Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd

[1989] FCA 393

Re: THE OFFICIAL TRUSTEE IN BANKRUPTCY
And: C.S. & G.J. HANDBY PTY LTD
No. TG2 of 1989
FED No. 393
Bankruptcy
87 ALR 734

COURT

IN THE FEDERAL COURT OF AUSTRALIA

TASMANIA DISTRICT REGISTRY
GENERAL DIVISION
Morling(1), Beaumont(1) and Burchett(1) JJ.

CATCHWORDS

Bankruptcy - claim that bankrupt personally liable as director of a company, under s.556(1) of the Companies (Tasmania) Code, for debt incurred by company without reasonable expectation of payment - whether claim is of a kind capable of proof under s.82 of the Bankruptcy Act 1966 - whether claim is a demand for unliquidated damages.

HEARING

HOBART

#DATE 21:7:1989

Counsel and Solicitors Mr. G.T. Bigmore instructed by
for Appellant: the Australian Government Solicitor

Counsel and Solicitors Mr. D.J. Gunson instructed by
for Respondent: Messrs Zeeman, Kable & Page

ORDER

Set aside the direction made by the Supreme Court that the appellant admit the proof of the respondent in the manner directed by the Supreme Court; in lieu thereof order that the decision of the appellant rejecting the claim of the respondent as incapable of being admitted to proof be reversed; and further, declare that the claim of the respondent is of a kind capable of being admitted to proof.

Otherwise dismiss the appeal with costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The Official Trustee in Bankruptcy appeals from a judgment of the Supreme Court of Tasmania (Wright J.) reversing a decision of the Official Trustee rejecting a proof of debt by the respondent, C.S. & G.J. Handby Pty. Ltd., in the bankruptcy of Albert Leslie Adams. The proceedings in the Supreme Court raised for determination the proper construction of s.82 of the Bankruptcy Act 1966 ("the Act") in the context of a claim made under s.556(1) of the Companies (Tasmania) Code ("the Code"). In certain circumstances, s.556(1) of the Code makes a director of a company liable for the payment of a debt incurred by the company. Section 82(1) of the Act states that, subject to some following provisions, all debts and liabilities of a bankrupt are provable in his bankruptcy. But, by s.82(2), certain demands are not provable. The question for his Honour was whether a claim made pursuant to s.556(1) of the Code was not provable by virtue of the provisions of s.82(2) of the Act.

1. The background facts were as follows. At all material times, Mr. Adams was a director of C. & C. Homes Pty. Ltd. ("the company"). On 21 May 1986, the respondent issued a writ out of the Supreme Court claiming against the company "for $35,028.51 being the price of goods sold and delivered by the (respondent) to the (company) at the request of the (company) during the period November 1985 to March 1986." On 9 June 1986, the respondent recovered judgment by default against the company in the sum of $35,028.51 "for damages" and an amount for costs. It is common ground that nothing turns on the use of the phrase "for damages". It appears that the phrase was inserted in the judgment in error because the claim, in respect of which judgment was recovered, as stated in the writ, was for the price of goods sold and delivered and not for damages. The significance of this will appear later.

2. On 30 September 1986, it was ordered that the company be wound up. On 18 September 1987, the bankrupt became a bankrupt.

3. The company's proof dated 16 March 1988, was, so far as material, as follows:
   

"1. Albert Leslie Adams was at the date on which he became a bankrupt, namely 18th September 1987, and still is, justly and truly indebted to (the respondent) in the sum of $35,O28.5l, in accordance with the particulars specified in the Statement of Account annexed... STATEMENT OF ACCOUNT

1. Between November 1985 and March 1986 (the respondent) sold and delivered to (the company) at the request of the (c)ompany timber and timber products specified in the invoices numbered below at the prices set forth against each invoice.

2. All of the prices in the invoices were agreed prices or alternatively, reasonable prices. The

(c)ompany has not paid any of the invoices. At all material times, Albert Leslie Adams was a director of the (c)ompany.

3. On the 30th day of September 1986 in the Supreme Court of Tasmania an Order was made that the

(c)ompany be wound up.

4. In the premises the (c)ompany is a company to which Section 556 of the Companies (Tasmania) Code applies.

5. At the times that each of the debts referred to in the Schedule hereto were incurred there were reasonable grounds to expect that the (c)ompany would not be able to pay all of its debts as and when they became due or alternatively, there were reasonable grounds to expect that if the

(c)ompany incurred that debt it would not be able to pay all its debts as and when they became due.

6. In the premises Albert Leslie Adams is liable for the payment of the sum of $35,028.51 as detailed in the Schedule hereto."

1. It will be noted that the proof makes no reference to recovery of the default judgment. It is not suggested that anything turns on this.

2. Section 82 of the Act, so far as presently relevant, provides:
   

"82. (1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he may become subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy. (Emphasis added)

(1A) ...

