JUDGMENT No 394 / && _ CATCHWORDS BANKRUPTCY —- property of bankrupts - vesting in trustee - cause of action accruing before bankruptcy - relating to property and estate of bankrupts - authority from trustee to bankrupts to commence action for benefit of creditors - no effective assignment - no standing in bankrupts to bring action - application dismissed. Bankruptcy Act 1966 Starke - Assignment of Choses in Action in Australia para.105 Lewis — Australian Bankruptcy Law 8th Ed. p.131 Jackson v Sterling Industries Ltd (1987) 71 ALR 457; (1986) 69 ALR Faulkner v Bluett (1981) 52 FLR 115 Pegler v Dale (1975) 24 FLR 401 General Steel Industries Inc. v Commissioner for Railways (NSW) (1964) Liz cLuR 125 Boaler v Power [1910] 2 KB 229 W.R. Henry & Son v Hodge (1961) 20 ABC 87 Shillito v Bent [1973] VR 762 EDWARD JAMES BRIDE and WENDY MARGARET BRIDE v AUSTRALIAN BANK LIMITED and BRYAN GUTHRIE STEWART WAG NO. 62 OF 1987 FRENCH J. . PERTH oa 26 JULY 1988 IN THE FEDERAL COURT ) OF AUSTRALIA ) WESTERN AUSTRALIA ) DISTRICT REGISTRY ) ) GENERAL DIVISION No. WAG 62 of 1987 BETWEEN: EDWARD JAMES BRIDE and WENDY MARGARET BRIDE Applicants and AUSTRALIAN BANK LIMITED First Respondent and BRYAN GUTHRIE STEWART Second Respondent MINUTE OF ORDER JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 26 July 1988 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The application is dismissed. 2. The applicants are to pay the respondents' costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION eee ee No. WAG 62 of 1987 BETWEEN: EDWARD JAMES BRIDE and WENDY MARGARET BRIDE Applicants and AUSTRALIAN BANK LIMITED First Respondent and BRYAN GUTHRIE STEWART Second Respondent CORAM: FRENCH J. 26 July 1988 REASONS FOR JUDGMENT ON MOTION TO DISMISS APPLICATION Introduction On 11 June 1987, Edward James Bride and his wife, Wendy, instituted proceedings in this Court in which they claimed against the Australian Bank Limited and Bryan Guthrie Stewart damages and an order setting aside the sale of certain property previously owned by them. The application which was filed in person and supported by an affidavit sworn by Mr Bride also sought an order "that the First and Second Defendant be bought (sic) before this Court under section 52 of the Trade Practices Act of 1974". The respondents, who are incorrectly designated as defendants in the application, have each moved to dismiss it under 2. 0.20 r.2 "or alternatively under the inherent jurisdiction of the Court" on the grounds that:- "(a) The Application does not disclose any reasonable cause of action; (b) Further or alternatively, the Application is frivolous or vexatious; (c) Further or alternatively, the Application is an abuse of the process of the Court." The reference to inherent jurisdiction would appear to be inappropriate in the light of the judgment of the High Court in Jackson v Sterling Industries Ltd (1987) 71 ALR 457, 460 (Wilson and Dawson JJ.), 464 (Deane J.), 469 (Toohey J.). As Bowen CJ said in the judgment of the Full Court in (1986) 69 ALR 92 at 97:- "In relation to a statutory court such as the Federal Court it is wise to avoid the use of the words "inherent jurisdiction". Nevertheless a statutory court which is expressly given certain jurisdiction and powers must exercise that jurisdiction and those powers. In doing so it must be taken to be given by implication whatever jurisdiction or powers may be necessary for the exercise of those expressly conferred. The implied power, for example, to prevent abuse of its process, is similar to, if not identical with, inherent power." The precise basis of the motions brought by the respondents, will be elaborated below. First, however, it 1s necessary to. say something about the nature of the application. Basis for the Application It is not an easy task to ascertain the precise nature 3. and basis of the applicant's claims. In support of the application there was filed an affidavit sworn by Mr Bride which, with the aid of some 14 documentary exhibits, detailed the history of dealings between himself and his wife and their associated companies on the one hand and the Australian Bank Limited and Mr Stewart on the other. It does no injustice to the detailed documentation filed by the Brides to say that in broad terms they indicate that they received from the Australian Bank substantial advances in connection with their stock and other food manufacturing businesses, peaking at a figure of some $3 million in 1983. The advances were protected by an impressive array of securities including mortgages, guarantees, debentures over the assets of their companies and bills of sale. It is evident