Somate Pty Ltd, in the matter of McCarthy v Caddy

[1990] FCA 831

831       40

3UDGMENP No. ....,.Y_..._I ,,-,,,,

IN THE FEDERAL COURT OF AUSTRALIA	)
GENERAL DIVISION	)
BANKRUPTCY DISTRICT OF THE	) NO W 1451 of 1986
STATE OF NEW SOUTH WALES AND THE	)
AUSTRALIAN CAPITAL TERRITORY	)
RE:
DAVID ANTHONY MCCARTHY

+ BETWEEN:

SOMATE PTY LIMITED

Applicant

AND :
GEORGE CADDY
THE OFFICIAL TRUSTEE IN

BANKRUPTCY

Respondent

CORAM: Einfeld J

m:  6 March 1990

PLACE: Sydney

EX TEMPORE JUDGMENT

This application which arose today in the ordinary bankruptcy list appears to raise a point which is quite novel. At any rate, in the time that I have had available to consider it and to inquire of other members of the Bench, I can find no examples reported or within the knowledge of anyone which are precisely on all fours with this one.

This was effectively about three and a half months ago.

The relevant facts for present purposes are that a sequestration order was pronounced against David Anthony McCarthy on 25 November 1986. Exactly three years after that date, in accordance with the statute, he was discharged from bankruptcy.

The present applicant commenced proceedings against Mr McCarthy in the Supreme Court of New South Wales on 8 March 1988 seeking damages for breach of contract and for tort as a result of events which took place on or before 24 March 1982. At the relevant time Mr McCarthy was a solicitor and the proceedings in the Supreme Court involve allegations of breach of trust and other similar miscreances.

The proceedings are now due to be heard in the Supreme Court on

26 arch 1990. At the time when the proceedings were commenced

in the Supreme Court, the present applicant did not know that Mr McCarthy was a bankrupt. Indeed, the evidence establishes that Mr McCarthyrs own solicitor did not know at the time.

The consequence was that no leave was sought under sub section

(3) of section 58 of the Bankruptcy Act to commence the

proceedings. It is alleged here that the substance of the Supreme Court proceedings involves a provable debt, or one which would have been provable if the bankrupt had made known to the Official Trustee the existence of the applicant as one of his creditors.

without any attention having been given to any debt provable by	The consequence has been that the bankruptcy has been completed
or otherwise owed to the applicant. The proceedings in the Supreme Court have proceeded apace right up to the eve of the hearing. Indeed, I am informed that the case was expedited in the Supreme Court and originally fixed for hearing last October, but an adjournment was granted at the request of Mr McCarthy who was then and is still facing criminal proceedings. Whether the criminal proceedings have anything to do with the current proceedings I am not particularly aware, but another aspect of this will arise in just a moment.
when the matter came before the Registrar this morning, Mr McCarthy attended and stated that he wished to contest the present application for the leave which section 5 8 ( 3 ) might make necessary for the continuation of the Supreme Court proceedings. This is particularly important to enable those proceedings to be heard and determined when they come before that Court shortly.
Mr McCarthy produced to the Registrar an affidavit. This indicates that what in substance he sought before the Registrar - and I rather gather though he has not attended before me, seeks before the Court - was the right to appear in this application for leave to continue with the litigation. There is no formal application to be joined as a respondent, nor even for the right to be heard, but the Registrar permitted Mr McCarthy to produce an affidavit which was placed with the papers and which I have since read.
both before the Registrar and before me. "Heard" is a Counsel for the applicant objected to Mr McCarthy being heard,
significant word in this context, because Mr McCarthy left the Registrar's court without appearing before me and went off to the

l

I	Local Court apparently to defend himself or to appear at the
l
I
I	continuation of the criminal proceedings. He has not been in attendance here at any time today, neither at the commencement of

the proceedings this morning just after 10 o'clock, nor this
afternoon when they are being continued after 3 o'clock.

