Morris Finance Ltd v Hodges
[2018] FCCA 3235
•9 November 2018
FEDERAL CIRCUIT COURT OF AUSTRALIA
| MORRIS FINANCE LTD v HODGES & ANOR | [2018] FCCA 3235 |
| Catchwords: BANKRUPTCY – Administration of property – Property available for payment of debts – Property not divisible amongst creditors – Trade or professional equipment or property used in earning income by personal exertion WORDS AND PHRASES – Void – Voidable |
| Legislation: Bankruptcy Act 1924-1950, s.94 Bankruptcy Legislation Amendment Bill 1996 (Cth) |
| Alati v Kruger (1955) 94 CLR 216 Balog v Independent Commission Against Corruption (1990) 169 CLR 625 Brady v Stapleton (1952) 88 CLR 322 Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234 Dennehy v Reasonable Endeavours Pty Ltd (2003) 130 FCR 494 Faulkner v Bluett (1980) 52 FLR 115 Florance v Andrew (1985) 58 ALR 377 Griffiths v Civil Aviation Authority (1996) 67 FCR 301 Official Trustee in Bankruptcy v Alvaro (1996) 66 FCR 372 Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355 Ruaro v Ferrari [2007] FCA 2022 Victoria v Sutton (1998) 195 CLR 291 Williams v The Official Assignee of the Estate of William Dunn (1908) 6 CLR 425 Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd (2009) 240 CLR 391 |
| Applicant: | MORRIS FINANCE LTD |
| First Respondent: | DARRELL RAYMOND HODGES |
| Second Respondent: | NICK JIM COMBIS AS TRUSTEE OF THE BANKRUPT ESTATE OF DARRELL RAYMOND HODGES |
| File Number: | MLG 225 of 2016 |
| Judgment of: | Judge Jarrett |
| Hearing date: | 26 August 2016 |
| Date of Last Submission: | 26 August 2016 |
| Delivered at: | Brisbane |
| Delivered on: | 9 November 2018 |
REPRESENTATION
| Counsel for the Applicant: | Mr Webster |
| Solicitors for the Applicant: | Smith Leonard Fahey Lawyers |
| Counsel for the Respondent: | Mr West |
| Solicitors for the Respondent: | Fallu McMillian Lawyers |
ORDERS
The parties bring in short minutes of orders to give effect to these reasons within 21 days of the date of these order.
Any applicant for an order for costs shall file and serve written submissions in support of any such application within 21 days of the date of these orders;
Any respondent to an application for costs shall file and serve any written submissions in response to any such application within 14 days after receipt of any written submissions from the costs applicant.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
MLG 225 of 2016
| MORRIS FINANCE LTD |
Applicant
And
| DARRELL RAYMOND HODGES |
First Respondent
| NICK JIM COMBIS AS TRUSTEE OF THE BANKRUPT ESTATE OF DARRELL RAYMOND HODGES |
Second Respondent
REASONS FOR JUDGMENT
The word “void” is inherently ambiguous. It sometimes means that the act in question has not, and never has had, any legal effect (void ab initio). But sometimes it means that the act becomes void as against the world or against those who cannot enforce or take advantage of it subsequently (void ex post facto). “Void” is in some contexts treated as synonymous with “voidable” or voidable at the election of the party for whose benefit a legal rule makes the transaction void.
per Kirby J in Victoria v Sutton (1998) 195 CLR 291 at 605.
The issue in this case is whether s.301 of the Bankruptcy Act 1966 (Cth) should be interpreted according to the text of that section – that is to say whether it should be given a literal interpretation – or whether it should be interpreted “according to the common law of bankruptcy”. Morris Finance contends for the latter construction, Mr Hodges for the former. If the latter construction is adopted, Morris Finance contends that the literal interpretation of s.301 must give way to a more limited interpretation than might otherwise be expected given the broad text of the section.
The facts
Mr Hodges entered into a written commercial lease agreement with Morris Finance on 24 September, 2015 for the lease of a used 2010 Kenworth T908 6x4 prime mover.
Mr Morris became bankrupt on 9 October, 2015 on his own petition.
On 15 October, 2015 Morris Finance caused the prime mover to be repossessed. Between 9 October and 15 October, 2015 Mr Hodges says that he continued to make payments pursuant to the lease agreement.
On about 28 October, 2015 Mr Hodges lodged a dispute against Morris Finance with Financial Ombudsman Service Limited. On 20 January, 2016 Morris Finance gave written notice to Financial Ombudsman Service Limited that it would like the dispute to be treated as a test case and an undertaking that it would institute proceedings within six months, seek to prosecute the test case proceedings expeditiously and would pay Mr Hodges’ costs of any proceeding.
