy Act, including its effect on the act of the appellants' trustee in bankruptcy in abandoning the action which is attributed to him by sub- s.60(3). Significantly, the statutory fiction created by the sub-section is not expressed in passive tense, ie. deeming the action to have been abandoned, but as a deemed act of abandonment of the trustee.

While the general effect of annulment provided for by sub-s.154(1) involves the retrospective annihilation of the sequestration order and its consequences, that is subject to the effect of other sections in the Act which make specific provision to the contrary, including sub-s.154(2). By that sub-section, certain actions and events are expressly excluded from the effect of annulment and deemed validly made or done. The actions protected include "all acts done by the trustee", including, in my opinion, acts which the

Act itself deems him to have done. Such an approach seems to me to provide a more consistent and cohesive relationship between the respective provisions in the Act which are presently material than the opposite view. Further, it removes or at least reduces the uncertainty faced by other litigants in an action apparently abandoned, who may rely upon that circumstance in ordering their affairs. In a suitable case, any inappropriate consequences could be avoided by an additional order at the time when the annulment order was made; for example, an order pursuant to sub-s.33(1)(c) of the Bankruptcy Act extending the time under sub-s.60(3) nunc pro tunc to a date beyond the period when the sequestration order operated. Such a course would allow other litigants who sought to oppose the extension and support the abandonment an opportunity to be heard.

The District Court order appealed from may well have been unnecessary or inappropriate in form but, except in relation to the costs order made, the only basis upon which the appellants sought to have it set aside depended upon the substantive argument which I have rejected.

In my opinion, the appeal should be dismissed with

costs.
IN THE COURT OF APPEAL

QUEENSLAND

Appeal No. 95 of 1992

BETWEEN:

KIMBERLEY N.Z.I. FINANCE LTD.

(Plaintiff)

- and -

EAZZY MEALS (INT) PTY. LTD.

(First Defendant)

- and -

HERBERT KOSTKA

(Second Defendant)

- and -

JOSEPH THEISSBACHER and

CHRISTINE THEISSBACHER

(Second Defendants) Appellants

- and -

MACGREGOR GARRICK & CO. (a firm) First

(First Third Party) Respondent

- and -

ROSS DOUGLAS MACGREGOR Second

(Second Third Party) Respondent

The President
Mr Justice Pincus

Justice White

Judgment of Fitzgerald P. delivered on the twenty-
sixth day of October, 1992

IN THE COURT OF APPEAL

QUEENSLAND

Appeal No. 95 of 1992

Before the Court of Appeal
The President
Mr. Justice Davies
Justice White

BETWEEN:

KIMBERLEY N.Z.I. FINANCE LTD.

(Plaintiff)

- and -

EAZZY MEALS (INT) PTY. LTD.

(First Defendant)

- and -

HERBERT KOSTKA

(Second Defendant)

- and -

JOSEPH THEISSBACHER and

CHRISTINE THEISSBACHER

(Second Defendants) Appellants

- and -

MACGREGOR GARRICK & CO. (a firm) First

(First Third Party) Respondent

- and -

ROSS DOUGLAS MACGREGOR Second

(Second Third Party) Respondent

JUDGMENT OF FITZGERALD P.

Delivered the twenty-sixth day of October 1992

CATCHWORDS:

Counsel:	Mr K.C. Flemming Q.C. with him Mr R. Clutterbuck for the appellants
Mr R. Traves for the first and second respondents

Solicitors: Messrs. Wellner Poole and Gray for the

appellants

Messrs. Feez Ruthning for the first and

second respondents

Hearing date: 13th October, 1992
IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 95 of 1992

BETWEEN:

KIMBERLEY N.Z.I. FINANCE LTD

(Plaintiff)

AND:

EAZZY MEALS (INT) PTY LTD

(First Defendant)

AND:

HERBERT KOSTKA

(Second Defendant)

AND:

JOSEPH THEISSBACHER and

CHRISTINE THEISSBACHER

(Second Defendants) Appellants

AND:

MACGREGOR GARRICK & CO (A firm) First

(First Third Party) Respondent

AND:

ROSS DOUGLAS MACGREGOR Second

(Second Third Party) Respondent

JUDGMENT - PINCUS J.A. AND WHITE J.

