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Federal Court of Australia |
Last Updated: 8 March 1999
PROCEDURE - amended statement of claim - strike out application - whether equitable claims precluded by relevant legislation - whether plea of unequivocal election to surrender in equity arguable - whether plea of estoppel arguable - whether prayer for relief appropriate.
BANKRUPTCY - whether equitable claims able to be enforced by bankrupt - whether Act an exclusive code - whether equitable claims vest in Official Receiver or trustee.
Bankruptcy Act (Cth) 1966, ss 58, 60, 73, 116
Cummings v Claremont Petroleum [1996] HCA 19; (1990) 185 CLR 124, considered
W R Henry & Son v Hodge (1963) 20 ABC 87, cited
Coyne v Commercial Equity Corporation Ltd (unreported WA Supreme Court FC, 28 July 1998, Kennedy, Franklyn & Walsh JJ), cited
Faulkner v Bluett [1981] FCA 5; (1981) 52 FLR 115, followed
Re Gordons Will Trusts [1978] Ch 145, considered
Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 423, considered
PRIDMORE & ORS v MAGENTA NOMINEES PTY LTD & ORS
WAG 164 of 1998
R D NICHOLSON
25 FEBRUARY 1999
SYDNEY (Heard in PERTH)
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| WESTERN AUSTRALIA DISTRICT REGISTRY | WAG 164 OF 1998 |
|
BETWEEN: | ANTHONY CHARLES PRIDMORE
First Applicant
HANS LOTHAR WITTE Second Applicant
MARINA PRIDMORE Third Applicant
RENATE WITTE Fourth Applicant |
|
AND: | MAGENTA NOMINEES PTY LTD
First Respondent
HALL CHADWICK (A FIRM) Second Respondent |
|
JUDGE: | R D NICHOLSON J |
| DATE OF ORDER: | 25 FEBRUARY 1999 |
|
WHERE MADE: | SYDNEY ( Heard in PERTH ) |
THE COURT ORDERS THAT:
The draft orders be held over on the following basis:
(1) within 10 days the applicant file and serve written submissions on how, if at all, the orders should apply to the third and fourth applicants.
(2) Within a further 10 days the respondent file and serve written submissions in response.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| WESTERN AUSTRALIA DISTRICT REGISTRY | WAG 164 OF 1998 |
|
BETWEEN: | ANTHONY CHARLES PRIDMORE
First Applicant
HANS LOTHAR WITTE Second Applicant
MARINA PRIDMORE Third Applicant
RENATE WITTE Fourth Applicant |
|
AND: | MAGENTA NOMINEES PTY LTD
First Respondent
HALL CHADWICK (A FIRM) Second Respondent |
JUDGE: PLACE:
R D NICHOLSON J DATE: 25 FEBRUARY 1999
SYDNEY (Heard in PERTH )
2 The case which the first respondent addresses is complicated by two factors. The first is there is a minute of the proposed further amended statement of claim which is dated 11 December 1998. Additionally, there are foreshadowed additional amendments to that draft. Concessions made during the hearing result in the applicants not wishing to rely on critical aspects of the amended statement of claim of 13 October 1998. It is therefore necessary that I consider the two alternative formulations as if leave were to be granted in respect of them.
Nature of pleading
3 The motion seeks to have struck out from the pleading of 13 October 1998 pars 1 to 18 inclusive, 21B and 21C as well as the prayer for relief against the first respondent in respect of those paragraphs as they are contained in the applicants' amended statement of claim dated 13 October 1998. The position disclosed by pars 1 to 18 is as follows.
4 The first and second applicants (described as "the first and second plaintiffs" in the statement of claim) were declared bankrupt on 2 June 1992. The second respondent is an accounting partnership of which Mr Lyford was a member and Mr Anderson an employee. Mr Lyford was duly appointed as the trustee in bankruptcy of the bankrupt estates of the first and second applicants. Mr Anderson, acting under the supervision and control of Mr Lyford, assisted him with the administration of those estates.
5 The first and third applicants are the registered proprietors of land at 15 Glenbrook Road Thornlie ("the Pridmore land"). The second and fourth applicants are the registered proprietors of land at 24 Henrietta Avenue, Armadale ("the Witte land").
6 At the time they were declared bankrupt the first and second applicants were respectively indebted to the first respondent in the total amount of $331,659. That amount was comprised of a debt of $143,490 secured by a registered third mortgage over the Pridmore land and the Witte land respectively and a judgment debt in the amount of $188,169 which was unsecured.
7 In or about September 1993 the first and second applicants proposed to Mr Lyford that they enter into a composition with their respective creditors other than the mortgagees of the Pridmore land and the Witte land. The composition would have been in accordance with the provisions of subs 73(4) of the Bankruptcy Act 1966 (Cth) ("the Act") in terms of which creditors were to accept, in each estate, the sum of $22,500 in full and complete satisfaction of all claims. On or about 14 October 1993 each of those applicants therefore paid to Mr Lyford an amount of $22,500 to be dealt with by him in the terms of the composition if it were accepted.
