Rogers v Bush
[2015] FCCA 950
•4 March 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| ROGERS & ANOR v BUSH & ANOR | [2015] FCCA 950 |
| Catchwords: BANKRUPTCY – Application for leave pursuant to s.58(3) of the Bankruptcy Act 1966 (Cth). |
| Legislation: Bankruptcy Act 1966 (Cth), ss.5, 58, 82, 117 |
| 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328 Allanson v Midland Credit Ltd (1977) 16 ALR 43; [1977] FCA 14 Aztech Science Pty Ltd v Daevys [2005] FCA 1828 |
| First Applicant: | KENNETH MALCOLM ROGERS |
| Second Applicant: | YVONNE LESLEY ROGERS |
| First Respondent: | JOHN ARTHUR BUSH |
| Second Respondent: | OFFICIAL TRUSTEE IN BANKRUPTCY |
| File Number: | SYG 3564 of 2014 |
| Judgment of: | Judge Barnes |
| Hearing date: | 4 March 2015 |
| Delivered at: | Sydney |
| Delivered on: | 4 March 2015 |
REPRESENTATION
| Counsel for the Applicants: | Mr C Bannan |
| Solicitors for the Applicants: | Maddocks |
| Solicitors for the Second Respondent: | TressCox Lawyers |
ORDERS
If and to the extent that it is necessary by reason of the provisions of s.58(3) of the Bankruptcy Act 1966 (Cth), the Applicants be granted leave to commence a cross-claim against the First Respondent in the Supreme Court of New South Wales Equity Division Commercial List Proceedings No.2014/43529, and to take any fresh steps in relation to the claim against the First Respondent.
Costs be costs in the cause of the Applicant’s cross-claim against the First Respondent.
| FEDERAL CIRCUIT COURT AT SYDNEY |
SYG 3564 of 2014
| KENNETH MALCOLM ROGERS |
First Applicant
| YVONNE LESLEY ROGERS |
Second Applicant
And
| JOHN ARTHUR BUSH |
First Respondent
| OFFICIAL TRUSTEE IN BANKRUPTCY |
Second Respondent
REASONS FOR JUDGMENT
(Revised from transcript)
This is an application filed on 19 December 2014 in which the Applicants, Mr and Mrs Rogers, seek leave pursuant to s.58(3) of the Bankruptcy Act 1966 (Cth) (the Act) to commence a cross-claim against the First Respondent, Mr Bush, in the Supreme Court of New South Wales in specified proceedings and to take all further necessary steps to prosecute the proposed cross-claim. The Second Respondent is the Official Trustee in Bankruptcy. There is an appearance for the Official Trustee who neither opposes nor consents to the application.
The First Respondent has not appeared and did not appear when this matter was before a Registrar of the Court on the first return date. The Applicants have tendered email correspondence with Sparke Helmore, who act for Mr Bush in his personal capacity, in relation to service of the application. Sparke Helmore confirmed that Mr Bush did not propose to appear in opposition to this application. In these circumstances I consider it appropriate to proceed with the hearing in the absence of Mr Bush. I am satisfied that the proceedings have been brought to his attention.
The background to the application and the matters relied on in support of it are attested to in the affidavit of Alexander Russell Langshaw, solicitor for Mr and Mrs Rogers, affirmed on 18 December 2014. In essence, Mr and Ms Rogers are defendants in Supreme Court proceedings No.2014/43529 brought against them by Fornalutx GmbH (Camper). Mr and Mrs Rogers each owned 25 per cent of the shares in two companies which conducted a business selling the Camper brand of shoes.
In 2012 Mr and Mrs Rogers entered into a share purchase agreement (SPA) with Camper pursuant to which they agreed to sell their shares in the two companies to Camper. The SPA contained a warranty given by Mr and Mrs Rogers to Camper that the companies that were the subject of the SPA had not paid any dividends or made any distribution of profits to shareholders since the financial report for the financial year ended 30 June 2010. It is asserted in the Supreme Court proceedings that the companies had in fact paid $1 million in dividends in the financial year ending 30 June 2011.
In February 2014 Camper commenced proceedings in the District Court of New South Wales against Mr and Ms Rogers seeking liquidated damages and orders on the basis that they breached the SPA dividend warranty. Mr and Mrs Rogers filed a defence and a cross-claim alleging mutual or unilateral mistake as to the content and effect of the dividend warranty. In effect, their argument was that the warranty ought to have been that no dividends had been paid since 30 June 2011. The matter was transferred to the Supreme Court in May 2014.
According to Mr Langshaw, in the course of preparing for that case it became apparent that there may be an arguable cause of action against Mr Bush, who acted as solicitor for Mr and Mrs Rogers in relation to the SPA.
