Re McLaren, Phillip Ex Parte Aboriginal Torres Strait Islander Commission
[1997] FCA 397
•22 MAY 1997
CATCHWORDS
BANKRUPTCY - creditor’s petition - sequestration order - current petition based on judgment debt incurred after discharge from previous bankruptcy - whether judgment debt provable in previous bankruptcy as a contingent liability - whether legal relationship required between parties at date of previous bankruptcy to found a debt provable in that bankruptcy - scope of ‘possible obligation’ under the Bankruptcy Act
Bankruptcy Act 1966 (Cth) ss 52(1), 82(1) and 82(8)(b)
Ellis & Co’s Trustee v Dixon-Johnson [1924] 1 Ch 342
Re PHILLIP McLAREN Ex parte ABORIGINAL AND TORRES STRAIT ISLANDER COMMISSION
No. NP2038 of 1995
EINFELD J
SYDNEY
22 MAY 1997
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT ) No.NP2038 of 1995
OF THE STATE OF NEW SOUTH WALES )
Re:PHILLIP McLAREN
Debtor
Ex Parte:ABORIGINAL AND TORRES STRAIT ISLANDER COMMISSION
Creditor
MINUTE OF ORDERS
The Court orders that:
A sequestration order be made against the estate of the debtor.
The Registrar appoint an appropriate trustee to the estate.
The costs of the creditor of and pertaining to the petition, including any reserved costs, be paid by the debtor.
The creditor file a minute of these orders with the Registrar in accordance with rule 124(1).
A copy of this order be given to the Official Receiver in Sydney within 2 days.
Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.
EINFELD J
SYDNEY
22 MAY 1997
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT ) No.NP2038 of 1995
OF THE STATE OF NEW SOUTH WALES )
Re:PHILLIP McLAREN
Debtor
Ex Parte:ABORIGINAL AND TORRES STRAIT ISLANDER COMMISSION
Creditor
EINFELD J SYDNEY 22 MAY 1997
REASONS FOR JUDGMENT
The Aboriginal and Torres Strait Islander Commission (ATSIC) has petitioned the Court for the sequestration of the estate of Phillip McLaren (Mr McLaren). Mr McLaren opposes the petition and has sought to have it dismissed.
Factual background
As detailed findings of fact were made by Justice Lockhart in prior proceedings between these parties which were concluded on 21 April 1995, it is necessary to refer to those findings to lay out the pertinent facts for the resolution of this matter. At relevant times Mr McLaren was an employee of a company called Focopa Pty Limited. In June 1990 Focopa and ATSIC entered into a contract for the supply by Focopa of 23 video segments to ATSIC for a specified sum. The contract comprised two letters. The first was an offer from ATSIC to Focopa on 8 June 1990. The second was Focopa’s acceptance on 14 June 1990. Approximately one month later, on 19 July 1990, Mr McLaren was declared a bankrupt on an unrelated petition. In December 1990 certain representations were made to ATSIC by Mr McLaren on behalf of Focopa pertaining to the contract to supply the video segments.
Mr McLaren was discharged from his bankruptcy on 20 July 1993 and on 27 July 1993 ATSIC began proceedings against both him and Focopa in respect of the representations made in December 1990. Justice Lockhart found that by these representations Focopa had both breached the contract and engaged in misleading and deceptive conduct in contravention of section 52 of the Trade Practices Act. His Honour also found that Mr McLaren had aided and abetted Focopa’s breach in contravention of section 75B of the Trade Practices Act. Mr McLaren was ordered to pay $56,872.36 in damages which included interest.
This judgment debt then became the basis for the issue of a bankruptcy notice which was served on Mr McLaren on 7 May 1995 at the instance of ATSIC. As Mr McLaren did not comply with the notice within the stipulated period of 21 days, he is said to have committed an act of bankruptcy as to found ATSIC’s petition for the sequestration of Mr McLaren’s estate.
Mr McLaren’s submissions
Prima facie the requirements of section 52(1) of the Bankruptcy Act have been complied with, thus enlivening the Court’s power to make a sequestration order against the estate of Mr McLaren. However, he argued that the debt cannot found a new sequestration order because it should have been proved, pursuant to section 82(1) of the Act, in his previous bankruptcy. It was said that the present debt was an obligation incurred before the date of the previous bankruptcy. The reasoning behind this submission can be summarised as follows:
Debts provable in a bankruptcy under section 82(1) include liabilities as defined in section 82(8)(b) which includes:
(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 discharge of the bankrupt;
The contract between Mr McLaren and ATSIC was forged before his bankruptcy began.
