LIMITED DISTRIBUTION ' nS No. 451 of 1584 IN THE FEDERAL COURT OF AUSTRALIA s EXERCISING FEDERAL JURISDICTION IN BANKRUPICY BANKRUPTCY DISTRICT OF THE sTATE OF VICTORIA Re : DAVID JOHN EMANUELLI a Bankrupt Ex Parte : ALAN MURRAY HORSBURGH (as trustee of the property or David John Emanuelli, a bankrupt) Applicant COURT: NORTHROP J. DATE: 11 FEBRUARY 1987 PLACE: MELBOURNE MINUTES OF ORDER THE COURT ORDERS THAT: - i. The amount of $200,000 paid to David John Emanuelli by the A.M.P. Fire and General Insurance Co. Ltd. be treated as property of the bankrupt vested in Alan Murray Horsburgh as trustee or David John Emanuelli, a bankrupt. ee The costs of each of the parties to this application be treated as expenses incurred in the administration of the estate of the bankrupt, be taxed and be paid out of the estate of the bankrupt. (This order 15 to be settled and filed ain accordance with rule 124 of the Bankruptcy Rules.) s/ I) ThE FEDERAL ZuuURT uP AUSTRALIA KALE ISING FEDERAL JURLSOICTIOU - pa a a LG e fa A, e oo to a IN BANKRUESTCOY BANKRUPTCY DISTRICT UF THE STATE OF VICTORIA Re : DAVID JOHN EMANUELLI a Bankrupt Ex Farte : ALAN MURRAY HORSBURGH (as trustee or the property or David John Emanuelli, a bankrupt) aAbplicant COURT: NORTHROF J. i te] ll FESRUARL Lyd7 ELACE: NELBOURNE REASONS FOR JUDGMENT This application brought under s.1l34(4) of the Bankruptcy Act 1366 ("the Act") by Alan Murray Horsburgh ("the trustee") as trustee of the property or David John Emanuelli, a bankrupt, raises ror consideration the proper application of 5.117 of the Act. That section 15 set out in fFull:- "Li7. (li Where- 1a) bankrupt 15 Gr was insured under a a contract or insurance against liabilities to third parties; and 1b) a liability against which he 15 or was 50 insured has been incurred (whether berore or after he became a bankrupt), ti the vidght of the bankrupt co indemnity under the policy vests in the teustee and any amount received by the trustee rrom the insurer under the policy in LeSpect or the ILiacility anall., af the Jlianility has not already been satistisd, s¢ paid ino ruil rorthwith to the tCaird sarty co whem it has been incurred. (2) Sup-secrion wis deas mot limit the viluhes or the tnird carcty in vespect of any balance aque to him after the waymenct vereérred to in that sub-section nas seen made. (3) This section applie 5 aareement to the contrary, wv roe 5 withstanding any he batore or arte he commencement Ls er anteraed into Fo thas Act." For the purposes of considering the question raised by this application, the relevant facts can he stated shortly. Those facts 1llustrate the dangers that can affect any person. On 15 January 1378, David John Emanuelli "the bankrupt"), was driving his motor car along a road petween Paynesville and Bairnsdale. He was tow1nd a trailer attached to the car. A wheel of the trarler reall off. The axieé reli to the road surface causing sparks. The sparks ignited dry grass alongsice the roaaway thereby causing a busn Tire which caused substantial damage to a number of properties. One of the properties so damaged was owned by Halleybury College. By action in the Supreme Court of Victoria, Harleybury College claimed damages against the bankrupt. At the time of the accident causing the bush fire, the bankrupt's motor car was the subject of a comprehensive motor vehicle policy aiussued by A.M.P. Faire and General Insurance Co. Ltd. ("the Insurer"). Under the policy, the Insurer was obliged to andemnify the bankrupt against liability at law by way of damages in respect ts damage ts hes property but 135 aqgregate Lianilicty was limited to S2u0,uu0 "in respect of all claims whatsoever and howsoever arising out of any one accident or series of accidents arising out or the one event". The Insurer denied it was liable to indemnify the bankrupt with respect to the claim brought by Haileybury College and was jo1ned by the bankrupt as a third party in those proceedings. Un 16 September 1582, the suprame Court constituted by Murphy J. agave judgment in these proceedings. The reasons for judgment are raported; Harleybury College v. Emanuelili C1335] 1 VLR. 325. Tha Court entered judgment in ravouc of Harleybury