Taylor v Rudaks

INTRODUCTION 1 The principal issue in this proceeding is whether the liability of a director under s 588M(2) of the Corporations Act 2001 (Cth) (the Corporations Act) for insolvent trading is provable in the bankruptcy of the director under s 82(1) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). It arises because a trustee of the bankrupt estates of directors of a company in liquidation rejected proofs of debt of the liquidator of the company based upon the directors having allowed the company to trade while insolvent. The liquidator seeks review of the trustee's decision under s 104(1) of the Bankruptcy Act. 2 Section 588M of the Corporations Act is the present legislative expression of the circumstances in which the liquidator of an insolvent company may recover, from a director of that company, losses incurred by creditors during a period of insolvent trading. Section 588M(2) says that the liquidator may recover "an amount equal to the loss and damage" from the director "as a debt due to the company". The "loss and damage" refers back to s 588M(1)(b) and is the loss and damage of a creditor because of the company's insolvency. Previous provisions regulating directors' liability for insolvent trading, particularly s 556 of the Companies Act 1981 (Cth) (the Code) and until the commencement of Part 5.7B of the Corporations Act 1989 (Cth) (the Corporations Law) s 592, were expressed somewhat differently.

FACTS 3 There is no dispute about the relevant facts. 4 DPS Technology Pty Ltd (the Company) was a precision engineering and tool making business. The directors of the company are Pompeo and Susan Feleppa (the directors). The Company went into liquidation on 15 April 2004. Austin Taylor was the appointed liquidator (the Liquidator). The directors declared themselves bankrupt on 22 June 2004. Maris Rudaks (the Trustee) is the trustee of the separate estates of the directors of the Company as well as of their joint estate in bankruptcy. 5 The Liquidator lodged proofs of debt on behalf of the Company with the Trustee on 28 October 2004 in the joint and individual estates of the directors. Each proof of debt claims an amount of $961,760.91 owing to the Company by the directors for debts incurred by it between 1 October 2001 and 20 August 2003 when it was trading while insolvent. The amount claimed in the proofs encompasses demands upon the company from trade creditors, from the Australian Taxation Office (including BAS payments and general interest charges on those debts and superannuation guarantee charges) and by Revenue SA and by the WorkCover Corporation. The amounts relating to trade creditors, as indicated in the Liquidator's Insolvency Report, include the supply of trade materials to the Company. Those debts of the Company remain unpaid. They are unsecured. At the present time there has been no action commenced under s 588G of the Corporations Act against the Directors for insolvent trading. 6 The proofs of debt were formally rejected by the Trustee on 31 January 2007. 7 There is an additional issue arising from the fact that the Liquidator's proofs of debt are based in part upon liabilities of the Company to the Australian Taxation Office. The Australian Taxation Office has separately lodged proofs of debt against the individual estates of the directors. The Trustee in Bankruptcy has admitted each of them. Such proofs include late payment tax and interest charged on unpaid income tax at the end of the 2002 financial year in the case of Pompeo Fileppa and debts owing from directors penalties imposed under the Income Tax (Assessment) Act 1936 (Cth) (the ITAA) in 2001-2002 in the case of each of the directors. The Australian Taxation Office has also separately lodged proofs of debt in the liquidation of the Company in respect of unpaid PAYG, superannuation and BAS liabilities debts from 2000 to 2004. The parties agreed that the Australian Taxation Office had been invited to lodge a joint debt application with the Liquidator, and had been notified and invited to participate in these proceedings. It is unclear the extent to which, if at all, the accepted proof of debt from the Australian Taxation Office overlap with the liquidator's proof of debt.

