DUCKWORTH -v- WATER CORPORATION [2012] WASC 30 (2 February 2012)

Supreme Court of WA|2012-02-02|Before: Edelman J

1 This trial was scheduled to commence on the 30 January 2012. Mr Duckworth is the plaintiff. Although the capacity in which his rights are held is disputed, he purports to bring his action against the Water Corporation in his capacity as trustee for the Ocean Farm Trust.

2 On 27 January 2012 a statement of agreed facts was prepared and filed by the parties. Paragraph 45 recited that 'Neil James Duckworth became bankrupt on 27 September 2011'. A sequestration order was made on that date by the Federal Magistrates Court of Australia.

3 At the commencement of the trial on 30 January 2012, I raised with the parties the question of whether the consequence of Mr Duckworth's bankruptcy was that the action is stayed due to of the (Cth). That subsection stays '[a]n action commenced by a person who subsequently becomes a bankrupt'. The application of the subsection 'is a matter which must necessarily be addressed by the court in which the proceeding has been commenced': Meriton Apartments Pty Ltd v Industrial Court of New South Wales ; , 22 [8] (Branson J).

4 There is one respect in which this case raises an important issue concerning s 60(2) of the Bankruptcy Act. It is an issue upon which there is very little authority. The issue concerns whether s 60(2) applies to actions commenced by a person in his or her capacity as trustee. I could find only one case which has decided this issue. It is the decision of Gray J in the Federal Court of Australia in Re Lofthouse [2001] FCA 25; (2001) 107 FCR 151. In that decision, Gray J stayed an action commenced by a plaintiff in his capacity as trustee. The researches of both counsel for the Water Corporation did not uncover any other authority. Their submissions were thorough, especially given the very limited preparation time.

5 The question before me is whether I should follow the decision in Re Lofthouse and conclude that the action has been stayed by s 60(2). Mr Duckworth submitted that one difficulty with the decision in Re Lofthouse was potential prejudice to the trust beneficiaries. A further concern which I raised at the hearing was whether the interpretation of s 60(2) in Re Lofthouse was consistent with the historic approach taken to stays of proceedings against which the Bankruptcy Act was enacted. I am satisfied that there are answers to both of these concerns. Further, I consider that there are seven reasons why, at least, the decision in Re Lofthouse cannot be said to be 'plainly wrong' and must be followed.

6 This is an action commenced by the plaintiff, Mr Neil James Duckworth, as trustee for the Ocean Farm Trust, on 23 December 2010. At the time of preparation of the writ and statement of claim (including amendments to the statement of claim) Mr Duckworth was legally represented. At the commencement of the trial he acted in person.

7 The statement of claim, as amended, broadly seeks relief for two causes of action. The actions arise from a development by Mr Duckworth on Ocean Farm Drive, Nilgen (the Land). Mr Duckworth says that the Land is held by him on trust. One of the documents which was to be tendered by consent at trial was a declaration of trust by Mr Duckworth over the Land dated 7 October 2002. The declaration is in favour of Frances Ann Duckworth, Karl James Duckworth, Rachel Alice Duckworth, Andrew Daniel Duckworth and Clare Leonora Duckworth.

8 It is common ground that under a 'Customer Constructed Works Agreement', entered into between Mr Duckworth and the Water Corporation, Mr Duckworth was required to pay the cost of certain works on the Land and required to provide the Water Corporation with a financial guarantee.

9 The first cause of action is an action for unjust enrichment (pars 9, 11). The action for unjust enrichment is pleaded in various alternative ways, but essentially it is a claim for restitution of two payments. The first payment concerns headwork charges of approximately $700,000 which Mr Duckworth pleads that he paid to the Water Corporation and which he says the Water Corporation did not have power to charge (or charge in that amount). The second 'payment' concerns the drawing down of a $3 million Westpac Bank Banker's Undertaking (bank guarantee) by the Water Corporation. There are agreed facts that the bank guarantee was provided at the request of three companies, and in none of those companies was Mr Duckworth a shareholder or director.

10 The second cause of action, arising from mostly the same facts, is for unconscionable conduct within the meaning of s 51AC of the Trade Practices Act 1974 (Cth) (as applicable by sch 7, item 6 of the Trade Practices Amendments (Australian Consumer Law) Act (No 2) 2010 (Cth)). The claim for unconscionable conduct is not contained in the writ but leave had been given to Mr Duckworth to amend his writ to include it.

11 One of the defences raised by the Water Corporation is whether Mr Duckworth is properly bringing the action as a trustee, or whether the action is brought, or should be brought, by him in his personal capacity. The Water Corporation points, for example, to Mr Duckworth's entry into the Customer Constructed Works Agreement apparently on his own behalf, and not as trustee for the Ocean Farm Trust.

12 The hearing of the action was to proceed on both the pleadings and a statement of agreed facts. The statement of agreed facts was prepared and filed by the parties on 27 January 2012. Paragraph 45 of the agreed facts was that 'Neil James Duckworth became bankrupt on 27 September 2011'.