8 By a circular to creditors in each bankrupt estate dated 18 October 1993 Mr Lyford gave creditors notice of a meeting on 3 November 1993 ("the Creditors Meeting") to consider the proposed composition and informed creditors of the terms of it. It is further pleaded that by undated instruments of proxies in each estate handed to Mr Anderson at the Creditors Meeting a director of the first respondent, Mr Chesson, claimed the first respondent was a creditor in each of the estates in the amount of $331,659, that is, the total of the first respondent's secured and unsecured debt. In the case of the first applicant he appointed himself as a proxy and in the case of the second applicant's estate appointed Ms Kelly as the first respondent's proxy.
9 The pleading continues by claiming that at the Creditors Meeting in each of the estates Mr Chesson moved a special resolution "that creditors accept the sum of $22,500 in addition to all available property and that by force (sic) s 73(4) of the Bankruptcy Act, the bankruptcy be annulled." In each case the proxy voted in favour of that resolution on the full value of the first respondent's secured and unsecured debts and in each case the proxies vote comprised 50 per cent in number and 98 per cent in value of the creditors present and voting personally or by proxy. Each of the special resolutions was declared to have been carried.
10 It is then claimed in par 20C that on a proper construction of the terms of each of the special resolutions the term "debts" of the first and second applicants which were released by those resolutions meant all the debts then due and owing including the secured debt. In par 20D this construction is pleaded as being in accordance with the presumed intention of each of the applicants, their trustee in bankruptcy and all participating creditors including the first respondent.
11 The particulars said in par 20D give rise to that presumed intention refer to discussions between the first and second applicants and Mr Lyford and/or Mr Anderson in relation to the compositions and to the fact that in each of the applicants' statement of affairs the value of the Pridmore mortgage and the Witte mortgage respectively were estimated as nil. Other matters particularised include the alleged facts that Mr Chesson and Ms Kelly signed the attendance register at the Creditors Meeting stating the amount of the first respondent's debt was the full value of the secured and unsecured amounts without attributing any value to either the Pridmore mortgage or the Witte mortgage. Additionally it is pleaded that each signed a proxy form relying on the entire debt, constituted by both the secured and unsecured debt.
12 In par 21A it is pleaded:
"21A.. The first and second plaintiffs say that by participating in the special resolutions in the first and second plaintiffs' estates on the basis as pleaded in paragraphs 20C to 20D (inclusive) above, Magenta13 In par 21B it is further pleaded that the first respondent has to date refused to discharge either of the mortgages.
a. unequivocally elected to surrender both the Pridmore Mortgage and the Witte Mortgage; alternatively;
b. is estopped from denying that it elected to surrender both the Pridmore Mortgage and the Witte Mortgage.
Particulars of Detriment to the Estoppel Pleaded
In reliance of the first defendant's said conduct, the first and third plaintiffs and the second and fourth plaintiffs repaid loans secured by mortgages prior to the Pridmore Mortgage and the Witte Mortgage as particularised in annexures "D" and "E" to the statement of claim, with the result that unless the Pridmore Mortgage and the Witte Mortgage are completely discharged, the first and third plaintiffs and the second and fourth plaintiffs will forego the equity they have built up in their respective properties since the annulment of the first and second plaintiffs' bankruptcies to the benefit of the first defendant whose claim now exceeds $270,000.00."
14 Paragraph 21C pleads that the payout figure of the secured debt as at 12 October 1998 was $272,901.10.
15 In the prayer for relief each of the plaintiffs claim as against the first respondent a declaration that by its conduct prior to and at the Creditors Meeting it surrendered the Pridmore mortgage and the Witte mortgage; that it lodge a discharge of those mortgages; further or alternative relief; and costs. Pursuant to other claims in the statement, relief is sought against the second respondent in damages and otherwise and against Mr Lyford as a member of the second respondent by way of exemplary damages.
Prior Supreme Court proceedings
16 The matter presently before the Court has a prior history in the Supreme Court. There an action was instituted in 1997 by the first and second applicants against the present respondents.
17 On 12 February 1998 White J held that the dispute of fact between Mr Anderson and Mr Chesson gave rise to triable issues. He described those triable issues as the factual dispute between Mr Chesson's version of the events at the Creditors Meeting and that of Mr Anderson over the short question whether the first respondent voted in favour of the proposed composition in relation to the whole of its debt or only the unsecured portion.
