Bankruptcy - proceedings commenced by present applicants as plaintiffs in District Court of New South Wales against bankrupt subsequent to date of Sequestration Order and prior to present application - construction of sub-section 58(3)(b) of Bankruptcy Act - whether Court has power to grant leave to commence District Court proceedings nunc pro tunc and whether it should do so.

Bankruptcy Act 1966 ss.5, 58(3)(b), 82(3)

Solicitors for the Applicants: Colquhoun and Colquhoun

Solicitors for the Respondent: Minter Ellison Morris

1. the applicants have leave to commence and continue

District Court of New South Wales proceedings number 9784 of

1991;

2. for the purposes of Order 1, leave to commence the said

proceedings be deemed to have been granted on 9 August 1991;

3. the respondent pay the costs of the applicants of and

incidental to the application including any reserved costs;

and

4. the respondent may recover from the estate of the bankrupt

the costs so paid.

NOTE: Settlement and entry of orders is dealt with in O.36 of the Federal Court Rules.

SWEENEY J On 3 April 1991 Anthony Veghelyi ("Mr Veghelyi") became a bankrupt upon the acceptance of his own petition. On 29 April 1991 Mr Veghelyi was struck off the roll of solicitors by order of the Legal Profession Disciplinary Tribunal. He had been practising as a sole practitioner as "Barnett Nicol and Veghelyi" from 19 December, 1983 until 30 June, 1989.

2. During that period Mr Veghelyi was retained by the firstnamed applicant Mrs Myrtle Smith ("Mrs Smith") to act in relation to affairs concerning the administration of the estate of her mother, Rosaline Matilda Kealy, who had died intestate in 1985.

3. The principal asset of the estate was a house at 1 Harden St Canley Heights ("the property"). On 10 August 1985 Mr Veghelyi prepared an agreement for sale of the property. He told Mrs Smith that she could enter into the agreement on behalf of the estate. In the Agreement the vendor is named as "Director, War Services Homes ... pursuant to authority vesting in Executrix of Estate late R.M. Kealy". The agreement for sale was exchanged with the purchaser on 10 August 1985 but it was not completed. Mrs Smith was later advised by her present solicitor that the sale could not be completed without a grant to her of Letters of Administration or an order of the Supreme Court, which had not been obtained.

4. On 9 August 1991 a statement of claim, numbered 9784 of 1991, was filed against Mr Veghelyi in the District Court of New South Wales on behalf of Mrs Smith as firstnamed plaintiff and the other eleven present applicants. In those proceedings the second to seventh plaintiffs are the children of Mrs Kealy. Another child of Mrs Kealy, Hazel Lewis, predeceased her mother. The eighth to twelfth named plaintiffs are the children of Hazel Lewis. The plaintiffs, who are the present applicants, claim to be the next of kin of Mrs Kealy.

5. It was only in February 1992, when their solicitors received a letter from the solicitors for Insolvency and Trustee Service Australia, that the applicants were notified that Mr Veghelyi had become a bankrupt on 3 April 1991. Mr Veghelyi had written letters to their solicitors in respect of his bills of costs on 30 July and 3 September 1991 but at no time mentioned the fact of his bankruptcy.

6. In the present application, filed on 22 April 1993, the following orders are sought:

"1. An order that the first to twelfth applicants

(inclusive) be given leave to commence and continue District

Court of New South Wales proceedings number 9784 of 1991;

2. For the purposes of order 1, such leave to commence

proceedings is deemed to have been granted on 9 August 1991;

3. Costs; and

4. Further or other orders."

7. On 18 March 1993 the Australian Government Solicitor on behalf of the Official Trustee in Bankruptcy advised the applicants' solicitors that the amount of $2,179.35 was "claimed by the Official Trustee in Bankruptcy as a debt owing to Mr Veghelyi which thus forms part of the bankrupt estate." The debt which remains unpaid arises from work undertaken by Mr Veghelyi on behalf of the applicants, including work in respect of the proposed sale of the property. A Certificate of Taxation in that amount dated 12 March 1993 was enclosed with the letter.

8. On 20 May 1993 Insolvency Trustee Service Australia by its solicitors filed a Notice of Intention to Appear citing the following grounds of opposition to the application:

"1. The applicants lack standing.

2. In the events which have happened, leave to commence

proceedings should not be granted."

9. The present application is made pursuant to sub-paragraph 58(3)(b) of the Bankruptcy Act 1966 ("the Act") which reads as follows:

"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 proceedings in respect

of a provable debt or take any fresh step in such a proceeding".

10. The phrase "provable debt" is defined in s.5 as meaning "a debt or liability that is, under this Act, provable in bankruptcy".

11. Sub-section 82(2) of the Act provides:

"Damages in the nature of unliquidated damages arising

otherwise than by reason of a contract, promise or breach of

trust are not provable in bankruptcy".

12. The parties to the present application appeared content to conduct it on the basis that leave was necessary to enable the District Court proceeding to be carried on by the applicants.

13. The Statement of Claim filed in that Court read as follows:

"The Plaintiffs plead their cause of action as follows:

1. The Defendant is (and was at all material times) a

solicitor of the Supreme Court carrying on his practice under

the style of Barnett Nicol and Veghelyi at 11th Floor, 9

Spring Street, Sydney 2000.

2. In or about 1985, the Firstnamed Plaintiff, retained and

employed the Defendant as her Solicitor to act for her in

relation to affairs concerning the administration of the

Estate of the late Rosaline Matilda Kealy.