13 Section 60 of the Bankruptcy Act is as follows:

(1) The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit:

(a) discharge an order made, whether before or after the commencement of this subsection, against the person or property of the debtor under any law relating to the imprisonment of fraudulent debtors and, in a case where the debtor is imprisoned or otherwise held in custody under such a law, discharge the debtor out of custody; or

(b) stay any legal process, whether civil or criminal and whether instituted before or after the commencement of this subsection, against the person or property of the debtor:

(i) in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt; or

(ii) in consequence of his or her refusal or failure to comply with an order of a court, whether made in civil or criminal proceedings, for the payment of a provable debt;

and, in a case where the debtor is imprisoned or otherwise held in custody in consequence of the non-payment of a provable debt or of a pecuniary penalty referred to in subparagraph (i) or in consequence of his or her refusal or failure to comply with an order referred to in subparagraph (ii), discharge the debtor out of custody.

(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) Notwithstanding paragraph (1)(b), this section does not empower the Court to stay any proceedings under a proceeds of crime law.

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

14 The term 'trustee' is defined in s 5 of the Bankruptcy Act as 'in relation to a bankruptcy - the trustee of the estate of the bankrupt'.

15 Section 60(2) confers no discretion on the court. If s 60(2) applies then the action is stayed until a written election is given by the trustee of the estate of the bankrupt to prosecute or to discontinue the action: Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47, 57 (Wheeler J).

Can Mr Duckworth sue in his capacity as trustee for the Ocean Farm Trust?

16 Since Mr Duckworth has been declared bankrupt, the immediate question is whether s 60(2) of the Bankruptcy Act applies where an action is commenced by a person such as Mr Duckworth in his capacity as trustee for a trust, rather than in his personal capacity.

17 I have addressed this as a preliminary question. If Mr Duckworth were able to continue the action in his capacity as trustee, then a further question would arise, namely whether Mr Duckworth is, in fact, seeking relief as a trustee or whether any relief to which he would be entitled would be in his personal capacity. This secondary issue arises because the Water Corporation says that it is not apparent that the payments made, for which restitution is sought by Mr Duckworth, were made (or, if this is sufficient, procured) by him in his capacity as trustee.

18 The first issue was considered by Gray J in the Federal Court of Australia in Re Lofthouse. In that case, Mr Guss and his wife owned property at Portsea. They held the property 'on trust for their three children' (152) [2]. The property was sold by the mortgagee, the Geelong Building Society (in liq) (the Society).

19 Mr Guss commenced an action against the Society. His claim alleged that the Society had breached its duty of care by selling the property at an undervalue. The proceedings were later consolidated with related proceedings and the plaintiffs became Mr Guss and his wife and their son.

20 Subsequently to the commencement of the action, a sequestration order was made by the Federal Court of Australia with respect to the estate of Mr Guss.

21 One question in the case was whether the Supreme Court proceedings had been stayed by the operation of s 60(2) of the Bankruptcy Act. Gray J, proceeded on the assumption that Mr Guss was a plaintiff in his capacity as a bare trustee so that even if he were successful in the action then he (and therefore his bankrupt estate) would have no entitlement to any of the proceeds of the litigation (156) [14].

22 The question was whether the proceedings by Mr Guss as a trustee were within s 60(2) as '[a]n action commenced by a person who subsequently becomes a bankrupt'. In other words, since the action was not commenced in Mr Guss' personal capacity did this mean that it fell outside the scope of s 60(2)?

23 Gray J said that the research of counsel, and of his associate, had suggested that there was no authority on this question (156) [15].

24 His Honour concluded that although the proceedings were commenced by Mr Guss in his capacity as a bare trustee, the proceedings were stayed by the operation of s 60(2) of the Bankruptcy Act upon the making of the sequestration order with respect to the estate of Mr Guss.

25 The decision in Re Lofthouse is directly applicable to these proceedings. Although, as I explain below, there are arguments that an action by a bankrupt in his or her capacity as trustee should not be stayed, there are significant reasons in support of the decision in Re Lofthouse. For those reasons, I am not satisfied that it is plainly wrong.

Re Lofthouse should be followed unless it is plainly wrong

26 There is no strict or necessary logic to the rules of precedent and the level of respect which ought to be afforded to earlier decisions of the same court (or coordinate courts in a federation). The rules of precedent are not ordinary rules of common law. In part, they are a concession to the uncertainty of the law or, perhaps more accurately, the uncertainty of adjudication. Their operation sometimes incites acrimony. The Court of Appeal of England and Wales treats itself as bound by its own decisions, subject to limited exceptions: Young v Bristol Aeroplane Co Ltd [1944] KB 718. Until he ultimately recanted, Lord Denning MR conducted a 'one man crusade' with the object of freeing the Court of Appeal from these shackles: see Davis v Johnson [1978] UKHL 1; [1979] AC 264, 325 (Lord Diplock). Courts of federal polities, such as Canada and the United States, take a less stringent approach than the English Court of Appeal. They treat decisions of coordinate jurisdictions in the polity only as persuasive.

27 The established Australian approach to precedent falls somewhere in between these positions. It is that a decision of an equivalent intermediate appellate court or trial court on Commonwealth or uniform national law (including the Australian common law) should be followed unless it is plainly wrong.