Despite Morris Finance giving that undertaking, when these proceedings were commenced, it opposed Mr Hodges being heard in them. I determined that issue against Morris Finance on the basis that Mr Hodges had a right to be heard on the application because under the lease agreement he had a right to possess the prime mover which “did not vest in [his] trustee in bankruptcy”: Morris Finance Ltd v Hodges [2016] FCCA 1402.
The lease agreement between the parties does not contain a single clause which has both the event of default and the consequences of default within it. Rather, Morris Finance’s right to terminate and repossess goods consequent on an act of bankruptcy arises from the combined operation of clauses 8.6 and 9 of the lease. Clause 9 conveys the general right to terminate and repossess. The clauses are in the following terms.
Clause 8 of the lease provides:
8. Events of default
If, at any time any of the following occur there will be an event of default under the agreement:
…
8.6 the lessee being a natural person shall commit an act of bankruptcy within the meaning of the Bankruptcy Act 1966;
Clause 9 of the lease agreement provides:
9. Lessors rights upon termination.
If during the continuance of this lease there is an event of default, the lessor may forfeit and become entitled without notice to the lessee to terminate this lease and, at the lessor’s option, to retake possession of the goods ....
Acts of bankruptcy are defined in s.40 Bankruptcy Act 1966. The presentation of a debtor’s petition is an act of bankruptcy. Mr Hodges committed an act of bankruptcy when he presented his debtor’s petition. Accordingly, on its face an act of default occurred at that time and clause 8 of the agreement was engaged. Arguably, that triggered Morris Finance’s rights under clause 9 of the agreement.
Section 301 of the Bankruptcy Act provides:
301 Certain provisions in contracts etc. to be void
(1) A provision in a contract or agreement for the sale of property, in a lease of property, in a hire-purchase agreement, in a licence or in a PPSA security agreement to the effect that:
(a) the contract, agreement, lease, hire-purchase agreement, licence or PPSA security agreement is to terminate, or may be terminated by the vendor, lessor, owner, licensor or PPSA secured party; or
(b) the operation of the contract, agreement, lease, hire-purchase agreement, licence or PPSA security agreement is to be modified; or
(c) property to which the contract, agreement, lease, hire-purchase agreement, licence or PPSA security agreement relates may be repossessed by or on behalf of the vendor, lessor, owner, licensor or PPSA secured party;
if the purchaser, lessee, hirer, licensee or PPSA grantor or debtor becomes a bankrupt or commits an act of bankruptcy or executes a personal insolvency agreement under this Act is void.
(2) This section extends to contracts, agreements, leases, hire-purchase agreements and licences entered into or granted before the commencement of this Act.
(2A) This section extends to a PPSA security agreement entered into at or after the time this subsection commences.
Note: This subsection commenced at the registration commencement time within the meaning of section 306 of the Personal Property Securities Act 2009.
(3) In this section:
lease includes an agreement for a lease.
lessee includes a person who has agreed to take a lease.
lessor includes a person who has agreed to grant a lease.
Prima facie, the terms of s.301(1) are engaged in this case. There is a lease of property that contains a provision (clause 9 when read with the definitions in clause 8) to the effect that:
a)the lease may be terminated by the owner; and
b)the property to which the lease relates may be repossessed by the owner
if the lessee becomes a bankrupt or commits an act of bankruptcy.
Morris Finance seeks to avoid this conclusion by arguing that the word “void” in the section should be given a narrow construction so that it means “void as against a trustee in bankruptcy.” It argues that if that construction is accepted then, as between the parties to the agreement, clause 8 or clause 9 is not void by reason of s.301 and continues to operate so as to entitle Morris Finance to take the action that it did.
Morris Finance points out that where there are two alternative constructions of a statute open, the one which is consonant with the common law is to be preferred: Balog v Independent Commission Against Corruption (1990) 169 CLR 625 at 635-6. I accept that proposition. In addition, it is always necessary to bear in mind the words of Brennan CJ in Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355 (citations omitted) at 381:
The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined “by reference to the language of the instrument viewed as a whole”. In Commissioner for Railways (NSW) v Agalianos, Dixon CJ pointed out that “the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed”. Thus, the process of construction must always begin by examining the context of the provision that is being construed.
