A.F.I. Management Pty Ltd v Condon in his Capacity as Trustee of the Bankrupt Estate of Brian Keith Hones

1. The matter be listed for a case management hearing on 6 December 2019 at 9.30 am. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

PERRAM J: 1 By an application dated 1 October 2019 the Applicant seeks leave under s 58(3) of the Bankruptcy Act 1966 (Cth) ('the Act') to commence and continue to prosecute a proceeding pending in the Common Law Division of the Supreme Court of New South Wales entitled AFI Management Pty Ltd v Hones being proceeding 2019/00134131 ('the Supreme Court proceeding'). That proceeding was commenced on 30 April 2019. The defendant is Mr Brian Keith Hones. An amount of around $2.4 million is claimed. At the time the suit was filed Mr Hones was an undischarged bankrupt. However, on 23 September 2019, just one week before the present application for leave was filed, he was discharged from bankruptcy. 2 Section 58(3)(b) of the Act provides: Vesting of property upon bankruptcy - general rule … (3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor: … (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. 3 This prohibition will arise only if the Supreme Court proceeding may be said to be in respect of a provable debt. A provable debt includes any future contingent liability (s 82(1)) and this might be thought to encompass the liability which may result from a law suit. But s 82(2) is explicit that demands in the nature of unliquidated damages are not provable debts unless they arise 'by reason of contract, promise or breach of trust'. There is some uncertainty as to whether the claims made by the Applicant in the Supreme Court answer this description or not. Largely this relates to whether one can see claims for breach of fiduciary duty as being claims for a breach of trust. 4 However, what cannot be doubted is that in relation to each individual claim made by the Applicant against Mr Hones in the Supreme Court proceeding is that either each claim is, or is not, a provable debt. Insofar as any particular claim in the Supreme Court proceeding is not in respect of a provable debt, the prohibition in s 58(3) does not apply and leave is not necessary. On the other hand, if a claim made in the Supreme Court proceeding is a provable debt then the effect of Mr Hones' discharge from bankruptcy on 23 September 2019 is that he has now been released from that debt (s 153(1)) with the inevitable consequence the suit against him is no longer tenable. Making the assumption in the Applicant's favour that the suit is nevertheless still stayed by operation of s 58(3), I can see no utility in lifting the stay where the underlying proceeding in question cannot succeed. 5 On the other hand, however, the release of Mr Hones does not have the effect of releasing his bankrupt estate from the liability: Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93 at 99. This is not presently material since the bankrupt estate is not the defendant named in the Supreme Court proceeding. A proceeding against Mr Hones' trustee in bankruptcy with respect to any such provable debt would, however, fall within s 58(3) and the question of leave would then arise. 6 It seems to me that the correct application is therefore one where the Applicant seeks leave: (1) to apply to the Supreme Court to substitute the trustee of the bankrupt estate as the first defendant, or perhaps add it as the second defendant (there may be ; and (2) if that be done, to prosecute that proceeding. 7 Subject to one matter, I will treat the present application as being for such orders. 8 Next, it is to be noted that Mr Hones has the benefit of a professional negligence policy under which the insurer has accepted liability in relation to the claims made by the Applicant in the Supreme Court proceeding up to a limit of $2 million. That indemnity has vested in the trustee in bankruptcy by force of s 117(1) of the Act which also operates so that any funds which are received by the trustee under it are to be paid forthwith to the Applicant. It follows that up to the cover level of $2 million the suit by the Applicant presents no risk to the bankrupt estate and I can see no reason why, to that extent, it should not be permitted to proceed against the estate as the defendant and thereafter to proceed against it. 9 On the other hand, in relation to the gap between the cover level of $2 million and the expressed size of the Applicant's claims of $2.4 million this would appear to open up the possibility that the Applicant may seek to prove a debt of $400,000 at some point. I do not know anything about the position of the bankrupt estate at the moment in that regard. I do not know whether a final dividend has been paid or even whether the administration is on-going. 10 In that circumstance, in principle I would be willing to order that: (1) The Applicant be granted leave to the extent necessary to apply to the Supreme Court of New South Wales in proceeding 2019/00134131 to substitute the trustee of the bankrupt estate of Brian Keith Hones as the defendant or to add it as a defendant. (2) The Applicant be granted leave to the extent necessary to prosecute that proceeding. (3) The Applicant not file any proof of debt in the bankruptcy without the leave of this Court. 11 However, I do not know whether the trustee agrees to this course. I will forestall making these orders until such time as I am informed of his position. The only order I will make is that the matter be stood over for a case management hearing in seven days. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.