from the affidavit that from March 1983 the Bank was becoming concerned about their indebtedness and there 1s evidence that Mr Stewart, then an employee of the accounting firm, K.M.G. Hungerfords, was engaged in a degree of supervision of the management of cashflow at least of the company Bride Foods Pty Ltd as disclosed in exhibit EJB3. In July 1984, at a time when he was' in practice on his own account, he was, it is said, appointed by Mr Bride as a kind of unofficial receiver to protect the interests of the Bank. This is reflected in a letter dated 4 July 1984 (evidently re-dated 6 July 1984) from Bride to Stewart and which included the following paragraph:-— "The designation of your appointment will be that of "Consultant" and your duties will be those generally assumed by Consultant, including the power to hire and fir; (sic) implement policy; control and generally oversee the entire business operation, to assist in the general running of the operation and be concerned with every aspect thereof, at the direction and control of the Chairman of Directors. Your appointment is viewed 4. by us andthe Australian Bank Limited as an interim caretaking operation to attempt to secure the preservation of the business." It seems to be suggested in Mr Bride's affidavit that he was improperly induced to sign the letter in terms which he claimed were sought by Stewart so that he would have power to sell the businesses. Various allegations are made against the respondents including conspiracy with the Brides' former solicitor to enable Stewart and his partners to take over the businesses. Stewart was said to have been acting as an "illegal unofficial receiver/manager" and doing so with the knowledge of the Bank. Reference was also made to the appointment of Peat Marwick Mitchell «& Co. as receivers and managers (of the companies) on 9 August 1984. On 10 August 1984 the affidavit discloses that the Brides appointed Bernard Putnin as their trustee under Part X of the Bankruptcy Act 1966 and on 6 September, at the request of a meeting of their creditors, filed their petition in bankruptcy. Further allegations followed in the affidavit against the Bank and Stewart including a claim that Stewart defrauded the Commonwealth by withholding group tax instalments. The affidavit then went on at para.33 to say:- "33. I seek an order of this Honourable Court that this application under Section 52 of the Trade Practices Act of 1974 be upheld on the following grounds. A. That the actions and conduct of the First and Second Defendants on or before and after the 18th June 1984 were false misleading and deceptive. B. That the Plaintiffs in this case were not in default of loan arrangements with the First Defendants on the 18th June 1984. Cc. That the Plaintiffs were not served with a Notice of Demand until after the appointment of the Second Defendant as unofficial receiver manager. D. That the Second Defendant was acting as unofficial receiver manager with the knowledge and consent of the First Defendant. E. That the purpose of the Second Defendants appointment was to enable that person to illegally take possession and ownership of the assets of the Plaintiffs at their expense and at the exoense (sic) of the Plaintiffs unsecured creditors. F. That the foreclosure on the 18th June 1984 was in fact invalid. G. That this Court grant the plaintiffs compensation on the following basis. 1. Return of all assets and properties owned by the Plaintiffs and in their control as at the 18th June 1984. 2. Loss of profits for the preceeding (sic) three years as per cash flow budget projections. 3. All costs and incidentals of this action be borne by the Defendants. 4. Special damages to both male and female Plaintiffs of $2,500,000.00 each (Two Million Five Hundred Thousand Dollars)." The affidavit was clearly prepared without the benefit of legal advice and throws up considerable difficulties in the way of understanding what, if any, viable grounds there are for any cause of action on the part of the applicants. The attack made on the application by the respondents is 6. not based, however, upon a consideration of its merits. In essence it depends upon the proposition that if the applicants have any cause of action at all it vested in their trustee and they have no standing to bring the current proceedings. Having regard to the nature of that attack it is necessary to turn to some factual issues which arise specifically on the question of standing. Factual Matters on the Question of Standing An affidavit sworn by Mr Vaughan of the solicitors for the Australian Bank discloses that on 14 July 1987 they