In the context of the Bankruptcy Act, divining the intention, general purpose and policy of a provision and the purpose of the Act as a whole has long been accepted as permitting, and indeed on some occasions, necessitating, an analysis or appreciation of the legislative history of the provision beyond that of the Act or its predecessors: Robert Reid Pty Ltd v Cassidy (1966) 114 CLR 558 at 575-577; Pyramid Building Society (in liquidation) v Terry (1997) 189 CLR 176 at 211; Coventry v Charter Pacific Corporation Ltd (2005) 227 CLR 234. In that respect, Morris Finance argues that the Bankruptcy Act generally is to be “interpreted against the background of what has been described as the “common law of bankruptcy””. There is little doubt about that proposition. In Faulkner v Bluett (1980) 52 FLR 115, Lockhart J said at 118 – 121:
Although bankruptcy is the creature of statute law, certain rules have been formulated from time to time by the English courts exercising bankruptcy jurisdiction which limit the literal interpretation of vesting sections in bankruptcy legislation and which have been called “the common law of bankruptcy”: Williams on Bankruptcy (18th ed), p 318.
Notwithstanding the language of s 38 of the Bankruptcy Act 1914 … which provides that the property of the bankrupt divisible among his creditors shall comprise all such property as may be acquired by or devolve on him before his discharge, it has been established by decisions of the English courts that the personal earnings of a bankrupt pass to his trustee except such part of them as is necessary for the maintenance of the bankrupt …
…
In Australia some of the ‘common law of bankruptcy’ has been embodied in bankruptcy legislation. An example is s 60(4) of the Act ... Another example is s 116(2)(g) which gives statutory recognition to the principle evolved by the ‘common law of bankruptcy’ that rights of action in respect of the person or feelings of a bankrupt do not vest in the trustee…
Those passages (amongst others) were applied by the Full Federal Court in Griffiths v Civil Aviation Authority (1996) 67 FCR 301 at 315, 323.
Although there are other purposes, one of the main purposes of bankruptcy is to ensure that a debtor’s property is made available through a trustee for distribution amongst the debtor’s creditors according to the Bankruptcy Act: Report of the Committee Appointed by the Attorney-General of the Commonwealth to Review, the Bankruptcy Law of the Commonwealth, 1962. Morris Finance argues that s.301 reflects a common law principle which serves that purpose and operates to protect the general body of a bankrupt’s creditors from disadvantage arising from contractual stipulations triggered on bankruptcy – a principle said to be part of the “common law of bankruptcy”.
Again, there is no doubt about the principle contended for by the bankrupt. In Re Jeavons; Ex parte Mackay and Brown (1873) LR 8 Ch App 643 Jeavons had been granted certain patent rights. He assigned the right to exploit the patent to two companies in return for royalties. At the same time he also borrowed money from the two companies. He granted a mortgage to the companies over certain leasehold property held by him to secure the advance. By a separate agreement, Jeavons and the companies agreed that the companies were to retain one half of the royalties otherwise due to Jeavons as repayments towards his loan from those companies. The other half of the royalties were to be paid to Jeavons. However, they agreed, amongst other matters, that in the event of Jeavons’ bankruptcy the balance of the amount loaned then outstanding should become immediately due and payable and the companies might retain the whole of the royalties until the debt to them had been discharged.
Jeavons became bankrupt. The companies, amongst other claims, asserted a lien against Jeavons’ trustee over all of the royalties due from them. They applied for and secured an order declaring that they were entitled to a charge on the royalties’ payable by the companies to Jeavons. Jeavons’ trustee appealed that declaration.
In allowing the appeal, James LJ said at 647:
It appears to me that this case is reasonably clear upon both points. I entertain no doubt that there is a good charge upon one moiety of the royalties, because they are part of the property and effects of the bankrupt. But, on the other band, it is equally clear to me that the charge cannot extend to the other moiety. If it were to be permitted that one creditor should obtain a preference in this way by some particular security, I confess I do not see why it might not be done in every case-why, in fact, every article sold to a bankrupt shou1d not be sold under the stipulation that the price should be doubled in the event of his becoming bankrupt.
It is contended that a creditor has a right to sell on these terms; but in my opinion a man is not allowed, by stipulation with a creditor, to provide for a different distribution of his effects in the event of bankruptcy from that which the law provides. It appears to me that this is a clear attempt to evade the operation of the bankruptcy laws. The result is that the order will be varied so as to declare that there is a security on one moiety only.
Mellish LJ expressed the positon in these terms, at 648:
That is to say, as I understand it, a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws.
Thus, the relevant agreement was void as against the trustee in bankruptcy and the one half of the royalties that was to go to the companies upon Jeavons’ bankruptcy vested in his trustee.
