Hudson v Signalla [2015] 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 Bankrupcty Act.

BACKGROUND

A bankrupt had his bankruptcy annulled by way of presentation of a composition that was accepted by participating creditors (Composition). 

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.

APPEAL

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 debtor.

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 debts.

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.

COMMENT

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 invoked.