Taylor (liquidator) v Trustee, bankrupt estate of Heading, in the matter of Heading

Solicitor for the Second Respondent: Moray & Agnew

ORDERS SAD 116 of 2020 IN THE MATTER OF THE BANKRUPT ESTATE OF PETER JOHN HEADING BETWEEN: AUSTIN ROBERT MEERTEN TAYLOR AS LIQUIDATOR OF HEADING CONTRACTORS PTY LTD (IN LIQUIDATION) ACN 067 151 688 First Applicant

HEADING CONTRACTORS PTY LTD (IN LIQUIDATION) ACN 067 151 688 Second Applicant

AND: STEPHEN JAMES DUNCAN, THE TRUSTEE OF THE PROPERTY OF PETER JOHN HEADING, A BANKRUPT First Respondent

PETER JOHN HEADING Second Respondent

order made by: CHARLESWORTH J DATE OF ORDER: 9 OCTOBER 2020

1. Pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth) the applicants have leave to commence and continue the proceedings in action SAD 132 of 2020, Austin Robert Meerten Taylor as Liquidator of Heading Contractors Pty Ltd (In Liquidation) ACN 067 151 688 & Anor v Peter John Heading & Anor, such leave to take effect nunc pro tunc to 10 September 2020.
2. The leave in paragraph 1: (a) is granted on the condition that the applicants comply with the orders in paragraphs 3 and 4 of the orders made today in action SAD 132 of 2020; and (b) does not affect the respondents' entitlement to apply for an order that the proceedings as against either of them be dismissed at any time prior to judgment for any reason.
3. The applicants are not to file any proof of debt in the bankruptcy of the second respondent without the leave of this Court.
4. The costs of this application be costs reserved in action SAD 132 of 2020. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

