Taylor v Rudaks

Case [2007] FCA 1962

FEDERAL COURT OF AUSTRALIA

Taylor v Rudaks [2007] FCA 1962

BANKRUPTCY – proof of debt – whether claim of liquidator of company under s 588M of the Corporations Act 2001 (Cth) against directors for insolvent trading admissible to proof in bankruptcy of directors under s 82(1) Bankruptcy Act 1966 (Cth) – whether liquidator’s claim unliquidated arising otherwise than by reason of breach of contract, promise or breach of trust so as to be excluded from proof under s 82(2) – nature of liquidator’s claim where based on “loss and damage” suffered by creditors of company – review of decision of trustee in bankruptcy to reject proofs of debt

BANKRUPTCY – claims made against joint estate of two bankrupts and against separate estates – whether double proof permitted – avoidance of “double dipping”

BANKRUPTCY – where claim of Australian Taxation Office against directors of company for penalty taxation proved in bankrupt estate – nature of claim – where claim of liquidator of company under s 588M Corporations Act 2001 (Cth) also sought to be proved in bankrupt estate – where claim of liquidator included debt of company to Australian Taxation Office in respect of which penalty assessment issued against directors – whether both claims admissible to proof – avoidance of “double dipping”

CORPORATIONS – whether claim of liquidator under s 588M of Corporations Act 2001 (Cth) for loss and damage suffered by creditors against directors provable in bankruptcy of directors – liability of directors of insolvent company for insolvent trading under s 588G

Corporations Act 2001 (Cth)
Bankruptcy Act 1966 (Cth)
Companies Act 1981 (Cth)
Corporations Act 1989 (Cth)
Income Tax (Assessment) Act 1936 (Cth)
Corporate Law Reform Act 1992 (Cth)
Corporate Law Reform Bill 1992 (Cth)

Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19 considered
Vale v TMH Haulage Pty Ltd (1993) 31 NSWLR 702 cited
CCA Systems Pty Ltd v Communications & Peripherals (Australia) Pty Ltd (1989) 15 ACLR cited
Re Wakim; Ex parte McNally (1999) 198 CLR 511 cited
Bond v R (2000) 169 ALR 607 cited
R v Hughes (2000) 171 ALR 155 cited
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 discussed
Cornelius v Barewa Oil & Mining (NL) (In liq) (1982) 42 ALR 83 cited
Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234 cited
Re Hide; Ex parte Llynvi Coal and Iron Co (1871) 7 Ch App 28 cited
Fryer v Powell (2001) 159 FLR 433 considered
Hawkins v Bank of China (1992) 26 NSWLR 562 cited
Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 considered
Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124 considered
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2007] NSWSC 930 discussed
Commonwealth Bank of Australia v Paola [2005] FCA 855 considered
Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304
Macks (trustee of the estate of Weber), Re Weber (bankrupt) (2006) 233…

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AGLC
Taylor v Rudaks [2007] FCA 1962
Case
[2007] FCA 1962
Decision Date

CaseChat Overview and Summary

In the case of Taylor v Rudaks, the liquidator of an insolvent company sought to recover losses from the company's former directors under section 588M of the Corporations Act. The directors had declared themselves bankrupt, and the liquidator lodged proofs of debt in the directors' bankruptcy estates. The trustee of the bankrupt estates rejected the proofs of debt, leading to a dispute over the admissibility of the proofs and the potential for double recovery of debts. The court was required to determine whether the liquidator's proofs of debt were admissible in the directors' bankruptcy estates, whether they should be admitted only in the joint bankrupt estate, and if the amount of the proofs should be reduced to avoid double recovery due to overlapping debts with the Australian Taxation Office. The court's reasoning focused on the specific wording of section 588M, which requires that a creditor must have suffered loss or damage because of the company's insolvency for the liquidator to recover from a director. This requirement was contrasted with previous provisions that did not make such a distinction. The court held that the liquidator's proofs of debt were admissible in the directors' bankruptcy estates, setting aside the trustee's decision to reject them. It also found that the proofs of debt should be admitted in both the joint and individual bankrupt estates of the directors and that the amount of the proofs should not be reduced to avoid double recovery with the Australian Taxation Office, as the provisions were distinct and did not overlap in a way that would result in double dipping.

The court's decision was significant in clarifying the admissibility of liquidators' proofs of debt in directors' bankruptcy estates and in distinguishing between different types of debts and liabilities. The court's determination that the proofs of debt were admissible in both the joint and individual bankrupt estates of the directors provided clarity for future cases involving similar issues. Additionally, the court's finding that the amount of the proofs of debt should not be reduced to avoid double recovery with the Australian Taxation Office highlighted the importance of understanding the distinctions between different legislative provisions and their applications. The final orders of the court set aside the trustee's decision to reject the proofs of debt and declared that the liquidator's proofs of debt were capable of being admitted to proof in the joint and individual bankrupt estates of the directors.

Orders

Orders of the court

1. Pursuant to s 104(2) of the Bankruptcy Act 1966 (Cth) the decision of the Respondent made on 31 January 2007 rejecting the proofs of debt lodged by the first applicant with the respondent and dated 28 October 2004 in the

(a) joint bankrupt estate of Susan Feleppo and Pompeo Feleppo; and

(b) bankrupt estates of Susan Feleppo and Pompeo Feleppo

is set aside.

THE COURT DECLARES THAT:

2. The first applicant’s proofs of debt lodged by the first applicant with the respondent and dated 28 October 2004 in the

(a) joint bankrupt estate of Susan Feleppo and Pompeo Feleppo; and

(b) bankrupt estates of Susan Feleppo and Pomeo Feleppo

are capable of being admitted to proof.

