Pt Garuda Indonesia Ltd v Grellman, R.J

P T GARUDA INDONESIA LIMITED v. RICHARD JOHN GRELLMAN
No. W970 of 1986
FED No 44/94
Number of pages - 13
Bankruptcy
(1994) 120 ALR 641
(1994) 48 FCR 252

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
LOCKHART J

CATCHWORDS

Bankruptcy - felonious tort rule - whether principle exists that a debt founded in a felony cannot be proved unless the offender has been prosecuted by the party proving or upon his evidence - whether provable debt in fact, when an arrangement to discharge bankrupt's indebtedness was set aside as a fraudulent disposition.

Bankruptcy Act 1966: ss. 82, 120, 121

Crimes Act 1900 (NSW): ss. 9, 10

Bankruptcy Act 1924: ss. 94, 95

Bankruptcy Act 1914 (UK): s. 42(2)

HEARING

SYDNEY, 2 and 21 December 1993
#DATE 16:2:1994

Counsel for the Applicant : Mr B Skinner

Solicitors for the Applicant: Alderdice and Clarke

Counsel for the Respondent : Mr F Gleeson

Solicitors for the Respondent: Phillips Fox

ORDER

THE COURT ORDERS THAT:

1. The matter be adjourned to a date to be fixed to hear argument on costs and to make final orders.

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

JUDGE1

Introduction and Facts
LOCKHART J The issue in this case is whether the applicant, P T Garuda Indonesia Limited (Garuda), is entitled to prove in the bankruptcy of Paul Anthony Simpson (the bankrupt) in the sum of one hundred and fifty thousand dollars.

The relevant facts are in a short compass. The bankrupt was employed by Garuda from November 1975 to July 1983 as an accounts manager. He lived in Sydney, but his duties were not confined to that city; they included the processing and recording of all financial transactions of Garuda in Australia, the receipt of moneys from ticket sales, the administration of moneys received from the offices of Garuda throughout Australia, arrangement of transfers of money overseas, negotiation of exchange rates, payment of wages and superannuation, and other administrative tasks; but the bankrupt was not authorized to sign cheques on behalf of Garuda.
Prior to July 1983, whilst he was employed by Garuda, the bankrupt stole an amount of $250,000 from it. After he left its employment the bankrupt admitted to Garuda that he had stolen money from it and said that he would return it. He repaid $100,000 to Garuda on 1 November 1985. On 9 or 10 December 1985, in repayment of the balance of the stolen moneys, the bankrupt transferred to Garuda a property known as No. 347 Livingstone Road, Marrickville, which had been purchased by him for $134,425. Garuda and the bankrupt agreed that the value of the property for the purposes of the transfer was $150,000. In the result, Garuda was repaid the whole of the moneys which had been stolen from it.
On 9 December 1985 Garuda issued a receipt to the bankrupt for the Certificate of Title to the Marrickville property and a form of transfer which recorded that those documents were received "in full satisfaction and discharge of debt to the extent of $150,000 outstanding from Paul Anthony Simpson to Garuda Indonesian Airways".
On 9 August 1986 the bankrupt became bankrupt on the petition of a creditor.
Thereafter, Richard John Grellman, the trustee of the bankrupt's estate (the trustee), instituted proceedings in this Court against Garuda seeking, inter alia, declarations that the payment of $100,000 and the transfer of the Marrickville property were void pursuant to s. 121(1) of the Bankruptcy Act 1966 (the Act). It was held by the Court (Hill J at first instance, affirmed by the Full Court on appeal) that the payment of $100,000 by the bankrupt to Garuda was not void; but that, as at the date of accepting the transfer of the Marrickville property, Garuda knew that a claim was being made by the former vendor of the Marrickville property against the bankrupt, that the vendor sought an undertaking from the bankrupt not to dispose of his assets, and that the bankrupt was keen to complete the transaction as quickly as possible so as to retain for himself the advantage of a promise made by Garuda to him that it would not, if the transactions took place (i.e. the payment of the $100,000 and the transfer of the property), report the misappropriation by the bankrupt to the police. The Court held that on those findings, together with the inference drawn from the hasty completion of the transaction and the omission to call for adjustments and to make the usual searches in accepting the transfer of the property, Garuda was a party to the bankrupt's fraud and the transfer was void.
Hill J (whose judgment is reported at (1991) 29 FCR 26) said at 36:

"For present purposes it may be accepted that Garuda may have been guilty of misprison of a felony or of compounding a felony, fraudulent misappropriation being an offence punishable by penal servitude: see R Watson and H Purnell, Criminal Law in New South Wales, Indictable Offences (2nd ed), Vol 18, par 2188 and Halsburys Laws of England (3rd ed, 1955), Vol 10, par 1201-1203. If the offence were to turn out to be merely a misdemeanour, it may well be that Garuda could be charged with obstructing or preventing the course of justice. However, it does not follow from this that Garuda in the relevant sense was guilty of a lack of good faith. Those words are concerned with the involvement of the disponee in a disposition made with intention to defraud creditors; they are not concerned with whether the transaction itself involves some illegal conduct on the part of the disponee."