CHARLESWORTH J 1 Mr Peter Heading was declared bankrupt by his own petition on 15 April 2015. Mr Stephen Duncan was appointed Trustee of his estate. On 16 April 2018, Mr Heading was automatically discharged from bankruptcy by the operation of s 149(1) of the Bankruptcy Act 1966 (Cth). His discharge operated to release him from all debts provable in the bankruptcy: Bankruptcy Act, s 153. 2 This is an application under s 58(3)(b) of the Bankruptcy Act for leave to commence a proceeding against Mr Heading and the Trustee in connection with a debt said to be provable in the bankruptcy. 3 From 25 November 2003, Mr Heading was the director of the second applicant, Heading Contractors Pty Ltd (the Company). On 15 September 2014 the Company was placed into voluntarily liquidation. Mr Austin Taylor was appointed to act as its Liquidator. 4 On 10 September 2020, the Liquidator commenced the proceedings to which this application for leave relates: action SAD132 of 2020 (the proposed proceeding). 5 The applicants' case in the proposed proceeding is that between 3 February 2014 and 15 September 2014 Mr Heading contravened s 588G(2) of the Corporations Act 2001 (Cth) by failing to prevent the Company from incurring debts whilst it was insolvent. It is alleged that some of the Company's creditors have suffered losses exceeding $4 million in relation to the debts because of the Company's insolvency. 6 Section 588M of the Corporations Act relevantly applies where a director has contravened s 588G(2) in relation to the incurring of a debt by a company and a creditor to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency. Section 588M(2) provides that 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. 7 In addition to the operation of s 153 of the Bankruptcy Act, s 58(3)(a) operates to prohibit the Liquidator (as a creditor) from enforcing any remedy against the person or property of Mr Heading in respect of that liability. 8 The originating process in the proposed proceeding includes a claim for a declaration against Mr Heading in lean terms as follows: A declaration as to the liability of the First Defendant pursuant to section 588M(2) of the Act. 9 The same declaration was sought by way of the prayer for relief in a statement of claim filed on 10 September 2020. The applicants filed an amended statement of claim on 17 September 2020. It contains an amended prayer for relief against Mr Heading which is intended to address the statutory consequences of Mr Heading's bankruptcy and subsequent discharge. As amended, the pleaded claim for relief against Mr Heading is expressed as follows: A declaration that the First Defendant incurred, prior to the date of his discharge from bankruptcy, a liability pursuant to section 588M(2) of the Act to the First Plaintiff in the sum of $4,105,953.07. 10 The originating process has not been amended to reflect the amendment to the plea. A claim for monetary relief is made directly against the Trustee in the following terms: Pursuant to section 588M(2) of the Act, recovery from the Second Defendant as a debt due to the Company the sum of $4,105,953.07, comprising unsecured debts incurred by the Company during the period 3 February 2014 to 15 September 2014 within the meaning of section 588G(1) of the Act and which remain unpaid at the date of this proceeding (Debts). 11 Proceedings under s 588M of the Corporations Act may only be commenced within six years from the beginning of the winding up: s 588M(4). The originating process in the proposed proceeding was filed five days before the statutory time limit was due to expire. On this application it was common ground that a grant of leave pursuant to s 58(3) of the Bankruptcy Act may be expressed to operate nunc pro tunc with the effect that the proceeding would be taken to have been regularly commenced by both applicants within the limitation period. 12 The applicants submit that the joinder of Mr Heading as a defendant in the proposed proceeding may facilitate a claim by the Trustee against a Policy of insurance for indemnity against any liability that may be proven in the proposed proceeding. The Policy is titled "Directors and Officers and Company Reimbursement" insurance policy (policy numberB0839/PX3956712). The Insurer under the Policy is Markel International Limited. Argument proceeded on the basis that apart from the bankruptcy of Mr Heading the Policy might respond to a liability of the kind claimed in the proposed proceeding. 13 Any right of indemnity that Mr Heading might previously have enjoyed under the Policy has vested (and remains vested) in the Trustee by virtue of s 117 of the Bankruptcy Act. It provides: 117 Policies of insurance against liabilities to third parties (1) Where: (a) a bankrupt is or was insured under a contract of insurance against liabilities to third parties; and (b) a liability against which he or she is or was so insured has been incurred (whether before or after he or she became a bankrupt); the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party to whom it has been incurred. (2) Subsection (1) does not limit the rights of the third party in respect of any balance due to him or her after the payment referred to in that subsection has been made. (3) This section applies notwithstanding any agreement to the contrary, whether entered into before or after the commencement of this Act. 14 The applicants submit that it is for the Trustee to make a claim on the Policy in respect of the debt claimed in the proposed proceeding. On the assumption that the Policy properly responds to the claim, the benefits obtained by the Trustee under the Policy are payable to the Company by the operation of s 117. The applicants assert that the relief claimed against the Trustee in the proposed proceeding is intended to be limited to such amounts as may be payable to the Company. The originating process in that proceeding does not appear to reflect that intention. It appears to assume that the same quantum of debt that would be recoverable against Mr Heading were it not for his bankruptcy (and assuming proof of the contravention) would instead be recoverable (without qualification) in the same amount as against the Trustee. 15 The Insurer is not joined as a party to this application and is not presently named as a defendant in the proposed proceeding, although the applicants anticipate that it may be joined in the event that it denies liability under the Policy to indemnify the Trustee in respect of the claims. 16 The Court was told that the Trustee and the Liquidator have come to an arrangement with a view to protecting the Trustee from costs liabilities in the proposed proceeding that might otherwise be borne by him personally, although the details of that arrangement are not known. The Court was also told that the Trustee proposes to assign his statutory right under s 117 of the Bankruptcy Act to the Liquidator. There is no certainty as to whether or when such an assignment might occur. 17 The Trustee did not oppose the grant of leave to commence the proposed proceeding and did not seek to be heard. He did not assert that he was not a proper party to be joined in the proposed proceeding, nor did he submit that the claim for relief proposed against him in his capacity as Trustee was defective in any way. 18 The applicants do not commit to a submission that Mr Heading is a necessary party to the proposed proceeding. Rather, the application for leave to proceed against Mr Heading is anticipatory of arguments the applicants expect the Insurer may advance as to the proper construction of the Policy, and as to whether it responds to the claimed contravention of s 588G of the Corporations Act, and as to whether it is necessary for a judgment to be entered against Mr Heading personally in order for obligations under the Policy to be triggered. Leave is sought to commence the proceeding naming Mr Heading as a defendant from the outset "out of an abundance of caution" because the expiry of the limitation period would otherwise prevent his joinder at a later time. 19 Mr Heading opposes the grant of leave, not only in connection with his own joinder as a defendant but also in respect of the joinder of the Trustee. He submits that the proceeding is untenable because there can be no action in respect of a provable debt against a discharged bankrupt: Geor & Anor v Delaney [2009] QCA 363. He further submits that the Policy does not, on its terms, respond to the claims to be made in the proposed proceeding because there can be no award of damages against Mr Heading capable of triggering the Insurer's obligations. He submits that the declaration of liability sought by the applicants would not invoke the Insurer's obligations under the Policy, properly construed. Accordingly, he submits, the grant of leave to commence the proceeding would be futile because the proposed proceeding would be bound to fail. 20 Mr Heading otherwise submits that the Court does not have jurisdiction to make a declaration against him in terms relating to a past liability, as proof of any past liability cannot give rise to any present right in the Liquidator or the Company against him personally. The absence of any extant liability on Mr Heading's part under the Corporations Act means that there can be no justiciable controversy between him and either applicant. Hence, he submits there is no "matter" that may properly form the subject of a declaration of right pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth). He submits that the Court should not grant leave in respect of a proceeding that is liable to be dismissed as incompetent. 21 Mr Heading further submits that leave to commence a proceeding in which he is joined as a defendant should be refused in the exercise of the Court's discretion. He relies on an affidavit in which he expresses concerns about the impact of the proposed proceeding on his ability to rebuild his life following his discharge from bankruptcy.

