CATCHWORDS BANKRUPTCY - compromise of suit by trustee - no permission or leave - claim above §20,000 - whether saved by s.135(4) - meaning of "good faith" - whether notice of failure by trustee - relevance of ignorance of law. Bankruptcy Act, 1966 ss.58(3)(b), 134(2), 135(1), 135(4) Re Timothy John Spratt Ex Parte Wilson Joseph Wilde and Ernest George Harris & Ors Qld. E207 of 1983 PINCUS J. BRISBANE 11 JUNE 1986 IN THE FEDERAL COURT OF AUSTRALTA ) GENERAL DIVISION ) QLD E207 of 1983 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: TIMOTHY JOHN SPRATT A Bankrupt EX PARTE: WILSON JOSEPH WILDE and ERNEST GEORGE HARRIS & ORS Trustees/Applicants AND: JANELLE KAYE SPRATT First Respondent AND: PB. & S. DECO OUARRIES PTY. LTD. Second Respondent AND: ROBEPT WILLIAM PEACH Third Respondent AND: JOHN ROBERT REES Fourth Respondent MINUTES OF ORDEP JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 11 JUNE 1986 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. It be declared that the compromise made on or about 28 February 1985, to which the respondents were parties, 15 not invalidated by the failure of the fourth respondent to obtain the permission or leave required by s.135(1) of the Bankruptcy Act. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) QLD E207 of 1983 BANKRUPTCY DISTRICT OF THE SOUTHERN } DISTRICT OF THE STATE OF QUEENSLAND ) RE: TIMOTHY JOHN SPRATT A Bankrupt EX PARTE: WILSON JOSEPH WILDE and ERNEST GEORGE HARRIS & ORS Trustees/Applicants AND: JANELLE KAYE SPRATT First Respondent AND: P. & S. DECO QUARRIES PTY. LTD. Second Respondent AND: ROBERT WILLIAM PEACH Third Respondent AND: JOHN ROBERT REES Fourth Respondent PINCUS J. 11 JUNE 1986 REASONS FOR JUDGMENT These reasons relate to a further hearing of an application in relation to which I gave a preliminary judgment on 19 February 1986. I shall not repeat what I said in my earlier reasons for judgment. The question then left unresolved, by agreement of the parties, was whether the facts fall within $.135(4) of the Bankruptcy Act. In what follows, I shall refer to the respondents P. & S&S. Deco Quarries Pty. Ltd. and R. W. Peach as "the respondents"; Mr. Rees took no part, and Mrs. Spratt but a nominal part, in the further hearing. I have held that there was such a compromise as is spoken of in s.135(1)(f) and (g) of the Act. As there was no permission or leave granted (or applied for), the compromise must be held invalid unless it is saved by s.135(4) which reads as follows: "The failure by a trustee to obtain the permission or leave required by sub-section (1) in relation to a transaction by he trustee does not affect the validity of the transaction if - (a) the transaction was for valuable consideration; and (b) the person with whom it took place acted in good faith and without notice of the failure to obtain the permission or leave." The transaction was clearly one for valuable consideration but the questions of good faith and notice are in issue. GOOD FAITH Counsel for the applicants, Mr. Tim Matthews, principally relied upon the argument that the compromise was brought about by pursuit of the action to which it related in breach of s.58(3)(b) of the Bankruptcy Act: "Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor - (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding." Counsel argued that the action which was compromised had been consciously pursued without leave, and that no compromise arrived at in those circumstances could be held to have been in good faith within the meaning of s.135(4). Mr. Matthews pointed out that in my first set of reasons I held that setting down the action in question "led directly to the compromise". Before setting out the relevant facts, 1t is desirable to consider the submission as a question of principle. Mr. Boughen, for the principal respondents, argued that s.58(3) does not prohibit anything or create any illegality. He contended that it merely makes certain steps legally ineffective. The critical expression in s.58(3) of our Act ("1t is not competent") may be contrasted with the corresponding provision of the English Bankruptcy Act 1914, s.7(1): "no creditor ... shall have any remedy ... or shall commence any action or other legal proceedings ...". It does not appear to me, however, that the difference in wording 1s of any present significance. The effect of our s.58(3) is that if, as here, a creditor takes a fresh step against a bankrupt, in circumstances within the sub-section, he does something which the Act says he may not do and thereby renders unlawful. In my first judgment, I held that the pursuit of the action in breach of s.58(3) - i.e. without leave - did not render the resultant compromise void. Mr. Matthews' contention was that, even though not void, the compromise so obtained could not be said to have been got in good faith. There 1s no definition of "good faith" for the purposes of s.135(4). From the context, it can be deduced that the person concerned may be held not to have acted in good faith although the transaction was for valuable consideration, and he had no notice of the failure to obtain permission or leave. In my view, the flexible expression "good faith" refers here to two aspects of the transaction under examination. Firstly, 1t relates to the question whether the transaction was entered into honestly. It