—_— LAS - Bankruptcy - Bankruptcy Act - debtor seeking a stay of execution of judgment in favour of creditor - contingent and uncertain claim allegedly arising from breach of contract prior to the deed of assignment - whether contingent claim provable in a deed of assignment under Part X - whether deed bars creditors claim after judgment in respect of previously contingent claim - relevant provisions of act considered. Bankruptcy Act 1966 sS.82;228;231. sub-ss.187(2):198(2) ;230(1) Bankruptcy Rules: r.82 RE: CHARLES RICHARD MORRTS and PAMELA MORRIS t/as "COUNTRY WIFE": "EXTRA MEATY SAUSAGES" "THE AUSTRALIAN SAUSAGE CO." CHARLES RICHARD MORRIS and PAMELA MORRIS, Applicants and JOHN MAROUDAS and SHIRLEY JANET MAROQUDAS Respondents No. 105 of 1983X% MUIRHEAD J. PERTH 26 MAY 1986 Paneer ort an nee TOD nT Ore Ww Sal Terenas tend Dolo IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA No. 105 of 1983X RE: CHARLES RICHARD MORRIS and PAMELA MORRIS t/as "COUNTRY WIFE": "EXTRA MEATY SAUSAGES": "THE AUSTRALIAN SAUSAGE CO." BETWEEN: CHARLES RICHARD MORRIS and PAMELA MORRIS Applicants and JOHN MAROQUDAS and SHIRLEY JANET MAROUDAS Respondents MINUTE OF ORDER JUDGE MAKING ORDER: MUTRHEAD J. DATE OF ORDER : 26 May 1986 WHERE MADE: Perth THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicants pay the respondents' costs of and incidental to the application. Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA No. 105 of 1983X wwe eww RE: CHARLES RICHARD MORRIS and PAMELA MORRIS t/as "COUNTRY WIFE": "EXTRA MEATY SAUSAGES": "THE AUSTRALIAN SAUSAGE CO." BETWEEN : CHARLES RICHARD MORRIS and PAMELA MORRIS Applicants and JOHN MAROQUDAS and SHIRLEY JANET MARQUDAS Respondents CORAM: MUIRHEAD J. 26 May 1986 REASONS FOR JUDGMENT The applicants (who I will refer to as the debtors) seek orders setting aside a District Court judgment, staying execution thereon and a declaration that the debtors be released from the debt which gave rise to the judgment. The judgment was entered in the District Court of Western Australia on 17 January 1985 in favour of the respondents (the creditors) whereby the debtors were adjudged liable to pay to the creditors by way of damages the sum of $40,000. The appropriateness of the relief sought may be in doubt but as to form was not the subject of argument. As the application must be dismissed I will regard the application as one seeking a stay of execution. de ta The judgment resulted from an action brought by Writ issued 5 July 1983 and served on 12 July 1983 in which the creditors sought damages arising out of a franchise agreement between the parties in early 1983. It is common ground that in that action the creditors claimed damages alleging fraudulent misrepresentation, negligent misrepresentation and in the alternative breach of contract. The court found the latter cause of action established. Of the sum of $40,000 assessed by way of damages, $25,000 represented monies paid by the creditors to the debtors in respect of the franchise and $15,000 for "additional loss" which included establishment expenses and other losses the creditors suffered by reason of the breach. In addition the creditors obtained judgment for $8,660 being interest at the rate of 14% from the approximate date of breach (1 July 1983) until the date of judgment. By agreement execution has been stayed pending the decision of this court. I turn to other events which commenced shortly before the Writ was served. On 20 June 1983 the debtors appointed a duly authorised registered trustee to call a meeting of creditors under 3.168 of the Bankruptcy Act 1966. The initial meeting of creditors was held on 18 July 1983 (after the date of the issue of the Writ). The creditors were represented by a solicitor. The minutes (of which there is no dispute) record that the chairman advised the meeting - Teas 4k et Fee. otisé ae) y- bh 2 BRET cilia, Mey Re ~~ ee ae BE ES git, SS sind tu "that Mr Maroudas a franchisee had issued a Writ against Mr Morris in the amount of $25,000 plus other unascertained amounts in respect to the Breach of the agreement and that this had been reflected in the Statement of Affairs as a contingent liability at the time of preparation. He understood that Mr Morris was to defend the Writ and that Mr Morris was presently obtaining independent legal advice." The meeting adjourned without a composition or arrangement being " reached. On 31 August 1983 a further meeting was convened when the creditors then present resolved that the debtors should execute deeds of assignment pursuant to s.204. Joint and several deeds were executed on 20 September 1983 whereby all the debtors' divisible property within the meaning of Part X was assigned to the trustee for the benefit of the creditors generally. The minutes of that second meeting filed with the Registrar in Bankruptcy show that the trustee referred to the claim of Mr Maroudas who was neither present nor represented. The minutes indicate that "Mr Morris was defending the action and as the debt was considered contingent Mr Maroudas would not be afforded a vote in this matter". Sub-section 228(1) of the Act provides that such a deed is binding "on all the creditors of the debtor" and sub~s.228(2)(b) provides that when the creditors are so bound "it is not competent for a creditor so long as the deed remains valid ..-to enforce any remedy against the person or property of the debtor in respect of a provable debt". Section 231 deals with the application of the Act to deeds of assignment. Sub-section 231(2) provides inter alia that the provisions of s.82 "apply" to a debtor who has executed a deed of assignment subject to such modifications as are prescribed by the rules as if "a creditors petition had been presented againat the debtor by whom the deed was executed on the day on which the special resolution requiring execution of the deed was passed". Section 82 deals generally with debts provable in bankruptcy, sub-s.(1) reading as follows: "Subject to this Division, all debts and liabilities, present or future, certain or contingent, to whicha 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, are provable in his bankruptcy." Thus contingent liabilities to which a bankrupt is subject at date of bankruptcy are provable. But Rule 82 requires otherwise when considering debts provable under a deed of assignment. It substitutes this sub-section by the following: "Subject to this Division, all debts and liabilities to which a bankrupt was subject at the date of the bankruptcy are provable in his bankruptcy". Reference to contingent liabilities is thus excluded. The question here is whether the creditors then contingent claim should be categorised as a liability to which the debtors were subject at the date of the assignment, i.e. 31 August 1983. Sub-section 82(2) excludes as debts provable in bankruptcy "demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust". Clearly in the circumstances the creditors' claim was one for unliquidated damages which arose by reason of a breach of contract, not "otherwise than by reason" of such breach. The fact um that alternative causes of action were pleaded does not prevent the operation of this section. and save for the further provisions of Rule 82 I consider the creditors' claims would be so provable. Rule 82(a)(ii) ousts the provisions of sub-s.82(8) which widely defines 'liability'. Rule 82(a)(ii) for the purpose of defining debts provable pursuant to a deed of assignment under $.231 provides that 'liability' includes "an express or implied engagement, agreement or undertaking to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is (i) in respect of amount, fixed or unliquidated...". This 19 a much narrower definition of the term 'liability' and it excludes the reference in sub-s.82(8)(b) to "breach of an express or implied covenant, contract, agreement or undertaking....". It seems to me therefore that the proper interpretation of the legislative scheme is that contingent and uncertain liabilities allegedly arising from contract at the date of the deed of assignment are not provable in a deed of assignment under : Part X. Reverting to the history of this matter I observe that the trustee made no estimate of the contingent liability to the creditors in this application. In fact the only reference to this claim appears ina Statement of Affairs "as at 12th July 1983" (before the first meeting) which makes reference toa "legal action by franchise operators pursuant to franchise agreement". But the trustee did not follow the matter up, the issue was not raised before the District Court, and it was a contested hearing. oS The creditors did not vote. nor had they been present would they have been entitled to vote by virtue of the provisions of sub-3.198(2), which provides "A creditor 18 not entitled to vote an respect of an unliquidated or contingent debt or a debt the value of which is not ascertained". As matters developed, save for the trustee's remuneration and payment to the Taxation Department ags a preferential creditor, the other creditors were not paid, nor does it appear that there was any formal proof of the other unsecured creditors' claim. The trustee's final accounts were filed in June 1984, the creditors' claim still being contingent at that stage. As I have said, I consider the creditors' contingent claim was not provable under the deed of assignment. But the question remains as to the consequence of that deed. Sub-section 230(1) provides that subject to that section "a deed of assignment that has become binding on the creditors of the debtor operates »e» to release the debtor from all provable debts, other than those (if any) that would not be released by his discharge from bankruptcy if he had become a bankrupt on the day on which he executed the deed". If bankruptcy was here involved the creditors would have been entitled to prove in the bankruptcy for their contingent debt which was 'provable' in bankruptcy. But I have held that it was not provable under the deed of assignment, and as I have commented a contingent creditor under such a deed has no voting right. Sub-section 187(2) which refers to deeds or compositions under Part X provides that in relation toa deed, a provable debt "shail be read as a reference to a debt or liability that would have been a provable debt in the debtor's bankruptcy if the debtor had become a bankrupt on the day on which he executed the deed...". And so. if I am right, we have a contingent creditor who cannot prove under a deed of assignment, who cannot vote ata meeting of creditors and who by virtue of sub-s.187(2) is unable to pursue his debt either under Part X, or otherwise at law. I can find no authority directly on this point and Counsel have been unable to refer me to any. The sections cannot logically stand together without inflicting unconscionable hardship on a contingent creditor. I can only conclude that "provable debts" under sub-s.230(1) must refer to debts provable under Part X. A creditor who cannot prove thereunder and who cannot participate as a creditor under the deed is not thereby bound. I am not persuaded in the circumstances that the creditors are bound by the deed of assignment so as to prevent them pursuing their rights under the District Court judgment which was regularly entered. The application is dismissed. The applicants must pay the respondents costs of and incidental to the application. I certify that this and the six preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Muirhead. Associate Dated: 26 May 1986