FEDERAL COURT OF AUSTRALIA Allnation Corporation Pty Ltd, in the matter of Maddy v Maddy [2017] FCA 1258 File number(s): WAD 483 of 2017 Judge(s): SIOPIS J Date of judgment: 20 October 2017 Catchwords: BANKRUPTCY – application for leave to commence legal proceedings – proposed proceedings against a legal practitioner alleging breach of duty in the provision of legal advice and assistance – professional indemnity insurer involved – leave granted. Legislation: Bankruptcy Act 1966 (Cth) ss 58(3)(b), 117(1) Date of hearing: 20 October 2017 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 22 Counsel for the Applicant: Mr A Prentice Solicitor for the Applicant: Latro Lawyers Counsel for the First Respondent: The First Respondent did not appear. Counsel for the Second Respondents: The Second Respondents did not appear. ORDERS WAD 483 of 2017 IN THE MATTER OF GRAHAME MADDY BETWEEN: ALLNATION CORPORATION PTY LTD (ACN 093 135 909) Applicant AND: GRAHAME MADDY First Respondent MARK WILLIAM PEARCE AND ANDREW JOHN HEERS Second Respondents JUDGE: SIOPIS J DATE OF ORDER: 20 OCTOBER 2017 THE COURT ORDERS THAT: 1. The applicant is granted leave to commence legal proceedings in the Supreme Court of Western Australia against the first respondent, pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth) in respect to the first respondent's alleged negligence and breach of contract in relation to two matters identified in the affidavit of Mr James Turner dated 8 September 2017. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT SIOPIS J: 1 This is an application by Allnation Corporation Pty Ltd (Allnation) for leave, under s 58(3)(b) of the Bankruptcy Act 1966 (Cth), to commence legal proceedings against the first respondent, Mr Grahame Maddy, who is bankrupt. 2 Section 58(3) of the Bankruptcy Act relevantly provides: Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor: (a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or (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. 3 The applicant relies upon the affidavit sworn on 8 September 2017 by Mr James Conrad Turner. Mr Turner is the sole director and shareholder of Allnation. Mr Turner has deposed to the facts and circumstances which give rise to the legal proceedings which Allnation proposes to commence against Mr Maddy. 4 At the material times, Mr Maddy practised as a legal practitioner in Albany, using the corporate entity, Great Southern Legal Pty Ltd. The proposed proceedings are founded on claims for breach of contract and negligence arising out of the provision of legal advice and assistance by Mr Maddy to Allnation. Mr Turner says that he intends to sue Mr Maddy in relation to two disputes between Allnation and third parties, in respect of which Mr Maddy provided Allnation with legal advice and assistance. 5 Mr Turner deposes that in June 2006 he entered into a contract with a company, RSM Crane Sales and Hire Pty Ltd (RSM), for the purchase of a crane. A representative of RSM made representations to Mr Turner including that the crane was an authentic 1992 Liebherr 50T LTM-1050 all terrain crane and that the crane was in good working order. In fact, said Mr Turner, the crane which was supplied to him was a composite crane made up of old parts to which a false serial number had been affixed. The crane did not work and RSM charged Allnation for its attempts to repair the crane. Allnation refused to pay and RSM brought proceedings in the Magistrates Court of Western Australia. Mr Turner says that, in reliance on Mr Maddy's advice, Allnation settled the Magistrates Court claim by paying RSM a sum of money. Mr Turner alleges that the advice to settle that claim was negligent. 6 Mr Turner then deposes that he engaged Mr Maddy to bring proceedings in the Supreme Court of Western Australia (the Supreme Court) in respect of the loss Allnation had suffered from the supply of the defective crane. 7 Mr Maddy duly commenced proceedings against RSM in the Supreme Court but he did not join, as defendants, either the representative of RSM who had made the allegedly false representations, or the independent certifier who had issued the certificate in relation to the crane. For reasons which are referred to in his affidavit, the Supreme Court proceedings against RSM were, according to Mr Turner, not diligently prosecuted by Mr Maddy, and never reached trial. In the meanwhile, RSM was deregistered as a company, and on 12 April 2016, Mr Maddy was made bankrupt on the application of the Commissioner of Taxation. 8 Allnation seeks to bring a claim against Mr Maddy in respect of the alleged mishandling of the RSM matter alleging breach of contract and negligence. 9 The second matter in respect of which Allnation proposes to claim relates to Mr Maddy's alleged breach of duty in respect of the attempts to recover a debt due to Allnation from a debtor. Mr Turner's complaint is that Mr Maddy advised that a statutory demand should be issued against an entity, referred to as Teksteel. Mr Turner said that the debtor was actually another entity, Welldun Rigging. The statutory demand against Teksteel was set aside. 10 Allnation then instructed Mr Maddy to institute proceedings against Welldun Rigging. Mr Maddy, it is said, commenced the proceedings but did not prosecute the proceedings with diligence, with the consequence that the proceedings were placed on the inactive list in the District Court of Western Australia and, said Mr Turner, it is now too late to revive them. 11 The allegations which Allnation proposes to make in respect of the Teksteel matter are that Mr Maddy gave negligent advice to issue a statutory demand, and the proceedings against Welldun Rigging were not prosecuted with diligence. 12 Allnation's solicitors have written to Mr Maddy's trustees in bankruptcy, the second respondents to this application, advising of this application. The trustees in bankruptcy have advised the solicitors that they neither object to, nor support, the application for leave to commence proceedings against Mr Maddy. 13 I have also been informed by counsel for Allnation from the bar table that Mr Maddy was served with the application and Mr Turner's affidavit; and that there is an affidavit of service to that effect. Mr Maddy has not, however, appeared today to make submissions in opposition to the granting of the leave. 14 Allnation's solicitors have also written to the professional indemnity insurers of Mr Maddy, Law Mutual (WA) (Law Mutual), outlining the claims referred to above. Law Mutual's solicitors have responded to that letter acknowledging that, subject to the terms and conditions of the policy, on the facts presently known, Mr Maddy was indemnified in respect of claims of the nature identified in Allnation's solicitors' letter. There is a representative of Law Mutual in Court today, although not at the bar table. 15 Section 117(1) of the Bankruptcy Act, therefore, has relevance. That section provides: Where: (a) a bankrupt is or was insured under a contract of insurance against liabilities to third parties; and (b) a liability against which he or she is or was so insured has been incurred (whether before or after he or she became a bankrupt); the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party to whom it has been incurred. 16 Accordingly, the position of any other creditors will not be prejudiced because, subject to the qualification expressed in the Law Mutual letter, the costs of the defence of the claim will be borne by Law Mutual and, should the claim be successful, that will not adversely impact on the potential return to other creditors. 17 The question, then, is whether, as a matter of discretion, the Court should grant leave. 18 In my view leave should be granted for the following reasons. 19 First, the factual and legal issues that are likely to arise in the proposed legal proceedings are such that they are better dealt with through the court process than pursuant to the proof of debt process under the Bankruptcy Act. A major consideration in this respect is that, if liability is established, Allnation's loss and damages will need to be established; and in my view, this is best done through the rigour of the court process. A further consideration is the fact that a third party, namely, Law Mutual, is also involved in the resolution of the dispute. 20 Secondly, as I have said, on the facts before the Court, other creditors of Mr Maddy are unlikely to be adversely affected by the conduct of the proposed proceedings because of the involvement of the insurer and the impact of s 117 of the Bankruptcy Act to which I have referred. 21 The question of whether leave is necessary or not does not arise on this application. 22 I will, therefore, grant leave to Allnation to commence the proposed proceedings against Mr Maddy. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. Associate: Dated: 25 October 2017