Re Van Phat Nguyen Ex Parte Official Trustee in Bankruptcy

[1992] FCA 185

Re: VAN PHAT NGUYEN and SON LANH LUU
Ex parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY
Nos. 347 of 1988 and 112 of 1989
FED No. 185
Bankruptcy
(1992) 107 ALR 424

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
French J.(1)

CATCHWORDS

Bankruptcy - property of the bankrupt - sale of property - whether consideration by way of money sum payable at a future time - sale to bankrupt - chose in action comprising cause of action against Bank and bank officer - consideration by way of proportion of proceeds of recovery - uncertainty of consideration - interest of creditors - whether unfair prejudice to Bank - effect on Bank's entitlement to set- off claim against bankrupts under mutual dealings provisions of Bankruptcy Act 1966.

Bankruptcy Act 1966 s.149, s.135, s.134, s.116, s.5, s.86, s.57

Bankruptcy Act 1869 (UK) (32 and 33 Vic C.71)

Bankruptcy Act 1914 (UK) s.56, s.167

Bankruptcy Act 1898 (NSW)

Bankruptcy Act 1924

Bankruptcy Amendment Act 1987

Bankruptcy Act 1883 (UK) s.168

Kitson v. Hardwick (1872) LR 7 CP 473

Re Motion, Maule v. Davis (1873) 9 Ch App 192

Seear v. Lawson (1880) 15 Ch D 426

Guy v. Churchill (1884) 40 Ch D 481

In Re Perkins; Poyser v. Beyfus (1898) Ch D 182

Ramsey v. Hartley (1977) 2 All ER 673

Gye v. McIntyre (1991) 98 ALR 393

HEARING

PERTH

#DATE 8:4:1992

Counsel for the Official Trustee: Mr P. Macliver

Solicitors for the Official Trustee: Australian Government

Solicitor

Counsel for the National Australia Bank Limited: Ms S. O'Sullivan

Solicitors for the National Australia Bank Limited: Mallesons Stephen

Jaques

ORDER

THE COURT ORDERS THAT:

1. The Official Trustee have leave to assign any chose in action which he may have as trustee of the bankrupt estates of Van Phat Nguyen and Son Lanh Luu against the National Australia Bank Limited and Max Goldenburg to Van Phat Nguyen and Son Lahn Luu on terms and conditions set out in a draft deed exhibited to the Affidavit of David John Newell sworn 5 December 1991 in number 112 of 1989.

2. There be no order as to the costs of the application.

3. There be liberty to apply within 7 days to vary the terms and conditions of the assignment.

Note: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

Van Phat Nguyen became bankrupt on 10 May 1988 upon filing his debtor's petition with the Registrar in Bankruptcy in Perth. His wife, Luu Son Lanh, filed her petition and became a bankrupt on 27 February 1989. On 21 June 1991 an application by the Official Trustee for the consolidation of their respective estates was dismissed. At that time the Official Trustee foreshadowed that he would be applying to the Court in due course for an order approving the assignment to the bankrupts of a cause of action which, it is said, they have against the National Australia Bank Limited and the former manager of its Wanneroo Branch.

1. The Official Trustee now seeks an order in each estate in the following terms:
   

1. That pursuant to Section 135(1)(b) of the Bankruptcy Act 1966 the Court grant leave to the Official Trustee to assign any chose in action which the Official Trustee as trustee of the bankrupt estate of (the Bankrupt) may have against the National Australia Bank Limited (the "Bank") and Max Goldenburg ("Goldenburg") to the Bankrupt in consideration of the Bankrupt paying to the Official Trustee 50 per cent of any proceeds recovered by the Bankrupt in any action brought against the Bank and/or Goldenburg after first having deducted:

(i) the amount of any counterclaim ordered to be paid by the Bankrupt; and

(ii) the Bankrupt's taxed costs of bringing the action to be less any costs ordered or agreed to be paid by the Bank and/or Goldenburg to the Bankrupt.

2. The Official Trustee's taxed costs of this application be paid out of the estate of the Bankrupt.

1. Mr Nguyen's application is supported by his own affidavit and that of Mr David John Newell, a public servant employed by the Insolvency and Trustee Service Australia, who has the care and conduct of the administration of the bankrupt estates. Ms Luu's application was supported by her affidavit and that of Mr Newell. An affidavit in opposition to each of the applications was sworn by Mr David Low, relieving manager of the W.A. Securities Services Department of the National Australia Bank Limited.

