CATCHWORODS BANKRUPTCY - partnership - partners severally sequestrated - sequestrations by joint creditor - whether petitioning creditor of joint estate entitled to prove as if separate creditor. STATUTES - Bankruptcy Act 1966 - whether codification of law - whether common law rules of bankruptcy survive - inconsistency with Act. Bankruptcy Act, ss.110, 141 Ny Re: Desmond Russell Owen aot ows Ex parte: G. James Pty. Ltd. foe . . Qld. E611 of 1985 pro ro Sy @oo ' aon = 2a > or) -_— i PINCUS J. BRISBANE 9 JUNE 1987 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ww QLD F611 of 1985 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: DESMOND RUSSELL _ OWEN Bankrupt EX PARTE: G. JAMES PTY. LTD. Creditor MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 9 JUNE 1987 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The surplus arising in the separate estate of Desmond Russell Owen be dealt with as part of the joint estate of Desmond Russell Owen and Vincent Norman Cox. 2. G. James Pty. Ltd. shall have no right to prove in respect of the separate estate of Desmond Russell Owen. 3. The trustee's costs of this application be paid out of the joint estate. Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ~ ~ QLD E6ll of 1985 BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND ~~ RE: DESMOND RUSSELL OWEN Bankrupt EX PARTE: G. JAMES PTY. LTD. Creditor PINCUS J. 9 JUNE 1987 REASONS FOR JUDGMENT This application raises a question as to the proper distribution of a surplus arising inthe separate estate of Desmond Russell Owen, against whom a sequestration order was made on the petition of G. James Pty. Ltd. on 26 August 1985. On the same day, Mr. Owen's partner, Vincent Norman Cox, was also made bankrupt and by virtue of a consent previously filed under s.156A of the Bankruptcy Act 1966, the applicant became trustee of the joint and separate estates. The point raised has to do with the relationship between the "common law of bankruptcy" and the statute, as well as the extent to which the rather cumbersome baggage of authority on early bankruptcy statutes is still with us. ai There is a substantial surplus in Mr. Owen's separate estate, but in the joint estate nothing will be left after priority payments. The question is whether the petitioning creditor, G. James Pty. Ltd. (a creditor of the joint estate), is entitled by virtue of being petitioning creditor to preferential treatment - more specifically, whether 1t 1s entitled to prove in the separate estate with the separate creditors. If so, the petitioning creditor will be paid in full. If not, it will receive only a fraction of its debt. The petitioning creditor also petitioned against the other partner, Mr. Cox, and its case depends entirely on its having issued two petitions rather than one; the privilege claimed is said to be one attaching to a joint creditor who obtains a sequestration order against the separate estate. There 1s nothing in the Act to suggest that such a petitioning creditor 1s entitled to this preferential treatment, but it is suggested by Mr. O'Brien, the solicitor for the trustee, who has researched the matter thoroughly, that by reason of a series of decisions in the late 18th century, the petitioning creditor is perhaps entitled to prove with the separate creditors, although it 18 not a separate creditor. There is no doubt about the former existence of the special rule favouring the petitioning creditor, which was accurately described in Ex parte Detastet 34 E.R. 95, as "... very Singular ... but ... settled". Mr. O'Brien has referred me to no reported application of the rule under either Commonwealth bankruptcy statute, but says that it has been held or assumed, both here and in England, that similar exceptional rules have survived the passage of successive bankruptcy Acts: see in particular Read v. Bailey (1877) 3 App.Cas. 94 at p.98. In 1715, Lord Cowper L.C. had before him a question as to whether joint creditors might prove in the separate estates of the bankrupts and, letting the joint creditors in, directed that "as the joint or partnership estate was in the first place to be applied to pay the joint or partnership debts; so in like manner the separate estate should be in the first place to pay all the separate debts: and as separate creditors are not to be let in upon the joint-estate, until all the joint-debts are first paid; so likewise the creditors to the partnership shall not come in for any deficiency of the joint-estate, upon the separate estate, until the separate debts are first paid" (Ex parte Crowder 23 E.R. 1064). This statement appears to be the origin of the law about joint and separate estates, but of course it developed and was modified, in ways which need not be set out in detail. The language Lord Cowper used 1s 1n large part similar in its effect to that of ss.110 and 141 of our current Bankruptcy Act. "1L10(1) In the case of joint debtors, whether partners or not, the joint estate shall be applied in the first instance in payment of their joint debts, and the separate estate of each joint debtor shall be applied in the first instance in payment of his separate debts. 