Trent & Rowley - [2014] FamCA 447

FAMILY COURT OF AUSTRALIA

TRENT & ROWLEY

[2014] FamCA 447

FAMILY LAW – BANKRUPTCY – Applicant for property alteration made bankrupt during proceedings – Trustee decides not to pursue those proceedings – Bankrupt claims the abandonment by the trustee gives him a right to pursue the matter – Bankrupt concedes any property so received will form part of the estate but such an order might reduce his time in bankruptcy – Application rejected – Consideration of past authorities permitting such a course.

Bankruptcy Act 1966 (Cth)
Family Law Act 1975 (Cth)

Bryson and Pember [2013] FamCA 43
Cummings v Claremont Petroleum NL (1996) 185 CLR 124
Doisy and Wilmot-Doisy [2009] FamCAFC 14
General Steel Industries Inc v Commissioner for Railways NSW (1964) 112 CLR 125
Kucera and Kucera [2007] FMCAfam 1187
O’Neill and O’Neill and Tayper Pty Ltd and Kayhaven Pty Ltd and Likami Properties Pty Ltd [1998] FamCA 67
Page and Page (No 2) (1982) FLC 91-241
The Marriage of Guirguis and the Official Trustee in Bankruptcy (1997) 21 Fam LR 356

APPLICANT:

Mr Trent

RESPONDENT:

Ms Rowley

FILE NUMBER:

MLC

10211

2011

DATE DELIVERED:

25 June 2014

PLACE DELIVERED:

Melbourne

PLACE HEARD:

Melbourne

JUDGMENT OF:

Cronin J

HEARING DATE:

17 June 2014

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr Smith

SOLICITOR FOR THE APPLICANT:

Waters Lawyers Pty Ltd

COUNSEL FOR THE RESPONDENT:

Mr Salamanca

SOLICITOR FOR THE RESPONDENT:

Webb Korfiatis

Orders

That the application filed 15 November 2011 is summarily dismissed.
The response of the respondent filed 18 January 2012 is adjourned to 9.00am on 4 July 2014 for mention.
That the application in a case filed on 12 June 2014 by the respondent is otherwise dismissed.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Trent & Rowley has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT MELBOURNE