LEGISLATION 8 Section 588M of the Corporations Act provides: (1) This section applies where: (a) a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and (b) the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up; whether or not: (e) the director has been convicted of an offence in relation to the contravention; or (f) a civil penalty order has been made against the director in relation to the contravention. (2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage. (3) The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage. (4) Proceedings under this section may only be begun within 6 years after the beginning of the winding up. 9 As the application of s 588M is predicated upon a contravention of s 588G(2), it is convenient to set out the parts of s 588G relevant to the present issue. They are: (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that the time is at or after the commencement of this Act. (1A) … (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. … 10 This matter has proceeded on the basis that the Company incurred certain debts upon which the Liquidator's proofs of debt are based at a time when the directors were directors of the Company (although the Trustee has presently been unable to reconcile the proofs of debt with the other records available to him), and that the Company was insolvent at the time those debts were incurred, and that at the time those debts were incurred there were reasonable grounds for suspecting that the Company was insolvent. In short, the Trustee has not put in issue that s 588G(1) applied at the time those debts were incurred by the Company. The Trustee also has not put in issue that the Directors contravened s 588G by failing to prevent the Company from incurring those debts, because one of ss 588G(2)(a) or 588G(2)(b) applies. Section 588H of the Corporations Act makes available to the Directors certain defences to a contravention of s 588G, but the Trustee has not sought to enliven any of those defences. 11 The real issue is whether the liability under s 588M(2) falls within provable debts as described in s 82(1) of the Bankruptcy Act or is excluded by s 82(2). 12 Section 82 of the Bankruptcy Act is in the following terms: (1) Subject to this Division, 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. (1A) Without limiting subsection (1), debts referred to in that subsection include a debt consisting of all or part of a sum that became payable by the bankrupt under a maintenance agreement or maintenance order before the date of the bankruptcy. (2) 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. … (6) If the Court finds that the value of the debt or liability cannot be fairly estimated, the debt or liability shall be deemed not to be provable in the bankruptcy. …. (8) In this section, liabilityincludes: (a) compensation for work or labour done; (b) an obligation or possible obligation to pay money or money's worth on the breach of an express of implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and (c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is: (i) in respect of amount - fixed or unliquidated; (ii) in respect of time - present or future, or certain or dependent on a contingency; or (iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion.

THE CONTENTIONS 13 The Liquidator argues that his proofs of debt should be characterised as being a statutory claim arising under s 588M(2) of the Corporations Act, capable of being admitted to proof under s 82(1) of the Bankruptcy Act. The Trustee argues that they are excluded by s 82(2) of the Bankruptcy Act as being unliquidated claims for damages which did not arise by reason of a contract, promise or breach of trust. Accordingly, the argument concerns the character of the liquidator's claims under s 588M(2) of the Corporations Act. 14 The parties referred the Court to various authorities considering s 556 of the Code and the former s 592 of the Corporations Law. Both parties agreed that there is no decided authority directly determining the question, even though relevantly ss 588G and 588M in their present terms have been on the statute books since 1992. 15 If the Liquidator's proofs of debt are admissible in the bankrupt estates of the directors, there are subsidiary issues of whether the proofs of debt are admissible only in the joint bankrupt estate, and as to whether the amount of the Liquidator's proofs of debt should be reduced having regard to the proofs of debt lodged by the Australian Taxation Office with the Trustee, so as not to result in a situation of double proof of the same debt or "double dipping" in the bankrupt estates of the directors.

CONSIDERATION 16 For present purposes, the most significant feature of s 588M of the Corporations Act is the requirement in s 588M(1)(b) that the creditor has "suffered loss or damage in relation to the debt because of the company's insolvency". The Liquidator under s 588M(2) is then empowered to recover from the director as a debt due to the company an amount equal to that loss or damage suffered by the creditor. 17 By way of contrast, the ancestors of s 588M found in s 556 of the Code and in the former s 592 of the Corporations Law rendered a director liable to a company for the payment of a debt incurred by the company when, in circumstances where it applied, the debt was incurred when the company was insolvent. There was no refinement of their application by reference to the loss and damage which the creditor had incurred. The terms of s 556 of the Code illustrate the point. Section 556(1) appeared in the following form: (1) If - (a) a company incurs a debt, whether within or outside the territory; (b) immediately before the time when the debt is incurred - (i) there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or (ii) there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and (c) the company is, at the time when the debt is incurred, or becomes at a later time, a company to which this section applies, any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred is guilty of an offence and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt. Penalty: $5,000 or imprisonment for 1 year, or both ….. (Emphasis added) 18 Under s 556 of the Code, and under the former s 592 of the Corporations Law (which is relevantly in the same terms as s 556 of the Code), it is clear that the liability of a director for insolvent trading could be proved by a creditor as a debt in the bankruptcy of the director: see e.g. Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19; Vale v TMH Haulage Pty Ltd (1993) 31 NSWLR 702; CCA Systems Pty Ltd v Communications & Peripherals (Australia) Pty Ltd (1989) 15 ACLR 720 at 728 - 729. In Handby 21 FCR 19, the Full Court (Morling Beaumont and Burchett JJ) concluded that s 556(1) of the Code rendered the company and the director (in the circumstances prescribed) jointly and severally liable for the debt. Their Honours observed at 24 - 25 that s 82(1) of the Bankruptcy Act and its precursors have been generously construed, and that there was no reason why it should not encompass debts or liabilities arising under statute. They then concluded at 26 - 27 that the statutory liability created by s 556(1) of the Code is for "the payment of the debt incurred by the company" (the Full Court's emphasis), and is a liability for a nominated debt which was not a demand in the nature of a demand for unliquidated damages but a claim for money under a statute.

