Did the trustee in bankruptcy make an election within s 60(2) to prosecute the action?
23 This involves a construction of the terms of the letter from the trustee. That letter does not specifically state that the trustee has elected to prosecute the action. Nevertheless, it would seem to me to be inconsistent with a determination not to proceed with the action that there be a purported assignment of it to the bankrupt applicant. As a matter of construction, I would read the letter, therefore, as electing to prosecute the action. In taking this approach I am mindful that it is consistent with the approach adopted by all members of the Full Federal Court of Australia in Cole v Challenge Bank Limited [2002] FCAFC 200. It is consistent also with the approach adopted by Mason P in the New South Wales Court of Appeal in Baker v Sheridan and anor [2005] NSWCA 408. That is, the courts will endeavour to ascertain the intention of the trustee not only from the language used but from the course of action proposed in determining whether there has been an election to prosecute proceedings.
24 It was submitted on behalf of the respondents that s 60(2) should be construed as being confined to an election made by the trustee that the trustee continue the proceedings and that the subsection should be confined so that it does not apply to circumstances where the proceedings are assigned.
25 It is clear that a trustee in bankruptcy is entitled to assign a cause of action including one that is personal to the bankrupt and not necessarily associated with some entitlement to property or other tangible matter. Indeed, it has been held that an assignment of a bare right of action even though champertous at common law and therefore against public policy is permitted under the Bankruptcy legislation to be effected by a trustee in bankruptcy. This matter was considered in some detail by reference to an extensive array of authorities by Bainton J in the Supreme Court of New South Wales in Cotterill v Bank of Singapore (Australia) Ltd (1995) 37 NSWLR 238. Furthermore, an examination of the mechanism established by the Bankruptcy Act to deal with the property of a bankrupt in the context of the powers of trustees in bankruptcy would mitigate against confining the operation of s 60(2) in the manner contended for by the respondents.
26 Madgwick J in the Federal Court of Australia discussed this matter in Brien v P and E Phontos Pty Ltd (in the Estate of Metchler) [1999] FCA 1072 in the following terms:
"[10] The election contemplated by s 60(2) is either "to prosecute or discontinue the action". Alternatively, there may be no election made, in which case there is a deemed abandonment. Thus, there are three possible outcomes for the action: (a) election within the primary or extended time to prosecute, in which case the action remains on foot, (b) election within such time to discontinue, in which case the action will be disposed of in a manner acceptable to the court in which the action is brought, but which, except by conscious decision of that court, will not finally extinguish the underlying cause of action, or (c) no such election, in which case there is a deemed abandonment of the action, which will not require any further steps in such court for its effectuation, although ancillary steps may be taken, for example, to provide for costs.
[11] The Act appears at least to contemplate that, upon a bankruptcy occurring, persons who have been sued should not be further troubled by the suit unless the independent trustee has formed the opinion that the action is worth pursuing. The mere act of election will not necessarily and does not of its own force expose the trustee to personal liability for costs. It seems that the "preferable opinion" is that the trustee should be substituted as the plaintiff in the action: Ryan v Hopkinson (1993) 16 FAMLR 659 per Priestley JA. If the trustee cannot procure sufficient indemnities from creditors as to costs, he or she will presumably be unwilling to make the election. Actual further prosecution of the action will, generally, at least be made conditional upon the defendants having an undertaking from someone who is not a bankrupt to meet their costs if the plaintiff should prove unsuccessful, but that is a matter for the court which provides the forum for the action. At best, for the defendant(s) in the action, the Act might therefore be said to contemplate that, by the election, the trustee will present himself or herself to the defendant(s), as a presently non-bankrupt individual, to meet the costs if the action is ultimately unsuccessful.
[12] However, there is nothing to stop a trustee, after an election to prosecute the action, from assigning the rights of the bankrupt estate in the action to a third party. The third party may then be substituted as the plaintiff. On such an assignment and substitution, the trustee would have no continuing power to influence the course of the proceedings, except by agreement with the assignee. Thus, the purpose of the Bankruptcy Act is not to assure the defendants in an action begun by a bankrupt that, if the trustee elects to prosecute the action, then he or she will necessarily remain personally available to meet costs or to direct the manner of further prosecution of the action.
