Abouslieman v Mercantile Mutual Insurance

Decision of the Federal Magistrate 3 Before referring to the reasons of the Federal Magistrate, it is convenient to set out s 82 of the Act. That section relevantly provides: (1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy. … (2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. … (8) In this section, liability includes: (a) compensation for work or labour done; (b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and (c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is: (i) in respect of amount - fixed or unliquidated; (ii) in respect of time - present or future, or certain or dependent on a contingency; or (iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion. 4 What were said to be the findings of fact of the Federal Magistrate, are set out in Abouslieman v Mercantile Mutual and Ors [2004] FMC 594 at [1]-[6] of his Honour's reasons: [The appellant] in this matter entered into a Deed under Part X of the Bankruptcy Act 1966 (Cth) on 28 June 2002. The Deed was in a familiar form and provided for the debtor to bring in for the payment of his creditors the sum of $16,000.00. This was done. (…) In about 1997 [the appellant] commenced building on land owned by him at 6 Statham Street Belfield in New South Wales. He proposed to construct a 356.8 square metre double storey domestic dwelling of double brick walls/concrete floors and terracotta tile roof including verandah and garage. [The appellant] carried out this work as an owner builder. Section 95(1) of the Home Building Act 1989 (NSW) is in the following form: 95 Owner-builder insurance An owner-builder must not enter into a contract for the sale of land on which owner-builder work is to be or has been done by or on behalf of the owner-builder unless a contract of insurance that complies with this Act is in force in relation to the work or proposed work. In compliance with that provision [the appellant] obtained on 15 May 1998 (Ex 2) an Owner Builder Home Warranty Insurance Policy No 22 OB00241 NSW from [the Insurance Company]. The terms of the policy are set out in the home warranty insurance policy insurance document, (…). That policy states that the beneficiary means the person: 1.1.3 who is a purchaser of land on which Owner-Builder Work, or work required by section 95 or 96 of the Home Building Act 1989 to be insured and covered by the contract, is done, or a successor entitled to any person in sub-clauses 1.1.1, 1.1.2 or 1.1.3. Under the section headed "Losses Indemnified" the policy states: 2.1 We will indemnify the beneficiaries under the insurance contract for the following losses or damage in respect of residential building work covered by the insurance contract; 2.1.1 …; 2.1.2 Loss or damage from a breach of statutory warranty referred to in Part 2C of the Home Building Act 1989. An extract of the statutory warranties is contained in Schedule 1 at the end of this insurance contract. It is common ground that the statutory warranties referred to in the policy were breached, that the [appellant] sold the property to [the Purchasers] who thereby became beneficiaries thereunder, that the beneficiaries made a claim under the policy and that they were paid out a sum of approximately $64,155.80. An amount of $19,557.14 was expended by [the Insurance Company] in advising and administering in respect of the rectification works for which the larger sum had been paid. [The Insurance Company] was invited to submit a proof of debt under the terms of the Part X Deed. It declined to do so. I understand that the moneys under the Part X Deedhave now been distributed. Instead of making a claim under the Part X Deed [the Insurance Company] sought to commence proceedings against [the appellant] in the District Court of New South Wales. The history of those proceedings has not been entirely happy. Suffice to say that after hearings in court and judgment of His Honour Judge Naughton [the Insurance Company] (and [the Purchasers] who have been joined in the proceedings), are now on their Second Further Amended Ordinary Statement of Claim. 5 His Honour noted that what is a provable debt under Part X of the Act, is determined by s 82(1) which identifies debts provable in bankruptcy. His Honour held that the debt in question was not a provable debt as it fell within the exception in s 82(2) of the Act. His Honour concluded: The relationship between the second and third respondents and [the appellant] which is the subject of [the Insurance Company's] rights of subrogation, is not a relationship which arises out of a contract, although it is true that it arises as a consequence of the existence of a contract of sale. The relationship under which those parties can proceed against [the appellant] arises out of the statutory warranties granted to the successors in title of an owner builder. They seem to me to have much in common with the statutory liability under theTrade Practices Act considered by Hely J in Reid. It is that statutory obligation which [the Insurance Company] as insurer fulfilled and in respect of which it is entitled to be subrogated. Looked at in this way it seems to me that it can be properly said that the contract of insurance does not constitute an essential element of the cause of action. Insofar as the first respondent has an alternative claim in respect of unjust enrichment I am satisfied that such a claim would be excluded from s 82(1) see Alferis at [21]. 6 The reference to statutory warranties was to warranties arising under the provisions of the Home Building Act 1989 (NSW) ("the Home Building Act"). The appellant challenges both conclusions of the Federal Magistrate.

