Bankruptcy - Property divisible among creditors and vesting in trustee - order for costs subject to lien of solicitor for unpaid charges - such order subject to solicitor's lien not vesting in trustee whether made before or after commencement of bankruptcy.

Bankruptcy Actsections 58, 116, 122. In re Clark ex parte Beardmore (1894) 2 QB 393 at 410; In re Eastgate ex parte Ward (1905) 1 KB 465 at 467; Tilley v Bowman Ltd (1910) 1 KB 745 at 750; Re Crowley (1949-52) 15 ABC 19 esp at p.23 and Ex parte Patience; Makinson v The Minister [1940] NSWStRp 11; (1940) 40 SR(NSW) 96 at p.l00, applied. Worrell v Power (Full Federal Court unreported delivered 19.11.93), considered.

JUDGE1 KING CJ The facts are set out in the judgment of Bollen J. The basis of the appellant's argument that the respondent was not entitled to enforce the order for costs was the contention that the benefit of the order was after acquired property which was divisible among the creditors pursuant to s.116(1) of the Bankruptcy Act (Cth) 1966 and therefore vested in the trustee in bankruptcy pursuant to s.58. It is necessary to examine the soundness of this contention.

It is common ground that the order for costs was made in litigation in which the respondent was represented by solicitors and that he is indebted to the solicitors for their costs in connection with the litigation. It is not contended that the costs recoverable under the order exceed the amount presently due to the solicitors.

It is well established that a solicitor has an equitable right, often referred to as a lien, entitling him to be paid his costs out of monies recovered by his exertions. Where an order for costs has been made in favour of the client, the equitable right or lien exists in respect of the proceeds of the order; Worrell v Power (Full Federal Court; unreported judgment delivered 19.11.93). The nature of the right or lien is explained in the judgment of Jordan CJ in Ex Parte Patience; Makinson v The Minister [1940] NSWStRp 11; (1940) 40 SR (NSW) 96 at p 100 as follows: "A solicitor has no lien for his costs over any property which has not come into his possession. If, however, as the result of legal proceedings in which the solicitor has acted for the client, the client obtains a judgment or award or compromise for the payment of money, although the solicitor acquires no common law title to his client's right to receive the money or to any part of that right, he acquires a right to have his costs paid out of the money, which is analogous to the right which would be created by an equitable assignment of a corresponding part of the money by the client to the solicitor. That is to say, the solicitor has an equitable right to be paid his costs out of the money; and if he gives notice of his right to the person who is liable to pay it, only the solicitor and not the client can give a good discharge to that person for an amount of the money equivalent to the solicitor's costs: Welsh v. Hole 1 Doug. 238. If the person liable to pay refuses after notice, to pay the costs of the solicitor, the solicitor may obtain a rule of Court directing that the amount of his costs be paid to him and not to the client; and payment by the judgment debtor to the client after notice of the solicitor's claim is no answer to an application for such a rule: Read v. Dupper [1795] EngR 4137; 6 TR 361; Ormerod v. Tate [1801] EngR 256; 1 East 464; Ross v. Buxton 42 ChD 190. Further, if the client and a judgment debtor make a collusive arrangement for the purpose of defeating the solicitor's right, the Court will enforce that right against the judgment debtor notwithstanding the arrangement and notwithstanding that no notice of the solicitor's claim had been given to the judgment debtor prior to the arrangement."

The benefit of a judicial order for costs is undoubtedly after acquired property. The trustee, however, can only take that to which the bankrupt is entitled. "The broad and general principle is that the trustee in bankruptcy takes only the property of the bankrupt, and takes it subject to all the liabilities and equities which affect it in the bankrupt's hands ..."; In re Clark ex parte Beardmore (1894) 2 QB 393 per Davey LJ at p 410. The trustee acquires the property of the bankrupt subject to the rights of third parties; In re Eastgate ex parte Ward (1905) 1 KB 465 esp at p 467; Tilley v Bowman Ltd (1910) 1 KB 745 esp at p 750; Re Crowley (1949-52) 15 ABC 19 esp at p 23.

