Cummings v Claremont Petroleum NL

1. The judgment was for Beach Petroleum NL only but it seems that Claremont Petroleum NL (which was the parent company of Beach Petroleum NL) was entitled to relief that, for reasons that are immaterial, was taken by Beach Petroleum NL. Both companies were joined as respondents to the appeals and both applied to the Federal Court for an order setting aside or dismissing the notices of appeal to that Court.

On 1 July 1993, Messrs Cummings and Fuller each filed notices of appeal against this judgment to the Full Court of the Federal Court. An appeal lies against a judgment of the Federal Court constituted by a single judge pursuant to s 24 of the Federal Court of Australia Act 1976 Cth. The respondents thereafter moved the Full Court for orders that the notices of appeal be set aside or dismissed. The Full Court by majority (Gummow and Whitlam JJ, Hill J dissenting) dismissed the appeals as incompetent. These appeals are brought by special leave against that decision.

If the appeals by the appellants had been commenced prior to their bankruptcy, they would have been stayed automatically pursuant to s 60(2) of the Act which provides:

An action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action. The term "action" is defined to mean any civil proceeding (s 60(5)). The institution of an appeal by a defendant against a judgment in favour of a plaintiff is the commencing of a proceeding. That follows from the decision of the Full Court of the Supreme Court of New South Wales in Want v Moss [2] . A verdict had been found for a plaintiff. The defendant moved for a rule nisi to set aside the verdict and his estate was thereafter sequestrated. The motion for a rule nisi was held to be a "proceeding commenced" by the bankrupt that was stayed on his bankruptcy. Manning J said [3] : In my opinion it would be monstrous if it were not so. It could never have been contemplated that a bankrupt, who can have no means to pay costs if he fails, should be allowed to go on and put the plaintiff to trouble and expense It is a proceeding at law and is commenced by a bankrupt, and as it has now been abandoned by the official assignee, the only person who has any interest in the matter, I am clearly of opinion that it cannot be allowed to continue. The considerations which affected Manning J in Want v Moss were echoed by a majority of the Full Court in the present case [4] : It is consistent with the policy of the Act that after sequestration of the estates of unsuccessful litigants the successful party not be put at the risk of sustaining further costs of appellate litigation. In Doran v Isaacs [5] , Want v Moss was held to be authority for the proposition that the statutory term "proceeding commenced" extends to a bankrupt's motion for a new trial in an action in which the bankrupt is a defendant. However, the respondents do not seek to support the order of the Full Court on the footing that the purported appeals were stayed pursuant to s 60(2) of the Act: the bankruptcies were prior, not subsequent, to the commencing of the appeals. But the respondents submit that it would be anomalous if the Act operated to stay an appeal commenced prior to the bankruptcy but not to stay an appeal commenced after the bankruptcy. The anomaly is avoided only if the respondents are right in contending that the appellants, upon becoming bankrupt, had no locus standi to institute an appeal either (i) because their rights to appeal were property vested in their respective trustees or (ii) because the fact that the judgment was enforceable only against property vested in the trustee meant that the appellants ceased to have the interest necessary to give a right to appeal. 1. (1889) 10 NSWR (L) 274. 2. Want v Moss (1889) 10 NSWR (L) 274 at 279. 3. Fuller v Beach Petroleum NL; Cummings v Beach Petroleum NL (1993) 43 FCR 60 at 68. 4. (1912) 12 SR (NSW) 699 at 707.

Gummow and Whitlam JJ held that the right to appeal fell within the term "personal property of every description" within the meaning of that term in the definition of property in s 5(1) of the Act and thus within the scope of "property of the bankrupt" that is vested in the trustee pursuant to s 58(1). Their Honours so held "even though the object of the appeal is the removal of the burdens of a judgment debt and costs orders placed upon an unsuccessful defendant by the orders the object of the appeal " [6] . Hill J was of a different view. His Honour found it "difficult to conceive of a right to appeal against a judgment for damages as property in anything but a colloquial sense", particularly "where the word "property" is used in the context of that which is divisible among creditors" [7] . Thus, in the Full Court, the respondents succeeded on the first of the submissions that they have made before this Court.

1. Fuller (1993) 43 FCR 60 at 67. 2. Fuller (1993) 43 FCR 60 at 74.

The Act follows the pattern of earlier bankruptcy law. Broadly, and not precisely, the effect of bankruptcy is to divest a bankrupt of his property, to vest that property in a trustee [8] and to make it available for the payment of provable debts [9] . The right to commence or take a fresh step in legal proceedings or to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt are, in general, denied to creditors when sequestration is ordered (s 58(3)). The right of the bankrupt to prosecute proceedings that he has commenced is restricted by s 60(2). The bankrupt's concerns as to the administration of his property and the payment of his creditors can be addressed by the Court in the exercise of its supervisory jurisdiction over the conduct of the trustee. Section 178 of the Act provides:

If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable. In the light of this brief conspectus of the Act, we turn to consider the two bases on which the respondents submit that the appellants had no locus standi to commence an appeal. 1. Section 58(1) reads as follows: "Subject to this Act, where a debtor becomes a bankrupt: (a) the property of the bankrupt, not being after acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and (b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee." 2. Section 116(1) provides: "Subject to this Act: (a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before the discharge; (b) the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his discharge; (c) property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D; and (d) money that is paid to the trustee of the bankrupt's estate under an order under section 139E; is property divisible amongst the creditors of the bankrupt." The generality of this sub-section is qualified by other sub-sections of s 116 and by subsequent provisions of the Act.

