Armour v Mason

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1659/02 MAXWELL NORMAN ARMOUR & ANOR V KENNETH CLIVE MASON & ANOR JUDGMENT 1 HIS HONOUR: Last year the plaintiffs sold their service station business and applied to the defendants for their consent to the transfer of the lease of the service station premises. When the consent was not forthcoming, they instituted the present proceeding for the purpose of securing that consent. 2 On 28 February 2002 Gzell J made a declaration that the defendants had unreasonably withheld their consent to the transfer of the lease to the purchasers, and ordered the defendants to consent forthwith. On the same day, after the orders were made and entered, the plaintiffs became bankrupt. 3 After deciding that they would not appeal against Gzell J's decision, the defendants executed an instrument of transfer of the lease, which they returned to their solicitor on 21 March 2002, duly executed. The defendants' solicitor then spoke by telephone to a person described as case manager of the bankrupt estates of the plaintiffs, who told him that the case manager's office would conduct an investigation into the sale of the service station business, and if the transfer of the business was not an arm's length transaction it might be set aside. 4 On 24 April 2002 the creditors of the plaintiffs met and decided to appoint a new trustee to the bankrupt estates of the plaintiffs. The defendants have not contacted the new trustee. It is not clear whether the new trustee will challenge the sale of the service station business. In the circumstances the defendants, acting on legal advice, have not taken any further steps with respect to the transfer of the lease. 5 It appears that for completion of the transfer of the lease, it will be necessary for the defendants to obtain the consent of the mortgagee of the freehold of the property. It is not clear from the evidence before me whether the lease is a registered lease but I assume so, because the transfer of lease has been prepared in the form of a registrable instrument. If that assumption is correct, it will be necessary for the defendants to procure the mortgagee to produce the certificate of title and for the transfer of lease to be registered by Land and Property Information. 6 By notice of motion filed on 14 May 2002, the plaintiffs (who are litigants in person) make an application for, in effect, a declaration that the defendants have not complied with the order of the court, and an order authorising the Registrar of the Court to execute the transfer of the lease on behalf of the defendants. The new trustee in bankruptcy did not appear before me and has apparently not been notified of this application. 7 In my opinion the plaintiffs do not have standing to make this application. When they became bankrupt after entry of the judgment on 28 February 2002, all of their property vested forthwith in their trustee in bankruptcy under s 58 (1) of the Bankruptcy Act 1966 (Cth). Their property included the chose in action constituted by their right to enforce the orders made by Gzell J earlier in the day. 8 It is beyond doubt that the word "property" in the definition of "property of the bankrupt" in s 58 (1) extends to choses in action. There can be no suggestion that Gzell J's orders relate to some personal remedy of the bankrupts falling outside the concept of "property of the bankrupt" for the purposes of s 58 (1): cf Lawindi v Elkateb [2001] NSWSC 865 (Young J, 3 October 2001). 9 The defendants referred to Cummings v Claremont Petroleum NL (1996) 185 CLR 124. In that case Brennan CJ, Gaudron and McHugh JJ held (at 133) that the right of a judgment debtor to appeal against an order for money compensation made against him is not property of the judgment debtor. There is, in their Honours' view, no property "over or in respect of" which the judgment creditor is capable of exercising any power at the point when he subsequently becomes bankrupt. Therefore there is no property divisible amongst the bankrupt's creditors under s 116 (1) (b), and consequently no "property of the bankrupt" for the purposes of s 58 (1). As a matter of ordinary language, a judgment debtor's right to appeal against the judgment is not property, in their view. 10 This reasoning is inapplicable to the rights conferred upon a successful litigant when orders are made in his or her favour. Those rights satisfy the indicia of property identified in Cummings v Claremont Petroleum and consequently they are rights vested in the trustee under s 58 (1) once the judgment creditor becomes bankrupt. 11 The defendants referred to s 60 (2) of the Bankruptcy Act, according to which "an action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the trustee makes an election, in writing, to prosecute or discontinue the action". Section 60 (2) would have prevented the plaintiffs from prosecuting this proceeding to hearing and judgment if they had become bankrupt prior to the hearing, unless their trustee elected in writing to proceed. But the section has no application in the present circumstances. It does not apply to the hearing and determination of the proceeding, because judgment was delivered and orders were made and entered before the plaintiffs became bankrupt. It does not apply to the plaintiffs' notice of motion, because they filed their notice of motion after they had become bankrupt. Their notice of motion is incompetent not because of s 60 (2) but because of s58 (1). 