New South Wales Supreme Court CITATION : Morkaya v Parkinson; Parkinson v Morkaya [2010] NSWSC 1194 HEARING DATE(S) : 2 September 2010 JURISDICTION : Equity Division JUDGMENT OF : Brereton J EX TEMPORE JUDGMENT DATE : 2 September 2010 DECISION : Proceedings by and against bankrupt stayed, with liberty to apply to vacate the stays upon certain relevant changes of circumstances. CATCHWORDS : BANKRUPTCY – Administration of property – Provable debts – s 58(3) – whether court has jurisdiction to grant leave under s 58(3) of the (CTH) Bankruptcy Act 1966 for a party to pursue a claim against a bankrupt – if so, whether leave should be granted – whether application for costs can be continued without leave after bankruptcy of respondent – proceedings by bankrupt – deemed election by trustee to abandon de facto property proceedings – whether election operates to preclude further prosecution of proceedings by bankrupt – whether proceedings should be stayed as vexatious or oppressive. (CTH) Bankruptcy Act 1966 s 58, s 60, s 82 LEGISLATION CITED : (CTH) Trade Practices Act 1974 (NSW) Property (Relationships) Act 1984, s 20 CATEGORY : Procedural and other rulings Audet v Audet; Official Trustee in Bankruptcy (1994) 19 Fam LR 291 Australian Competition and Consumer Commission v The Bio Enviro Plan Pty Ltd (2004) 2 ABC(NS) 130 Bendigo Bank Ltd v Demaria [2001] VSC 218 Davies v Gertig (No 2) (2002) 83 SASR 521 DCT v Swain (1988) FLC 91-976 Ex parte Llynvi Coal & Iron Co; Re Hide (1871) LR 7 Ch App 28 at 31- 32 (CA) CASES CITED : Finikiotis v Knight Frank (SA) Pty Ltd [2001] FCA 1733 Fraser Property Developments Pty Limited v Sommerfeld (No 2) [2005] 2 Qd R 404 Gao v Official Trustee in Bankruptcy of Yu Jing Zhu [2002] VSC 285 Green v Schneller (2001) 164 FLR 82; 189 ALR 464 Macks v Edge [2006] FCA 1077 O'Neill v O'Neill (1998) 23 Fam LR 326 Page (No 2) (1982) FLC 91-241 Re Killington; Ex parte Chisholm v Official Trustee in Bankruptcy of the Estate of Killington [1998] FCA 1474 08/278779 Aydan Morkaya (plaintiff) David Anthony Parkinson (defendant) PARTIES : 08/278871 David Anthony Parkinson (plaintiff) Aydan Morkaya (first defendant) Ativa Pty Ltd (second defendant) FILE NUMBER(S) : SC 08/278779; 08/278871 COUNSEL : Ms A Morkaya (in person) Mr D Parkinson (in person) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRERETON J Thursday, 2 September 2010 2008/278779 Aydan Morkaya v David Anthony Parkinson 2008/278871 David Anthony Parkinson v Aydan Morkaya JUDGMENT (ex tempore) 1 HIS HONOUR: On 22 May 2008, Ms Morkaya commenced proceedings 2905/2008 (which are now proceedings 2008/278779), claiming adjustive property orders pursuant to (NSW) Property (Relationships) Act 1984, s 20, against Mr Parkinson, whom she contended was her former de facto husband ("the de facto property proceedings"). On 23 May 2008, Mr Parkinson commenced proceedings 2945/2008 (now 2008/278871) against Ms Morkaya and Ativa Pty Limited, a company in which Ms Morkaya and Mr Parkinson were both equal shareholders and directors, claiming its winding up on the ground of oppression and on the just and equitable ground, and relief against Ms Morkaya for various alleged breaches of her director's duties ("the corporations proceedings"). Subsequently, orders were made for the winding up of Ativa, and the remainder of Mr Parkinson's claim against Ms Morkaya in the corporations proceedings has proceeded in parallel with his cross-claim filed in the de facto property proceedings on 7 November 2008, whereby he claims damages for pecuniary loss under multiple heads (including diminution in the value of Ativa said to have been occasioned by Ms Morkaya's alleged breaches of her director's duties, moneys said to have been misappropriated by Ms Morkaya, loss and damage caused by the alleged removal of signage and otherwise through Ms Morkaya's supposed conduct in relation to the business of DCA Computers, amounts outstanding on loan, and some interest components). The proceedings have had a protracted procedural history before this Court. 2 Meanwhile, on 13 April 2010, a sequestration order was made in the Federal Magistrates Court against Ms Morkaya, and Paul G Weston was appointed her trustee in bankruptcy, on the petition of Fairfax Media. Ms Morkaya disputes her indebtedness to Fairfax Media and, for reasons referred to in my judgment of 23 March 2010 [Morkaya v Parkinson [2010] NSWSC 596], there are grounds for doubting it, but it has not been set aside, nor has the sequestration order been annulled. 