An appeal by Garuda from Hill J's judgment was dismissed by a Full Court of the Court on 4 May 1992 ((1992) 35 FCR 515). It was held by the Full Court (at 532) that the payment of $100,000 and the contract and transfer of the Marrickville property were made for valuable consideration. The Full Court said (at 533) that:

"... Garuda's promise not to report the misappropriation did not in a relevant sense constitute the consideration for the payment or transfer of the property. The consideration for those transactions was the antecedent obligation arising from the misappropriation. The transactions were to discharge that obligation. Garuda's promise formed no part of the original 'transaction' which created that obligation. Garuda was an entirely innocent party to the misappropriation. The later promise not to report the misappropriation to the police should in our view be viewed as a separate event. That promise does not invalidate the valuable consideration already present, but was a matter highly relevant to the question whether the payment and transfer of property were received in good faith by Garuda."

Garuda transferred the Marrickville property to the trustee in compliance with the Court's judgment.
On 7 September 1992 Garuda lodged a proof of debt in the bankruptcy of the bankrupt in respect of the $150,000 which represented the value of the transfer back by Garuda to the trustee of the Marrickville property.
On 7 April 1983 the trustee rejected the proof of debt on two grounds, namely:

"1. The alleged debt of $150,000 arises from a felonious act by the bankrupt and as the bankrupt has not been prosecuted by you, or upon your evidence, the alleged debt is not provable in the bankruptcy.

2. Further and alternatively, I am not satisfied as to the existence of the alleged consideration for the alleged debt."

The parties to the present proceeding agreed in the following facts:-

the debt of $150,000, the subject of Garuda's proof of debt, arose from the theft by the bankrupt;

an officer of Garuda, a Mr Woerjanto, agreed with the bankrupt on behalf of Garuda on or about 22 October 1985 not to report to the police the theft by the bankrupt which gave rise to the debt of $150,00;

Garuda has not reported to the police the theft by the bankrupt giving rise to the debt of $150,000; the police spoke to Mr Santangelo of Garuda on 23 October 1985, during an investigation of an alleged arson by the bankrupt. The police told Mr Santangelo they had noted that there were substantial funds in the bankrupt's bank account and that there was a "mismatching" of assets and income and that they were led to believe that the money came from Garuda. They sought details of moneys received by the bankrupt during and upon the termination of his employment with Garuda. Mr Santangelo did not tell the police that the bankrupt had stolen the $250,000; the bankrupt has not been prosecuted by Garuda, the Director of Public Prosecutions, the police or any other person in respect of the theft.

Garuda applied to the Court in April 1993 for a declaration and order that the decision of the trustee rejecting its proof of debt be reversed. This application for review of the trustee's decision is made pursuant to s. 104 of the Act and is by way of rehearing. The Court must determine the matter in the light of the evidence before it. Its task is not merely to examine the material before the trustee and determine the correctness of his decision in the light of it. It is a hearing de novo: Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 341; Re D K Rogers; Ex parte CMV Parts Distributors Pty Limited (1989) 20 FCR 561 at 562-3.
The grounds of rejection of Garuda's proof of debt raise two questions on which this case turns. The first question (which is in substance the second ground of rejection of the proof of debt) is whether Garuda is entitled to prove in the bankruptcy for the $150,000 notwithstanding that the transfer to it of the Marrickville property was received in full satisfaction and discharge of the bankrupt's remaining indebtedness to Garuda and that the transfer was later set aside by the Court as a fraudulent disposition pursuant to s. 121 of the Act. The second question (which is the first ground in the trustee's rejection of the proof of debt) is whether what is said to be an old rule of law, that a debt founded in a felony cannot be proved unless the offender has been prosecuted by the party proving, or upon his evidence, operates to bar Garuda's proof or to stay it until the bankrupt has been prosecuted for his criminal action in stealing the $250,000 from Garuda.

The first question
15. I turn to the first question which arises irrespective of whether the claim of Garuda is founded in a felonious act (the second question).

Garuda claims that, as a result of the setting aside of the acquisition of the Marrickville property and its subsequent transfer by Garuda to the trustee, the original debt due to it by the bankrupt of $150,000 revived as there was a total failure of consideration, with the result that Garuda is entitled to prove in the bankruptcy for $150,000.
The trustee argues that the conveyance of the Marrickville property and the execution of the receipt by Garuda constituted an accord and satisfaction between the bankrupt and Garuda which extinguished the earlier debt of $150,000 because the accord and satisfaction was not expressed to be conditional upon the conveyance not subsequently being set aside in the event of the bankrupt becoming a bankrupt; hence, the debt was discharged by the accord and satisfaction and cannot be revived by the subsequent avoidance of the disposition of the Marrickville property.
Other arguments were advanced by the parties on this issue relating to unjust enrichment and questions of alleged unconscionability. Reference was made to Re Stephenson (1888) 20 QBD 450; Re Condon, Ex parte James (1894) LR 9 Ch App 609; Re Ayoub (1983) 67 FLR 144; Australia and New Zealand Banking Group Limited v Westpac Banking Corporation (1988) 164 CLR 662 and David Securities Pty Limited v Commonwealth of Australia (1992) 175 CLR 353.
Section 121 is the critical provision in this case; it provides:

"121(1) Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

(2) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property.