12 Although the plaintiffs, being bankrupts, were not competent to make their application, the matter is now before the Court and the Court has been put on notice that Gzell J's second order has not been fully complied with. Since the order was made and entered before the plaintiffs became bankrupt, the property in the lease of the service station that vested in their trustee in bankruptcy was the leasehold interest subject to their contractual obligation in favour of the purchaser and subject to the order directing the landlord to consent to the transfer of the lease. There is no evidence to suggest that the trustee in bankruptcy has disclaimed, or intends to disclaim, the bankrupts' contractual obligation to complete the transfer of the lease to the purchasers. There is a possibility that the trustee may seek to set the sale of the business aside, but that is another matter. 13 In these circumstances, the Court having been put on notice that its order has not been completely complied with, I see no reason why are the Court cannot or should not make a direction on its own motion to ensure that compliance with its previous order is completed. The order to be enforced is a mandatory order requiring the defendants to perform an obligation that the Court has found them to owe to the plaintiffs. Performance of the obligation will not confer any benefit on the plaintiffs, other than to relieve them of obligation they owe to the purchasers. Therefore compliance with the order will not give the bankrupts anything that should have been given to their bankrupt estates. The position may well have been different if the order to be enforced had been an order conferring a proprietary or money benefit on the plaintiffs. 14 There is nothing in Cummings v Claremont Petroleum to the contrary. In that case Brennan CJ, Gaudron and McHugh JJ held (at 130) that the institution of an appeal by a defendant against a judgment in favour of the plaintiff is the commencement of a proceeding, and therefore an "action" for the purposes of s 60 (2) (given that "action" means any civil proceeding, according to s 60 (5)). Their analysis of the case law (at 131) discloses that the policy underlying s 60 (2) is that, after sequestration of the estates of unsuccessful litigants, the successful party should not be put at risk of sustaining further costs through appellate litigation or similar proceedings, such as a motion for setting aside the verdict or for a new trial. The enforcement of a judgment or order against an unsuccessful litigant and in favour of a party who subsequently has become bankrupt is not contrary to the policy of s 60 (2). 15 My conclusion, that is open to the Court on its own motion to make a direction to ensure compliance with Gzell J's second order, is indirectly supported by Beneficial Insurance Company Ltd v Hamilton (1985) 73 FLR 347. In that case, after the conclusion of a hearing but before judgment was delivered and orders were made, a successful cross-claimant became bankrupt. Holland J held that s 60 (2) did not preclude the Court from making orders to give effect to its judgment delivered after bankruptcy had occurred in respect of a hearing that was completed before the bankruptcy. His Honour noted that s 60 (2) gave the trustee in bankruptcy an election to prosecute or discontinue an action, and pointed out that the position in relation to the cross-claim had passed the point where it was material to consider whether the cross-claim ought to be prosecuted or discontinued. He then said (at 348): 16 "The purpose of the section is to give the trustee in bankruptcy the opportunity to make that election and no other and it would seem to me that the section presupposes that the state of affairs with respect to the particular piece of litigation is such that considering whether or not to make such an election is still a relevant and practical matter. In my opinion, in the circumstances of the present case in all events, there is no materiality at all in embarking upon a consideration of election between prosecuting and discontinuing the first cross-claim. The litigation in respect of that cross-claim is spent and it would seem to me to have become spent at the time the hearing concluded and the court reserved its judgment. The making of orders today makes no relevant difference to the cross-claimant's situation than the making orders immediately at the conclusion of the hearing would have done." 17 Likewise, the making of a direction now to ensure compliance with the second order made by Gzell J on 28 February 2002 does not involve any election to prosecute or discontinue the proceeding, and it makes no relevant difference to the plaintiffs' and the defendants' situations, because their rights and obligations were set by Gzell J's order. 18 I have therefore decided that the Court should direct the defendants to exercise their best endeavours, and take all relevant steps, to ensure that the transfer of the lease that has already been executed is duly completed and registered. I made an order to that effect on 24 May 2002, together with an order dismissing the plaintiffs' application. I reserved publication of my reasons for judgment, without objection by counsel for the defendants. 19 I did not make any order with respect to the costs of the plaintiffs' application filed on 14 May 2002. The plaintiffs were not competent to make that application and therefore failed, and so they should not receive an order for costs, even though the Court acting on its own motion has made an order similar to the one they sought. The defendants should not receive an order for costs because the outcome of the application is an order that they discharge their obligations. 20 The plaintiffs have endeavoured by correspondence to recover the costs ordered by Gzell J to be paid on 28 February 2002. The analysis set out above implies that the benefit of that costs order is now vested in their trustee in bankruptcy as part of their respective bankrupt estates. It will be up to the trustee in bankruptcy to pursue the defendants for recovery of costs, and presumably the trustee will do so with all due expedition. **********

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