Although occurring after the start of his bankruptcy, these representations arose directly out of that contract.
Through this chain of reasoning, Mr McLaren contended that the debt was a contingent liability, as contemplated by section 82(8)(b), provable in his previous bankruptcy and subsequently expunged on his discharge.
Contingent liability in previous bankruptcy
Actual liability to pay this debt did not arise until the orders of Justice Lockhart were entered. Thus the only possible way to succeed in a claim that the debt was provable in his previous bankruptcy would be to show that it was a contingent liability within the ambit of subsections (1) and (8)(b) of section 82. Subsection (1) requires that the debt to be proved must be one ‘to which a bankrupt is subject at the date of the bankruptcy’ (emphasis added). The relevant part of subsection (8)(b) for these purposes states that a liability includes a ‘possible obligation to pay money...on the breach of an express...contract’. It is necessarily implied in the wording of this provision that the bankrupt and the party to whom the bankrupt owes the contingent liability must be parties to the contract. At least there must be some legal relationship between the bankrupt and the party owed the allegedly provable debt.
This requirement highlights the fundamental problem with Mr McLaren’s reasoning. The kernel of his argument is that he owed some obligation to ATSIC, albeit contingently, before and when he was made bankrupt on 19 July 1990. It is quite clear, however, from the judgment of Justice Lockhart that the contract claimed to be the basis of this obligation was made between Focopa and ATSIC. Mr McLaren was not a party to it and was not bound by it. He was merely an employee of Focopa, ostensibly authorised to enter into contracts on Focopa’s behalf. From a legal standpoint, his involvement in acquiring the relevant liability began when he aided and abetted Focopa’s breach of the Trade Practices Act in contravention of section 75B of that Act.
Even then there was as yet no provable debt owed by Mr McLaren to ATSIC, even contingently. Firstly, the relevant time for assessing whether a contingent liability exists is the date of the bankruptcy: Ellis & Co’s Trustee v Dixon-Johnson [1924] 1 Ch 342. No provable debt was even on the horizon at that time. Secondly, there can be no debt, even contingently, until it crystallises into at least a possible, likely or expected amount. This event did not occur until at the earliest the launch of the proceedings by ATSIC against Mr McLaren on 27 July 1993 after his discharge from bankruptcy. Even then, it would hardly have been possible to quantify the extent of his so-called contingent liability until the order of Justice Lockhart was entered against him on 21 April 1994, approximately nine months later.
In essence Mr McLaren is asking the Court to find that, at the time of his previous bankruptcy, he had an obligation to ATSIC based on the possibility that, at some undetermined time in the future if he was sued, he might be found to have aided and abetted a breach of the Trade Practices Act by a company which had entered into a contract with ATSIC. It is obvious that this contingency is well outside the bounds of any ‘possible obligation’ envisaged by section 82(8)(b), as the only relationship between Mr McLaren and ATSIC at the date of the original bankruptcy was that he was employed by a company contracting with ATSIC. There was no legal relationship between him and ATSIC that could possibly found a contingent liability.
Conclusion
No liability on the part of Mr McLaren ever arose out of Focopa’s contract with ATSIC; it was an issue that concerned only Focopa. The debt owed by Mr McLaren to ATSIC on the basis of Justice Lockhart’s orders was not provable in Mr McLaren’s previous bankruptcy because it did not then exist even as a contingent liability.
As the petitioning creditor has therefore made out all of the required elements of section 52(1) of the Bankruptcy Act and I am satisfied that this is an appropriate case for the making of a sequestration order, I pronounce a sequestration order against the estate of the debtor. I order that the Registrar appoint an appropriate trustee to the estate. I order that Mr McLaren pay the ATSIC’s costs of and pertaining to the proceedings including any reserved costs. I direct that ATSIC file with the Registrar a minute of these orders in accordance with rule 124(1).
For the debtor:
Mr P. Friend, Solicitor For the creditor: Mr M. Murray, Solicitor Date of Hearing: 19 November 1996 Written submissions completed 29 November 1996 Date of judgment: 22 May 1997
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