is not necessary to pursue that point, because no suggestion of dishonesty affecting the transaction itself is made. The second requirement which may be imported by the mention of good faith 1s that there be nothing in the nature of a deliberate abstention from enquiry, in order to avoid possible notice. That notion is derived from the rules as to the protection accorded by the law of equity to a bona fide purchaser of the legal estate without notice of its existence. On the views just expressed, it does not matter that the action which was compromised in breach of s.135 was carried on in breach of 5.58. Mr. Matthews submitted that the requirement of good faith makes necessary a rigorous scrutiny of the conduct of the respondents. I do not agree; "good faith" does not require that the respondent be innocent of any breach of the law associated with the compromise, whether the breach be deliberate or otherwise. That is, I am of opinion that, even if it was shown that the respondent carried on the proceedings in conscious breach of s.58(3), that would not require a finding that the transaction was not in good faith. In case that legal view is wrong, however, I make further findings of fact. A sequestration order was made in respect of the estate of Mr. Spratt on 16 May 1983, and four days later the solicitors for the respondent company wrote to the trustee informing him of the existence of the Supreme Court action against Mr. and Mrs. Spratt. They said they hoped to obtain judgment against the Spratts "within the next two weeks with costs". They also expressed a desire on the part of their client to have the Spratt shares in the company transferred to the directors. On 16 June, the solicitors filed an application for judgment in the suit, but that was adjourned, and on 23 June the solicitors wrote again to Mr. Rees telling him that 1f the action was to be defended, they would require security for costs. In July the solicitors lodged proofs of debt, one being for $80,000 "moneys owing pursuant to Supreme Court writ no. 2508 of 1981" and the other for $15,000 being "legal costs which will be owing on a party-party basis upon finalisation of the matter of writ no. 2508 of 1981 by the bankrupt". The lodgment of these proofs makes it clear enough, of course, that the solicitors were conscious of the bankruptcy, but Mr. Matthews particularly relied upon a sentence in a letter sent by the solicitors to the trustee, accompanying the proofs; they said, "We have strict instructions to make application to the Court for leave to proceed." Mr. Matthews argued that this showed that the solicitors knew of the necessity to obtain leave under s.58(3) and pursued the action despite that knowledge. That is a reasonable inference, but the point 1s not as clear as it might be. I am mot certain that the solicitors had troubled carefully to investigate the legal rules which applied to their client's position; they seem to have thought that they could obtain security for costs in respect of their claim, whereas they could not do so, and they also had the idea that they could lodge a proof for the costs which they expected to incur if they took the action to trial, which they obviously could not do, The next relevant step relied on by Mr. Matthews was that the solicitors set down the adjourned summons for judgment for hearing on 27 March 1984. Then, on 9 May 1984, discussions being in progress with respect to a sale of the shares in issue, they told Mr. Rees that they awaited his urgent advice "as we are instructed to proceed". The action was set down for hearing against both defendants. While the parties were waiting for the matter to be heard, counsel for the defendant mentioned to counsel for the plaintiff that leave should have been obtained under s.58(3); the response was that the action was being, or was to he, pursued against Mrs. Spratt only. I assume that what counsel had in mind was to discontinue against the trustee if the matter came toa hearing. It did not do so, but was settled. I find, on the balance of probabilities, that the solicitors, at least from July 1983, pursued the matter against the trustee knowing that to do so conflicted with the Bankruptcy Act. I aunfer that they thought that aggressive tactics were desirable to induce a mood of compromise in the trustee. Mr. Matthews argued that the deliberate pursuit of the action against the trustee made the compromise one not in good faith. For the reasons given above, I do not think the notion of good faith here has a scope wide enough to encompass the conduct just described. I should add that Mr. Boughen for the respondents argued, and I agree, that is no reason to think that the pursuit of the matter without obtaining leave caused the trustee to accept a settlement he would not otherwise have regarded as satisfactory. The trustee must have been aware that, as long as he was not on the record, he could incur no personal liability for costs, and seems also to have known that the pursuit of the action against the bankrupt without leave was contrary to the Act; the latter point was discussed with his counsel. In short, the action posed no practical threat to the trustee and there is no reason to think that he would have been unwilling to settle on the basis put forward if the action had never been pursued. The party