Is a right to appeal " property " vested in the trustee?

Section 58(1) provides that the property of the bankrupt vests in his trustee forthwith on the bankruptcy or, in the case of after-acquired property, as soon as it is acquired by or devolves on the bankrupt. The term "property" is broadly defined by s 5(1) of the Act to mean -

real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property. A right to appeal may be a substantive right [10] , but it is another question whether such a right has the character of property. Some rights created by statute can constitute property [11] , but a right to appeal does not have the character of property merely because it is the creature of statute. A chose in action may be the property of the person entitled to enforce it [12] , but a liability to satisfy a judgment enforcing a chose in action is not property of the person against whom the judgment is entered. A liability is not property of the person liable. Nor is a right to appeal against a money judgment property of the judgment debtor. Nor does such a right to appeal answer the description of property divisible among creditors defined by s 116(1)(b), namely, "the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit". The powers referred to are powers "which are familiar to all conveyancers and are powers properly so called", as Farwell J pointed out in In re Rose; Trustee of the Property of E T Rose v Rose [13] . In other words, the powers referred to are authorities to dispose of property or interests in property for the benefit of the donee of the power or of some other person. In this case, there is no property "over or in respect of" which the bankrupt is or would have been capable of exercising a power. As a matter of ordinary language, a judgment debtor's right to appeal against the judgment is not property. 1. Colonial Sugar Refining Co Ltd v Irving [1905] AC 369 at 372. 2. See Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300 at 327; Australian Tape Manufacturers Association Ltd v The Commonwealth (1993) 176 CLR 480 at 509-510; Mutual Pools & Staff Pty Ltd v The Commonwealth (1994) 179 CLR 155. 3. Georgiadis v Australian & Overseas Telecommunications Corporation (1994) 179 CLR 297 at 303-304, 312, 325, cf 314-316, 320-321. 4. [1904] 2 Ch 348 at 352; see, on appeal [1905] 1 Ch 94.

In W R Henry & Son v Hodge [14] , however, Adam J held that a right to appeal against a judgment was property which was divested from the bankrupt on his bankruptcy. His Honour based his decision on the decision of the English Court of Appeal in Boaler v Power [15] . In the last-mentioned case, a bankrupt commenced proceedings to set aside on the ground of fraud judgments in actions brought by him prior to his bankruptcy. He had sued to enforce his claims to certain shares and books. His actions had been dismissed with costs and the taxed costs in one of those actions formed the judgment debt on which he was adjudged bankrupt. Farwell LJ, speaking for himself and Kennedy LJ, said [16] :

It is open to the Court in Bankruptcy, if it thinks fit, to allow the debtor to contest in the Bankruptcy Court the validity of the petitioning creditor's judgment on the ground of fraud, collusion, or for any other sufficient reason: In re Flatau [17] . But this is the only way in which the bankrupt can contest it: the adjudication, while it stands, is conclusively binding on him: he cannot contest it in any other Court on the ground of fraud or on any other ground. The right to continue these three actions is a chose in action vested in the trustee, and the bankrupt has no locus standi: see Motion v Moojen [18] ; Rochfort v Battersby [19] ; Metropolitan Bank Ltd v Pooley [20] . In so far as his Lordship's decision rests on the exclusivity of the bankruptcy procedure for challenging the judgment on which the sequestration order was made, it does not illuminate the question whether a right to appeal is property. But the last sentence above cited suggests that the consequence of the exclusivity is that a right to impeach a judgment for fraud is classified as a chose in action which is part of the property of the bankrupt [21] . By analogy, the same character might be attributed to an appeal against a judgment, as Adam J held. If the postulated appeal relates to property that became vested in the trustee on the bankruptcy, or if the postulated appeal relates to a claim by the bankrupt for money or property that would be vested on recovery in the trustee, the right to appeal is vested in the trustee, as the cases cited by Farwell LJ illustrate. But it does not follow that a right to appeal against a money judgment entered in an action against a bankrupt is property of the bankrupt and, on that account, vested in the trustee. 1. [1963] VR 111 at 112. 2. [1910] 2 KB 229. 3. Boaler v Power [1910] 2 KB 229 at 232-233. 4. (1888) 22 QBD 83. 5. (1872) LR 14 Eq 202. 6. (1849) 2 HLC 388 [9 ER 1139]. 7. (1885) 10 App Cas 210. 8. Section 168 of the Bankruptcy Act 1883 UK (46 & 47 Vict c 52) like s 4 of the Bankruptcy Act 1924 Cth defined property to include, inter alia, "things in action". See now the Insolvency Act 1986 UK, s 436.

