SBA Music Pty Ltd v Hall

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1587 of 2013

JUDGE: WIGNEY J DATE: 23 October 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 On 13 October 2014 I made an order granting SBA Music Pty Ltd (SBA) leave under s 58(3) of the Bankruptcy Act 1966 (Cth) (the Act), to the extent that such leave was required, to take fresh steps and continue with proceedings in this Court against Wayne Hall. I also granted SBA leave under s 58(3) of the Act to commence proceedings in the Family Court of Australia (Family Court) under s 79A of the Family Law Act 1975 (Cth) (Family Law Act) setting aside or varying consent orders made by the Family Court on 5 February 2014. Given the grant of leave, I made a number of ancillary orders relating to the proceedings between SBA and Mr Hall and an application for a freezing order associated with those proceedings. When making these orders I indicated that I would provide brief reasons in due course. These are my reasons.

Background 2 On 6 August 2013 SBA filed an originating process and statement of claim seeking relief against Mr Hall that included: (a) Compensation for breach by Mr Hall of fiduciary duties he owed SBA; (b) Damages or compensation for breach by Mr Hall of his contractual engagement with SBA; (c) Compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) (Corporations Act) arising from Mr Hall's breach of his statutory duties as director or officer under ss 181, 182 and 183 of the Corporations Act. (the substantive proceedings). 3 SBA subsequently amended its application and statement of claim, however the essential allegations against Mr Hall and the relief sought remained in substance the same. Mr Hall filed a defence (and an amended defence) and a cross-claim in which he claimed damages or equitable compensation from SBA for alleged breach of a consultancy agreement with SBA. Mr Hall also alleged, in the cross-claim, that SBA was in breach of another agreement related to a business venture called MyStore. 4 The essence of SBA's case in the substantive proceedings is that, whilst engaged as a senior manager in SBA's business, Mr Hall directed business opportunities away from SBA and towards himself and his own businesses. Evidence filed by SBA quantifies SBA's damages or compensation claim against Mr Hall as being in the order of $2.3 million. 5 Following numerous interlocutory skirmishes and directions hearings, the parties filed their respective evidence and the matter was listed for hearing to commence on 13 October 2014. Following a directions hearing on 4 September 2014, on 5 September 2014 I made a series of pre-trial directions relating to objections to evidence, submissions, a court book and a tender bundle. Mr Hall was represented by counsel at this directions hearing. There was no suggestion that the matter would not be ready to proceed to trial on 13 October 2014. Counsel for Mr Hall gave no hint of any issue that might imperil the trial date, such as the possible bankruptcy of Mr Hall. 6 The matter was next listed before me at short notice and ex parte on 16 September 2014. SBA was granted leave to file in court an interlocutory application and supporting affidavit. The interlocutory application sought asset preservation or freezing orders against various companies allegedly associated with Mr Hall and against Mr Hall's wife, Ms Sylvie Comeau-Hall. The time for service of the application was abridged and the application was made returnable on 19 September 2014. 7 SBA's case for freezing orders against Ms Comeau-Hall is based on the fact that in mid-2014 Mr Hall transferred his interest in two properties to Ms Comeau-Hall for no consideration. The transfers were apparently made pursuant to consent orders made by the Family Court on 5 February 2014. SBA, as a prospective creditor of Mr Hall, was given no notice of these transfers. The timing and circumstances surrounding the transfers, on SBA's case, give rise to an inference that Mr Hall carried out the transfers so as to defeat his creditors or prospective creditors. 8 On 17 September 2014 Mr Hall presented a Debtor's Petition to the Official Receiver pursuant to s 55 of the Act. When the application for freezing orders came before me for hearing on 19 September 2014, it was unclear whether the Debtor's Petition had been accepted or rejected by the Official Receiver. It is now clear that it has been accepted and that, by force of s 160 of the Act, the Official Trustee is the trustee of Mr Hall's bankrupt estate. 9 It is unnecessary, for present purposes, to detail the fate of the freezing order applications against the entities or individuals other than Ms Comeau-Hall. On 19 September 2014 SBA's application for a freezing order against Ms Comeau-Hall was adjourned to 13 October 2014. The Court was informed that Ms Comeau-Hall had given certain inter partes undertakings that were sufficient to satisfy SBA that its position was preserved up to and including 13 October 2014. 10 On 3 October 2014 SBA filed an interlocutory application seeking an order that, to the extent necessary, it be granted leave pursuant to s 58(3) of the Act to take fresh steps in, and to continue with, the substantive proceedings against Mr Hall and any interlocutory application made in those proceedings. The time for service of this interlocutory application was abridged and it was made returnable on 13 October 2014, this being the day that the hearing of the substantive proceedings was due to commence. 11 When the matter was called on for hearing on 13 October 2014, SBA moved on the interlocutory application. There was evidence that the application and supporting affidavits had been sent to both Mr Hall and the Official Trustee and that both were made aware that the application was to be heard on 13 October 2014. Neither Mr Hall nor the Official Trustee appeared. 12 Mr Hall's position in relation to the application is unknown. Despite being aware of the application, as already indicated, he did not appear. Nor did he otherwise communicate to SBA or the Court any opposition to the grant of leave. 13 Correspondence between SBA's solicitor and the Official Trustee, tendered by SBA on the application, revealed that the Official Trustee did not consent to leave being granted under s 58(3) because it is intended that a "replacement trustee" will be appointed on 29 October 2014. The Official Trustee did not, in these circumstances, wish to bind the future trustee. The Official Trustee has not, however, indicated any opposition to the grant of leave. As already indicated the Official Trustee did not appear on 13 October 2014. No submission in opposition to the grant of leave was otherwise communicated to SBA or the Court. Nor did the Official Trustee apply for an adjournment of the leave application. 14 SBA's primary position when the application came on for hearing was that leave should be granted and that the hearing of its substantive application should proceed immediately. In the alternative, SBA submitted that if the leave application was to be adjourned, leave should nevertheless be granted to the extent necessary to allow SBA to proceed with the interlocutory application for freezing orders, or to allow SBA to commence proceedings under s 79A of the Family Law Act.