28 In Farah Constructions Pty Ltd v SayDee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, 151 152 [135], a unanimous joint judgment of the High Court reiterated a long established rule of Australian precedent that '[i]ntermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong'. See also Daniell v Robotham [1883] VicLawRp 99; (1883) 9 VLR (L) 215, 217 (Higinbotham J: 'a previous decision [must be] clearly shown to be wrong'), 217 (Holroyd J: 'the Court should adhere to its decisions until it is convinced that they are wrong'). The reason given for this rule of precedent is the importance of uniformity of decision making across Australia: Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, 492 (Mason CJ, Brennan, Dawson, Toohey & Gaudron JJ).

29 In two decisions in this jurisdiction, judges had considered that the same 'plainly wrong' stricture which applies to intermediate appellate courts does not apply to first instance judges. On this view, a trial judge need only give 'due respect' to first instance decisions of equivalent courts: Australian Securities and Investments Commission v Emu Brewery Mezzanine Ltd [2004] WASC 241; (2004) 187 FLR 270, 280 [51] (Simmonds J); Walker v Midlink Nominees Pty Ltd [2000] WASC 112; (2000) 22 WAR 318, 324 [23] (Owen J). See also Temsign Pty Ltd v Biscen Pty Ltd (56) (Wheeler J).

30 However, in neither of these decisions was the judge referred to earlier authority which had held that trial judges should also follow a decision of an equivalent court on Commonwealth or uniform national law unless the decision is plainly wrong. When, four months after his decision in Walker, Owen J was referred to the decision of Hayne J in Re Brashs Pty Ltd (1994) 15 ACSR 477, 483, his Honour chose to follow the approach of Hayne J: Sentron Pty Ltd v Australian Securities and Investments Commission [2000] WASC 272; (2000) 158 FLR 147. Justice Simmonds has also subsequently followed the approach of Hayne J: Cooper & Oxley Builders Pty Ltd v Bunnings Group Ltd [2008] WASC 63 [90].

31 There is considerable authority supporting the approach of Hayne J in Re Brashs Pty Ltd, namely that trial judges should follow other decisions of equivalent trial judges in Australia on Commonwealth or uniform national law unless those decisions are plainly wrong: Valentine v Eid (1992) 27 NSWLR 615, 622 (Grove J referring to the rule of the English High Court 'convinced that that judgment is wrong'); La Macchia v Minister for Primary Industries & Energy (1992) 110 ALR 201, 204 (Burchett J: 'usually follow the decision of another judge at first instance ... unless he is convinced that the judgment was wrong'); Re York Street Mazzanine Pty Ltd (in liq) [2007] FCA 922; (2007) 162 FCR 358, 365 366 [22] [23] (Finkelstein J referring to the test of 'plainly wrong'). The same 'plainly wrong' approach should be applied in this case.

Seven reasons in support of the decision in Re Lofthouse

32 I do not consider that the decision in Re Lofthouse is plainly wrong. There are seven reasons why it should be followed.

33 First, although there are very few cases which have considered Re Lofthouse on the issue of the effect of trusteeship (it has been approved on numerous occasions in relation to other aspects of the decision), the essence of the reasoning of Gray J on s 60(2) has been referred to by the Victorian Court of Appeal with apparent approval. In Owens v Comlaw (No 62) Pty Ltd [2006] VSCA 151; (2006) 201 FLR 275, 284 [40] Ashley JA (Redlich JA agreeing) quoted a substantial extract from the decision in Re Lofthouse upon which the decision had relied, including reference to the breadth of s 60.

34 Secondly, the plain words of s 60(2) encompass all actions commenced by a bankrupt. There is no reference to, nor is the section confined by, whether the bankrupt sued in his or her personal capacity or capacity as a trustee. The words used are simply 'an action commenced by a person who subsequently becomes a bankrupt'. If some warrant were to be found for reading those words to exclude actions commenced by a bankrupt in his or her capacity as a trustee it would need to be found in the statutory purpose or from a broader contextual reading.

35 Thirdly, the context of the whole of s 60 makes more compelling an interpretation of s 60(2) as applying to actions commenced by a bankrupt in any capacity. Several points can be made about this context, each of which was made in Re Lofthouse:

(i) Section 60(4) contains specific, exceptional circumstances in which a bankrupt may continue an action 'in his or her own name'. The exceptions were described in Re Lofthouse (158) [20] as 'expressed quite narrowly'. I consider the s 60(4) exceptions below. None of those exceptions concerns a right to sue where the bankrupt holds property on trust. Compare, for instance, s 116(2)(a) which specifically exempts from the property divisible amongst creditors 'property held by the bankrupt in trust for another person'.

(ii) In s 60(5) the word 'action' is defined. The definition of 'any civil proceeding, whether at law or in equity' was rightly described by Gray J as 'plainly a definition of great width': Re Lofthouse (156) [16]. This supports a broad construction of s 60(2) generally, so that an action commenced by a person should include actions by that person in any capacity.

36 Fourthly, the approach to s 60(2) which construes it to include actions commenced by a subsequent bankrupt in his or her capacity as trustee is also consistent with the Bankruptcy Act as a whole.