Delivered the Twenty-sixth day of October 1992

This is an appeal from an order of the District Court in a case involving the Bankruptcy Act 1966. The dispute which underlies the case had its beginning in the sale of the appellants' interests in a company, Eazzy Meals (Int.) Pty. Ltd. That sale took place in about October 1984, the purchaser being one Kostka. The appellants say that the respondents acted as solicitors in that transaction. In 1989 a creditor of Eazzy Meals (Int.) Pty. Ltd. sued the company, Kostka and the appellants for money due under lease agreements. The plaint alleged that Kostka and the appellants had guaranteed the debt in question. The appellants issued a third party notice to the respondents claiming an indemnity or contribution in respect of a creditor's claim, substantially on the ground that the respondents should have so arranged the sale to Kostka that the appellants would be released from guarantees. That notice was dated 1 November 1990. The creditor obtained judgment in the action against the appellants, but the third party proceedings have not been tried and the question which arises in the case is whether an order made by a District Court judge dismissing the third party notice, with costs, was properly made.

No reasons were given in the District Court, which is unfortunate, but Mr. Fleming Q.C. who led Mr. Clutterbuck for the appellants did not press the submission that on that ground the matter should be sent back to the District Court.

The point raised appears to be one purely of law.

The order made in the District Court mentions that the judge found that "the proceedings were abandoned and cannot be recovered", where "the proceedings" must mean the third party proceedings. The reason for that view was that a sequestration order was made under the Act with respect to the estates of the appellants on 11 September 1991 and on 13 September, the respondents' solicitors gave a notice to the trustee of their estates under s.60(3) of the Act; the trustee did not respond except by a letter asking for more information. It was argued before the District Court as well as before this Court that the trustee was deemed to have abandoned the third party proceedings under s.60(2) and (3) of the Act, which read as follows:

"(2) An action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.

(3) If the trustee does not make such an election within 28 days after notice of the action is served upon him by a defendant or other party to the action, he shall be deemed to have abandoned the action".

This argument apparently succeeded in the District Court, but the appellants said that it should not have done, principally on the ground that the appellants' bankruptcy was annulled under s.154 of the Act by an order of the Federal Court which became effective on 22 February 1992.

Section 154 was repealed and replaced after the events in question occurred, by Act No. 9 of 1992; we shall for convenience refer to the provision in force at the relevant time, in the present tense. The Federal Court's order was made under s.154(1)(b) - that is, on the ground of proof of payment of all the debts. It seems desirable to set out the whole of s.154(1):

"Where the Court is satisfied:

(a)  that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Registrar; or

(b)  that the unsecured debts of the bankrupt, being debts that have been proved in the bankruptcy, have been paid in full or the bankrupt has obtained a legal acquittance of them;

the Court may make an order annulling the
bankruptcy".

It will be noted that an annulment order may be made, not only on the ground that the debts have been paid, but on the ground that "a sequestration order ought not to have been made": see paragraph (1)(a). If a sequestration order is wrongly made, for example because the debtor was not served, then instead of appealing, the bankrupt may apply for an annulment under s.154(1).

The initial question raised by the case is the effect
of an annulment. It was argued that this is comprehensively
defined by s.154(2), but that does not appear to be so.
That provision reads as follows:

"Where a bankruptcy is annulled under this section, all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment shall be deemed to have been validly made or done but, subject to subsection (3), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his estate or interest in it, on such terms and subject to such conditions, if any, as the Court orders".

It is unnecessary to explain the provisions of sub-s.(3) which are referred to in sub-s.(2).

It was contended by Mr. Fleming that the general effect of annulment is that the former bankrupt is treated as if he had never been bankrupt, subject to the provisions of s.154(2).

The first question, as it seems to us, is whether the annulling effect is retrospective; on one view, the annulment might be thought to operate only from the time of the making of the order or, in the present case, from the time the order became effective. If that was so, then of course the annulment could have no effect upon the deemed abandonment brought about by the trustee's not having made an election as contemplated by s.60(3) of the Act. There is a number of reasons for thinking that the annulling effect is indeed retrospective. One is that an annulment may be an appropriate remedy where there was no possible justification for the bankruptcy, for example because the debt on which the bankruptcy petition was based had been paid or had not yet fallen due. It would seem odd if, in those circumstances, consequences attaching to bankruptcy, such as criminal liabilities dependent on bankruptcy, arising before annulment, survived that order. Another reason for concluding that the intention is that the annulment should expunge the sequestration order from the beginning is that in the first part of s.154(2) the legislature has taken the trouble to validate the acts of the trustee before annulment. That could not have been necessary if the effects of the annulment were wholly prospective.

The third and most important reason is that a series of decisions has treated the effect of annulment as retrospective. An early example is Bailey v. Johnson [1872] L.R. 7 Ex. 263. That was decided under a provision in the English Bankruptcy Act 1869, the terms of which appear to me to be in no relevant respect different from those with which the Court is presently concerned. It concerned the effect of an annulment granted on appeal; that aspect of the litigation is reported in [1870] L.R. 5 Ch. 741. It was argued that the fact that the annulment was granted on appeal made a difference, but that was rejected: see L.R. 7 Ex. 263, 264. The effect of the English provision corresponding to s.154, namely s.81 of the Act of 1869, was held to be:

"... subject to any bona fide disposition lawfully made by the trustee prior to the annulling of the bankruptcy, and subject to any condition which the Court annulling the bankruptcy may by its order impose, to remit the party whose bankruptcy is set aside to his original situation ... that effect is to remit the bankrupt, at the moment the decree annulling his bankruptcy is pronounced, to his original powers and rights in respect of his property" - per Cockburn C.J., p.265.