2. The allegations made in support of the existence of a cause of action against the Bank and its former manager are set out in Mr Nguyen's affidavit and a draft statement of claim exhibited to it. In substance it is alleged that in withdrawing its financial support for a market garden business conducted by the bankrupts through a company called Viex Imports and Exports (1986) Pty Ltd, of which they were the sole shareholders and directors, the Bank exercised undue influence in circumstances surrounding the signing of debtor's authorities and the freezing of accounts and credit and the initiation of recovery action. It is said to have engaged in unconscionable conduct contrary to the provisions of s.52A of the Trade Practices Act 1974 and s.11 of the Fair Trading Act 1987 (WA) as well as misleading or deceptive conduct in contravention of s.52. The bankrupts and their company would seek to recover damages against the Bank and against Mr Goldenburg. The conduct complained of is largely said to have occurred in the period from February through to July 1987.

3. On 11 May 1991 Mr Nguyen was discharged from bankruptcy by operation of s.149 of the Bankruptcy Act 1966. He has requested the Official Trustee to sell to him any chose in action which he may have as trustee of the bankrupt estate against the Bank and Mr Goldenburg in return for him pursuing the claim and giving to the Official Trustee fifty per cent of any proceeds which he may receive after having first having deducted his legal costs. A proposed form of deed to be entered into with the Official Trustee in the event that the assignment of the chose in action is approved, was exhibited to the affidavit. Ms Luu's affidavit corroborates that of her husband and indicates that she too has requested the Official Trustee to sell to her the chose in action. She has also indicated that she would be a party to the deed, a draft of which was also exhibited to her affidavit.

4. In supporting the application, Mr Newell pointed out that there are no assets in the estate other than the chose in action and shares in the company Viex Imports and Exports (1986) Pty Ltd. He does not believe that the company has any assets apart from the possible cause of action against the Bank and/or Goldenburg. Proofs of debt had not been called for in the bankrupt estate of Mr Nguyen, but from information provided by him and inquiries made of creditors and credit reference reports it is estimated that he had approximately 17 creditors with claims totalling $435,783.59. Neither were proofs of debt called for in Ms Luu's estate. Mr Newell estimates that she has approximately 10 creditors with claims totalling $186,058.15. A schedule of creditors of each of the estates is exhibited to the affidavits sworn by Mr Newell in each case.

5. On 20 November 1990, a meeting of creditors of Mr Nguyen's estate was held to consider a resolution in the following terms:
   

"That the bankrupt be authorised to pursue an action for damages against the National Australia Bank and/or the former manager of the Wanneroo Branch (Max Goldenburg) on the following conditions:

(1) that he meet all costs from his own or from his friend's resources. No costs are to be incurred by the Official Trustee; and

(2) that in the event of success, the proceeds after costs be shared 50 per cent to the bankrupt and 50 per cent to his bankrupt estate."

Five creditors to whom a total of $135,339.47 was owing voted in favour of the resolution. The Bank, to whom approximately $251,038.94 was owing, voted against and accordingly the resolution was not passed. Mr Newell says, and I accept, that if a meeting of creditors of Ms Luu's estate were to be held for the purposes of approving the transfer of the chose in action to her, it is likely that the Bank would again vote against the resolution. The amount owed to the Bank exceeds what is owed to other creditors.

1. Mr Newell says that on information presently available, the Official Trustee is unable to say that it would definitely be successful in any action brought against the Bank or Goldenburg and does not therefore want to commit public funds to pursuing that course. He believes, however, that the proposal offered by Nguyen and Luu to pursue an action against the Bank and/or Goldenburg in exchange for 50% of any proceeds recovered after deduction of costs is reasonable and asks that the Court grant the application which is now made. A copy of the proposed Deed between the Official Trustee and Mr Nguyen and Ms Luu is exhibited to each of Mr Newell's affidavits.