37 In the Bankruptcy Act, specific exclusions are made from the 'property divisible among creditors' including

(i) where that property is 'held by the bankrupt in trust for another person' (s 116(2)(a)); or

(ii) where the bankrupt is seeking damages or compensation 'for personal injury or wrong done to the bankrupt or a member of the family of the bankrupt' (s 116(2)(g)(i)); or

(iii) where the bankrupt is seeking damages or compensation 'in respect of the death of the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt' (s 116(2)(g)(ii)).

38 Section 60(4) also provides for exclusions of particular actions commenced by a subsequent bankrupt 'in his or her own name' which are not stayed upon the bankruptcy. Those exceptions repeat (ii) and (iii) above. But they do not include (i).

39 It appears that Canadian courts now permit a 'trust' to be a plaintiff (see Strother v 3464920 Canada Inc [2007] SCC 24; [2007] 2 SCR 177). This is not the position in Australia. In this country, a trust is not a legal person: the trustee sues in his or her own name and is personally liable for any order for costs (below at [45]). Hence, an action by the bankrupt as trustee is an action which is commenced in his or her own name for the benefit of the beneficiaries. But, unlike in s 116(2)(a), there is no exception provided for such an action in s 60(4). It might have been expected that the exception would have been repeated in s 60(4) if it were intended that it should also apply to s 60(2).

40 Fifthly, a broad approach to the words 'an action commenced by a person' is also consistent with the broad approach taken to s 60(2) where an action by a bankrupt is stayed even if the bankrupt concerned was 'only one of several plaintiffs, whose claim was separate from those of other plaintiffs, although raising common questions of law and fact': Re Lofthouse (156) [16], followed by Campbell v Metway Leasing Ltd [2001] FCA 1311; (2001) 188 ALR 100, 104 [18] (Katz J); McKellar v Container Terminal Management Services Ltd (No 4) [2002] FCA 185 [22] (Weinberg J); Goodman v Thomson Maloney & Partners Pty Ltd t/as Charter Keck Cramer [2011] FCA 97 [11] (Gray J).

41 This broad approach to s 60(2), generally staying any litigation in which a bankrupt is one of a number of plaintiffs, has been acknowledged to 'doubtless cause hardship in many cases'. But that is the necessary effect of the broad statutory language and policy: John v Neiman Holdings Pty Ltd (1986) 84 FLR 84, 86 (Young J).

42 Sixthly, there is support for the approach of Re Lofthouse in the purpose of s 60(2). This support comes from a line of decisions which have described the purposes of the section in light of its long historical antecedents. The purposive construction does not come from the Report of the Clyne Committee or in the second reading speech. Neither makes reference to s 60: see Commonwealth Parliament, Report of the Committee Appointed by the AttorneyGeneral of the Commonwealth to Review the Bankruptcy Law of the Commonwealth (1962); second reading speech of Bankruptcy Act 1966 (Cth) (No 33 of 1966), Hansard, 20 April 1966, 418 423 (Senator Gorton).

43 It has often been repeated that one rationale behind s 60(2) is 'to protect those whom the bankrupt has been suing': Re Lofthouse (158) [19]; Owens v Comlaw (No 62) Pty Ltd (284) [40] (Ashley JA; Redlich JA agreeing). In Want v Moss (1889) 10 LR (NSW) 274, 279, Manning J said that 'it would be monstrous if ... 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'.

44 The reason why those whom the bankrupt has been suing need protection is because 'if the defendant or other party should be successful in the proceeding, and should obtain an order that the [bankrupt] pay the costs of the proceeding, the order will be effectively unenforceable because of the bankruptcy': Re Lofthouse (158) [19]; Owens v Comlaw (No 62) Pty Ltd [40] (Ashley JA); Temsign Pty Ltd v Biscen Pty Ltd (54) (Wheeler J).

45 The same cost consequences apply to proceedings commenced by a bankrupt trustee. If the bankrupt trustee is unsuccessful then the ordinary order will be that the trustee must pay the costs of the defendant. As the Full Federal Court has explained '[s]uch an order imposes a personal obligation on the trustee': Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201, 210 (the Court). That personal costs liability is therefore incurred by the estate of the bankrupt. The order for costs is 'entered against a bankrupt [and] has the effect of increasing the amount of the debts provable in his estate': Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124, 138 (Brennan CJ, Gaudron & McHugh JJ).

46 It may be that a trustee such as Mr Duckworth, and therefore the bankrupt's estate, would have a right to be reimbursed from the trust estate. But this would depend on factors which include whether there are sufficient assets in the trust estate, and whether the bankrupt trustee could show that the litigation was reasonably instituted, and the expenses were reasonably incurred: Trustees Act 1962 (WA), s 71; Re England's Settlement Trusts [1918] 1 Ch 24, 29, 31 32 (Eve J); Re Beddoe [1893] 1 Ch 547, 558 (Lindley LJ), 560, 562 (Bowen LJ); Patterson v Wooler (1876) 2 Ch D 586, 587 588 (Bacon VC). There remains serious risk that unsuccessful litigation would increase the provable debts in the estate.