The appeal and its disposition 7 The issue raised in this appeal is whether the claimed debt, as pleaded, was a provable debt for the purposes of the Act. The parties proceeded on the basis it was sufficient, in order to determine the character of the debt, to have regard to the second further amended statement of claim which relevantly pleads the following: 6. In or about 15 May 1998 [the Insurance Company] issued a Policy being Policy No. 31013000 241 EXW being an Owner Builder Home Warranty Insurance Policy through its agent Concord Underwriting Agencies (NSW) Pty Limited (ACN:062 947 166) with respect to the property located at 6 Statham Street, Belfield. 7. It was a term of the Policy that [the Insurance Company] would indemnify the successors in title of [the appellant] against any loss or damage from a breach of a Statutory Warranty referred to in Part 2C of the Home Building Act 1989. 8. Pursuant to Section 18C of the Home Building Act [the Purchasers] being the immediate successors in title to [the appellant] were entitled to the benefit of the Statutory Warranties provided by Section 18B of the Home Building Act as if [the appellant] were a licensed builder and had done the work under a contract with [the Purchasers]. … 12. [The Purchasers], as beneficiaries of the Policy of Insurance made a claim on the Policy and [the Insurance Company] has paid the sum of $64,155.80 in rectifying the work done in breach of the implied Statutory Warranties as set out above. 13. Further in assessing the claim made by [the Purchasers] and advising and administering in respect of the rectification work [the Insurance Company] has incurred a further sum of $19,557.14. 14. [The Insurance Company] has paid the cost of rectification for and on behalf of [the Purchasers]. 15. But for the breach of the Implied Warranties by [the appellant], [the Insurance Company] would not have had to pay the Rectification costs or incurred the cost of investigation and liaising in respect of those costs and claims. 16. [The appellant] has not had to pay for the rectification work and has, as a result received the benefit of the payment by [the Insurance Company] and is thereby unjustly enriched. (Emphasis added) 17. Further or alternatively [the Insurance Company] is subrogated by reason of its payment by or on behalf of [the Purchasers] to the benefit of the Warranties implied by Section 18B and 18C of the Home Building Act. 8 One immediate difficulty with these pleadings is that they identify three plaintiffs, namely, the Insurance Company and the two Purchasers. However, the paragraph in which damages are claimed identifies "the plaintiff" as the claimant. Presumably, this is the Insurance Company. 9 It appeared to be common ground that the debt as claimed (which really has two discrete components), involved a claim in the nature of unliquidated damages. A claim must have that characteristic to fall within the general class of debts or liabilities which are not provable because of s 82(2). The focus of the submissions of both parties was whether the demand embodied in the claim in the District Court fell within the proviso ("otherwise than by reason of a contract, promise or breach of trust") to the exception created by s 82(2) and not whether it was a provable debt comprehended by s 82(1) having regard to the (inclusive) definition of liability in s 82(8). 10 The appellant sought to distinguish Aliferis v Kyriacou (2000) 1 VR 447, which held that a claim against a solicitor for damages for negligence was not provable (even though there existed a contractual relationship between the plaintiff and the solicitor). Aliferis v Kyriacou (supra) held that to fall within the proviso in s 82(2) it was necessary for the contract to constitute an essential element of the cause of action: per Charles JA at 463. The appellant also sought to distinguish Reid v Interarch Australia Pty Ltd [2000] FCA 1328 which held that a claim for damages under s 82 of the Trade Practices Act 1974 (Cth) for contraventions of s 52 and s 75B of the Trade Practices Act 1974 (Cth) was not provable. 