To similar effect is Re Harrison; Ex parte Jay (1880) 14 Ch D 19. In that case the owner of certain land and a builder entered into a lease of the land and building contract for the construction of 40 houses. Upon the completion of the houses they were to be leased to third parties. Until the leases were granted the builder was to hold the premises subject to the power of distress and entry in default of the agreement, or on his becoming bankrupt or insolvent. In that event, all improvements, materials and effects on the land, or adjacent thereto, would become absolutely forfeited to the owner and the owner was to be at liberty to re-enter and take possession of the property to use and enjoy it as fully as if the agreement had never been made.
James LJ said:
The case has been very well argued. But it appears to me that it is governed by the decisions of this Court in Ex parte Mackay (1) and Ex parte Williams (2), which only followed much older decisions. The principle of those decisions is this, that a simple stipulation that, upon a man’s becoming bankrupt, that which was his property up to the date of the bankruptcy should go over to some one else and be taken away from his creditors, is void as being a violation of the policy of the bankrupt law. Now that we have all the facts before us, I think we cannot escape from applying that principle to the present case. According to the debtor’s own evidence everything that he was bound to do under the agreement had been performed by him up to the date of the bankruptcy, and therefore no right was vested in the lessor except by virtue of the bankruptcy. Her title is founded only on the stipulation that in the event of the builder’s bankruptcy the materials which had been placed on the land should become her property. It seems to me impossible to distinguish the case from those authorities to which I have referred.
Cotton LJ said:
I am of the same opinion. This case is governed by the decision of Lord Eldon in Higinbotham v. Holme (1), that there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that event shall go over to some one else and be taken away from his creditors. Here the forfeiture is to take place on the happening of either of two events. There is no stipulation as to the mode in which the lessor shall use the materials when they become forfeited to her. One of the two events is not hit by the decided cases. But, as to the other, though the contract is good as between the parties to it, it is on principle void in the event of the builder’s bankruptcy.
In Re Johnson Johnson; Ex parte Matthews [1904] 1 KB 134 a settlor assigned property to trustees on trust to pay to him the annual income until he was declared bankrupt. Thereafter his rights were to cease and the trustees were to have power to apply at their discretion the income or any part thereof for his personal maintenance and support and were to apply the residue for the benefit of his children, if any, or to accumulate it and add it to the corpus, which was ultimately to go to his relatives. In 1900 the settlor was adjudicated bankrupt and the trustee in bankruptcy applied to set aside the settlement. It was set aside so far as was necessary to pay the bankrupt’s debts provable in the bankruptcy. The trustees of the settlement by consent raised a sufficient sum to pay the bankrupt’s debts in full and the costs, but the bankruptcy was not annulled. In 1902 the settlor was adjudicated bankrupt for a second time, and the trustee in that bankruptcy applied again to set aside the settlement, but was refused on the ground that at the time of making the settlement the bankrupt was in a position to pay his debts without the aid of the settled property. The trustee in bankruptcy then applied for a declaration that the bankrupt’s life estate under the settlement had vested in the trustee in bankruptcy.
Phillimore J said, at 136-7:
An owner of property cannot by way of settlement or contract qualify his own interest in property by a condition determining or controlling it, in the event of his own bankruptcy, to the disappointment or delay of his creditors. This was decided in Wilson v. Greenwood, and the decision has been followed in a number of cases, many of which will be found enumerated in Mackintosh v. Pogose. But this rule applies only to a limitation upon bankruptcy, and to cases where but for this limitation the property or income would have come to the assignee or trustee in bankruptcy, and then only so far as it would have thus come.
Morris Finance places particular stress upon the emphasised portion of Phillimore J’s reasons and argues that the effect of Re Johnson Johnson is that whilst the forfeiture clause was ineffective against the settlor’s trustee in bankruptcy, it was nonetheless otherwise effective according to the terms of the trust.
The effect of Re Johnson Johnson was confirmed in Re Burrows-Fowler [1916] 2 Ch 251. That was a case where the property of a husband was, by an antenuptial settlement, settled upon trust to pay the income thereof to him during his life. Upon the happening of one of a number of specified matters occurring, including that the husband should he be declared bankrupt, his interest would pass to his wife for life. The husband was adjudicated bankrupt in his wife’s lifetime. The husband’s trustee in bankruptcy offered for sale the husband’s life interest under the settlement, but the intending purchaser objected that the husband’s life interest remained defeasible if the husband should do or suffer any of the other specified acts of forfeiture. The trustee applied for the determination of the question as to what estate, right, or interest in the income and capital of the trust funds and property he could make a good title in favour of a purchaser.
