Australian Competition & Consumer Commission v Kritharas,

REASONS FOR JUDGMENT 1 There is before the Court a petition presented by the Australian Competition and Consumer Commission ("the ACCC") for the making of a sequestration order against the estate of Mr Nicholas Kritharas ("the debtor"). The act of bankruptcy relied on in the petition was the failure by the debtor, within the time specified in a bankruptcy notice served on him by the ACCC, either to comply with the requirements of that notice or (to put it shortly) to satisfy the Court that he had a cross demand of the sort referred to in par 40(1)(g) of the Bankruptcy Act 1966 (Cth) ("the Act"). 2 The judgment on which the bankruptcy notice had been based had been one given by a single Judge of this Court, Tamberlin J. The reasons for that judgment had been given on 4 June 1999: see ACCC v Top Snack Foods Pty Ltd (1999) ATPR ¶41-708, while the judgment itself had been given on 2 August 1999. 3 In his judgment, Tamberlin J had relevantly: declared that the three corporate respondents to the proceeding before the Court had contravened both ss 52 and 59 of the Trade Practices Act 1974 (Cth) ("the TPA") in certain respects; declared that the debtor had been knowingly concerned in those contraventions; declared that nine named persons had suffered loss in specified amounts by reason of those contraventions, those amounts totalling $406,129.79; ordered that the debtor was liable, pursuant to subss 87(1A) and 87(1B) of the TPA, to pay to the ACCC $406,129.79 on behalf of the nine named persons; and ordered that there be judgment for the ACCC against the debtor in the sum of $406,129.79. 4 In his reasons for judgment, Tamberlin J had found the following. Each of the nine named persons had, either alone or in combination with another one of those persons, entered into a franchise agreement with one of the three corporate respondents. The other two corporate respondents had been in partnership for the purpose of undertaking the business carried on by the corporate respondent which had entered into the franchise agreements. The latter corporate respondent had made certain misleading representations, both on its own behalf and on behalf of the other two corporate respondents, to the nine named persons, which representations had induced those persons both to enter into the franchise agreements and to continue to carry on their franchise operations. The debtor had been knowingly involved in the making of those representations. 5 Among the matters which are common ground between the ACCC and the debtor in the present proceeding are: first, that the ACCC had, by the end of 1996, made in its TPA proceeding the claims against the debtor on behalf of the nine named persons which, on 2 August 1999, resulted in the money judgment in its favour against the debtor; secondly, that, in mid-1997, the debtor authorised a trustee to be his controlling trustee under s 188 of the Act and that the creditors of the debtor shortly thereafter accepted a composition under s 204 of the Act; and, thirdly, that the ACCC refused to participate in that composition, taking the attitude that its TPA claims against the debtor were not affected by the composition. 6 Further, it is conceded by the debtor that he has no argument against the making of a sequestration order against his estate except an argument based on the effect on the ACCC's creditor's petition of the composition to which I have just referred. 7 In substance, that argument depends on par 238(2)(a) of the Act, which provides (subject to presently irrelevant exceptions) that "it is not competent for a creditor, so long as a composition under this Part remains valid … to present a creditor's petition against the debtor … in respect of a provable debt". The composition, it is said by Mr Kritharas, remains valid within the meaning of that provision; and the ACCC, it is said by Mr Kritharas, is a creditor which presented a creditor's petition against him in respect of a provable debt within the meaning of that provision. The presentation of that creditor's petition against the debtor was something which it was not competent for the ACCC to do and the petition must therefore be dismissed. 