However Mr Bush is an undischarged bankrupt. In these circumstances Mr and Mrs Rogers seek leave under s.58(3) of the Act to bring a second cross-claim against Mr Bush. A copy of the proposed cross-claim is in evidence. Mr and Mrs Rogers propose to assert a breach of a warranty of due care and skill implied into the contract of retainer and also professional negligence on the part of Mr Bush, on the basis that he failed to advise them as to the effect of key terms in the SPA, in particular the dividend warranty.
On 5 December 2014 the Supreme Court made orders that Mr and Mrs Rogers were to file any application in this Court for leave to commence a cross-claim against Mr Bush by 19 December 2014 and that they file a cross-claim against Mr Bush within seven days of any such leave being granted. The proceedings are listed for further directions in the Supreme Court on 6 March 2015.
Relevantly, s.58(3) of the Act provides that:
(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
As elaborated on in detailed and helpful written submissions for the Applicants, a threshold question is whether s.58(3) of the Act applies, in particular whether the proposed cross-claim is in respect of a provable debt. However I accept that, as submitted for the Applicants, it is not necessary for the Court to decide such question in these proceedings. There is authority to the effect that it is permissible to proceed on the basis that leave is necessary and that leave may be granted to the extent that it is required. In particular, in Allanson v Midland Credit Ltd (1977) 16 ALR 43; [1977] FCA 14, the Full Court of the Federal Court proceeded on the basis that if s.58(3) applied, the Court had jurisdiction to grant leave to proceed and that such leave should be granted. The Court stated (at [27]) that it was “…unnecessary in the circumstances … to express a final view of the effect of the…stay on the operation of section 58(3)” and that in circumstances where the court had power to grant leave and the question of whether the need for such leave arose involved “…difficult and complicated questions of law or fact”, it was “permissible, in an appropriate case, to proceed on the basis that such leave is necessary rather than to involve the parties” in what was described as “…the futile exercise of determining, possibly after a series of appeals, whether the need for such leave has arisen”.
In this case, as in Allanson, having regard to all the circumstances, including the timing of the application and the urgency of the matter, I consider that this is the appropriate way in which to proceed. In other words, it is not necessary to determine the threshold issue, as an order may be made on the basis that if leave is required it should be granted. Such an approach has also been taken in other recent decisions of the Federal Court (see for example Stoker (Trustee), in the matter of Starr (Bankrupt) v Starr [2011] FCA 746, Commonwealth Bank of Australia v Collins (as trustee of the bankrupt estate of Campbell) [2014] FCA 1061 and SBA Music Pty Ltd v Hall(No 2) [2014] FCA 1116).
Having said that, it is appropriate to give attention to the issues that arise in relation to whether the proposed cross-claim against Mr Bush is “in respect of a provable debt”. Such notion has been given a wide meaning (see for example Aztech Science Pty Ltd v Daevys [2005] FCA 1828 and Melnik v Melnik (2005) 144 FCR 141 at 148; [2005] FCAFC 160).
The proposed cross-claim contemplates both a claim based on a breach of an implied warranty and a claim based on negligence as defined in s.5 of the Act, having regard to the provisions of s.82 of the Act, in particular subsections (1) and (2) which are as follows:
(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 or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
…
(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.
The claims are in the nature of unliquidated damages. The issue is whether or not, having regard to s.82(2), they arise by reason of a contract, promise or breach of trust.
As the Applicants submitted, insofar as there is a claim based on breach of an implied term of the retainer, it is probable that such claim does arise by reason of a contract and hence it would be outside the s.82(2) exclusion. On that basis it is probably a provable debt. Counsel for the Applicants conceded that the position was less clear in relation to the negligence claim and in submissions referred to some conflicting (or not entirely consistent) authority in relation to claims in negligence (see Chittick v Maxwell (1993) 118 ALR 728 but cf Aliferis v Kyriacou (2000) 179 ALR 477 at 46 to 51; [2000] VSCA 123). In Lovell v Penkin (A Bankrupt) and Another (2008) 101 ALD 335; [2008] FCA 637 (referred to with apparent approval in 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328) the Federal Court concluded that on balance such a claim was provable, so that leave under s.58(3) was required. In 7Steel Flick J proceeded on the basis that it was unnecessary to reach a concluded view as to whether leave was required, that it probably was and that the discretion to grant leave should be exercised on the basis that leave was necessary. The same may be said in this case. It is not necessary to determine whether or not the negligence claim in fact arises by reason of a contract (that is, the retainer) and is therefore provable in bankruptcy.
Moreover, it is appropriate to proceed on the basis that even if all of the claims are not in respect of a provable debt (see SBA Music Pty Ltd v Hall (No 2)), leave is required and if it is to be granted it ought to be granted in respect of the whole of the claim insofar as it is necessary to do so.