The first case cited by Farwell LJ, Rochfort v Battersby [22] , concerned the interest which the bankrupt had in certain estates in Ireland. The mortgagee of the estates was held entitled to priority over the assignees in bankruptcy. The assignees did not appeal but the bankrupt purported to do so, contending that he had an interest in the surplus after payment of his creditors. The bankrupt was held to have no locus standi to prosecute the appeal, because "the Courts have always considered these acts of Parliament as divesting the insolvent of all title and interest in the property, which would authorise and justify him in entering into any litigation respecting it" [23] . The subject of the litigation being the property of the bankrupt, the right to appeal was held to be vested solely in the assignees in whom that property was vested. The case does not support the proposition that a right to appeal against a money judgment entered against a bankrupt is part of the property of the bankrupt. In the second case, Motion v Moojen [24] , a bankrupt filed a bill in Chancery impugning an order approving a sale of some part of the bankrupt's interest in a partnership. The Vice-Chancellor allowed a demurrer to the bill, saying [25] :

As a consequence of the bankruptcy, all the rights and interests which the bankrupt had at the time of his bankruptcy have become vested in other persons. The creditors are the persons who have all the rights the bankrupt ever had. Until they are satisfied, of course the bankrupt has no interest, and they can only be satisfied by carrying the proceedings in the bankruptcy to their legitimate and proper conclusion. Again, the case related to a right to bring proceedings in equity which, if successful, would enhance the property which had formerly belonged to the bankrupt but was then vested in the trustee. In Metropolitan Bank Ltd v Pooley [26] , the bankrupt instituted proceedings claiming, inter alia, damages against a defendant who had allegedly been guilty of tortiously maintaining proceedings which ultimately led to the plaintiff's bankruptcy. One ground for dismissing that claim was stated by Lord Blackburn [27] : assuming for the moment that it means something which was an injury to his estate for which an action could be maintained to recover damages, as long as the commission in bankruptcy remains, and his creditors are therefore entitled to take those damages, that would be a thing which the assignees would recover for the benefit of the creditors and not of the bankrupt himself. 1. (1849) 2 HLC 388 [9 ER 1139]. 2. Rochfort v Battersby (1849) 2 HLC 388 at 409 [9 ER 1139 at 1147]. 3. (1872) LR 14 Eq 202. 4. Motion v Moojen (1872) LR 14 Eq 202 at 209. 5. (1885) 10 App Cas 210. 6. Metropolitan Bank Ltd v Pooley (1885) 10 App Cas 210 at 223.

None of the three cases cited in Boaler v Power related to litigation in which judgment had been sought or entered against a bankrupt. Boaler v Power itself was a case in which the bankrupt was seeking to impeach judgments in actions brought to enforce proprietary rights which, if they existed, were vested in the trustee. Neither Boaler v Power nor the cases cited establish the affirmative proposition that a right to appeal is property. They do establish the negative proposition that a bankrupt has no right to bring or prosecute proceedings to protect, enhance or add to the property of which he has been divested on bankruptcy [28] . W R Henry & Son v Hodge was wrongly decided. If Boaler v Power were taken as authority for the proposition that a right to appeal in an action brought to enforce a liability of the defendant is property of the defendant, it too would be wrongly decided. But Boaler v Power is explicable as a case relating to proceedings brought by a bankrupt to protect or enforce rights in or to property vested in his trustee. But that is not the present case.

1. See Rochfort v Battersby (1849) 2 HLC 388 at 406, 409 [9 ER 1139 at 1146, 1147] and Heath v Tang [1993] 1 WLR 1421; [1993] 4 All ER 694, referred to below.

The appellants, believing that they had to escape from the proposition that the right to appeal in the present case was property, contended that that "property" was not vested in their trustee but was analogous to those rights of action which do not pass to a trustee on bankruptcy because they are personal to the bankrupt and do not affect the quantum of the bankrupt estate [29] . As the right to appeal in this case was not "property" within the meaning of that term in s 58(1), the appellants' submissions miss the point.

1. Beckham v Drake (1849) 2 HLC 579 at 627 [9 ER 1213 at 1230]; Rose v Buckett [1901] 2 KB 449 at 454; Davies v English, Scottish & Australian Bank Ltd (1934) 7 ABC 210 at 214; Coffey v Bennett [1961] VR 264 at 266.

Do the appellants have such an interest in the purported appeals as to give them locus standi to institute the appeals?

The creditor of a bankrupt cannot enforce any remedy against the person or property of the bankrupt in respect of a provable debt (s 58(3)(a)); the creditor must prove in the bankruptcy [30] , receiving a dividend out of the property divisible amongst the creditors of the bankrupt. The respondents' claims for unliquidated damages in their action against the appellants, other than the claim arising from breach of fiduciary duty, were not provable debts at the times when the appellants became bankrupt [31] . The judgment entered against the appellants after their bankruptcies would not have converted those claims into a debt provable in their respective bankruptcies [32] were it not for the merger in the one judgment of all claims against the appellants, whether they be framed as arising from breach of fiduciary duty or otherwise [33] . As a claim arising from breach of fiduciary duty is classified as a claim arising by reason of contract or breach of trust for the purposes of s 82(2) [34] the damages for which judgment was entered against the appellants are a provable debt in their bankruptcies [35] . The judgment creditors were confined to their right to prove against the estates to the "property" in which, of course, neither appellant had any entitlement. The respondents submit that, on that account, the appellants have no locus standi to appeal against the judgment.