19 The wording of s 588M(2) is clearly different from the section then under consideration. The present issue requires consideration of its terms. And, as the present contentions demonstrate, its terms are capable of supporting alternative constructions, which would produce a different effect in the application of s 82(2) of the Bankruptcy Act. The issue therefore invites consideration of the policy underlying ss 588G and 588M. 20 As noted above, ss 588G and 588M were introduced by s 111 of the Corporate Law Reform Act 1992 (Cth). It amended the Corporations Law by introducing Part 5.7B, entitled Recovering Property or Compensation for the Benefit of Creditors of Insolvent Company, including Division 4 called "Director liable to compensate company" containing ss 588J-588U. Subsequent extensive amendments to the Corporations Law did not materially change the terms of ss 588G or 588M. No submission was put to the contrary, so it is not necessary to specifically note the amendments to ss 588G or 588M up to the enactment of the Corporations Act or by that Act. 21 As is well known, the Corporations Act followed the decisions of the High Court in Re Wakim; Ex parte McNally (1999) 198 CLR 511; and Bond v R (2000) 169 ALR 607 and R v Hughes (2000) 171 ALR 155. The States referred power to the Commonwealth so as to enable it to enact the Corporations Act under s 51(xxxvii) of the Constitution. The Corporations Act then largely re-enacted the previous Corporations Law as a single Commonwealth law. Obviously, there are some differences, but none relevant to the present issue. As the terms of ss 588G and 588M were not materially altered when carried forward into the Corporations Act, it is not surprising that there are no observations in the parliamentary materials surrounding the enactment of the Corporations Act which enlighten the legislative intention in relation to those sections, or indeed of Div 4 of Pt 5.7B of the Corporations Act in which they stand. 22 The Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) at p 217 refers generally to the purpose of what then became Div 4 of Pt 5.7B of the Corporations Law. The recovery of "compensation" by the liquidator from a director in breach of s 588G is clearly for the benefit of the unsecured creditors. That reflects the view of the Harmer Report (Report of The Law Reform Commission, Report No 45, General Insolvency Inquiry, AGPS Canberra 1988) that amounts recovered from directors be available to unsecured creditors generally, as they normally suffer greatest loss as a consequence of a corporation's insolvent trading. 23 The Harmer Report and the Discussion Paper of The Law Reform Commission (Discussion Paper 32, August 1987) explain generally the rationale of what became Pt 5.7B of the Corporations Law. It was to impose a positive duty upon a director owed to the company to prevent the company from engaging in insolvent trading. Thus, it was intended to produce a legislative structure which enables all creditors to share equally in the sums recovered, so as to promote the principle of equality. The reason for the change from a focus upon a creditor recovering a debt to the liquidator recovering loss and damage suffered by a creditor in relation to a debt is set out in pars 200 and 201 of the Discussion Paper and in the legislative proposals then put forward. It is relevantly summarised in par 202 of the Discussion Paper as being that the amount of the liability is to be determined by the Court and measured by reference to the loss and damage sustained by the creditors, and the sum recovered should then be applied for the benefit of all the unsecured creditors. Paragraph 213 then provides that the Court has … a very broad power to give judgment in favour of the company in such amount as is just having regard to the interests of the creditors. This is to ensure that the damages recovered do not simply reflect some nominal damage to the company. The damage suffered by creditors is the relevant measure. This is consistent with Kinsela's case. It is not sufficient simply to provide that the measure of damages should be an amount equal to the sum of the unpaid debts which were incurred during the period of insolvent trading. Where debts are incurred, the company usually obtains some benefit. … The amount for which a director who is found to have breached the duty should be liable is a matter requiring careful quantification on the facts of each case. A broad discretion to be exercised by the court is appropriate. Paragraph 317 of the Harmer Report restates those views, and gives some examples of the need for a broad judicial discretion. The reference to Kinsela's case is a reference to Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, where Street CJ (with whom Hope and McHugh JJA agreed) at 732 - 733 said that the damage suffered by creditors from insolvent trading supports the view that the directors of a corporation must owe a duty to consider, in certain circumstances, the interests of the creditors.

