Deputy Commissioner of Taxation v Garrett [2015] VSC 347

1 By a document styled 'Proposed Further Amended Application for Extension of Time in which to File and Serve a Notice of Appeal' ('the Application') filed 14 October 2014, purportedly pursuant to the order of Dixon J dated 8 October 2014, the defendant seeks twenty-six 'judgments/declarations/orders'. In particular, he seeks an extension of time to file and serve the notice of appeal[1] against the orders of Mukhtar AsJ made 6 August 2014.

2 In substance, by orders made on 6 August 2014, Mukhtar AsJ:

(a) granted the plaintiff summary judgment against the defendant in the sum of $71,007.69 for the Running Balance Account deficit debt ('RBA deficit debt') concerning the Andrew Garrett Family Trust;

(b) refused the plaintiff's application for summary judgment against the defendant for the RBA deficit debt concerning the Oenoviva (Australia and New Zealand) Plant and Equipment Trust No. 2;

(c) refused the defendant's application to file and serve a counterclaim; and

(d) refused the defendant's application to file and serve a third party notice.

3 The Application does not, in terms, seek to set aside the refusal of the application to file and serve a counterclaim; but the grounds of appeal indicate that, on the appeal, the defendant would seek to appeal against this order; and he would seek leave to file and serve a counterclaim. I propose to deal with this Application on that basis.

4 On 11 February 2004, the plaintiff obtained judgment in default of defence in an unrelated matter in the District Court of South Australia against the defendant, in his capacity as trustee of the Andrew Garrett Family Trust, in the sum of $72,329.70. On the basis of this judgment, the plaintiff filed a creditors petition in the Federal Magistrates' Court and obtained a sequestration order against the defendant on 24 September 2004.

5 By writ filed on 11 June 2013 in this proceeding, the plaintiff brought claims against the defendant for RBA deficit debts in respect of:

(a) the defendant as trustee of the Andrew Garrett Family Trust at 7 June 2013; and

(b) the defendant as trustee of the Oenoviva (Australia and New Zealand) Plant and Equipment Trust No. 2 at 7 June 2013.

6 On 19 August 2013, the defendant filed a defence, which identified a single defence that he had not been a trustee of either trust at the relevant time, being 7 June 2013.

7 By summons dated 27 September 2013, the plaintiff sought summary judgment against the defendant in respect of both claims in the writ.

8 By summons dated 5 February 2014, the defendant sought leave to file a counterclaim dated 31 January 2014 against the plaintiff, Mr Peter Ivan Macks as the trustee in his bankruptcy following the 2004 sequestration order, a Mr Stephen James Duncan as the trustee in bankruptcy of the plaintiff's former wife in 2004; and the National Australia Bank Limited. As best as one can discern, the counterclaim appears to claim damages related to these bankruptcies on the basis of unspecified breaches of:

(b) the Bankruptcy Regulations Act 1966 (Cth) by Mr Macks and Mr Duncan;

(c) a contract with the National Australia Bank Limited; and

(c) common law rights presumably by all defendants by counterclaim.

(i) setting aside a settlement agreement dated 10 March 2009 between the plaintiff, Mr Macks and Mr Duncan; and

(ii) setting aside consent orders made on 31 March 2009 in the Federal Court of Australia; and

(iii) cross-vesting an appeal 'to be filed' of a decision of a Master in the District Court of South Australia.

9 By summons dated 5 June 2014, the defendant sought leave to file a third party notice against a Mr Francis Michael Cahill. The third party statement proceeding seeks a variety of orders including repayment of $310,000 paid by the defendant into a solicitor's trust account on the basis that 20 instances of conduct by the third party, with respect to the provision of legal services by the third party and/or companies associated with the third party, were:

(a) unconscionable, unfair and misleading and deceptive in contravention of specified provisions of the Competition and Consumer Act 2010 (Cth);

(c) negligent in breach of implied retainer agreements;

(d) in breach of unspecified provisions of the Legal Profession Act 2004 (Vic).

10 The plaintiff's application for summary judgment and the defendant's application to file the counterclaim and the third party notice, together with other applications made by the defendant, were heard before Mukhtar AsJ on 4 and 6 August 2014. As noted above, Mukhtar AsJ allowed the application for summary judgment in part and refused the defendant's applications to file the counterclaim and third party notice. Mukhtar AsJ provided minutes of reasons dated 7 August 2014 which I summarise as follows:

(a) The sole defence relied upon by the defendant to the claim against him as trustee of the Andrew Garrett Family Trust was that he was not the trustee of that trust for the relevant periods being the quarter ended December 2012 and the quarter ended March 2013. However, the documentary evidence established, and the defendant conceded at the hearing, that he was the trustee of the Andrew Garrett Family Trust on the dates alleged by the plaintiff.