18 On 9 September 1998 Heenan J ordered the joinder of the third and fourth applicants and gave leave for further amendments to the re-amended statement of claim. In doing so, he said:
"Presently the plaintiffs allege, in paras 19 and 20, that the composition brought into existence a contract between the plaintiffs and Magenta whereby the former were released from all Magenta's debts, including the debt secured by the mortgages. In the proposed new paragraphs 20A to 20D inclusive the plaintiffs allege in the alternative that the resolution approving the composition contained an implied term to that effect.In the course of his reasons his Honour also dismissed the applicants' application for an order transferring the proceedings to the Federal Court pursuant to the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth) ("the Cross-Vesting Act") or to hear and determine on the merits an application for transfer, and directed the issue be heard and determined by the trial judge as a preliminary issue. (The claim for contract referred to by Heenan J is not now contained in the pleading of 13 October 1998).
The primary submission of counsel for Magenta was that both allegations must fail. His submission, as I understand it, was to this effect. The written proposal for composition in satisfaction of their debts, which was not amended at the meeting, was accepted by the special resolution of the creditors. The bankruptcies thereupon were annulled (Bankruptcy Act 1966 ss73(3) and 74(5)). However, the proposal could have related only to provable debts (s75(1) of the Act). Because it neither surrendered its security for the benefit of creditors generally nor deducted the estimated value of the security and proved for the balance due to it, Magenta was not entitled to prove any part of its secured debt (s90 of the Act). Counsel submitted that the composition therefore could not have released the plaintiffs from any part of the secured debt.
The submission is logical. In the end, it might prevail and, if it does, the allegations in pars 19 and 20 as to the existence of a contract must fail. But those paragraphs are not now under attack. For so long as they remain it seems appropriate to allow the plaintiffs to plead the existence of an implied term in the contract."
19 On 25 September 1998 the matter came before Ipp J in chambers as part of the expedited list. His Honour declined to allow a strike out application to be brought forward on the basis of the jurisdictional point directed to the appropriateness of the proceeding in the Supreme Court.
20 On 8 October 1998, pursuant to indications given by Ipp J in the course of his reasons on the strike out application, the first respondent sought leave to appeal from the order of Heenan J on 6 October 1998. The Full Court held that it was for the trial court to determine whether on the pleadings as they remained there was a federal matter for the purposes of the Cross-Vesting Act.
21 On 21 October 1998 Scott J directed that the action be transferred to the Federal Court having ruled that it was a special federal matter under the provisions of the Cross-Vesting Act.
22 Scott J considered it was sufficient to dispose of the matter to refer to the pleading raised by the first respondent that the Act constitutes an exclusive code so as to exclude the principles of equity from the applicants' claim. In the course of his reasons he said:
"In dealing with this aspect of the application, it is important to note that the mortgages that the first defendant held in relation to the various lands of the plaintiffs were third mortgages. The plaintiffs allege that the two prior mortgagees subsumed their entire equity in the properties concerned. The plaintiffs allege that the third defendant accepted the compositions referred to earlier in these reasons because the third mortgages were valueless.Requirements for strike out
Following their release from bankruptcy, the plaintiffs contend that they discharged the first and second mortgages in the belief that the third mortgage had also been discharged in the course of the bankruptcy. No discharge, however, was ever registered in relation to the third mortgages. It is said that as a consequence, the third mortgages held by the first defendant became first mortgages and as a consequence the balance of moneys owing to the first defendant, which is a substantial sum of money, is thereby secured by first mortgage. The first defendant pleads that it did not release its security in the bankruptcy and was not involved in the composition to the extent of any secured debt. That is very much a matter of controversy for determination when the action is resolved."
23 The motion for strike out is brought pursuant to O 20 r 2 and/or O 11 r 16 of the Federal Court Rules. The grounds relied upon are that the pleadings referred to disclose no reasonable cause of action, are scandalous, frivolous and/or vexatious and may prejudice, embarrass or delay the fair trial of the action.
24 A cause of action is every allegation of fact which the plaintiff must prove to establish the right to the relief claimed (Letang v Cooper [1965] 1 QB 232; Docarmo v Ford Excavations Pty Ltd [1984] HCA 17; (1984) 154 CLR 234). A "reasonable cause of action" means a cause of action with some chance of success, when considering the allegations of fact contained in the challenged pleading alone. The terms "vexatious" and "frivolous" have been used interchangeably (The Atlantic Star [1974] AC 436 at 464-468). "Frivolous" has been held to be apt to describe proceedings in which the Plaintiff's claim is so obviously untenable that it cannot possibly succeed (Burton v Shire of Barnsdale [1908] HCA 57; (1908) 7 CLR 76 at 92). "Vexatious" has been held to be apt to describe an action which is a sham and which cannot possibly succeed (Wills v Earl Beauchamp (1856) 11 PD 59, 63).