(3) In this section, 'disposition of property' includes a mortgage of property or a charge on or in respect of property."

Section 121 is one of a number of sections in the Act (others are ss. 120 and 122) which avoid certain payments, covenants, contracts or dispositions of property. Unlike ss. 120 and 122, s. 121 does not in terms confer any right on the person to whom the disposition of property was made to prove in the bankruptcy of the disponor or claim a dividend. Nor was any such right conferred by the equivalent sections of the previous act (the Bankruptcy Act 1924 (Cth)) or the bankruptcy legislation of the United Kingdom.
Section 120 should be mentioned. It avoids certain settlements of property ("settlement of property" is defined by sub-s. (8) as including any disposition of property) and certain covenants or contracts, payments of money and transfers of property if the settlor becomes a bankrupt within a certain number of years (the number of years differs according to the nature of the settlement) after the date of the settlement (I use the expression "settlement" to encompass a settlement or the making of a covenant or contract or paying money or transferring property pursuant to such a covenant or contract). Sub-sections (4) and (6) of s. 120 confer rights to claim dividends in the bankruptcy of the settlor upon the persons entitled under the covenant or contract or the persons to whom the payment was made or the property was transferred. But in the case of certain covenants or contracts in consideration of marriage, the claims of the persons entitled under the covenant or contract are postponed until all claims of the other creditors have been satisfied (sub-s. (4)).
The precursor of s. 120 was s. 94 of the Bankruptcy Act 1924 (Cth); it contained sub-s. (2) which in terms avoided, as against the trustee in bankruptcy, voluntary settlements except so far as the settlements enabled the persons entitled under them to claim for dividend in the settlor's bankruptcy under or in respect of the settlement; but any such claim to dividend was postponed until all claims of the other creditors for valuable consideration in money or money's worth had been satisfied. The equivalent provision in the Bankruptcy Act 1914 (U.K.) was s. 42(2) which was considered by Tomlin J in Re Cumming And West; Ex parte Neilson And Craig v The Trustee (1929) 1 Ch 534, where his Lordship said (at 547-8) that the language of s. 42(2) was curious, but was due to the legislature's desire to produce a special result, namely, that the contract or settlement was void against the trustee, but there was reserved out of the "voidness" a right on the part of the persons entitled under the contract or settlement to claim for dividends. His Lordship said that the real explanation of this section (and equivalent sections in earlier English bankruptcy legislation) was that the word "creditors" there means the persons entitled to prove in respect of their debts, and that persons who claim under a voluntary contract made void against the trustee are not creditors. They are persons who have a special right, namely, a right to a claim for dividend in the settlor's bankruptcy under or in respect of the contract or settlement after all the claims of the other creditors for valuable consideration have been satisfied. He said that the claimants in the case before him were not creditors, and therefore their right to put in a proof or claim a dividend must depend on all the creditors whose proof the trustee is bound to accept being first satisfied. This approach of Tomlin J was approved by Romer J in Re A Debtor; Ex parte Official Receiver (1947) 1 Ch 313 at 323-4.
Unlike s. 42(2) of the 1914 Act of the United Kingdom, the language of s. 120 of the Act (the 1966 Act) does not in terms purport to avoid settlements except so far as they enable persons entitled thereunder to claim for dividend in the bankruptcy under or in respect of the settlement. Section 120 (1) avoids the settlement; but sub-s. (4) and (6) confer upon the persons mentioned earlier rights to claim dividends in the bankruptcy. I doubt if there is any difference in substance between sections which avoid settlements except so far as they enable persons entitled under them to claim dividends in the settlor's bankruptcy (see s. 42(2) of the United Kingdom Act of 1914 and s. 94(2) of the Australian Act of 1924) and sections (like s. 120 of the Act) which avoid settlements without reserving out of the "voidness" a right to claim a dividend, but expressly confer a right to claim a dividend.
The Clyne Committee Report (1962) does not throw much light on this question. In paragraph 146 of the report, the Committee said that some doubts had arisen as to the proper order of priority of persons entitled under covenants or contracts for future payments or settlements by virtue of s. 94(2) (of the 1924 Act), and it said that the doubt should be removed.
Section 122 must be mentioned. It avoids preferences given by debtors to creditors within the period of six months before the presentation of the petition on which the debtor became a bankrupt. Section 122 contains sub-section (5) which entitles creditors who received preferences to prove in the bankruptcy as if the preferences had not been given. Section 95 of the Bankruptcy Act 1924 (Cth) contained no equivalent provision. However, in practice the trustee in bankruptcy allowed creditors who had received preferences, which were subsequently set aside in the bankruptcy, to prove in the bankruptcy on the same basis as sub-s. (5) of s. 122 of the Act now affords. So, the inclusion of sub-section (5) removed any doubt that might have previously existed; though no reference to this particular question was made by the Clyne Committee in its report. It was doubtless prudent to include the subsection in the Act, but I doubt the necessity to do so because once a creditor has disgorged the benefit of the preference which he previously received from the debtor before he became a bankrupt, the avoidance generally gives rise to a failure of consideration to the extent of the preference. It depends on the intention of the parties. In the usual case, where a creditor receives a payment which is subsequently held to be a preference, plainly there would be no intention by the creditor and the debtor that the creditor give up his right of proof, should the debtor subsequently be made a bankrupt and the payment be set aside as a preference.
What does all this mean so far as the present case is concerned? Debts and liabilities, to which a bankrupt in subject at the date of his bankruptcy or to which he may become subject before his discharge by reason of obligations incurred before the date of the bankruptcy, are provable in the bankruptcy (s. 82(1)). Persons entitled to prove in the bankruptcy almost invariably are creditors of the bankrupt.