1. See Pt VI, Div 1. 2. s 82(2) which reads: "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." 3. In re Newman; Ex parte Brooke (1876) 3 Ch D 494 at 496-497. 4. Green v Weatherill [1929] 2 Ch 213 at 221; Letang v Cooper [1965] 1 QB 232 at 242-243. See also Tarea Management (North Shore) Pty Ltd v Glass (1991) 28 FCR 93 at 100-101. 5. Emma Silver Mining Co v Grant (1880) 17 Ch D 122 at 129-130; Britter v Sprigg (1900) 26 VLR 65 at 82; Barewa Oil & Mining NL v Isim Mineral Development Pty Ltd (1981) 59 FLR 451 at 456; 38 ALR 288 at 292; on appeal sub nom Cornelius v Barewa Oil & Mining NL [1982] WAR 311 at 318; (1982) 64 FLR 287 at 295-296; 42 ALR 83 at 90-91. 6. Under s 82(1).

In Heath v Tang [36] , Hoffmann LJ, delivering the judgment of the Court, recalled the observation of Farwell LJ in Boaler v Power and pointed out [37] that -

In cases in which the bankrupt is defendant, there is of course usually no question of the cause of action having vested in the trustee. Unless the defence is set-off the bankrupt will not be asserting by way of defence any cause of action of his own. But in cases in which the plaintiff is claiming an interest in some property of the bankrupt, that property will have vested in the trustee. And in claims for debt or damages, the only assets out of which the claim can be satisfied will have likewise vested. It will therefore be equally true to say that the bankrupt has no interest in the proceedings. As we have seen, s 285(3) [38] deprives the plaintiff of any remedy against the bankrupt's person or property and confines him to his right to prove. (Emphasis added.) After canvassing the authorities, his Lordship concluded that they demonstrated "that in principle a bankrupt cannot in his own name appeal from a judgment against him which is enforceable only against the estate vested in his trustee" [39] . In a later unreported case [40] , Hoffmann LJ said: The essence of [the] decision [in Heath v Tang ] is that a bankruptcy order divests the bankrupt of any further interest in what debts he owes because it provides that he shall no longer be under any personal liability. An appeal from the judgment against him or an application to set aside the judgment against him is therefore a matter for his trustee, but does not concern the bankrupt. So far as a judgment entered in an action against a bankrupt creates or evidences a provable debt, we respectfully agree that the bankrupt has no financial interest which would confer locus standi to appeal in his own name against the judgment. That is because it is fundamental to the law of bankruptcy that the bankrupt is divested of both his interest in his property and liability for his provable debts [41] . 1. [1993] 1 WLR 1421; [1993] 4 All ER 694. 2. Heath v Tang [1993] 1 WLR 1421 at 1424; [1993] 4 All ER 694 at 698. 3. Insolvency Act 1986, the United Kingdom analogue of s 58(3) of the Act. 4. Heath v Tang [1993] 1 WLR 1421 at 1425; [1993] 4 All ER 694 at 700. 5. Royal Bank of Scotland v Farley; 17 March 1994. 6. Heath v Tang [1993] 1 WLR 1421 at 1427; [1993] 4 All ER 694 at 701. It was not suggested in argument that, pursuant to s 153, the discharge of the appellants from bankruptcy would not release them from liability for the judgment debt, albeit there has been a finding of fraud. On that footing, the appellants have no financial interest in the judgment entered against them.

Of course, a money judgment entered against a bankrupt has the effect of increasing the amount of the debts provable in his estate. But it is immaterial that, if an appeal against the judgment were successful, there would or might be a surplus in the estate after the remaining creditors are paid. A bankrupt's contingent interest in a surplus does not give him an interest which would allow him to sue to enforce proprietary rights [42] and, that being so, it cannot give him an interest to appeal to minimise liabilities. If the bankrupt cannot appeal against such a judgment, does his trustee have the power to do so? The powers of a trustee are defined by s 134. By sub-s (1)(j), the trustee is authorised to "bring, institute or defend any action or other legal proceeding relating to the administration of the estate". That is an ample power to permit the trustee to institute an appeal against a judgment entered against a bankrupt that affects the administration of the estate. But if the judgment against which a bankrupt wishes to appeal reflects on his personal or professional character (as the present judgment does), it seems unjust to leave the institution of an appeal to the discretion of a trustee whose interests do not extend, or do not necessarily extend, to the preservation of the bankrupt's personal or professional character [43] . Is the bankrupt without any prospect of relief in such circumstances?

1. Rochfort v Battersby (1849) 2 HLC 388 at 408, 409 [9 ER 1139 at 1147]. 2. This consideration led Hill J, rejecting what Manning J had said in Want v Moss, to think that it would be "monstrous" if the right to appeal against a judgment which carried with it findings of fraud was to be taken away from the appellants: Fuller (1993) 43 FCR 60 at 75-76.