2. Mr Low's affidavit in relation to the application in the Estate of Mr Nguyen shortly sets out that he is indebted to the Bank in sums of $103,661.09 together with interest at $43.27 per day from 12 September 1987 and $108,404.49 plus interest at $45.33 per day from 12 September 1987. Each of these sums remains outstanding and the Bank has instituted actions numbered 2435 of 1987 and 2436 of 1987 in the Supreme Court of Western Australia for their recovery. A third sum of $16,007.76 plus interest at the rate of $7.09 per day from 12 September 1987 is said to be owing to the Bank pursuant to an overdraft account. That sum also remains outstanding and the Bank has instituted action number 6471 of 1987 in the District Court of Western Australia in relation to it. In the estate of Ms Luu, Mr Low's affidavit sets out that she is indebted to the Bank in the sum of $108,404.49 plus interest at $45.33 per day from 12 September 1987 under an overdraft account made available by the Bank to herself and her husband. Ms Luu is also named as a defendant in the Bank's action number 2436 of 1987 in the Supreme Court of Western Australia.
   Statutory Framework

3. Section 135 of the Bankruptcy Act 1966 provides in the relevant parts:
   

"135(1) The trustee may, with the permission of the creditors granted by resolution passed at a meeting of the creditors, with the permission of the committee of inspection or with the leave of the Court, do all or any of the following things:-

(a) sell, by private contract, any property of the bankrupt having a net value exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134;

(b) accept, without terms or conditions, or subject to terms and conditions, a sum of money payable at a future time as the consideration or part of the consideration for the sale of any property of the bankrupt;

.

.

.

135(3) Permission or leave given for the purposes of subsection (1) shall not be general permission or leave to do all or any of the things referred to in that sub-section, but shall be permission or leave to do only the particular things for which permission or leave is sought in a specified case."

Reference should also be made to s.134 of the Act which confers general powers upon the Trustee but limits the power of disposition to property not exceeding $20,000 in value:

"134(1) Subject to this Act, the trustee may do all or any of the following things:

(a) sell all or any part of the property of the bankrupt;

.

.

.

134(2) Paragraph (1)(a) does not authorize the trustee to sell by private contract any property having a net value exceeding the prescribed amount. 134(2A) A reference in sub-s (1) or (2) to the prescribed amount is a reference to $20,000 or, if a greater amount is prescribed for the purposes of this section, to that greater amount."

The term "the property of the bankrupt" is defined for present purposes in s.5 as:

""the property of the bankrupt", in relation to a bankrupt, means:

(a) except in subsection 58(3) and (4):

(i) the property divisible among the bankrupt's creditors; and

(ii) any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; "

Section 116 sets out the classes of property which constitute property divisible among the creditors of the bankrupt and relevantly for present purposes provides:

"116(1) Subject to this Act-

(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge; .

.

.

is property divisible amongst the creditors of the bankrupt."

Section 5 defines the term "property" as follows:

""property" means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property."

1. In the context of the present application s.86 providing for mutual credits and set-offs is also relevant:
   

"86(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy-

(a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;

(b) the sum due from the one party shall be set off against any sum due from the other party; and

(c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.

(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he had notice of an available act of bankruptcy committed by that person."

Statutory History

1. The Bankruptcy Act 1869 (UK) (32 and 33 Vic C.71) made provision in s.25(6) whereby trustees were empowered to sell all the property of the bankrupt by public auction or private contract. Although by s.26 the trustee was authorised to appoint the bankrupt to superintend the management of the property or to carry on the trade of the bankrupt for the benefit of the creditors, the Act did not expressly empower sale of property to the bankrupt himself. Section 56(1) of the Bankruptcy Act 1883 conferred on the trustee a power to "sell any part of the property of the bankrupt..." but did not impose any monetary limit. Section 57 provided:
   

"57. The trustee may, with the permission of the committee of inspection, do all or any of the following things:

.

.

.

(4) Accept as the consideration for the sale of any property of the bankrupt a sum of money payable at a future time subject to such stipulations as to security and otherwise as the committee think fit."

Sub-sections (1) to (3) and (5) to (9) are not material for present purposes. Separated as it was from the general power of sale in s.56, sub-s.57(4) required special consideration of the exercise of the general power to the extent that it involved a sale under which monetary consideration was payable at some future date. This provision was replicated in sub-s.56(4) of the Bankruptcy Act 1914 (UK). It appeared in sub-s.64(4) of the Bankruptcy Act 1898 (NSW).