Is leave required? 15 Section 58(3) of the Act provides as follows: Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor: (a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. 16 The critical issue here is whether the substantive proceedings are proceedings "in respect of a provable debt". In that respect, s 82(1) of the Act provides as follows in respect of provable debts: …all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy. 17 Section 82(2), however, excludes certain debts from the operation of s 82(1). It provides that demands in the nature of unliquidated damages "arising otherwise than by reason of a contract, promise or breach of trust" are not provable in bankruptcy. 18 SBA's claims are unquestionably in the nature of unliquidated damages. But do they arise by reason of a contract, promise or breach of trust? If so, they are provable in Mr Hall's bankruptcy and leave is required under s 58(3) of the Act. 19 It is clear that SBA's claim for damages for breach of Mr Hall's contractual engagement arises by reason of a contract or promise and therefore falls outside the s 82(2) exclusion. It is therefore a provable debt. The authorities also suggest that a claim for breach of fiduciary duty arises "by reason of a contract": Barewa Oil and Mining NL (in liq) v Isim Mineral Development Pty Ltd & Ors (1981) 38 ALR 288; affirmed on appeal in Cornelius v Barewa Oil and Mining NL (in liq) (1982) 42 ALR 83. 20 The position is less clear in relation to SBA's claim for compensation for breach by Mr Hall of his statutory duties as a director or officer. It is difficult to see how such a claim could realistically be characterised as arising by reason of a contract or promise. But could it be said that this claim arises by reason of breach of trust? 21 In Re Sharp; Ex parte Tietyens Investments Pty Ltd [1998] FCA 1367, Weinberg J said that there is a "modern tendency to give a narrow interpretation to the exclusionary aspect of s 82(2)". His Honour also noted that in the matter before him the proceedings concerned allegations of "moral turpitude and breach of fiduciary obligation" on the part of the prospective defendants and that they were therefore "allegations of "breach of trust" within the meaning of that expression in s 82(2)". However in Mercedes Holdings Pty Ltd v Waters (No 5) (2011) 10 ABC(NS) 24; [2011] FCA 1428 at [158], Perram J disagreed with this observation and expressed doubt that a breach of fiduciary duty would necessarily amount to a breach of trust. 22 There is also authority that an action for damages under s 82 of the Competition and Consumer Act 2010 (Cth) (Competition and Consumer Act) arising from a contravention of a provision of a Part IV or IVB of the Competition and Consumer Act is not a provable debt; such an action is not a demand in the nature of unliquidated damages arising by reason of a contract, promise or breach of trust: Australian Competition and Consumer Commission v Black on White Pty Ltd (2004) 138 FCR 314. To the extent that an action under s 82 of the Competition and Consumer Act is comparable to an action for compensation under s 1317H of the Corporations Act, that would suggest that the latter action is also not a provable debt. 23 Were it necessary for me to decide this issue, I would be inclined to the view that a claim for compensation under s 1317H of the Corporations Act arising from a contravention of ss 181, 182 or 183 of the Corporations Act is not a provable debt. In the context of an application under s 58(3) of the Act, however, it is unnecessary to finally resolve this issue. In Allanson v Midland Credit Ltd (1977) 16 ALR 43 (Allanson), Bowen CJ, Riley and Deane JJ said (at 49): Where a Court is given power to grant leave to perform a particular act, or pursue a particular cause of action, and the question whether the need for such leave has arisen involves difficult and complicated questions of law or fact, it is permissible in an appropriate case, to proceed on the basis that such leave is necessary rather than involve the parties in the futile exercise in determining, possibly after a series of appeals, whether the need for such leave had arisen. 24 That is the position here. Difficult questions of law and fact are no doubt involved in determining whether leave is necessarily required in respect of SBA's claim for compensation under s 1317H of the Corporations Act. In any event, it is clear that leave under s 58(3) is required in respect of SBA's claim for damages or compensation arising from Mr Hall's breach of contract of engagement and fiduciary duties. The Court will therefore proceed on the basis that other aspects of SBA's claims also require leave.

