When can a bankrupt continue a claim after bankruptcy? It’s all about substance

Services: Dispute Resolution & Litigation, Restructuring & Insolvency
Industry Focus: Financial Services
Date: 25 August 2017
Author: Andrew Ng, Associate
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What you need to know

  • The Federal Court of Australia has recently considered the circumstances in which a claim brought by a person who subsequently becomes bankrupt can be continued, rather than being stayed until the trustee elects to prosecute or discontinue the action.
  • While there are provisions in the Bankruptcy Act 1966 (Cth) which provide that a bankrupt may continue a claim that relates to personal injury or wrong done to the applicant, the inevitable question is: what constitutes personal injury or wrongdoing?
  • As the Federal Court of Australia has recently confirmed, this question will be answered with reference to the substance and not the form of the bankrupt’s claim.

The facts

In November 2014, Mr Nyoni commenced an application in the Federal Court of Australia seeking compensation and injunctive relief on the basis of the alleged conduct of the Pharmacy Board of Australia and the Australian Health Practitioner Regulation Agency (Respondents). Mr Nyoni alleged that the Respondents had published material online which created the impression that Mr Nyoni had been found guilty of improperly taking or self-administering certain drugs or that he was an addicted drug taker, thereby impugning his reputation and giving rise to three causes of action:

  1. defamation
     
  2. misleading or deceptive conduct in contravention of the Australian Consumer Law (ACL)
     
  3. malicious falsehood.

Before these proceedings were resolved, in February 2017 a sequestration order was made against the estate of Mr Nyoni by the Federal Circuit Court of Australia.

Upon Mr Nyoni becoming bankrupt, the provisions of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) became relevant to the question of whether or not his action against the Respondents could continue.

The law – when can a bankrupt continue its claim?

Section 60(2) of the Bankruptcy Act provides that upon a person becoming a bankrupt, any action commenced by that person is stayed until the trustee makes an election in writing to prosecute or discontinue the action.

However, it is well established that a bankrupt should not be deprived of a right to recover compensation for injury or wrong done to the bankrupt, as it would be unjust to bestow such relief on the bankrupt’s general creditors.

This principle underpins the intention of the statutory framework set out in section 116(2)(g) and section 60(4) of the Bankruptcy Act.

Section 116(2)(g) excludes from property that is divisible among a bankrupt’s creditors:

“any right of the bankrupt to recover damages or compensation:

(i) for personal injury or wrong done to the bankrupt, the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt; or

(ii) in respect of the death of the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt;”

Section 60(4) of the Bankruptcy Act then provides an exception to the rule set out in section 60(2), providing that a bankrupt may continue, in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of any personal injury or wrong done to the bankrupt.

Mr Nyoni’s claims

On 9 June 2017, the Respondents filed an interlocutory application in the proceedings that Mr Nyoni had commenced in 2014, seeking a stay pursuant to section 60(2) of the Act. The Respondents sought the stay in relation to the claims for misleading and deceptive conduct (in breach of the ACL) and the tort of malicious falsehood (Claims), on the basis that they did not fall within section 60(4) of the Act because they compensated for economic loss.

The stay application did not include the claim for defamation, as the Respondents accepted that this was a claim relating to personal injury to Mr Nyoni.

Outcome

The preliminary question for determination by Siopis J was whether Mr Nyoni’s Claims fell within the exception in section 60(4) such that he was entitled to continue the proceedings, notwithstanding his bankruptcy. This in turn required a determination about whether Mr Nyoni’s Claims were claims involving economic loss (such that that they would vest in his Trustee in Bankruptcy) or in respect of a personal injury or wrong.

In answering these questions, Siopis J considered the decision in Moss v Eaglestone (2011) 83 NSWLR 476 in which Allsop P (as his Honour then was) made clear that the distinction between personal and property rights is one of substance, and that section 60(4) requires the substance of the bankrupt’s claim to be examined.

Siopis J also considered the more recent decision in Berryman v Zurich Australia Ltd (2016) 310 FLR 108, in which the bankrupt sued to enforce an insurance policy. In that case, Tottie J was required to consider whether the benefit payable pursuant to the bankrupt’s disability insurance policy was in respect of a contractual right.

Tottie J rejected the submission that the bankrupt was seeking to enforce a contractual right and that the claim was linked to the conditions of the life insurance policy, rather than to his personal injury. In so finding, Tottie J concluded that whilst the bankrupt’s action was based in contract (pursuant to the life insurance policy), the substance and nature of his claim (that being for personal injury) were not altered by the interposition of the policy between the injury and his action.

Ultimately, Siopis J found that in substance, Mr Nyoni’s Claims related to the result of the materials published by the Respondents, through which Mr Nyoni claimed to have suffered loss primarily in relation to his personal and professional reputation and earning capacity. His Honour found that the substance of the Claims was in the nature of a personal injury or wrong done to Mr Nyoni and that this conclusion was not changed by Mr Nyoni seeking to rely on three separate causes of action to vindicate the harm arising from the personal wrong which he alleged he had suffered. Accordingly, Siopis J dismissed the Respondents’ application.

Whether or not a claim is one which, 'in substance', involves personal injury or wrongdoing is a case by case question. 

However it is important to differentiate between:

  1. on the one hand, claims which are in substance personal injury claims even if the technical cause of action arises say in contract, and
     
  2. on the other hand, claims for personal injury damages which are consequential upon the loss or damage referable to proprietary claims.

As has been seen, the former type of claim (1 above) may be excluded from the property of the bankrupt estate, and remain a claim which can be brought or continued by the bankrupt in their own right.

However, the latter type of claim (2 above) will, as a general rule, vest in the trustee in  bankruptcy and so will not be able to be brought or continued independently by the bankrupt. For example, if a bankrupt former bank customer were to allege that their health, reputation or credit had been detrimentally affected by a loan approval relating to an unsuccessful property development, this type of claim would not be excluded from the bankrupt’s estate under section 116(2)(g) of the Bankruptcy Act.

Key takeaways

The application of section 116(2)(g) and section 60(4) of the Bankruptcy Act seems straightforward enough in theory, however it becomes less clear when a bankrupt’s cause of action is ‘mixed’ involving elements of property and contractual rights or tort and personal injury.     

This decision is important as it provides some guidance as to the application of section 60(4) and section 116(2)(g) and when an action will be stayed in the context of a party’s bankruptcy.

The decision also reaffirms the importance of substance over form in determining when a bankrupt’s action will fall within section 60(4) the Bankruptcy Act.

For more information, please contact:

Justin Kang | Partner

T +61 2 8233 9665 | M +61 417 482 408

E justin.kang@dibbsbarker.com

Scott Guthrie | Partner

T +61 7 3100 5019 | M +61 421 369 861

E scott.guthrie@dibbsbarker.com

John Stragalinos | Partner

T +61 3 8640 1004 | M +61 412 745 085

E john.stragalinos@dibbsbarker.com

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