Peterson J held, at 254, as follows:
Now the limitation until the settlor is declared bankrupt is void as against the trustee in bankruptcy, and therefore, so far as the trustee in bankruptcy is concerned, the words relating to the bankruptcy and insolvency of the settlor must be treated as if they were omitted altogether from the clause. But on the other hand the provision as to bankruptcy and insolvency is not void as between the husband and the wife; for it was decided in In re Johnson that, while the provision for the cessation of the life interest on bankruptcy was void as against the trustee in bankruptcy, it was effective for the purpose of producing a forfeiture as between the person who had the protected life interest and the persons interested in remainder.
I accept the applicant’s argument that there is no doubt that the principle for which it contends is part of the common law of bankruptcy. So much is confirmed by the above cases.
The question then is, should s.301 of the Act be construed consistently with that principle?
If the provision was intended to mirror the common law, then it is curious that the text of the section does not do so by including the words “as against the trustee” after the word “void”. The phrases “void against the trustee” or “void as against the trustee” appear in other provisions of the Act: see for example, ss.40(1)(b), 59(1)(d), 61(5), 118(9), 250(1)(d). Perhaps the most familiar references appear in ss.120 – 122 of the Act which deal with transactions which, if specified conditions are met, are “void against the trustee”. In such cases, it is axiomatic that if the facts of a given transaction do not engage one of those sections then the transaction is good, not only as against the bankrupt’s trustee, but also the bankrupt.
Parliament is presumed to have a mastery of both the common law and the statute law. It is also presumed to know the cases which interpret statutes: Williams v The Official Assignee of the Estate of William Dunn (1908) 6 CLR 425 at 441; Dennehy v Reasonable Endeavours Pty Ltd (2003) 130 FCR 494.
Thus, in circumstances where the Act uses the phrase “void against the trustee” in other provisions of the Act and the common law principle set out in Re Johnson Johnson (above) and Re Burrows-Fowler (above) is to the effect that an offending stipulation is void as against a trustee in bankruptcy, but otherwise valid, it is curious that parliament would choose to use only the word “void” in s.301, rather than the phrase “void against the trustee” if it intended the latter rather than the former. That circumstance tends to suggest that the construction for which Morris Finance contends ought to be rejected.
However, Morris Finance argues that support for its proposition is to be found in the explanatory memorandum to the Bankruptcy Legislation Amendment Bill 1996 (Cth), which inserted s.302B into the Act.
The applicant draws to my attention paragraphs 19.1 and 23 of the Explanatory Memorandum, which provides:
19.1 Item 434 [relating to s 302B] proposes the insertion of a new section 302B to make certain items in a trust deed void against the trustee in bankruptcy…. The Superannuation Industry (Supervision) Consequential Amendments Act 1993 made provisions in the governing rules of superannuation and approved deposit fund trust deeds void against bankruptcy trustees [by s 302A], and it is considered appropriate that this rule should apply to all types of trust, so creditors are not denied possible access to funds that may be held in a trust for a person who becomes bankrupt…
...
23. The Bill also proposes the insertion of a new section under which the provisions of trust deeds which provide for some forfeiture or qualification of the interest of a beneficiary in a trust fund in the event that the beneficiary becomes bankrupt or insolvent will be void against the trustee of the beneficiary’s bankrupt or insolvent estate…
Sections 302A and 302B of the Act (referred to in the Explanatory Memorandum extract above) do not use the phrase “void as against the trustee”, but rather simply describe the offending provisions as “void”. Morris Finance argues that the Explanatory Memorandum discloses an intention that the sections be construed consistently with the common law principles set out above. It argues that there is no good reason to read the word “void” in s.302B any differently to the same word in ss.301, 302A or 302AB, which are evidently all part of the same statutory scheme. Thus, if “void” as used in s.302B is to be construed in a particular way as evidenced by the Explanatory Memorandum, it should be similarly construed in ss.301, 302A and 302AB.
One difficulty with that argument, however, is that the explanatory memoranda relevant to each of the Bills that introduced ss.302A and 302AB are not consistent with the Explanatory Memorandum extracted above. Section 302A was inserted into the Act by the Superannuation Industry (Supervision) Consequential Amendments Act 1993. The relevant part of the accompanying EM provides:
CLAUSE 4F INSERTION OF NEW SECTION
10. The insertion of the section [s.302A] will act to void any provision in the governing rules of a superannuation fund or approved deposit fund where the effect of the rules is to cancel, forfeit, reduce or qualify the interest of a person in such a fund or to allow another person to exercise a discretion relating to the member’s interest, if the member has become bankrupt, commits an act of bankruptcy or executes a deed of assignment or arrangement under this Act. This provision applies to all governing rules, irrespective of whether they were made before the commencement of this provision.