24 Paragraphs 1103 to 1106 of the Explanatory Memorandum to the Corporate Law Reform Bill specifically address the proposed s 588M. The text appears to assume that the liquidator will effect recovery of the loss and damage suffered by a creditor to whom a debt is owed by "action", and explains why such "proceedings" should generally be permitted only through the liquidator, so the creditor's right to bring proceedings under s 588M(3) is curtailed: see s 588R - 588U. That was said to ensure the principle of equal sharing. 25 Nothing is said in the Explanatory Memorandum as to why the expression "loss and damage in relation to a debt" was introduced, rather than the form of expression in the earlier legislation. 26 The question is whether the essential character of the demand contained in the proofs of debt is in respect of a debt provable in the bankruptcies: Cornelius v Barewa Oil & Mining (NL) (In liq) (1982) 42 ALR 83 per Wickham J at 89-90. All debts and liabilities are provable in the bankruptcy unless they fall within one or more of the exceptions specified in s 82, relevantly for present purposes, s 82(2) of the Bankruptcy Act. 27 Section 82(1) of the Bankruptcy Act adopts the use of wide language in expressing what are to be considered admissible debts and liabilities in bankruptcy. See for example the discussion of its history and of its terms in the joint judgment of the majority (Gleeson CJ, Gummow, Hayne and Callinan JJ) in Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234 at [20] - [29]; Re Hide; Ex parte Llynvi Coal and Iron Co (1871) 7 Ch App 28 at 31 - 32 per James LJ. 28 Section 82(2) exists as an exception to the debts and liabilities which are admissible in bankruptcy. Under this provision, claims in the nature of unliquidated damages are inadmissible unless they arise by nature of contract, promise or breach of trust with the bankrupt. In this matter, the trustee argues that the liability of the directors to the company enforceable by the liquidator under s 588M is unliquidated and does not arise in the circumstances otherwise mentioned in the section, that is, it does not arise by reason of contract, promise or breach of trust. The liquidator's primary position is that his claims are not claims falling within s 82(2). 29 It is worthwhile considering the consequences of the trustee's approach. It would mean that the liquidator of a company could not prove the liability enlivened by s 588M(2) of the Corporations Act in any bankruptcy of a director. Nor could a creditor under s 588M(3). The right of recovery from the director, as a debt due to the company, of an amount equal to the loss or damage suffered by the creditor or creditors would not be provable in the bankruptcy because, so the argument runs, it is a demand in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust. That would be a surprising outcome. It would be surprising because it would be so different from the regime which existed up to the time Pt 5.7B, including Div 4 of Pt 5.7B, was inserted into the Corporations Law in 1992. Up to that time, it is plain that a debt incurred by a company for which a director was liable under s 592 of the Corporations Law or s 556 of the Code was provable in the bankruptcy of the debtor. It would also mean that, upon the discharge of the bankrupt from bankruptcy, the bankrupt would not be released from those liabilities because they would not have been provable in the bankruptcy: see s 153(1) of the Bankruptcy Act. Indeed, it would further mean that a creditor of the company, or the liquidator of the company, could institute and maintain proceedings against the bankrupt personally during the bankruptcy unrestrained by the operation of s 58(3) of the Bankruptcy Act because the remedy sought to be invoked would not be in respect of a provable debt. The power to stay actions under s 60 of the Bankruptcy Act also generally appears to be confined to actions to recover provable debts: see s 60(1)(b). There is nothing in the Harmer Report which suggests that the then proposed amendments to the Corporations Law by the addition of Div 4 of Pt 5.7B would make a dramatic change in that regime. Such a dramatic change would have the consequence that neither the liquidator of a company nor its creditors could enforce their rights under s 588M(2) and (3) by participating in the distribution of the bankrupt estate of the director who had breached the duty to the company imposed by s 588G. In my view, Div 4 of Pt 5.7B of the Corporations Act does not have that purpose or intention. 