3 (CTH) Bankruptcy Act 1966, s 60, relevantly provides as follows: (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 actions. (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. 4 Prima facie, Ms Morkaya's claim in the de facto property proceedings appears to be an "action" within s 60(2), as defined in s 60(5). On or about 27 July 2010, Mr Parkinson's solicitors sent to Ms Morkaya's trustee in bankruptcy a notice under s 60(3), requiring the trustee to make an election under s 60(2) within 28 days, namely by 24 August 2010, in respect of the de facto property proceedings. The trustee made no such election, as he confirmed in a letter to Mr Parkinson's solicitors of 30 August 2010. Accordingly, the trustee is deemed to have abandoned the de facto property proceedings. 5 Ms Morkaya wishes to continue the proceedings, notwithstanding their deemed abandonment by her trustee in bankruptcy. At first, I thought that she no longer had standing in respect of it, it being vested in her trustee, who has abandoned it. However, on further reflection this is not so. In Page v Page (No 2) (1982) FLC ¶91-241, Frederico J in the Family Court of Australia explained that s 60 does not preclude the bankrupt from bringing or continuing a claim for matrimonial property adjustment: The situation of the bankrupt, however, is quite different. Although s 60 of the Bankruptcy Act provides that any action commenced by the bankrupt prior to the bankruptcy is stayed until the trustee elects to either prosecute or discontinue, that does not preclude the bankrupt from bringing or continuing an application under the Family Law Act for settlement of property. It appears from what is referred to in Williams on Bankruptcy , 18th ed., p 318 as "the common law of bankruptcy" that a claim for settlement of property under the Family Law Act is not a right which vests in the Official Receiver. In Coffey v Bennett [1961] VR 264, Scholl J considered an application by a bankrupt under Pt IV of the Administration and Probate Act 1958. His Honour said in the course of his judgment (at p 266): … in my opinion, the right to sue for maintenance out of an estate is, notwithstanding the possible implications of a New Zealand decision and New South Wales decision to which I was referred by Mr Stephen, a personal right not capable of assignment by a statutory claimant or of assignment by operation of law to his trustee in bankruptcy at any rate. No one, I venture to think, ever heard of a stranger to the testator coming to the court as an application for testator's family maintenance and suing for such as the assignee of a right vested by the Administration and Probate Act in the widow or a child of the testator, any more than anyone ever heard of an assignee of the rights of a deserted wife or child suing as such assignee for maintenance under the Maintenance Act or under the Marriage Act. Similar considerations would apply in relation to applications for settlement of property by an undischarged bankrupt under the Family Law Act . Section 79 of the Family Law Act empowers this Court to make orders by way of settlement of property "for the benefit of" a party to the marriage. Counsel for the wife has submitted that no order should be made in circumstances of this case as any fruits falling to the husband would pass to the Official Receiver by virtue of s 58 of the Bankruptcy Act . I reject counsel for the wife's argument. The fact of the bankruptcy is a matter for which this Court must have general regard. The fact of the bankruptcy may have importance in considering, in particular, the factors under s 75(2) of the Family Law Act as imported by s 79(4) of the Act. But it would be quite wrong for the husband to be placed in a worse position solely because of his bankruptcy, or for the wife to be placed in a better position merely because the fruits of the husband's application be applied to effect a discharge of his just debts. In the present case, the husband wishes to apply the proceeds of the application towards to bankruptcy in the hope of obtaining an early discharge. Thus an order for property settlement would be for his benefit in any event. 