Similarly, s.302AB was inserted into the Act by the Retirement Savings Accounts (Consequential Amendments) Act 1997 and the accompanying EM provides:
Item 10 - After section 302A
138. This item inserts section 302AB into the Bankruptcy Act. This section acts to void any provision in the terms and conditions of an RSA where the effect of the term or condition is to cancel, forfeit, reduce or qualify the amount a person has in an RSA or to allow another person to exercise a discretion relating to the amount, if the RSA holder has become bankrupt, commits an act of bankruptcy or executes a deed of assignment or arrangement under the Bankruptcy Act.
There is no reference in those memoranda to the sections only operating to make offending provisions “void against the trustee”.
Given the parliament’s assumed familiarity with the common law and given the use of the phrases “void against the trustee” and “void as against the trustee” in other parts of the Bankruptcy Act, it is difficult to accept that by the use of the word “void” alone, the parliament in fact intended s.301(1) to be construed in the way contended for by Morris Finance.
Morris Finance also argues that the term “void” where it is used throughout the Bankruptcy Act is generally construed to mean “voidable”. Such a construction, it is said, is consistent with s.301 being read in the way contended.
In Brady v Stapleton (1952) 88 CLR 322 at 333, Dixon CJ and Fullagar J observed in relation to the term “void” as it was then used in s.94 of the Bankruptcy Act 1924-1950 that (citations omitted):
The truth seems to be that, although the statute uses, and most emphatically uses, the word “void”, the courts have always treated a fraudulent assignment as effective unless and until a creditor or creditors intervene by levying execution or taking legal proceedings… In Morewood v South Yorkshire Railway & River Dun Co. Pollock CB, in the course of argument, said: “‘Void’ does not mean utterly and absolutely void, but void sub modo. Here, before the question of the validity of the bill of sale arose, the property was divested out of the first assignee”. In the same case Watson B. said: “In the case of a deed void as against creditors, there must be an election to avoid the deed, but before any election the property was gone out of Morewood”. (Morewood was the immediate assignee of the debtor). And Bramwell B. said: “The title of the mala fide purchaser was defeasible; but before any step was taken to defeat such title the property passed”. Again, in Harrods Ltd. v. Stanton Bailhache J. said: “But in my opinion until a deed of gift is set aside the donee under the deed of gift is the true owner of the goods comprised therein. It is true that the donee has a defeasible title, but unless and until the deed of gift is set aside the title is a good title”. In the same case McCardie J. said: “It was an actual gift from himself to his wife, and she therefore became the owner of the goods, though it is clear that her title was subject to defeasance upon an application by the creditors of her husband under 15 Eliz. 1 c. 5 as being in fraud of creditors”. The use of the word “voidable” in the judgment of Lowe J. in Thomson v. Nicholson illustrates the substance of the position. Cf. also In re Carter d; Kenderdine’s Contract a case under another statute.
Australian authority has consistently followed Bradley v Stapelton: e.g., Official Trustee in Bankruptcy v Alvaro (1996) 66 FCR 372; Anscor Pty Ltd v Clout (Trustee) (2004) 135 FCR 469; Trustee of the Property of O’Halloran, in the matter of O’Halloran v O’Halloran [2002] FCA 1305. However, all of the authorities have considered the word “void” in the context of ss.120 and 121 of the Act and in those sections it appears in the context of the phrase “void as against the trustee”. However, I do not think that Bradley v Stapelton and the cases that follow it are authority for the proposition that wherever the word “void” appears in the Bankruptcy Act it ought to be construed as “void as against the trustee”.
A term which appears in different parts of the Bankruptcy Act may not necessarily have the same meaning each time it is used. “Creditor” is an example. In Pyramid Building Society (in liquidation) v Terry (above) Gummow and Gaudron JJ said at 192-3 (citations omitted):
The term “creditor” is used in various senses throughout the Act. It takes its colour from the particular context. An example is s 41(2). This deals with bankruptcy notices and is contained in Div 1 (ss 40-42) of Pt IV. Division 1 is headed “Acts of Bankruptcy”. At the relevant time, s 41(2) provided for the prescribed form of bankruptcy notice, amongst other things, to require the debtor to secure the payment of a judgment debt or sum “to the satisfaction of the Court or the creditor or his agent” (emphasis added). The creditor there referred to is not merely a judgment creditor but the particular species of judgment creditor identified in par (g) of s 40(1). This is a judgment creditor entitled directly to the benefits or fruits of the judgment or order made against the debtor and does not extend to a judgment creditor who is not able to issue execution.