30 The wording of s 588M(2) also, in my view, tends to confirm that no such dramatic change was contemplated by the introduction of Div 4 of Pt 5.7B. Section 588M(2) empowers the liquidator to recover from the director "as a debt due to the company" an amount equal to the amount of loss or damage. That is the loss or damage suffered by the creditor or creditors in relation to the debt because of the company's insolvency. The use of the word "debt" in s 588M(2) and in s 588M(3) in the case of a creditor's action must be given some work. In Fryer v Powell (2001) 159 FLR 433, the Full Court of the Supreme Court of South Australia (Olsson, Duggan and Williams JJ) addressed the use of that word "debt" in s 588G and s 588M. In that case the liquidators of a company in liquidation sued the directors for recovery of a sum of money equivalent to the sum of the debts incurred at the time when the company was insolvent or when grounds existed for a reasonable suspicion that it was insolvent, to the knowledge of the directors. Judgment was given against the directors and they appealed. The relevant issue on that appeal was whether statutory imposts under the ITAA could constitute a debt for the purposes of s 588G of the Corporations Law, so the precise issue in this matter did not directly arise. The claim against the directors included a range of categories of debt including debts due to trade creditors (which do not appear to have been contentious), accrued leave entitlements, unpaid sales tax liabilities, penalties for non-payment of sales tax, unpaid group tax and assessed penalties for non-payment of group tax, and unpaid WorkCover levies and penalties for non-payment of WorkCover levies. Olsson J (with whom Duggan and Williams JJ agreed) concluded at 442, at [62] - [63] that the ordinary English meaning of the word "debt" should be adopted, there being nothing in the Corporations Law to suggest any other special meaning, and because that meaning had been attributed to that word in s 556 of the Companies Code: see eg per Gleeson CJ in Hawkins v Bank of China (1992) 26 NSWLR 562 at 572. In respect of the statutory imposts, his Honour said at [72], at 444: … if, by reason of the normal, ongoing operations of a company (including the mere passive retention of existing staff or premises), it is liable to pay a statutory impost, then it may properly be said that such an impost has been "incurred", as a debt, by the entity in question. In a complementary submission, counsel for the directors in that case (as here) placed emphasis upon the expression "loss or damage" in s 588M. It, too, is not defined either in the Corporations Law or in the Corporations Act. The argument was that the expression "loss or damage" indicated that the quantification of the liability was not the amount of the unpaid trade debt in each instance, and it was necessary for the Court to examine each individual debt and to make various potential abatements of it. His Honour said at [88] - [89], at 447 that: I entertain no doubt that, read in context, the loss and damage adverted to is the amount of the unpaid debt due to the creditor in question. This is the view which was obviously taken by Austin J in Tourprint International Pty Ltd (In Liq) v Bott (1999) 32 ACSR 201 at 217 and, in my experience, has always been applied to the practical administration of the statute. Whilst the provisions of the Corporations Law, so applied, may give rise to some practical consequences which could be said to be somewhat arbitrary and possibly inequitable in some respects, the insolvency law has always, as a matter of practicality and commercial expediency, had to adopt certain parameters which are arbitrary. There is nothing particularly novel in the approach here in question. By way of contrast, the adoption of the approach espoused by Mr Randle would render administration in insolvency virtually unworkable. The legislature could not possibly have envisaged creating the inevitable complexity and requirement for detailed examination of collateral issues which Mr Randle propounds. I therefore reject his submissions and conclude that the "loss or damage" in question will normally be the quantum of relevant unpaid debts. Austin J in Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 at 217 at [78] does not appear to have given the matter considerable attention because it did not arise in that case. See at [78]. His Honour's observations are certainly consistent with that conclusion, but they do not contain any consideration specifically of the point. 