FILE NUMBER: MLC 10211 of 2011

Mr Trent

Applicant

And

Ms Rowley

Respondent

REASONS FOR JUDGMENT

A bankrupt’s contingent interest in a surplus in his or her estate does not alone give a right or entitlement which would allow him or her to sue to enforce proprietary rights (Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 132 per Brennan CJ, Gaudron and McHugh JJ).
A bankrupt who seeks an order under s 90SM of the Family Law Act 1975 (Cth) (“the Act”) seeking that the Court alter the interests of a former spouse is seeking, if not to enforce a proprietary right, at least seeking to obtain one.
In Bryson and Pember [2013] FamCA 43, Forrest J said that the filing of an application for alteration of property interests (pursuant to s 79 of the Act) does not of itself create, or give rise to interests in property in the applicant spouse that do not already exist. Nor does the filing of the application change any interests that already exist or the way in which they are held. Whilst I agree with those statements, this is a case in which the bankrupt through his counsel, specifically disavowed having any legal or equitable interest in any of the property of the respondent but he sought to create an interest for himself by seeking that her property interests be altered in his favour. Whilst there may be some argument about whether the right to sue is a personal or a property right, the end result is one which, if successful, would devolve property on the bankrupt to which, in law, he is not entitled.
Section 58(1) of the Bankruptcy Act 1966 (Cth) provides that where a debtor becomes bankrupt, not only does his or her property vest in the trustee of the estate, but so too does after-acquired property as soon as it is acquired by or devolved on, the bankrupt.
Section 60(2) of the Bankruptcy Act has two relevant provisions to these proceedings. They are:
60(2)an action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
60(3)if the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.
Peculiarly in this case, the trustee appears to have made no election in writing within the terms of s 60(2). In her affidavit filed on 28 March 2014, the respondent said that the applicant became a bankrupt on or about 13 September 2013. She went on to say that as at 16 January 2014, the appointed trustee had not “determined” whether to intervene. That statement was never denied by the trustee. I have therefore concluded that no election had been made by January 2014. Thus, s 60(3) would be expected to apply. In this case for the reasons that follow, that is somewhat academic because the trustee ultimately appeared before the Court to indicate his position.
In Cummings, the majority made the following observations:
When a trustee declines to exercise his power to sue or to appeal against the judgment, the bankrupt may apply to the Court under s 178 of the [Bankruptcy Act] and the Court is empowered to make such order “as it thinks just and equitable”.
Their Honours observed that the Court’s discretion was at large and had to be exercised in the particular circumstances of each case. They said:
It may be that, before a bankrupt obtains an order under which an appeal will be instituted for the protection of his reputation, the trustee's costs would have to be met by sources other than the bankrupt estate in which the bankrupt no longer has an interest. The Court would be unlikely to permit the bankrupt to pursue his personal interests, in so far as they are not coincident with the due administration of the estate by the trustee, at the expense of the creditors. (My emphasis.)
In Cummings as in this case, there was, and in this case is, no application under s 178 for consideration. In my view, therefore, the applicant does not have locus standi.
It is arguable that if there was no election by the trustee and no application under s 178, the proceedings have no utility save for exempt property such as superannuation and certain personality. No such orders were sought. The absence of an applicant to prosecute his application does not bring an end to the proceedings. The Court needs to understand the position of the respondent (who is not bankrupt) to see whether she seeks orders. In this case, she did. On 14 June 2013, the respondent sought orders that the applicant pay out a loan to discharge a mortgage but she also sought the return of personal property. Subject to those matters, the respondent did not seek a dismissal of the applicant’s application until it was made orally on 17 June 2014. That application sought a summary dismissal of the applicant’s claim.
The position of this litigation has been reached after a long and expensive history in this Court which arose as now set out.
Mr Trent (“the applicant”) and Ms Rowley (“the respondent”) lived, uncontroversially, in a de facto relationship between April 2006 and March 2011.
By an application filed on 15 November 2011, the applicant commenced proceedings in this Court seeking orders under s 90SM of the Act.
Section 90SM provides that in property settlement proceedings after the breakdown of a de facto relationship, the Court may make such orders as it considers appropriate in the case of proceedings with respect to the property of the parties, altering the interests of them in the property or relevantly:
In the case of proceedings with respect to the vested bankruptcy property in relation to a bankrupt party to the de facto relationship – altering the interests of the bankruptcy trustee in the vested bankruptcy property.
Section 90SM goes on to say that the orders that the Court may make include the settlement of property in substitution for any interest in the property of the parties or an order for the benefit of either or both of the parties as the Court determines.
In 2013, the final hearing between the applicant and the respondent began only to be adjourned part-way through the cross-examination of the applicant. In that hearing, the applicant disclosed that he had filed a debtors’ petition for bankruptcy. Subsequent to that adjournment the applicant became a bankrupt. He remains so.
In the months after these events, a trustee was appointed for the applicant’s estate. It took considerable time to obtain the position of the trustee.
Section 90SM(15) of the Act provides:
If a bankruptcy trustee is a party to property settlement proceedings in relation to the parties to a de facto relationship, then, except with leave of the court, the bankrupt party to the de facto relationship is not entitled to make a submission to the court in connection with any vested bankruptcy property in relation to the bankrupt party.
As will be seen below, the applicant was of the view that he did not need that leave.
In an odd turn of events, the trustee at an early stage instructed the solicitors who had acted for the applicant to act for him and it was indicated that the part-heard case would resume shortly thereafter. That position foundered when it became apparent that the appointed solicitor was a creditor of the estate and the conflict being obvious, that firm withdrew. The trustee then having instructed new solicitors, elected to abandon the proceedings. That occurred by an appearance on behalf of the trustee at a hearing on 23 May 2014. The proceedings were then further adjourned to allow the applicant to obtain legal advice.
In a written submission carefully and properly prepared in June 2014, counsel then acting for the applicant submitted:
…the Bankruptcy Trustee withdrew from these proceedings on 23 May 2014, prima facie, it seems that s 90SM(15) does not apply to this matter.
In my view, that is wrong.
The abandonment by the trustee either at law (by virtue of s 60) or by the orders consequent upon the hearing on 23 May 2014 has left the position where the bankrupt requires the exercise of the Court’s discretion in circumstances where no s 178 of the Bankruptcy Act application nor any application under s 90SM(15) has been made. In the hearing on 23 May 2014, I adjourned the proceedings with the applicant then unrepresented and directed that he indicate to the Court on the next occasion what cause of action he had and the basis upon which any such power could be exercised. He had consulted solicitors and although no formal amended application as had been ordered, was filed, he appeared by counsel on 17 June 2014 and the matter was then argued.
Counsel for the applicant submitted that the applicable law was found in Cummings (supra) namely that the bankrupt had no right to bring or prosecute proceedings to protect, enhance or add to the property of which he had been divested on bankruptcy. The submission however said:
However, this is subject to an exception of rights of action personal to the bankrupt.