CONSIDERATION 22 Section 58(3) of the Bankruptcy Act relevantly provides: (3) 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. 23 In Hudson v Sigalla (2015) 235 FCR 122 the Full Court (Allsop CJ, Jagot and Katzmann JJ) said (at [25]) that a purpose of s 58(3) is to assist in the orderly administration of a bankrupt estate by protecting the bankrupt and the bankrupt's property (vested in his or her trustee) against the enforcement of remedies. The Court continued: … This is done by enabling the court to supervise the handling of claims through the procedure of proof of debt (administered by the trustee or liquidator), by ensuring that the assets of the estate are not expended on costs in a multiplicity of litigation, and by ensuring that no one creditor gets an advantage over others: Re Sydney Formworks Pty Ltd (in liq) [1965] NSWR 646; Re AJ Benjamin Ltd (in liq) [1969] 2 NSWR 374; Re Rose; Ex parte Devaban Pty Ltd [1994] FCA 1082; Re McMaster; Ex parte McMaster (1991) 33 FCR 70 at 72-73; 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328 at [10]. 24 Neither party drew the Court's attention to an authority of this or any other court determinative of the question of how s 58(3) might operate on the facts of this case. The critical facts are that the proposed proceeding is sought to be commenced in respect of a provable debt from which the bankrupt has been released personally by the operation of s 153 of the Bankruptcy Act and in respect of which there is a policy of insurance to which s 117 applies, and which appears to have responded to the claim at least until the date of Mr Heading's discharge. 25 The situation prior to Mr Heading's discharge was that, subject to a grant of leave, proceedings may have been commenced naming him as a defendant. However, any remedy obtained in the proceeding could not be enforced against him personally, but instead would be a debt provable in the administration of his bankrupt estate: Bankruptcy Act, s 58(3), Taylor v Rudaks (2007) 166 FCR 451; Williamson v Michell (Trustee) [2019] FCA 481; 16 ABC(NS) 472; Perrine v Carrello [2017] WASCA 151. Section 117 of the Bankruptcy Act would operate so as to ensure that the whole of the benefit paid under the Policy would be paid to the Company independently of the provisions of the Bankruptcy Act that would otherwise operate to rank the Company's claim equally among all creditors in the distribution of the bankrupt's property. Counsel for Mr Heading properly acknowledged that were it not for his discharge, the claims advanced in the proposed proceeding were obvious candidates for a grant of leave, both because of their nature and because of the existence of an insurance policy that would appear to respond to them: see Free v Ma [2020] FCA 226; Hillig, in the matter of Battaglia [2019] FCA 2191; Bailey, in the matter of Australian Recruiting Group Pty Ltd (in liq) v Aningat [2020] FCA 1319; Allnation Corporation Pty Ltd, in the matter of Maddy v Maddy [2017] FCA 1258; A.F.I. Management Pty Ltd v Condon in his Capacity as Trustee of the Bankrupt Estate of Brian Keith Hones [2019] FCA 2012 at [8]. 26 The peculiar aspect of this case is that the proposed claim against Mr Heading is not in respect of an extant liability but rather in respect of a liability that previously existed and that is said to give rise to extant rights vis a vis the Trustee and the Insurer under the Policy. 27 The applicants submit that s 153 of the Bankruptcy Act does not have the effect that the bankrupt estate of Mr Heading has been released from the relevant liability: Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93 at 99. That is true in the sense that the discharge does not prevent a creditor from proving the debt in the estate of the bankrupt, or from having the proven debt dealt with under the Bankruptcy Act in accordance with its terms. Absent a grant of leave to commence a proceeding to establish the existence and quantum of the liability, it is the duty of the Trustee to reject the proof or to admit it in whole or in part. Any decision of the Trustee in that regard is reviewable under s 104(1) of the Bankruptcy Act. Where leave is granted to commence a proceeding in respect of a provable debt, the leave cannot extend to the enforcement of a remedy against the bankrupt personally: Taylor at [35]. Rather, any judgment obtained in the proceeding may facilitate the participation of the creditor in the administration of the bankrupt estate by putting beyond argument existence and quantum of its claim. Whether the debt may be "recoverable" against the Trustee of a bankrupt estate in the way contemplated in the claim for relief in the proposed proceeding is another question.