wrote to the solicitors for Brides' trustee, Mr Putnin, confirming that the Brides had instituted these proceedings and enclosing a copy of the application and Mr Bride's affidavit (not including the exhibits). In the letter they contended that the claims' the subject of the action are clearly referrable to the business affairs of the Brides before they became bankrupt and that the right to pursue the action had vested in the trustee. They sought Mr Putnin's written confirmation that the trustee would not adopt the proceedings. In a written reply dated 29 July 1987, Mr Putnin's solicitors confirmed that their client did not intend to adopt the proceedings in relation to the claim against the Australian Bank Limited. The letter concluded:- "We make no comment upon your belief that the rights to pursue the action have in fact vested in our client." A further affidavit sworn by Mr Vaughan deposed to the 7. fact that he was present with a Mr Hancock, then General Manager of the Australian Bank, at a meeting of 6 May 1986 which appears to have been a meeting of creditors, with a solicitor, Mr Kelly, then advising the trustee. The purpose of the meeting was to attempt to achieve a settlement of ail disputes relating to the applicants and their bankrupt estates. At that meeting Hancock and Vaughan were informed that the applicants would not be party to any settlement which might be reached. However, the Australian Bank accepted that position because, in Vaughan's opinion, any rights which the applicants may have had against it had vested in their trustee. There was no suggestion that the trustee had assigned or purported to assign any of those rights to the applicant. Following the meeting a settlement was concluded with the trustee on behalf of the joint and separate estates of the applicants. On 19 August 1986 a deed was executed by then joint trustees, Putnin and Campbell-Smith, by the applicants and by the first respondent. It was exhibited to Mr Vaughan's affidavit. The deed is expressed to be between the Australian Bank Limited, the Receivers and Managers, Messrs. Young and Anderson of Peat Marwick Mitchell & Co., and Mr Putnin together with Donald Campbell-Smith as the Brides' trustees. The first operative clause of the deed provided that in consideration of the trustees entering into it the Bank and the Receivers and Managers would withdraw all claims to book debts of the business collected by the trustees and would acknowledge that the business was carried on by and the assets thereof owned by Mr and Mrs Bride in partnership. Further covenants, not material for present purposes, were also made by the Bank and were set out in 8. cl.2 of the deed. Clause 3 of the deed provided, inter alia:- "3, In consideration of the Bank and Receivers and Managers entering into this Deed and of the payment by the Bank to the Trustees on behalf of the joint and separate estates of Mr and Mrs Bride of the sum of FIVE THOUSAND DOLLARS ($5,000.00) (receipt whereof the Trustees hereby acknowledge) the Trustees hereby jointly and severally acknowledge covenant and agree:- (6) that the Trustees will, and hereby do, irrevocably withdraw all allegations, of whatever nature, against the Bank and the Receivers and Managers and their respective employees, agents and advisers, concerning:-— {a) the validity of the Security Instruments; (b) the validity of the appointment by the Bank of the Receivers and Managers; (c) the conduct of the Bank in connection with the advances made by the Bank, the granting of the Security Instruments and realisation thereof; (d) the conduct of the Receivers and Managers in the performance of their duties as such Receivers and Managers; and (e) any other matter or thing in any wise relating thereto." Clause 5 of the deed also provided:- "Ss, This Deed shall be in full and final settlement of all claims, actions, suit and demands which the Bank and the Receivers and Managers on the one hand and _ the Trustees for and on behalf of the joint and separate estates of Mr and Mrs Bride on the other now have or at any time hereafter may have or but for this Deed could or might have had against the Trustees and the Bank and Receivers and Managers respectively for or in respect of any claim matter or thing referred to in this Deed or for or in respect of any claim matter or thing in anywise relating thereto." And at cl. 6:- "6. The Trustees jointly and severally warrant in favour of the Bank and the Receivers and Managers' that they the Trustees are duly authorised pursuant to. the Bankruptcy Act 1966 to enter into this Deed and hereby bind the joint and separate estates of