Common cause
25 It is common cause that the first respondent did not prove its secured debts in accordance with provisions of Part VI Division 1. Additionally, it is common cause that at no time at or before the Creditors Meeting did the first respondent or any other creditor provide or give to the trustee a written statement setting out any of the matters referred to in s 64D of the Act. In these circumstances and by reason of the provisions of subss 64ZA(5) and (6) of the Act, neither the first respondent nor any other creditor had any entitlement to vote at the Creditors Meeting in respect of the claims, whether secured or unsecured. Consequently the vote that was cast by the first respondent and other creditors at the Creditors Meeting was of no force or effect under the provisions of the Act.
26 It is also common cause that the alleged "special resolution" was not a special resolution within the meaning of s 5 of the Act and thereby within the meaning of Part IV Division 6 of the Act because it was not passed by majority in number and at least three-quarters in value of the creditors present at the meeting.
27 For the applicants it is accepted that there was no binding composition.
Concessions
28 In the draft pleading of 11 December 1998 the applicants concede pars 20C and 20D (so far as it relies on "presumed" intention) cannot be pursued. It is proposed to introduce par 19 reading:
"19 Magenta voted in favour of the proposed compositions in the first and second plaintiffs' estates, as pleaded in paragraphs 17 and 18 above, in the following circumstances:..."Then would follow what were the "particulars of facts giving rise to presumed intention".
29 In consequence, what was formerly par 21A (now par 20) would be amended to read in its opening line:
"20. The first and second plaintiffs say that by voting in favour of the proposed compositions in the first and second plaintiffs' estates on the basis as pleaded... Magenta ...".Then would follow the pleas of election and estoppel in the same form as in the former par 21A with the same particulars of detriment.
30 In the course of submissions counsel for the applicants foreshadowed that rather than re-cast par 20 (formerly 21A) to rely only on the act of voting, he would seek the leave of the Court to further amend so that it related instead to the conduct of Magenta as now pleaded in par 19 (that is, the list of former particulars of presumed intention).
31 The difficulty facing the Court is that (1) the motion related to the pleading of 13 October 1998 and (2) the proposed further amendment has not been finally formulated and, in that sense, is presently hypothetical. As a result of the concessions, much of the argument directed on behalf of the first respondent to the pleading of 13 October 1998 does not need to be addressed but does require adaptation to both the proposed pleading of 11 December 1998 and the foreshadowed re-pleading of par 20.
No room for equity argument
32 The substantive pleading in par 20 is founded on the equitable doctrines of election (to surrender) and estoppel. For the first respondent it is said there is no room for such doctrines to apply in the context of the Act.
33 The submissions run as follows.
34 The statutory scheme of the Act as explained by the High Court in Cummings v Claremont Petroleum [1996] HCA 19; (1990) 185 CLR 124 at 137-138, 142 and 146-147 has the consequence that surrender of a creditor's rights can only occur in accordance with the Act. Section 58 provides that where a debtor becomes bankrupt, the bankrupt's property vests forthwith in the person's trustee in bankruptcy. "Property" is defined by s 5 broadly enough to encompass choses in action and thus a right or entitlement to pursue an action or recover damages by suit. The "property of the bankrupt" which vests in the trustee is defined to mean the property divisible among the bankrupt's creditors and any rights and powers in relation to that property that would have been exercisable by the bankrupt if he had not become a bankrupt: s5(1).
35 Section 116(1)(a) provides that:
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 her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge;
(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 or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge;
(c) property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D; and
(d) money that is paid to the trustee of the bankrupt's estate under an order under section 139E;
36 This however must be read subject to subs 116(2)(g) which provides that subs (1) does not extend to:
is property divisible amongst the creditors of the bankrupt."
"(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 or she became a bankrupt) in respect of such an injury or wrong or the death of such a person; ..."
37 In relation to s 116(2)(g) the first respondent relied on Cummings at 141, Coyne v Commercial Equity Corporation Ltd (unreported WA Supreme Court FC, 28 July 1998, Kennedy, Franklyn & Walsh JJ and Mt Gibson Manager Pty Ltd v Deputy Commission of Taxation (French J, Federal Court of Australia, 18 December 1997, unreported). For the applicants it is accepted that Cummings does not involve argument on residual equitable rights and that par (g) is confined to damages or compensation and does not address equitable rights.
38 For the first respondent it is submitted that as a consequence of the statutory scheme, at all material times during the terms of the bankruptcies of the first and second applicants their respective property, including any choses in action, vested in the trustee in bankruptcy alone and neither of them therefore had any capacity right or entitlement to enter into a binding and effective composition with the first respondent in equity or under the common law as relied upon by the applicants or at all. It is submitted that only a composition made under the Act can take effect as a valid and enforceable composition. It is submitted therefore that the Act provides an exclusive code as to the circumstances and conditions under which a bankrupt can enter into a binding and effective composition with his or creditors and there are no common law or equitable rights in relation to the property of the bankrupt that can be enforced by a bankrupt independently of the terms of the Act. It is said that such rights are excluded by necessary implication as a matter of proper construction of the Act. The submissions continue by stating that it follows that a bankrupt is not empowered to make any arrangement with respect to his or property with his or her creditors during the course of the bankruptcy.
