Pitman v Pantzer (Trustee of the Bankrupt Estate of Thomas Richard Wenkart) [2002] FCA 46 (1 February 2002)

Last Updated: 20 February 2002

FEDERAL COURT OF AUSTRALIA

Pitman v Pantzer (Trustee of the Bankrupt Estate of Thomas Richard Wenkart) [2002] FCA 46

BANKRUPTCY - effect of assignment and release after sequestration order.

Bankruptcy Act 1966 (Cth)

Bechrose Pty Ltd v Jefferson (Trustee) [1999] FCA 1153; (1999) 94 FCR 494 cons.

Clyne v Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589 cons.

ALAN PITMAN V WARREN PANTZER (TRUSTEE OF THE BANKRUPT ESTATE

OF THOMAS RICHARD WENKART)

N7752 OF 2000

JUDGE: BEAUMONT J

DATE: 1 FEBRUARY 2002

PLACE: SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N7752 OF 2000

BETWEEN:	ALAN PITMAN APPLICANT
AND:	WARREN PANTZER (TRUSTEE OF THE ESTATE OF THOMAS RICHARD WENKART) FIRST RESPONDENT THROVENA PTY LIMITED, HAPDAY HOLDINGS PTY LIMITED AND MACQUARIE HEALTH CORPORATION LIMITED SECOND RESPONDENTS
AND BETWEEN:	THROVENA PTY LIMITED, HAPDAY HOLDINGS PTY LIMITED AND MACQUARIE HEALTH CORPORATION LIMITED CROSS-APPLICANTS
AND	ALAN PITMAN FIRST CROSS-RESPONDENT WARREN PANTZER (TRUSTEE OF THE ESTATE OF THOMAS RICHARD WENKART) SECOND CROSS-RESPONDENT GENNARO ABIGNANO AND GENALLCO PTY LIMITED THIRD CROSS-RESPONDENTS
JUDGE:	BEAUMONT J
DATE OF ORDER:	1 FEBRUARY 2002
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. Direct that the cross-applicants file and serve draft short minutes of the orders they seek, on the application and cross-application, as soon as practicable.

2. Proceedings stood over to a date to be fixed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N7752 OF 2000

BETWEEN:	ALAN PITMAN APPLICANT
AND:	WARREN PANTZER (TRUSTEE OF THE ESTATE OF THOMAS RICHARD WENKART) FIRST RESPONDENT THROVENA PTY LIMITED, HAPDAY HOLDINGS PTY LIMITED AND MACQUARIE HEALTH CORPORATION LIMITED SECOND RESPONDENTS
AND BETWEEN:	THROVENA PTY LIMITED, HAPDAY HOLDINGS PTY LIMITED AND MACQUARIE HEALTH CORPORATION LIMITED CROSS-APPLICANTS
AND	ALAN PITMAN FIRST CROSS-RESPONDENT WARREN PANTZER (TRUSTEE OF THE ESTATE OF THOMAS RICHARD WENKART) SECOND CROSS-RESPONDENT GENNARO ABIGNANO AND GENALLCO PTY LIMITED THIRD CROSS-RESPONDENTS

JUDGE:	BEAUMONT J
DATE:	1 FEBRUARY 2002
PLACE:	SYDNEY

SUPPLEMENTARY REASONS FOR JUDGMENT

(ON CROSS-CLAIM)

BEAUMONT J:

INTRODUCTION

1 In my reasons dated 21 December 2001, I reserved (at [64]) liberty to any party to raise any further issue which required determination.

THE FURTHER ISSUES

2 On behalf of Mr Pitman, it is contended that the following arise as further issues for determination (as stated in his counsel's written submissions in reply dated 2 March 2001):

"5.5 ... execution of the Throvena Deed did not have the effect of rendering the debts claimed in [Mr Pitman's] proof of debt incapable of proof. In order to do so, the Throvena Deed would need to have had the effect of changing those previously provable debts so that they were no longer, in the words of s.82 of the Bankruptcy Act 1966, `debts [or] liabilities, present or future, certain or contingent, to which [the] bankrupt was subject at the date of the bankruptcy, or to which he ... may become subject before his ... discharge by reason of an obligation incurred before the date of the bankruptcy ...'.