47 Seventhly, a further reason, not arising in Re Lofthouse, why s 60(2) should apply to stay the proceedings in this case is that, as I have explained above at [11], one of the very issues in this case is whether a distinction can be drawn between the rights of Mr Duckworth as trustee and the rights of Mr Duckworth in his personal capacity (ie for his own benefit).

48 Even if s 60(2) did not apply to situations where a bankrupt held rights on trust for another, this trial could only proceed on the basis that Mr Duckworth is asserting rights which he holds as a trustee. But the question whether Mr Duckworth is asserting rights as a trustee or in his own personal capacity is one of the very questions in the trial. If s 60(2) does not operate to stay proceedings brought by Mr Duckworth in his capacity as trustee then this court would need, at least, to conduct a trial of a preliminary issue concerning the manner in which Mr Duckworth holds his rights (and hence whether s 60(2) applies). But to do so would, at the least, create tension with s 60(2) because no steps can be taken in a proceeding, stayed by operation of the Bankruptcy Act, if s 60(2) applies.

Doubts cast upon Re Lofthouse by the Administrative Appeals Tribunal

49 Counsel for the Water Corporation properly brought to the attention of the court a decision of the Deputy President of the Administrative Appeals Tribunal in which some doubt was raised about the correctness of the decision in Re Lofthouse.

50 In Re Singh and Secretary, Department of Education, Employment and Workplace Relations [2010] AATA 720, Mr Singh had challenged a decision of the Social Security Appeals Tribunal that he was not entitled to a Newstart allowance. His application challenging the decision was dismissed by the Deputy President due to his failure to attend a hearing. Mr Singh applied for reinstatement of his application. It was subsequently reinstated by the Deputy President. At the time of reinstatement the Deputy President had not been informed that prior to Mr Singh's application for reinstatement he had been made bankrupt by a sequestration order of the Federal Magistrates Court.

51 One issue which the Deputy President had to determine was whether her discretion to reinstate the application had been correctly exercised despite the failure to consider the effect of s 60(2). The Deputy President considered that a question for the exercise of discretion was whether, if the application were successful, then Mr Singh's action challenging the decision would have to be stayed by s 60(2) prior to her order reinstating it. She held that it would not have been stayed.

52 The reason given by the Deputy President, at [111], was that if Mr Singh's challenge were successful then his Newstart allowance would not be available to his creditors. The consequence of this was then said to be that his action did not have any connection with the property vested in his trustee in bankruptcy. In effect, the Deputy President construed s 60(2) as if it included the words in italics: 'an action [which is connected with property of the bankrupt vested in the trustee] commenced by a person who subsequently becomes a bankrupt is ... stayed'.

53 In reaching her decision, the Deputy President considered the decision in Re Lofthouse and doubted its correctness for three reasons:

(i) Gray J 'assumed that, through the operation of ss 58(2) and 60, bankruptcy divests the bankrupt of all property (broadly defined to include actions and appeals) and of all interests (including those in matters in which, as a trustee for others, the bankrupt can have no interest affecting his or her estate or provable debts) and protects those whom the bankrupt has been suing and the estate from further costs' [79].

(ii) Gray J 'did not explain why an action at first instance, as opposed to an appeal ... would be property for the purposes of ss 5(1) and 58(1)' [80].

(iii) Gray J 'did not explain why the Bankruptcy Act can be used to protect those who are being, or might be, the defendant to an action by the bankrupt' [81].

54 As to the Deputy President's concern (i), Gray J did not assume that, through the operation of s 58(2) and s 60, bankruptcy divests the bankrupt of all property. His Honour specifically contemplated that property held on trust might not be divested. Gray J said '[e]ven if it be the case that property of which a bankrupt is a bare trustee for someone else does not pass to the trustee in bankruptcy (because such property is not available for distribution to the bankrupt's creditors) it does not follow that s 60 must be construed as excluding proceedings brought by the bankrupt as trustee' (157) [18]. As I explain below at [74], a right of action by a trustee for the benefit of the trust is not 'property' for the purposes of s 58. But Gray J did not suggest that it was property that would vest in the trustee in bankruptcy.

55 As to the Deputy President's concern (ii), it is true that Gray J did not explain why an action at first instance, but not an appeal, would be property. But this did not matter for his conclusion. As explained immediately above, his Honour's conclusion was expressed to apply irrespective of whether a trial proceeding was 'property'.

56 In this respect, the conclusion of Gray J is consistent with Owens v Comlaw (No 62) Pty Ltd (285) [42] where the Victorian Court of Appeal held (after citing Re Lofthouse), that a right of appeal can fall within s 60(2), even though it is not property and does not vest in the trustee in bankruptcy.

57 The Victorian Court of Appeal said that the right of appeal would fall within s 60(2) if there is 'such a connection between the action and the estate as to make s 60(2) applicable': Owens v Comlaw (No 62) Pty Ltd (285) [42]. A reversal of costs consequences was given as an example of such a connection. As I have explained above at [42] [46], potential adverse costs orders, increasing the amount of debts provable in the bankrupt's estate, may be a consequence of trial proceedings brought by a bankrupt in his or her capacity as trustee.

