Faulkner v Bluett [1981] FCA 3; (1981) 52 FLR 115 (6 February 1981)

FEDERAL COURT OF AUSTRALIA

FAULKNER v. BLUETT [1981] FCA 5; (1981) 52 FLR 115
Bankruptcy

COURT

FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Bankruptcy - Court action commenced by bankrupt before bankruptcy - Application to continue action in her own name - Whether action for "damages for personal injury or wrong done to the bankrupt" - Bankruptcy Act 1966 (Cth), ss. 60 (4) (a), 116 (2) (g).

Bankruptcy - Statutory interpretation - Common law of bankruptcy - Bankruptcy Act 1966 (Cth), ss. 60, 116. In 1974 the applicant commenced an action in the High Court against the Commonwealth of Australia and one Brigadier Flint. In December 1975 she filed a statement of claim alleging damages totalling $1,246,000 arising out of the negligent advice or misrepresentation of the defendants. On 15th March, 1978, a sequestration order was made against the applicant; the respondent was the trustee of her estate. On 14th November, 1980, the applicant filed an application seeking, inter alia, two declarations: (a) that she might continue in her own name the High Court Action; (b) that the provisions of s. 116 (2) (g) of the Bankruptcy Act 1966 applied to her right to recover damages in the High Court action.

Held: (1) The right of action alleged to exist by the applicant in the High Court proceedings was a right directly related to her property or estate. Any damages to which she might be entitled would be estimated by reference to her rights of property and not to any pain felt by her in respect of her body, mind or character.

Wetherell v. Julius [1850] EngR 698; (1850), 10 CB 267; 138 ER 108; Beckham v. Drake [1849] EngR 843; (1849), HLC 579; 9 ER 1213, referred to.

(2) Any right of action possessed by the applicant as alleged against the Commonwealth of Australia and Brigadier Flint therefore vested in the official receiver pursuant to s. 116 of the Act and did not come within s. 116 (2) (g) (i) in that it was not a "right . . . to recover damages or compensation for personal injury or wrong done" to her.

(3) The applicant's action was stayed on the making of the sequestration order. She had no right to continue it in her own name pursuant to s. 60 (4) (a).

Cox v. Journeaux (No. 2) [1935] HCA 48; (1935), 52 CLR 713, followed.

HEARING

Sydney, 1980, December 17; 1981, February 6. 6:2:1981
APPLICATION.

Application by the bankrupt for declarations.

S. S. W. Davis and T. M. Healey, for the applicant.

C. Darvall Q.C. and R. L. Walker, for the respondent.
Cur. adv. vult.

Solicitors for the applicant: R. Spanko & Co.

Solicitors for the respondent: Connah Steed & Co.
D. LEVIN

DECISION

February 6th.

The following judgment was delivered.
LOCKHART J. In 1974 Sylvia Margaret Faulkner (the applicant) commenced an

action in the original jurisdiction of the High Court of Australia against the Commonwealth of Australia and Brigadier Charles Francis Flint (the High Court action). It was not until December 1975 that the applicant filed a statement of claim in the High Court action. It alleges that the Commonwealth of Australia, by its agent, Brigadier Flint, represented to the applicant as the beneficial owner of the issued share capital in a company, Trisal Engineering Pty. Ltd. and as its governing director, that the Commonwealth would lodge orders in large quantities for the purchase of articles known as Trisal clips produced by Trisal Engineering Pty. Ltd. for use by the Australian armed forces; and that, relying upon those representations, the applicant advanced moneys to Trisal Engineering Pty. Ltd. for the purpose of developing and marketing the clips, refrained from disposing of her interest in the clips and the patent and other rights relating thereto and procured Trisal Engineering Pty. Ltd. to refrain from disposing of its interest in the clips and the patent and other rights relating thereto; and that, in the result, damage was sustained by the applicant.

My summary is brief, but it is sufficient to understand the essential character of the applicant's claim.

The applicant has given the following particulars of the damage claimed by her:

"1. Unsecured loans made by the female bankrupt to companies
of which she was the major shareholder, which manufactured
Trisal clips.
(a) Trisal Engineering Pty. Ltd.
1964 to 1970 $158,296
(b) Trisal Clips Pty. Ltd. 1970 to
1973 71,500
--------.