8 In its response to that argument, the ACCC has neither suggested that any reason exists why the debtor should be prevented from seeking to rely in the present proceeding on par 238(2)(a) of the Act nor disputed that the composition remains valid within the meaning of that provision; however, it has submitted that the creditor's petition which it presented was not in respect of a provable debt within the meaning of that provision and, since Mr Kritharas concedes that he has no argument against the making of a sequestration order against his estate except the argument that the ACCC's creditor's petition was in respect of such a provable debt, it follows that the sequestration order must be made. 9 The reference in par 238(2)(a) of the Act to a "provable debt" takes one to subs 187(2) of the Act, which provides that the reference to a "provable debt" in (relevantly) the former provision "shall be read as a reference to a debt or liability that would have been a provable debt in the debtor's bankruptcy if the debtor had become a bankrupt on the day on which … the special resolution accepting the composition was passed…." That latter provision takes one, in turn to s 82 of the Act, dealing with debts provable in bankruptcy, and, in particular, to subs (2) thereof, which provides in part: "Demands in the nature of unliquidated damages arising otherwise than by reason of a contract … are not provable in bankruptcy". 10 Before me, the parties debated, among other questions, the question whether, on the day on which the composition was accepted, the ACCC's TPA claims against the debtor fell within the notion of "[d]emands in the nature of unliquidated damages arising otherwise than by reason of a contract …." If they did, then, by the legislative route which I have traced above, par 238(2)(a) of the Act does not provide the debtor with a defence to the ACCC's creditor's petition. If, on the other hand, the ACCC's claims against the debtor did not fall within the notion of "[d]emands in the nature of unliquidated damages arising otherwise than by reason of a contract …", then a further question arises whether those claims fell within subs 82(1) of the Act. 11 (It is true that the latter provision contains a general definition of provable debts, but, since it is expressed to be subject to, among other provisions, subs 82(2) of the Act, it is logical to deal first with the subs 82(2) issue.) 12 The issue whether a claim under the TPA (or under one of its State equivalents) falls within subs 82(2) of the Act is not a novel one. 13 It appears first to have arisen in this Court in Fielding v Vagrand Pty Limited (In liquidation) (1992) 39 FCR 251 (Morling J). In that case, leave to proceed was being sought against a company in liquidation. The claim in respect of which leave to proceed was being sought was (relevantly) one for contravention of the TPA together with resulting damage. (Although it was not stated in the reasons for judgment, the provision of the TPA alleged to have been contravened seems plainly, from the recitation in those reasons of the facts alleged by the applicants for leave to proceed, to have been subs 52(1).) The principal relief being sought in respect of that claim was an order under s 87 of the TPA avoiding ab initio a contract for the sale of certain units in a unit trust, together with a consequential order for the restitution of the units sold. Further or in the alternative, damages were being sought under s 82 of the TPA. 14 Among the questions which arose on the application for leave to proceed was whether, if damages were to be awarded on the claim, that judgment would be a provable debt of the company in liquidation or would instead fall within subs 82(2) of the Act. (The provisions of the Act relating to provable and non-provable debts were incorporated by reference into the statutory provisions relating to the winding up of companies.) 15 It was held by Morling J (at 255-58) that leave to proceed would not be given in respect of the damages sought under s 82 of the TPA, because that relief fell within subs 82(2) of the Act. On the other hand, leave to proceed would be given in respect of the avoidance of the sale contract and the consequential restitution of the units sold sought under s 87 of the TPA, because that relief did not fall within subs 82(2) of the Act. 16 Morling J's decision to grant leave in respect of the relief sought under s 87 of the TPA was afterwards the subject of an unsuccessful appeal to a Full Court of this Court, although there was no cross-appeal against Morling J's decision to refuse to grant leave in respect of the relief sought under s 82 of the TPA: Vagrand Pty Limited (In liquidation) v Fielding (1993) 41 FCR 550 (Wilcox, Burchett and Beazley JJ). Subsection 82(2) of the Act was not discussed in the Full Court's reasons. 