58 In any event, there is a difference between a cause of action at trial to vindicate an existing right, and the exercise of a statutory power of appeal. A bare majority of the High Court has held that a right of appeal 'does not have the character of property merely because it is the creature of statute': Cummings v Claremont Petroleum NL (133) (Brennan CJ, Gaudron & McHugh JJ). But their Honours also said that '[a] chose in action may be the property of the person entitled to enforce it' (133), citing Georgiadis v Australian & Overseas Telecommunications Corporation [1994] HCA 6; (1994) 179 CLR 297, 303 304 (Mason CJ, Deane & Gaudron JJ), 312 (Brennan J), 325 (McHugh J) where their Honours, respectively, spoke of 'property' as including 'every species of valuable right', an 'action for damages for negligence', and 'a liability ... to pay damages'.

59 As to the Deputy President's concern (iii), the short answer is that there is a long line of authority which has recognised, as Gray J did at (158) [19], that one purpose of the Bankruptcy Act is to protect defendants to an action by a bankrupt, particularly from the inability to enforce costs orders. I have referred to those authorities above at [42] [46].

Does potential injustice arise from the construction of s 60(2) in Re Lofthouse?

60 This issue concerns a submission succinctly made by Mr Duckworth. It is a submission which requires careful consideration. Essentially, Mr Duckworth's point was that if the action is stayed and a notice is issued to the trustee in bankruptcy then, as Gray J said in Re Lofthouse '[i]f the bankrupt has sued as trustee for another person, and the estate will not benefit, the trustee in bankruptcy would no doubt usually elect not to continue to prosecute the proceeding' (158) [20].

61 Although the election of the trustee is subject to principles including those in s 178 of the Bankruptcy Act (see the references at the end of this paragraph), the conclusion of Gray J that a trustee in bankruptcy might usually elect not to continue to prosecute proceedings may be reinforced by limits on the trustee in bankruptcy's powers under s 134(1)(j) of the Bankruptcy Act which empowers the trustee in bankruptcy to 'bring, institute or defend any action or other legal proceeding relating to the administration of the estate': Cummings v Claremont Petroleum NL (138 139) (Brennan CJ, Gaudron & McHugh JJ); Benfield v Solomons (1803) 9 Ves 77, 84; [1803] EngR 675; (1803) 32 ER 530, 533 (Lord Eldon); Heath v Tang [1993] 1 WLR 1421, 1425, 1427 (Hoffmann LJ).

62 The consequence of this might be that a claim which could be potentially fruitful to beneficiaries of a trust could be lost. This consequence, combined with s 134(1)(j) of the Bankruptcy Act, might support a construction of s 60(2) which excluded from the scope of s 60(2) stayed proceedings those actions in which the bankrupt was bringing proceedings in his or her capacity as trustee.

63 However, there is an answer to this potential concern. As Gray J said, if the trustee in bankruptcy does not continue the proceedings the 'beneficiary may be forced to institute proceedings in his or her own right to enforce the trustee's legal right, as can be done where there are "exceptional circumstances"' (158) [20]: see also Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432.

64 If the beneficiary, rather than the trustee, is permitted to institute the proceedings then one purpose of s 60 would not be frustrated. That purpose, to ensure that a defendant is not prejudiced by inability to enforce costs orders, would be fulfilled. If the beneficiary's action were unsuccessful then costs orders could be made against the beneficiary personally.

The history of s 60(2)

65 One aspect of the conclusion in Re Lofthouse which troubled me was that the interpretation of s 60(2) was apparently contrary to the old practice of both the common law and Chancery courts.

66 The 1604 statute of 1 Jac 1 c 15 (An Act for the better relief of the creditors against such as shall become bankrupts) provided in cl 13 that the commissioners of bankrupts 'shall have the power to grant and assign, or otherwise to order or dispose all or any of the debts due or to be due to or for the benefit of the said bankrupt'.

67 This phrase in the 1604 statute, 'debts due or to be due to or for the benefit of the said bankrupt', was almost immediately construed to exclude rights which the bankrupt held as a trustee: Winch v Keeley (1787) 1 Term Rep 619, 623; [1787] EngR 38; (1787) 99 ER 1284, 1286 (Buller J).

68 In the court of Common Pleas in Scott v Surman (1742) Willes 400, 402; (1742) 125 ER 1235, 1236, Willes CJ said that nothing vests in assignees under a commission of bankruptcy 'but such real and personal estate of the bankrupt in which he had the equitable as well as the legal interest, and which is to be applied for the payment of the bankrupt's debts'. In other words, rights which a bankrupt holds on trust do not form part of the bankrupt's estate. In Boddington v Castelli [1853] EngR 515; (1853) 1 El & Bl 879, 885; [1853] EngR 515; (1853) 118 ER 665, 667, Baron Parke said in argument that this proposition of the Lord Chief Justice from Scott v Surman 'has repeatedly been recognised since'.

69 It was, therefore, a well established principle that rights which were held on trust did not form part of the bankrupt's estate. Even where the proceedings took place in the courts of common law, the common law courts took 'notice of a trust': Winch v Keeley (623), (1286) (Ashurst J).

