Tarea Management (North Shore) Pty Ltd (in liq) v Glass
[1991] FCA 73
•08 MARCH 1991
Re: TAREA MANAGEMENT (NORTH SHORE) PTY LIMITED (IN LIQUIDATION)
And: RORY JAMES GLASS
No. N G392 of 1990 FED No. 73
Bankruptcy
(1991) 9 ACLC 579/99 ALR 549/4 ACSR 271
28 FCR 93
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(2), Einfeld(3) and Hill(1) JJ.
CATCHWORDS
Bankruptcy - stay of local court proceedings pursuant to s.60(1) of the Bankruptcy Act 1966 (Cth) - underlying rationale of s.60(1) discussed - applicability of s.60(1) to proceedings commenced after the discharge of the bankrupt - whether proceedings to recover compensation under s.229(6) Companies (NSW) Code 1981 are in respect of "non-payment of a provable debt" - relevance of conduct of bankrupt to exercise of discretion under s.60(1).
Bankruptcy Act 1966 (Cth): s.60(1)
Companies (NSW) Code 1981: s.229.
Tarea Management (North Shore) Pty Limited (In Liquidation) v Rory James Glass
HEARING
SYDNEY
#DATE 8:3:1991
Counsel and Solicitors J. Chippindall instructed by
for Appellant: Roxburgh and Co
Counsel and Solicitors B.M. Skinner instructed by
for Respondent: Kemp, Strang and Chippindall
ORDER
The appeal be dismissed.
The appellant pay the respondent's costs of the appeal.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
The appellant, Tarea Management (North Shore) Pty. Limited (In Liquidation), appeals from so much of the judgment of a judge of this court (Beaumont J.) as ordered that proceedings in the local court, brought by the appellant against the respondent, Mr Glass, to enforce orders for compensation in the sums of $60,000 and $40,000 respectively, be stayed.
Mr Glass became a bankrupt upon a creditor's petition on 23 June 1986. Prior to that time he had been a director of the appellant. The appellant was wound up on 25 July 1984 and remains in liquidation. Prior to its liquidation, the business of the appellant had been sold in a terms sale and Mr Glass had received two cheques, being the proceeds of the sale, totalling in all $90,000 in August 1984 and March 1985. These cheques he applied to his own purposes, in breach of his fiduciary duties to the appellant.
On 23 June 1989, by force of s.149 of the Bankruptcy Act 1966 ("the Act"), Mr Glass was discharged from his bankruptcy.
Subsequently, on 7 July 1989, summonses were issued, on the information of the Corporate Affairs Commission, alleging that on each of the two occasions of 31 August 1984 and 6 March 1985 Mr Glass, being an officer of the appellant, failed to act honestly, in the exercise of his powers and discharge of his duties, in that he applied the two cheques referred to above other than for a purpose of the appellant. Mr Glass was convicted of the two offences on 1 March 1990, and fined $10,000. The local court ordered Mr Glass to pay the sums of $60,000 and $40,000 respectively to the appellant by way of compensation. The evidence does not make it clear why, in respect of the cheque for $30,000, the award of compensation was for $40,000, but it is agreed between the parties that nothing turns upon this.
Section 229 of the Companies (NSW) Code 1981 provided relevantly:
"(1) An officer of a corporation shall at all times act honestly in the exercise of his powers and the discharge of the duties of his office.
Penalty -
(a) in a case to which paragraph (b) does not apply - $5,000;...
(6) Where -
(a) a person is convicted of an offence under this section; and
(b) the court is satisfied that the corporation has suffered loss or damage as a result of the act of omission that constituted the offence, the court by which he is convicted may, in addition to imposing a penalty, order the convicted person to pay compensation to the corporation of such amount as that court specifies, and any such order may be enforced as if it were a judgment of that court."
It was against this background that Mr Glass applied to the court for orders that the appellant be restrained from enforcing the orders for compensation made in the local court and for an order that the proceedings to enforce the orders for compensation be stayed until further order.
The decision appealed againstBeaumont J found in favour of Mr Glass and accordingly ordered that the local court proceedings be stayed until further order. His Honour held, and this was common ground between the parties on the appeal before us, that the claim of the appellant against Mr Glass in respect of the appropriation of the cheques was a claim provable in Mr Glass's bankruptcy, in terms of s.82(1) of the Act. It was a liability of Mr Glass at the date of his bankruptcy and although in the nature of unliquidated damages, it arose by reason of a breach of trust, and so fell outside the exclusion for demands in the nature of unliquidated damages being provable debts; Emma Silver Mining Company v Grant (1881) 17 Ch D 122 at 129; Britter v Sprigg (1900) 26 VLR 65 at 82; Barewa Oil and Mining N.L. (in liq.) v Isim Mineral Development Pty. Ltd. (1981) 38 ALR 288 at 292; and on appeal Cornelius v Barewa Oil and Mining N.L. (1982) 42 ALR 83 at 89.