Division 6 (ss 238-243A) of Pt X contains special provisions applicable to compositions. Section 238 takes as the starting point a composition which has been accepted by special resolution at a meeting at which, subject to further provisions of s 198, that section had treated “every creditor” as entitled to vote. No creditor was entitled to vote, otherwise than in respect of the election of chairman, unless particulars of the debt had been made known to the chairman (s 198(4)). A secured creditor might vote in respect of the balance of the secured debt above the estimated value of the security (s 198(6)) or upon surrendering the security (s 198(5)). Creditors who satisfied these requirements no doubt would be creditors entitled to move under s 239 to satisfy the composition. But what of a creditor disentitled under s 198(4) only by reason of accidental and non-culpable failure to have made known to the chairman particulars of the debt? It would be an odd construction of s 239 which foreclosed this remedy to such a party. This suggests that the class of creditors referred to in s 239 is not necessarily co-extensive with those who were entitled to vote at the meeting which passed the special resolution accepting the composition. It is unnecessary to determine these questions.
Thus, whilst Bradley v Stapelton (above) and the cases that follow it make clear the meaning of the word “void” for the purposes of ss.120 and 121 of the Act, their utility for present purposes is limited.
On Mr Hodges’ proposed construction, the word “void” in s.301(1) would mean void ab initio or perhaps voidable at his or the trustees election. However, I am not persuaded that it should mean void ab initio. Even cases where a transaction is found to be void ab initio depend upon one of the parties taking steps to avoid the relevant transaction, e.g., via a rescission: Alati v Kruger (1955) 94 CLR 216; Cockburn & Ors v GIO Finance Ltd (No 2) (2001) 51 NSWLR 624.
To construe s.301(1) of the Act consistently with the principles set out above and the general purpose of the Bankruptcy Act would suggest that s.301(1) ought to be construed such that the word “void” is read to mean “void against the trustee”. If it were so construed then there would be no prospect of the subsection being engaged in this case. For the reasons I gave in Morris Finance Ltd v Hodges [2016] (at [20] – [27]) Mr Hodges had, and has, no proprietary interest in the prime mover. Because he has no proprietary right in the prime mover, there is no property to vest in his trustee in bankruptcy upon him becoming bankrupt. There is nothing for the trustee to protect by avoiding the lease.
But, as the High Court has said on many occasions now, the construction of a statutory provision begins and ends with its text, read always in context. The text of s.301(1) makes it clear, in my view, that a provision in a lease such as the present is caught by its terms:
…if the purchaser, lessee, hirer, licensee or PPSA grantor or debtor becomes a bankrupt or commits an act of bankruptcy or executes a personal insolvency agreement under this Act…
(my emphasis)
Irrespective of the construction of the word “void”, s.301(1) identifies that the subsection will be engaged in three alternative circumstances, namely:
a)the debtor becomes a bankrupt; or
b)the debtor commits an act of bankruptcy; or
c)the debtor executes a personal insolvency agreement under the Act.
It is only the first and third of those events that will lead to the appointment of a trustee of the debtor’s estate for the purposes of the Act. The second will not unless the debtor subsequently becomes bankrupt. That may never happen because not all debtors who commit an act of bankruptcy go on to become bankrupt. Even if they do, that might happen well after the commission of the act of bankruptcy. A debtor might become bankrupt independently of the particular act of bankruptcy concerned.
That the commission of an act of bankruptcy alone will be sufficient to engage s.301(1) is strong evidence that parliament intended for “void” to mean void in the sense that the provision was never effective. To construe “void” in the way in which Morris Finance contends means that the phrase “or commits an act of bankruptcy” in s.301(1) has no work to do at all. If it is to be construed as “voidable” some person must elect to treat the offending provision as void and in the absence of a trustee (or controlling trustee under Part X of the Act) the only other candidate is the debtor.
The authorities demonstrate that there is a significant difference between the phrases becomes a bankrupt and commits an act of bankruptcy. A debtor does not become a bankrupt simply upon committing an act of bankruptcy: Florance v Andrew (1985) 58 ALR 377 at p.383–384; Corke v Corke (1994) 48 FCR 359.
As Mr Hodges points out, there is often a period of time between an act of bankruptcy and a person becoming a bankrupt when there will be no trustee, yet the legislation still makes the relevant contractual provision void. During that period s.301(1) must operate for the benefit of the debtor. There is no other person for whose benefit it could operate.