(b) The application to file and serve a counterclaim was refused on the basis that the counterclaim was embarrassing.

(c) The application for leave to file and serve a third party notice was refused because it had no common question with the principal proceeding.

His Honour also gave reasons for other orders made during the course of the hearing, which are not presently relevant to the Application.

11 By document styled 'Notice to Appeal' filed 28 August 2014, the defendant gave notice of intention to appeal and sought an extension of time to serve the notice of appeal because it was outside the 14 day period provided by r 77.06.2 of the Supreme Court (General Civil Procedure) Rules 2005.

12 Interlocutory hearings before Bell J on 17 and 22 September 2014, Dixon J on 8 October 2014 and Zammit AsJ on 14 October 2014 resulted in the current application for an extension of time, together with the appeal being listed for hearing on 26 May 2015.

13 On 15 May 2015, on the application of Mr Cahill, with Austrade as a supporting creditor, it was ordered by the Federal Circuit Court of Australia at Melbourne that the plaintiff be added as a second applicant and a sequestration order be made against the estate of Andrew Morton Garrett.

14 When the application and appeal came on for hearing on 26 May 2015, the plaintiff contended that the Application was stayed pursuant to s 60 of the Bankruptcy Act 1966 (Cth) ('the Act'). The relevant provisions of the section are as follows:

(2) An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.

(3) If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.

(4) Notwithstanding anything contained in this section, a bankrupt may continue, in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of:

(a) any personal injury or wrong done to the bankrupt, his or her spouse or de facto partner or a member of his or her family; or

(b) the death of his or her spouse or de facto partner or of a member of his or her family.

(4A) ...

(5) In this section, action means any civil proceeding, whether at law or in equity.

15 By letter dated 17 June 2015, Mr Timothy Holden, the trustee of the bankrupt estate of the defendant, elected under s 60(2) of the Act not to continue with this action.

(b) the application to extend the time to file a notice of the appeal against the orders of Mukhtar AsJ does not fall within the definition of an action within the meaning of s 60(2) of the Act;

(c) the application for leave to file the counterclaim and third party notice are not stayed by s 60(2) because of the exception for actions in respect of personal injury or wrong done to the bankrupt within the meaning of s 60(4) of the Act; and

(d) s 60(2) of the Act does not operate to stay the Application because it is brought by the defendant as trustee of the Andrew Garrett Family Trust, to which he contends he was re-appointed as trustee on 16 May 2015.

Is the Application an 'action' within the meaning of s 60(2)?

17 The defendant contends that the Application, to the extent that it relates to the appeal from the summary judgment of Mukhtar AsJ, is not an action within the meaning of s 60(2) for the following reasons:

(a) The effect of bankruptcy under s 58 of the Act, was that the property of the defendant bankrupt vested forthwith in the trustee.

(b) A right of appeal against a money judgment is not:

(ii) property divisible amongst creditors within the meaning of s 116 of the Act; or

(iii) property which vests in the trustee pursuant to s 58 of the Act.[2]

(c) Section 60(2) should be construed as if it included the words in italics: 'an action [which is connected with the property of the bankrupt vested in the trustee] commenced by a person who subsequently becomes a bankrupt is ... stayed'.[3]

(d) The Application does not have a sufficient connection with the property of the bankrupt vested in the trustee because the proceedings against the defendant are in his capacity as a trustee of two completely different trusts.

18 The plaintiff contends that the Application is an action within the meaning of s 60(2) for the following reasons:

(a) An action to which s 60(2) of the Act applies is defined by s 60(5) as 'any civil proceeding whether at law or in equity'.

(b) The term 'action' has been held to include an appeal,[4] an application for special leave to appeal to the High Court,[5] and an application for leave to appeal against the decision of a State court.[6]

(c) Accordingly, by analogy, an application for leave for an extension of time for an appeal is an action to which s 60 applies providing:

(i) the application was commenced before the date of bankruptcy (as a precondition of the application of s 60);

(iii) there is some connection between the application and the bankrupt estate.[7]

(d) A connection exists between the Application and the defendant's bankrupt estate for the following reasons:

(i) if the appeal succeeds, the plaintiff may not be able to prove its debt and the distribution to other creditors may be increased; and

(ii) if the appeal does not succeed, an adverse costs order has the potential to increase the amount of debts provable in the bankrupt's estate.[8]