31 On the other hand, Mandie J in Australian Securities and Investments Commission v Plymin (No 1) recognised, correctly in my view, that Fryer v Powell 159 FLR 433 laid down only a general rule capable of variation according to particular circumstances: see at (2003) 175 FLR 124 at 255, at [535]. In that case, the loss and damage suffered by the creditors of a company in their claim against the directors needed to be adjusted beyond the amount of the unpaid debt because of an interim dividend distributed by the administrator under a scheme of arrangement of the company and for a further dividend which those creditors were likely to receive. His Honour added at 256 [535]: To the extent that any allowance for actual unexpected dividends is contrary to what was decided concerning the meaning of "loss and damage" in Powell v Fryer (2001) 37 ACSR 589, 602-3 (sic), I understand the plaintiff to have conceded that such allowance should be made and I tend, with respect, to think that the concession was correct in principle. 32 There is some apparent inconsistency in expression in the observations of Olsson J in Fryer v Powell 159 FLR 433, between an absolute assertion that loss and damage is the amount of unpaid debt due to the creditor, and that it is normally the quantum of the relevant unpaid debts. Those two things are not necessarily the same. The difference may not have been significant to the resolution of that case. 33 In my view, the difference in expression is also not of significance to the issue which presently arises in this matter. That is because the question is as to the nature of the entitlement in the liquidator established by s 588M(2) so far as it applies in the bankruptcy of the directors, having regard to s 82(1) and (2) of the Bankruptcy Act. 34 I do not consider it is useful to import into the words of s 588M(2) a requirement that the loss and damage referred to in s 588M(1)(b) and s 588M(2) be characterised as liquidated or unliquidated. Clearly, s 588M(2) entitles the liquidator to recover the loss and damage, whatever its character, from the directors as a debt due to the company. It is the debt due to the company which entitles the liquidator to prove in the bankruptcy of the directors. Although the wording of s 588M(1)(b) and (c) indicate that the loss and damage of the creditor or creditors need not equate to the amount of the debt or debts (eg as Mandie J identified in Plymin 175 FLR 124),if there has been a distribution in the liquidation of the company to reduce that debt as at the date of the claim made in the bankruptcy by realisation of other assets of the company), s 588M(2) states that the loss and damage for the purposes of the claim against the directors be recoverable as a debt. I note that Hammerschlag J in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2007] NSWSC 930 at [24] - [25] adopted that position, albeit that the question was not apparently in contention before his Honour. 35 In the case of a claim made by a liquidator or creditor against a director under s 588M(2) or (3) respectively, the director may put in issue the amount of the claimed debt. There will then need to be a determination about the extent of the loss and damage, as in any debt claim where the amount claimed may be put in issue. If the director does not do so, the claim should be treated as a claim for a debt because that is the statutory nature of the claim. Of course, the director may also dispute any contravention of s 588G(2) or (3) or enliven the defence available under s 588H; see s 588M(1)(a). In the present circumstances, the Trustee has the role on behalf of the director of deciding whether to dispute the claimed debt or to accept the claimed debt in whole or in part on the basis that the loss and damage which underlies it either was not suffered or was not suffered to the extent claimed. Any decision in that regard is reviewable under s 104(1) of the Bankruptcy Act.