Mr and Mrs Bride." By way of response to the motion, Mr Bride swore a further affidavit on 17 August 1987 in which he contended that these proceedings were commenced "with the permission of our former Trustee Mr B. Putnin". He relied upon a letter, a file copy of which was exhibited as EJB1 to the affidavit. The letter from B. Putnin was dated 29 October 1984 and said, inter alia:- "Further to your enquiry as to whether you may take legal actions to protect your interests and safeguard the value of your business, this is to advise you that I, as Trustee, have no objection to such action being commenced by you, as long as it is clearly understood that any action that you take if it ultimately results in a success is for the benefit of the creditors and the estate. It is also a condition that I, as Trustee, am not contributing to and shall not become liable for any cost of the actions taken by you." This authority, according to Mr Bride, was never withdrawn. In relation to the settlement discussions to which Vaughan had deposed, Bride said that it was explained to both Hancock and Vaughan that the compromise would not bind either him or his wife in any way. Exhibited to his affidavit were minutes 10. of the meeting held on 6 May 1986. The minutes include the following passage:- "Mr Vaughan and Mr Hancock returned to the meeting and Mr Putnin explained to them that he and Mr Kelly had been authorised by the creditors to negotiate the final amount of cash forming part of the settlement but made it quite clear that the resolution and the negotiations would not bind Mr and Mrs Bride in any way and would leave them free to pursue any action which they may wish to bring independently against the Australian Bank or any other parties." Four affidavits sworn by creditors who were present at the meeting each deposed to the fact that negotiations entered into on the part of the creditors were not intended in any way to deny to Mr and Mrs Bride the right to pursue any action they might wish to bring independently against the Australian Bank. According to Mr Bride, Putnin had assigned to him and his wife the raght to take legal action for the benefit of creditors. This contention was clearly based upon the letter of 29 October 1984 and the absence of any recantation or withdrawal of the authority contained in that letter. For the purpose of the present motion, I accept that the letter from Putnin was sent and that what Mr Bride said happened at the meeting of 6 May, happened as he recounted and as is set out in the minutes. On these facts it is nevertheless contended that any relevant cause of action vested in the trustee, that he did not assign it to the bankrupt and in any event, could not, and that the reservation stated at the meeting of creditors in relation to the applicants was ineffective in connection with any 11. cause of action vested in the trustee. As to any such cause of action, it is said to have been compromised as against the Bank by the deed of settlement. The Statutory Framework Section 58 of the Bankruptcy Act 1966 provides for the vesting of the property of a bankrupt in the trustee. Sub~-section 58(1), which is material for present purposes, provides:- "58(1) Subject to this Act, where a debtor becomes a bankrupt - (a) the property of the bankrupt, not being after-acquired property, vests forthwith in The Official Trustee or, if, at the time when the debtor becomes a _ bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and (b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee." Section 5 of the Act includes definitions of "property" and "property of the bankrupt":~ ""property" means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property;" ""the property of the bankrupt", in relation to a bankrupt, means: (a) except in subsections 58(3) and (4): (i) the property divisible among the bankrupt's (b) The property which is divisible among the bankrupt's creditors 12. ereditors; and (ii) any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; and tt is that referred to in sub~-s.116(1), the relevant parts of which provide:-— "116(1) Subject to this Act- (a) (b) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge; the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his discharge; is property divisible amongst the creditors of the bankrupt." Sub-section (2) sets out categories of property to which sub-s.