Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

“The human importance of bankruptcy”

The significance of bankruptcy and the need for its law to be clear and predictable is emphasized in a recent judgment of the Chief Justice of the Federal Court.  The judgment brings in issues raised by the Chief Justice in his 2015 speech about the significance of bankruptcy in public law.

In a 2015 article entitled Values in Public Law,[1] Chief Justice James Allsop of the Federal Court of Australia spoke of the significance of bankruptcy in the context of the

“values of fairness, reasonableness and justice in the framing of legal rules and in the exercise of power in a free society, and in the recognition that these values inhere because the subject is about how power affects people – their rights, interests and expectations”.

For those interested, it is a thoughtful comment on the impact of bankruptcy, among other areas of public law, including criminal law, on a person and their rights.

In the article Allsop CJ cites these comments of Deane J in a dissenting judgment in Kleinwort Benson Australia Ltd v Crowl [2] in relation to the law of bankruptcy notices:

“It is true that the strictness of the above rules leaves open the possibility of abuse by unscrupulous debtors.  That is, however, and unavoidable concomitant of the protection of ordinary people faced with the threat of being made bankrupt.  Many, and possibly most, of the petitions in the bankruptcy lists of this country seek the bankruptcy of honest, albeit unbusinesslike or naive, people whose indebtedness springs from causes which evoke sympathy rather than indignation.  For such people, bankruptcy does not represent a game to be played to the frustration of their creditors.  It represents a pronouncement of failure and humiliation attended by the fear of unknown consequences and the susceptibility to criminal punishment for what would otherwise be innocent conduct”. (citations omitted)

which words Chief Justice Allsop said

“identified the very real, human, side of bankruptcy. Whilst Dickensian images of squalid and unjust debtors’ prisons such as Marshalsea and the Prison of the Fleet are no longer a reality, public law continues to grapple with how best to provide reasonable certainty and equality for creditors and yet at the same time protect the bankrupt from the inherent vulnerability that comes with her or his impoverishment”.

Hutchings v ASIC

In a recent judgment, Hutchings v ASIC[3], Allsop CJ refers again to the words of Justice Deane in responding to an appeal by a man who had been made bankrupt by the Federal Circuit Court of Australia on a $50,000 costs order but who was both seeking a stay of that sequestration order and appealing from a judgment of the Queensland Supreme Court. ASIC v Managed Investments Ltd (No 9) [2016] QSC 109 followed a long and complex trial where the trial judge did not accept the honesty of Mr Hutchings and rejected significant parts of his evidence. 

If Hutchings were made bankrupt, his right of appeal, to the Queensland Court of Appeal, would be lost to him, and although the appeal right would pass to his trustee in bankruptcy, the trustee may well not pursue it for legitimate costs reasons.

No justice can be done to the judgment of Allsop CJ in this brief commentary but some extracts give some indication of his thinking.

4. As an introduction to these reasons, two things should be emphasised which are central to every application in the bankruptcy jurisdiction almost without exception.  First, the jurisdiction is not about debt collection; it is about the change of status of insolvent persons.  The question of solvency or insolvency is at the root of the jurisdiction.  That said, however, insolvency can arise from a whole raft of reasons, and those reasons have a connection with the second matter which attends every single application, and that is not just the economic, but the human consequences that attend the change of status and the change of lives of people who are made bankrupt.

The Chief Justice then quoted the words of Deane J, saying that the importance of the issue “is best understood by reminding oneself of what one of the masters of bankruptcy in this country, Deane J, said in a dissenting judgment in Kleinwort Benson Australia Ltd v Crowl”.  He explained the findings of the Queensland Supreme Court, the Judge not accepting the honesty of Mr Hutchings and rejecting significant parts of his evidence.

“14. To state the matter thus is to recognise a number of things … the catastrophic nature of those findings for any participant in commerce does not need to be explained.  Secondly, of their nature, credit findings are not easy to overturn. …”.

The evidence of Mr Hutchings was “on its face, carefully and clearly seeking to deal with all the relevant events with all the relevant documents”.

As to the Federal Circuit Court decision, Allsop CJ said that

“Before one can really come to the view that prospects of success are negligible, one would be required to undertake more than a cursory examination of it and to decry it simply because there are 19 grounds of appeal”.

The Chief Justice thought there was an arguable case, but not by way of any “criticism of the trial judge, nor [as] a prediction of success”.  He referred to the important principles referred to in the recent decision in Culleton [2017] FCAFC 8 at [36] to [39].

Allsop CJ noted that Mr Hutchings could not pay the debt. He was unemployed with no assets, aged 54, with his wife supporting him.

I return to the first remarks that I made about the relationship between solvency and the human importance of bankruptcy.  In circumstances where I am persuaded that there is some arguability in the appeal – that it is arguable, I should say, whatever its prospects of success – the consequences of the orders and reasons were and are catastrophic to his participation in the commercial community and to his reputation.

His right of appeal should not be, in my view, denied in circumstances where the general body of creditors can be protected.

The Chief Justice made orders that allowed an adjournment of the creditors’ petition “subject to a degree of supervision by the Court in the appellate jurisdiction as to whether or not the adjournment should be dissolved”.

Mr Hutchings’ was to do what he could to bring the appeal on as quickly as possible.  The Court also accepted certain undertakings from Mr Hutchings.

Brief comment

Without detracting from the value of the judicial sentiments, they reinforce a view of bankruptcy that perhaps needs to change.  While bankruptcy will probably always have a significant impact on a person’s rights, a reduction in the period of bankruptcy from 3 years, and a change in the cultural perception of it from one of censure for unpaid debt to societal approval of a release from unmanageable liabilities, may result in bankruptcy being seen in the longer term as having a less fundamental impact on a person’s rights. 

[1] Values in Public Law, The James Spigelman Oration 2015, Chief Justice Allsop, 27 October 2015

 

[2] [1988] HCA 34; 165 CLR 71

[3] [2017] FCA 858

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