$229,796

2. Interest of ten per cent on the
moneys advanced to the above
companies between 1964 to 1973

114,299

3. Share capital invested by the female
bankrupt in the two companies
(8,000 by two-dollar fully paid
ordinary shares)

16,000

4. Estimated expected profit to be
derived from contract with Department
of Army for supply of Trisal
clips, which did not eventuate (five
years at $74,592 per annum)

372,960

5. Value of patents and other rights
(a) cost of registration of patents 13,797
(b) value of patents 500,000

513,797
-------- --------.
$1,246,852"
--------.

The Commonwealth filed a defence to the statement of claim which in essence either denies or does not admit the material allegations. If Brigadier Flint has filed a defence, it is not in evidence in this application.

On 15th March, 1978, a sequestration order was made against the estate of the applicant. Daniel Joseph Noel Bluett (the respondent) is the trustee of her estate.

On 14th November, 1980, the applicant filed an application in this Court seeking certain declarations, only two of which are now sought, namely, a declaration that the applicant may continue in her own name the High Court action and a declaration that the provisions of s. 116 (2) (g) of the Bankruptcy Act 1966 (Cth) (the Act) apply to the right of the applicant to recover damages in the High Court action.

The first declaration sought is based on s. 60 of the Act which, so far as relevant, provides:

"60. (1) . . .
(2) An action commenced by a person who subsequently becomes a bankrupt is,

upon his becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
(3) If the trustee does not make such an election within twenty-eight days after notice of the action is served upon him by a defendant or other party to the action, he shall be deemed to have abandoned the action.
(4) Notwithstanding anything contained in this section, a bankrupt may continue, in his own name, an action commenced by him before he became a bankrupt in respect of -
(a) any personal injury or wrong done to the bankrupt, his spouse or a member of his family; or

(b) the death of his spouse or of a member of his family.
(5) In this section, 'action' means any civil proceeding, whether at law or

in equity."
The second declaration relates to s. 116 of the Act which, so far as relevant, provides:

"116. (1) Subject to this Act -
(a) all property that belonged to, or was vested in, a bankrupt at the

commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge; and
(b) the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of the bankruptcy of the bankruptcy and before his discharge, is property divisible amongst the creditors of the bankrupt.
(2) the last preceding sub-section does not extend to the following property:

(g) any right of the bankrupt to recover damages or compensation -
(i) for personal injury or wrong done to the bankrupt, the spouse of the

bankrupt or a member of the family of the bankrupt; or
(ii) in respect of the death of the spouse of the bankrupt or a member of the family of the bankrupt, and any damages or compensation recovered by the bankrupt (whether before or after he became a bankrupt) in respect of such an injury or wrong or the death of such a person. . . . "

Thus, two questions arise for determination: 1. whether the High Court action is "an action . . . in respect of - any personal injury or wrong done to the bankrupt . . . " within the meaning of s. 60 (4) (a); and 2. whether the right, if any, of the applicant, the subject of the High Court action, is a "right of the bankrupt to recover damages or compensation - for personal injury or wrong done to the bankrupt . . . " within the meaning of s. 116 (2) (g).

It is convenient to consider the two questions together.

Although bankruptcy is the creature of statute law, certain rules have been formulated from time to time by the English courts exercising bankruptcy jurisdiction which limit the literal interpretation of vesting sections in bankruptcy legislation and which have been called "the common law of bankruptcy": Williams on Bankruptcy (18th ed.), p. 318.

Notwithstanding the language of s. 38 of the Bankruptcy Act, 1914 (Eng.) (and of its predecessor, s. 44 of the Bankruptcy Act, 1883 (Eng.)) which provides that the property of the bankrupt divisible amongst his creditors shall comprise all such property as may be acquired by or devolve on him before his discharge, it has been established by decisions of the English courts that the personal earnings of a bankrupt pass to his trustee except such part of them as is necessary for the maintenance of the bankrupt, his spouse and family: Re Roberts (1900) 1 QB 122.

Also the English cases draw a distinction between personal earnings of the bankrupt and the profits of a business carried on by him, notwithstanding that the profits were due substantially to the personal effort and labour of the bankrupt, and such profits have been held to pass absolutely to the trustee of his estate: Re Rogers; Ex parte Collins (1894) 1 QB 425. ; Re De Marney (1943) Ch 126.