Likewise, his Honour held that that claim was one not released as a consequence of the statutory discharge under s.153(1) of the Act, it falling within the exception in para.(b) of sub-s.(2) of that section being:
"... a debt incurred by means of fraud or a fraudulent breach of trust to which he (the bankrupt) was a party ..."
His Honour held that the orders made by the local court for compensation against Mr Glass were "legal process ... in respect of the non payment of a provable debt" for the purposes of s.60(1)(b)(i) with the result that power existed under s.60(1) of the Act to stay the rocess in the local court. As a matter of discretion, his Honour was of the view that the stay should be granted. In exercising that discretion, his Honour was of the view that the personal conduct of Mr Glass relating to the winding up of the appellant, was irrelevant to the exercise of the court's discretion. Hence his Honour, in exercising the discretion, did not take into account that Mr Glass, as an officer of the appellant, may have failed to cooperate in the winding up of the appellant. In so doing his Honour said:
"The evident object of s.60(1) is to ensure an orderly administration of the assets of a bankrupt in the interests of the general body of creditors. The grant of a stay should not depend upon the personal conduct of the bankrupt in another context."
The submissions
The appellant submitted that his Honour erred in finding that the provisions of s.60(1)(b)(i) applied on the facts of the case. First it was submitted that s.60(1)(b)(i) was limited in its operation to the bankruptcy of a bankrupt and the section was spent once the bankrupt has been discharged. Alternatively, it was submitted that his Honour erred in holding that the local court proceedings were proceedings in respect of the non-payment of a provable debt. Finally, it was submitted that his Honour had erred in exercising the discretion to stay under s.60(1)(b) and that his Honour had failed to take into account Mr Glass's lack of cooperation in the winding up, it being said that that was a matter relevant to the discretion to be exercised under s.60(1) of the Act.
Section 60(1) provides relevantly as follows:
"(1) The court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit -
(a) discharge an order made, whether before or after the commencement of this subsection against the person or property of the debtor under any law relating to the imprisonment of fraudulent debtors and, in a case where the debtor is imprisoned or otherwise held in custody under such a law, discharge the debtor out of custody; or
(b) stay any legal process, whether civil or criminal and whether instituted before or after the commencement of this subsection against the person or property of the debtor -
(i) in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt; or
(ii) ... "
The background to s.60
The background to s.60 is discussed in the judgment of Walsh J in Commissioner for Motor Transport v Train (1972) 127 CLR 396 and by Gibbs C.J.. and Aickin J. in Storey v Lane 1981) 147 CLR 549 at 555 and 563 espectively. It is intertwined, as Aickin J. demonstrates in Storey v Lane with the gradual abolition, both in the United Kingdom and in Australia, of imprisonment for debt. In the English Bankruptcy Acts of 1883 and 1914, provision was made for the staying, after the presentation of a bankruptcy petition, of an action, execution or process against the property or person of the debtor. It is at the heart of modern bankruptcy law that upon a person becoming a bankrupt the remedies against that person and his property by creditors are taken away and there is substituted a right to prove against the estate which vests in the bankrupt's trustee. The debt is, at least provisionally, merged in an equitable execution; Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 594 and cases there cited.
Partial relief from imprisonment for debt was granted in England as early as the Bankruptcy Act 1838 (UK) 1 and 2 Vict. c.110. The English Bankruptcy Acts of 1883 and 1914 made no reference to discharging an order against the property or person of a debtor under a law relating to the imprisonment of fraudulent debtors. Such a provision arose for the first time in the Bankruptcy Act 1924, s.63, and was with minor changes incorporated in the Bankruptcy Act 1966.