6 See also Audet v Audet; Official Trustee in Bankruptcy (1994) 19 Fam LR 291; O'Neill v O'Neill (1998) 23 Fam LR 326. Similar considerations apply to proceedings for de facto property adjustment under s 20. Contrary to my initial view, I do not consider that Ms Morkaya must be deemed to have abandoned her de facto property proceedings, and I cannot stay them on that basis. 7 However, the course of her prosecution of the proceedings has been tortuous. There have been repeated failures on her part to comply with directions and to have the matter ready and there is no foreseeable prospect that this will change. The proceedings have not been prosecuted with due dispatch [cf UCPR r 12.7]. Although, in accordance with the authorities to which I have referred, Ms Morkaya has standing to prosecute them, at this stage she would be doing so for the benefit of her bankrupt estate, when the trustee has elected to abandon them. As a bankrupt, she is not amenable to an adverse costs order. In my view, given her delays, defaults, and bankruptcy; the absence of benefit for Ms Morkaya personally; and that (as will appear below) Mr Parkinson will not be entitled to prosecute his cross-claim – it would be oppressive of Mr Parkinson to permit the proceedings to continue, and I propose to stay them on that ground. 8 Ms Morkaya says that she wishes to apply to set aside the bankruptcy. The proceedings before me have been adjourned on several occasions, since the sequestration order was made, to enable Ms Morkaya to make an application to that effect, but it has not yet happened. Although it seems to me that there has been ample opportunity for any such application to be made, nonetheless I will preserve the possibility that these proceedings could be resurrected by Ms Morkaya, by staying them only until further order, on the basis that if the bankruptcy is annulled, or circumstances otherwise change, then it would be open to her to apply to this Court to have the stay lifted [cf Bendigo Bank Ltd v Demaria [2001] VSC 218, [34]-[38] (McDonald J); Finikiotis v Knight Frank (SA) Pty Ltd [2001] FCA 1733 (Gray, Dowsett and Stone JJ)]. 9 Mr Parkinson's cross-claim, and his claim in the corporations proceedings, are, as I have recorded, claims for damages for pecuniary loss. The debts which he claims, if established, would be provable debts in Ms Morkaya's bankruptcy. Bankruptcy Act, s 82(1), provides: (1) All debts and liabilities present or future, certain or contingent to which a bankrupt is subject to the date of the bankruptcy or to which he or she may be become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy are provable in his or her bankruptcy. 10 As James LJ said in Ex parte Llynvi Coal & Iron Co; Re Hide (1871) LR 7 Ch App 28, at 31- 32 (CA): Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy, and to be ascertained by either by the Court itself or the aid of a jury. The broad purview of this Act is that bankrupt is to a freed man - freed not only from debt from the contracts, liabilities, engagements and contingencies of every kind. On the other hand, all the persons from whose claims and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets. 11 The ordinary way in which provable debts are dealt with after the debtor becomes bankrupt is for the creditor to lodge a proof of debt with the trustee in bankruptcy, together with any supporting evidence. The trustee in bankruptcy must then adjudicate on that proof of debt, and either admit it to rank with the other unsecured creditors, or reject it. If the trustee rejects it, the creditor may appeal to the appropriate court, which in this case would be the Federal Magistrates Court, where the sequestration order was made. 12 Any cross-claim under the Property (Relationships) Act would be hopeless, as with effect from her bankruptcy Ms Morkaya has no property capable of being subject to an order [DCT v Swain (1988) FLC ¶91-976; Macks v Edge [2006] FCA 1077; Page v Page (No 2) (1982) FLC ¶91-241]. There is no provision in the Act equivalent to Family Law Act, s 79(1), enabling continuation of property adjustment proceedings after bankruptcy; and while the provisions of the Family Law Act now apply to de facto relationships which ended after 1 March 2009, they do not apply to this relationship, which ended before that date. 13 Bankruptcy Act, s 58(3), provides: Except as provided by this act, after a debtor has become a bankrupt, it is not competent for the creditor: … (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceedings in respect of a provable debt or take any fresh step in such a proceeding. 