With respect to voluntary settlements avoided by s. 120, the person who is the recipient of the settlement generally is not a creditor of the debtor or otherwise entitled to prove under s. 82 of the Act. This is recognized by sub-sections (4) and (6) of s. 120 which expressly confer rights to claim dividends on certain recipients, but not others.
Absence of any express right to prove or claim a dividend under s. 121 with respect to what are usually described as fraudulent dispositions is explicable, in my opinion, on the basis that persons to whom fraudulent dispositions of property have been made by debtors usually are not creditors and the legislature did not intend that they should be entitled to prove or claim dividends in the bankruptcy in respect of dispositions of property which the section has avoided because of their participation in the bankrupt's fraud.
Thus, Garuda would not have a right of proof under s. 121 with respect to or by reason of the setting aside of the conveyance of the Marrickville property to it by the bankrupt. But whether Garuda is entitled to prove in the bankruptcy with respect to the debt of $150,000 (it was originally $250,000 but reduced to $150,000 after the payment of $100,000 by the bankrupt) is a different question.
Garuda was not a party to the fraudulent misappropriation of its moneys by the bankrupt. The Full Court of this Court observed in 35 FCR (at 533) that Garuda was an entirely innocent party to the misappropriation and that Garuda's promise not to report the misappropriation to the police did not constitute consideration for the payment of the $100,000 or transfer of the Marrickville property. The Full Court said also that the consideration for those transactions was the antecedent obligation arising from the misappropriation and that Garuda's later promise not to report the misappropriation to the police was a separate event which did not invalidate the valuable consideration already present; although this was a matter highly relevant to the question of Garuda's good faith with respect to the payment and transfer of the Marrickville property.
In the hearing before me it was not suggested by counsel for the trustee that Garuda itself committed a criminal offence in making the promise to the bankrupt not to report the misappropriation to the police.
Whether Garuda and the bankrupt intended that, when Garuda agreed to the transfer of the Marrickville property to it, it would surrender its right of proof with respect to the debt of $150,000 should the bankrupt subsequently become bankrupt and the transaction be set aside, is a question of intention to be gleaned from all the relevant facts and circumstances. In my opinion, no such intention existed. It seems clear enough to me that the transaction was made on the basis that the discharge of the original obligations (for which the receipt signed on behalf of Garuda provided) was not intended to be operative in case of bankruptcy and the setting aside of the transfer. Any other conclusion would be contrary to common sense.
As Cave J said in Re Stephenson at 543:

"In the case of fraudulent preference the creditor can seldom intend that the acceptance of a payment by way of fraudulent preference shall be a valid release to the debtor, such as, if the payment is set aside, to disentitle the creditor to prove in bankruptcy."

In my opinion, the consideration which Garuda gave when it acquired the Marrickville property totally failed when that transaction was set aside; the initial debt of $150,000 revived, it was never extinguished. It follows that, unless the argument of the trustee with respect to the second point succeeds (that a debt founded in a felony cannot be proved unless the offender has been prosecuted by the party proving or upon his evidence), Garuda is entitled to prove in the bankruptcy.

Before leaving this first question, I shall say something about the argument of counsel for the trustee that a total failure of consideration no longer gives rise to an action for money had and received; but now lies in restitution or unjust enrichment, and that an obligation in restitution does not fall within the concept of a liability or debt within s. 82(1) of the Act.
Section 82(1) is to be generously or liberally construed: Official Trustee in Bankruptcy v C S and G J Handby Pty Limited (1989) 21 FCR 19 at 24. In my opinion, on the facts of this case, if the true nature of the entitlement of Garuda lies in restitution, it answers the description of a liability of the kind to which s. 82(1) is directed.

The second question
36. I turn to the second question: is Garuda's right to prove ousted by what is said to be the old rule of law, that a debt founded in a felony cannot be proved unless the offender has been prosecuted by the party proving, or upon his evidence?