The rationale of the distinction between earnings of a bankrupt personal to him and those derived from a business carried on by him underlies also the distinction between rights of action that vest in the trustee of a bankrupt's estate and those that do not. Although rights of action generally pass to the trustee of a bankrupt's estate, exceptions have been created by decisions of the courts, including the following: a right of action for slander, Ex parte Vine; Re Wilson (1878) 8 Ch D 364. ; for seduction of a servant, Howard v. Crowther [1841] EngR 770; (1841) 8 M & W 601; 151 ER 1179. ; for trespass to land or goods in the plaintiff's actual possession, at least where the only substantial damage is for the annoyance and personal inconvenience to him, Clark v. Calvet [1819] EngR 273; (1819) 8 Taunt 742; 129 ER 573. and Rose v. Buckett (1901) 2 KB 449. ; for breach after bankruptcy of a contract for personal service made before bankruptcy, Bailey v. Thurston & Co. Ltd. (1903) 1 KB 137. ; for personal injuries arising out of certain breaches of contract such as a contract of marriage, Drake v. Beckham [1843] EngR 325; (1843) 11 M & W 315; 152 ER 823.

The common thread running through these cases is that where the primary and substantial right of action is direct pecuniary loss to the property or estate of the bankrupt, the right to sue passes to the trustee notwithstanding that it may have produced personal inconvenience to the bankrupt: Wetherell v. Julius [1850] EngR 698; (1850) 10 CB 267; 138 ER 108. ; Wage on Bankruptcy (1904 ed.), p 201. Where the essential cause of action is the personal injury done to the person or feelings of the bankrupt the right to sue remains with the bankrupt.

As Erle J. said in an oft-cited passage in Beckham v. Drake [1849] EngR 843; (1849) 2 HLC 579; 9 ER 1213. : "The right of action does not pass where the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind, or character, and without immediate reference to his rights or property" (1849) 2 HLC, at p 604; 9 ER, at p 1222.

There is still some doubt whether a right of action passes to the trustee where one and the same cause of action results in substantial damage to the property of the bankrupt as well as substantial injury to his person or annoyance to his feelings: Beckham v. Drake; Hodgson v. Sidney (1866) LR 1 Ex 313. ; Morgan v. Steble (1872) LR 7 QB 611. In England the accepted view seems to be that such a cause of action passes to the trustee so far as it relates to the property of the bankrupt, and remains with the bankrupt so far as it relates to his person or feelings: Wilson v. United Counties Bank Ltd. (1920) AC 102. Some of the problems that arise from this notion of a "mixed action" appear from cases such as Wilson v. United Counties Bank Ltd. and Beckham v. Drake.

The same principles are applied by the English courts with respect to staying proceedings against a bankrupt. Section 9 of the English Bankruptcy Act, 1914 provides that the court may, at any time after the presentation of a bankruptcy petition, stay any action against the property or person of the debtor. Neither the receiving order nor the adjudication operates as a stay of pending proceedings against the bankrupt unless the court makes an order under s. 9: Realisations Industrielles et Commerciales S.A. v. Loescher & Partners (1957) 1 WLR 1026.

The English courts have held that the power to stay proceedings against the property or person of a debtor does not extend to actions in respect of the person or feelings of a bankrupt as distinct from an action that relates to his property or estate.

In Australia, some of the "common law of bankruptcy" has been embodied in bankruptcy legislation. An example is s. 60 (4) of the Act relating to actions commenced by the bankrupt in respect of "any personal injury or wrong done to the bankrupt, his spouse or member of his family". The first introduction of such a provision into bankruptcy legislation in Australia was by s. 33 of 5 Vic. No. 17 (N.S.W.): see Salusbury, The Law and Practice in Bankruptcy in New South Wales (2nd ed., 1899), pp. 60-61. Section 33 was repeated in later bankruptcy legislation including s. 10 (6) of the Bankruptcy Act, (1887) (NSW); s. 10 (7) of the Bankruptcy Act, 1898 (NSW) and s. 63 (3) of the Bankruptcy Act 1924 (Cth). In Cox v. Journeaux (No. 2) [1935] HCA 48; (1935) 52 CLR 713. Dixon J. construed s. 63 (3) of the Bankruptcy Act 1924 (Cth) as stating the "common law of bankruptcy". He said: "Notice was given under s. 63 (3) of the Bankruptcy Act 1924-1933 to the official receiver requiring him to elect to prosecute or discontinue the action and he has elected not to prosecute it. The plaintiff says that he himself is entitled to prosecute it under the proviso as an action for personal injury or wrong done to himself. The test appears to be whether the damages or part of them are to be estimated by immediate reference to pain felt by the bankrupt in respect of his mind, body or character and without reference to his rights of property (Wilson v. United Counties Bank Ltd. (1920) AC 102.)" (1935) 52 CLR, at p 721.