17 Although it is apparent that Morling J had not been referred in Fielding to the decision, in CCA Systems Pty Ltd v Communications & Peripherals (Australia) Pty Ltd (1989) 15 ACLR 720, Giles J (now Giles JA) of the New South Wales Supreme Court had already reached the same conclusion as did Morling J on the question whether a claim for damages under the TPA (or under one of its State equivalents) of the type made in Fielding fell within subs 82(2) of the Act. 18 By way of background to the CCA Systems case, I mention that, in the same way that par 238(2)(a) of the Act renders it incompetent for a creditor, so long as a composition remains valid, to present a creditor's petition against the debtor in respect of a provable debt, par 238(2)(c) of the Act renders it incompetent for a creditor, so long as a composition remains valid, to commence any (other) legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. (The latter provision is one on which, incidentally, the debtor might have sought to rely either in the proceeding before Tamberlin J or for the purpose of setting aside the bankruptcy notice served on him by the ACCC: see, on the latter point, Re Dawson; Ex parte Dawson and Arthur Andersen and Co (1985) 5 FCR 133 (Pincus J). Why the debtor did not do so was not explained before me.) 19 In the CCA Systems case, the plaintiff had commenced proceedings against (relevantly) an individual for damages for (relevantly) contraventions of the New South Wales statutory equivalents of ss 52 and 53 of the TPA, which equivalents were applicable to individuals, rather than to corporations. That individual defendant had then entered into a composition under the Act and had defended the claims against him by reliance on par 238(2)(c) of the Act. 20 Giles J rejected that defence, concluding (at 726-27; 730-31) that the plaintiff's claims fell within subs 82(2) of the Act. 21 The CCA Systems case was afterwards applied in Re NIAA Corporation Ltd (In liquidation) (NSWSC: McLelland CJ in Eq, 2 December 1994, unreported), a case which, unlike the CCA Systems and Fielding cases, was not referred to in argument before me. In that case, which arose in a context like that of Fielding (although the latter case was not mentioned in the reasons for judgment), it was again held that a claim for damages for contravention of subs 52(1) of the TPA fell within subs 82(2) of the Act. 22 In addition to the three decisions which I have mentioned above, there has been a further relevant decision of a single Judge of this Court since I reserved judgment in the present matter, Reid v Interarch Australia Pty Limited (ACN 069 490 795) [2000] FCA 1328 (Hely J, 19 September 2000, unreported). 23 In Reid, a claim for damages under s 82 of the TPA was made against an individual on the basis that he had been involved within the meaning of subs 75B(1) of the TPA in a contravention by a corporation of subs 52(1) of the TPA. The individual concerned subsequently became a bankrupt and argued before Hely J that thereafter the leave of the Court had been required under subs 58(3) of the Act before a fresh step could be taken in the prosecution of the TPA claim against him. The question whether such leave had been required resolved itself into one of whether the claim against him fell within subs 82(2) of the Act. Hely J held (at [15]-[23]) that the claim did fall within subs 82(2) of the Act, so that no leave had been required before a fresh step could be taken in the prosecution of the TPA claim. 24 It will be apparent from what I have said above that there exists a formidable body of authority for including within subs 82(2) of the Act claims for damages under s 82 of the TPA for contravention of subs 52(1) of the TPA. Most of that authority, namely, the CCA Systems and Fielding decisions, the latter being a decision of a single Judge of this Court, was relied on by the ACCC at the hearing before me. Further, since the hearing before me, a single Judge of this Court has taken the view in Reid that there was included within subs 82(2) of the Act a claim for damages under s 82 of the TPA against an individual for being involved within the meaning of subs 75B(1) of the TPA in a contravention by a corporation of subs 52(1) of the TPA. 25 In seeking to swim against the tide referred to above, the debtor relied in substance on two matters, both of which have already been rejected either expressly or by necessary implication in the authorities to which I have referred above. 26 It is convenient to deal first with the debtor's submission that the claims made by the ACCC against the debtor under the TPA were not "[d]emands in the nature of … damages" within the meaning of subs 82(2) of the Act, but were rather demands for statutory debts. In making that submission, the debtor relied on the decision of a Full Court of this Court in Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19 (Morling, Beaumont and Burchett JJ). 