It is clear from Ex parte Patience; Makinson v The Minister supra and Worrell v Power supra that the solicitor's lien comes into existence when the order for costs is made. Worrell v Power was a case in which the order for costs was made prior to the commencement of the bankruptcy and there was considerable emphasis on that point in the judgment. I consider, however, that that is not a material distinction between that case and the present case. The lien comes into existence concurrently with the making of the order for costs. The trustee can take the benefit of the order only subject to the lien. The lien arises by operation of law so there is no preference under s.122. As the unpaid Bill of Costs of the solicitors is not less than the amount of costs recoverable under the order for costs the lien of the solicitors is co-extensive with the order for costs. The bankrupt therefore has no interest in the order for costs. There is therefore no property arising out of the order for costs which is divisible among the creditors and vests in the trustee.

In my opinion the benefit of the order for costs did not vest in the trustee. The bankrupt respondent is entitled to enforce the order for costs and the solicitors have a lien on any proceeds for the payment of their costs.

If I had been of opinion that the benefit of the order vested in the trustee, I would nevertheless have upheld the right of the respondent to enforce the order, in the absence of any intervention by the trustee, for the reasons given by Bollen J.

JUDGE2 BOLLEN J This appeal raises the question whether the respondent may in the circumstances enforce an order for costs made in his favour in an action in a Magistrates Court which order was made after the respondent became bankrupt. Has the respondent standing to enforce that order or does the trustee in bankruptcy alone have that standing?

The appellant instituted the action in which the order for costs was made. He sued the respondent in the Magistrates Court of Whyalla. The appellant claims the sum of $5,323.17. The respondent contested the action. The action was heard on 5th December 1986. The magistrate reserved judgment. On 27th day of January 1987 the respondent "became a bankrupt" (the expression used in the certificate dated 22nd September 1992 issued by the Deputy Registrar in Bankruptcy). The same certificate certifies that the respondent was discharged on 28th January 1992.

On 6th February 1987 the magistrate in the Magistrates Court of Whyalla delivered judgment. He dismissed the claim made by the appellant against the respondent. He ordered that the appellant pay the respondent's costs of the action.

Costs were taxed. An allocatur in the sum of $1,620.05 was signed on 15th April 1992.

The trustee in bankruptcy has refused to take any step to enforce the order for costs. The respondent wishes to enforce the order. The respondent has made it known that he contends that he is entitled to enforce the order. The appellant, therefore, applied to the Magistrates Court sitting at Whyalla for a stay of any enforcement of the order. On 14th October 2 1992 Mr Kleinig SM heard argument on this application. He dismissed the application and made other orders.

An application for leave to appeal against that dismissal was made to Perry J. On 29th January 1993 Perry J granted an extension of time within which to make that application but refused leave to appeal. The appellant applied to the Full Court for leave to appeal against the dismissal ordered by Perry J. The Full Court granted leave on 8th July 1993.

The matter comes before us as an appeal from the refusal of Perry J to grant leave to appeal. But it is really an appeal which raises the question which I mentioned at the beginning of these reasons. No Court has in terms held that the respondent may not enforce the order for costs pronounced in his favour in 1987. A magistrate has refused a stay. Perry J has dismissed an appeal from that refusal. On the face of the documents in the Local Court it would seem that the respondent may enforce the order for costs against the appellant. He is a litigant with an order for costs in his favour. Hence the appeal by the appellant. The appellant asks this Court to say, as a matter of law, that the respondent may not enforce the order for costs, that he has no standing to attempt so to do.

The appellant accepts that the judgment pronounced and the consequential orders made in the Local Court at Whyalla on 6th February 1987 are valid and binding even though they were pronounced and made after the respondent became bankrupt. The submissions of the appellant, as appears in part of the Outline of Mr Bryant, for the appellant, are:- "3. The benefit of the order for costs granted in favour of the respondent was after acquired property within the meaning of s116(1)(a) of the Bankruptcy Act 1966.