This so-called rule is referred to in many cases and by learned authors. It is the corollary of the alleged rule of law that where a debt arises out of a felony committed by an offender the person injured cannot sue in respect of it unless the offender has been prosecuted by the person injured or upon his evidence: see Re Jermyn, Ex parte Elliott (1837) 2 Dea. 179; Wellock v Constantine (1863) 2 H and C 146; Ex parte Leslie Re Guerrier (1882) 20 Ch D 131; Re McMaster (1858) 32 LT (os) 288; Re A Debtor (1932) 7 ABC 182; Re Pemberton (1879) 1 NZLR 61; Smith v Selwyn (1914) 3 KB 98; and see Ex parte Ball In Re Shepherd (1879) 10 Ch D 667. See also Halsbury's Laws of England, 2nd ed., vol 11, para 364 and Mew's Digest of Cases on Bankruptcy to 1924, 2nd ed., pp 835-837.
In William's Law and Practice in Bankruptcy, 17th ed., 1958, p. 166 the learned authors said that the rule was previously clear law, but had been modified by more modern cases. The modifications or exceptions are, in fact, of some antiquity. A proof may be allowed where the bankrupt has been brought to justice by another person injured by a similar offence: Ex parte Ball; also Marsh v Keating (1834) 1 Bing (NC) 198; where prosecution is impossible by reason of the death of the offender or his escape before a prosecution could have been begun by reasonable diligence: Ex parte Ball; Stone v Marsh (1827) 6 B and C 551; where a prosecution in respect of some items of the debt has failed or there is no chance of a conviction: Re Jones Ex parte Jones (1833) 2 Mont and A 1939; where it is not clear that a felony has been committed: Ex parte Shaw (1816) 1 Madd 598; or where the proof is made by the trustee in bankruptcy, or by the personal representatives of the person injured by the felony: Ex parte Ball and Smith v Selwyn.
Whether this rule exists at all and, if it does, whether it is a rule of substantive law that may operate as a plea in bar or is simply an element (albeit an important element) for courts to take into account in the exercise of their discretion to stay proceedings until public justice is satisfied, has been the subject of much judicial comment. In 1879 in Ex parte Ball it was held by the English Court of Appeal (James, Baggallay and Bramwell LJJ) that, even if a person injured by a felony is barred from proving in the bankruptcy of the felon in respect of the injury until he has prosecuted him, the obligation to prosecute does not extend to his trustee, although the injured person himself tendered his proof before his own bankruptcy. Bramwell LJ, James LJ concurring, had this to say at 671-3 (it is a long passage but is useful to recite as it contains an illuminating analysis of the question which has been referred to many times since then in the cases and articles):-

"The law on this subject is in a remarkable state. For 300 years it has been said in various ways by Judges, many of the greatest eminence, without intimating a doubt, except in one instance, that there is some impediment to the maintenance of an action for a debt arising in this way. The doubt is that which was, not so much expressed by Mr Justice Blackburn in Wells v Abrahams, Law Reports 7 QB 554 as to be inferred from what he said. But, though such an opinion has been entertained and expressed for all this time, there are but two cases in which it has operated to prevent the debt being enforced. These two cases are Wellock v Constantine 2 HandC 146 and Ex parte Elliott 3 Mont and A 110. Wellock v Constantine has been said to be no authority. If I may speak of myself, I have no doubt I concurred in the judgment, or the statement that I did so would have been set right, but I am sure I must have done so in the faintest way, not only from what I think now, but from what I am reported to have said then, and from there being no reasons given for the judgment, which I should have desired to give if I had thought there were any good ones to support it. But at all events there are the opinions of Chief Barron Pollock and Mr Justice Willes - opinions which no one who knew those Judges will undervalue. Then there is the judgment in Ex parte Elliott, besides the expressed opinion for centuries that the felonious origin of a debt is in some way an impediment to its enforcement. But in what way? I can think of only four possible ways: (1) that no cause of action arises at all out of a felony; (2) that it does not arise till a prosecution; (3) that it arises on the act, that is suspended till prosecution; (4) that there is neither defence to nor suspension of the claim by or at the instance of the felon debtor, but that the Court, of its own motion, or on the suggestion of the Crown, should stay proceedings till public justice is satisfied. It must be admitted that there are great difficulties in the way of each of these theories. That the first is not true is shown by Marsh v Keating 1 Bing NC 198, where it was held that, prosecution being impossible, a felony gave rise to a recoverable debt. It is difficult to suppose that the second supposed solution of the problem is correct. That would be to make the cause of action the act of the felon, plus a prosecution. The cause of action would not arise till after both. Till then the Statute of Limitations would not run. In such a case as the present, or where the felon had died, it would be impossible. And it is to be observed that it is never suggested that the cause of action is the debt and the prosecution. The third possible way is attended by difficulties. The suspension of a cause of action is a thing nearly unknown to the law. It exists where a negotiable instrument is given for a debt and in cases of compositions with creditors, and these were not held till after much doubt and contest. There may be other instances. And what is to happen? Is the Statute of Limitations to run? Suppose the debtor or his representative sue the creditor, is his set-off suspended? Then how is the defence of impediment to be set up? By plea? That will be contrary to the rule nemo suam turpitudinem est audiendus. Besides, it would be absurd to suppose that the debtor himself ever would so plead and face the consequences. Then is the fourth solution right? Nobody ever heard of such a thing; nobody in any case or book ever suggested it till Mr Justice Blackburn did as a possibility. Is it left to the court to find it out on the pleadings? If it appears on the trial is the Judge to discharge the jury? How is the Crown to know of it? There are difficulties, then, in all the possible ways in which one can suppose this impediment to be set up to the prosecution of an action. But again, suppose it can be, what is the result? It has been held that when the felon is executed for another felony the crime may be maintained. What is to happen when he dies a natural death, when he goes beyond the jurisdiction, when there is a prosecution and an acquittal from collusion or carelessness by some prosecutor other than the party injured? All these cases create great difficulties to my mind in the application of this alleged law, and go a long way to justify Mr Justice Blackburn's doubt. Still, after the continued expression of opinion and the cases of Ex parte Elliott and Wellock v Constantine, I should hesitate to say that there is no practical law as alleged by the Respondent. It is not necessary for us to do so in this case because, assuming that there is, and assuming that Messrs Willis and Co themselves could maintain no claim in this case until they had performed their duty (if it can be said there is any) to prosecute, we are of the opinion that there is no such duty in the Respondent who represents, not them, but their creditors; that the debt is due at and from the time of the act causing it; that the disability to sue or liability to have proceedings stayed, if any, is personal to him in whom is the duty, and, consequently, that this claim may be maintained."