27 In Handby, the question was whether a claim made pursuant to s 556(1) of the Companies (Tasmania) Code, which provision rendered a company director liable, in certain circumstances, for the payment of a debt incurred by the company, fell within subs 82(2) of the Act. It was held unanimously that it did not. (Incidentally, the same conclusion was reached three weeks later by Giles J in CCA Systems with reference to the materially identical provision of the Companies (New South Wales) Code (see at 728-29), although it is apparent that his Honour was not then aware of the Full Court's decision in Handby.) Among the reasons which the Full Court gave for its holding (at 26-27) was that such a claim was not a demand "for [sic] damages". In essence, its reasoning was that: first, the liability created by s 556(1) of the Code was status based, rather than conduct based; and, secondly, the liability created by the provision was in any event expressly described in the Code as a "debt". 28 Since neither of the reasons given by the Full Court in Handby for holding that a claim made pursuant to s 556(1) of the Companies (Tasmania) Code was not a demand "for damages" has any application in the present matter to the TPA claims made by the ACCC against the debtor, I am neither required nor persuaded by that case to conclude that those claims were not "[d]emands in the nature of … damages" within the meaning of subs 82(2) of the Act. In my view, those claims were no less demands in the nature of damages than were the claims in CCA Systems, Fielding, NIAA and Reid, all of which claims were necessarily implicitly accepted in those cases to be demands in the nature of damages, rather than demands for statutory debts. In particular (although this was a matter expressly not relied on before me by the debtor), I can see no reason to grant to a claim seeking damages under s 82 of the TPA the status of a demand in the nature of damages, while denying that status to a claim by the ACCC seeking compensation on behalf of other persons alleged to have suffered loss under s 87 of the TPA. 29 The debtor's second substantial submission was that, even if the ACCC's TPA claims against the debtor were properly to be described as demands in the nature of unliquidated damages, nevertheless they did not "aris[e] otherwise than by reason of a contract"; on the contrary, they arose by reason of contracts, namely, the franchise agreements between, on the one hand, one or more of the persons on whose behalf the ACCC was making the TPA claims against the debtor and, on the other hand, one of the corporate respondents to the proceeding in which the TPA claims against the debtor were being made. 30 Arguments of a similar kind were made and rejected in CCA Systems, NIAA and Reid. Although the last of those three cases is of most significance for present purposes, I will nevertheless say something as well of the way in which the arguments were dealt with in the first two of those three cases. 31 So far as CCA Systems is concerned, it is sufficient to quote the following passage from the reasons of Giles J (at 731): "[I]t was said that the claim was by reason of a contract … because the representations [alleged to have been made by the second defendant, the individual defendant] were made in order to bring about the contract for the sale of the goods by the plaintiff to the first defendant…. I am unable to accept that the connection between the representations and the sale of the goods was such that the plaintiff's claim … was by reason of the sale: the claim was by reason of the making of the representations." 32 As to NIAA, unlike CCA Systems, it is necessary to do more than merely quote a brief passage from the reasons for judgment; it is also necessary to say something of the background facts. NIAA, which was in liquidation, sued Mr and Mrs O'Keefe for the unpaid balance of a loan made to them by it. Another company had acted as an intermediary in connection both with the making of the loan by NIAA to the O'Keefes and with its repayment. The O'Keefes were seeking leave to cross-claim against NIAA, alleging against it misleading or deceptive conduct under subs 52(1) of the TPA. The conduct alleged consisted of: permitting the intermediary so to act; failing to disclose certain matters about the intermediary; and misstating the balance owing under the loan. 33 In support of their application for leave to proceed against NIAA on their cross-claim, the O'Keefes submitted that each of their subs 52(1) TPA claims was a demand arising by reason of a contract. That was because (at 4), "… the connection between the respective claims for … misleading and [sic] deceptive conduct on the one hand, and the contract of loan between the company and the O'Keefes on the other hand, was such as to lead to the conclusion that each of those claims should properly be so characterised." 