(1) does not extend and among these is:~ any right of the bankrupt to recover damages or compensation — {i) for personal injury or wrong done to the bankrupt, the spouse of the bankrupt or a member of the family of the bankrupt; or (ii) in respect of the death of the spouse of the bankrupt or a member of the family of the 13. bankrupt, and any damages or compensation recovered by the bankrupt (whether before or after he became a bankrupt) in respect of such an injury or wrong or the death of such a person". Whether the Cause of Action Vests in the Trustee The definition of property ins.5 is wide enough to encompass a chose in action. And subject to certain exceptions a chose in action belonging to a bankrupt will be notionally assigned to and vest in the trustee by force of s.58 (Starke - Assignment of Choses in Action in Australia para.105; Lewis - Australian Bankruptcy Law 8th Ed. p.131.) Judicial decisions have established certain exceptions to that general proposition, as Lockhart J. observed in Faulkner v Bluett (1981) 52 FLR 115 at 118, and concerning which his Honour made the general observation at 119:- "The common thread running through these cases is that where the primary and substantial right of action is direct pecuniary loss to the property or estate of the bankrupt, the right to sue passes to the trustee notwithstanding that it may have produced personal inconvenience to the bankrupt: Wetherell v Julius ((1850) 10 CB 267; 138 ER 108]; Wage on Bankruptcy (1904 ed); p.201. Where the essential cause of action is_ the personal injury done to the person or feelings of the bankrupt the right to sue remains with the bankrupt." The case before his Honour involved a claim for damages arising out of negligent advice or misrepresentation. That right of action was directly related to the applicant's interest in certain shares and patents. Any damages would be estimated by reference 14. to rights of property and not to pain felt in respect of "body, mind or character". On that basis any right of action vested in the official receiver. The present case also is, in my opinion, clearly one in which the nature of the applicants' complaint relates directly to the dealings of the Australian Bank and Mr Stewart with their businesses and property interests. The cause of action, if any, vested in the trustee in bankruptcy by force of s.58. That position was not altered by the discharge, for property vested in the trustee continued to be so vested even after discharge - Pegler v Dale (1975) 24 FLR 401. This is apparent from the terms of sub-s.152(1):- "152(1) <A discharged bankrupt shall, notwithstanding his discharge, give such assistance as the trustee reasonably requires in the realization and distribution of such of his property as is vested in the trustee." The letter of 29 October 1984 cannot, in my opinion, amount to an assignment by the trustee of such chose in action as might arise from any alleged wrongdoing on the part of the Bank or Stewart. The statement by the trustee that he has "no objection to such action being commenced by you" was clearly posited on the assumption that it was, at most, a matter of his permission not involving the alienation of any right to the bankrupts. The understanding expressed in the letter that any action "is for the benefit of the creditors and the estate" 1s conclusive against the suggestion of assignment. If the chose in action existed and were assignable it was not assigned. As to whether the trustee could 15. assign a chose in action to the bankrupt, there must be considerable doubt in the face of the provisions of s.58. The trustee's letter does not take effect as an assignment of any cause of action. And it is clear that all causes of action against the Australia Bank Limited vested in the trustee by force of s.58 were compromised by the deed of Compromise and Release to which reference has already been made. The reservation of the rights of the Brides to pursue action against the Bank cannot have any effect in relation to any chose in action which is no longer their property. CONCLUSION Order 20 r.2 provides:- "2.(1) Where in any proceeding it appears to the Court that in relation to the proceeding generally or in relation to any claim for relief in the proceeding ~ (a) no reasonable cause of action is disclosed; (b) the proceeding is frivolous or vexatious; or (c) the proceeding is an abuse of the process of the Court, the Court may order that the proceeding be stayed or dismissed generally or in relation to any claim for relief in the proceeding." The principles governing the application of the rule to the summary dismissal of proceedings are well established and require that an action shall not be summarily dismissed unless it is so obviously untenable that it cannot succeed - General Steel 16. Industries Inc. v Commissioner for Railways (NSW) (1964) 112 CLR 