(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. (Emphasis added)

(3) ...

(4) ...

(5) ...

(6) ...

(7) ...

(8) In this section, 'liability' includes -

(a) compensation for work or labour done;

(b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and

(c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is -

(i) in respect of amount - fixed or unliquidated;

(ii) in respect of time - present or future, or certain or dependent on a contingency; or

(iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion."

1. The proof referred to s.556 of the Code which, so far as material, provides as follows:
   

"556 (1) If -

(a) a company incurs a debt, whether within or outside Tasmania;

(b) immediately before the time when the debt is incurred -

(i) there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or

(ii) there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and

(c) the company is, at the time when the debt is incurred, or becomes at a later time, a company to which this section applies, any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred is guilty of an offence and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt. (Emphasis added) Penalty: $5,000 or imprisonment for 1 year, or both.

(2) In any proceedings against a person under subsection (1), it is a defence if the defendant proves -

(a) that the debt was incurred without his express or implied authority or consent; or

(b) that at the time when the debt was incurred, he did not have reasonable cause to expect -

(i) that the company would not be able to pay all its debts as and when they became due; or

(ii) that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due.

(3) Proceedings may be brought under sub-section

(1) for the recovery of a debt whether or not the person against whom the proceedings are brought, or any other person, has been convicted of an offence under subsection (1) in respect of the incurring of that debt.

(3A) In proceedings brought under subsection (1) for the recovery of a debt, the liability of a person under that subsection in respect of the debt may be established on the balance of probabilities.

(4) Where subsection (1) renders a person or persons liable to pay a debt incurred by a company, the payment by that person or either or any of those persons of the whole or any part of that debt does not render the company liable to the person concerned in respect of the amount so paid..."

1. It was common ground in the Supreme Court, and in this Court, that the question for determination for his Honour was whether the claim by the respondent was of a kind which was capable of being admitted to proof, and not whether, in the particular circumstances of the case, the claim should be admitted, in whole or in part (cf. Re Payne; Ex parte Hurst, Toohey J., 23 September 1986, unreported). Thus the question raised for determination was in the nature of a preliminary point which, even if answered favourably to the respondent, still left for resolution the further question, whether the existence of the conditions precedent stipulated in paras. (a), (b) and (c) of s.556(1) could be established.

2. Wright J. was of the view that it was necessary to consider whether or not a claim made under s.556 of the Code is "essentially" a claim in tort (in which event it would be excluded by s.82(2)), or a claim in the nature of a contract, promise or breach of trust which, his Honour thought, would be provable under s.82(1). He held that a claim by an "aggrieved" creditor of the company against a director who "attracts liability" pursuant to s.556(1) is a "claim of a contractual nature".

3. Wright J. said:
   

"In my opinion, the (respondent's) counsel is correct in maintaining that what he seeks to prove is not a claim for unliquidated damages arising other than by reason of contract promise or breach of trust. It is, in my opinion, a contractual claim for a liquidated sum for which the directors of a company may be liable vicariously by virtue of Section 556. It seems to me that Section 556 of the Companies (Tasmania) Code is clearly distinguishable from Section 374(d) of the Companies Act 1962 South Australia (now repealed) which required consideration by Prior J. in Corporate Affairs Commission South Australia v. Karounos (1984) 9 ACLR p 405. In that case, Prior J. reached the conclusion that the debt of a company in liquidation could not be claimed in the bankrupt estate of an officer of the company under the South Australian section, because unless and until that person had been convicted of an offence under the section no liability arose. In other words, the liability of the company officer was contingent upon his conviction under the Act and as no such conviction had taken place there was no debt or liability to which that company officer was subject at the date of his bankruptcy. Section 556 of the Companies (Tasmania) Code although providing for the attachment of both civil and criminal liability in the circumstances provided for, does not make the civil liability dependent or contingent upon conviction for the offence. It seems to me that the view which I have formed is entirely consistent with the decision of Rogers J. in 3M Australia Pty. Limited v. Watt & Anor.

(1984) 9 ACLR p 203; affirmed (sub nom) Watt & Anor. v. 3M Australia Pty. Limited by the Court of Appeal, NSW (1984) 9 ACLR p 524. It is also apparent to me that the amount claimed by the applicant may properly be characterised as a liquidated rather than an unliquidated claim and being, at least, from one perspective a claim in respect of a fiduciary duty breached by the bankrupt, it may properly be regarded as not excluded from proof by Section 82(2) of the Bankruptcy Act. See Barewa Oil and Mining NL (In Liquidation) v. Isim Mineral Development Pty. Ltd. & Ors. (1981) 38 ALR p 288."

1. Accordingly, his Honour directed the Official Receiver to admit the proof of debt in respect of so much of the total amount claimed as he determines to be due after considering the appropriate criteria for liability referred to in s.556(1) of the Code and any defences which the bankrupt may prove under s.556(2).