When a trustee declines to exercise his power to sue or to appeal against a judgment, the bankrupt may apply to the Court under s 178 of the Act and the Court is empowered to make such order "as it thinks just and equitable". That jurisdiction has long been exercised by the courts charged with the supervision of administrations in bankruptcy [44] . If it was just and equitable that an action should be brought or an appeal instituted in order to prevent an injustice being suffered by the bankrupt, Lord Eldon LC held [45] that -

the Court would say, with reference to the circumstance, that the bankrupt cannot sue, the law supposing, that he has no interest in the property, yet that is not to be acted upon to the effect of gross injustice. Therefore, if he can give security for the costs, the Lord Chancellor will order the assignees to permit him to use their names, to enable him to recover the property; indemnifying them. The bankrupt therefore is without any ground of complaint. The cases were reviewed by Hoffmann LJ in Heath v Tang where his Lordship said [46] that, just as a bankrupt might apply to the court for an order compelling the trustee to lend his name to the bringing of an action, so the bankrupt might "apply to the court exercising bankruptcy jurisdiction to direct the trustee to appeal or to allow the bankrupt, on providing suitable security, to use the trustee's name". He further observed [47] : The bankruptcy court acts as a screen which both prevents the bankrupt's substance from being wasted in hopeless appeals and protects creditors from vexatious challenges to their claims. 1. Spragg v Binkes (1800) 5 Ves Jun 583 at 587 [31 ER 751 at 752]; Benfield v Solomons (1803) 9 Ves Jun 77 at 83-85 [32 ER 530 at 532-533]. 2. Benfield v Solomons (1803) 9 Ves Jun 77 at 84 [32 ER 530 at 533]. 3. Heath v Tang [1993] 1 WLR 1421 at 1425; [1993] 4 All ER 694 at 699. 4. Heath v Tang [1993] 1 WLR 1421 at 1427; [1993] 4 All ER 694 at 701.

The Court's discretion is at large and is to be exercised in the particular circumstances of each case. It may be that, before a bankrupt obtains an order under which an appeal will be instituted for the protection of his reputation, the trustee's costs would have to be met by sources other than the bankrupt estate in which the bankrupt no longer has an interest. The Court would be unlikely to permit the bankrupt to pursue his personal interests, in so far as they are not coincident with the due administration of the estate by the trustee, at the expense of the creditors. But it is unnecessary now to examine how the Court should exercise its jurisdiction under s 178 to safeguard the reputation of the bankrupt and, at the same time, protect the creditors from the risk of costs incurred in an appeal. There is no application under s 178 for consideration in this case.

In this case, although we would not regard the right to appeal as property of the respective bankrupt appellants, the decision reached by the majority of the Full Court of the Federal Court was correct. The bankruptcy of the appellants leaves them without such an interest in the judgment against them as would support their institution of an appeal in their own names. The appeals must be dismissed.

These appeals were heard together. The arguments in each were the same and the appeals stand or fall together.

Each appellant is a bankrupt. A sequestration order was made against Mr Fuller on 20 May 1993 and against Mr Cummings on 21 May 1993. At that time, von Doussa J, in the Federal Court, had reserved his decision in an action brought by the present respondents against the present appellants and others in which very substantial damages were claimed for conspiracy to defraud, misleading and deceptive conduct, breach of fiduciary duty and breach of the Companies (South Australia) Code. On 10 June 1993 von Doussa J entered judgment in favour of the respondents against the appellants and others in the sum of $44,450,000 [48] . Subsequently the appellants were ordered to pay the respondents' costs, to be assessed on an indemnity basis.

On 1 July 1993 each appellant lodged a notice of appeal against the judgment so far as it related to him. The grounds of appeal in each case are extensive but it is unnecessary to refer to them. The respondents filed a notice of motion in each appeal, seeking an order that the notice of appeal "be set aside or in the alternative dismissed". Each notice sought, in the event that the primary relief was not granted, an order that the appellant provide security for costs.

The authority for the notices of motion is to be found in O 52, r 18(1) of the Federal Court Rules 1979 Cth which reads:

A respondent may move on notice at any time for an order dismissing an appeal as incompetent. Sub-rule (2) of r 18 provides that, upon the hearing of the motion, the burden of establishing the competency of the appeal is on the appellant. It was not suggested in argument that the outcome of these appeals turned on the onus of proof.

On 14 September 1993 the Full Court of the Federal Court, (Gummow and Whitlam JJ, Hill J dissenting), ordered that each appeal be dismissed as incompetent for the reason that the right of appeal conferred by s 24 of the Federal Court of Australia Act 1976 Cth fell within the meaning of the expression "personal property of every description" in the definition of property in s 5(1) of the Bankruptcy Act 1966 Cth (the Act). It therefore vested in the appellants' trustee [49] . The appellants were granted special leave to appeal to this Court against those orders.