Should leave be granted? 25 The Court's discretion to grant leave under s 58(3) of the Act is unfettered. There is no fixed list of relevant considerations. Regard must, however, be given to the statutory context and the apparent purpose or policy behind s 58(3). In Re Rose; Ex parte Devaban Pty Ltd (unreported, Federal Court of Australia, Hill J, 7 October 1994) Hill J said: The obvious policy behind s 58(3) of the Act was that any proceedings in force at the time of bankruptcy should be stayed and no further proceedings should be commenced so far as they relate to the period prior to bankruptcy unless the Court gives leave. In this way the bankrupt is freed from any claims that might be made in respect to the period prior to bankruptcy and the Trustee in bankruptcy can, if the Trustee accepts the proof of debt, treat a claim against the estate like the claim of all other creditors, so that the assets of the estate are, in due course, divided pro rata among the creditors. Another reason for staying proceedings or preventing new proceedings from being commenced is to ensure that the Trustee of a bankrupt estate is not put to expense in defending proceedings which the Trustee has no money to defend. On the other hand, the Act does contemplate that the Court will, in an appropriate case, grant leave. In that respect a case would be an appropriate case where the proceedings proposed against the bankrupt are proceedings to which other parties are involved and for the proper conduct of which it may be necessary for the bankrupt to become a party. 26 A consideration relevant to the exercise of the discretion to grant leave is whether the facts and issues the subject of the relevant proceedings are sufficiently complex that it would be preferable for the facts and issues to be resolved at a hearing, rather than by the trustee considering a proof of debt. In Allanson, Bowen CJ, Riley and Deane JJ said (at 48): The facts are complex. The claim of Midland Credit is not only against Mr Allanson but against other current defendants who, in some respects, may be jointly and severally liable with him. There is also the question of the defences, some of which form the basis of the cross-claim. It would seem that all of these issues would be better and more comprehensively dealt with by a contested trial of the action in the Supreme Court than could possibly be the case if Midland Credit were required to lodge a proof of debt in respect of its claim against Mr Allanson alone. Such a proof of debt would be in the form of an affidavit and determined by the Official Receiver at such time as the stay ceased to operate. If the Official Receiver disallowed the claim in whole or in part, an appeal on this isolated issue could be brought to the Bankruptcy Court. But in these circumstances, the issues would have been determined in a less satisfactory way and questions between Mr Allanson and the other parties to the action would not be resolved. 27 The nature and state of the relevant proceedings is also likely to be a relevant consideration. Where, as here, all the evidence has been filed and the matter is effectively ready for hearing, it is difficult to see why unsecured creditors would be prejudiced if the proceedings were permitted to continue: see for example Pedersen v Delaveris [2010] FCA 536. 28 The circumstances of SBA's substantive proceedings against Mr Hall favour the grant of leave. The proceedings were commenced some considerable time ago and are now ready for hearing. The facts are undoubtedly complex. There would be no disadvantage, and indeed there would be considerable advantage, to the trustee and unsecured creditors in having the facts and issues resolved by the Court as opposed to by the trustee by way of a proof of debt. It is also relevant that neither the Official Trustee nor Mr Hall have actively opposed the grant of leave. 29 For these reasons, to the extent leave was necessary, I granted SBA leave to take fresh steps in and to continue with the substantive proceedings against Mr Hall. I should add that, even if I had been minded to adjourn the leave application, I would in any event have granted SBA leave to the extent necessary to enable it to proceed with the interlocutory application for freezing orders against Ms Comeau-Hall. Whilst I have not yet heard from Ms Comeau-Hall in relation to the application, the evidence demonstrates that there is at least an arguable case that freezing orders against Ms Comeau-Hall are warranted. The pursuit of such orders would plainly be in the interest of the unsecured creditors as a whole. It is, however, unnecessary to separately consider the grant of leave in relation to the freezing order application. The general grant of leave to pursue the substantive proceedings enables SBA to also pursue the freezing orders against Ms Comeau-Hall. 30 In all the circumstances, however, I considered that it was unnecessary and undesirable for the matter to proceed immediately to hearing. The main concern in permitting the matter to proceed immediately to hearing is that the proceedings include a cross-claim by Mr Hall against SBA. The facts, circumstances and issues involved in Mr Hall's cross-claim are inextricably intertwined with the facts, circumstances and issues in SBA's substantive claims against Mr Hall. Upon Mr Hall's bankruptcy, his interest in the cross-claim vested in the Official Trustee. The Official Trustee's position in relation to the cross-claim and whether or not he intends to pursue it remains unclear. Whilst the Official Trustee has been Mr Hall's trustee in bankruptcy since mid-September 2014, there is no indication that he has given any consideration to this issue. That may be because he intends that another trustee will in due course replace him. It may also be that he has had limited time to do consider the merits of the cross-claim. 