On 21 December 2011, the New South Wales Court of Appeal (Court) delivered its decision in Moss v Eaglestone (2011) 257 FLR 96.  This decision clarifies the circumstances in which legal causes of action will be considered property divisible amongst a bankrupt’s creditors.

Background

In 2007, Moss supplied information regarding Schapelle Corby to Nationwide News Pty Ltd (News).  News published this information in a newspaper article, which also referred to Moss’s criminal background.

Moss subsequently sued News, claiming that News had breached an agreement to pay him $250,000 for the information (Contractual Action).  In commencing the Contractual Action, Eaglestone, Moss’s then solicitor, failed to include a defamation claim against News for publishing Moss’s criminal background (Defamation Claim).

Moss failed in the Contractual Action and, as a consequence, became bankrupt.  Moss then sued Eaglestone for negligently failing to bring the Defamation Claim (Negligence Action).

However, the trial judge ordered a permanent stay of the Negligence Action on the basis that section 60(2) of the Bankruptcy Act 1966 (Cth) (Act) vests a bankrupt’s causes of action in the trustee in bankruptcy.  Therefore the Negligence Action had become property divisible among Moss’s creditors, rather than Moss’s personal property.

Moss appealed against the stay in reliance on an exception in section 60(4) of the Act which allows a bankrupt to maintain a cause of action “in respect of...any personal injury or wrong” done to that bankrupt.

Decision

The Court allowed Moss’s appeal and overturned the stay.

The Court noted that it was clear that the Defamation Claim would be classed as a cause of action relating to a personal injury or wrong in accordance with the section 60(4) exception.  The difficulty here was that the Negligence Action was a claim for consequential economic loss – namely the likely lost proceeds of the Defamation Claim – rather than for defamation directly.

However, the Court emphasised that the rationale for the section 60(4) exception is that it is unjust for a bankrupt’s creditors to effectively receive a windfall gain from personal injuries or wrongs to the bankrupt.  Moreover, the words “in respect of” in section 60(4) showed that it was to be interpreted flexibly.

Accordingly, the Court held that the Negligence Action was an action for a personal injury or wrong as it derived its character from the underlying Defamation Claim and, pursuant to section 60(4), the Negligence Action did not form part of Moss’s divisible property.

Comment

This case shows that courts will not adopt an overly-strict approach in applying the section 60(4) exception.  Instead, courts will focus on whether, in substance, the bankrupt’s cause of action relates to a personal injury or wrong.  This reflects a concern to ensure that creditors do not receive windfall gains and that bankrupts are compensated for personal injuries or wrongs.