Australia: When can a bankrupt continue a claim after bankruptcy? It is all about substance

Last Updated: 28 August 2017
Article by Andrew Ng
Services: Dispute Resolution & Litigation, Restructuring & Insolvency
Industry Focus: Financial Services

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) of the Bankruptcy Act.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.