39 These arguments now sought to be put in relation on behalf of the first respondent are substantially contained in par 9 of the first respondent's amended defence and are expressed as follows:
"9(b) As to paragraphs 17, 18, 20C, 20D, and 21A of the statement of claim the first defendant says as follows:40 Additionally, there is a denial that there was a binding and effective composition between the applicants and the first respondent or between any of the applicants.
(a) At all material times during the term of the bankruptcies of the first plaintiff and the second plaintiff their respective property, including any choses in action did vest in the trustee in bankruptcy alone and neither the first plaintiff nor the second plaintiff had any capacity, right or entitlement to enter into a binding and effective composition with the first defendant in equity or under the common law as alleged or at all;
(b) Further or alternatively the Bankruptcy Act 1966 ("Act") does provide an exclusive code as to the circumstances and conditions under which a bankrupt can enter into a binding and effective composition with his or her creditors and there are no common law or equitable rights that can be enforced independently of the terms of the Act. Such common law and equitable rights are excluded as a matter of the proper construction of the Act by necessary implication."
41 On behalf of the first and second applicants it is said the point is that if the compositions were not enforceable under the Act, a court of equity should still be able to do "equity" on the basis that equitable considerations outweigh the policy considerations underlying the argument that the applicants are either entitled to relief under the Act or they are not entitled to relief at all: Seventeenth Connute Pty Ltd v Bradley Air-Conditioning Pty Ltd [1987] 1 Qd R 111. The applicants' primary argument is that the enforcement of the mortgages would in the circumstances be contrary to equity and good conscience.
42 The applicants' case is put as follows. Firstly a bankrupt can decide whether to put a proposition to creditors or discuss it with the trustee. This is a situation which the Act does not deal with. Secondly, waiver of creditor's rights is a possibility so that it is open to a bankrupt to acquire equitable rights in relation to the manner in which creditors vote on the composition of the bankrupt's property.
43 The general powers of courts in bankruptcy are set out in s 30, paragraph (b) of which expressly recognises the power of the Court to make orders including declaratory orders and orders granting injunctions or other equitable remedy. For the applicants it is said that if the Act is a code then by the terms of the Act itself there is unlimited jurisdiction to grant equitable relief. The first respondent says s 30 should be seen merely as facultative.
44 In my view it is incontrovertible that the first respondent is right in submitting that as a consequence of the provisions of the Act referred to and the vesting of the choses in action of the first and second applicants in their trustee and bankruptcy alone neither of them had any capacity, right or entitlement to enter into a binding and effective composition with the first respondent in equity or under the common law or at all. The position is quite simply that only a composition made under the Act can take effect as a valid and enforceable composition. I accept that the Act provides an exclusive code as to the circumstances and conditions under which a bankrupt can enter into a binding and effective composition with his or her creditors.
45 I also accept that to the extent that the common law or equitable rights in issue are ones in or created by the bankrupt in relation to a composition, they cannot exist and be enforced independently of the Act.
46 But neither of those principles touch what is pleaded on behalf of the applicants. The case which they seek to bring is not one in which it is said any arrangement was entered into by them or in which they exercised any purported capacity, right or entitlement. Rather, it is that the whole course of conduct pleaded in par 19 (previously par 20D) gives rise to equitable claims in respect of the conduct of the creditors. The claim is directed to the conduct of the creditors at the Creditors Meeting. It is not directed to establishing any different binding and effective composition to that arrived at by the Creditors Meeting. It is directed to establishing liability in the creditors in equity because of their conduct at that meeting.
47 In my view the provisions of the Act do not have the consequence of excluding by necessary implication the possible application of common law or equitable principles to the conduct of a creditor at a Creditors Meeting which is said to give rise to liability independently of the binding and effective quality of any composition made at that meeting. It is the conduct which is sought to be the source of liability. It is contended for the first respondent that no common law or equitable rights can be enforced independently of the terms of the Act. That contention can only be accepted to the extent of the application of the Act to securing a binding and effective composition.
48 For the first respondent it is submitted, however, that is not the case in relation to the question of surrender. Relevant to these submissions are the provisions of s 73 and s 90. Subsection 73(4) provides that creditors may, by special resolution, accept the proposal made by a bankrupt. Subsection 73(5) provides:
"(5) A creditor who has proved his or her debt may assent to or dissent from the proposal by written notice to that effect delivered to the trustee before the meeting or sent by post to the trustee and received by him or her before the meeting, or sent by post to the trustee and received by him or her before the meeting, and in that case the creditor shall, for the purposes of this division, be deemed to have been present at the meeting and to have voted according to his or her assent or dissent."