The joint judgment of Gummow and Whitlam JJ and the judgment of Hill J approached the competency of the appeals from somewhat different angles. The majority emphasised the character of the statutory right of appeal as a chose in action and therefore property, which vested in the trustee in bankruptcy on the making of a sequestration order. Hill J saw the problem as going directly to the meaning of property in order to determine whether the statutory right of appeal amounted to property in terms of the Act. As the parties to this appeal took their stands in terms of the minority judgment, on the one hand, and the majority judgment, on the other, it is necessary to look more closely at each of those judgments. But first it is advisable to identify the statutory scheme within which their Honours reached different conclusions.

Upon the bankruptcy of a debtor there is vested in the trustee in bankruptcy "the property of the bankrupt, not being after acquired property" (s 58(1)(a)). After-acquired property vests in the trustee as soon as it is acquired by the bankrupt (s 58(1)(b)).

"[T]he property of the bankrupt" is defined by s 5(1) and, for relevant purposes, means:

(i) the property divisible among the bankrupt's creditors; and

(ii) any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt.

The property of the bankrupt divisible among creditors is defined by s 116(1) and, relevantly, includes:

(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge;

(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his discharge.

Section 116(2) excludes from the property divisible among creditors by s 116(1) various categories, including, by s 116(2)(g): any right of the bankrupt to recover damages or compensation:

(i) for personal injury or wrong done to the bankrupt, the spouse of the bankrupt or a member of the family of the bankrupt; or

(ii) in respect of the death of the spouse of the bankrupt or a member of the family of the bankrupt. [50]

1. As to the meaning of "personal injury or wrong done to the bankrupt": see Cox v Journeaux [No 2] (1935) 52 CLR 713 at 721, per Dixon J.

The intent of the Act is clear, namely, that save for rights of action of a personal nature, everything answering the description of "property" vests in the trustee, including after-acquired property.

"Property" is somewhat circularly defined by s 5(1) to mean:

real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.

The respondents placed some reliance on the power to stay proceedings conferred by s 60 of the Act. The power conferred by s 60(1) is only exercisable in respect of legal process against the property of the debtor. The particular legal process in question, namely each notice of appeal, is process by, not against, the debtor.

An action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action. Section 60(4) permits a bankrupt to continue in his own name any action, commenced before he became bankrupt, in terms corresponding to s 116(2)(g). In Faulkner v Bluett [51] Lockhart J examined authorities deriving from "the common law of bankruptcy" and concluded in relation to s 60(4): The common thread running through these cases is that where the primary and substantial right of action is direct pecuniary loss to the property or estate of the bankrupt, the right to sue passes to the trustee notwithstanding that it may have produced personal inconvenience to the bankrupt. Sub-section (5) defines "action" to mean "any civil proceeding, whether at law or in equity". Since the institution of an appeal has been accepted as the commencement of an action within a provision such as s 60(2) [52] , had the sequestration orders been made after 1 July 1993 when the notices of appeal were filed, it would have been open to the trustee to discontinue the appeals. In that case the appellants' only remedy would have been to make an application under s 178 which reads: If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable. 1. (1981) 52 FLR 115 at 119. 2. Want v Moss (1889) 10 NSWR(L) 274; Doran v Isaacs (1912) 12 SR (NSW) 699. And see Daemar v Industrial Commission (NSW) (1988) 12 NSWLR 45 for a discussion of the scope of s 60(2). Daemar was applied by Whitlam J in Madden v Madden (1995) 58 FCR 590.

While neither sub-s (2) nor (4) of s 60 is directly relevant to the present situation, there is force in the comment of Gummow and Whitlam JJ [53] :

However, it might be thought an odd result if the authority of a bankrupt to institute and continue with an appeal were greater in the case of an appeal instituted after sequestration than in respect of an appeal pending at the time of sequestration. 1. Fuller (1993) 43 FCR 60 at 64.

The judgment of von Doussa J against the appellants for a liquidated sum is a debt provable in the bankruptcy of each appellant. It is not competent for a creditor "to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt" (s 58(3)(a)). The respondents, therefore, can do no more in respect of the judgment than prove in each bankruptcy. This provision of itself has no direct consequences in the situation in which the parties to this appeal find themselves. Its relevance is its place in and the light it throws on those provisions of the Act which relate to the prosecution of actions by and against a bankrupt.

The questions raised by this appeal are primarily twofold:

(1) Is the right of appeal otherwise available to the appellants "property" within s 5(1)?

(2) If it is, is it within s 116(2)(g) and thereby excluded from the operation of s 58?

If the right of appeal is "property", it must be after-acquired property since the judgment of von Doussa J was only handed down after the two sequestration orders were made. As such the right of appeal would vest in the trustee in bankruptcy as soon as it came into existence.

The appellants' argument, based on the judgment of Hill J, was that a right of appeal is not "property", hence is not property divisible among creditors. In particular, Hill J said [54] :

It would be a strange concept to regard a right of appeal against a judgment imposing a liability as being property which could be available for the payment of creditors. Hill J regarded the appropriate principle as having been stated in Rose v Buckett [55] where Collins LJ said: The general principles which determine whether a cause of action does or does not pass to the trustee in bankruptcy are well settled, and may be stated in the language of Parke B in Beckham v Drake [56] : "What then is the proper construction of this section of the Act" (ie, s 63 of the Act 6 Geo 4, c 16) "according to its words and the several cases decided upon it? The proper and reasonable construction appears to me to be, that the statute transfers not all rights of action which would pass to executors (for rights incapable of being converted into money, such as the next presentation to a void benefice, pass to them), but all such as would be assets in their hands for the payment of debts, and no others - all which could be turned to profit, for such rights of action are personal estate". 1. Fuller (1993) 43 FCR 60 at 73. 2. [1901] 2 KB 449 at 454. 3. (1849) 2 HLC 579 at 627 [9 ER 1213 at 1230-1231].