[13] These considerations affect the meaning to be accorded to the expression "to prosecute" in s 60(2). The phrase cannot mean "to prosecute personally" or "to prosecute under the trustee's direction". Once it is appreciated that the phrase, on the contrary, may include the meaning, "to prosecute or to arrange the prosecution of the action by any assignee who is not a bankrupt", the nature of the election is illuminated. The ability so to elect is obviously not retroactively vitiated by the subsequent assignment of the right to conduct the action in question.
[14] Neither, in my opinion, is there any warrant to constrict the notion of an "election" in s 60(2) so as to make it impossible for an assignment which pre-dates the election to take effect. To interpret the notion of the trustee's "election" as the respondents contend is apt to have a number of unfortunate effects. One is to give an unwarranted benefit to the defendants in the action. Another is to disappoint the assignee. A third may be to prevent the bankrupt's estate from retaining either the consideration for the assignment or the rights in the action. Further, it is not the case that upon an assignment of the right to the benefit of a particular action, the trustee is irrevocably disconnected from the action: the trustee might buy back such a right. Had the trustee done so here, then, as I apprehend it, the objection taken could not be sustained. The applicant might, indeed, still do so. It would be odd if the ability to elect could be extinguished and then resurrected in that way.
[15] It is apparent, from the trustee's having assigned the right to conduct the action, that it was the trustee's intention that the action should continue. It would be the trustee's implied obligation to the assignee not to fail, except for reasonable cause, to take available steps to make the assignment effective. The Act expressly requires no formality of an election except that it be in writing and implicitly it only requires that such election be communicated to the defendant(s) in the action and to the forum court within a reasonable period or periods. The written assignment in this case may therefore have amounted to an election contemplated by the Act. However, it is unnecessary to decide that question."
27 The observations of Madgwick J were adopted by Mason P in the New South Wales Court of Appeal in Baker v Sheridan, previously referred to. I also respectfully adopt this reasoning.
28 Accordingly, I find that there was, on a prima facie basis, an election constituted by the trustee's letter of 7 January 2006 within the provisions of s 60(2).
29 However, this prima facie election needs to be considered against the background that at the time that the purported election was made by letter of 7 January 2006 the trustee had already purported to assign the chose in action represented by the proceedings by deed of assignment made on 20 December 2005. If the assignment was effective then the trustee would have no power or right to make an election, he having previously assigned any right, title or interest in the proceedings. It is therefore necessary to consider the effectiveness of the purported assignment to the bankrupt.
Was the assignment to the bankrupt applicant effective?
30 The respondents asserted that the assignment by the trustee in bankruptcy of the chose in action constituted by these proceedings to the applicant, an undischarged bankrupt, was ineffective at law. I should add that Mr Whitton, the applicant's trustee in bankruptcy, stated that the assignment of the chose in action had been undertaken "for valuable consideration" and had been effected by a deed of assignment made on 20 December 2005. It was further asserted by the trustee that that decision "was made in good faith and in the best interests of the creditors."
31 The principal authority cited by the respondents in aid of this submission was a judgment of Wheeler J in the Supreme Court of Western Australia in Temsign Pty Ltd v Biscen Pty Ltd (1998) 157 ALR 83.
32 In those proceedings, her Honour was also faced with circumstances where a trustee in bankruptcy had purported to assign choses in action constituted by court proceedings to undischarged bankrupts who were some of the plaintiffs in those proceedings. That purported assignment had also been effected prior to any purported election having been made by the trustee under s 60(2) of the Bankruptcy Act.
33 In order to consider her Honour's judgment it is also necessary, for completeness, that I refer to the provisions of s 134 of the Bankruptcy Act. S 134(1)(a) empowers a trustee in bankruptcy to "sell all or any part of the property of the bankrupt." It may be assumed that there is no specific provision in s 134 or elsewhere in the Bankruptcy Act which would have the effect of prohibiting a sale of the property of a bankrupt by the trustee to the bankrupt himself or herself during such period as that person remains a bankrupt.
34 Wheeler J approached the matter in a number of ways by reference to principle, the statutory scheme and its policy and by reference also to decided cases. It is not necessary for the purpose of these reasons for judgment that I review her Honour's judgment in any detail. I respectfully adopt her Honour's approach and reasoning and will attempt, accordingly, to summarise her Honour's conclusions without, hopefully, detracting in any meaningful way from her Honour's overall judgment.