110(2) If there is a surplus in the case of any of the separate estates, it shall be dealt with as part of the joint estate and if there is a surplus in the case of the joint estate, it shall be dealt with as part of the respective separate estates in proportion to the right and interest of each joint debtor in the joint estate." "141 Where one partner of a firm becomes bankrupt, a creditor to whom the bankrupt is indebted jointly with the other partners of the firm or any of them shall not receive a dividend out of the separate property of the bankrupt until all the separate creditors have received the full amount of their respective debts." The argument in favour of the petitioning creditor is that legislatures have consistently used such language in dealing with this problem and, although they have not troubled to set out the refinements of the doctrine of Ex parte Crowder, subsequently developed, have nevertheless intended the latter to continue to govern the distribution of such estates. Before considering the history of the matter further, however, 1t 1s desirable to examine the wording of the statute. The word "surplus" in s.110(2) means the amount whichis left after performing the exercise in s.110(1), that is, after "the separate estate of each joint debtor" has been "applied in the first instance in payment of his separate debts". What is left is the surplus in the separate estate, and has to be "dealt with as part of the joint estate". If the petitioning creditor 1s to obtain the suggested advantage here, then the separate estate must be applied in the first instance in payment of the separate debts and one of the joint debts. To do so would be inconsistent with the plain requirement of the statute. The inconsistency is made more striking if one has regard to the provisions of s.109, setting out in detail those who are to receive favoured treatment in the distribution of estates; a petitioning creditor is given no advantage by that provision except as to costs: s.109(1)(a). The Bankruptcy Act is long and detailed and looks rather like a code. The merit of treating it as a code at least as to some matters 1s not merely simplicity, but that todo so might accord with a view expressed by Mason J. (as his Honour then was) in Sungravure Pty. Limited v. Middle Fast Airlines Airliban $.A.L. (1975) 134 C.L.R., at p.22, speaking of the Defamation Act 1958 (N.S.W.): "Yet within the ambit which it seeks to cover the Act 1s a code which 1s expressed by its long title "to state and amend the law relating to defamation". Its meaning therefore is to be ascertained in the first instance from its language and the natural meaning of that language is not to be qualified by considerations deriving from the antecedent law (Bank of England v. Vagliano Brothers (18911 A.C. 107 at p.144-145). An appeal to earlier decisions can only be justified if the language of the statute is itself doubtful or if some other special ground is made out, e.g. if words used have previously acquired a_ technical meaning." (134 C.L.R. 1 at p.22.) The first comprehensive English bankruptcy statute was passed in 1824 (5 George IV c.98). It was "... an attempt to deal with every case and occasion that could arise and... minutely detailed" (Aronson and Campling on the Bankruptcy Acts, 9th ed. p.xi). The special rule favouring the petitioning creditor was assumed still to exist in 1842, after its passage: Re Blake; Ex parte Burnett 110L.J3.Ch. 180. But that was before the modern a attitude towards such statutes had developed. In In re Budgett; Cooper v. Adam (1894) 2 Ch. 557, Chitty J. rejected a contention that an old rule dealing with proof by joint creditors had been abolished. In the course of argument, he drew a distinction (p.559) between a consolidating and amending Act on the one hand, and a codifying Act on the other, and said in his judgment (at p.