4. The nature of the interest created by the order for costs does not fall within the meaning of any of the placita of s116(2) of the Act such as to exclude the interest from being after acquired property divisible among the creditors of the bankrupt within the meaning of s116(1) of the Bankruptcy Act 1966.

5. After acquired property subject to the bankruptcy vests in the Official Trustee as the trustee in bankruptcy -

6. The discharge of the bankrupt does not serve to revest the property from the Official Trustee

• see Pegler v Dale [1900] ArgusLawRp 24; (1975) 6 ALR 62; Daemar v Industrial Commission of New South Wales (No.2) (1990) 99 ALR 798.

7. Accordingly, at all material times including following the discharge from bankruptcy of the respondent the interest in enforcing the order for costs made in favour of the respondent against the appellant remained vested in the Official Trustee and did not revert to the respondent."

Mr Bryant submitted that the order for costs, (a chose in action) is after-acquired property. If that is correct one would have expected the trustee in bankruptcy to have sought to enforce that order during the term of the bankruptcy. The trustee refused to do so.

Now, of course, the respondent is discharged. I do not wish to offer any disagreement to the views of Needham J in Peglar v Dale [1900] ArgusLawRp 24; (1974-5( 6 ALR 62 nor of the Court of Appeal (NSW) in Daemar v Industrial Commission of NSW (No.2) (1990) 99 ALR 789. The Court of Appeal was faced with competing authority about the title after discharge of the bankrupt to property vested in the trustee during bankruptcy. The Court of Appeal adopted the views and reasoning of Needham J and held that such property remained vested in the trustee after discharge. Thus far, then, it would seem there is a strong possibility that the respondent cannot enforce the order.

As I have said, the order for payments of costs in his favour was made after the respondent had become bankrupt. I think that the right to costs was after-acquired property. I notice that the trustee does not seem to agree. In a letter to solicitors for the appellant the trustee said:- "Even if the bankrupt had successfully defended the action and judgment had been obtained in his favour prior to bankruptcy the costs awarded would not have been considered as divisible property and the trustee would not have attempted to recover them by virtue of subsection 116(2)(a) of the Bankruptcy Act, 1966. I consider that the right to recover costs from the plaintiff in a judgment given prior to the bankruptcy should be treated as the right to recover monies to be held in trust for the legal representation which obtained the dismissal."

And

"I reiterate that I do not consider the chose in action in
respect of execution of the judgment order obtained
subsequent

to bankruptcy vests in the trustee pursuant to Section 58 of the Bankruptcy Act, 1966."

If the trustee is correct the respondent may enforce the order for costs. I consider the matter on the assumption that the order for costs is after-acquired property divisible amongst creditors. That was rather assumed at the hearing.

The respondent is faced with the difficulty which I have mentioned and with the refusal of the trustee to act.

The appellant takes the stand that no one can now compel him to pay the costs which he has been ordered to pay to the respondent. The respondent submits, as I have said, that he must be entitled in the circumstances to enforce the order for costs himself. It certainly does not seem right that the appellant should escape payment.

The bankrupt or discharged bankrupt, in some cases, may take steps to enforce rights relating to after-acquired property. This appears in particular from the case upon which I most rely. That is the decision of Bowen CJ in Eq (as he then was) in Thistlethwayte v Gender Estate Pty Ltd (1975-6) 8 ALR 700. I rely, too, on the cases which His Honour has examined and cited. I set out much of the reasoning of Bowen CJ in Eq which includes excerpts from the reasons of various English judges. Bowen CJ in Eq said (at pp703-704):- "The effect of such provisions has been variously described in the cases. Perhaps the best account in England was given in Re Pascoe (1944) 1 All ER 218; (1944) 1 Ch 219. As Lord Greene MR (All ER at 285; Ch at 227 - citing Lord Cozens-Hardy MR in Hill v Settle (1917) 1 Ch 319 at 324) there pointed out: 'Then, by a long series of authorities which it is quite impossible, I think, for this court, or any court, to review, it was held that that vesting could not be regarded as operating in the strict and full sense of the term. As long as the trustee did not intervene, the bankrupt himself had power to enter into transactions for value with persons dealing with him bona fide in relation to his after-acquired property. That is dealt with in so many cases that I do not think it is necessary for me to refer to any more than Cohen v Mitchell (1890) 25 QBD 262.' At p285 (All ER); p228 (Ch) his Lordship comments: 'It is to be noticed that the thing which is valid is the transaction, and to validate a transaction by an undischarged bankrupt comes nowhere near saying that the title to after-acquired