(e) The fact that part of the plaintiff's claim relates to the liability of the defendant for the Oenoviva (Australia and New Zealand) Plant and Equipment Trust No. 2 is irrelevant because the plaintiff is prevented by s 58(3) of the Act from taking any fresh step in that proceeding. The plaintiff's right to recover any debt with respect to the liability related to Oenoviva (Australia and New Zealand) Plant and Equipment Trust No 2 is limited to his right to prove in the defendant's bankrupt estate.[9]

The Application is an 'action' within the meaning of s 60(2)

19 The proposition that s 60(2) should be read as limiting the word 'action' only to a proceeding which is connected with the property of the bankrupt, which is vested in the trustee pursuant to s 58, was authoritatively rejected by the Victorian Court of Appeal in Owens v Comlaw (No 62) Pty Ltd,[10] which approved the decision of Gray J in Re Lofthouse,[11] which has been further endorsed by Edelman J in Duckworth v Water Corporation.[12]

20 I accept the plaintiff's submission that what is required for the right of appeal to be an action within the meaning of s 60(2) is there is 'such a connection between the action and the estate as to make s 60(2) applicable'.[13] Further, for the reasons submitted by the plaintiff (see paragraph 18(d) above), the right of appeal in this Application has a sufficient connection with the bankrupt estate as to make s 60(2) applicable. The connectors are similar to those identified in Owens v Comlaw (No 62) Pty Ltd.[14]

21 The fact that the continuation of the appeal by the trustee in bankruptcy may impact on the estate of the bankrupt estate, either positively or negatively, is the reason why s 60(2) provides the election to the trustee. As was explained by Kirby P (Samuels and Clarke JJA agreeing) in Daemar v Industrial Commission of New South Wales:

Obviously, the prosecution of litigation commenced before bankruptcy by a person who later becomes bankrupt can involve the potential or actual diminution of the estate of the bankrupt available to his creditors. On occasion, it can, of course, provide a benefit to the creditors. That is precisely why Parliament has provided for the trustee to make an election. This the trustee in the present case has steadfastly refused to do. As has been stated, he is therefore by s 60(3) taken by the statute to have abandoned the action.

... as far as the apparent disharmony between s 58 and s 60 is concerned, this case clearly falls within s 60 and s 60(2) must be given its full operation. If the section is clear, as I believe it to be, the fact that it may sometimes provide a wider provision for a stay on proceedings commenced before bankruptcy than would effectively be secured by proceedings commenced after bankruptcy does not avail the claimant. Especially because the Parliament has specifically adumbrated the exceptions to the operation of the statutory stay, in the terms of s 60(4), this indicates that it attended to the way in which prior civil action should go forward at the option only of the trustee, or be stayed by the statute.[15]

22 Further, I do not consider that the fact that the Application, in the first instance, only seeks to extend time for the service of the notice of appeal affects the fact that the Application is an action within the meaning of s 60(2).

23 In Sarkis v Moussa,[16] Beazley JA considered whether an application for leave to appeal was an action within the meaning of s 60 in the following circumstances:

(a) The plaintiff had obtained a judgment debt against Mr Sarkis.

(b) Sarkis had filed a summons for leave to appeal against the judgment.

(c) Sarkis subsequently became bankrupt and the trustee elected not to prosecute the application.

24 Beazley JA considered the definition of 'civil proceedings' in s 3(1) Civil Procedure Act 2005 (NSW) and the Uniform Civil Procedure Rules 2005 (NSW). After reviewing relevant authorities,[17] her Honour concluded that the application seeking leave to appeal was an action for the purposes of s 60(2) of the Act.[18]

25 The definition of civil proceedings in s 3(1) Civil Procedure Act 2005 (NSW) is identical to the definition of civil proceeding in s 3 Civil Procedure Act 2010 (Vic) and the relevant provisions of the Uniform Civil Procedure Rules 2005 (NSW), with respect to the filing of applications in a proceeding, are substantially similar to the provisions in the Supreme Court (General Civil Procedure) Rules 2005 (Vic).

26 In my opinion, an application to extend the time for the filing of an appeal applies no different consideration to an application for leave to appeal; and, accordingly, the defendant's application with respect to the appeal was stayed pursuant to s 60(2).

Is the Application for a 'personal injury or wrong done to the bankrupt' within the meaning of s 60(4)?

27 Section 60(4) permits a bankrupt to continue an action, which is commenced 'for any personal injury or wrong done to the bankrupt'.

