Hudson v Sigalla [2014] FCCA 1652
Mr Frank Hudson (Hudson) and Mr Andrew Sigalla (Sigalla) were in business together.
Their business dealing included an arrangement providing a financier with the power to debit the bank account of one party for the obligations of the other. The financier was said to have debited Sigalla’s account for Hudson’s debts for $1.9 million.
Hudson was a licensed bookmaker and claimed that, between 2006 and 2008 Sigalla placed bets with him resulting in an overall debt of more than $1.9 million.
Sigalla was made bankrupt on 28 June 2010.
On 21 May 2013, a meeting of creditors made a special resolution accepting a proposal for a composition satisfying the debts of Sigalla which annulled the bankruptcy pursuant to s 74(5) of the Bankruptcy Act.
On 16 July 2013, Sigalla, then a discharged bankrupt, commenced proceedings to recover the debts he claimed were owed to him by Hudson.
In November 2013, Hudson filed a cross-claim to recover the gambling debts he claimed were owed to him by Sigalla.
Subsequently, in March 2014, Sigalla filed a notice of motion seeking summary dismissal of the cross-claim on the basis that the debt it related to could not be claimed due to Sigalla’s bankruptcy.
Hudson then filed an application to, relevantly, seek leave to proceed with the cross-claim which was heard over two days in June and July 2014 by Driver J of the Federal Circuit Court of Australia.
Driver J discussed at length the gambling debts and whether they could be enforced under Victorian legislation as well as the circumstances relating to annulment of the bankruptcy.
Pursuant to s 74(5) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), a bankruptcy may be annulled in the following manner:
Upon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution has passed.
Section 58(3) of the Bankruptcy Act provides as follows:
Except as provided by this Act, after a debtor has become a bankrupt [emphasis added], it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
Driver J made the following order:
I will grant leave nunc pro tunc to Mr Hudson pursuant to s.58(3) of the Bankruptcy Act to institute and continue his cross-claim in the Supreme Court proceedings. The application should be otherwise dismissed.
First appeal – Hudson v Sigalla (No 2) [2015] FCCA 542
On 10 February 2015, Sigalla applied to the primary judge to revoke the order for leave, this time making substantive arguments that leave could not be granted as s 58(3) of the Bankruptcy Act was not engaged.
Driver J granted the application to re-open and subsequently revoked his previous order granting leave and dismissed Hudson’s application for leave to proceed with his cross-claim.
Driver J stated:
The effect of the composition was to not only terminate but to extinguish the bankruptcy and to release Mr Sigalla from provable debts in that bankruptcy. The consequence, in my opinion, is that s 58(3) was not enlivened when subsequently called in aid by Mr Hudson and has no work to do in circumstances where the composition was confirmed by the court. It follows that I fell into error in granting leave pursuant to s 58(3) for the cross-claim initiated by Mr Hudson in the Supreme Court to continue.
Decision – Hudson v Sigalla [2015] FCAFC 140
Hudson appealed to the full court of the Federal Court of Australia (FCAFC) to determine:
[W]hether any leave is required under s 58(3)(b) for a creditor to sue a person (who was previously the bankrupt) after creditors have, by special resolution, accepted a proposal for a composition in satisfaction of the debts of the bankrupt … thereby bringing about the annulment of the bankruptcy by force of s 74(5) of the Act.[3]
Allsop CJ, Jagot and Katzmann JJ of the FCAFC briefly discussed the effect of annulment of a bankruptcy and stated at [21] that “[t]he precise effect or significance of an annulment depends upon the question at issue”.
Their Honours reasons referred to the decision of Giles JA in Union Club v Battenberg [2006] NSWSC 72 (Battenberg). In Battenberg, Giles JA held at [81] that “annulment of the respondent’s bankruptcy reversed the fact that he had become bankrupt.”
Battenberg referred to the previous decision of Campbell J in Battenberg v Union Club [2005] NSWSC 242 and in particular referenced the below statements made at [70]:
The Bankruptcy Act has provisions in ss 73 and 74, which have the effect that, today, the bankruptcy which once applied to the plaintiff is one which has been “annulled”. [I]n the eyes of the law it is treated as not having occurred.
Their Honours’ reasons included a discussion of the purpose of the legislation in question. It was held at [26] that:
No part of that statutory purpose extends to requiring leave to proceed against someone who had been a bankruptcy but, by force of ss 43(2) and 74(5), no longer was, and in circumstances where the trustee no longer ad ministered an insolvent estate.
At paragraph [27] the judges went on to say:
Section 58(3) 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 substance, in the trustee. Pargaraph (a) refers to the “person or property of the bankrupt”. After the annulment the erstwhile bankrupt ceases to be such: s 43(2). Any debt owed by the bankrupt to a creditor, if a “provable debt’, will be dealt with by the composition. (emphasis added by Allsop CJ, Jagot and Katzmann JJ.)
The FCAFC held at [3] that leave is not required under s 58(3) and the appeal was dismissed with no order as to costs.
Lavan Legal comment
This case illustrates that a claim may be commenced against an individual who was previously bankrupt but whose bankruptcy has been annulled. Such a claim may be commenced without leave pursuant to s 58(3) of the Bankruptcy Act.
This means that a debt claimed to be owed to a creditor, but not yet secured, is not necessarily extinguished if the debtor becomes bankrupt.
This case demonstrates the importance of monitoring the bankrupt status of any individual debtors.