Subsection 90(1) provides:
"90(1) A secured creditor is entitled to prove the whole or a part of his secured debt in the debtor's bankruptcy in accordance with the succeeding provisions of this Division, and not otherwise."
In my opinion these provisions provide a code being the only means by which a creditor may prove a debt.
49 However, the proving of a debt whether secured or unsecured does not encompass the surrender of rights to prove that debt. Rather, it involves the assertion of the rights. Surrender involves an election not to pursue the rights which the code provided in the Act makes available. Accordingly, I do not consider it can be said that a creditor can surrender rights only in accordance with the Act. The Act is concerned with the assertion of rights and through the proving of debts, not with the surrender of them. In my view this is supported by reference to subss 90(4) and (5) which read:
"(4) A secured creditor who has not realized or surrendered his security may:The above conclusions also receive support from subs s 75, which relevantly provides:
(a) estimate its value; and
(b) prove for the balance due to him after deducting the value so estimated.
(5) A secured creditor to whom subsection (4) applies shall state particulars of his security, and the value at which he estimates, it, in his proof of debt."
"75(1) Subject to this section, a composition or scheme of arrangement accepted in accordance with this Division is binding on all the creditors of the bankrupt so far as relates to provable debts due to them from the bankrupt."
(2) The acceptance of a composition or scheme of arrangement does not:
(a) ...
(b) release any other person from any liability from which he would not be released by the discharge of the bankrupt."
It follows that I do not consider the provisions of the Act, exclusive as they are in respect of compositions and proving of debts, can exclude the potential application of the principles of equity to the conduct of person involved in the execution of proceedings purportedly in accord with the Act. Where such proceedings are, as here, not completely in accord with the Act, it is even more difficult to perceive of the application of an excluding effect to conduct which may arguably attract the application of equitable principles.
50 The applicants accept that in respect of estoppel there is no appropriate prayer for relief.
Whether equitable rights vest in trustee
51 For the first respondent it is contended that any equitable rights arising in the bankrupt pass to the trustee as after-acquired property. For the applicants it is contended that the equitable rights they seek to rely on were not rights of property prior to the sequestration nor were they after-acquired rights for the purposes of s 58(1) of the Act.
52 Subsection 58(1) of the Act provides:
"58.(1) Subject to this Act, where a debtor becomes a bankrupt:Also relevant to vesting is s 132 which reads:
(a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or
(c)
(d) devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt in that registered trustee.
...
(6) In this section, `after-acquired property', in relation to a bankrupt, means property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt."
"132.(1) Subject to this section, and to section 158 where a trustee is appointed by the creditors, the property of the bankrupt passes to and vests in the trustee so appointed on the day on which the appointment takes effect.53 The equitable rights sought to be relied upon in the pleading by the applicants could arguably have arisen prior to the sequestration occurring. In view of the arguments put by the parties however it is also necessary to address the possibility that such rights might be after-acquired property.
(2) Subject to this section, the property of the bankrupt passes from trustee to trustee and vests in the trustee for the time being during his continuance in office or, if the Official Trustee becomes the trustee, in the Official, without any conveyance, assignment or transfer.
(3) ..."
54 The words "the property of the bankrupt" so far as they appear in s 58 (other than subss (3) and (4) which are not relevant here) and s 132 are defined in subs 5(1) of the Act to mean:
"(i) the property divisible among the bankrupt's creditors; andThe word "property" is defined in the same subsection to mean:
(iii) any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt."
"real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property."
55 The "property divisible among creditors" is defined by subs 116(1) the full terms of which have been previously set out.
56 In Faulkner v Bluett [1981] FCA 5; (1981) 52 FLR 115 it was held that proceedings commenced against the Commonwealth of Australia claiming damages flowing from negligent advice or misrepresentation prior to bankruptcy were directly related to property and vested in the Official Receiver pursuant to 116 of the Act. They were not rights which fell within the exception in s 116(2)(g). See Lockhart J at 111-120.
57 It has also been held that the right to have a judgment which was entered by default against a debtor who was subsequently made bankrupt on the ground of failure to comply with a bankruptcy notice set aside, was a right which vested in the trustee and the debtor had no locus standi to make the application to set aside. The application was accordingly dismissed without any regard to the case the applicant might have on the merits: W R Henry & Son v Hodge (1963) 20 ABC 87.
58 In relation to s 58(1)(a) "the property of the bankrupt" as defined in par 116(1)(a) would include any choses in action which the applicants had to enforce equitable rights. Such rights, being property being divisible among the creditors of the bankrupt, would vest in the Official Trustee.
59 If the equitable rights arose after the sequestration order it would for the same reasons be "property that is divisible amongst the creditors of the bankrupt" within s 58(6) and thus property to which par 58(1)(b) applies so that again the exercise of the rights would therefore vest in the Official Trustee.