70 The independence from the bankrupt's estate of rights which the bankrupt held on trust also permitted a claim to be brought in the name of the bankrupt to enforce those rights. In Winch v Keeley the plaintiff was the assignor in equity of a chose in action (claim) for various forms of action in indebitatus assumpsit. As assignor, the plaintiff held the benefit of the claim on trust for a third party. A day after making the assignment the plaintiff became bankrupt. A demurrer was brought in the court of King's Bench alleging that the assignee could bring the action in the name of the plaintiff (assignor) who had been declared bankrupt. The court of King's Bench held that the action could be brought in the bankrupt's name because 'such things as the bankrupt held as trustee did not pass under the commission' (623), (1284) (Buller J).

71 Just as a bankrupt could not commence an action after bankruptcy in relation to rights which formed part of the bankrupt's estate, so too the courts of common law and equity developed practices by which an action already commenced could be stayed. These rules concerning the abatement of extant legal proceedings by a supervening bankruptcy differed slightly between common law and equity, and the differences are traced in detail by Gummow and Whitlam JJ in Fuller & Cummings v Beach Petroleum NL [1993] FCA 453; (1993) 43 FCR 60, 64 68.

72 When the Bankruptcy Act 1924 (Cth) was enacted it followed the model of the Bankruptcy Act 1883 (46 & 47 Vict) c 52. After explaining that the 1924 Act had followed the 1883 UK model, the Clyne Committee described the history of the enactment of the legislation as involving a 'motto' of '[t]he estate for the creditors, not for the debtors, nor for the trustee [in bankruptcy]': Commonwealth Parliament, Report of the Committee Appointed by the AttorneyGeneral of the Commonwealth to Review the Bankruptcy Law of the Commonwealth (1962), page 11.

73 The 1883 legislation was described by Sir MacKenzie Chalmers as making 'a fresh departure in bankruptcy legislation': M Chalmers The Bankruptcy Act 1883 (1883) ix. And in the second reading speech of the Bill on 19 March 1883, the Right Hon J Chamberlain, the President of the Board of Trade, described the 'chaos', 'absolute chaos', 'general dissatisfaction', 'great carelessness and negligence' which had accompanied the previous statutory regimes dating from Lord Brougham's Act in 1831: House of Commons Debates, 19 March 1883, vol 277, 824 835.

74 The scheme of the Bankruptcy Act 1924 was in similar terms to the Bankruptcy Act 1966. In particular, the 1924 Act, and the 1966 Act which followed it, preserved the historic principle from common law and equity that rights which were held by a bankrupt on trust for another did not vest in the trustee in bankruptcy upon sequestration. In the 1966 Act, s 58(1) provides that the 'property of the bankrupt' vests forthwith in the Official Trustee. The term 'the property of the bankrupt' is defined by s 5 and s 116(2)(a) to exclude property held by the bankrupt on trust for another person.

75 However, although the general scheme and many provisions of the Bankruptcy Act 1924 had followed the Bankruptcy Act 1883 (46 & 47 Vict) c 52, this was not the case in relation to the provision staying actions commenced by a bankrupt.

76 The 1883 English Act made no provision staying actions commenced by a bankrupt. Instead, the rights to sue were vested in the trustee in bankruptcy and if the trustee elected not to proceed the court could stay the action on application by the defendant: Rules of Court 1875 (UK), O 50 r 1; Warder v Saunders (1882) 10 QBD 114; Fuller & Cummings v Beach Petroleum NL (65) (Gummow & Whitlam JJ).

77 As to the situation where a bankrupt was a trustee, the Bankruptcy Act 1883 (46 & 47 Vict) c 52 provided in s 147 for the power of the court to authorise the appointment of a new trustee in substitution for the bankrupt 'if it appears expedient to do so'. A similar provision is contained in s 77(2)(e) of the Trustees Act 1962 (WA).

78 In Australia, prior to the Bankruptcy Act 1924 there had been legislative provision staying actions brought by a persons subsequently declared bankrupt as early as 1842 in New South Wales: see s 33 of Act 5 Vic No 17 (Insolvency Act 1841 (NSW)). See also Insolvency Act 1915 (Vic), s 176; Bankruptcy Act 1924, s 63(3). The 1842 statute provided in part, in s 33, that,

all actions commenced by any person whose estate shall afterwards be placed under sequestration as insolvent for any debt or demand due to the said estate and all proceedings therein shall upon the order of such sequestration being made be stayed ...

79 The wording of this section might be thought to echo the 1604 statute of 1 Jac 1 c 15. If that were correct then 'actions... for any debt or demand due to the said estate' would not include actions by the bankrupt as trustee for another. Those actions would not be stayed.

80 Section 63(3) of the 1924 Act and s 60(2) (4) of the 1966 Act which followed it departed from the English model. A separate provision was included like the New South Wales legislation. But the wording of the New South Wales legislation was not precisely followed. The chosen wording did not confine the stay of a bankrupt's actions to those which were 'for any debt or demand due to the said estate'. Instead, the sections of the 1924 Act, and the 1966 Act which followed it, referred, in much broader terms to '[e]very action or proceeding at law or in equity commenced by any person, against whom a sequestration order is afterwards made' (1924 Act) and '[a]n action commenced by a person who subsequently becomes a bankrupt' (1966 Act).