Counsel then drew the Court’s attention to O’Neill and O’Neill and Tayper Pty Ltd and Kayhaven Pty Ltd and Likami Properties Pty Ltd [1998] FamCA 67 which was a decision of the Full Court of this Court. There, at paragraph 88, the Full Court said:
88.Furthermore, the majority of the High Court in Cummings referred without apparent disapproval to the concept of ''rights of action which do not pass to a trustee on bankruptcy because they are personal to the bankrupt and do not affect the quantum of the bankcrupt [sic] estate '' (underlining added), and cited Coffey v Bennett again without disapproval (at p. 136). Although there must be a question as to meaning of the words which we have underlined in the passage just quoted, it would appear to remain good law that a bankrupt spouse may initiate and prosecute property settlement proceedings during the course of his or her bankruptcy although any property acquired would have to vest in the trustee by virtue of s. 58(1)(b) of the Bankruptcy Act (apart from the limited classes of property exempted under s. 116(2) of that Act).
Counsel for the applicant emphasised the reference by the Full Court to the fact that it “would appear” to remain good law that a bankrupt spouse may initiate and prosecute property settlement proceedings during the course of his or her bankruptcy. I return to that position below.
Counsel for the applicant also referred to the decision to which I earlier referred in Bryson and Pember (supra) but that case concerned a bankrupt who had already been discharged at the point that he filed the document seeking the alteration of property interests. The issue was whether the bankruptcy had some retrospective impact on the right to pursue an alteration of existing interests in property. In my view, the case is not relevant.
When pressed, counsel for the applicant acknowledged that any order, if one could be made, would be caught by s 58 of the Bankruptcy Act. Section 58(6) of the Bankruptcy Act defines “after acquired property” in relation to a bankrupt as:
property that is acquired by, or devolves on, the bankrupt on or after the date of bankruptcy, being property that is divisible amongst the creditors of the bankrupt.
What counsel conceded was that the applicant had a “hope” that by contributing to his bankrupt estate as a result of any property alteration vis a vis the respondent, his time in bankruptcy might be reduced. His authority for the proposition that such approach gave rise to a justiciable issue was found in Page and Page (No 2) (1982) FLC 91-241 where the husband was a bankrupt and the wife was not. Frederico J held that s 79 (the equivalent of s 90SM) of the Act empowered the Court to make orders by way of settlement of property for the benefit of a party to the marriage. His Honour said that the fact of the bankruptcy was a matter for which the Court had to have general regard and that it may have importance in considering the various factors in s 79(4) of the Act. His Honour then said:
But it would be quite wrong for the husband to be placed in a worse position solely because of his bankruptcy, or for the wife to be placed in a better position merely because the fruits of the husband’s application be applied to effect a discharge of his just debts. In the present case the husband wishes to apply the proceeds of the application towards the bankruptcy in the hope of obtaining an early discharge. Thus an order for property settlement would be for his benefit in any event.
Counsel for the applicant also drew the Court’s attention to a similar approach in Kucera and Kucera [2007] FMCAfam 1187 and to the explanatory memorandum to the 2005 Amendments to the Family Law Act which said that the amendments addressed the issues clarifying the rights of the bankruptcy trustee and the non-bankrupt spouse which were not to remove existing rights of bankrupt spouses save for those expressly in conflict with the bankruptcy trustee.
In my view, there is nothing controversial about the explanatory memoranda nor indeed the amendments to the Act in 2005. I do however have doubts about the correctness of the decisions of Page and Kucera having regard to what was said by the High Court in Cummings. Whilst Cummings concerned an appeal, so too was the decision in The Marriage of Guirguis and the Official Trustee in Bankruptcy (1997) 21 Fam LR 356. The latter decision did not overturn earlier principles about a bankrupt having standing to prosecute appeals but the statements by the High Court seem relatively clear. In O’Neill (supra) the Full Court considered Guirguis and Cummings. O’Neill too was a case involving an appeal. The Full Court held that the appellant had no locus standi to prosecute the appeal. Their Honours referred to Page as well as other authorities and said that Guirguis did not purport to overrule Page or other similar authorities which had said that a bankrupt spouse may institute and prosecute an application for property settlement under s 79 of the Act.
In O’Neill, the Full Court went on to say that the majority of the High Court in Cummings referred without apparent disapproval to the concept of:
rights of action which do not pass to a trustee on bankruptcy because they are personal to the bankrupt and do not affect the quantum of the bankrupt estate. (Underlining added.)
and noted that although there must be a question about what that was meant to say, it would appear to remain good law that a bankrupt spouse may initiate and prosecute property settlement proceedings during the course of his or her bankruptcy. Their Honours then however went on to say:
although any property acquired would have to vest in the trustee by virtue of s 58(1)(b) of the Bankruptcy Act.
Importantly, the Full Court in O’Neill also said that the fact that a successful appeal could result in a surplus in which the bankrupt would have a contingent interest would “apparently” not provide the bankrupt with the necessary interest to institute an appeal in his or her own name. The same must be said of an application to prosecute a case to seek an alteration of property interests. Thus, allowing the bankrupt to pursue a property alteration claim in the hope that any money might be given to his estate to reduce his time in bankruptcy, cannot be permitted without reference to s 178 of the Bankruptcy Act. Absent some order by the Court determined on the basis of justice and equity, there is no right and the decision of Page must be viewed with scepticism.
Even if the application by the applicant in the form of his counsel’s written submissions could be seen as some form of application for leave, no evidence was presented that would justify such an order. Furthermore, as the majority in Cummings observed, a court would have to look carefully at the issue of security for costs. In this very case, the respondent brought an application for security of costs and the applicant through his counsel when asked to address that issue, indicated it would be strongly opposed because his client was otherwise impecunious. It must follow therefore that even if leave was contemplated, if the applicant was unsuccessful, the respondent would have no remedy in the peculiar circumstances of this case. Those peculiar circumstances also include the fact that the major creditor of the applicant was a commercial bank who also sued the respondent but, rather than her entering into bankruptcy, she settled and paid a significant sum to resolve the dilemma. The justice and equity issue would have to be contemplated with those facts in mind.
To the extent that I am wrong about all of those matters, the respondent sought an order in the hearing that the applicant’s application be summarily dismissed. That application was founded on the basis that the applicant had no reasonable likelihood of success. Success in this case must be the alteration of an order for property in his favour.
The principles governing summary dismissal applications are well-known. (See Doisy and Wilmot-Doisy [2009] FamCAFC 14 at paragraph 70.) In summary form, it is a serious matter to deprive a person of access to the court and therefore relief of the type sought by the respondent was rarely and sparing provided. Absent an application to be permitted to take up what the trustee rejected, and no evidence being so provided not only as to what is just and equitable but also whether the trustee might give reason for the applicant to be optimistic about the reduction in his bankruptcy time, this is one of those cases where the relief sought by the respondent should be granted. In addition, to secure the relief, the respondent needs to show that the applicant’s cause of action lacks reasonableness. That is clearly the case here where the trustee has abandoned the cause and s 58 of the Bankruptcy Act will come into play.