60 It is the case that par (a)(ii) of the definition in subs 5(1) of the phrase "the property of the bankrupt" refers to "any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt". Likewise in par 116(1)(b) reference is made to the capacity to exercise and take proceedings "over or in respect of property". It may be arguable that the rights which the applicants seek to enforce in equity are not rights "in relation to ... property" or "in respect of property" in that they relate to the alleged conduct of certain parties. However I do not consider that either of those paragraphs is the operative paragraph which determines that the choses in action the applicants seek to enforce are included in the property which is vested on sequestration or after acquisition.
61 The position is also to be tested by reference to s 60 which relevantly 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 28 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.
It will be observed that subs 60(4) reserves the right of the bankrupt in the limited circumstances reflected in s 116(2)(g).
(4a) Notwithstanding paragraph (1)(b), this section does not empower the Court to stay any proceedings under the Proceeds of Crime Act 1987 or a corresponding law.
(5) In this section, `action' means any civil proceeding, whether at law or in equity."
62 In Coyne it was held that upon bankruptcy all the bankrupt choses in action, subject to s 60(4), pass to the trustee.
63 It therefore must follow that whether the equitable rights pleaded by the applicants are rights alleged to exist prior to the bankruptcy or are after-acquired property, they are rights which vested in the trustee on bankruptcy or after acquisition. They are not rights which can be enforced by the applicants. It follows that the motion to strike out the portion of the pleadings in which the applicants seek to enforce the equitable rights should be allowed.
Unequivocal election to surrender
64 Further arguments were addressed to the content of the equitable claim. Inasmuch as the trustee could be required to consider that claim, it may be helpful if I state the following in relation to the arguments which were put.
65 For the first respondent it is said that the allegation that "by voting in favour of the proposed compositions" the first respondent "unequivocally elected to surrender both the Pridmore mortgage and the Witte mortgage" is insupportable as a matter of construction and of law. It is submitted there is no conduct pleaded to support a surrender under the provisions of the Act nor is it alleged there was a surrender under the Act. It is further submitted there can be no surrender in equity.
66 The doctrine of election at equity "fastens upon the conscience of a person taking under a deed or will and refuses to allow him to take the benefit of the disposition in his favour except upon satisfaction of certain conditions": Meagher, Gummow and Lehane, Equity, Doctrines and Remedies (Butterworths 3rd ed 1992) p 848, par 3901. The relevant deed posited by the pleading is either the Pridmore mortgage or the Witte mortgage. As that text makes apparent in par 3902, the principle of election applies in two principal classes of case, namely, cases of dual gifts (the question being whether the legatee can both approbate and reprobate) and also cases of mutual obligation where a party having a beneficial interest in property under a disposition may be required, on equitable principles, to submit to another part resorting to that interest so as to compensate that other party for the deprivation of a beneficial interest by reason of an action of the first party. In Re Gordons Will Trusts [1978] Ch 145 at 153-154 Buckley LJ described the classes of cases as follows.
"Thus, if A and B enter into a mutual settlement under which A settles property upon trust under which B has a beneficial interest, and B covenants to settle property on trusts under which A or C will be entitled to a beneficial interest; and if for some reason (as, for example, that B was a minor at the date of the covenant) B can repudiate his or her obligation to bring property into the settlement and does so, equity will compel B to submit to A or C, as the case may be, being compensated out of B's beneficial interest in A's trust fund, so far as practicable, for being deprived of his, A's or C's beneficial interest in B's intended trust fund.So the question is whether the pleading in par 19 (formerly par 20D) is sufficient to give an arguable case that a mutual obligation arose leading to the position that the first respondent should not equitably retain the whole of its beneficial interest under the Pridmore mortgage and the Witte mortgage. The pleading in terms of contract has been abandoned so there is no longer any pleading of a "mutual obligation". However the effect of the sub-paragraphs of par 19 is to show the applicants seek to prove that from the course of conduct there adumbrated, the parties proceeded upon a foundation of mutual accommodation.
The circumstances which cause equity to intervene in these two classes of case are distinguishable. In the first class, which I might call cases of dual gifts, it is the refusal of B to give effect to A's intention to confer a beneficial interest on C in what is in fact B's property. In the second class, which I might call cases of mutual obligation, it is the repudiation by B of his obligation to bring his own property into settlement for the benefit of A or C, but the equitable remedy is of the same character in each case. Equity lays hold of B's beneficial interest under the disposition for the purpose of compensating the disappointed party thereout, but only interferes with B's enjoyment of it to the extent necessary to achieve compensation. The mutual obligation cases, I think, clearly proceed upon the footing that B cannot equitably retain the whole of his beneficial interest under the trusts of the settlement and at the same time fail to fulfil part of the consideration for the settlement."
