Bucketts Road Business Services Pty Ltd v Phalona Pty Ltd

EX TEMPORE REASONS FOR JUDGMENT 1 This is a motion filed by the applicants, in which they seek an order granting leave to proceed against the second respondent in respect of the claim made in paragraph 2.1 of the application. The second respondent, so the evidence demonstrates, is a bankrupt. Leave is required by virtue of s 58(3)(b) of the Bankruptcy Act 1966 (Cth) which provides: 'Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor: (a) …; or (b) except with 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'. 2 The statement of claim pleads a case against four respondents. The proceedings have been settled against the third and fourth respondents. Accordingly, the only respondents remaining are the first and second respondents. 3 The statement of claim alleges that a company known as Metborn Pty Limited (in liq) ('Metborn') holds 100 per cent of the issued share capital of the first respondent ('Phalona'). It is further alleged that the second respondent and others associated with him were the beneficial owners of 100 per cent of the issued share capital of Metborn and that at all material times the second respondent was the sole director of Phalona and a director of Metborn. 4 Phalona is said to have been the trustee of the Phalona Unit Trust which was created by a deed between Phalona and the second respondent 21 August 2000. The statement of claim pleads that the applicants made a number of substantial investments in the Phalona Unit Trust during the period September 2001 to March 2003. It is further alleged that, at the time that each of the applicants submitted their applications for units in the Phalona Unit Trust, the second respondent or, alternatively, Metborn, made certain representations that were misleading or deceptive. The representations are said to have involved the second respondent and Metborn in conduct that contravened s 52 of the Trade Practices Act 1974 (Cth) ('TP Act') or, alternatively, comparable Commonwealth or State legislation. The statement of claim goes on to plead that the applicants relied upon the misleading or deceptive representations and thereby sustained loss. 5 It is also alleged that Phalona, through its sole director, the second respondent, withdrew moneys in breach of its duties as trustee of the Phalona Unit Trust. Paragraph 35 of the statement of claim pleads that: 'At all relevant times the second respondent knew of the matters [involving the breach of trust] and knowingly participated in the breaches of trust'. 6 The statement of claim goes on to allege that Phalona, in breach of trust, withdrew certain amounts from the account held by the Phalona Unit Trust and that these moneys were used by the second respondent, among other things, to reduce indebtedness to a bank. 7 The relief sought in paragraph 2.1 of the application against the respondent is as follows: 'A declaration that, on the ground of the second respondent's knowing assistance in [Phalona's] breach of trust or further or alternatively Metborn's knowing receipt of moneys paid by [Phalona] in breach of trust, the second respondent is jointly and severally liable for any moneys that this court declares [Phalona] is liable to pay to the New Trustee [of the Phalona Unit Trust] or the applicants or such other sum as the Court thinks fit'. 8 The relief sought by the applicants against Phalona includes an order that, on account of Phalona's breach of trust, it pay equitable compensation or damages. The application also seeks damages or compensation from the second respondent pursuant to s 82 of the TP Act or comparable Commonwealth or State legislation. 9 Finally, the application seeks a declaration that the second and third respondents are jointly and severally liable to account to the 'New Trustee' for certain sums on the ground of knowing receipt of moneys obtained in breach of trust. I have been told by counsel for the applicants that this claim for relief will be pressed against the second respondent, even though the applicants' claim against the third respondent has been settled. 10 In helpful written submissions, counsel for the applicants, Ms Dawson, points out that leave of the Court is not required for the applicants to pursue the claim for damages for misleading or deceptive conduct against the second respondent. The representations allegedly made by him are said to have induced the applicants to invest moneys with Phalona. It has been authoritatively established that a claim for damages of this kind is not provable in bankruptcy. The reason is that the claim falls within the ambit of s 82(2) of the Bankruptcy Act, which provides that certain debts are not provable in a bankruptcy. Relevantly, these are 'demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust'. 11 In Coventry v Charter Pacific Corporation Ltd (2005) 222 ALR 202, the joint judgment of the High Court stated, at [6], that: 'A statutory claim for unliquidated damages for misleading or deceptive conduct which induced the claimant to make a contract not with the bankrupt but with a third party is not a debt provable in bankruptcy. It is a demand in the nature of unliquidated damages arising otherwise than by reason of a contract or promise. The bankrupt is not discharged from liability. The claim may be pursued by the claimant during the bankruptcy and after discharge from bankruptcy'. (Emphasis in original.) 