FEDERAL COURT OF AUSTRALIA Brien v P & E Phontos Pty Ltd (In the matter of Estate of Metchler) [1999] FCA 1072 BANKRUPTCY – application by trustee in bankruptcy to extend time to elect to prosecute legal proceedings commenced by bankrupt – whether time may be extended after assignment of the right to bring the action – whether adequate grounds for the court to exercise its discretion to extend time Bankruptcy Act (Cth) 1966, ss 33(c), 60(2), 60(3) Re Faulkner; Ex parte Official Receiver (1981) 52 FCR 109, followed Ryan v Hopkinson (1993) 16 FAMLR 659, followed Stobbart v Mocnaj (1996) 16 WAR 318, distinguished Temsign v Biscen (1998) 157 ALR 83, distinguised IN THE MATTER OF ESTATE OF ANTON EDWIN METCHLER; RICHARD C BRIEN v P & E PHONTOS PTY LTD NG 8201 of 1998 MADGWICK J SYDNEY 6 AUGUST 1999 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8201 OF 1998 BETWEEN: RICHARD C BRIEN Applicant AND: P & E PHONTOS PTY LTD Respondent JUDGE: MADGWICK J DATE: 6 AUGUST 1999 PLACE: SYDNEY REASONS FOR JUDGMENT HIS HONOUR: 1 This is an application to extend the time in which a trustee, pursuant to a Deed of Arrangement made under Part X of the Bankruptcy Act (Cth) 1966 (the Act), may elect to prosecute certain legal proceedings commenced by the debtor. 2 The applicant, Mr Richard Brien, was appointed trustee of the estate of Dr Anton Metchler (the debtor) on 8 February 1993. In 1991 the debtor had sued P & E Phontos Pty Ltd and others (by consent made the respondents to this notice of motion) in the Supreme Court of New South Wales. The action was current when the applicant was appointed as trustee. However, the trustee did not become aware of the Supreme Court action until 9 February 1998. The debtor had apparently regarded himself as no more than his father's nominee in the Supreme Court action and in the underlying transaction which gave rise to it. The evidence is that, on the trustee's appointment, he forgot to inform the trustee of the action. The respondents only become aware of the trustee's appointment much later, and they then served the trustee with notice of the action. The applicant trustee did not elect to prosecute the action, begun by the debtor, within 28 days of being served with the notice. Unless that time be now extended then, according to s 60(3) of the Act, the action would be deemed to have been abandoned. 3 After the expiry of the 28 day limit, on 20 May 1998, the applicant assigned his right, title and interest in the causes of action, described in the Statement of Claim in the Supreme Court proceeding, to the debtor's father, Mr Leslie Metchler (the assignee). The applicant now seeks in this Court to extend the 28 day limitation, imposed by s 60 of the Act, in which he may elect to prosecute the legal proceedings before the Supreme Court. Relevant legislation 4 Subsections (2) and (3) of s 60 of the Act provide: "(2) An action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action. (3) If the trustee does not make such an election within 28 days after notice of the action is served upon him by a defendant or other party to the action, he shall be deemed to have abandoned the action." Section 33(c) provides that the Court may: "extend before its expiration or, if this Act does not expressly provide to the contrary, after its expiration, any time limited by this Act, or any time fixed by the Court or the Registrar under this Act (other than the time fixed for compliance with the requirements of a bankruptcy notice), for doing an act or thing or abridge any such time." 5 It is well settled that, in general, the power of the Court to extend time under s 33(c) will authorise the court to extend the time within which a trustee may make an election so as to avoid the consequences of s 60(3) and this was not in dispute: see Re Faulkner; Ex parte Official Receiver (1981) 52 FCR 109. The respondent's objections to an extension of time 6 However, the respondent raised two objections to the application. Firstly, it was submitted that, in the particular events that had transpired, either the Court had no power to extend time or that, if there were power, the Court's exercise of discretion would be futile. It was claimed that, since the applicant had assigned both the right to maintain the existing action itself and the right to the underlying causes of action, which would include the right to sue again on those causes of action, the applicant had nothing left in respect of which he might make an election under s 60(2), and therefore nothing in relation to which to make an application for an extension of time under s 33(c). 7 Secondly, it was argued, though somewhat faintly, that insufficient grounds had been shown to warrant the exercise of the Court's discretion to extend time. Extending time to elect after assignment of the right to bring the action 8 The principal submission has some attractions. The argument runs that, if the trustee has put himself in a position where he no longer has any right to conduct the action, he cannot elect to continue it. The position of the debtor's father, the assignee, would be that he would still have his rights to the causes of action which underlay the particular action that would now be deemed to be abandoned under s 60(3) of the Act: Stobbart v Mocnaj (1996) 16 WAR 318 and Temsign v Biscen (1998) 157 ALR 83. If, as is anticipated, the actual result might be that those somewhat aged causes of action are now statute-barred, the responsibility for this does not rest with the respondents and, in any event, the operation of insolvency law occasionally produces such odd results. 9 However, in my opinion these attractions are merely superficial. I accept the analysis, offered by Ipp J in Stobbart, that the underlying causes of action may survive the deemed abandonment of a particular proceeding founded on them. But, in my opinion, that carries the resolution of this case no distance. It seems to me that the Court has power to grant an extension of time and that it would not be futile to do so. 10 The election contemplated by s 60(2) is either "to prosecute or discontinue the action". Alternatively, there may be no election made, in which case there is a deemed abandonment. Thus, there are three possible outcomes for the action: (a) election within the primary or extended time to prosecute, in which case the action remains on foot, (b) election within such time to discontinue, in which case the action will be disposed of in a manner acceptable to the court in which the action is brought, but which, except by conscious decision of that court, will not finally extinguish the underlying cause of action, or (c) no such election, in which case there is a deemed abandonment of the action, which will not require any further steps in such court for its effectuation, although ancillary steps may be taken, for example, to provide for costs. 