If a right of action does not result in something which can be used by the trustee for the payment of debts, it may be argued that nothing in the scheme of the Act demands that it vest in the trustee. Thus in Rose v Buckett the bankrupt had commenced action for trespass and seizure of goods. It being admitted that no substantial damage had been done to the premises or the goods, it was held that the right of action did not pass to the trustee in bankruptcy. The argument has a certain attraction. But it involves reading "property" in the Act as limited to that which can be turned to profit for the payment of debts. There is no justification for that limitation. It does not lie easily with the scheme of the Act, the breadth of the definition of property or the narrow scope of the exceptions to be found in s 116(2)(g) [57] . Thus in W R Henry & Son v Hodge [58] Adam J held that the right to have set aside a default judgment upon which a sequestration order was based was "property" within the meaning of s 4 of the Bankruptcy Act 1924 Cth. A similar view was taken in Kyte v Mahoney [59] , where the default judgment was not the basis for the sequestration order.

1. See Bourke v State Bank of New South Wales (unreported; Federal Court, File No 566/95, 4 August 1995) where the Full Court held that a defamation claim could only be continued by the trustee in bankruptcy in so far as it claimed for damage to a business or professional practice but not in so far as it claimed for injury to personal reputation. 2. [1963] VR 111. 3. (1868) 5 WW & a'B 6.

The respondents' argument, which was accepted by the majority in the Full Court, was that the right of appeal which the appellants wish to exercise is a chose in action, hence that it is property within the meaning of the Act [60] .

1. Section 4 of the Bankruptcy Act 1924 Cth, which was repealed by the present Act, defined "property" in terms similar to the definition in s 5(1) of the present Act, save that it included the words "things in action". Section 99(4) of the 1924 Act provided: "Where any part of the property of the bankrupt consists of things in action, they shall be deemed to have been duly assigned to the trustee." There is no comparable provision in the present Act.

This raises the question of assignability of a right of appeal. Assignability is not in all circumstances an essential characteristic of a right of property. However, as Mason J said in R v Toohey; Ex parte Meneling Station Pty Ltd [61] , referring to National Provincial Bank Ltd v Ainsworth [62] :

Nonetheless, it is generally correct to say, as Lord Wilberforce said, that a proprietary right must be "capable in its nature of assumption by third parties". 1. (1982) 158 CLR 327 at 342-343. 2. [1965] AC 1175 at 1247-1248.

As a general rule all choses in action are assignable in equity though they were not assignable at law. But if an assignment of a chose in action is obnoxious to the law relating to maintenance and champerty, "it is bad in equity no less than at law" [63] . For this reason a bare right of litigation has been regarded as unassignable. On the other hand property is assignable, even though it may not be recovered without litigation. Again, the fruits of litigation, when recovered, may be assigned provided that the assignee's purpose is not to engage or participate in the conduct of proceedings [64] . In the ordinary course it would be hard to see that a right of appeal against a judgment for a money sum could be assigned without offending against maintenance and champerty. But if a right of appeal is property within the meaning of the Act, whether as a chose in action or otherwise, no such question arises on bankruptcy because there is a statutory vesting of the property in the trustee.

1. Ellis v Torrington [1920] 1 KB 399 at 409. 2. Glegg v Bromley [1912] 3 KB 474 at 484, 490.

The question is not simply whether a right of appeal is a chose in action or whether it is property according to general concepts. The question is whether a right of appeal is "property" within the meaning of the Act. In bankruptcy legislation, a broad view has been taken of the meaning of "property". In Federal Commissioner of Taxation v Official Receiver [65] Kitto J observed:

[T]he unassignability of a right to be paid money does not necessarily exclude it from the category of property which vests in the official receiver under the Bankruptcy Act. 1. (1956) 95 CLR 300 at 327.

While the definition of property in the Act is cast in broad terms, it is a definition which requires consideration of what is meant by the word property itself. The answer to that question is not to be found directly within the definition. At the same time the scope of the word cannot be divorced from the context in which it appears [66] . In that regard the respondents naturally stressed that the scheme of the Act is to vest in the trustee rights of the bankrupt, including some which would not traditionally be thought of as proprietary, subject only to the exceptions to be found in s 116(2). Gummow and Whitlam JJ, in referring to s 116, said [67] :

What is of present significance is that s 116 contemplates that were it not for the express exclusion, what might be called bare rights of action to recover damages for personal injury, rights not ordinarily assignable, would nevertheless be treated as property divisible amongst the creditors of the bankrupt and therefore as property which vested under s 58(1). The meaning of property in the Act, "real and personal property of every description", is wide enough to include the right of appeal conferred by s 24 of the Federal Court of Australia Act. And that is so even where the appeal is against a judgment imposing a monetary obligation on the appellant. 1. Hepples v Federal Commissioner of Taxation (1990) 22 FCR 1 at 9-10, 24-27. 2. Fuller (1993) 43 FCR 60 at 66-67.