28 The defendant contends that the Application relates to claims by him under the Charter of Human Rights and Responsibilities Act 2006 (Vic) ('the Charter') and seeks to tender a psychological assessment which he contends demonstrates damage caused by 'abuse over a period of 11 years'. Further, the defendant refers to the fact that the plaintiff's decisions were capable of review under the Crimes Act 1958 (Vic), the Crimes Act 1914 (Cth) and the Criminal Code 1995 (Cth); and constituted unconscionable conduct (presumably that alleged in the proposed third party notice). He asserts that these categories of wrongs fall within s 60(4).

29 The plaintiff submits that the defendant has not been granted leave to file a counterclaim and, as a result, no part of his application for extension of time within which to appeal was in respect of any claims concerning a personal injury or a wrong done to the bankrupt.

The Application does not relate to a personal injury or wrong done to the bankrupt

30 I do not consider that the Application relates to claims by the defendant for 'any personal injury or wrong done to the bankrupt' for the following reasons:

(a) Although the defendant's submissions refer to some criminal statutes and the Charter, these matters are not referred to in the proposed counterclaim or third party proceeding.

(b) The third party proceeding does include numerous allegations of unconscionable conduct but 'unconscionable conduct' has been held not to fall within the words of 'wrong done to the bankrupt'.[19] The words in the section were considered by Dixon J in Cox v Journeaux (No 2)[20] in which he stayed a claim brought by a plaintiff, who had subsequently become bankrupt, alleging conspiracy to 'punish and ruin the plaintiff and to inflict injury and damage upon him personally and to discredit him'.[21] Dixon J said that the test for whether an action was for 'personal injury or wrong' within the meaning of s 60(4) of the Act depended upon 'whether the damages or part of them are to be estimated by immediate reference to pain felt by the bankrupt in respect of his mind, body or character and without reference to his rights of property'.[22]

(c) I do not consider that any of the damages proposed to be claimed by the plaintiff in the counterclaim or the third party proceeding would be referable to 'pain felt by [him] in respect of [his] "body, mind or character"'.[23] I do not consider the attempt by the defendant to tender a psychological assessment as part of his submissions changes the nature of the claims as pleaded.

31 Accordingly, I do not consider that the Application falls within the exception in s 60(4).

The effect of s 60(2) on an action brought by a bankrupt in the capacity as a trustee

32 The defendant contends that 'by force of the provisions of the Deed of Settlement of [the Andrew Garrett Family Trust] as varied I automatically vacated my office as Joint Trustee of [the Andrew Garrett Family Trust] and was reappointed as a Joint Trustee on 16 May 2015' and it was resolved on 16 May 2015 he would represent the Andrew Garrett Family Trust in this proceeding. As a result, if I understand the defendant's submissions correctly, he contends that, as the Application is brought by him in his capacity as trustee, s 60(2) does not apply.

(a) To the extent that the Application relates to the appeal from the summary judgment, the liability of the judgment debt is personal to the defendant and therefore the fact that he incurred the liability as a trustee is irrelevant.

(b) Actions commenced by a person acting in the capacity as trustee, who subsequently become bankrupt, are still automatically stayed under s 60(2).

Section 60(2) applies to bankrupts acting as trustee

34 The proceeds of a claim brought by a bankrupt on behalf of a trust are not property divisible amongst creditors pursuant to s 116 of the Act and such proceeds do not vest in the trustee pursuant to s 58 of the Act. However, in Re Lofthouse, Gray J explained why, nonetheless, s 60(2) applied to stay claims brought by a bankrupt in the capacity as trustee, stating:

Section 60 is not the provision that vests the right of action in the trustee in bankruptcy. It has a different, and in some respects wider, role. It operates to stay pending proceedings unless the trustee elects to prosecute or discontinue them. It also provides the machinery for a defendant or other party to a pending proceeding to force the making of an election. It is directed towards the protection of the bankrupt's creditors, by preventing the unnecessary dissipation of the assets of the estate in fruitless litigation. In my view, s 60 also has the purpose of protecting a defendant or other party to a pending proceeding. A defendant or other party to a pending proceeding suffers an immediate detriment upon the plaintiff becoming a bankrupt. The detriment is that if the defendant or other party should be successful in the proceeding, and should obtain an order that the plaintiff pay the costs of the proceeding, the order will be effectively unenforceable because of the bankruptcy. The rationale behind s 60(2) and (3) is therefore, at least in part, to protect those whom the bankrupt has been suing. Such protection would be lost if the word "action" in s 60 were to be construed as excluding a proceeding in which the bankrupt has sued as a trustee for someone else.