Background

Background to the litigation

Section 588M of the Corporations Act is the present legislative expression of the circumstances in which the liquidator of an insolvent company may recover, from a director of that company, losses incurred by creditors during a period of insolvent trading. Section 588M(2) says that the liquidator may recover “an amount equal to the loss and damage” from the director “as a debt due to the company”. The “loss and damage” refers back to s 588M(1)(b) and is the loss and damage of a creditor because of the company’s insolvency. Previous provisions regulating directors’ liability for insolvent trading, particularly s 556 of the Companies Act 1981 (Cth) (the Code) and until the commencement of Part 5.7B of the Corporations Act 1989 (Cth) (the Corporations Law) s 592, were expressed somewhat differently. FACTS There is no dispute about the relevant facts. DPS Technology Pty Ltd (the Company) was a precision engineering and tool making business. The directors of the company are Pompeo and Susan Feleppa (the directors). The Company went into liquidation on 15 April 2004. Austin Taylor was the appointed liquidator (the Liquidator). The directors declared themselves bankrupt on 22 June 2004. Maris Rudaks (the Trustee) is the trustee of the separate estates of the directors of the Company as well as of their joint estate in bankruptcy. The Liquidator lodged proofs of debt on behalf of the Company with the Trustee on 28 October 2004 in the joint and individual estates of the directors. Each proof of debt claims an amount of $961,760.91 owing to the Company by the directors for debts incurred by it between 1 October 2001 and 20 August 2003 when it was trading while insolvent. The amount claimed in the proofs encompasses demands upon the company from trade creditors, from the Australian Taxation Office (including BAS payments and general interest charges on those debts and superannuation guarantee charges) and by Revenue SA and by the WorkCover Corporation. The amounts relating to trade creditors, as indicated in the Liquidator’s Insolvency Report, include the supply of trade materials to the Company. Those debts of the Company remain unpaid. They are unsecured. At the present time there has been no action commenced under s 588G of the Corporations Act against the Directors for insolvent trading. The proofs of debt were formally rejected by the Trustee on 31 January 2007. There is an additional issue arising from the fact that the Liquidator’s proofs of debt are based in part upon liabilities of the Company to the Australian Taxation Office. The Australian Taxation Office has separately lodged proofs of debt against the individual estates of the directors. The Trustee in Bankruptcy has admitted each of them. Such proofs include late payment tax and interest charged on unpaid income tax at the end of the 2002 financial year in the case of Pompeo Fileppa and debts owing from directors penalties imposed under the Income Tax (Assessment) Act 1936 (Cth) (the ITAA) in 2001-2002 in the case of each of the directors. The Australian Taxation Office has also separately lodged proofs of debt in the liquidation of the Company in respect of unpaid PAYG, superannuation and BAS liabilities debts from 2000 to 2004. The parties agreed that the Australian Taxation Office had been invited to lodge a joint debt application with the Liquidator, and had been notified and invited to participate in these proceedings. It is unclear the extent to which, if at all, the accepted proof of debt from the Australian Taxation Office overlap with the liquidator’s proof of debt.LEGISLATION

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

MANSFIELD J

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Established by: MANSFIELD J

If the Liquidator’s proofs of debt are admissible in the bankrupt estates of the directors, there are subsidiary issues of whether the proofs of debt are admissible only in the joint bankrupt estate, and as to whether the amount of the Liquidator’s proofs of debt should be reduced having regard to the proofs of debt lodged by the Australian Taxation Office with the Trustee, so as not to result in a situation of double proof of the same debt or “double dipping” in the bankrupt estates of the directors. CONSIDERATION For present purposes, the most significant feature of s 588M of the Corporations Act is the requirement in s 588M(1)(b) that the creditor has “suffered loss or damage in relation to the debt because of the company’s insolvency”. The Liquidator under s 588M(2) is then empowered to recover from the director as a debt due to the company an amount equal to that loss or damage suffered by the creditor. By way of contrast, the ancestors of s 588M found in s 556 of the Code and in the former s 592 of the Corporations Law rendered a director liable to a company for the payment of a debt incurred by the company when, in circumstances where it applied, the debt was incurred when the company was insolvent. There was no refinement of their application by reference to the loss and damage which the creditor had incurred. The terms of s 556 of the Code illustrate the point. Section 556(1) appeared in the following form:(1) If –(a) a company incurs a debt, whether within or outside the territory;(b) immediately before the time when the debt is incurred –(i)there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or(ii)there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and(c)the company is, at the time when the debt is incurred, or becomes at a later time, a company to which this section applies,any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred is guilty of an offence and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt. Penalty: $5,000 or imprisonment for 1 year, or both….. (Emphasis added) Under s 556 of the Code, and under the former s 592 of the Corporations Law (which is relevantly in the same terms as s 556 of the Code), it is clear that the liability of a director for insolvent trading could be proved by a creditor as a debt in the bankruptcy of the director: see e.g. Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19; Vale v TMH Haulage Pty Ltd (1993) 31 NSWLR 702; CCA Systems Pty Ltd v Communications & Peripherals (Australia) Pty Ltd (1989) 15 ACLR 720 at 728 – 729. In Handby 21 FCR 19, the Full Court (Morling Beaumont and Burchett JJ) concluded that s 556(1) of the Code rendered the company and the director (in the circumstances prescribed) jointly and severally liable for the debt. Their Honours observed at 24 – 25 that s 82(1) of the Bankruptcy Act and its precursors have been generously construed, and that there was no reason why it should not encompass debts or liabilities arising under statute. They then concluded at 26 – 27 that the statutory liability created by s 556(1) of the Code is for “the payment of the debt incurred by the company” (the Full Court’s emphasis), and is a liability for a nominated debt which was not a demand in the nature of a demand for unliquidated damages but a claim for money under a statute.