11 The respondents submitted that the claim by the Purchasers under the statutory warranty as the successor in title (and the rights of the Insurance Company for the purposes of subrogation) is a statutory one: see ss 18B, 18C and 18D of the Home Building Act. The policy provided: 9.1 If We make any payment to the Beneficiary or to any other party in order to satisfy a claim that the Beneficiary may have under this insurance contract then We will be subrogated to the Beneficiary's rights of recovery against the Contractor, Supplier, Owner-Builder or other party in relation to such payment or payments and the Beneficiary must assist and co-operate with Us and provide Us with the information and a signed statement as We may reasonably require in order to exercise those rights of recovery. We have a full discretion in the conduct of any proceedings against the Contractor, Supplier, Owner-Builder or other party. The definition of "Beneficiary" is in sufficiently wide terms to comprehend the Purchasers. 12 I approach the matter on the footing that the proviso in s 82(2) is enlivened only if a contract constitutes an essential element of any cause of action maintained in the District Court proceedings. First, no contract or rights deriving from a contract have been pleaded as part of the causes of action. Secondly, and putting to one side for the moment how the Insurance Company's right of subrogation arises, the claims are based on either breach of the statutory warranties or unjust enrichment. In neither instance is a contract raised as an essential part of the cause of action: see Aliferis v Kyriacou (supra) and Reid v Interarch Australia Pty Ltd (supra). 13 It is conceivable that the District Court proceedings are framed on the assumption that the Insurance Company's right of subrogation arises under clause 9.1 above. That is, the right of the Insurance Company to maintain a claim under the statutory warranties (standing in the shoes of the Purchasers) depends on the terms of the contract of insurance it entered with the appellant in May 1998. On that footing, it may well be that an essential part of the cause of action in the District Court proceedings (concerning the warranties) is the contractual right of the Insurance Company to be subrogated to the rights of the Purchasers. That is not pleaded and it is not obvious how the right of subrogation between the Insurance Company and the Purchasers could arise under a contract between different parties (viz. the Insurance Company and the appellant). It may be that the Insurance Company's rights of subrogation are asserted as arising at common law: see generally Woodside Petroleum Development Pty Ltd v H & R-E & W Pty Ltd (1999) 20 WAR 380. 14 Ultimately, it appears to me, I need to be affirmatively satisfied that the Federal Magistrate erred and that the appellant has made good the contention that the District Court proceedings fall within the proviso to the exception in s 82(2). I am not so satisfied. 15 I conclude with the following observation. The Federal Court of Australia's jurisdiction (and also that of the Federal Magistrates Court) in the field of bankruptcy is a wide one. In particular, the Court has power to stay any legal process against a debtor (including a bankrupt) for the non-payment of a provable debt: see s 60(1)(b)(i) of the Act. However, it is not entirely clear to me that the application heard by the Federal Magistrate and this appeal, concern a matter on which the Court can adjudicate. The respondent's claims are in a state of flux in the sense that the statement of claim could be further amended. However, more importantly, the findings of fact that the Federal Magistrate was said to have made were not based on evidence nor on any formal admissions made by the parties. At least some of the facts are, as I understand it, in issue in the District Court proceedings. His Honour was, in effect, asked to assume that certain facts could be established, and by reference to those assumed facts, consider the operation of s 82. This appears to be somewhat removed from the exercise of judicial power: see Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 especially at [49]. However, perhaps the answer to this possible difficulty is all that is necessary to prove in a case such as the present is that certain facts are alleged in proceedings against the bankrupt and it is the facts as alleged (and not as they might ultimately be established by evidence in those proceedings) which give the proceedings a character on which both s 60(1)(b) and s 82(2) can operate. Such an approach is consistent with the purpose of s 60(1)(b) discussed by Gibbs CJ in Storey v Lane (1981) 147 CLR 549 at 556 and the observations of Hill J in Tarea Management (North Shore) Pty Ltd (in liquidation) v Glass (1991) 28 FCR 93 at 100.8. 16 The appeal should be dismissed with costs. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

Solicitor for the Respondent: A R Conolly and Company