Hudson v Signalla  FCAFC 140 confirms
that leave of the court is not required under s58(3) Bankruptcy
Act 1966 (Cth) to sue a former bankrupt in respect of what was
a provable debt in the bankruptcy, after an annulment of the
bankruptcy by way of a composition under ss73 and 74 of the
A bankrupt had his bankruptcy annulled by way of presentation of
a composition that was accepted by participating creditors
Subsequently, a creditor who did not attend the meeting of
creditors at which the Composition was accepted
(Creditor), and therefore did not vote in favour
of the Composition, sought to sue the former bankrupt for a debt
allegedly still owing, by way of counterclaim to proceedings
commenced against him by the former bankrupt.
After initially granting leave to the Creditor under s58(3)
Bankruptcy Act 1966 (Cth) (Act) to pursue
his counterclaim, the primary judge re-opened the application and
revoked the order granting leave, on the basis that the relevant
section of the Act had no work to do in circumstances where debts
were no longer "provable debts" within the meaning of the
Act, because the bankruptcy had been annulled. The Creditor was not
required to obtain leave.
On appeal, the Court agreed with the primary judge. The Court
re-iterated the purpose of s58(3) of the Act, which is to,
"assist in the orderly administration of the insolvent
estate by protecting a bankrupt, and the property of an erstwhile
debtor (as now vested in the trustee), against the enforcement of
remedies. This is done by enabling the court to supervise the
handling of claims through the procedure of proof of debt... by
ensuring that the assets of the estate are not expended on costs in
a multiplicity of litigation, and by ensuring that no one creditor
gets an advantage over the others."
The Court held that the purpose of the section is clearly
directed to the period of time from making the debtor a bankrupt to
the point at which the bankrupt ceases to be such and the estate
ceases to be vested in the trustee. After an annulment by way of
composition or otherwise, there is no legal proceeding to which
s58(3)(b) is directed, because the proceeding is not in respect of
a debt provable in bankruptcy, but rather (if the debt exists) it
is a debt, not of the bankrupt, but of the person who was the
The fate of provable debts in the Composition is brought about
by s75(1) of the Act, which provides that a composition is binding
on all creditors in so far as it relates to provable debts from the
bankrupt, therefore releasing the bankrupt from all provable
So, whilst it may well be the case that s75(1) of the Act would
prove an effective bar to the Creditor's action in the
counterclaim against the former bankrupt (the bankrupt's debt
having been extinguished by the effect of the Composition under the
Act), he was nevertheless not required to seek the leave of the
Court in order to bring his claim.
The Court took a dim view of the eventual prospects of the
Creditor's actual counterclaim, the subject of the leave
question in these proceedings. However, that will be a matter for
the consideration of the Victorian Supreme Court, where the
relevant proceedings in connection with the debt will be heard.
Where it is necessary however to bring proceedings
against a former bankrupt in respect of provable debts in the
bankruptcy, this case makes clear that the requirement to seek
leave in accordance with s58(3) of the Act will not be
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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