His Lordship went on to point out that the observations of Lawrence J in Dyster v Randall and Sons (1926) 1 Ch 932 at 939; (1926) All ER Rep 151 at 155, where he spoke of after-acquired property remaining in the bankrupt until the trustee intervened should not be interpreted in a sense inconsistent with these remarks. He did not suggest that Dyster v Randall and Sons where a bankrupt was held to be entitled, in the absence of intervention by the trustee, to sue for specific performance of a contract entered into after the bankruptcy, was wrongly decided.

It seems that unless and until the official receiver intervenes, a bankrupt, whether it be correct or not to describe him as a factor or agent for the official receiver;

has power to deal with after-acquired property and to bring proceedings in respect of it, notwith- standing it is vested

in the official receiver. If in 6 the course of proceedings by the bankrupt the official receiver does intervene, the bankrupt's proceedings may be brought to nothing (Montgomery v Scott (1907) 24 WN (NSW) 160).

In the present case the proceedings are for the dissolution and winding up of a partnership entered into after bankruptcy and for the taking of accounts. Can such an action be maintained by a bankrupt, in the absence of intervention by the official receiver? The cases I have discussed would suggest that it can. Indeed, in Buchan v Hill (1888) WN (Eng) 233, North J had to consider a claim for accounts brought by a bankrupt in respect of two partnership agreements between himself and three defendants entered into since the date of his bankruptcy. The brief report records: 'North J held that the plaintiff could sue without his trustee unless the trustee intervened, and in the absence of any suggestion that the trustee was the real plaintiff, he would not be required to give security for costs.'

In view of the attitude which the court takes regarding the possibility of multiplicity of proceedings, the question of estoppel raised in relation to the official receiver is not without importance. However, having regard to the fact that the official receiver is not represented and would not be

bound by a decision on this question, and having regard to the cases I have mentioned and the conclusion at which I have arrived, I do not think I should deal with this question.

I conclude that in the absence of intervention by the official receiver the plaintiff is entitled to prosecute these proceedings."

Here there has been no intervention by the trustee. I think on the authority of the reasoning of Bowen CJ in Eq, and of that of the other Judges whom he mentioned that the respondent may enforce his order for costs in this case.

The learned authors of Australian Bankruptcy Law and Practice (McDonald, Henry and Meek) 5th ed at p333 paragraph 727 say:- "Bankrupt's right to sue. It should be noted that, subject to the right of the trustee to intervene (Montgomery v Scott (1907) 24 WN (NSW) 160) an undischarged bankrupt can maintain any action in relation to after-acquired property, and can sue on any contract made with him after bankruptcy: Dyster v Randall and Sons, supra, at pp939, 940; Herbert v Sayer [1844] EngR 27; (1844) 5 QB 965; Jameson v Brick and Stone Co Ltd (1878) 4 QBD 208 (CA); Bailey v Thurston and Co Ltd (1903) 1 KB 137; Thistlethwayte v Gender Estates Pty Ltd (1976) 8 ALR 700; Gough v Fraser (1977) 1 NZLR 280. See s116 and notes thereto, (613)."

On the whole I think that the cases to which the learned authors refer support the reasoning of Bowen CJ in Eq. The old English cases there cited were, of course, decided under the English legislation then in force. But they do seem to support the proposition of the authors. The case of Herbert v Sayer [1844] EngR 27; (114 ER 1512; 5 QB 565) decided that a bankrupt may sue in respect of after-required property in some circumstances. The case was much concerned with points of pleading. But the case was treated as authoritative on the issue of "right to sue" by the Court of Appeal in Jameson and Co v The Brick and Stone Co Ltd (1878-9) 4 QB 208. At p210 appears the following splendid judgment:- "Bramwell LJ: 'This case is concluded by authority. Herbert v Sayer is expressly in point. If the trustee does not interfere the bankrupts can sue. The law which existed at the time Herbert v Sayer was decided exists now. The appeal must be dismissed.' Brett and Cotton LJJ concurred."