34 In rejecting that submission, McLelland CJ in Eq said (at 5-6), "[I]t is not suggested here that any alleged … misleading and deceptive conduct of the company induced the O'Keefes to enter into the contract on which they are being sued. In the present case, the loan contract between the company and the O'Keefes was no more than a circumstance against the background of which, and in connection with the obligations established by which, the alleged … misleading and deceptive conduct of the company is said to have taken place. But in my opinion, this association is insufficient to satisfy the statutory formula that the claim arises 'by reason of' that contract…." 35 I turn finally to Reid. There, the factual circumstances were that the applicant alleged that it had contracted with a corporate respondent to have the latter perform certain services for it, that the corporate respondent had subsequently falsely represented to it that those services had been performed, that, in reliance on that representation, it had wasted expenditure and that an individual respondent had been involved in the making of the relevant representation by the corporate respondent. It was the individual respondent's submission before Hely J (rejected, as I have already said) that the applicant's claim against him arose by reason of a contract, so that the claim did not fall within subs 82(2) of the Act. The contract being referred to was that between the applicant and the corporate respondent. 36 In rejecting the individual respondent's submission, Hely J relied on two matters. First (see at [17]-[19]), a demand cannot be said to "aris[e] … by reason of a contract" for the purposes of subs 82(2) of the Act unless the demand arises by reason of a contract to which the debtor himself or herself is a party. That was not the case in Reid (nor, I add, is it the present case). Secondly (see at [20]-[22]), a demand cannot be said to "aris[e] … by reason of a contract" for the purposes of subs 82(2) of the Act unless a contract constitutes an essential element of the cause of action in reliance on which the demand is made. That was not the case in Reid (nor, I add, is it the present case). 37 So far as the second of those two matters was concerned, in relying on it, Hely J expressly followed a recent decision of the Victorian Court of Appeal on the construction of subs 82(2) of the Act, Aliferis v Kyriacou [2000] VSCA 123 (Brooking, Phillips and Charles JJA, 20 July 2000, unreported): see, in particular, Aliferis at [9] and [14] (Brooking JA); [18] (Phillips JA); and [46] (Charles JA). (I should mention here that, although it is apparent that Hely J had not been referred in Reid to either CCA Systems, Fielding or NIAA, Charles JA, in his leading reasons for judgment in Aliferis,had given approving references to aspects of the reasoning in both CCA Systems and NIAA: see at [38] and [48] respectively. Further, for a note on Aliferis, see Barrett, "Claims excluded from proof in bankruptcy" (2000) 74 ALJ 659.) 38 I take the attitude that I should follow the decisions of other single Judges of this Court, if applicable, unless satisfied that they are clearly wrong. Not only am I not satisfied that the decision of Hely J in Reid was plainly wrong, I am not satisfied that it was wrong to any degree. Further, I regard it as applicable in the present case. In those circumstances, I will naturally reject the debtor's submission that the ACCC's TPA claims against him arose by reason of various contracts and therefore did not fall within subs 82(2) of the Act, since in the factual circumstances of the present case the success of that submission depends on my accepting the contrary of both of the matters relied on by Hely J in Reid. 39 Having accepted that, on the day on which the composition was accepted, the ACCC's TPA claims against the debtor fell within subs 82(2) of the Act, I consider it unnecessary to deal with the parties' submissions on the further question whether those claims fell within subs 82(1) of the Act. 40 I have already mentioned above that the debtor conceded before me that he had no argument against the making of a sequestration order against his estate except the one which I have rejected. However, it was also agreed between the parties that, if I did reject that argument, I should not myself make a sequestration order against the debtor's estate, but should instead direct that a Registrar, on proof of the formal matters required, may exercise the Court's power under subs 52(1) of the Act to make such an order against the debtor's estate. I will therefore do so. I will also order the debtor to pay the ACCC's costs of the proceeding to the present time, those costs to be taxed and paid in accordance with the Act once the sequestration order is made. The costs before the Registrar will naturally be dealt