67 In my opinion, subpars a-t of par 19 (formerly par 20D) are pleading the circumstances which give rise to the mutual accommodation which it is said would attract the application of the equitable principle of election to surrender. In those circumstances it does not appear to me that the absence of a pleading of an act of surrender makes the applicants' case unarguable. The thrust of the case is that in all the circumstances there was a mutual accommodation that the first respondent could not equitably retain the whole of its beneficial interests under the Pridmore mortgage and the Witte mortgage and at the same time fail to fulfil part of the consideration of the accommodation said to arise from those circumstances.
68 Nevertheless, while I consider that the matter is arguable I am not satisfied that the particular pleading in par 19, subpars a-t is presently in a form to which leave could be given if the applicants could pursue their claim. Various objections were taken to matters of detail on the part of the first respondent. The applicants would have required the opportunity of attending to those objections considering very closely the matters requiring to be pleaded to establish the equitable doctrine of election to surrender and bringing an amended pleading before the Court for further argument. At the same time the applicants would have needed to unequivocally decide whether they rely on par 20 (formerly par 21A) on:
" Voting in favour of the proposed compositions", or
" Voting in favour of the proposed compositions" in the circumstances pleaded in par 19, or;
All of the conduct pleaded in par 19.
If the last of these alternatives is relied on for the applicants, the conduct would date back to June 1992 and would have been the subject of further submissions from the first respondent.
Estoppel
69 In relation to the pleading of estoppel it is said for the first respondent that none of the matters referred to by Brennan J in Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 423 at 428-429 have been pleaded against it so that no estoppel is capable of arising on the pleadings. It is also said for the first respondent that the alleged "detriment" is not in fact a detriment of a kind which would attract equitable relief or at all. Furthermore in relation to estoppel it is said for the first respondent that the fundamental flaw in the pleadings is the absence of anything to establish detriment. It is contended the applicants conceded they did not repay the loans in consideration of anything said by the first respondent but because of their liability so that there was therefore no change of position based on reliance and no relevant detriment. The applicants concede there was a continuing obligation to repay the loans. That, it is said for the first respondent, is fatal to estoppel, see The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 415.
70 A further point of importance which arose in oral argument, was that it is accepted for the applicants that it was not they who were the representees; rather it was the trustee. Whether a plea of estoppel can arise on the facts in those circumstances is therefore a critical point.
71 It is correct there is no pleading which can obviously relate to the requirements of the construct of estoppel. On behalf of the applicants it was argued, taking each in turn, that the material facts are in the pleadings in subpar 19 a-t. That is quite an inadequate basis upon which the first respondent should be called upon to address the claim of estoppel. It leaves the first respondent in the position of conjuring up the facts in those paragraphs which arguably relate to the requirements of the doctrine of estoppel. In my opinion the plea of estoppel in its present form would have been properly struck out. This position has come about due to the fact that the particulars in pars a-t of par 19 were originally drafted to support pleas of implied conditions and presumed intention, each of which have been abandoned.
72 For the first respondent it is further contended that if, by its conduct, it is estopped from denying that it agreed to surrender the securities, such an estoppel cannot take effect as to oust the provisions of the Act which exclusively cover the field. Reliance is placed on Verwayen at 405-406, 410 per Mason J; 425 per Brennan J; 454-456 per Dawson J; 486 per Gaudron J and 496-497 per McHugh J - and see Deane J at 432 to 433 for the proposition that an individual cannot waive a matter in which the public have an interest. Here it is said that the scope and policy of the Act precludes waiver.
73 In my view it would not have been necessary to decide this issue on a strike-out application. The question is whether pleadings can show that the issue of estoppel is arguable. The issue whether a waiver was involved would be considered in the findings of fact relevant to the finding of estoppel and would arise in that context for decision as an issue of law at trial.
Prayer for relief
74 It was conceded for the applicants that the prayer for relief does not relate to the plea of estoppel and would have therefore required amendment.
75 In the prayer for relief the declaration is said to relate to "conduct prior to and at the Creditors Meeting". This is wider than the allegation of "voting in favour of the proposed compositions".
Conclusion
76 For these reasons I consider the first respondent's motion should be allowed.
Associate:
Dated:
|
I certify that this and the preceding seventy-six (76) numbered paragraphs are a true copy of the Reasons for Judgment herein of
the Honourable Justice R D Nicholson |
|
Counsel for the Applicants: | Mr G A Rabe |
| Solicitor for the Applicants: | Camm & Associates |
| Counsel for the First Respondent: | Mr S Owen-Conway QC with Mr T Galic |
| Solicitor for the First Respondent: | Galic & Co |
| Counsel for the Second Respondent: | Mr D J Martino |
| Solicitor for the Second Respondent: | Black & Co |
| Date of Hearing: | 11 December 1998 |
| Date of Judgment: | 25 February 1999 |
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/1999/152.html