The decision of the High Court in Commissioner for Motor Transport v Train (supra) showed that an order made on conviction following a complaint for failure to pay certain charges to the Commissioner for Motor Transport and requiring the defendent to pay the charges and in default for committal to prison, was not an order against the person of a debtor made "under any law relating to the imprisonment of fraudulent debtors" and accordingly a court of bankruptcy had no power under s.60 of the 1966 Act as then in force, to order a bankrupt committed to prison for non-payment to be discharged from custody. As a result of that decision, the section was amended by the Bankruptcy Amendment Act 1980 to its present form. The explanatory memorandum which accompanied the Bankruptcy Amendment Bill 1979 in its comments to cl.35 of that Bill states:
"The court will be able to stay any legal process, whether civil or criminal, against the person or property of the debtor in respect of a provable debt and to discharge him out of custody imposed because of failure to pay a provable debt (Bill cl.35). The purposes of these amendments are:-
- to overcome the use of criminal procedures to collect provable debts when bankruptcy proceedings have intervened; - to ensure that legal proceedings against bankrupts for the recovery of provable debts are brought pursuant to the Bankruptcy Act;
- to ensure that bankrupts are not held in custody for the non-payment of debts provable in bankruptcy; and - to remove an uncertainty as to the ambit of the present s.60." Reference is made at the end of the note to Train's Case. Thus, in Storey v Lane (supra), Gibbs C.J. said (at 554-555): "The parliament clearly intended, by the amendment made to s.60(1) in 1980, to give the courts of bankruptcy a wider power than had been vested in them by the sub-section in its original form - a power that had become necessary by reason of the enactment of legislation making it an offence to fail to pay certain civil debts, empowering the courts to order the offender to pay the debt and providing for the imprisonment of the offender if the order were not obeyed."
In the same case, his Honour (at 556) referred to an essential feature of any modern system of bankruptcy law as being to ensure that:
"... provision is made for the appropriation of the assets of the debtor and their equitable distribution amongst his creditors, and for the discharge of the debtor from future liability for his existing debts."
His Honour emphasised that in support of this purpose it could be necessary to enact provisions to stop individual actions by creditors for the purpose of (at 557):
"... obtaining payment of the debts due to them when the aim of the law is to secure administration of the debtor's assets in the interest of the creditors generally."
Thus his Honour concluded (at 557) that the policy of s.60(1)(b) was:
"to assist in ensuring that the assets of the insolvent debtor are distributed in the interests of creditors generally, to prevent one creditor obtaining an undue advantage over the others, and to prevent the scheme of the Bankruptcy Act from being defeated."
Is the power in s.60(1)(b) spent when a bankrupt is discharged?
It was submitted by the appellant that the power in s.60(1) was spent when the bankruptcy of a bankrupt came to an end by virtue of his discharge. In support of this submission, reference was made to the decision of Lukin J in Re Malins (1936) 9 ABC 140. That case rejected an argument, dependent upon the use of the word "debtor" in the predecessor to the section (s.63 of the Bankruptcy Act 1924-1933), that the power to stay under the section was limited to the period between the presentation of the petition and the making of the order of sequestration. In the course of the judgment his Honour said (at 145):
"I am of opinion that the section is not restricted by the use of the word 'debtor' to the intervening period between the presentation of the petition and the making of the order of sequestration and that the court may, in regard to any order made against the property or person of the debtor before the sequestration, exercise the powers in the section prescribed at any time from the presentation of the petition onwards throughout the consequent bankruptcy." (emphasis added)
It was submitted by the appellant, that as the bankruptcy came to an end upon a discharge (s.55(8)) the case was authority for the proposition that after discharge no order could be made under s.60.
The question whether an order under s.60(1) could be made after discharge was considered by Pincus J in Re Rooney (1986) 13 FCR 175. The appellant submitted that that case was wrongly decided. In Re Rooney, as before us, the argument was put that the use of the word "debtor" in the section brought about the result that the section could be availed of only where there had been no discharge. His Honour pointed out that other bankruptcy statutes expressly deal with the matter as, for example, s.162 of the English Bankruptcy Act 1861 which expressly empowers the court to discharge a bankrupt from prison after the order of discharge takes effect. His Honour said (at 177):
"In my view, the expression 'the debtor' is used because the provision may be availed of 'at any time after the presentation of a petition' and a petition may be presented only against (s.44) or by
(s.55) a debtor. The section exhaustively prescribes the limits of the times during which the jurisdiction under it may be exercised by the words 'at any time after the presentation of the petition' and it is not intended to imply a further limitation by the words 'the debtor'. Those words are used only as a natural and convenient designation of the person by, or against, whom the petition spoken of earlier in the section is presented."
With respect I agree. It was also submitted by the appellant that once the bankruptcy had been discharged it was no longer possible for a debt to be a "provable debt".
The reference in s.60 to a provable debt does not however necessitate the conclusion that the section was intended to operate only in the period prior to the discharge of a bankrupt. It is true the discharge does operate as a release of the bankrupt from some, although not all, provable debts. However, s.153(2) of the Act provides a number of exceptions to the general rule contained in sub-s.(1). Indeed, as the present case illustrates, the liability of the bankrupt to the appellant, admittedly a debt incurred by means of fraud or a fraudulent breach of trust, was not released by force of s.153(1).