The Trustee 28 Given the Trustee's agnostic position, and having regard to the matters considered elsewhere in these reasons, I am satisfied that leave should be granted to commence the proposed proceeding naming him as a defendant. The grant of leave will be expressed in a way that does not affect his entitlement to seek an order that the proceedings be dismissed prior to judgment for any reason, including on the basis that they do not enjoy reasonable prospects of success. 29 The leave will otherwise be subject to a condition that any monetary remedy sought against him is to be limited to such amounts as may be payable by the Insurer under the Policy in respect of the pleaded claims. The Liquidator and the Company should be afforded an opportunity to amend the originating process and to further amend their pleading to expressly confine their case in accordance with the terms of the grant. The grant of leave will be made conditional upon those amendments being made.

Mr Heading 30 I do not consider it necessary or appropriate to express any view as to whether the Policy would or would not respond to the applicants' claims for relief as they are presently formulated. Relatedly, I do not consider it necessary to express a view as to whether there is commercial utility in the proposed proceeding, either against the Trustee or against Mr Heading. Whether the Policy responds to the claims is subsumed to some extent in the question of whether an award of damages should be made against the Trustee. That is because the monetary award against the Trustee is intended to be limited to the amount that would be payable by the Insurer to the Trustee under the Policy. If the Policy does not respond to the claims, the substantive action will lack commercial utility. I accept that is a possible outcome in the proposed proceeding. However, I consider that the issues concerning the construction of the Policy and its application to the facts to be a substantive issue that should be determined in the substantive proceeding and not on this application for leave. The costs consequences of an adverse outcome for the applicants may be dealt with in the proceedings themselves, having regard to all matters relevant to the exercise of the discretion as they are then known. 31 The question of whether there is or was a liability to which the Policy presently responds (notwithstanding Mr Heading's discharge) is a matter of importance both in the winding up of the Company and in the administration of the bankrupt estate. If the Policy does respond, there is an obvious interest in the Trustee exercising the right of indemnity vested in him by s 117 of the Bankruptcy Act for the ultimate benefit of the Company and hence its creditors. Subject to hearing further from the parties (possibly including the Insurer), it may be appropriate to fashion a procedure to determine the proper construction of the Policy as a separate and preliminary issue should the Insurer deny liability to satisfy any claim on the Policy that may be made by the Trustee in the exercise or purported exercise of the rights vested in him under s 117 of the Bankruptcy Act. 32 Against those observations, there are strong discretionary factors weighing against the grant of leave to proceed against Mr Heading. Mr Heading's evidence is that he should be entitled to rebuild his life following his discharge, which occurred more than two years ago. He alleges that the commencement of the proceedings would affect his ability to obtain loan finance, whether or not a monetary award is sought against him personally. I accept that is Mr Heading's subjective concern. However, in the absence of further evidence, the likelihood of the proceedings objectively having that effect cannot be reliably measured. 33 I also accept that the joinder of Mr Heading as a defendant in the proceeding will cause him to suffer stress and inconvenience as a party to litigation, having regard to the nature of the litigation that is contemplated. However, whilst Mr Heading's discharge from bankruptcy may have operated to release him from personal liability for debts, it did not operate to absolve him from other consequences that may follow from his status as an officer of the Company and the performance of his duties in that role, nor from the continued operation of the Bankruptcy Act on him. Notwithstanding his discharge, Mr Heading remains obliged to give such assistance as the Trustee reasonably requires in the realisation and distribution of such of his property as is vested in the Trustee: Bankruptcy Act, s 152. It seems to me that that obligation would extend to cooperating with the Trustee in presenting a claim against the Policy to the Insurer in the exercise of any right under the Policy (in the nature of a chose in action) vested in the Trustee by s 117 of the Bankruptcy Act. Mr Heading and the Trustee may also owe obligations to the Insurer under the Policy in respect of the defence of the proposed proceeding, but that is a matter in respect of which the present parties have not made submissions and I express no concluded view about it. Whilst the inconvenience and stress associated with the proceedings may be ascribed some weight in the exercise of the discretion, I take into account that the proceedings would cause considerable inconvenience to Mr Heading as a non-party (including as an essential witness) even if he were not joined as a party.