36 The trustee, in my judgment, is not entitled to reject the proof of debt lodged by the Liquidator because it falls within s 82(2) of the Bankruptcy Act. For the reasons given, I consider that the trustee erred in doing so. It is not therefore necessary to address the qualification in s 82(2) excluding claims for unliquidated damages arising otherwise than by reason of a contract promise or breach of trust. That qualification in s 82(2) was considered by the High Court in Coventry 227 CLR 234. If it had been necessary to address that qualification, there may have been some difference between the Liquidator's claim based upon unpaid trade creditors of the Company and the statutory imposts also included in his proofs of debt. 37 In reaching that conclusion, I have not overlooked the observation of Hill J in Commonwealth Bank of Australia v Paola [2005] FCA 855 at [25] upon which senior counsel for the Trustee relied. That case concerned the opposition of a bankruptcy petition based upon an act of bankruptcy - the failure to comply with a bankruptcy notice founded upon a judgment debt. The debtor disputed his insolvency, and claimed that he would receive funds to pay the judgment debt from the liquidator of another company in liquidation who had accepted a proof of debt from the debtor for a significant sum. Alternatively, the debtor sought the bankruptcy petition be adjourned until the liquidator paid a dividend to the creditors of the company in liquidation. The payment of the anticipated dividend was held up pending the hearing of certain proceedings involving that company. 38 His Honour rejected the debtor's claim of solvency. He observed that the outstanding proceedings included a contested claim against the debtor for insolvent trading in his capacity as a director of the company, but declined to adjourn the bankruptcy petition pending the outcome of that proceeding in the exercise of his discretion because its resolution was a considerable time off, and because its outcome was uncertain. In the course of considering the exercise of the discretion, his Honour said at [25] that, even if a sequestration order were made, the proceedings against the debtor for insolvent trading would be stayed under s 58(3)(a) of the Bankruptcy Act because that claim fell under s 82(2) of that Act. 39 Although his Honour's remarks suggest that he held the view that a claim under s 588M(2) of the Corporations Act is not a claim provable in the bankruptcy of a director, that view was not expressed after the benefit of argument on the matter. It does not form part of the ratio decidendi of the decision. It is not a view which his Honour reached after the opportunity of considering the decisions to which I have referred or the analysis of the precise wording of s 588M. I accordingly do not think that the decision obliges me to reach a conclusion different from that I have reached; nor that I should do so. 40 The liquidator asserts a right to prove in the joint estate of the directors and in the separate estates of the directors, on the authority of Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304. The Trustee says that, in any event, the claims may only be proved in the separate estates of the directors. 41 Manpac 20 ACLC 1304concerned an action under s 588M of the Corporations Act in which Young CJ in Eq held the directors jointly and severally liable for insolvent trading. There was apparently no debate in that case as to whether such liability should be joint and several. Such an order mirrors the wording of s 556 of the Code and the former s 592 of the Corporations Law, where the directors were expressly said to be "jointly and severally liable". There is no such expression in s 588M of the Corporations Act. 42 The liquidator also relied upon Macks (trustee of the estate of Weber), Re Weber (bankrupt) (2006) 233 ALR 50. I do not think that decision is of particular significance. Relevantly, it concerned the entitlement of creditors under certain contracts to prove in the joint and several estates of the bankrupts by reason of s 95 of the Bankruptcy Act: see per Finn J at [13] - [16]. 43 At present, I see no reason why the fact that s 588M does not use the words "joint and several" should preclude the Liquidator from proving his debt under s 588M(2) in both the joint and several estates of the directors. 44 In my judgment, there is nothing in s 588M which supports the conclusion that the recovery of a debt under s 588M must be confined to the several estates of the delictual directors, provided at least that the conduct giving rise to their liability is in substance the same. 45 Further, one might rhetorically ask why, where there is no suggestion that the directors did not each breach s 588G over the same period of time, assuming their only assets were jointly owned and assuming that they had no other creditors, those assets in the hands of the Trustee should be immune from the reach of the Liquidator. 46 On the limited material before me, the directors' respective liability to the Liquidator is the same debt arising out of the same conduct incurred by them in the same capacity. The rule against double proof discussed by Mandie J in Re Master Painters Association of Victoria Ltd (subject to deed of company arrangement) (2004) 211 ALR 316 at 319 - 324 at [29] is not shown to have been enlivened. The rule preventing double dividends to the detriment of other creditors can be addressed by the Trustee as discussed below. 47 I note that the directors' penalty imposed under the ITAA can be characterised as a debt admissible to proof in bankruptcy. See eg Deputy Commissioner of Taxation v Woodhams (2000) 199 CLR 370 at [16]-[17] and Forsyth v Deputy Federal Commissioner of Taxation [2007] HCA 8 at [16]. 