81 The conclusion which must be reached in relation to the historical context of s 60(2) is that although the decision in Re Lofthouse is not consistent with the historic approach taken in the old English bankruptcy cases the enactment of s 60(2) appears to have been an intentional break from the English approach, in favour of that adopted from 1842 in New South Wales. The best construction of s 33 of the New South Wales legislation might have been that an action by a bankrupt in his or her capacity as trustee would not be stayed. But the significantly different wording of the 1924 and the 1966 Commonwealth Acts, and the existence of provisions such as s 77(2)(e) of the Trustees Act, provides, at least, reasonable support for the view that a broader application was intended for actions which would be stayed.

82 The effect of the decision in Re Lofthouse is that the Bankruptcy Act 1966, and (necessarily) the 1924 Act which preceded it, effected a break with the historic approach where actions by a bankrupt as trustee for another would not be stayed. Although this conclusion cannot be confidently asserted, there is a reasonable basis to suppose that this break might have been part of an intentionally broader approach in the broad new scheme of the 1924 Act. In any event, for the seven reasons I have described above, at [32] [48], I am not satisfied that the decision in Re Lofthouse is plainly wrong. The conclusion is therefore that an action commenced by a subsequently declared bankrupt is stayed even if that action is commenced, and asserts rights, which the bankrupt holds in his or her capacity as a trustee for another.

The exception for actions for 'personal injury or wrong' in s 60(4)

83 During the hearing into the issue of whether the proceedings had been stayed by s 60(2), Mr Duckworth, who represented himself admirably and had a strong command of the issues involved, raised the question whether his claim fell within the exception in s 60(4), quoted above at [13].

84 Section 60(4) permits a bankrupt to continue an action which he has commenced 'for any personal injury or wrong done to the bankrupt'. At least in relation to Mr Duckworth's action for damages for 'unconscionable conduct' this might be thought to fall within the words of 'wrong done to the bankrupt'.

85 In Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 45, 55, Kirby P said that it 'is understandable that a person unversed in the principles of statutory construction and unaware of legal authority on the meaning of s 60(4)(a) of the [Bankruptcy] Act should have taken [these words] ... in isolation'. The phrase 'personal injury or wrong' has a long history of interpretation. The words are a paregmenon. 'Wrong' and 'personal injury' have the same connotation and derivation.

86 In Cox v Journeaux (No 2) [1935] HCA 48; (1935) 52 CLR 713, 721, Dixon J (as his Honour was then) said of whether an action was for 'personal injury or wrong' that '[t]he test appears to be 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'. This was the approach which had been taken by English courts for many years in relation to the English legislation: Beckham v Drake [1849] EngR 843; (1849) 2 HL Cas 579, 604; [1849] EngR 843; (1849) 9 ER 1213, 1222 (Erle J); Wilson v United Counties Bank Ltd [1920] AC 102, 111 (Lord Birkenhead LC), 128 133 (Lord Atkinson).

87 In Faulkner v Bluett [1981] FCA 3; (1981) 52 FLR 115, Lockhart J said:

The common thread running through these cases [exceptions to the rule that rights of actions generally pass to the trustee of a bankrupt's estate] 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: Wetherell v Julius [(1850) [1850] EngR 698; 10 CB 267; 138 ER 108]; Wage on Bankruptcy (1904 ed), p 201. Where the essential cause of action is the personal injury done to the person or feelings of the bankrupt the right to sue remains with the bankrupt (119).

The action in that case for negligent misrepresentation was held to have been stayed on the making of the sequestration order because any damages which the plaintiff might be awarded would not be referable to 'pain felt by her in respect of her "body, mind or character"' (122).

88 The passage from Faulkner quoted above was cited with approval by Lockhart J, and separately by O'Loughlin and Merkel JJ, in Bryant v Commonwealth Bank of Australia (1997) 75 FCR 545, 547 548, 562. The action in that case against the Commonwealth Bank of Australia was for declarations, compensation and damages for matters including loss of business loss of reputation and standing, stress and suffering. The action was stayed. It was not within the exception in s 60(4).

89 For the same reasons, this action also does not fall within the exception in s 60(4). It does not seek recovery for injury to the person or to the mind.

90 The effect of s 60(2) of the Bankruptcy Act is that this action was stayed upon the sequestration order against Mr Duckworth. As Young J (as his Honour was then) explained in John v Neiman Holdings Pty Ltd (86), all that is meant by a stay 'is that nobody can take any step in the proceedings, nobody can make any order in the proceedings'.

91 The action is therefore stayed until the trustee in Mr Duckworth's bankruptcy, after receipt of proper notice, makes an election, in writing, to prosecute or discontinue the action. Failing an election within 28 days after service of the notice, the action is deemed abandoned (s 60(3)). The consequences of abandonment are discussed by Wheeler J in Temsign Pty Ltd v Biscen Pty Ltd (58).

Insolvency Act 1841(NSW)

Bankruptcy Act 1924(Cth)

(Insolvency Act 1841(NSW)

When the Bankruptcy Act 1924(Cth)

M Chalmers The Bankruptcy Act 1883

At a glance

Court

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Judgment (117 paragraphs)

Legislation Cited (7)

Cases Cited (23)