Taking it personally: the effect of bankruptcy on court proceedings

In the recent case of Berryman v Zurich Australia Ltd¹,  the Court found that a bankrupt’s pursuit of an action against his insurer for a breach of contract, where the insurer denied the bankrupt’s claim on his total and permanent disability (TPD) policy, did not fall foul of the ‘vesting’ rule.

Background

Mr Berryman was a self employed carpenter when he suffered a workplace injury whereby a large granite rock crushed his right foot.  Mr Berryman made a claim upon his insurer, Zurich Australia Ltd (Zurich), under an insurance policy that provided for him to be paid $2 million if he became totally and permanently disabled.  The claim was denied by Zurich and Mr Berryman commenced proceedings in the Supreme Court of Western Australia for damages for breach of contract in the sum of $2 million.

Mr Berryman became bankrupt after commencing the action.  Zurich applied for an order that the action be dismissed on the ground that the proceedings were deemed to have been abandoned by operation of section 60(3) of the Bankruptcy Act 1966 (Cth) (the Act).

One of the issues before the Court was whether Mr Berryman could continue the action in his own name having declared bankruptcy after the action was commenced in circumstances where the trustee had not made an election to continue the action.

Statutory framework

When a person becomes bankrupt, the ‘property of the bankrupt’ vests in the Official Trustee.² 'Property’ means any real or personal property of every description, whether situated in Australia or elsewhere and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.³ A chose in action is property.⁴ ‘Property of the bankrupt’ means any:⁵

1. property divisible among the bankrupt’s creditors; and
2. rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become bankrupt.

Importantly, an action commenced by a person who subsequently becomes a bankrupt is stayed until the trustee makes an election in writing to prosecute or discontinue the action.⁶ However, a bankrupt may continue in his or her own name an action commenced before he or she became bankrupt in respect of:⁷

1. any personal injury or wrong done to the bankrupt, his or her spouse or de facto partner or a member of his or her family; or
2. the death of his or her spouse or de facto partner or a family member.

It follows that any damages or compensation recovered in such an action will be quarantined from distribution amongst the bankrupt’s creditors as they do not form part of the bankrupt’s estate.⁸

The parties’ submissions

Zurich argued that (amongst other things):

1. Mr Berryman’s claim was in contract and not in respect of a personal injury or wrong done to him; and consequently
2. the action should be dismissed given that the trustee had not elected to prosecute the action.

Mr Berryman argued (amongst other things) that the fact that his action depended on a contractual cause of action did not mean that it was not ‘in respect of’ his personal injury and the fact that the action was brought in contract does not take it outside the ambit of section 60(4) of the Act.

Legal principles

The test as to whether an action is in respect of a ‘personal injury’ which the bankrupt may continue is whether the damages or part of them are to be estimated by immediate reference to pain felt by the bankrupt in respect of his mind, body or character and without reference to his rights of property.⁹

This test is often misinterpreted where a bankrupt asserts a mixed claim case for personal injury or wrong done to them as a result of, for example, a loss of opportunity¹⁰ or loss of rights of property.¹¹ In such cases, courts have held that the actions are not founded on an action for personal injury or wrong without reference to rights of property and therefore do not fall within the section 60(4) exception.

Outcome

Tottle J rejected Zurich’s submissions and held that:

1. Suing to enforce a contractual right does not compel the conclusion that the action was outside the section 60(4) exception.
2. Section 60(4) and section 116(2)(g) of the Act focus on the substance of the claim, not the form of the action.  In this case, Mr Berryman’s cause of action would not have arisen if Mr Berryman had not suffered the personal injury that enlivened any entitlement to the TPD benefit under the policy.
3. Provided that there is a relationship between the amount of compensation and the nature of the injury, neither the fact that the claim is contractual in nature nor that it is for a fixed amount, negates the essential character of the payment as compensation for injury.

Lavan comment

Trustees should give careful consideration to whether an action commenced by a bankrupt prior to their appointment vests by operation of the Act.  If so, the trustee may elect to continue this action.

Insolvency practitioners should be mindful of the assertion of ‘personal rights’ by bankrupts and not too readily ‘give up’ those claims which may actually form part of the bankrupt’s estate.  In some cases however, a truly personal injury claims can be maintained by a bankrupt. If in doubt, trustees should obtain legal advice.