The mere fact that the debtor is released from a debt does not mean that the debt did not remain a provable debt in the bankruptcy which has been discharged. A debt to be provable need only be one to which the bankrupt was subject at the date of the bankruptcy: s.82(1). No time limit is imposed by s.82(1) or s.84(4) upon a creditor lodging a proof of debt and there would seem to be no reason in principle why a creditor might not lodge a proof of debt after discharge. However, subject to the court extending the time, the proof must be lodged sooner than 14 days after the expiration of the period specified in a notice of intention given by the trustee to declare a dividend, for it is by this time the trustee is required to admit the proof in whole or in part, to reject it, or require further evidence: s.102(1). Such a notice might not have been given before discharge and until the final dividend is declared such a notice may be given in respect of each dividend to be paid by the trustee: s.140. A creditor who has not proved his debt before the declaration of a dividend is entitled to be paid, out of any available monies for the time being in the hands of the trustee, dividends which the creditor has failed to receive before any money is applied to the payment of a future dividend.
Ordinarily, the proof would need to be lodged before the final dividend provided for in s.145, but even then, unless creditors have been fully paid out, subsequent property of the bankrupt divisible among creditors may come to light and the decision of the trustee to declare and distribute a final dividend would not preclude the trustee from making a further dividend.
The true principle is that a creditor, whether secured or unsecured, may prove at any time during the administration (provided that he may not interfere with the prior distribution, subject, in a case where leave of the court is required, to such terms as the court may impose): In Re McMurdo, Penfield v McMurdo (1902) 2 Ch 684 and 699 per Vaughan-Williams LJ, Re Hertzberg; Ex parte The Protestant Alliance Friendly Society of Australia (1933) 6 ABC 257 at 262. The administration of the bankrupt estate may not have come to an end on discharge, particularly where the discharge arises by operation of the statute at the expiration of three years.
It follows, therefore, that the decision of Pincus J in Re Rooney (supra) was correctly decided. On the circumstances of the present case, the mere fact that the bankrupt had been discharged did not preclude the making of an order by the court under s.60(1). It would have been different had the debt, otherwise provable in the bankruptcy, been released.
The order of the local court in respect of the provable debt?It is a prerequisite to the power to stay in s.60(1) in the circumstances of the present case, that the local court order, or more precisely the process to recover the amount owed under that order (the order being treated as a judgment of the local court) be a process in respect of the non-payment of a provable debt.
Beaumont J was of the view that the words "in respect of" should in the context of s.60(1)(b)(i) be given a wide construction. His Honour referred to the well known statement of Mann C.J. in Trustees, Executors and Agency Co. Limited v Reilly (1941) VLR 110 at 111 that the words have the:
"... widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer."
In so doing his Honour expressed the same view that he had taken in Re Sutherland Cropper (1985) 11 FCR 156 (at 161).
The appellant did not challenge the applicability of the passage from Reilly's Case. Instead, it submitted:
1. That the orders were not in respect of provable debts because the power in the local court to order compensation was at large and completely within the magistrate's discretion.
2. The liability to pay compensation under s.229(6) was not one to which Mr Glass was subject at the date of his bankruptcy for it did not arise until an order has been made by a magistrate.
3. That the present was not a case where the enforcement of the orders of the magistrate would tend to defeat the policy of the Act.
The first submission, even if otherwise relevant, is misconceived. It may well be that the local court has a discretion under s.229(6) to order compensation and that the "may" in that sub-section is discretionary rather than indicating that the power must be exercised when the preconditions are satisfied (cf Finance Facilities Pty. Limited v Federal Commissioner of Taxation (1971) 127 CLR 106 at 133-34). But it is not true that an exercise of the power by the court is at large. What is to be awarded is compensation. The prima facie meaning of "compensation" in the sense in which it is used in s.229(6) is recompense for loss (cf Nelungaloo Pty. Limited v Commonwealth (1948) 75 CLR 495 at 571 per Dixon J). Whether or not it is possible that the local court might award, under the sub-section, an amount less than the loss suffered by a company (a matter upon which no opinion is expressed), the power is circumscribed by the loss that is in fact suffered.
The second submission may readily be accepted. However, the fact that the right to an order under s.229(6) did not exist at the commencement of the bankruptcy is irrelevant. It is not a requirement of s.60(1) that the liability sought to be enforced in a civil or criminal process to be stayed under the sub-section be itself a provable debt. It is sufficient if the legal process be one that is in respect of the non-payment of a debt which is provable.