The issue before the Court of Appeal in England in Heath v Tang [68] was whether a bankrupt was entitled to pursue an appeal from the judgment on which the bankruptcy order was founded or whether it had to be brought in the name of his trustee. The Court refused the bankrupt leave to appeal on the ground that he had been divested of any interest in the proceedings and had no locus standi to appeal from a judgment against him which was enforceable only against the estate vested in his trustee. The judgment of the Court was delivered by Hoffmann LJ who said [69] :

But in cases in which the plaintiff is claiming an interest in some property of the bankrupt, that property will have vested in the trustee. And in claims for debt or damages, the only assets out of which the claim can be satisfied will have likewise vested. It will therefore be equally true to say that the bankrupt has no interest in the proceedings. In one sense the bankrupt may have a very real interest in the proceedings. If the claim is defended successfully or any judgment obtained is set aside on appeal, the result may be in a particular case that the creditors will be paid in full and that there will be a surplus payable to the bankrupt. Nevertheless, in our view, the result arrived at by the Court of Appeal was correct. 1. [1993] 1 WLR 1421; [1993] 4 All ER 694. 2. Heath v Tang [1993] 1 WLR 1421 at 1424; [1993] 4 All ER 694 at 698.

In the course of his judgment Hoffmann LJ referred to Rochfort v Battersby [70] which concerned the locus standi of a bankrupt to appeal against a judgment in foreclosure proceedings commenced after the bankruptcy. Lord Cottenham LC said [71] :

There cannot be a stronger proof therefore that the Courts have always considered these acts of Parliament as divesting the insolvent of all title and interest in the property, which would authorise and justify him in entering into any litigation respecting it. Hoffmann LJ referred to some earlier authorities relating to challenges against the judgment on which the bankruptcy petition was founded and concluded [72] : The insolvency law has of course changed a great deal since the time of Lord Eldon Nevertheless, the principle that the bankrupt is divested of an interest in his property and liability for his debts remains fundamental in the new code [73] . The consequences for the bankrupt's right to litigate do not seem to us inconvenient or productive of injustice. The bankruptcy court acts as a screen which both prevents the bankrupt's substance from being wasted in hopeless appeals and protects creditors from vexatious challenges to their claims. Those comments are apposite so far as the Act is concerned. They reinforce the conclusion we have reached that each right of appeal vests in the trustee. 1. (1849) 2 HLC 388 [9 ER 1139]. 2. Rochfort v Battersby (1849) 2 HLC 388 at 409 [9 ER 1139 at 1147]. 3. Heath v Tang [1993] 1 WLR 1421 at 1427; [1993] 4 All ER 694 at 701. 4. A reference to the Insolvency Act 1986 UK.

When the right of appeal is analysed, what does it involve in the present case? It is a right to appeal against a judgment which is in monetary terms. In so far as each appellant seeks an order that the respondents pay the costs of the appeal, the recovery of property is no doubt involved though it is incidental to and dependent upon the appeal itself succeeding. In substance the appeal aims to set aside a liability. But it is a liability in the form of a judgment which constitutes a debt provable in bankruptcy and is otherwise unenforceable. To that extent the Act clearly operates (s 58(3)(a)). If the appeals succeed, nothing will come into the hands of the trustee which can be applied in the administration of the bankruptcies. In particular, nothing will come into the trustee's hands for the payment of debts. On the other hand, if the appeals succeed the very substantial judgment ceases to be a debt provable in the bankruptcy of either appellant. As a result there may be a greater dividend payable to creditors than would otherwise be the case. While this is something on which the Court was not given any details, it clearly has a bearing on the administration of the bankruptcy. But that consideration does not determine the question whether the right of appeal is property.

In any event it is misleading to focus too much on the result intended to be achieved by the appeal. It is the nature of an appeal which is important. The position is as described by Hoffmann LJ in Heath v Tang [74] :

in principle a bankrupt cannot in his own name appeal from a judgment against him which is enforceable only against the estate vested in his trustee. 1. [1993] 1 WLR 1421 at 1425; [1993] 4 All ER 694 at 700. See also Timmings v Treadgold [1923] NZLR 73; Ryan v Hallam [1991] 1 NZLR 700.

The judgment does not constitute a "personal injury or wrong done to the bankrupt". It may be said that the findings of conspiracy to defraud, deceit and contraventions of statutory obligations not to engage in misleading and deceptive conduct affect the appellants. But these are findings in the course of arriving at the orders to be made. Although they affect reputation, they are not themselves a "personal injury or wrong done to the bankrupt" which could form the basis for a separate cause of action [75] . The judgment is a judgment for a sum of money which cannot be pursued against the appellants save through the machinery of the Act.

1. cf Re Kavanagh; Ex parte The Bankrupt v Jackson [1950] 1 All ER 39.