Baggallay LJ said at 673-4:

"It appears to me that the following propositions are affirmed by the authorities, many of which, however, are dicta or enunciations of principle rather than decisions:-

(1) that a felonious act may give rise to a maintainable action; (2) that the cause of action arises upon the commission of the offence; (3) that, notwithstanding the existence of the cause of action, the policy of the law will not allow the person injured to seek civil redress if he has failed in his duty of bringing or endeavouring to bring the felon to justice;

(4) that this rule has no application to cases which the offender has been brought to justice at the instance of some other person injured by a similar offence, as in Marsh v Keating, or in which prosecution is impossible by reason of the death of the offender, or of his escape from the jurisdiction before a prosecution could have been commenced by the exercise of reasonable diligence; (5) that the remedy by proof in bankruptcy is subject to the same principles of public policy as those which affect the seeking of civil redress by action. It is unnecessary to refer to the authorities by which these propositions have been affirmed; the whole subject is fully discussed and the leading decisions commented upon in Ex parte Elliott; Wellock v Constantine and Wells v Abrahams."

The existence of the rule was seriously questioned in New Zealand by Richmond J in Re W R Waters Ex parte City Advance Co (1887) 5 NZLR 449; where his Honour described it (at 450) as being "very much shaken". Sir Frederick Pollock said in his Law of Torts, 7th ed., 1904, at 197-8:

"... But so much doubt has been thrown upon the supposed rule in several recent cases, that it seems, if not altogether exploded, to be only awaiting a decisive abrogation. The result of the cases in question is that, although it is difficult to deny that some such rule exists, the precise extent of the rule, and the reasons of policy on which it is founded, are uncertain, and it is not known what is the proper mode of applying it."

In editions of Williams on Law and Practice in Bankruptcy that have been published after the enactment of the Criminal Law Act 1967 (UK), which abolished the division of crimes into felonies and misdemeanours (s. 1) and assimilated the law to that applicable to misdemeanours, the learned authors have stated that the earlier rule must now be regarded as obsolete having regard to the abolition by s. 1 of the Criminal Justice Act 1967 of all distinction between felony and misdemeanour, so that the law and practice relating to all offences cognizable under English law is now the law and practice applicable to misdemeanours: see the 19th edition of Williams and Muir Hunter, The Law and Practice in Bankruptcy 1979 at 166.
There are various possibilities as to the origin of the so-called rule; but in my view, an analysis of the cases establishes that the more probable foundation is the ground of public policy enunciated in many of the cases that it is a rule calculated to bring offenders to justice (Master v Miller 4 TR 320 per Buller J); a rule intended to ensure that, until the vindication of the criminal law is complete, any civil action should not be entitled to proceed based upon the felony. But the cases demonstrate that it is always a question of fact whether the cause of action which the plaintiff seeks to prosecute arises out of a felony committed by the bankrupt or not. The principle that emerges from the cases is that the creditor, if he uses due diligence in endeavouring to bring the felon to justice, is entitled to sue or prove in the bankruptcy of the felon; but, on the other hand, if he connives at the felon escaping justice, he is not entitled to sue or prove until he has done all he can to bring the felon to justice; but the cases are replete with exceptions to this so-called rule, to which I referred earlier.
Other possible bases for the alleged rule is that it may have arisen out of the law with respect to restitution in cases of larceny: see Crosby v Leng 12 East 409 or the protection of the Crown's right to the forfeiture of the property of a convicted felon: McMahon v Gould (1982) 7 ACLR 202 at 204. It is clear, however, that the rule was never extended beyond what public policy required; hence the various modifications or exceptions to it.
In Ceasar v Sommer (1980) 2 NSWLR 929 Roden J of the Supreme Court of New South Wales did not follow Smith v Selwyn (1914) 3 KB 98, Thomas v High (1960) 60 SR(NSW) 401; Ricketts v Ingersoll (1930) 47 WN(NSW) 56; Rochfort v John Fairfax and Sons Limited (1970) 92 WN(NSW) 483; and Wonder Heat Pty Limited v Bishop (1960) VR 489. Roden J preferred to follow Jefferson Limited v Bhetcha (1979) 1 WLR 898 and Saltergate Insurance Co Limited (In liq) and The Companies Act (1980) 4 ACLR 733, the latter being a decision of Needham J, together with various cases referred to by his Honour. Roden J approved the statement by Needham J in Saltergate that the emphasis of the so-called rule had shifted from public policy considerations upon which it was originally based, to a consideration of the "principle of justice between the parties" to the civil litigation. Roden J said that it would be wrong to regard the rule in Smith v Selwyn as a law applying in New South Wales in 1980 as if it were an immutable principle of the common law. His Honour said (at 931) that what remained in 1980 was the immutable principle that the common law would have regard to the requirements of public policy. He discussed the possible bases for the rule including one basis, which is referred to in some of the cases, that the origin of the rule lay in the fact that the property of a convicted felon was forfeited to the Crown. He said that if this were the foundation for the rule it had disappeared in New South Wales, notwithstanding that State's retention of "a totally artificial version of the archaic distinction between felonies and misdemeanours". Roden J's approach was criticized by the Court of Appeal of New South Wales in Halabi v Westpac Banking Corporation (1989) 17 NSWLR 26 at 52.