Perhaps Bailey v Thurston and Co Ltd (1903) 1 KB 137 is a little different to our case. It deals with an action for damages not with a money count. The Court of Appeal held that an undischarged bankrupt could maintain an action for damages for wrongful dismissal occurring after the commencement of his bankruptcy. The trustee in bankruptcy had taken no action. My reading of the reasons of the court lead me to say that I, unlike the learned authors of the text book, do not rely on this case.

The case of Gough v Fraser (1977) 1 NZLR 279 in the Court of Appeal of New Zealand is, in my opinion, consistent with the reasoning of Bowen CJ in Eq in Thistlethwayte v Gender Estates.

I do not think that there is any significant difference between the legislation then in force in New Zealand, that in force at the time when Bowen CJ in Eq spoke, and that in force now. In Gough v Fraser at p283 et seq Richmond P said:- "It remains to refer to certain submissions advanced by Mr Robinson relating to Mr Gough's bankruptcy. In the Supreme Court, White J found as a fact that it had not been established that either the 1960 agreement or the acknowledgement signed in 1964 were executed with the intention of defeating the bankruptcy laws. Mr Robinson submitted that this finding by the learned judge was contrary to the evidence and that we should take an opposite view. For myself, I see no grounds on which this court could properly arrive at a different conclusion from the trial judge.

The second submission is the one to which I referred earlier in this judgment, namely, that because of his bankruptcy Mr Gough had no capacity to counterclaim seeking various forms of relief in relation to the Kaitoke property. It is, of course, common ground that Mr Gough's interest in that property was acquired by him after his bankruptcy and before his discharge. Mr Robinson contends that the effect of s61(a) of the Bankruptcy Act 1908 (now reproduced in substantially the same form as s42(2)(a) of the Insolvency Act 1967) was to vest in the Official Assignee all property rights, including any right of action in respect thereof, acquired by Mr Gough in the Kaitoke property or in relation to income arising from that property. In Mr Robinson's submission the result is that Miss Fraser is able to set up, as a defence to the counterclaim, a lack of title in Mr Gough. The statutory provisions to which I have referred vest in the Official Assignee property belonging to or vested in a bankrupt at the commencement of his bankruptcy and also property '...acquired by or devolving upon him before his discharge'. It should be noted that s61(b) of the Bankruptcy Act 1908 also vests in the Official Assignee: 'The capacity to exercise and to take proceedings for exercising all such powers in or over or in respect of property as might have been exercised by the bankrupt for

his own benefit at the commencement of the bankruptcy or before his discharge.'

Similar provision is now made by s42(2)(b) of the Insolvency Act 1967. Finally, s67 of the Bankruptcy Act 1908 provided as follows: 'After adjudication neither the bankrupt nor any person claiming through or under him shall have power to recover any property, or to make any release or discharge thereof, nor shall the same be attached for any debt of the bankrupt by any person, and the Assignee for the time being shall have the like remedy to recover the same in his official name as the bankrupt himself might have had if he had not been adjudicated a bankrupt.'

The corresponding provision of the Insolvency Act 1967 is s44(a) which is as follows: 'Subject to the provisions of section 49 of this Act, after adjudication - (a) Neither a bankrupt nor any person (other than the Assignee) claiming through or under him shall have power to recover any property forming part of the bankrupt's estate or to make any release or discharge thereof.'