-561) that the decision in Bank of England v. Vagliano Bros. (1891) A.C. 144 did not apply to the Bankruptcy Act 1883. In Re Boots; Ex parte Official Receiver (1976) 12 A.L.R. 427, a question in the same broad category arose before Riley J. and his Honour held that the "common law of bankruptcy" applied (p.433) to the construction of s.110 of the Bankruptcy Act 1966. Lord Eldon, when at the bar, had pressed Lord Rosslyn to abandon the rule I am considering (Ex parte Ackerman (1808) 33 E.R. 653) but, when he became Lord Chancellor himself, regarded 1t as too well settled to be abrogated. I have found no case in which the reason for Lord Eldon's dissatisfaction 1s explained in detail, but the impracticality and injustice of the rule are evident enough. If it is known in advance that the separate estate will be large, and the joint estate insufficient, then it may be in the interests of each joint creditor to issue a petition and hope that sequestration will be granted on his petition rather than on one of the others. Further, application of the rule results in there being a sharp distinction between the rights of a petitioning creditor who petitioned against the debtors jointly under s.46(1) and a petitioning creditor such as G. James Pty. Ltd. which issued a separate petition against each debtor. The oy reason for the rule as expressed in Ex parte Elton (1796) 30 E.R. 988 at 989 by Lord Loughborough L.C. is as follows: "With regard to the creditor suing out the commission, the separate creditors cannot object to his having the effect of the execution, he has taken out. He is precluded from suing at law; and it would be against all Equity, having done it for their benefit, to refuse him the fruit of that for his own debt." At least in the present state of the law, there 1s no lack of fairness 1n declining to reward the petitioning creditor for having issued two petitions rather than one. Indeed, to do so borders on absurdity. Examples may be found in which courts have striven to preserve strange common law rules (see for example Kodak (Australasia) Pty. Ltd. v. Hally; Ex parte Hally £1960] Qd.R. 452), but it appears to me that problems of that sort arise 1n a special context where one 1s invited to apply such a rule in contradiction of a statute. Whatever the cases under more primitive statutes say, the Court's duty 1s to construe the Act which binds 1t; see Bank of New South Wales v. Brown (1982) 151 C.L.R. 514 at 532.1. In re Budgett (above), although Chitty J. held that the English Bankruptcy Act of 1883 was not a code, in applying the rule that, where there is no joint estate, a joint creditor may prove with the separate creditors, he regarded himself as merely interpreting the statute: "... it is legitimate in the interpretation of the sections in this amending and consolidating Act to refer to the previous state of the law for the purpose of ascertaining the intention of the Legislature" (1894 2 Ch. at pp.561 and 562). It is to be noted also that in Re Boots (above) Riley J. applied the rule that the "joint estate" includes, in a bankruptcy of partners, property other than partnership property not in conflict with the statute, but by way of construing it. I can see some advantage in applying old rules of bankruptcy law even at the cost of a straining of the present statute's language; but where the rule put forward 1s one which attaches a considerable substantive advantage to a merely procedural difference, has not been applied in any modern case and appears plainly to conflict with the statute, 1t would seem incorrect to apply it. In my opinion, the provisions of s.110 of the Bankruptcy Act are not to be read as subject to a rule that the separate estate of each joint debtor is to be applied in the first 1unstance 1n payment of the joint debt of his petitioning creditor, as well as his separate debts. It will be directed that the surplus arising in the separate estate of Desmond Russell Owen be dealt with as part of the joint estate of Desmond Russell Owen and Vincent Norman Cox, and that G. James Pty. Ltd. shall have no right to prove in respect of the separate estate. The trustee's costs of this application shall be paid out of the joint estate. * certify that this and the & preceding Pages are a true copy of the reasons for judgment herein of His Honour Mr. Justice Pincus tettberd Associate Dated J June 19¢7 Solicitor appearing for the Applicant: Mr. D. O'Brien Solicitors for the Applicant: Morris Fletcher and Cross Date of Hearing: 25 May 1987