New South Wales is the only State in Australia to retain the division of offences into felonies and misdemeanours: see ss. 9 and 10 of the Crimes Act 1900 (NSW), although the distinction in New South Wales is of little practical significance in terms of differential custodial terms of imprisonment between penal servitude and imprisonment, the distinction between penal servitude and imprisonment being the traditional distinction between felonies and misdemeanours. In R v McHardie (1983) 2 NSWLR 733, the Court of Criminal Appeal of New South Wales said (at 742) that:

"The categorizing of crimes into felony and misdemeanour is still preserved to a very slight degree in New South Wales."

The Court of Appeal of New South Wales held in Halabi (at 39, 47 and 58) that the common law felony-tort rule had existed, but has been superseded in New South Wales by the inherent jurisdiction of the Supreme Court to stay civil proceedings based on felonious conduct where to do so on a proper evaluation of all relevant considerations would prevent abuse of process and achieve justice between the parties.
The difficulty in determining if there was or is a rule that a felon must be criminally prosecuted before he can be sued civilly is that the statement of the rule differs from case to case, sometimes markedly, expressed to be subject to numerous exceptions and its existence has been questions by courts of high authority. I am not persuaded that it is or ever has been a settled rule of the common law. But whatever may be the answer to that question, it is plain that the present state of the law in Australia is that where it is said that an injury amounts to an infringement of the civil rights of an individual and at the same time to a criminal act, the civil remedy and the right to prove in the bankruptcy of the wrongdoer, may be stayed or suspended by the court in which the civil proceeding has been brought (or the court exercising bankruptcy jurisdiction), until the party inflicting the injury has been prosecuted or the person aggrieved has done everything reasonably possible to bring the wrongdoer to criminal justice. It is a matter for the Court in the exercise of its discretion to decide whether it is appropriate to grant a stay or not and, if so, on what conditions, if any, it should be granted. This will involve a consideration of all the relevant circumstances, in particular the public policy necessarily involved in bringing criminals to justice, and all matters which affect the rights and liabilities of the parties to the civil action. If appropriate to grant a stay, it may be desirable to do so until the party inflicting the injury has been prosecuted or criminal proceedings have been taken and completed or until some earlier intermediate point. The fundamental questions for the courts to determine are whether the institution or continuation of the civil proceeding is an abuse of process and what is necessary to do justice between the parties. However, the so-called old rule still remains as an important matter for a court to consider, as an element in the exercise of discretion, when deciding whether to suspend or stay the civil action or the receipt of the proof in bankruptcy. The rule originated as a rule of public policy with respect to the bringing of civil proceedings; but by extension it has applied to the right to prove in the bankruptcy, because the right of proof is the right into which the cause of action has been converted by the intervention of the bankruptcy of the party inflicting the injury; right of proof corresponds with right of redress by action: see Waters per Richmond J.
It is erroneous to confine the application of the rule simply to felonies, because the foundation of the rule is not so much that the bankrupt had committed a felony, but that offenders must be brought to justice; it is a rule designed to ensure that persons who have been injured by the criminal action will not connive at the offender escaping justice, but will do all that they reasonably can do to bring the offender to justice. The object of the rule is to prevent the abandonment of criminal proceedings which would be likely to occur in certain cases if action is permitted or proof allowed before any steps are taken for the prosecution of the bankrupt: Robson's Law and Practice on Bankruptcy 1887, 6th ed., at p 229 and the cases there cited; see also Wace on Bankruptcy 1904, 3rd ed., at pp. 108-9.
The question before a court is whether it is just and convenient that the plaintiff's rights in respect of the action should be interfered with by staying the civil proceedings until the criminal proceedings have been disposed of. It must be clear that before a stay is granted the plaintiff's case is in fact based upon the commission by the defendant of the criminal act (Thomas v High (1960) 60 SR(NSW) 401). The evidence of the criminal act must be such, that, if believed, there would be a reasonable prospect that a prosecution would succeed. (See Roden J's judgment in Ceasar v Sommer). It is a question for the court of balancing justice between the parties having regard to the criminal proceedings and the interests of the parties in the civil proceedings; but it is a matter for the discretion of the court as to whether the stay be granted.
The true principle is that the civil remedy for recovery of a debt (and hence a right to prove in bankruptcy) may be suspended until the creditor has first performed his public duty of doing his best to bring the offender to justice. The Court may stay the proceedings until public justice is satisfied; and then, the Court, in the exercise of its discretion, may prevent abuse of its own process and interfere by stay.