In my view, s 60 has been enacted deliberately as a broad provision, so as to encompass any proceeding brought by a bankrupt before bankruptcy. The exceptions have been expressed quite narrowly. The intention is that, once a bankruptcy occurs, no further costs should be incurred in a proceeding unless the trustee in bankruptcy makes an election to continue the proceeding. If such an election is made, the trustee in bankruptcy will ordinarily become substituted as plaintiff in the pending proceeding, in the capacity of trustee in bankruptcy for the former plaintiff. The trustee in bankruptcy will thereby become liable for the costs of the proceeding in the event that it is unsuccessful and a costs order is made in favour of the defendant in the proceeding or some other party to it. The trustee in bankruptcy may be entitled to an indemnity in respect of those costs out of the bankrupt estate, as expenses of the administration of the estate, to the extent to which the estate has assets. The trustee in bankruptcy will obviously consider whether continuing to prosecute the proceeding will be likely to have any benefit to the estate of the bankrupt, and therefore to the bankrupt's creditors.[24]

35 The conclusion of Gray J in Re Lofthouse was accepted by Edelman J in Duckworth v Water Corporation.[25] In that decision, his Honour:

(a) articulated seven reasons in support of the decision in Re Lofthouse;[26]

(b) considered and rejected the doubts cast upon the decision in Re Lofthouse by the Administrative Appeals Tribunal;[27] and

(c) explained why the history of s 60(2) does not contradict the interpretation adopted in Re Lofthouse.[28]

36 Further, although this issue was not squarely raised in Owens v Comlaw (No 62) Pty Ltd, Ashley JA, with whom Redlich JA agreed, quoted with approval the passage from Re Lofthouse I have cited in paragraph [34] above.[29] Accordingly, I do not consider the fact that the defendant brings the Application as a trustee avoids the operation of s 60(2) of the Act.

37 In my opinion, s 60(2) applies to the Application and, as a result of the election by the trustee in bankruptcy, the Application is now discontinued.

[1] The notice of appeal is incorporated in the Application.

[2] Cummings v Claremont Petroleum NL (1996) 185 CLR 124, 133 (Brennan CJ, Gaudron and McHugh JJ).

[3] See Re Singh v Secretary, Department of Education, Employment and Workplace Relations [2010] AATA 720 [111].

[4] Owens v Comlaw (No 62) Pty Ltd [2006] VSCA 151 [42] (Ashley JA with whom Redlich JA agreed). Also see Cummings v Claremont Petroleum NL (1996) 185 CLR 124, 130 (Brennan CJ, Gaudron and McHugh JJ).

[5] Healey v Prentice (No 2) [2000] FCA 1598 [35] (Madgwick J).

[6] Sarkis v Moussa [2012] NSWCA 136 [31]-[37] (Beazley JA).

[7] Owens v Comlaw (No 62) Pty Ltd [2006] VSCA 151 [42], particularly points (4)-(8).

[8] Duckworth v Water Corporation [2012] WASC 30 [57] (Edelman J).

[9] Clyne v Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589, 594-595 (Gibbs CJ, Murphy, Brennan and Dawson JJ).

[10] [2006] VSCA 151 [42] (Ashley JA with whom Redlich JA agreed).

[11] [2001] FCA 25; (2001) 107 FCR 151.

[12] [2012] WASC 30 [82].

[13] Owens v Comlaw (No 62) Pty Ltd [2006] VSCA 151 [42]. Also see Duckworth v Water Corporation [2012] WASC 30 [57].

[14] Owens v Comlaw (No 62) Pty Ltd [2006] VSCA 151 [42]-[45], [48].

[15] (1988) 12 NSWLR 45, 54-55 (citations omitted).

[16] [2012] NSWCA 136.

[17] Want v Moss [1889] NSWLawRp 71; (1889) 10 LR (NSW) 274; Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 45; Cummings v Claremont Petroleum NL (1996) 185 CLR 124.

[18] Sarkis v Moussa [2012] NSWCA 136 [31], [37].

[19] Duckworth v Water Corporation [2012] WASC 30 [83]-[89].

[20] [1935] HCA 48; (1935) 52 CLR 713.

[23] Faulkner v Bluett [1981] FCA 3; (1981) 52 FLR 115, 122 (Lockhart J).

[24] [2001] FCA 25; (2001) 107 FCR 151, 157-8 [19]-[20]. Also see the statement of Kirby P to similar effect in Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 45, 54-5 referred to in [21] above.

[25] [2012] WASC 30.

[27] See discussion of Re Singh and Secretary, Department of Education, Employment and Workplace Relations [2010] AATA 720 in Duckworth v Water Corporation [2012] WASC 30 [49]-[59] (Edelman J).

[29] (2006) VSCA 151 [40].