48 Apart from the late payment penalty and interest imposed on Pompeo Feleppo of $8,148.20, the proofs of debt of the Australian Taxation Office submitted to, and accepted by, the trustee concern $180,363 of penalties imposed upon each of the directors under s 222AOC of the ITAA for failing to cause the Company to meet its obligations in relation to deductions made or amounts withheld by the Company: s 222AOB(1)(a) and s 222AOB(2). The penalties are an amount equal to the unpaid amount of the Company's liability under the relevant remittance provision. Consequently, it appears that there is a parallel between the liability of the Company to the Australian Taxation Office which is included in the Liquidator's proofs of debt and the penalty liability of each of the directors which is the subject of the proofs of debt of the Australian Taxation Office. 49 Section 222AOH of the ITAA appears to address that circumstance. It provides: (1) If one or more persons are liable to a penalty under this Subdivision, the following are parallel liabilities: (a) the liability of that person, or of each of those persons to the penalty; (b) the liability referred to in subsection 222AOC(1), (1A) or (2) (whichever relates to the penalty); (c) liability under a judgment, so far as it is based on a liability referred to in paragraph (a) or (b). (3) This means that if, at a particular time: (a) an amount is paid or applied towards discharging one of the parallel liabilities; or (b) because of section 222AHA, one of the parallel liabilities is discharged to the extent of a particular amount; each of the others that is in existence at that time is discharged to the extent of the same amount. However, this subsection does not discharge a liability to a greater extent than the amount of the liability. 50 The liability referred to in s 222AOH(1)(b) refers to the original liability of the company to the Australian Taxation Office. 51 In my view, that recognises that the penalty liability of the directors under s 222AOC is a different liability to that of the company, and that the payment by a director towards satisfaction of the penalty liability pro tanto discharges the liability of the company. Section 222AOI then gives such a director the same rights against the company as if the payment by the director was made under a guarantee. 52 That does not give the result that the proofs of debt lodged by the Liquidator, apparently including certain of the Company's liability to the Australian Taxation Office which also led to the penalty liability imposed upon the directors, are not properly made. Nor does it make the Australian Taxation Office proofs of debt improper, because they are based upon a parallel but independent liability of the directors based on s 222AOC of the ITAA. Thus, its claims against the directors in respect of the penalty assessments are not claims under s 588M(3) and so they are not claims which might not be permitted whilst the Liquidator's claims under s 588M(2) is being pursued. 53 It is a matter for the Trustee, in due course, when and if a dividend is to be declared in any of the joint or several bankrupt estates of the directors, to make the appropriate adjustments. If the direct claims of the Australian Taxation Office are met or partially met from the bankrupt estate of one or other of the directors or from their joint estate, that will pro rata reduce the claims of the Liquidator to that extent. Ultimately, the unsecured creditors in each of the joint and several bankrupt estates of the directors should be treated equally as amongst themselves. 54 I note that a claim by a director under s 222AOH of the ITAA might then be made by the Trustee against the Company in due course. I do not know sufficient of the circumstances to comment upon whether any such putative claim by a director would be provable in the winding up of the Company under s 553 of the Corporations Act. I do not know anything about the state of the winding up of the Company. Consequently, I do not know if there is any prospect of a claim by a director in such circumstances. There may also be some circularity in the director, in such circumstances, having a claim against the Company in respect of a liability which the director should have procured the Company to have made. That problem does not arise for present consideration. 55 I note the suggestion that the Trustee may seek to set off against the claims of the Liquidator certain director's loans to the Company. I do not know the details of any such claimed entitlement, and have not been asked to adjudicate upon it.

ORDERS 56 For the reasons given, I propose to set aside the decision of the Trustee of 31 January 2007 rejecting the proofs of debt lodged by the Liquidator in the joint bankrupt estate of the directors and in their several bankrupt estates as incapable of being admitted to proof. I declare that those proofs of debt are capable of being admitted to proof in those bankrupt estates. 57 I do not think I need to go further. There are other matters which the Trustee may now have to address as to the amount of those proofs. And, in due course, the Trustee may have to make adjustments to avoid the Liquidator or the Australian Taxation Office from "double dipping" to the detriment of any other creditors. For the reasons given, it is not appropriate to make any orders on those matters at present.

58 Finally, I note that the Australian Taxation Office was notified of the issues which were considered in this proceeding. It did not appear or make any submissions on any of the matters discussed above. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Counsel for the Applicants: Mr G Bigmore QC and Mr A Narayan

Solicitor for the Applicants: Donaldson Walsh

Counsel for the Respondent: Mr B Coles QC and Mr S Ower

Solicitor for the Respondent: Cowell Clarke

Date of Hearing: 27 April 2007

Date of Judgment: 13 December 2007