Cost considerations 34 If Mr Heading is to be a defendant in the proposed proceeding, he may incur his own legal expenses (some of which may ordinarily not be recoverable) and he may also be at risk of adverse costs orders should he adopt a position that is ultimately unsuccessful. A grant of leave to proceed against Mr Heading will also result in him having the obligations of a party in proceedings involving a potentially costly dispute between the Liquidator, the Company, the Trustee and the Insurer as to their respective rights and obligations that do not and should not directly affect his own monetary interests. 35 Whilst I afford those factors some weight, I consider them to be outweighed by the interests of the Company (more particularly its creditors) in having its interests vis a vis the Trustee and (if there be a dispute) vis a vis the Trustee and the Insurer heard and determined. I consider that any undue negative impacts upon Mr Heading may be avoided or ameliorated by fashioning procedures that adequately protect his interests, including as to costs. Whether or not Mr Heading's cost liabilities may be indemnified by the Insurer under the Policy is unknown at present. It may be that the costs otherwise incurred by him in the proceedings would be for the Insurer to bear. 36 Whether there is utility in joining Mr Heading as a defendant in the proceedings is a question that may turn upon the proper construction of the Policy. I will not attempt to summarise why that is so in these reasons, not least of all because the question is likely to arise for determination in the substantive action. It is sufficient to say that should an issue concerning the construction of the Policy arise, procedures may be fashioned to have the issue determined as a separate and preliminary question, so that the necessity for Mr Heading to remain joined as a party may be decided at the earliest opportunity. 37 As has been mentioned, the Liquidator seeks to join Mr Heading as a defendant "out of an abundance of caution" because on one view of the Policy, a declaration of contravention against Mr Heading may be necessary to trigger the Insurer's obligation to pay a claim made by the Trustee (or his assigns) in the exercise of the vested right under s 117 of the Bankruptcy Act. The Liquidator's alternate and principal position is that it is not necessary for Mr Heading to be joined in order to succeed against the Trustee and obtain the benefit under the Policy at all. A grant of leave in respect of the proposed action affords the Liquidator some protection against the circumstance that his principal position is wrong, because a grant of leave at a later time would come too late for a suit to be commenced given of the expiry of the limitation period in s 588M(4) of the Corporations Act. 38 On the material before me I am not presently satisfied that the Liquidator has taken all reasonable steps to commence the application for leave and to prepare the substantive action at an earlier time so as to not be faced with the difficulties now presented by the limitation period as they affect the leave application. The consequence is that the Liquidator, for the time being, straddles two horses: his primary position that he can succeed in the action without joining Mr Heading and his alternate cautionary position that he cannot. The correct position may not be ascertained until the proceedings are commenced and a claim on the Policy in respect of the pleaded liability is made under the Policy by the Trustee. Whilst I do not consider that to be a sufficient reason to refuse leave, in the circumstances it would be highly relevant on any application that may be made by Mr Heading in the proceedings as to his costs. 39 To be clear, if the limitation period were not pending at the time that the initiating documents in the proposed proceeding were filed, I would have refused the application for leave to proceed against Mr Heading and granted the applicants liberty to apply for leave to join Mr Heading at a later time once the position of the Insurer in response to the claim against the Trustee was known and the legal basis for his joinder in connection with the Policy could be conclusively established. I do not presently see why Mr Heading should assume any costs consequences of the applicants preserving their position on the necessity for his joinder, although that is a matter that may be more fully explored should Mr Heading make an application for costs. 40 Finally, I do not consider it necessary at this juncture to determine whether the Court has jurisdiction to grant a declaration in the terms sought against Mr Heading in the proposed proceeding and I do not express any view on that question. Mr Heading's interests will be sufficiently protected by an order that he not be required to file a defence in the action until further order with other parties to the proceeding having liberty to apply to vary that order at a time when the Insurer's position is more likely to be known. It may be that the Insurer will adopt a position that renders it unnecessary for Mr Heading to remain as a party, so justifying an order that he be disjoined. The Court will determine the question of competency in the substantive proceeding once the Insurer's position in response to the claim against the Trustee is known, if the question has not been overtaken by steps taken by other parties in the action. 41 The requirement that Mr Heading not file a defence in his capacity as the first defendant does not operate to absolve him from any obligations he may owe to the Trustee or the Insurer in relation to the applicants' substantive claims, including to render such assistance in the preparation of the Trustee's defence as he may be obligated to provide. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Charlesworth.