whose conduct was influenced by missing the suit was Mrs. Spratt, who was induced to part with her shares by concern about having a large money judgment against her. NOTICE The question whether the respondents had notice of the failure to obtain the permission or leave appears to be one of law, the facts as to that not being in issue. It must have been evident to the respondents that the trustee had no permission or leave, but they were unaware of the necessity for him to do so. It appears that their counsel noticed the provisions of s.134(2) of the Act, which set a limit of $20,000 on the value of property which may be sold by the trustee by private contract. He did not, however, advert to the possibility that the compromise of the action might fall within the provisions of s.135(1), and require such permission or leave as is there mentioned. I was referred to the decision of the High Court in Deming No. 456 Proprietary Limited v. Brisbane Unit Development Corporation Proprietary Limited (1983) 155 C.L.R. 129 which concerned the construction of a Queensland statute requiring that a certain statement in writing be given by the original proprietor to the purchaser of a home unit. The statute provided that if the "original proprietor" failed to give the statement, then the purchaser could avoid the contract of sale "within 30 days after he first becomes aware of the failure". The High Court held that the words "becomes aware of the failure" - "involve not only knowledge that a statement containing the specified material has not been given but an awareness that the fact that such a statement was not given constitutes a 'failure' to do something which the Act says should be done." Putting this another way, the Court was of the view that the purchaser was not deemed to be aware of the failure if ignorant of the relevant provisions of the statute and the obligations they imposed: see the report at p.151. It is true that this view was, at least implicitly, criticised by the Privy Counsel in Boheto Pty. Ltd. v. Sunbird Plaza Pty. Ltd. (1984) 2 Qd.R. 9 at p.13, but that criticism cannot justify declining to apply the decision to the interpretation of the statute in question. What can, arguably, justify that course is that the problem in the Deming case arose in a markedly different broad statutory context; but, as to the actual language used, the only basis of distinction is that the Deming statute used the words "aware of the failure", not "notice of the failure". However, the Court in the Deming case treated the problem as one concerning notice: "We would be inventing a new doctrine of constructive notice if we were to hold that a purchaser 1s 'aware' of failure to comply with particular statutory provisions when he knows the facts, even though he is ignorant of those provisions and of the obligations which they impose." (p.151) The real objection to treating lack of knowledge of the legal requirement as excusing the breach 1s the tendency of the law not to make liability, or its absence, depend upon a party''s state of knowledge of the law. See, for example, Iannella v. French (1968) 119 C.L.R. 84 at 112, 113, per Windeyer J. But that is not an ainflexible rule and here, even more than in the Deming case, treating knowledge of the law as material appears necessary to reach a result according with common sense: it would seem odd to hold that the respondents, although having no knowledge of the 10. requirement that permission or leave be obtained, nevertheless had notice of the failure to obtain it. It should be mentioned that there was some discussion of the relevance of the articles of the company providing fora pre-emptive right, mentioned in my reasons of 19 February 1986. Counsel were agreed that whether or not the relevant articles applied and the effect of a breach of them (if one occurred) were not questions to be determined in these proceedings. In Summary: (1) There being no allegation of dishonesty, the requirement of good faith under s.135(4)(b) ais here satisfied if there was good faith with respect to the question of notice of failure to obtain permission or leave - 1.e. if the respondents did not shut the1r eyes to sucha failure. (ii) It is not necessary, in order that there be good faith, that the respondents' behaviour be, in all respects, above reproach. In particular, it is not material that the action settled was pursued in conscious breach of s.58(3). (iii) "Notice of the failure to obtain the permission or leave" cannot exist without knowledge of the legal requirement that permission or leave be obtained. ll. Since there is no dispute that the transaction was for valuable consideration, as required by par.(a) of the sub~section, and on the legal views just set out, (b) is satisfied, it follows that the respondents must succeed. Subject to anything counsel may have to say, the following declaration will be made: That the compromise made on or about 28 February 1985, to which the respondents were parties, is not invalidated by the failure of the fourth respondent to obtain the permission or leave required by s.135(1) of the Bankruptcy Act. I shall hear counsel on costs. t eertify that this and the 10 preceding ~yae Loe pores are a true copy cf the reasons 10 Jucament bere n of His Honour Mr Justice Pincus & Lit Koprrc Associate Dated // ene 1986 %