14 It is true that under s 58(3)(b), leave can be granted to commence or to take a fresh step in a legal proceeding which is otherwise stayed by operation of s 58(3). Although there is some doubt about it, the balance of authority favours the view that such leave must be obtained from the bankruptcy court – relevantly, in this case, the Federal Magistrates Court [see Davies v Gertig (No 2) (2002) 83 SASR 521; Green v Schneller (2001) 164 FLR 82; 189 ALR 464; Gao v Official Trustee in Bankruptcy of Yu Jing Zhu [2002] VSC 285; Fraser Property Developments Pty Limited v Sommerfeld (No 2) [2005] 2 Qd R 404 but compare Re Killington; Ex parte Chisholm v Official Trustee in Bankruptcy of the Estate of Killington [1998] FCA 1474]. At least in the absence of learned argument to the contrary, I should follow the overwhelming balance of authority to the effect that this Court does not have jurisdiction to grant leave under s 58(3)(b). Accordingly, it is not competent for me to grant leave to Mr Parkinson to continue his claims. 15 But even if it were competent to do so, I would not grant such leave. Given that both parties claim to be in financial distress, this seems to me to be the paradigm case in which Mr Parkinson should proceed by way of proof of debt with the trustee in bankruptcy, rather than by contested proceedings before this Court. It is the obligation of the trustee in bankruptcy to assess the claims made by creditors on a bankrupt estate and admit or reject proofs of debt – and thereby found, if necessary, any right of appeal from a rejection. Accordingly, even if I thought I had jurisdiction to do so, I would not grant leave; but that is a matter for another court, and not for me. 16 Again, against the possibility that the appropriate court might grant leave to Mr Parkinson to continue his claims, I will stay his claims only until further order, rather than permanently. 17 Mr Parkinson also seeks a costs order in respect of the de facto property proceedings to date. However, it seems to me that such a costs order would create a provable debt, and that to seek it is to take a further step in proceedings in respect of a provable debt and is not permissible without leave, under s 58 (3)(b). This is consistent with the decision of Nicholson J in Australian Competition and Consumer Commission v The Bio Enviro Plan Pty Ltd (2004) 2 ABC(NS) 130, in which it was held that leave was required to pursue costs orders in proceedings under the (CTH) Trade Practices Act 1974, when the respondents had become bankrupt after the hearing and determination against them of the substantive issues in the proceeding. Consistently with that, I do not think that it is open to Mr Parkinson to seek, or to the Court to make, a costs order in respect of Ms Morkaya's abandoned proceedings. 18 My orders, therefore, are as follows: 19 In proceedings 2008/278871, being the corporations proceedings: 1. Order that until further order the proceedings be stayed. 2. Reserve liberty to apply to vacate the stay in the event that leave under Bankruptcy Act s 58(3)(b) is granted by a court of competent jurisdiction. 20 In proceedings 2008/278779, being the de facto property proceedings: 1. Order that until further order the plaintiff's claim be stayed. 2. Reserve liberty to apply to vacate the stay, in the event that the sequestration order against the plaintiff is set aside or her bankruptcy is annulled, or there is some other relevant change of circumstances. 3. Order that until further order the cross-claim be stayed. 4. Reserve liberty to apply to vacate the stay of the cross-claim in the event that a court of competent jurisdiction grants leave under Bankruptcy Act s 58(3)(b) to Mr Parkinson, or in the event that application is made to vacate the stay of the plaintiff's claim. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.