I accept Mr Hodges’ submission that the true effect of s.301(1) is that it prevents lessors from depriving a debtor of property which would be necessary or useful to the debtor to continue to carry on his or her livelihood, something of benefit to the debtor’s trustee. A debtor’s ability to earn an income is capable of being of assistance to his trustee in satisfying his creditors.
Conclusion – s.301(1)
Subsection 301(1) of the Bankruptcy Act renders void any provision in a contract or agreement for the sale of property, in a lease of property, in a hire‑purchase agreement, in a licence or in a PPSA security agreement. The provision so caught is not merely voidable against the trustee in bankruptcy of the debtor. It is void in the sense that it is of no effect against the debtor or the relevant trustee in bankruptcy.
Here, the offending provision is clause 8.6 of the parties’ contract. Mr Hodges argues that the provision which is struck down by s.301(1) is clause 9 of the lease, but I do not accept that submission.
Clause 9 is only caught by s.301(1) insofar as the words “event of default” are read with the reference to an “act of bankruptcy” in clause 8.6 of the lease. The provision which is void is the provision which arises by reading clause 8.6 into the words “event of default” in clause 9 of the lease. It is the provision resulting from the combination of both clauses, read together, which is void.
The approach revealed in the authorities is that where legislation makes a contractual provision or term void, the provision should be read down only to the extent necessary to avoid the forbidden result: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd (2009) 240 CLR 391 at 405-6; Ruaro v Ferrari [2007] FCA 2022.
I accept Morris Finance’s submissions that s.301 of the Act should not be construed as intended to make provisions of contracts void save insofar as they convey a right to terminate or repossess on the occurrence of the matters prescribed by that section. I accept the submission that the fact that the general terms of clause 9, when read with the specific terms of clause 8.6, contravene s.301 of the Act does not make clause 9 void in its entirety as Mr Hodges contends. It is void only to the extent it contravenes s.301.
In my view, clause 8.6 of the lease agreement is void, but the balance of the lease remains efficacious.
Other matters
Morris Finance argues that alternatively, it was entitled to determine the lease and repossess the prime mover because Mr Hodges made a materially false statement during the course of the negotiations prior to the execution of the lease. It argues that it has an alternative basis on which it is entitled to exercise its rights under clause 9 of the lease. It argues that clause 8.1 offers a different trigger in that it provides that it is an event of default if:
... the lessor discovers that the lessee has made a materially false statement during the course of the negotiations prior to the execution of [the lease] which resulted in the execution of [the lease by the applicant].
As Mr Hodges’ submissions point out, this is an issue which was first raised in the affidavit of Mr Glynn Sadler filed on 1 July, 2016.
I accept that these matters are not part of the “test case” which is set out in Annexure G to Mr Sadler’s affidavit filed on 5 February, 2016. The matter which was the subject of these proceedings was indeed to be the question of the effect, if any, of s.301(1) on clauses 8 and 9 of the lease agreement.
Nonetheless, Mr Hodges and those that advised him had sufficient notice of the point for there to be evidence and submissions made about it.
It was quite properly conceded by counsel for Mr Hodges that the evidence demonstrated that he had made a materially false statement in his statement of financial position that was completed by Mr Hodges for the purposes of his application for lease finance with Morris Finance. However, at the time Morris Finance purported to terminate the lease pursuant to clause 9, it did not know of the materially false statement. There is no evidence before me as to when any person on behalf of Morris Finance became aware of the false statement that Mr Hodges had made in respect of his financial circumstances. It was not until Mr Sadler, from Morris Finance saw Mr Hodges’ statement of affairs which was included in a report to creditors made on 4 November, 2015 that anyone from Morris Finance became aware of the false statement. Until Mr Sadler’s affidavit filed on 1 July, 2016 there was no suggestion by Morris Finance that it was, at least in the alternative, relying upon that matter as grounding its entitlement to repossess the prime mover and terminate the lease.
Notwithstanding that, Morris Finance is entitled to rely upon that event of default to exercise its rights pursuant to clause 9 of the lease. Mr Hodges did not seem to contend to the contrary.
It is appropriate the parties confer and agree upon a minute of orders that should be made consistent with these reasons. There is also an issue of costs that will need to be resolved. I will make directions for the filing and service of written submissions in respect of the question of costs. In the event that either party seeks an oral hearing with respect to the question of costs in addition to the filing of written submissions, they should indicate their preference in their written submissions.
I certify that the preceding sixty-nine (69) paragraphs are a true copy of the reasons for judgment of Judge Jarrett delivered on 9 November, 2018.
Date: 9 November, 2018
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