I merely refer to the affidavit at the moment to illustrate the issues but not to admit it into evidence. Because of its contents, I really treat it as a submission from the bar table. The affidavit says that Mr McCarthy is not in a position to seek the leave of the Court to appear in these proceedings and contest the orders sought in the application for effectively three reasons.

The first is that he is appearing in the Local Court at this time on charges of breaching section 169 of the Companies Code and that he is unrepresented there because he cannot afford legal representation. He says that these proceedings were set down for hearing over five months ago by the magistrate and that he was unaware that the applicant would be seeking the orders sought in the application until recently served.

He secondly says in his affidavit that he believes that there are substantial legal grounds to support his objection to the orders and, as he describes it, craves the leave of the Court to present

his case at the first opportunity available. It is a strange	level of courtesy, even by a former solicitor, to do the Court
the honour of saying that he will attend whenever it is convenient to him.
I do not accept an affidavit in this form even if it is formally
admissible. The affidavit says that 18 days were set down for the hearing of these proceedings before the magistrate. I have not the slightest doubt that when the proceedings commenced in this batch of hearing days in the Local Court yesterday, he could have applied to the magistrate, if he had wanted to, for the opportunity of appearing this morning in the Bankruptcy Court for an hour or so to argue this matter. It is completely unacceptable that someone who seeks the Court's indulgence in a matter such as this just decides to allocate the priorities in his own way and makes no attempt to deal with the obligation here if he wished to make any submissions.
More importantly even than that, the affidavit describes him as having "substantial legal grounds to support my objection to the orders sought in the said application", but gives no details of such grounds. I am advised that something similar was said to a Supreme Court Judge last October when an adjournment was obtained of the then specially fixed proceedings. By now Mr McCarthy would surely know what his "substantial legal grounds" were. If he had given any indication of what they were, it might have been possible to assess more seriously whether there was anything to be debated on this issue.
McCarthy has standing before the Court on this application. The I do not find it necessary to rule on the issue as to whether Mr
matter is not of simple disposition because he is now a discharged bankrupt and I am not sure that he might not in some circumstances be entitled to be heard, perhaps even to be joined as a respondent. However, the reason why his so-called opposition should be put to one side in my view is that there
appears to be no substance to it and 1 see no reason at all why this matter should be delayed to abide and await Mr McCarthyfs personal convenience.
In any event, according to him, he would be in the Local Court right up to the last working day before this matter is to be heard in the Supreme Court. It is unthinkable that the Supreme Court proceedings could be allowed to be adjourned again in order for Mr McCarthyfs objection to be heard. If I were to do as he asks now, it would have that result, for that is the substantive effect of the affidavit which Mr McCarthy presented to the Registrar this morning.
That brings me then to the substance of the application itself. Sub-section (3)(b) of section 58 provides as follows:

Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor -

(a) . . . . . . . . . . ,

(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceedings in respect of a provable debt or take any fresh step in such a proceeding.