2. On behalf of the Official Trustee, it is now submitted that Wright J. should have held that a claim made under s.556(1) of the Code does not fall within s.82(1) of the Act and, in any event, is excluded from proof by s.82(2) of the Act. It is convenient to deal with these contentions separately.
   Is a claim made under s.556(1) of the Code a debt or liability within the meaning of s.82(1) of the Act?

3. Section 82(1) and its precursors have been generously construed. In Ex parte Llynvi Coal & Iron Company; In re Hyde (1871) LR 7 Ch App 28 at pp 31-2, James LJ. said (of s.31 of the English Bankruptcy Act, 1869):
   

"Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy, and to be ascertained either by the Court itself or with the aid of a jury. The broad purview of this Act is, that the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements, and contingencies of every kind. On the other hand, all the persons from whose claims, and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets."

1. On behalf of the Official Trustee, it is submitted that, because a claim under s.556(1) of the Code is neither in contract nor in tort, it falls outside s.82(1).

2. We accept that a claim under s.556(1) of the Code is not a claim in contract. No express agreement by the bankrupt is suggested here. It may be arguable that there is an implied or constructive contract of the kind described by Adam J. in State of Victoria v. Hansen (1960) VR 582 at pp 586-7. In some cases, it may be possible to characterise a claim under a statute as one analogous to a claim in contract because the law imports a fictitious promise to pay (see Gilchrist v. Dean (1960) VR 226 per Sholl J. at p 271). Yet in Gilchrist v. Dean, supra, Sholl J. held (at p 272) that a statutory right to contribution between tortfeasors was not contractual. Only in a very artificial sense could the liability of a director under s.556(1) be described as contractual.

3. We further accept that the claim here is not made in tort (cf. Ryder v. Hartford Insurance Co. (1977) VR 257 at pp 260-1; and see Borg Warner (Australia) Ltd. v. Zupan (1982) VR 437 at pp 440-2, 451, 455-6). However, it does not follow from the fact that the present claim is not made in contract or in tort, that is, is not made under the general law, that the demand falls outside the scope of s.82(1) of the Act. There is no reason why s.82(1) should be read down so as to pick up only claims which may be made under the general law. On the contrary, there is every reason to suppose that it was intended that s.82(1) should extend to debts or liabilities arising under a statute. A liability imposed upon a bankrupt director by virtue of the operation of s.556(1) of the Code is clearly a liability of the bankrupt for the purposes of s.82(1) of the Act. It may very well also be a debt of the bankrupt for the purposes of s.82(1) but it is not necessary that we decide the point.
   Is a claim made under s.556(1) of the Code a demand in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust within the meaning of s.82(2) of the Act?

4. The first question which arises is whether the claim is a liquidated one. In Spain v. The Union Steamship Company of New Zealand Limited (1923) 32 CLR 138 a right conferred by an award to recover "reasonable expenses" was held to be a "liquidated" claim. Knox C.J. and Starke J. said (at p 142):
   

"Process was issued under the provisions of the District Courts Act 1912, sec. 64, regulating actions for debts and liquidated demands in money; and it was said that this procedure was inappropriate because the plaintiff's right was to recover 'reasonable expenses' and not a sum certain or any liquidated amount. The objection is untenable...As is well said by Mr. Odgers (Pleading and Practice, 5th ed., p 41), 'whenever the amount to which the plaintiff is entitled...can be ascertained by calculation or fixed by any scale of charges, or other positive data, it is...liquidated."

1. Reliance is placed, by the Official Trustee, upon the decision of Sholl J. in Alexander v. Ajax Insurance Co. Ltd. (1956) VLR 436. It was there held that a claim for an indemnity against a total loss of goods by an insured person under an insurance policy is not a liquidated demand when the policy is not a 'valued' policy, that is, one whereby the insurer has agreed, in the event of a total loss of the insured property, to pay an agreed sum whatever the value of the insured property may have been.

2. Sholl J. said (at p 445) that the words "debt or liquidated demand" in money covered any claim:
   

"(a) for which the action of debt would lie;

(b) for which an indebitatus (or 'common') count would lie - including those cases formerly covered by the quantum meruit or quantum valebat counts, notwithstanding that the only agreement implied between the parties in such cases was for payment at a 'reasonable' rate;

(c) for which covenant or special assumpsit would lie, provided that the claim was for a specific amount, not involving in the calculation thereof elements the selection whereof was dependent on the opinion of a jury."

1. Counsel for the Official Trustee also referred to the following passage from Odgers, Pleading & Practice, 12th ed. (1939) pp 47-8, part of which was cited in Spain's Case:
   

"...whenever the amount to which the plaintff is entitled (if he is entitled to anything) can be ascertained by calculation or fixed by any scale of charges or other positive data, it is said to be liquidated or 'made clear'. But an action in which the amount to be recovered depends upon all the circumstances of the case, and no one can say positively beforehand whether the plaintiff will recover a farthing, or forty shillings, or a hundred pounds, is an action for unliquidated damages."