3. The Second to Twelfth Plaintiffs consented to or

requested the Firstnamed Plaintiff to act as the legal

personal representative of the Estate of the said late

Rosaline Matilda Kealy and to apply for Letters of

Administration.

4. The Defendant at the time of accepting instructions from

the Firstnamed Plaintiff and at all material times was aware

that each of the Plaintiffs was a beneficiary or a potential

beneficiary in the said Estate.

5. At all material times the Defendant owed the Plaintiffs a

duty of care.

6. Further, or in the alternative, it was a term of the said

retainer referred to above that the Defendant would exercise

reasonable care as the Firstnamed Plaintiff's Solicitor.

7. In breach of the duty of care and in breach of the terms

of his retainer the Defendant acted negligently and failed to

exercise reasonable care.

Particulars:

a) Causing or permitting the real estate known as 1 Harden

Street, Canley Heights (hereinafter referred to as 'the

property') to be offered for sale by the estate at a time

when there was no one, pursuant to orders of the Court or a

grant of Letters of Administration by the Court, to act as

the estate's legal representative.

b) Causing or permitting the First Plaintiff, Myrtle Rae

Smith, to enter into a contract for sale dated 10th August

1985 (hereinafter referred to as 'the contract') on behalf of

the estate when she did not have the power to do so.

c) Failing to clarify the issue of ownership of the property

prior to the contract being drawn up and entered into.

d) Failing to draw a contract which would provide time

limits and protection for the estate to rescind the contract

if Letters of Administration were not granted within a

reasonable time or a specific time nominated.

e) Failing to attend to or to complete requisitions by the

Court in relation to the obtaining of Letters of

Administration of the estate.

f) Failing to obtain a grant of Letters of Administration of

the estate.

g) Failing to obtain compliance with the Court directions,

under the Deed of Compromise for all parties to sign and

thereby allowing the Deed of Compromise to be put into

effect.

h) Failing to make any application to the Court to obtain

declarations or failing to use any other method of

enforcement in relation to the execution of the said Deed of

Compromise.

i) Failing to draw up any agreement which thereby allowed

the purchaser under the contract to enter into occupation of

the said property or alternatively, drawing up such agreement

without advising the Plaintiffs of the terms of such

agreement or obtaining their authority to do so.

j) Causing or permitting the purchaser under the contract to

enter into early occupation of the property, without any

provision for the payment into the estate accounts of any

rental or occupation fee being charged for the early

possession taken by the purchaser under the contract.

k) Failing to make any provision for the payment into the

Estate accounts of any rental or occupation fee being charged

for the early possession taken by the purported purchaser

under the Contract.

8. As a result of the negligence and failure to exercise

reasonable care of the Defendant the Plaintiffs have suffered

loss and damage.

Particulars:-

a) Diminution in value of the assets of the Estate;

b) Loss of rental income on the Estate real estate that

could or should have been earned from assets of the Estate;

c) Interest on income which could have been or should have

been earned from the assets of the Estate;

d) The proceeds of the Estate.

AND the Plaintiffs claim the sum of $100,000 together with

interest pursuant to Section 83A of the District Court Act

from the date the cause of action arose to judgment, or in

the alternative, interest at such rate and on such amount as

the Court deems fit."

14. At all relevant times Mr Veghelyi was insured under the Lawcover Policy of the Law Society of New South Wales.

15. If it were sought to proceed with the District Court proceeding, without the leave of this Court, it would be necessary for the District Court to determine whether the plaintiffs were claiming "unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust".

16. I do not need to decide this question but I note that it would be open to the plaintiffs to contend in that court that, at least in part, their claim arose by reason of a contract or promise, constituted by the retainer. This question will not arise in the District Court, if leave is granted as sought.

17. The respondent has submitted that the applicants lack standing in this court and there is no power to make the orders sought.

18. I am satisfied that the applicants have standing. In the District Court they are suing Mr Veghelyi as his former clients and it is in their capacity as such plaintiffs that they here seek leave.

19. The power of this court, in my opinion, includes the power to make a nunc pro tunc order, a familiar order in leave applications.

20. As is illustrated by this case, and the experience of other similar cases, including claims for workers compensation, it can easily happen that a plaintiff may sue a defendant in ignorance of the fact of his bankruptcy. Sitting in bankruptcy I have heard applications by creditors for leave to commence and continue proceedings already on foot and have made orders in such cases nunc pro tunc, without anyone contending that the court lacked jurisdiction to do so. If the sub-paragraph were to be construed in the manner sought by the respondent, a plaintiff who had commenced proceedings in ignorance of the dependants bankruptcy would be obliged to discontinue his action, accept any costs penalty, and commence a fresh action, although this court thought that the circumstances justified the grant of leave. Such a result would be wasteful and undesirable. If the Parliament had intended to produce it, it would have said so in plain terms and I do not consider that it has done so.

21. Counsel were unable to cite any decided case upon this question arising under the sub-paragraph, but referred to a number of cases in which nunc pro tunc orders have been made under the Corporations Law and its predecessors. I have not found it necessary to consider whether these authorities should be relied upon by way of analogy. I prefer to base my opinion upon the construction of the sub-paragraph.

22. The application should succeed, without the imposition of any terms.

1. the applicants have leave to commence and continue

District Court of New South Wales proceedings number 9784 of

1991;

2. for the purposes of Order 1, leave to commence the said

proceedings be deemed to have been granted on 9 August 1991;

3. the respondent pay the costs of the applicants of and

incidental to the application including any reserved costs;

and

4. the respondent may recover from the estate of the

bankrupt the costs so paid.