Taken literally, what this provision means is that a person	cannot sue a bankrupt in respect of a provable debt without the
leave of the Court. If the proceedings have been commenced against the person before becoming a bankrupt, the moving party cannot take any fresh step in the proceedings without the leave of the Court.
As I have earlier pointed out, the Supreme Court action was commenced without knowledge of the bankruptcy while the debtor was a bankrupt, and will be heard after his discharge. Counsel for the applicant firstly argued that it would be satisfactory if
I were merely to give leave to the applicant to take such fresh
steps in the proceedings in the Supreme Court as it may be advised, including presumably to embark on the hearing. The problem with that seems to be that the proceeding itself may be invalid because it was commenced while the debtor was a bankrupt but without the leave of the court. Furthermore, it seems to suffer from the difficulty that the defendant in the proceedings in the Supreme Court is now a discharged bankrupt.
It was argued on the basis of the reasoning in the decision in Official Receiver in Bankruptcy v Todd [l9861 70 ALR 119 that the definition of bankrupt in section 5 has no temporal concept. I accept of course what was said on the question by the majority of the Full Court in that case, but it seems to me that section 58(3)(b) cannot be read as requiring the leave of the Court to be obtained to commence any legal proceedings in respect of a provable debt against a person who is a discharged bankrupt.
a vexed one. I have been benefited with the presence of the The question of provability of the debt in the present context is
acting Official Trustee in these proceedings. It was his submission, and with respect, I agree with it, that there is at least some doubt about whether the Supreme Court proceedings to which I have referred, are about "a provable debt".
I think it is clear that so far as the action depends upon tort, it is almost certainly not a provable debt. So far as the action turns on a breach of contract or trust, the matter is not easy of solution, especially not in an ex tempore judgment of this kind under the pressures of time that apply here.
The only course I can take in this connection is to assume that the Supreme Court proceedings do involve a provable debt. If they do not, then no question of leave arises. The applicant's principal aim in these proceedings is to ensure that when the Supreme Court matter comes on for hearing, it is not met by a challenge from any other party or from the Court on the validity of the proceeding because it was commenced without any leave of this Court.
Before turning to whether section 58(3) can be called in aid in this regard, I note a submission from the applicant that some assistance could be gained from the use of section 30 (l)(b).
This provides:

30. (1) The Court

(a)
. . . . . . .
(b)	may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.

The submission is that the purpose of this provision is to overcome technical problems that may arise due to a person having

become a bankrupt. I am not at all sure that the section 30 (l)(b) provides much assistance in this type of matter. I do not think that under its terms it would be possible to make an order which another provision of the statute either forbade or appeared deliberately to exclude merely because it would be convenient for the purposes of carrying out or giving effect to what might be deemed as the Act's general purposes.

For that reason, I think it is really necessary if it is going to be possible to deal with this matter at this time, to deal with it within the context of section 58(3)(b). I should add that the applicant rightly points to the fact that there are still a number of steps to be taken in the Supreme Court proceedings, including matters such as the issuing of subpoenas and other interlocutory steps. No doubt also there is the hearing itself and the necessary work involved in preparing for the hearing.

However, as I say, these are all steps which are being taken after the debtor has become discharged, and I do not think that validating those would do anything to validate what were otherwise invalid legal proceedings. Thus I do not think it is possible to avoid confronting the issue as to whether these

proceedings can now be validated nunc pro tunc, by giving leave	now to commence the legal proceedings in 1988.
In the old courts of Chancery, it appears that orders for the entry of judgments nunc pro tunc were entitled to be made after long intervals. Judgments, for example, could be entered and apparently enforced long after they had been pronounced. Even where the original documents had been lost, the Court permitted an office copy of the judgment to be entered nunc pro tunc.
It appears as if the Court took a very expansive view. Indeed, in one case reported in Daniel's Chancery Practice 8th Edition printed some 80 years ago, permission was given where the original judgment was made and pronounced 79 years before the application for validation was made. Other such examples include 23 years and 9 years. This case, where the delay is just 2 years almost exactly to the day, rather pales into insignificance in comparison.
It thus seems as if the Chancery Court generously pronounced on the capacity of the Court to validate what should have been done some considerable time earlier. It is interesting to compare the practice of the Chancery courts to the Common Law courts in this connection. The texts to which I have had the opportunity to refer in the short time available indicate that in the Common Law courts, this retrospective validation or acting was only permitted where the error or delay had been caused by the act of the Court as opposed to the act of the parties.
which have dealt with this matter in the context of the Couhsel for the applicant has drawn my attention to three cases liquidation of companies where a similar leave is required under the various Codes to take action against companies in liquidation. He argues that this is a direct analogy to the insolvency of individuals. In Re Sydney Formworks Pty Limited (In Liquidation) [l9651 NSWR 646, McClelland CJ in Equity held
that the Court administering the liquidation may give leave to commence an action if it thinks it proper to do so and to continue an action which has been commenced without leave. McClelland CJ in Equity also said that the order should be made only upon the undertaking to the Court of the person seeking the order that he would not enforce against the company any judgment he might obtain against it without the leave of the court.
In Re A.J. Benjamin Limited, (In Liquidation) and The Companies Act I19691 90 WN (Pt 1) (NSW) 107, Street J, as he then was, granted leave for an action to be taken against a company in liquidation notwithstanding that there had been gross delay in seeking the leave of the Court. The statutory provision there as here gave the court wide power to impose conditions and Street J said that this power should ordinarily be exercised to prevent the risk of prejudice. It was ordered in that case that leave be granted nunc pro tunc to commence the action; in other words, validating the matter as if it had been commenced with leave.
I pause to observe that I am informed here that Mr McCarthyrs defence in the Supreme Court proceedings is actually being conducted by the insurance company who backs or supports the
other words, the insurer has apparently accepted that it is solicitor's indemnity scheme familiarly known as Law Cover. In
required or bound to indemnify Mr McCarthy in respect of any verdict which is given to this applicant in those procedings.
In Benjamin, Street J held that the fact that the respondent was insured against the liability which the applicant sought to
propound was a factor weighing in favour of the grant of leave His Honour said at page 110:

It is also relevant and admissible to recognize that the respondent is insured, because it is the hope of recovering under the insurance policy that presents the prospect of the applicant's claim being fruitful. If there were no prospect of surplus assets in the company, and no question of insurance, then that alone might well provide a reason for refusing leave to proceed with what would ex hypothesi be merely an empty action.

Those words appear to apply here as well.

In Re Gordon Grant and Grant Pty Limited, a decision of the Master of the Queensland Supreme Court given on 11 February 1982 and reported in [l9821 ACLC 196, the Master said in the first column on page 199 that from his study of the authorities and from the Sydney Formworks and Benjamin cases, a principle emerges that an application for leave nunc pro tunc to commence any action or to continue any action which was commenced without obtaining leave may be given if good cause is shown on the merits.

On the issue of insurance, he said that the section concerned is	"not designed to protect an insurer", and that leave is more
likely to be granted where there is an insurance company standing behind the company to pay any judgment which the plaintiff might obtain against it. This is because if successful such an action is unlikely to prejudice the creditors or the company.
I£ section 58(3)(b) contained the words or "continue any such proceedings" instead of "or take any fresh step in such a proceeding", I think this matter might be simpler but in its present form I think it is really necessary to determine whether this Court has power to grant leave to commence legal proceedings nunc pro tunc, in respect of what I am prepared to assume is a provable debt, meaning that I would thereby validate the commencement of the proceedings taken without leave.
In my opinion the section does extend that far. It seems to me that the principles of equity to which I have referred together with the way in which the cases of liquidated companies have been dealt with as well as general principle lean in favour of the view that the section is wide enough to contemplate the concept of the Court granting leave after proceedings have been commenced without leave.
I therefore hold that the Court has power under section 58(3)(b) to validate the commencement of legal proceedings without leave by granting leave nunc pro tunc.
It is my further view that this is an appropriate case for the
exercise of that power. The delay here has really been remarkably short in comparison to some of the reported cases. In
any event, were it not for the fact that the proceedings were adjourned last year, this matter would probably have been brought on long before today.
No grounds have been given for suggesting that anyone has been prejudiced by the failure to make this application before now. The fact that an insurer has accepted or apparently accepted liability to indemnify the former bankrupt in the Supreme Court proceedings leads me to the same conclusions as were formulated by Street J in Benjamin, by McClelland CJ in Equity in Sydney Formworks, and by Master Lee in Gordon Grant.
I therefore grant leave to the applicant nunc pro tune to
commence the legal proceedings in the Supreme Court of New South Wales number 11141 of 1988 in which the applicant is the plaintiff and the former bankrupt is the first defendant and to take such fresh steps in those proceedings as may be necessary for the matter to be brought on for hearing and determined.

I certify that this and the

preceding pages are a !rue copy of the

Reasons fcr Ju::;msnt herein of his Honour

Justice EinTc!d