In that respect, I note that if leave were to be refused an issue would arise as to whether the negligence claim could nonetheless proceed on the basis that it was not in respect of a provable debt so that leave under s.58(3) was not required. That possibility reinforces the view that I have taken of the appropriateness of considering the grant of leave in circumstances such as the present.
In this case the discretion conferred on the Court under s.58(3) of the Act should be exercised in favour of granting the leave sought. The application was not opposed by Mr Bush (or by his professional indemnity insurer LawCover for whom Sparke Helmore also acts). Nor does the Trustee in Bankruptcy oppose the application (see Sydney Adventist Hospital Limited v Nemes [2011] FCA 48, 7Steel v Wright, SBA Music v Hall (No.2) and Stoker v Starr).
The grant of such leave would promote the general purpose of the Bankruptcy Act as a whole (see Re Rose; Ex parte Devaban Pty Ltd (unreported, Federal Court of Australia, Hill J, 7 October 1994) in which Hill J described the objectives of s.58(3) and Sydney Adventist Hospital Limited v Nemes and Done v Financial Wisdom Limited [2008] FCA 1706). That is particularly so given that there is a professional indemnity insurance policy with Lawcover, Mr Bush’s insurer. This is of relevance because if the policy applies, then it would appear that there would be no prejudice to other creditors of Mr Bush. Even if it does not, Lawcover has engaged solicitors and it would seem that its payment of any costs of the defence would not dissipate assets available for other creditors of Mr Bush. Mr and Mrs Rogers are seeking payment of the amount recoverable under whatever right to indemnity Mr Bush had (and the Trustee would have under s.117 of the Act) against his professional indemnity insurer.
Thus, while a principle underlying the staying of proceedings is to prevent a creditor obtaining an advantage over other creditors and to ensure that a trustee is not put to additional expense so as to dissipate limited assets, in this case, given the particular nature of the proceedings in issue, the grant of leave would not impinge on such objectives.
In addition, and of some significance, the claims in this case are connected with other claims the subject of the existing Supreme Court proceedings. The claim is complex. I accept that there are likely to be contested facts (for example in relation to the nature and the content of any advice provided by Mr Bush). Other parties are involved, in particular Camper (through its corporate identity), which initiated the proceedings.
In my view the issues involving Mr Bush would be more conveniently and more comprehensively dealt with by a contested trial of the action (which I note has been transferred to the Supreme Court from the District Court) than would be the case if Mr and Mrs Rogers were required to lodge a proof of debt in respect of their claim against Mr Bush alone (see Allanson at 114 and also see Re Rose in relation to the relevance of the involvement of other parties in the Supreme Court proceedings, and more generally see Re Peter Lyle Sharp; Ex Parte: Tietyens Investments Pty Ltd (in liq) & Anor [1998] FCA 1367 at 6, Sturdy Components Pty Ltd v Trustee of the Bankrupt Estate of Sturt [2000] FCA 884 at [3] – [4] and Done v Financial Wisdom Limited at [36]).
I note that while the proceedings have been on foot for some time, there is an explanation in the affidavit evidence in relation to the time and circumstances in which the cross-claim involving Mr Bush was raised. There is no suggestion that there has been an excessive delay in that respect. The need for the grant of leave has been anticipated by the Supreme Court orders. The grant of leave avoids the possibility that the Supreme Court would be inhibited in dealing with or allowing the cross-claim because of the application of s.58(3)(b) of the Act in circumstances where the proceedings contemplated and the grant of leave are not inconsistent with the principles underlying that provision or with the purpose of the Bankruptcy Act generally.
Counsel for the Applicants referred to SydneyAdventist Hospital Limited v Nemes which also concerned a claim for professional negligence against a solicitor where there was evidence that, as here, solicitors had been instructed by Lawcover, there was no suggestion that Lawcover opposed the grant of leave and the Trustee in Bankruptcy neither opposed nor consented to the grant of leave. Jagot J took the view that it was not necessary to impose a condition on the grant of the leave that it would only apply in the event that Lawcover continued to provide cover and defend the proceedings. No such condition is sought in this case. Nor does it appear to me, having regard to the particular nature of the proceedings and the factors discussed by Jagot J, that it is necessary to impose such a condition.
On balance, I am satisfied that it is appropriate to grant the leave that is sought if and to the extent that such leave is necessary on the basis sought by the Applicants in these proceedings and to order that costs be costs in the cause of the Applicants’ cross-claim against the First Respondent.
I certify that the preceding twenty-five (25) paragraphs are a true copy of the reasons for judgment of Judge Barnes
Associate:
Date: 16 April 2015
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