125, 129 (Barwick CJ). The effect of my findings is that the Brides have no rights which they can enforce in relation to the matters complained of in their application. The authorities show that in such a case the bankrupt lacks requisite standing and that dismissal or setting aside of the proceedings is an appropriate disposition. In Boaler v Power [1910] 2 KB 229, the plaintiff had instituted proceedings to set aside certain judgments in the Chancery Division and the Court of Appeal on the ground that' they had been obtained by fraud. The judgments related to a company of which he was a shareholder. While the action was pending he was adjudicated bankrupt. On the trustee refusing to continue with the action it was dismissed on the application of the defendants. The Court of Appeal dismissed the plaintiff's appeal from that decision on the basis that he had no standing. The judgment of the Court (Farwell and Kennedy LJJ) at 232 said of the plaintiff:- "He states that one of his claims was to certain shares and to have the register of the defendant company rectified by inserting his name therein as the holder of such shares. This is property which, if recovered, would belong to his trustee in bankruptcy for the benefit of his creditors; there is no question of after-acquired property or his personal earnings; it is clear that he has no locus standi in respect of this." And further:- "It is open to the Court in bankruptcy, if it thinks fit, to allow the debtor to contest in the Bankruptcy Court the validity of the petitioning creditor's judgment on the ground of fraud, collusion, or for any other sufficient reason...But this is the only way in which 17. the bankrupt can contest it: the adjudication, while it stands, is conclusively binding on him: he _ cannot contest it in any other Court on the ground of fraud or on any other ground. The right to continue these three actions is a chose in action vested in the trustee, and the bankrupt has no locus standi: see Motion v Moojen {(1872) LR 14 £Eq.202]; Rochfort v Battersby [(1849) 2 HLC 388]; Metropolitan Bank v_ Pooley [(1885) 10 App.Cas.210]). This appeal must be dismissed...." That decision was applied by the Supreme Court of Victoria in W.R. Henry & Son v Hodge (1961) 20 ABC 87 in which a bankrupt sought to set aside a default judgment entered against him. In refusing the application Adam J. said at 90:- ",..the right he asserts to have the judgment set aside is property within the meaning of the Bankruptcy Act, which on the sequestration order being made against him vested in the official receiver. In the result, this application must be dismissed without regard to any case which the appellant might be considered to have on the merits to have the default judgment set aside." In Shillito v Bent [1973] VR 762, the Full Court of the Victorian Supreme Court held in an action by bankrupts founded on a proprietary interest in land, that any interest or right to assert such claim was vested in the trustee in bankruptcy "who alone can assert or claim any interest". That result, it was held, was produced by ss.58 and 116 of the Bankruptcy Act 1966 read in conjunction with the definitions in s.5 of that Act. At 767 the Court said:- "...the lack of any proprietary interest or right to claim any such interest in the land in the plaintiffs by virtue of their bankruptcy goes, we think, to the very root of their title to sue in the present action. As we have said they had no locus standi to sue at the date of the issue of the writ, and in those circumstances' the 18. appropriate order was that which in fact was made by the learned Judge, namely, to set aside the writ. The power to make such an order, that is of setting aside the whole proceedings, setting aside the writ in the exercise of the inherent jurisdiction of the Court, is clearly shown by the decision of the English Court of Appeal in Huntley v Gaskell [1905] 2 Ch.656..." In my opinion it has been clearly demonstrated in this case that the application cannot succeed for lack of standing on the part of the applicants. In the event, and pursuant to the exercise of the power under 0.20 r.2, the application will be dismissed. I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment of His Honour Justice French. Associate: Devorol rea Date: allo Sothys 19 € 19. Mr E.J. Bride appeared on his own behalf and on behalf of Mrs W.M. Bride, Counsel for the First Respondent: Mr R. Pringle Solicitors for the First Respondent: Freehill Hollingdale & Page Counsel for the Second Respondent: Mr K. Dundo Solicitors for the Second Respondent: Robinson Cox Date of Judgment: 26 July 1988