It should be noted that in that case, Blackburn J. expressed some reservation as to how far the principle went (p.265).

In Bailey v. Johnson the plaintiff, the trustee in bankruptcy of a banking firm sued for the balance due by the defendant to the firm. The defendant claimed to set off a sum of money paid into the bank by the trustee in the defendant's own bankruptcy, the money being the proceeds of his estate. The defendant's bankruptcy had been annulled subsequently to the banking firm becoming bankrupt. It was held that the defendant was entitled to set off the amount so paid into the bank by his trustee. Because of the annulment the money paid by the trustee was, so the Court said, to be looked at "as though it were money paid in his name instead of in the name of Bullard [the trustee], having become his by virtue of the annulling of his bankruptcy, it is to be considered as his at the moment when it was paid in ...". To give effect to the theory that the bankrupt is restored to his original situation, the facts were reconstructed.

In Re Taylor; Ex parte Taylor (1898) 8 B.C.(N.S.W.) 50 Manning J. at p.51 stated that if a bankrupt obtains an order annulling the bankruptcy "he goes scot free, and is as though he had never been in the Court at all".

Bailey v. Johnson was cited by Clyne J. as authority for the proposition that the effect of an annulment order is, subject to the conditions set out in s.154(2) and its predecessors, to remit the party whose bankruptcy is set aside to his original situation: Re Lawson (1939) 11 A.B.C. 137, Re Gay (1943) 13 A.B.C. 134, Re Falvey (deceased) (1946) 13 A.B.C. 291. It has also been applied in this State: Lemura v. Coppola [1960] Qd.R. 308 at 329.

Bailey v. Johnson was followed by Latham C.J. in Cameron v. Cole (1944) 68 C.L.R. 571 at 583, where his Honour said "When an order for sequestration is annulled the debtor, in respect of his property, is restored to the status quo ante, subject to any order which the Court may make under that sub-section (See per Cockburn C.J. in Bailey v. Johnson (1872) L.R. 7 Ex., at p.264) - he is remitted to his original situation". The joint judgment of Kitto and Menzies JJ. in Marek v. Tregenza (1963) 109 C.L.R. 1 at pp.4, 5 also supports the view that, so far as that can be done without invalidating acts done by the Court or by bankruptcy officials in the meantime, annulment restores the bankrupt to his former condition.

The effect of annulment has been considered in a number of decisions of the Federal Court. Of these, Re Oates (1987) 88 A.T.C. 4038 at 4040 and Re Fitzgerald (1988) 99 A.L.R. 189 which followed it unequivocally treat annulment as having retroactive effect. In that respect, the two cases are consistent with those just discussed. Director of Public Prosecutions v. Ashley [1955] Crim.L.R. 565, which is authority for the view that bankruptcy offences may be prosecuted after annulment, is hard to reconcile with these authorities and is perhaps erroneous.

The former bankrupt is, at least in general, treated as never having been made bankrupt; that is the effect of annulment. If one applies that principle to the present case, then the appellants, being deemed never to have become bankrupt, are unaffected by s.60(2), which depends upon their having become bankrupt; in consequence s.60(3) does not affect them either.

The question is, however, whether the saving provisions of s.154(2) operate so as to preserve the position as it was immediately before the annulment - namely that the trustee was deemed to have abandoned the action. It was suggested during argument that the trustee's failure to make an election under s.60(3) has an effect continuing after annulment because it gives rise to an act done by the trustee which is deemed to have been validly done under s.154(2).

In our view, the general effect of s.154(2) is to preserve from invalidity acts of the trustee which would otherwise be rendered invalid by the annulment. Here, there is no act one can point to of that sort; the contention was, we think, that there is a deemed act under s.60(3).

Although the argument has substance, in our view it should not succeed. To deem an action to have been abandoned, it is not necessary to treat the trustee as having done anything. The notion of abandonment in this context appears to be introduced to convey the idea that the trustee is not allowed to pursue the action further, but that result can be achieved without assuming the trustee to have done anything at all. Putting the matter more simply, abandonment of a thing may be achieved and commonly is achieved by doing nothing about it.