5.6 The first problem with the interveners' argument that the Throvena Deed has had the effect that the debts claimed by [Mr Pitman] are not capable of proof is that the deed was entered into after the sequestration order was made. Dr. Wenkart was made bankrupt on 29 October 1999. The Throvena Deed was entered into on 22 December 2000. There is no suggestion that the Throvena Deed had any retrospective effect.

5.7 Hence, on the assumption that, as at immediately prior to the sequestration order, Mr Pitman was entitled to be indemnified by Dr. Wenkart against the debts in the applicant's proof of debt, then, at the least, those debts were `liabilities, present or future, certain or contingent, to which [the] bankrupt was subject at the date of the bankruptcy ...' within the meaning of that expression in s.82 of the Bankruptcy Act 1966. The subsequent execution of the Throvena Deed could not have altered the fact that the debts claimed by the applicant were liabilities to which Dr. Wenkart was subject at the date of the bankruptcy and, therefore, provable debts within s.82.

5.8 An example of the application of this principle is Ex parte Trustee of Cork (deed) (1932) 5 ABC 1, in which it was held that if there is a provable debt owing at the date of the bankruptcy, the creditor's right to prove for it in the bankruptcy cannot be affected by subsequent moratorium legislation postponing the debt or rendering it unenforceable. [Mr Pitman] submits that this principle is a complete answer to the argument of the interveners.

...

5.11 Finally, even if Abignano/Genallco release Mr Pitman in December 2002 in accordance with the terms of clause 1.4 of the Throvena Deed, that would not have the effect, even then, of disentitling Mr Pitman from proving the debts claimed in his proof of debt in the bankruptcy of Dr. Wenkart.

5.12 Clause 1.4 requires Abignano/Genallco to release Mr Pitman from all claims which they have against Mr Pitman `which give rise to or would give rise to a liability of Wenkart to Pitman or would cause Wenkart to become liable to Pitman ...'. However, the right which Mr Pitman has to prove against the bankrupt estate is not `a liability of Wenkart to Pitman'. On the making of the sequestration order against Dr. Wenkart, any liability of Dr. Wenkart to Mr Pitman `merged in an equitable execution...', so that Mr Pitman was a creditor whose right was a right of proof against the estate, not a mere right of action for a debt.

5.13 It is submitted that the expression `a liability' carries with it the same connotation of a sense of obligation to make the payment that the expression `debts ... still owing' was held to have in Clyne v Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589 at 594. `Liability' is `an obligation, especially for payment; debt or pecuniary obligations' or the `state of being obliged in law or equity'. The effect of bankruptcy, however, is that the debtor `is no longer obliged to pay his creditors; indeed he is disabled from doing so. If he offered payment they could not safely accept it; their right is a right of proof against the estate.' The result is that the right of Mr Pitman to prove against the estate would not be released even if clause 1.4 became operative in December 2002.

5.14 In any event, even if a right to prove against the bankrupt's estate could be understood to be a `liability of Wenkart to Pitman', clause 1.4 does not effect a release of any of the claims of Abignano/Genallco which, indirectly, gave rise to the applicant's right to prove against the estate. The relevant claims (see MFI 3A, para 49(c)) did not, at the time of execution of the Throvena Deed (to give clause 4.1 an interpretation most favourable to the interveners), `give rise to ...' and `would [not] give rise to' any right to prove against the estate. Rather, at that time, the claims which Abignano/Genallco had against Mr Pitman had already given rise to a right to prove against the estate. That right arose on the making of the sequestration order.

5.15 However, there is an even more fundamental problem with clause 1.4. The Throvena Deed was executed after Dr Wenkart became bankrupt. From the date of the sequestration order, the right which Mr Pitman had to an indemnity from Dr. Wenkart merged into a right to prove against the estate. From that date, the underlying basis of Mr Pitman's entitlement against Dr. Wenkart, namely, an entitlement to an indemnity against Mr. Pitman's own obligation to indemnify Abignano/Genallco, was replaced by a different right to prove against the estate.

5.16 Thus, whereas before the sequestration order, a release of Mr Pitman's obligation to indemnify Abignano/Genallco would, in turn, have released Dr. Wenkart from his obligation to indemnify Mr Pitman; after the sequestration order, a release of Mr Pitman's obligation to indemnity Abignano/Genallco would have the effect of releasing Dr. Wenkart because Mr Pitman's entitlement to an indemnity from Dr Wenkart ceased to exist on sequestration, having merged into the right to prove against the estate. The link in the indemnity chain between Mr Pitman and Dr Wenkart was broken on sequestration and replaced by a free-standing right.

5.17 The result is that, on the given assumptions, the execution of the Throvena Deed did not have the effect that the debts in the applicant's proof of debt were not capable of being admitted to proof. Accordingly, the answer to this question is `No'."

3 On behalf of Mr Pitman it is further contended that the following also arise for determination as further issues (as stated in his counsel's later written submissions on the amended cross-application dated 21 November 2001):

"The right to prove

6. Secondly, even if it were not for the estoppel, the claim is bad because:

6.1 Section 82 of the Bankruptcy Act 1966 specifies that it be determined whether the bankrupt was subject to the claimed debt as `at the date of bankruptcy'. This is consistent with the principles underlying s.82, as established by the authorities (Reasons, 13 July 2001, para 61-62; Submissions, 2 March 2001, para 5.5-5.8); and

6.2 On the making of the sequestration order, the right which Mr. Pitman had to an indemnity from Dr. Wenkart merged into a right to prove against the estate: Clyne v Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589 at 594. Hence, any release by Genallco/Abignano of a contractual obligation of Mr. Pitman to indemnify them after the making of the sequestration order cannot affect Mr. Pitman's accrued right to prove in the bankruptcy. Mr. Pitman's relevant right is no longer a contractual right to an indemnity from the bankrupt. (Submissions, 2 March 2001, para 5.11-5.17).

Valuation of the debt

7. The trustee is obliged to value Mr. Pitman's debts as at the date of bankruptcy and is not entitled to take into account subsequent events affecting the amount of the debt owed: Bechrose Pty Ltd v Jefferson (Trustee) [1999] FCA 1153; (1999) 94 FCR 494. Hence, any release of Mr. Pitman by Abignano/Genallco is irrelevant to the valuation of the amount of the debt for the purposes of proving the debt in the bankruptcy."

CONCLUSIONS ON FURTHER ISSUES

4 I cannot accept any of these arguments in the present context.

5 In the first place, for the reasons given in my judgment dated 21 December 2001 (especially at [11], [19] and following), Clyne did not involve any assignment or release, and accordingly did not decide the present point.

6 Moreover, cases such as Bechrose are distinguishable for present purposes. No release was involved there. Although there was an assignment of a creditor's debt, its effect had to be considered in the context of the special provisions of s 642B, ascribing a notional value to the debt. The present question, relevantly, is whether Mr Pitman has been effectively released, an issue which does not invoke s 642B.

7 Another feature in Bechrose, not present here, was the existence of a guarantee by the bankrupt where the creditor also held security from the principal debtor. Drummond J said at [44] - [45]:

"In the ordinary case, a creditor with security from the principal debtor sufficient to satisfy the debt could be expected to enforce that security before seeking to enforce a guarantee. But in estimating the value of the applicant's debt under the guarantee, the trustees are not, I think, permitted to take into account the unrealised entitlement of the applicant to recover, by enforcing the Chelmscliff mortgages, payment of the moneys in respect of which the guarantee was given: that would not be to value the bankrupt's liability on the guarantee, which is all s 82(4) authorises, but to value the creditor's rights under the mortgages. The creditor's rights against third parties in respect of a debt due to the creditor by the bankrupt are, as a general rule, irrelevant to the valuation of that debt for the purposes of the bankruptcy administration.

But it appears to be a settled rule of bankruptcy law that where a creditor proves in the bankruptcy of a guarantor and (as here) the guarantor is only responsible for the amount in fact owing by the principal debtor, any payment by or on behalf of the principal debtor received by the creditor before proof must be taken into account by the trustees in valuing the creditor's proof; a creditor claiming in a guarantor's bankruptcy is not, however, obliged to bring into account, in reduction of the amount of the debt sought to be proved, payments received from the principal debtor after submission of proof, let alone an estimate of what it may be able to obtain by realising the principal debtor's security. This rule is subject only to the qualification that the creditor is not entitled to recover more than 100 cents in the dollar. If the creditor who has proved in the guarantor's bankruptcy ends up with more than 100 cents in the dollar, it must account to the bankrupt guarantor or, more accurately, to his trustee, for the excess. See Re Blakeley (1892) 9 Morr 173; Re Houlder [1929] 1 Ch 205 at 209-210; Re Amalgamated Investment and Property Co Ltd [1984] 3 All ER 272 at 287-292 and Re Hunter; Ex parte Bank of New South Wales [1982] Qd R 131 and O'Donovan and Phillips, The Modern Contract of Guarantee (3rd ed, 1996), pp 471-473."

8 This is far removed from the present context.

9 The special context of s 642B, which has no application here, was explained by Drummond J as follows at [53] - [54]:

"While prima facie all creditors are entitled to vote at a meeting held pursuant to s 73 and the trustee, in valuing a creditor's debt for the purpose of so voting, is to value the debt in accordance with the provisions of Div 1 of Pt VI of the Act, the entitlement of a creditor to vote at a s 73 meeting also depends on its giving the trustee the written statement prescribed by s 64D and, in valuing a creditor's vote to be cast at such a meeting, the trustee must apply not only those provisions of Div 1 of Pt VI that are relevant to the particular creditor's debt, but also ss 64ZA(5) and 64ZB(8).

The explanatory memorandum explains the mischief that ss 64D(aa) and 64ZB(8) were designed to deal with, namely, the activities of persons favourably disposed towards a bankrupt in procuring, for only a fraction of their value, the assignment to them of debts due by the bankrupt to creditors and thereby obtaining control over voting at meetings of creditors, including those called by the bankrupt under s 73. The stated object of these provisions is to ensure that a creditor claiming as assignee of a debt due by the bankrupt can vote at a meeting of creditors only for the amount of the consideration that he gave to the assigning creditor. Given this, I can see no basis for putting the gloss on these provisions suggested by the trustees, namely, that s 64ZB(8) should be read as if prefaced by something along the following lines: `Where a creditor has been assigned a debt for an amount which is less than the value of the debt ...'. The mischief intended to be cured by these amendments is met by giving s 64ZB(8) the ordinary meaning which the words bear. So long as the value of the vote of a creditor taking by assignment is equal to the value of the consideration the creditor gave for the assignment, it matters not that that creditor gave consideration less, equal to or greater than the value of the original debt."

10 In short, in my view, the propositions which Mr Pitman seeks to extract from Clyne and from Bechrose are too widely stated.

11 I remain of the view that, in the events which have now happened, Mr Pitman has been effectively released from all liability to Abignano and Genallco.

ORDERS

12 I will hear the parties on the orders to be made, in accordance with my reasons, including orders for costs.

I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont.

Associate:

Dated: 1 February 2002

Counsel for the Applicant:	Mr A Ogborne
Solicitor for the Applicant:	The Bruce & Stewart Commercial Practice
Counsel for the Intervening Creditors:	Mr J K Chippindall
Solicitor for the Intervening Creditors:	Hunt & Hunt
Dates of Hearing:	21 January 2002
Date of Judgment:	1 February 2002