12 The applicants have made it clear that they intend to pursue the claim against the second respondent for damages based on misleading or deceptive conduct, regardless of his bankruptcy. 13 As I have noted, the applicants seek leave to pursue the claim for declaratory relief made in par 2.1 of the application. It is a little curious that the only relief sought against the second respondent, at least explicitly, is a declaration. Ms Dawson has made it clear that no claim by way of tracing is sought against the second respondent, presumably because that there are no assets in respect of which such a claim can be made. 14 In her written submissions, Ms Dawson makes six points in support of the grant of leave to proceed with the claim against the second respondent. One of those points is no longer relevant, since it concerns the tracing claim that is now not to be pursued. 15 A second contention rests on the proposition that the applicants' claim for declaratory relief would not be released upon the second respondent's eventual discharge from bankruptcy. This contention, in turn, depends upon the language of s 153(2)(b) of the Bankruptcy Act, which provides: 'The discharge of a bankrupt from a bankruptcy does not … release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he or she was a party'. 16 As I discussed with Ms Dawson in argument, I have considerable doubts as to whether this provision can apply to a claim based on misleading or deceptive conduct or, indeed, any other conduct, that is not specifically pleaded to be fraudulent notwithstanding that a finding consistent with fraud might ultimately be made. It may be that, since the Courts have given a broad construction of the concept of fraud in s 153(2)(b) of the Bankruptcy Act (a point discussed in Skalkos v Smiles [2006] NSWSC 192), no specific pleading of fraud is required. However, I would not wish to base a grant of leave upon this particular contention. 17 The other four matters raised by Ms Dawson are these. First, the underlying factual matrix for the claim based on misleading or deceptive conduct is similar to the other claims made against the second respondent that can proceed without the leave of the Court. Accordingly, the principal factual issues involved in the claim against the second respondent will need to be determined by the Court in any event. It follows, so she argues, that the claim for which the applicants require leave of the Court will not impose any undue additional burden on the Court. 18 Secondly, she contends that the claims against Phalona are inherently tied to those against the second respondent. In particular, the claims made against the second respondent for declaratory relief are dependent upon factual findings of breach of trust by Phalona, in which the second respondent is said to have knowingly participated. Accordingly, the material facts will need to be determined in any event, given that the applicants' claim against Phalona must be addressed. 19 Thirdly, Ms Dawson initially pointed out that the second respondent's trustee in bankruptcy had expressed the view that it was unlikely that a dividend would be paid to ordinary unsecured creditors. However, in the course of argument, Ms Dawson, when asked by me what practical utility there might be in continuing the proceedings against the second respondent, replied that there was a possibility of additional assets becoming available to the trustee in bankruptcy for distribution to unsecured creditors. 20 A preliminary report from the trustee to creditors indicates that, at that early stage of the bankruptcy, there was little likelihood of any assets becoming available for the benefit of unsecured creditors. However, the report refers to a possibility of the trustee investigating whether certain assets should be retrieved on behalf of the estate of the second respondent. Accordingly, there is perhaps some possibility, albeit slight, that assets will come into the hands of the trustee in due course. 21 Fourthly, Ms Dawson points out that the trustee in bankruptcy has been served with the relevant documents, but has not entered an appearance. She suggests that this indicates that the trustee has no particular interest in the proceedings and that the proceedings therefore will not prove to be a burden upon the estate of the bankrupt. 22 I must confess to some doubts about the utility of granting leave to the applicants to proceed against the second respondent. However, based on what I have been told, it appears that the claims against the second respondent founded on s 52 of the TP Act (or equivalent legislation) will be pursued in any event. Those claims are closely related to the claims against the second respondent for which the leave of the Court is required. Similarly, as Ms Dawson submits, the circumstances giving rise to the claims against Phalona are also closely linked to those giving rise to the claims against the second respondent. 23 Having regard to these matters, I think it appropriate to grant leave to the applicants in the terms sought by the motion and I propose to do so. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.