1. But, in our view, a claim made under s.556(1) of the Code is not at large in the sense suggested by Odgers. The statutory liability which is created by s.556(1) is for the payment of the debt incurred by the company. This is a sum which is "made clear".

2. It is true that, under the general law, questions can arise, generally as matters of construction rather than of principle, as to the real character of the liability of a guarantor of the performance by another of an obligation. As Lord Diplock pointed out in Moschi v. Lep Air Services Ltd. (1973) AC 331 at pp 348-9):
   

"It follows from the legal nature of the obligation of the guarantor to which a contract of guarantee gives rise that it is not an obligation himself to pay a sum of money to the creditor, but an obligation to see to it that another person, the debtor, does something; and that the creditor's remedy for the guarantor's failure to perform it lies in damages for breach of contract only. That this was so, even where the debtor's own obligation that was the subject of the guarantee was to pay a sum of money, is clear from the fact that formerly the form of action against the guarantor which was available to the creditor was in special assumpsit and not in indebitatus assumpsit... The legal consequence of this is that whenever the debtor has failed voluntarily to perform an obligation which is the subject of the guarantee the creditor can recover from the guarantor as damages for breach of his contract of guarantee whatever sum the creditor could have recovered from the debtor himself as a consequence of that failure. The debtor's liability to the creditor is also the measure of the guarantor's."

1. But whatever be the position of a guarantor under the general law, the present claim is governed by a statute which creates a liability for payment of a nominated debt. In our view, this is a "liquidated" claim for the purposes of s.82 of the Act.

2. Is it, in any event, a claim for damages?

3. We think not. It is a claim for money under a statute, made independently of a wrong which is a tort or a breach of contract. Unless he can exculpate himself by establishing a positive defence, a director is liable in the circumstances set out in the section, not for any defined act or omission, but by reason of his having been a director of the company. Such a claim is not an action for damages. It is described in sub-ss. (3) and (3A) of s.556 itself as 'proceedings...for recovery of a debt'. McGregor on Damages, 14th ed. 1980 at p 6 explains the general position as follows:
   

"Actions claiming money under statutes, where the claim is made independently of a wrong which is a tort or breach of contract, are not actions for damages. Actions in respect of benefits under the Social Security Act 1975...provide an excellent illustration; further examples are provided in the sphere of employment by claims for unfair dismissal...and claims for redundancy payments, both of which are now provided for under the Employment Protection (Consolidation) Act

1978. On the other hand, actions claiming money which are based upon statutes which have created a tort are actions for damages and are within the definition (of "damages") adopted here. The statutory tort may be one the existence of which is spelt out by the courts from the general duty imposed by the statute,...or the statute may create the tort expressly..." (Emphasis added)

1. It has been held that a statutory claim for indemnity is not a demand in the nature of unliquidated damages (see In re W.A. Brown & Sons Pty. Ltd. (1964) 81 WN (Pt.1) (NSW) 402 at p 407; see also Public Transport Commission (NSW) v. J. Murray-More (NSW) Pty. Ltd. (1975) 132 CLR 336 at p 351; Philip Morris Ltd. v. Ainley (1975) VR 345 at p 350). In our view, this reasoning supports, by analogy, the conclusion that a demand under s.556(1) is not a claim for damages.

2. Although s.556(1) imposes a liability upon a director in circumstances where he may have committed misfeasance, it would not be accurate to describe the respondent's claim as a proceeding for unliquidated damages for misfeasance or breach of trust, whether as a matter of form, or as a matter of substance (see Cornelius v. Barewa Oil and Mining (NL) (in liq.) (1982) 42 ALR 83 at pp 90-1; see also 3M Australia Pty. Ltd. v. Watt (1984) 9 ACLR 203 at p 206 affirmed (1984) 9 ACLR 524; see also Metal Manufacturers Ltd. v. Lewis (1988) 13 ACLR 357).

3. In the result, the appeal cannot succeed. We would, however, vary the orders made by Wright J. to the following extent. Instead of directing the Official Trustee to admit the proof in the manner ordered by his Honour, we would reverse the decision of the Official Trustee and declare that the claim made by the respondent is of a kind which is capable of being admitted to proof.

4. The orders of the Court will be:
   

1. Set aside the direction made by the Supreme Court that the appellant admit the proof of the respondent in the manner directed by the Supreme Court; in lieu thereof order that the decision of the appellant rejecting the claim of the respondent as incapable of being admitted to proof be reversed; and further, declare that the claim of the respondent is of a kind capable of being admitted to proof.

2. Otherwise dismiss the appeal with costs.