An important point is that the machinery of the law with respect to prosecutions for criminal offences has changed markedly over the last hundred years or so. Prosecutions for criminal proceedings are now invariably brought by statutory authorities or government agencies established for this purpose; private prosecutions for criminal offences are rare. When courts today are considering whether or not to stay a civil proceeding or suspend a right to prove a debt, the ground is not that private citizens should prosecute criminal offenders (because that is now largely academic), but that they should lend their aid to the prosecuting authorities by telling them that the offence has been committed and giving evidence or otherwise.
The present case raises an interesting question because of the arrangement between the bankrupt and Garuda that Garuda would not inform the police about the fraudulent misappropriation of funds by the bankrupt. The funds were stolen prior to July 1983. Repayment of $100,000 by the bankrupt to Garuda was made on 1 November 1985, and the transfer of the Marrickville property was made in December 1985. The agreement that Garuda not report the matter to the police was made on or about 22 October 1985. However, the police spoke to Mr Santangelo of Garuda on 23 October 1985 during the investigation of alleged arson by the bankrupt, and they told Mr Santangelo that they had noted there were substantial funds in the bankrupt's bank account, there was a mismatching of assets and income, and they were led to believe that the money came from Garuda. They sought details of moneys received by the bankrupt during and upon the termination of his employment with Garuda. Although Mr Santangelo did not tell the police of the theft, it is difficult to believe that the police did not entertain serious suspicions about the source of the funds received by the bankrupt which were the subject of their enquiry. Nevertheless, the bankrupt was not prosecuted for his misappropriation. It was not until the proceeding was heard in this Court by Hill J, and later by the Full Court on appeal, that the facts emerged about the arrangement not to tell the police that had been struck between Garuda and the bankrupt. Hill J's judgment was delivered on 11 April 1991, at least seven years after the misappropriation.
As mentioned earlier, it was no part of the trustee's case on the hearing of this application that Garuda committed or was party to the commission of a criminal offence in agreeing with the bankrupt not to tell the police about his misappropriation. But Hill J accepted, for the purposes of the case before him, that Garuda may have been guilty of misprison of a felony or of compounding a felony. The Full Court approached the matter a little differently. It found that the later promise not to report the misappropriation to the police should be viewed as a separate event and that the promise did not invalidate the valuable consideration already present, but was highly relevant to the question whether the payment and transfer of the Marrickville property was received in good faith by Garuda. It was this adverse finding of Garuda's absence of good faith that led to the Full Court's endorsement of Hill J's judgment that there had been a disposition of property in favour of Garuda, contrary to s. 121 of the Act.
Although some seven years or so passed between the date of the fraudulent misappropriation by the bankrupt of Garuda's money and the judgment of Hill J, that judgment placed on public record the facts concerning the arrangement between the bankrupt and Garuda about not informing the police of the theft. Over two years have now passed since the delivery of that judgment, and the material before me does not suggest that the police have brought any prosecutions against the bankrupt. It may be that the police would have charged the bankrupt with a criminal offence if they had known of it in 1985. It is also possible that, even if they had known of the misappropriation at that time, they would not have charged him and left it to Garuda and the bankrupt to sort the matter out between them. However, these are speculative considerations; matters to which I can attribute little, if any, weight.
To hold at this stage that Garuda should not be entitled to prove until the avenues of prosecution against the bankrupt have been exhausted is to my mind an exercise in futility. For all practical purposes, a finding of that kind would be tantamount to forever precluding Garuda from proving in the bankruptcy; and this would not be a correct course to take.
It would be a most unjust result if Garuda is not entitled to prove in the bankruptcy. $250,000 of its funds were stolen from it by the bankrupt. $150,000 (or its value being the Marrickville property) was returned by Garuda to the trustee following the trustee's success in the s. 121 proceeding. If Garuda is not entitled to prove in the bankruptcy, the other creditors whose proofs have been admitted by the trustee would be entitled to benefit from the fraud of the bankrupt; yet the person with the highest moral right to share in the funds, namely, Garuda, would be denied that benefit. The law of bankruptcy is concerned with the equitable distribution of a bankrupt's assets among the creditors to ensure fairness and justice to them all. If the trustee's submissions are correct, this fundamental principle would be negated and result in an inequitable distribution of funds among the creditors of the bankrupt.
In all the circumstances I am satisfied that, by paying due regard to the old rule of public policy as an important element for the Court to consider in the exercise of its discretion, Garuda should be entitled to have its proof of debt considered and admitted by the trustee, and that it is not barred from doing so by reason of the rule. I reach this conclusion after taking into account the troubling circumstance of the arrangement between Garuda and the bankrupt that Garuda would not tell the police about the theft of the $250,000. Conclusion
Garuda succeeds in its application. I propose to order that the decision of the trustee made on 7 April 1993 not to admit Garuda's proof of debt dated 7 September 1992 be reversed. I shall not, however, make orders to-day; but shall adjourn the matter to a date to be fixed to hear argument on costs and to make final orders.

[1994] FCA 44

16 FEBRUARY 1994