31 If the cross-claim is to be pursued, it plainly should be pursued at the same time as SBA's substantive claims. Severance of the cross-claim, whilst possible, would not be desirable. SBA would suffer no detriment or prejudice, other than perhaps in respect of its legal costs, if the hearing of its substantive claim was deferred for a short period to enable the Official Trustee (or any "replacement" trustee) to consider whether he intends to proceed with the cross-claim. For these reasons, I decided to order that the hearing be adjourned for a short period to enable the Official Trustee to further consider the position. 32 An additional advantage in taking this course is that it permits the Official Trustee, (or any "replacement" trustee) if he considers it warranted, to file an application to set aside or vary the leave order made in his absence, or to apply for a further adjournment of the hearing of the substantive claim. If he does not do so, and the matter proceeds to hearing in his absence, it is difficult to see how he could subsequently successfully apply to set aside or vary any order made in his absence pursuant to r 30.21(2) of the Federal Court Rules 2011 (Cth). 33 Finally, SBA submitted that it should be given leave to commence proceedings in the Family Court for orders under s 79A of the Family Law Act in relation to the transfer of Mr Hall's property interest to Ms Comeau-Hall. There is authority that such an action is a legal proceeding "in respect of a provable debt" for the purposes of s 58(3)(b) of the Act: Fraser v Commissioner of Taxation (1996) 69 FCR 99; Macquarie Bank Ltd v Bardetta (2005) 216 ALR 670. SBA accordingly requires leave if it wishes to commence such a proceeding. 34 In my opinion, proceedings under s 79A of the Family Law Act are the most appropriate way for SBA to pursue its allegation that the transfers of property had the purpose and effect of defeating prospective creditors of Mr Hall. If such proceedings are commenced, interlocutory relief in the nature of freezing orders could then undoubtedly be sought from the Family Court pending its determination of the proceedings. Such orders would overtake the need for freezing orders in this Court and would be more appropriate given that the Family Court can set aside the consent order and effectively order the reversal of the property transfers. Whilst it would be open to the Official Trustee (or any replacement trustee) to commence proceedings under s 79A of the Family Law Act, if the trustee decides, for whatever reason, not to pursue such a course, SBA should be granted leave to do so. 35 For these reasons, I considered that it was appropriate to grant SBA leave to commence proceedings in the Family Court under s 79A of the Family Law Act. 36 The orders made on 13 October 2014 were as follows:

1. If and to the extent that it is necessary by reason of the provisions of s58(3) of the Bankruptcy Act 1966 (Cth), the plaintiffs be granted leave to take fresh steps in and to continue with the Federal Court of Australia proceedings number NSD1587 of 2013 (the "Proceedings"), including any interlocutory application made in the Proceedings.
2. The Trustee of the Property of Wayne Edwin Hall, a Bankrupt (the "Trustee"), be joined as a party to the Proceedings.
3. The defendant and/or the Trustee be granted leave to file any application to set aside or vary order 1 by 4.00pm on 30 October 2014.
4. This matter be listed for directions on 31 October 2014 at 9.30am.
5. This mater be listed for hearing on 25 November 2014 commencing at 10.15am.
6. Any application by the defendant or the Trustee to adjourn the hearing will need to be made by notice of motion and supporting affidavit. Any such application and supporting affidavits are to be filed and served by 4.00pm on 30 October 2014.
7. Leave be granted to the plaintiffs and the Trustee, to commence proceedings in the Family Court of Australia for orders under s79A of the Family Law Act 1975 (Cth) setting aside or varying consent orders made by the Family Court of Australia on 5 February 2014 in proceedings number SYC7141 of 2013 including any application for asset preservation orders.
8. Leave be granted to the plaintiffs to issue a subpoena returnable at 9.30am on 31 October 2014 to: (a) the legal practitioners previously acting for the defendant in these proceedings; and (b) Ms Sylvie Comeau-Hall.
9. Leave is granted to the plaintiffs to issue a Notice to Produce to the defendant returnable at 9.30am on 31 October 2014.
10. Costs of the interlocutory applications filed 16 September 2014 and 3 October 2014 and costs thrown away of the hearing which was due to commence on 13 October 2014 are reserved.
11. The asset preservation order application filed on 16 September 2014 is stood over generally with the plaintiffs being granted leave to have it relisted on short notice. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wigney.