11 The Act appears at least to contemplate that, upon a bankruptcy occurring, persons who have been sued should not be further troubled by the suit unless the independent trustee has formed the opinion that the action is worth pursuing. The mere act of election will not necessarily and does not of its own force expose the trustee to personal liability for costs. It seems that the "preferable opinion" is that the trustee should be substituted as the plaintiff in the action: Ryan v Hopkinson (1993) 16 FAMLR 659 per Priestley JA. If the trustee cannot procure sufficient indemnities from creditors as to costs, he or she will presumably be unwilling to make the election. Actual further prosecution of the action will, generally, at least be made conditional upon the defendants having an undertaking from someone who is not a bankrupt to meet their costs if the plaintiff should prove unsuccessful, but that is a matter for the court which provides the forum for the action. At best, for the defendant(s) in the action, the Act might therefore be said to contemplate that, by the election, the trustee will present himself or herself to the defendant(s), as a presently non-bankrupt individual, to meet the costs if the action is ultimately unsuccessful. 12 However, there is nothing to stop a trustee, after an election to prosecute the action, from assigning the rights of the bankrupt estate in the action to a third party. The third party may then be substituted as the plaintiff. On such an assignment and substitution, the trustee would have no continuing power to influence the course of the proceedings, except by agreement with the assignee. Thus, the purpose of the Bankruptcy Act is not to assure the defendants in an action begun by a bankrupt that, if the trustee elects to prosecute the action, then he or she will necessarily remain personally available to meet costs or to direct the manner of further prosecution of the action. 13 These considerations affect the meaning to be accorded to the expression "to prosecute" in s 60(2). The phrase cannot mean "to prosecute personally" or "to prosecute under the trustee's direction". Once it is appreciated that the phrase, on the contrary, may include the meaning, "to prosecute or to arrange the prosecution of the action by any assignee who is not a bankrupt", the nature of the election is illuminated. The ability so to elect is obviously not retroactively vitiated by the subsequent assignment of the right to conduct the action in question. 14 Neither, in my opinion, is there any warrant to constrict the notion of an "election" in s 60(2) so as to make it impossible for an assignment which pre-dates the election to take effect. To interpret the notion of the trustee's "election" as the respondents contend is apt to have a number of unfortunate effects. One is to give an unwarranted benefit to the defendants in the action. Another is to disappoint the assignee. A third may be to prevent the bankrupt's estate from retaining either the consideration for the assignment or the rights in the action. Further, it is not the case that upon an assignment of the right to the benefit of a particular action, the trustee is irrevocably disconnected from the action: the trustee might buy back such a right. Had the trustee done so here, then, as I apprehend it, the objection taken could not be sustained. The applicant might, indeed, still do so. It would be odd if the ability to elect could be extinguished and then resurrected in that way. 15 It is apparent, from the trustee's having assigned the right to conduct the action, that it was the trustee's intention that the action should continue. It would be the trustee's implied obligation to the assignee not to fail, except for reasonable cause, to take available steps to make the assignment effective. The Act expressly requires no formality of an election except that it be in writing and implicitly it only requires that such election be communicated to the defendant(s) in the action and to the forum court within a reasonable period or periods. The written assignment in this case may therefore have amounted to an election contemplated by the Act. However, it is unnecessary to decide that question. 16 These considerations lead me to think that the expression "to prosecute" in s 60(2) should be interpreted as including the meaning "to arrange the prosecution of the action by an assignee, who is not a bankrupt, whether or not the assignment occurs before or after the trustee's election to prosecute". 17 This view is at odds with remarks expressed by Wheeler J in Temsign v Biscen (1998) 157 ALR 83 at 93. However, that was a case of purported assignment by a trustee to the bankrupt himself. The assignment was held to be contrary to the policy and purposes of the Bankruptcy Act. It was not necessary to decide whether an assignment of the rights in the action might be made to a non-bankrupt assignee. The case should not be read as so deciding and it is, accordingly, distinguishable. In any event, there is no sign that the sorts of considerations that weigh with me were urged before Wheeler J. If that case should be read as supporting a conclusion contrary to my own, then, despite the special importance of seeking uniform interpretation of a much-litigated Commonwealth statute, I would respectfully decline to follow it, believing that aspect of the decision, to be wrong. It will be apparent from my general approach to the present case that I respectfully consider the principal basis for the decision in Temsign to be correct and that I have assumed its correctness in what I have said above. Grounds upon which to extend time 18 Enough appears from the above discussion of the respondents' first point to indicate why I am unimpressed with the second point, that insufficient grounds have been shown to warrant the exercise of the Court's discretion. What appears is that it was either assumed that a post-assignment election to prosecute would suffice or that the trustee and the assignee failed to turn their minds to the necessity for an election before the assignment occurred. If it was the former, the assumption has been vindicated. If it was the latter, the Court ought, in general, to relieve against oversight. 19 It is, however, certainly true that there was egregious delay, poorly explained by the assignee, in attending to the matter once it was raised by the respondents. The relief sought should therefore be conditional upon the applicant undertaking to pay the respondents' costs of this application on an indemnity basis. Presumably the applicant will not so undertake unless the assignee indemnifies him in relation to such an undertaking. Upon the undertaking being given, I will extend the time for election for 21 days from today. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick. Associate: Dated: 6 August 1999 Counsel for the Applicant: B Skinner Solicitor for the Applicant: Ledlin Partners Counsel for the Respondent: M Aldridge Solicitor for the Respondent: Harper Watson Date of Hearing: 18 December 1998 Date of Judgment: 6 August 1999