The conclusion which we favour, that there is nothing
in s.154(2) to save the deemed abandonment from the general
effect of annulment is supported by another consideration.
This is that it would be odd if, a sequestration order
having been wrongly made, after annulment the erstwhile
bankrupt should be adversely affected by complete inactivity
on the part of the trustee and, more particularly, that he
or she should lose a cause of action on that basis. The
principal purpose, at least, of s.154(2) is to preserve the
validity of dealings on the part of the trustee before
annulment; it appears to be straining the language somewhat
if the provision is pressed into service to save a
consequence of complete inactivity on the part of the
trustee.

Lastly, there is room for doubt as to whether the effect of deeming the failure to make an election "to have been validly made" is such as to assist the respondents; the problem is not that the failure to make the election is invalidated by annulment, but rather that after annulment it is not taken to have put an end to the former bankrupt's suit. The question whether the failure is "validly" made or not is inapposite when what has to be decided is whether despite the annulment the trustee's inaction is still deemed to have that destructive effect which it would have had if no annulment order were made.

It follows, in our view, that the annulment retrospectively deprived s.60(3) of the effect it would, apart from the annulment, have had on the action.

That conclusion makes it unnecessary to deal with the other arguments raised, but we propose briefly to state our views about the principal additional point on which Mr. Fleming relied. This was that the deemed abandonment under s.60(3) does not destroy the trustee's right to pursue the action absolutely, but has some lesser effect. Although the point does not seem to have been dealt with in any case to which we were referred or which we have found, we express the view that the argument should not succeed. It seems improbable that the legislature intended so minor a result as that in some unspecified way the trustee's right to pursue the case should be interrupted rather than terminated.

The only other additional point it is necessary to mention is that Mr. Fleming argued that there was no justification for the order made in District Court that the appellants pay the costs of the suit; that may well be correct, but there is no need to deal with it.

In our opinion, the appeal should be allowed, the orders of the District Court set aside and in their stead, it should be ordered that the respondents' application to the District Court for dismissal of the third party proceedings and other relief be dismissed, with costs. We would further order that the respondents pay the appellants' costs of the appeal.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 95 of 1992

BETWEEN:

KIMBERLEY N.Z.I. FINANCE LTD

(Plaintiff)

AND:

EAZZY MEALS (INT) PTY LTD

(First Defendant)

AND:

HERBERT KOSTKA

(Second Defendant)

AND:

JOSEPH THEISSBACHER and

CHRISTINE THEISSBACHER

(Second Defendants) Appellants

AND:

MACGREGOR GARRICK & CO (A firm) First

(First Third Party) Respondent

AND:

ROSS DOUGLAS MACGREGOR Second

(Second Third Party) Respondent

_______________________________________________

The President
Mr. Justice Pincus

Justice White

_______________________________________________

Judgment delivered on 26th October, 1992.
Reasons for judgment of Pincus J.A. and White

J. jointly. Fitzgerald P. dissenting.

_______________________________________________

APPEAL ALLOWED.
ORDERS OF THE DISTRICT COURT SET ASIDE AND IN
THEIR STEAD IT IS ORDERED THAT THE
RESPONDENTS' APPLICATION TO THE DISTRICT
COURT FOR DISMISSAL OF THE THIRD PARTY
PROCEEDINGS AND OTHER RELIEF BE DISMISSED,
WITH COSTS.
FURTHER ORDER THAT THE RESPONDENTS PAY THE
APPELLANTS' COSTS OF THE APPEAL.

_______________________________________________

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 95 of 1992

Before the Court of Appeal
The President
Mr. Justice Pincus

Justice White

BETWEEN:

KIMBERLEY N.Z.I. FINANCE LTD

(Plaintiff)

AND:

EAZZY MEALS (INT) PTY LTD

(First Defendant)

AND:

HERBERT KOSTKA

(Second Defendant)

AND:

JOSEPH THEISSBACHER and

CHRISTINE THEISSBACHER

(Second Defendants) Appellants

AND:

MACGREGOR GARRICK & CO (A firm) First

(First Third Party) Respondent

AND:

ROSS DOUGLAS MACGREGOR Second

(Second Third Party) Respondent

JUDGMENT - PINCUS J.A. AND WHITE J.

Delivered the Twenty-sixth day of October 1992

CATCHWORDS:	BANKRUPTCY - DISCHARGE AND ANNULMENT - Appellant claimed that action deemed to have been discontinued under Bankruptcy Act was revised on annulment of bankruptcy - whether annulling effect retrospective - whether annulment preserves position as before bankruptcy - whether action not totally abandoned.
Counsel:	K.C. Fleming Q.C., with him, R.J. Clutterbuck for the Appellants R.N. Traves for the Respondents
Solicitors:	Wellner Poole & Gray for the Appellants Feez Ruthning for the Respondents
Hearing Date(s):	13 October 1992