The third submission has, as its unstated premise, the lack of relationship between the s.229(6) proceedings and the liability of Mr Glass to the appellant for the fraudulent misappropriation of the cheques. Indeed in oral argument, counsel for the appellant went so far as to suggest that an order under s.229(6) was in addition to the right of the appellant to recover in ordinary civil proceedings against Mr Glass, assuming that bankruptcy had not intervened. On the facts of the present case this is not so. Absent bankruptcy, the appellant, if it had recovered in ordinary civil proceedings against Mr Glass, would not have been entitled to an order under s.229(6) because there would have been no loss to compensate the appellant for. Conversely, if an order were made under s.229(6) and were satisfied, the appellant could not have obtained damages in civil proceedings for it would have suffered no damage. What s.229(6) does, in a case such as the present, is to provide an alternative, rather than an additional remedy to a company. It is this close relationship between the s.229(6) proceedings and the provable debt which demonstrates why in the circumstances of the present case the necessary connection or relationship exists between the s.229(6) proceeding and the liability of Mr Glass to the appellant which constituted the provable debt.
Cases may well be imagined where the remedy under s.229(6) provides a different measure of damages from the general law remedy, particularly where there is a claim for consequential loss. Such cases will fall to be examined on their own facts as to whether the necessary connection between the s.229(6) proceeding and the provable debt is present. However, the present case raises no such complications.
The close inter-relationship between the s.229(6) proceedings and the general law proceedings in the present case, indicates why, contrary to the appellant's submissions, the continued enforcement of the s.229(6) order would tend to defeat the policy of the Act. To permit the appellant to recover the amount ordered under s.229(6) would effectively satisfy the appellant's general law claim which was provable in the bankruptcy. To the extent that there was property that should have been divisible among creditors in the bankruptcy, that would advantage the appellant against the general body of creditors and the policy of rateable distribution of assets in bankruptcy, which is such an important aspect of bankruptcy law, would be frustrated.
Did the trial Judge's exercise of discretion miscarry?It was submitted that the exercise of discretion under s.60(1)(b) by Beaumont J had miscarried by the failure of his Honour to consider Mr Glass' conduct both in regard to the bankruptcy and to the liquidation. It was said that the evidence before his Honour showed that Mr Glass had failed:
1. To file a report as to affairs in the liquidation.
2. To deliver books to the liquidator of the appellant.
3. To pay other creditors of the appellant.
4. To attend the liquidator of the appellant until at least 1986.
It was further said on the evidence to be doubtful whether Mr Glass had disclosed his misfeasances to the liquidator. Reference was also made to the fact that the files in the bankruptcy disclosed that creditors had received little, if any, dividend. All but the last of the matters set out above concern Mr Glass' conduct or alleged conduct in the liquidation of the appellant. The last mentioned matter related, of course, to the bankruptcy.
The appellant submitted that the bankruptcy legislation exists not merely to protect debtors but also for the protection of creditors generally. The court should, it was said, have regard to matters of commercial morality and in particular should consider the commercial conduct of the bankrupt outside the bankruptcy itself.
As a general proposition it is true that considerations of commercial morality may, at least in certain bankruptcy matters, be relevant, e.g. in determining whether the court should exercise its discretion to annul a bankruptcy even where all the debts of the bankrupt have been paid in full: Re Hester (1889) 22 QBD 632; In Re Flateau; Ex parte Official Receiver (1893) 2 QB 219, 224; Boral Johns Perry Industries Pty Ltd v Piccardi (Federal Court of Australia, Full Court, unreported 23 June 1989 at 15). Protection of the public is an important aspect of bankruptcy law and as Lord Hamworth M.R. said in Re Paget (1927) 2 Ch 85 at 87-88:
"To concentrate attention upon the mere debt collecting and distribution of assets is to fail to appreciate one very important side of bankruptcy proceedings and law."
However, it can not be said that commercial morality is relevant to every exercise of discretion under the Act particularly when the alleged commercial immorality arises outside the scope of the bankruptcy itself. With respect to the submission, it is difficult to see how the conduct alleged to have been engaged in by Mr Glass in relation to liquidation of the appellant, even if established, bore at all upon the exercise of discretion under the sub-section.
The conduct of a bankrupt during a bankruptcy could well be a relevant matter in a given case. However, the only such matter referred to here was the size of the dividend available to creditors. It is difficult to see in the circumstances of the present case how that fact (involving of itself no misconduct) was relevant to the exercise of discretion. Since counsel for the appellant did not elaborate upon this last matter, it is unnecessary to deal with it further.
It follows that the appeal should be dismissed and that the appellant should pay the respondent's costs of it.
JUDGE2
I have read the reasons for judgment of Hill J. and agree with them and the orders which he proposes.
JUDGE3
I agree with the orders proposed by Mr Justice Hill for the reasons he has given.
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