Although the point raised by Mr Robinson does not appeal to have been considered in this court it was considered as long ago as 1908 by Cooper J in Hutchison v Benge [1908] NZGazLawRp 102; (1908) 27 NZLR 1060. At that time s63(1) of the Bankruptcy Act 1892 provided for after-acquired property passing to the assignee. Section 69 of the same Act corresponded to s67 of the Act of 1908. In his judgment Cooper J traced in some detail the history of the relevant sections both in this country and in England. He pointed out that at the time when Herbert v Sayer [1844] EngR 27; (1844) 5 QB 965; 114 All ER 1512 was decided legislation was in force which not only vested after-acquired property in the assignees but also that the statute 6 Geo IV, c 16 (1825) (UK), contained a provision, s63, similar to s69 of the New Zealand Bankruptcy Act 1892. This latter provision disappeared from the English legislation when the Bankruptcy Act 1869 (UK) came into

operation but that Act contained a provision, s15(4), similar to s61(b) of the New Zealand Act of 1908 (which re-enacted s63(2) of the Act of 1892). Cooper J came to the conclusion that in those circumstances the principle laid down in Herbert v Sayer was applicable in New Zealand. For present purposes it may be said that Herbert v Sayer recognised that, so far as after-acquired property is concerned, the legislation should be interpreted as giving to the assignees the beneficial interest but leaving the bankrupt in a position to sue in respect of after-acquired property unless the assignee elected to 'disaffirm his action'. Cooper J pointed out that Herbert v Sayer was expressly approved by the Court of Appeal in Cohen v Mitchell (1890) 25 QBD 262 except that in that case it was said that the judgment in Herbert v Sayer, when it spoke of the assignee being able to 'disaffirm' the act of a bankrupt, meant that the assignee might 'intervene' and that until such intervention the bankrupt had the right to sue. It should be noted that when Cohen v Mitchell was decided the change in the English legislation which I have already mentioned had taken place. The Court of Appeal evidently did not regard the introduction into the English legislation of provisions corresponding with s61b) of the New Zealand Act of 1908 as altering the position in any way.

The decision in Hutchison v Benge was later followed by Reed J in Buckland and Sons ltd v Marshall (1925) GLR 275. That learned judge (at p276) distinguished the position in regard to after-acquired property from that in regard to property vested in the bankrupt at the time of his bankruptcy and referred to his own earlier decision in Timmings v Treadgold

[1922] NZGazLawRp 71; (1923) NZLR 73.

For my own part, I respectfully agree with the reasoning of Cooper J in Hutchinson v Benge, and am of opinion that both under the Bankruptcy Act 1908 and under the Insolvency Act 1967 the law still is as stated by him, namely, that a bankrupt is competent to sue in respect of after-acquired property unless and until the Official Assignee intervenes.

I have reached the foregoing conclusion notwithstanding the reliance placed by Mr Robinson on the decision of the English Court of Appeal in the case of Re Pascoe (1944) Ch 219; (1944) All ER 281. It seems quite clear from the way in which Lord Greene MR referred to Cohen v Mitchell and summarised the effect of that case and earlier cases which had been referred to in argument that he was in no way questioning the rule that a bankrupt could sue in respect of after-acquired property unless the trustee intervened. The question for decision in Re Pascoe related to the ownership of a sum of money as between the bankrupt and his trustee in bankruptcy. It did not involve any question of the right of a bankrupt to sue for after-acquired property."

There is, then, support for the reasoning of Bowen CJ in Eq in Thistlethwayte v Gender Estate. That reasoning seems, with respect, to me to be perfectly correct. I rely on it.

The learned authors of the text book to which I have referred appear to put a primary right on the bankrupt to proceed unless the trustee acts. I am not sure that I quite agree with that nor that it is consistent with the way in which Bowen CJ in Eq puts it. But that does not matter. I think the respondent may enforce the order for costs in his favour here. I think that on the success of enforcement he may pay his solicitors the amount of the allocatur or reimburse himself if he has paid them. I think that the refusal of a stay and any other incidental order made by Mr Kleinig SM should be confirmed. The appeal should be dismissed and the order of Mr Kleinig SM confirmed.

Since writing these reasons I have read the reasons of the Chief Justice. I agree with those reasons. I, therefore, offer two paths to holding that the bankrupt respondent may enforce the order for costs.

JUDGE3 MULLIGHAN J I agree that the appeal should be dismissed and I agree with the reasons given by the Chief Justice.