College against tne bankrupt in the total sum or 3423,256,.75 with costs subsequently faxed at $15,u¢8.98 anc ordered the Insurer to andemnify the bankrupt with respect to those sums. aAn appeal by the Insurer against the order to indemnify was dismissed; see A.M.P." Fire and General Insurance Co. Ltd. v. Emanuelli C1984] V.R. 607. In addition to the judgment in favour of Haileybury College, a number of other claims for damages in respect of property and arising from the bush fire were pending against the bankrupt. It was obvious that the total amount of the jiability of the bankrupt with respect to all those claims tor damages aqainst him exceeded s2uu,udu. The Insurer Washed 165 corporate hands of the whole matter. ®Bv an agreement in writing between the bankrupt and the Insurer dated 15 Mav 1384 the Insurer agreed to pay to the bankrupt the sum of 3200,UU0 and the bankrupt agreed to release the Insurer from "all actions, suits, claims and demands which the oankrupt then had or mizht therearter have in respect ts damagvas arising out of the busn fire. Fursuant ta cne terms of the agréement, on 19 April 1384 tne Insurer paid the said sum of SLuu,uud to tha bankrupt 5s solicitors. At 12 June 1384, the position with respect to claims for damages against the bankrupt with respect ca damages ta property arising from the bush fire was:- l. Judgment un favour of Halleybury College - $128,226.75. The costs amounting ts $315,048.98 were paid by the bankrupt to the College. Interest 135 accruing on the judgment debt. Ze Judqment in favour of three other persons namely N.S. Maher, A.J. Watts and L.G. Moon - 3. A number of claims where interlocutory judgment had been entered but damages had not been assessed. 4. A number of claims pending in Court. Se A number of claims where leqal proceedings had not been commencea, For all practical purposes, the only source from which the bankrupt could pay the judgments and claims was the sum of $200,000 being the aggregate limit of liability or the Insurer under 1ts policy with the bankrupt. The Insurer had paid that $200,000 to the bankrupt s solicitor. The bankrupt had no further right to andemnity against the Insurer with respect to claims arising from the bush rire. The Insurer was no longer under any liability to pay monevs to the bankrupt. On 12 June 1384, the bankrupt presented his own petition under 5.25 of the Act. Tha petition was accepted by the Registrar. Thereupon the bankrupt became bankrupt on that day. In August 1584 the bankrupt's solicitors paid the sum of $200,000 to the trustee who has invested 1t pending the determination of how that sum is to be expended. The primary question raised by the application 15 whether the sum of $200,000, together with accrued interest, be treated:- (a) as property of the bankrupt vested in the trustee; or \b) as the proceeds of realisation of the bankrupt 5 right to indemnity under a contract of insurance against liabilities to third parties and to be dealt with pursuant to the provisions of 5.117 of the Act. et ball ui -ll7 apgites, a number or other questions arise with respect to the method of applying that section to the facts of this case. At the hearing of the application, the trustee was represented by his solicitor. Ha1leybury College was represented by counsel. Two other counsel appeared who between them represented the other creditors and claimants coming within grouos 3, 4 and 5 mentioned above. The primary question 15 considered first. Under 3.58 of the Acct, the property of the bankrust vested in the trustees on 12 June 1984. Frima facie, the sum of 3200,uV00 which had been paid by the Insurer to the bankrupt [Cy fe q u a a before that date was the property of the bankrupt and vesred in the trustee onli June 15984. On 12 June 15984, the bankrupt had no existing right of indemnity under his policy with the Insurer with respect to damages to property caused by the bush fire. The right to indemnity under that policy had been satisfied by the Insurer paying to the bankrupt its total amount of liability under that policy. It follows, therefore, that prima facie, the $200,000 15 property of the bankrupt divisible amongst his creditors, see