1. In the first Commonwealth bankruptcy legislation, the Bankruptcy Act 1924, the power there conferred by the like provision was conditioned alternatively upon permission of the creditors by resolution passed at any general meeting or of the committee of inspection or leave of the Court. The relevant provision was s.107(c) which provided:
   

"107. The trustee may, by permission of the creditors by resolution passed at any general meeting or of the Committee of Inspection, or by leave of the Court, do all or any of the following things: .

.

.

(c) Accept, as the consideration for the sale of any property of the bankrupt, a sum of money payable at a future time subject to such stipulations as to security and otherwise as he thinks fit."

The relevant parts of s.107 were reproduced in s.135 in the Bankruptcy Act 1966 but the Bankruptcy Amendment Act 1987 substituted the reference to "a meeting of the creditors" for the previous wording which referred to a general meeting of creditors.

1. The definition of property in the 1924 Act specifically included "things in action". That phrase had a respectable antiquity. It had appeared as part of the definition of "property" in s.4 of the Bankruptcy Act 1869 (UK), s.168 of the Bankruptcy Act 1883 (UK) and s.167 of the Bankruptcy Act 1914 (UK). The definition of "the property of the bankrupt" in the 1966 Commonwealth statute appeared in the draft Bill proposed in 1962 by the Committee chaired by Sir Thomas Clyne and appointed by the Attorney-General to review the bankruptcy law of the Commonwealth. The Report of that Committee contained no discussion of the change in definition nor indeed of the provisions of s.135. It is evident from the broad terms of the new definition and the absence of any express discussion of it in the Report, that it was not intended to change the substantive law and that the definition of "the property of the bankrupt" extended, although not expressly, to choses in action.
   The Question of Power

2. Whether the Court has power to make the order sought depends upon whether the proposed transaction is of a kind that can be authorised under s.135(1) of the Bankruptcy Act 1966. There are the obvious preliminary questions whether a sale of property to the bankrupt lies within the purview of the subsection and whether it covers sale of a chose in action.

3. The general power of sale conferred by s.134 includes a power to sell to the bankrupt. A fortiori so too does s.135(1). In Kitson v. Hardwick (1872) LR 7 CP 473, Willes J. rejected a submission in respect of s.25(5) of the Bankruptcy Act 1869 that such a transaction was contrary to the policy of the Act or that property so sold would be immediately revested in the trustee. At 478 the Judge said:
   

"Having had much experience in bankruptcy, I have seen the advantage of giving the debtor a chance of getting back the business, especially where it is one which depends upon the personal influence or skill of the individual. In many cases a higher price might be obtained from him than a stranger would be willing to give. We are bound to put the ordinary construction upon the words of the Act, unless the doing so will be manifestly inconsistent and contrary to the general scope and policy of the legislation: and, when the Act says that the trustee may sell the estate to any person, and that any person buying may sue in his own name in respect of it, I see nothing inconsistent or contrary to the policy of the Act in holding that a sale to the bankrupt himself is not even voidable."

See also Re Motion, Maule v. Davis (1873) 9 Ch App 192.

1. For the reasons already outlined in the statutory history, the "property of the bankrupt" which may be sold under sub-s.135(1)(a) and (b) includes a chose in action. There is no policy impediment to such a constraint. In Seear v. Lawson (1880) 15 Ch D 426, the Court of Appeal held that s.25(6) of the 1869 Act would allow a chose in action vested in the trustee in bankruptcy to be sold. Jessel M.R. said at 433:
   

"If the trustee gets a right of action why is he not to realize it? The proper office of the trustee is to realize the property for the sake of distributing the proceeds amongst the creditors. Why should we hold as a matter of policy that it is necessary for him to sue in his own name? He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding up of the bankruptcy till the end of the litigation. Considering these things it seems to me to be a priori probable that he would be entitled to sell it, but I prefer to rest my decision upon the plain words of the statute."

1. James L.J. agreed at 434. See also Brett L.J. at 434.

2. A fairly encouraging approach to assignment of choses in action in bankruptcy was also disclosed in Guy v. Churchill (1884) 40 Ch D 481. An assignment of a chose in action to a creditor on the basis that he would receive an agreed proportion of the ultimate recovery was held to be neither maintenance nor champerty. Chitty J. referring to s.57 of the 1883 Act, said at 488:
   

"The policy of the statute appears to be to give power to the trustee, with the sanction of the committee, to make arrangements in reference to choses in action which are considered beneficial to the creditors."