Another example is s. 116 (2) (g) which gives statutory recognition to the principle evolved by the "common law of bankruptcy" that rights of action in respect of the person or feelings of a bankrupt do not vest in the trustee.

Counsel for the applicant relied principally on three cases in support of his contention that the applicant's right of action in the High Court action did not pass to the respondent as trustee of her estate.

The first case was Merry v. The Queen (1887) 13 VLR 264. In my opinion it does not support the applicant's case. Higinbotham C.J. drew a sharp distinction between rights of action with reference to "claims on property" and those with reference to "wrongs or injuries done to the reputation or person, such as libel, slander, or assault; these do not affect his estate in any way. It is only such personal wrongs that remain in him, and it is only in respect to such claims that he can prosecute his suit" (1887) 13 VLR, at p 267.

Then I was referred to the decision of Reed J. in Timmings v. Treadgold (1923) NZLR 73. Nor does it support the applicant. A clear distinction was drawn between rights of action which have immediate reference to property as distinct from pain felt by the bankrupt in respect of his body, mind or character. Reed J. said: "Mr. Jellicoe, for the plaintiff, claims that the cause of action is, primarily, personal injury to the plaintiff, and that in such a case an action ban be brought in the name of the bankrupt without joining the Official Assignee. The rule of law appears to be stated by Erle, J., in Beckham v. Drake [1849] EngR 843; (1849) 2 HLC 579; 9 ER 1213. : 'The right of action does not pass where the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind, or character, and without immediate reference to his rights or property. Thus it has been laid down that the assignees cannot sue for breach of promise of marriage, for criminal conversation, seduction, defamation, battery, injury to the person by negligence, as by not carrying safely, not curing, not saving from imprisonment by process of law' (1849) 2 HLC, at p 604; 9 ER, at p 1222. Lord Campbell, C.J., in Stanton v. Collier [1854] EngR 153; (1854) 3 EL & BL 274; 118 ER 1143. puts it thus: 'The rule which is to be deduced from Beckham v. Drake [1849] EngR 843; (1849) 2 HLC 579; 9 ER 1213. and Wetherell v. Julius [1850] EngR 698; (1850) 10 CB 267; 138 ER 108. is that if a cause of action is disclosed which touches only the person of the bankrupt or insolvent it does not pass to the assignees, but that if it touches his estate it does pass to them' (1854) 3 EL & BL, at p 281; 118 ER, at p 1145. The respective rights of the Official Assignee and the bankrupt are well illustrated in the recent House of Lords case of Wilson v. United Counties Bank Ltd. (1920) AC 102. where all the most important authorities upon the point are collected in the judgment of Lord Atkinson. In that case the verdict of the jury awarding damages to the Trustee in Bankruptcy was upheld. The damages awarded to the bankrupt were for injury caused to his credit and reputation as a trader, whilst the damages to the Trustee in Bankruptcy, who was a party to the action, were for breach of contract" (1923) NZLR, at pp 75-76.

Finally I was referred to Wenlock v. Maloney (1967) 111 Sol Jo 437. Nor does it support the applicant's case. Lord Denning M.R., with whose judgment Harman and Salmon LJJ. agreed, relied on the distinction between claims in respect of the bankrupt's property and "claims for personal injuries, libel or slander or matters of that kind which remained his".

All three decisions in truth support the case for the respondent.

What then is the character of the right of action in the present case? It is common ground that it is a claim for damages for breach of a duty of the kind recongnized in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. (32) and Mutual Life and Citizens' Assurance Co. Ltd. v. Evatt (33). The pleader of the statement of claim has sought to frame a cause of action based on those cases. I say nothing, of course, as to whether the pleader has in fact brought the alleged cause of action within a recognized category of the law of torts or as to its prospects of success.

The right of action of the applicant is directly related to her property or her estate, namely, her shares in Trisal Engineering Pty. Ltd. and her interests in the patents or the Trisal clips. Any damages to which the applicant may be entitled would be estimated by immediate reference to her rights of property and not to pain felt by her in respect of her "body, mind or character".

The right of action of the applicant, if any vested in the official receiver pursuant to s. 116 (1) of the Act, and does not answer the description of a right to recover damages or compensation for personal injury or wrong done to the applicant within the meaning of s. 116 (2) (g) (i). Likewise, the High Court action was stayed upon the applicant becoming a bankrupt; and she has no right to continue it in her own name under s. 60 (4) (a). In the result, the applicant fails.

I order that the application be dismissed and that the applicant pay the respondent's costs of the application including reserved costs.

ORDER

Application dismissed with costs.