Whilst it is also said that a weak case is entitled to the time of the court, nothing I heard indicated that that case would ever get any better for the applicant and the tenor of his counsel’s submission was that he had a right to bring it because it was a personal right to pursue. For the reasons I earlier outlined, the case is weak and nothing I saw, would indicate that it is likely to get any better.
Ultimately, the rules provide that the guiding principle is to do what is just. Ironically, that is exactly what the Bankruptcy Act provides in circumstances where the trustee rejects involvement to pursue the cause of action. The applicant produced nothing to indicate how the Court should approach that issue. Justice must apply to both parties and when examining the pleadings of the respondent, it has always been her position that the applicant was never entitled to anything. The respondent sat patiently through the pre-trial process, the cross-examination of the applicant and has now waited almost a further year subsequent to the adjournment during which time the applicant was made bankrupt. She too is entitled to get on with her life particularly having regard to what I earlier said about her contribution towards the major debt that gave rise to the bankruptcy.
Whilst other decisions such as General Steel Industries Inc v Commissioner for Railways NSW (1964) 112 CLR 125 described a number of bases for summary dismissal, the reality is that the respondent needs to show that her opponent lacks a reasonable cause of action. Having regard to all of the matters to which I have referred, I find that that is the case here.
The applicant’s application for substantive relief must therefore be dismissed but that still leaves the respondent’s response alive. I will list that for determination unless it is earlier withdrawn.

I certify that the preceding Thirty Eight (38) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Cronin delivered on 25 June 2014.

Associate:

Date: 25 June 2014