Seear v. Lawson (supra) was cited with approval in the judgment of Lindley M.R. at 188 in In Re Perkins; Poyser v. Beyfus (1898) Ch D 182.

1. The remaining question of power is whether s.135(1) prevents the present transaction from being approved. The short answer is that it does not. Sub-paragraph (b) refers to "a sum of money payable at a future time". The National Australia Bank contends that the consideration to the Trustee in the proposed transaction is uncertain. The litigation, it says, may not proceed and if it does proceed, it may not succeed. On that basis the Official Trustee is not accepting a sum of money payable at a future time. There is merit in the submission put by the Bank that the transaction does not fall within sub-para 135(1)(b) But the section as a whole is not to be construed in a way that would prevent the Trustee, subject to the supervision of the Court or the creditors, from taking such steps as may be desirable to maximise the prospect of a return to creditors. To say that the transaction does not involve "a sum of money payable at a future time" does not lead to the conclusion that it is not a sale capable of being approved in any event under sub-s. 135(1)(a) - see Ramsey v. Hartley (1977) 2 All ER 673. In the special case in which a sale involves payment of a money sum at a future time whether or not the value of the property exceeds $20,000, the leave of the court or the permission of the creditors or committee of inspection will be required. This special provision may have been designed to focus the attention of the trustee and the court or creditors upon the need to have adequate security for money payments to be made in the future. It does not prevent permission for the sale of a chose in action for a non-monetary consideration. In this case I am satisfied that the court has power to grant the leave for the proposed sale under sub-s.135(1)(a). I should add that it is possible that leave is not necessary. The size of the claim made against the Bank is not its net value for the purposes of s.134 or s.135(1)(a). Net value would have to be assessed in the light of the probability of success as it stands on present information. But there is no evidence to suggest that the net value was less than $20,000 and I am content to proceed on the assumption that it exceeded that amount.

2. The Bank contends further that the sale is not in the best interests of the creditors because it is not known whether the funds to finance the action should form part of the bankrupt estate. This possibility is speculation. In any event, Mr Nguyen has said in a second affidavit filed in these proceedings, that the action will be financed by friends on the basis that if it is successful they will recover what they have contributed plus an interest charge. There is nothing, in my opinion, to support the contention that the transaction is not in the interests of the creditors.

3. Finally, the Bank says it will be prejudiced by the proposed assignment. Its claims against Mr Nguyen and Ms Luu are blocked by virtue of s.58(3) of the Bankruptcy Act. It has only a right to lodge a proof of debt. If the proposed action were brought by the Official Trustee it would have a right of set-off under s.86 in relation to its claim. If the rights of action are assigned, says the Bank, it will lose its right of set-off. I do not accept that submission. The section is "...a statutory directive ... which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed ... If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee" - Gye v. McIntyre (1991) 98 ALR 393 at 401. A chose in action subject to set-off by virtue of the section if assigned is assigned, in my opinion, with the right of set-off intact. The trustee cannot sell more than he has. What he has in this case at best is a chose in action subject to the right of set-off.

4. Even if that view were incorrect, the Bank would have available to it the argument that any damages recoverable by Mr Nguyen and Ms Luu must take into account the moneys they received from the bank. That is not a matter of proving a debt, but rather of assessing damages. And, of course, under the proposed arrangements, fifty per cent of the net proceeds of the action would fall back into the estate. Although the costs and benefits to the Bank and other creditors could not be calculated with any precision in the event that s.86 is not available to it, I would consider it in the interests of the creditors as a whole and in the legitimate interests of Mr Nguyen and Ms Luu to grant the leave sought as a matter of discretion.

5. In my opinion therefore, leave should be given for the proposed assignment of the chose in action to Mr Nguyen and Ms Luu.

6. As leave would have been necessary in this case with or without the filing of a notice of opposition to the respective applications by the National Australia Bank and given that the Bank's representation allowed consideration of arguments which had an impact beyond advancing its own interests, I am of the opinion that no order as to costs should be made.