35 Having considered the relevant statutory provisions including in particular ss 58, 116 and 60, her Honour noted the tension between the concept of assignment of a chose in action by a trustee to the bankrupt and the provisions of s 58 dealing with "after acquired property". That is, if a trustee assigns a chose in action to a bankrupt, that chose in action would immediately become after acquired property and vest accordingly in the trustee, creating a circuitous situation. Her Honour also noted that there was an apparent inconsistency in the concept of an assignment of a chose in action by a trustee to a bankrupt that would prime facie be inconsistent with the policy behind s 60. That section, particularly by reference to subsection (4) would appear to restrict the circumstances in which and the ability of a bankrupt to continue to maintain legal proceedings consequent upon bankruptcy. After discussing in some detail the nature of the statutory scheme and its policy by reference to historical matters and earlier authorities, her Honour concluded "If the purpose of s 60 is the protection of other parties from litigation commenced by a bankrupt, in part for the reason that a bankrupt will neither be personally at risk as to costs, nor able to meet an order for costs, a power in the trustee to assign the action to the bankrupt would appear to be contrary to this objective. Similarly, such a power would not appear to promote orderly administration of the estate, nor to assist in removing uncertainty." (At 90).
36 Wheeler J then considered a number of authorities. Principally, these were the proceedings in the Federal Court in what I shall summarise as the Cirillo litigation and an English authority, Kitson, to which I shall shortly refer. Neither of these authorities persuaded her Honour to adopt a different approach to the "in principle" conclusion which her Honour drew from a consideration of the statutory scheme and its policy, namely that the Bankruptcy Act should be construed so as to render a purported assignment of a chose in action by a trustee in bankruptcy to an undischarged bankrupt as ineffective.
37 I shall refer briefly to the Cirillo litigation. The proceedings at first instance came before Branson J in the Federal Court of Australia and are reported as Re Bankrupt Estate of Cirillo Exparte Official Trustee in Bankruptcy (1996) 136 ALR 607. The unsuccessful appeal from her Honour's judgment to the full Federal Court of Australia is reported as Citicorp Australia Ltd v Offical Trustee in Bankruptcy (1996) 141 ALR 667. The facts in those proceedings are, as Wheeler J pointed out in Temsign, relevantly distinguishable from the factual matrix being considered by her Honour and from the factual matrix that applies in these proceedings. In the Cirillo proceedings, a trustee in bankruptcy assigned a cause of action that had vested in the trustee back to the bankrupt, but at a time after the assignee had been discharged from his bankruptcy. There is reference in the judgment of Branson J and of the members of the full Court to the power of a trustee in bankruptcy to authorise a sale to "the bankrupt." There is, however, as I read these judgments, no consideration either expressly or by implication as to whether the undoubted right of assignment under s 134 of the Bankruptcy Act includes a power to sell or assign to a bankrupt who is and remains at the time of the assignment undischarged from his or her bankruptcy. In these circumstances, I would not consider it efficacious to have regard to these judgments for the purpose of resolving this particular issue in these proceedings.
38 There is, however, authority in England that reaches a view contrary to that expressed by Wheeler J. That authority has been followed in Australia by French J in the Federal Court of Australia in Nguyen Exparte Official Trustee in Bankruptcy (1992) 107 ALR 424 and by the English Court of Appeal in Ramsey v Hartley (1977) 1 WLR 686. The authority is Kitson v Hardwick (1872) LR 7 CP 473. Wheeler J referred to both Kitson and Nguyen, and it appears that Ramsey v Hartley was not cited to her Honour.
39 In Kitson, a trustee in bankruptcy had assigned to a bankrupt, whilst he remained a bankrupt, what appears to have been the totality of his property including, relevantly, all causes of action and interests of and thereto. The undischarged bankrupt then commenced proceedings as plaintiff. The defendants demurred, attacking the validity of the assignment.
40 The judgment of the Court was delivered by Willes J, Keating J concurring. Willes J approached the matter by reference to the statutory construction of the Bankruptcy legislation. His Lordship noted a power in the trustee "to sell all the property of the bankrupt…." either by way of auction or private contract. There was nothing in the language used in the legislation to preclude a bankrupt from seeking to acquire property vested in the trustee. Nor, could his Lordship see any policy reason that would preclude a bankrupt from "bidding" to acquire property. His Lordship said, in part at page 478- 9: