Re Collins; Ex parte Official Trustee in Bankruptcy v Bracher

BACKGROUND 3 On 7 July 1992, Mr Trkulja commenced proceedings, No 8187 of 1992 in the Supreme Court of Victoria. On 30 September 1993, he filed an amended statement of claim which resulted in the proceedings continuing against two defendants, the State of Victoria and one Pattison.

The Supreme Court Action 4 Mr Trkulja pleaded, as one alternative, that he carried on business in 1985 and 1986 under the trading name ÒRMT BuildersÓ (RMT). RMT did work for the Public Works Department of the State of Victoria. The work was mainly emergency building repair work at schools and other like government buildings. Although there is some lack of clarity about the way in which Mr Trkulja puts his claim against the State of Victoria, at its highest it seems to be as follows. Mr Trkulja submitted a works order which specified the price of the job to be done. In evidence, Mr Trkulja explained that this document was no more than a quote. The document does not appear to be a quote, rather, it appears to be a statement by Mr Trkulja that the specified work has been done. Mr Trkulja came from Yugoslavia in 1969 and, although his English is good now, he says that, in 1985 and 1986 when these forms were completed, his English was not good. The evidence was that he would not receive payment for work done unless a further form, called a claim form, was submitted to the Department. Mr Trkulja said that he only submitted a claim form after he had been advised by the Department that the work had been inspected and a claim for payment could be submitted. Again, this procedure is at odds with the face of the documents. The claim form purports to be a certification by Mr Trkulja that the work has been completed. Mr Trkulja relied upon the internal regulations of the Department, which required an inspector to certify the satisfactory completion of works before payment could be made. The relevant inspector was Pattison. Apparently, Pattison did not inspect some of the works for which claim forms were submitted. The result was that RMT was paid by the Department for works which had not been completed or had not been completed satisfactorily. As a result, Mr Trkulja was charged with theft and obtaining property by deception and stood trial in the County Court. On 3 December 1987, Judge Hewitt directed that the charges be dismissed on the ground that there was no case for Mr Trkulja to answer. In the Supreme Court action, Mr Trkulja alleges that Pattison acted in breach of duty and negligently, in failing to inspect the particular works. It is further alleged that the State of Victoria is liable as the employer of Pattison. Paragraph 37 of the amended statement of claim particularises the loss and damage as follows: Ò(a) For a period of at least 5 years following the trial the Plaintiff and RMT were denied works orders from the PWD. He or it lost the chance to compete for tenders; (b) legal fees and expenses for the trialÓ.

5 On 21 February 1995, a sequestration order was made against the estate of Mr Trkulja. By operation of s60(4) of the Bankruptcy Act, the causes of action particularised in paras 37(c) and (d) of the amended statement of claim could be continued by Mr Trkulja. These causes of action were as follows: Ò(c) the Plaintiff is a builder. The Plaintiff has suffered the odium and contempt of colleagues and customers in the building industry; (d) damages for physical inconvenience and mental distress.Ó 6 The causes of action particularised in paras 37(a) and (b) passed to the trustee in bankruptcy. 7 On or about 10 September 1997, solicitors for the State of Victoria gave notice to Mr Abeyratne requiring him to elect whether to continue the action. It was common ground on the hearing of this application that the 28-day period referred to in s 60(3), within which the trustee could make an election, expired in early October 1997 without Mr Abeyratne making such an election. 8 On 31 October 1997, Mr Abeyratne entered into a deed of assignment with Mr Trkulja whereby he assigned his rights to the action to Mr Trkulja on certain terms, including provision of an indemnity as to costs to Mr Abeyratne and a promise by Mr Trkulja to use the proceeds of the assigned action to pay any outstanding debts of his bankrupt estate. It was common ground on the hearing of this application that this assignment was ineffective to pass any rights to Mr Trkulja because, at that stage, the action had been abandoned by operation of s 60(3). 9 The State of Victoria then applied to Master Wheeler of the Supreme Court of Victoria for an order that the claim for damages particularised in para 37(a) and (b) be forever stayed. On 28 November 1997, the Master made the following orders: Ò1. The claim for damages particularised as (a) and (b) in paragraph 37 of the Amended Statement of Claim filed 10 November 1993 is forever stayed. 2. There is liberty to apply. 3. The Plaintiff pay the Secondnamed DefendantÕs costs.Ó 10 The Master made these orders because he held that the action had been abandoned by operation of s 60(3). An appeal against this decision was dismissed with costs on 12 January 1998. The costs of the application by Mr Trkulja and the appeal, both ordered to be paid by Mr Trkulja, remain to be taxed. 11 On 7 March 1998, Mr Trkulja was discharged from bankruptcy. 12 In the light of the changed circumstances, Mr Trkulja applied to Master Wheeler for a removal of the stay previously granted. On 20 April 1998, Master Wheeler refused the application with costs. Those costs also remain to be taxed. 13 On 15 September 1998, Mr Trkulja sought an adjournment of a directions hearing in the Supreme Court action, on the ground that the present application was pending in this Court. Master Kings acceded to the application but ordered Mr Trkulja to pay the costs fixed at $200. Mr Trkulja applied for, and was granted, a stay of thirty days on payment of these costs. Despite a demand to pay, dated 15 September 1998, from the State of Victoria, the costs have not been paid. 14 Mr Abeyratne gave evidence that, if the Court extended the time within which he could make the election, he would elect to continue the action and would then assign the action to Mr Trkulja. Mr Trkulja gave evidence that he would agree to the assignment on terms that he would indemnify Mr Abeyratne against any claim for costs, and would use any proceeds of the action first to pay the shortfall between the amount owing to creditors of his bankrupt estate and the amount paid to them under the trusteeship of Mr Abeyratne. I was told that this amount is in the vicinity of $100,000. 15 I will first address the question of the power of the Court to make the orders sought.

THE POWER OF THE COURT 16 In Re Faulkner; Ex parte Official Receiver (1981) 52 FLR 109, it was conceded by the Commonwealth of Australia, the defendant in the proceedings concerned, that the Court had power to extend the time for making an election under s 33(1)(c). Lockhart J said: ÒThe concession was correctly made, especially in the light of the decisions in Re Brooks (1930) 2 ABC 49 and Re Greve; Ex parte Horsburgh (1967) 10 FLR 187.Ó 17 In Re Collins; Ex parte Official Trustee in Bankruptcy v Bracher (1986) 10 FCR 209, Burchett J acknowledged the authority of Faulkner and did not question its correctness although, on his view of the case before him, no extension of time was necessary in that case. 18 Mr Masel, who appeared as counsel for the State of Victoria in the present case, argued that the Court did not have power to extend time under s 33(1)(c). He contended that the views expressed in Faulkner and Collins were called into doubt by the later decision of the Full Court in Nilant v Macchia (1997) 148 ALR 329. That case concerned s 149 of the Bankruptcy Act, which provided relevantly: Ò(1) Subject to section 149A, a bankrupt is, .... unless sooner discharged ...., discharged from bankruptcy in accordance with this section. .... (3) If the bankrupt became a bankrupt before the commencement of section 27 of the Bankruptcy Amendment Act 1991, and subsection (2) does not apply in relation to the bankrupt, the bankrupt is discharged at: (a) the end of the period of 3 years from the date on which the bankrupt filed his or her statement of affairs; or (b) the commencement of that section; whichever is the later.Ó 19 In holding that there was no power under s 33(1)(c) to abridge the time specified by s 149(3) for the period of the respondentÕs bankruptcy, the Court said, at 336-337: ÒWe do not think that the time referred to in s 149(3) of the Act is, in terms of s 33(1)(c), a Ô.... time limited by [the] Act .... for doing an act or thingÕ. That subparagraph confers power to extend or abridge any such time. It does not in our view confer power to abridge the time which parliament has provided for the automatic discharge of a bankrupt under s 149(3). In our view, it is clear that the court has power, for example, to extend the time in which the bankrupt is obliged to file his or her statement of affairs by s 54(1). That is a time limited for the doing of an act or thing. The same cannot be said of the time referred to in s 149(3). Section 149(3) limits the time at which a bankrupt is discharged by operation of that section.Ó 20 Mr Masel contended that the Court drew a distinction between a provision which limited a time for doing an act, and a provision in which parliament specified a time for the automatic happening of an event. He submitted that s 60(3) was in the latter category. 21 In Nilant, the Court said, at 337: ÒWe also agree, respectfully, with Burchett J that this situation ought to be looked at by those responsible for amending the Act. It is unlikely that parliament, in introducing the new regime now found in Pt VII of the Act, intended a statutory framework so rigid as to be unfair in particular circumstances. In our view, it would work an injustice in factual situations (such as those in Rohde and the significant number of cases which followed that decision) where there is a reasonable excuse for a bankrupt not filing his or her statement of affairs within time.Ó 22 In that passage, the Court identified a reason why the Court should be slow to adopt a construction of s 33(1)(c) which limits its operation. The section allows for a flexibility often necessary to achieve fairness in particular circumstances. In my view, the result in Nilant does not apply to s 60(3). In providing for the trustee to make an election within a specified time, the section is unlike s 149(3), which provided for an automatic happening after the specified time. Section 60(3) requires the trustee to do an act within a specified time to prevent the stipulated occurrence. Section 33(1)(c) allows the time for doing that act to be extended. In my view, the Court has power to make the orders sought.

Is the trustee able to assign? 23 Mr Masel contended that the Court should not extend the time because the assignment contemplated by Mr Abeyratne and Mr Trkulja could not be effectuated. He argued that the trustee does not have power to assign the cause of action to the person who was the bankrupt. He relied upon the decision of Wheeler J in Temsign Pty Ltd v Biscen Pty Ltd (1998) 157 ALR 83, in which her Honour held that a trustee could not assign a cause of action to a bankrupt. In this view, her Honour differed from the view expressed by French J in Re Nguyen; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320; 107 ALR 424. I need not enter into that debate because her HonourÕs decision related to an assignment during the course of the bankruptcy. The central reason for her HonourÕs conclusion was that, if a cause of action were assigned to the bankrupt, it would be after‑acquired property of the bankrupt and, by application of s 58(1)(b), would vest in the trustee as soon as it was acquired. This reasoning is applicable to an attempted assignment in the course of bankruptcy, but it is not applicable to an assignment made after discharge because property which vests in the bankrupt after discharge is not divisible among creditors (s 116(1)(a)). Her Honour recognised this factor when she distinguished Re Bankrupt Estate of Cirillo; Ex parte Official Trustee in Bankruptcy (1996) 136 ALR 607, on the following basis: ÒUnlike the present case, in CirilloÕs case the bankrupt had been discharged from bankruptcy by force of law some months prior to the date upon which he offered to purchase the rights to the choses in action which had vested in the official trustee upon bankruptcy.Ó 24 In my view, therefore, Temsign is not authority which assists the State of Victoria. In Cirillo, Branson J held that a trustee could assign a cause of action to the bankrupt after discharge where the bankrupt had commenced the action prior to bankruptcy. I agree with that conclusion. Consequently, in the present case, Mr Abeyratne is able to assign the causes of action to Mr Trkulja.

Would the assignment be futile? 25 Mr Masel then argued that it would be futile to extend the time in which Mr Abeyratne could make an election because the action was abandoned by operation of s 60(3) and the election would not cause the action to be revived. He contended that the authorities showed that an action which was abandoned came to an end, although there were differing judicial views on whether the underlying cause of action could be relied upon after abandonment. Authorities which held that the underlying cause of action could be relied upon later are Bennett v Gamgee (1877) 36 LT 48; Re Summerhayes; Ex parte Official Assignee; McGinnis and Archer (Respondents) (1890) 1 BC (NSW) 24; Re Kwok; Ex parte Rummel (1981) 61 FLR 336; Re Collins; Ex parte Official Trustee in Bankruptcy (1986) 10 FCR 209; Fitzgerald P in Theissbacher v MacGregor Garrick & Co [1993) 2 Qd R 223 and Stobbart v Mocnaj (1996) 16 WAR 318. A contrary view was expressed in Somerset v Esanda Finance Corporation Ltd (Court of Appeal, Qld, 17 June 1992, unreported) and by the majority in Theissbacher. The relevant question in the present case is what was the effect of the deemed abandonment? In Kwok, Rogerson J adverted to the issue at 343, as follows: ÒWhat effect the deemed abandonment of that action by the trustee may have had upon the bankruptÕs action if he subsequently again becomes free to prosecute it himself will depend on the order made in that action by the court in which it was brought, and not on the Bankruptcy Act.Ó 26 In the present case, the State of Victoria applied to Master Wheeler in effect to formalise the abandonment by making an order that the proceeding be forever stayed. Had this order alone been made, there may have been no scope to revive the action. But an additional order was made, giving Mr Trkulja liberty to apply. This latter order reflects the CourtÕs intention to consider circumstances which may arise which would make it just to order that the stay be lifted. In the circumstances of this case, one can understand the reason for the order giving liberty to apply. The order was made just after Mr Trkulja had taken an assignment of the cause of action from Mr Abeyratne. His desire to continue the litigation was evident, and the order seems to have left this possibility open. It is implicit in the order that the abandonment by the trustee meant that the trustee would not continue the litigation, but that the cause of action remained vested in the trustee and could be assigned to Mr Trkulja after discharge from bankruptcy. If such an assignment were made, the order seems to have contemplated that it might be appropriate for the stay to be lifted to allow Mr Trkulja to pursue the action. 27 Thus, in my view, an extension of time is not necessarily futile. The extension of time would allow Mr Abeyratne to assign the cause of action to Mr Trkulja, and would allow Mr Trkulja to apply to the Supreme Court for the lifting of the stay. If that application were granted, the action could proceed.

The circumstances leading to abandonment 28 A matter relevant to the exercise of the discretion is the reason the causes of action became abandoned by operation of s 60(3). For instance, it would conduce to injustice if an abandonment which arose by mistake was treated in the same way as an abandonment which arose by deliberate act. Mr AbeyratneÕs evidence was that, at the time he was required to elect, he did not have sufficient information to decide whether to continue the causes of action or not. As to the time limit for making an election, he said: ÒMy belief was that it didnÕt matter, that I could get an extension of timeÓ (transcript p 82). Mr Trkulja at all times wanted to proceed with the causes of action. He made this clear to Mr Abeyratne. It was as a result of this desire that Mr Abeyratne agreed to the first assignment in October 1997. It does emerge, although not with great clarity, that Mr Abeyratne did not mean to abandon the causes of action. He did not have enough information to decide to continue them and thought, probably on legal advice, that he did not have to make the decision within the time limited. These circumstances show that the abandonment of the causes of action was not intended by Mr Abeyratne. Rather, it happened as a result of an erroneous belief that the time for making the election would be extended. These circumstances, therefore, tend in favour of making the orders sought.

Policy of the Act 29 Mr Masel submitted that the Bankruptcy Act exhibited a policy that causes of action of the bankrupt which vested in the trustee should not be assigned to the bankrupt. To do so, it was contended, would expose other parties to litigation to the risk of continued suit by a person unable to meet the costs of an unsuccessful proceeding. 30 In relation to assignments of choses of action to a bankrupt during bankruptcy, French J, in Re Nguyen, rejected the existence of such a policy. He relied upon the following passage in the judgment of Willes J in Kitson v Hardwick (1872) LR 7 CP 473: ÒHaving had much experience in bankruptcy, I have seen the advantage of giving the debtor a chance of getting back the business, especially where it is one which depends upon the personal influence of skill of the individual. In many cases a higher price might be obtained from him than a stranger would be willing to give. We are bound to put the ordinary construction upon the words of the Act, unless the doing so will be manifestly inconsistent and contrary to the general scope and policy of the legislation: and, when the Act says that the trustee may sell the estate to any person, and that any person buying may sue in his own name in respect of it, I see nothing inconsistent or contrary to the policy of the Act in holding that a sale to the bankrupt himself is not even voidable.Ó 31 Any such policy has no place in relation to the assignment of causes of action to a bankrupt after discharge. The bankrupt does not carry any residual status as an ex bankrupt after discharge. Thereafter, the protection of parties to the litigation from other parties, who may not be able to pay the costs of an unsuccessful action, lies in the procedure for obtaining orders for security for costs.

Merits of the action 32 Mr Masel contended that the causes of action involved in this application were so lacking in merit that the extension of time should not be granted. I am not persuaded that the cause of action is so weak that an extension should be refused on this ground. Mr TrkuljaÕs case depends on the Court accepting his evidence of the procedures in place for payment by the Public Works Department. It is true that the face of the works orders and claims forms contradict his version. They contain certificates from him that the work had been done. But Mr Trkulja explained that his command of English in 1985-1986 was not good. It is possible that the system adopted in fact did not conform with the paperwork. In the end, whether Mr Trkulja is accepted, or whether the face of the documents prevails, will depend, in a significant degree, upon an assessment of Mr TrkuljaÕs credit. I am not in a position to make that assessment on this application. However, the fact that the documents do not support Mr TrkuljaÕs case is a factor to be taken into account in exercising the discretion. It is a factor which militates against making the orders sought.

Delay 33 The election should have been made in October 1997. The application for an extension of time was made on 19 November 1998. The State of Victoria was, however, on notice from 14 September 1998 that Mr Trkulja wanted to pursue the action. On that date, he filed an application under s 178 of the Bankruptcy Act to compel Mr Abeyratne to make an application for an extension of time within which to make an election. Thus, the relevant delay is about a year. This is a significant period, in view of the 28-day period limited for making an election. However, it must be seen in the context of an action which was commenced in July 1992 and was not completed when the sequestration order was made in February 1995. It is not suggested that Mr Trkulja was responsible for the action taking that time. Further, the State of Victoria did not require Mr Abeyratne to make an election until September 1997. There is no obvious reason why that notice could not have been served immediately after the sequestration order was made in February 1995. The State of Victoria has not led any evidence of prejudice flowing from the delay. In the absence of prejudice flowing from the delay I would not refuse the orders sought on this ground alone. However, the passing of substantial time beyond the 28 days provided is again a factor which should be taken into account and which tends against the making of the orders sought.

Outstanding costs 34 In the Supreme Court action, prior to the hearing of this application, Mr Trkulja had not paid costs of $200 of the adjournment ordered by Master Kings, although the sum was due in mid October and was, therefore, about two months overdue. Mr Trkulja said that, in the course of the hearing, he forwarded a cheque to the State of Victoria for the $200 costs. As it was not cashed by 16 December 1998, he hand delivered a bank cheque for $200 on that day and stopped payment on the previous cheque. Mr Trkulja has not paid the costs of the two applications before Master Wheeler and the appeal to Beach J. But these latter costs have not been taxed. That is not surprising, because a number of other orders for costs remain outstanding in proceedings taken by Mr Trkulja against, inter alia, the State of Victoria. For instance, on 18 September 1997, Judge Meagher ordered judgment against Mr Trkulja as a result of a jury verdict in an action for defamation which Mr Trkulja brought against the State of Victoria, arising out of events associated with the events the subject of the present claim. Judge Meagher ordered Mr Trkulja to pay costs fixed at $13,200. Mr Trkulja appealed against the decision. On 21 November 1997, the Full Court ordered that, by 2 February 1998, Mr Trkulja provide security for costs of the appeal fixed at $6,000. The security was not paid and the appeal was dismissed as a result. There are a number of other smaller orders for costs outstanding. For example, on 2 September 1997, Judge Meagher ordered Mr Trkulja to pay costs fixed at $1,000. Mr Trkulja gave evidence that he was not able to pay the outstanding costs, or any costs of the action if unsuccessful, without the assistance of others. He said that his sister would pay the costs of the State of Victoria if he lost the action in the Supreme Court of Victoria to which the present application relates. I am not satisfied from his cryptic, unparticularised and uncorroborated evidence that those costs would be met. In a letter to the solicitor for the State of Victoria dated 16 December 1998, which accompanied the bank cheque for $200, Mr Trkulja said: ÒI await the taxation of the other cost orders which were ordered to be taxed.Ó It is significant that, even after the argument put by the State of Victoria on the hearing of the application, Mr Trkulja, when addressing the question of the taxed costs, gave no indication of any arrangements for payment. If the trustee had elected to continue the action, he would have been liable for such costs. 35 Mr Hardy, who appeared as counsel for Mr Trkulja, submitted that the ability of Mr Trkulja to meet a costs order should be considered by the Supreme Court in an application for security for costs brought by the State of Victoria if it was so advised. In my view, the capacity of the proposed assignee to pay the costs of the litigation is a relevant factor in determining whether to extend time. The power to extend time is a broad discretionary power. It is unfettered and must be exercised with a view to doing justice between the parties. On the material before me, an application for security for costs would be highly likely to succeed and Mr Trkulja would not be able to provide such security. The State of Victoria would suffer the prejudice of incurring costs of the application, which costs would be unlikely to be met by Mr Trkulja if the application succeeded. Mr Hardy suggested that the Court should not refuse orders to Mr Abeyratne on the basis of the financial position of Mr Trkulja. But, in my view, it would be unreal to limit consideration to the position of Mr Abeyratne and not take into account the capacity of Mr Trkulja to pay the costs of the proceeding when the only purpose for seeking the orders is to allow Mr Abeyratne to assign the causes of action to Mr Trkulja. 36 On an application for security for costs, it is a relevant consideration that the making of an order might stifle the litigation. In my view, the same consideration is relevant in the exercise of the broad discretion in this case. It is a serious step to refuse orders when the practical result will be to prevent a party proceeding with a case which is not shown to be hopeless. Further, even if the orders are refused, the State of Victoria will still have to defend the Supreme Court action, insofar as the action relies upon the causes of action particularised in paragraphs 37 (c) and (d) of the amended statement of claim. That will involve the State of Victoria in cost. The fact that it will have this involvement in the action is a reason in favour of extending the time. However, I am satisfied that the additional causes of action for which the extension of time is sought will involve additional expense in preparation for and conduct of the trial by the State of Victoria. 37 Mr Hardy relied upon Lines v Tana [1987] VR 641, to argue that the failure of Mr Trkulja to pay costs which have not yet been taxed should not be taken into account in determining whether security for costs should be ordered. In allowing the appeal against an order for security, the Full Court dealt with the facts of the particular case before it. At 643-644, the Court said: ÒHowever, it is unnecessary and, indeed, profitless to search for and identify other circumstances in which the jurisdiction might be invoked. It is sufficient to say we are firmly of the view that neither non-payment of costs in the circumstances disclosed in this case nor delay in prosecution of the action afford the occasion for ordering security.Ó 38 In my view, the circumstances of the present case make it relevant to consider, not whether Mr Trkulja would attempt to avoid compliance with a costs order, as was the allegation in Lines, but whether the State of Victoria would be prejudiced by Mr TrkuljaÕs financial position in all the circumstances of the case.

CONCLUSION 39 Taking into account all the factors in the manner discussed and balancing them against each other, I have come to the conclusion that the application should be refused. While no one factor is determinative in refusing the extension, an important factor is that Mr Trkulja has not satisfied me that he could meet or secure the costs of the State of Victoria should he fail in the action.

I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North

Counsel for the Applicant: Mr G Hardy Solicitors for the Applicant: Abbott Stillman & Wilson Counsel for the First Respondent: Mr G Hardy Solicitor for the First Respondent: Frank N Libman

Solicitor for the Second Respondent: Victorian Government Solicitor

Date of Hearing: 30 November-2 December 1998

Date of Judgment: 18 December 1998