sub-section 116.11) of the Act. Reference will be made later in these reasons to paragraph llbli2ila). The judgments obtained against the bankrupt before 12 June 13984, are debts provable in the bankruptcy; see sub-section 382(1). On the materlal before the Court, Harleybury College, N.S. Maher, A.d. Watts and £.G. Moon thus would be able to prove thery debts ain the bankruptcy. The claims by the other persons ror damages to property, based as they are on the negligence of the bankrupt, are all deamanas an the nature of unliquidatad damages and are not provable in bankruptcy; ses sub-section 3212) of the act. This sub-section applies even where an interlocutory judgment has been entered but damages have not been assessed. Since these claims are not provable debts, the provisions of sub-section 58(3) of the Act do not prevent those persons from pursuing their claims by legal proceedings. Even if judgment was obtained in those proceedings and the damages assessed, the judgment debts so obtained would not be provable debts in the bankruptcy which commenced on lf June 15384. Any such judgment debt, however, could be used as a basis for a second bankruptcy but, for practical purposes, no useful purpose, on the facts of this application, could result therefrom. Initially, the crustee advised a number of the claimants that theizc proofs of debt had been admitted. That advice was wrong in law. That advice cannot affect the legal position. Cor ft 13 difficult to see now s.ll7 of che Act can have any application to the facts af these proceedings. That Section applies where a bankrupt nas aA right to andemnity under a contract of insurance. Onder that section, that vight vests inthe trustee in the bankruptcy but amounts yeceived by the trustee pursuant to the indemnity do not form part of the property ofr the bankrupt but must be paid Torthwith to the third person with respeck to whom the amount of the indemnity 1s paid. In the present proceedings, at no relevant time aid the bankrupt have a right to andemnity under the policy of insurance. Prior to the bankruptcy, the Insurer had paid to the bankrupe the total amount of its liability under the relevant insurance policy. At the time or the bankruptcy, there was no fight of the bankrupt to indemnity which could vest ain che trustee. The trustee has no right to receive payment from the Insurer. Section 117 of the Act has no application to the facts of these proceedings. It was not argued that any of the claimants had any claim against the Insurer. No directions can be made in these proceedings adverse to the Insurer which 1s not a party to these proceedings. It 18 interesting to note that the Insurer 1s instructing one of the counsel appearing under its right of subrogation since it has indemnified that claimant under a separate insurance policy. It was arqued on behalf of Ha1lleybury College that the $200,000 paid to the bankrupt was held by the bankrupt in trust for the Uslieqe. On tnat oasis, paragraph 1llei.: af the Act would have preventec the $200,000 vesting in the trustee. This contention is rejected. The Supreme Court did not order the Insurer to make the payment to Haileybury College. If the contention was correct, similar trusts would arise with respect to each of the other claims. Under the policy, the bankrupt was indemnified up to a specified amount. He has received that amount. He had become bankrupt before paying any of the claims. The amount paid to him 15 property which vests in the trustee. Accordingly, on the primary issue, the $200,000, together with accrued interest, is to be treated as property of the bankrupt vested in the trustee. In these circumstances, it is not necessary ta consider the other submissions made on the basis that 3.117 of the Act applied. Accordingly, the order of the Court 15 that the amount of $200,000 paid to David John Emanuelli by the A.M.P. Fire and General Insurance Co. Ltd. be treated as property of the bankrupt vested in Alan Murray Horsburgh as trustee of David John Emanuelli, a bankrupt. I certify that this and the eight (8) preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice R.M. Northrop. Sateen eel Cidade ociate ll February 1987