By Andrew Ng an Associate of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
It is a long standing principle that a bankrupt should not be deprived of a right to recover compensation for injury or wrong done to the bankrupt as it would be “unjust and harsh that the estate of the bankrupt and the participating creditors should be swelled and advantaged by a wrong to the person or reputation of the bankrupt” (Moss v. Eaglestone  NSWCA 404 per Allsop P at ) . This principle underpins the intention of the statutory framework set out in section 60(4) and section 116(2)(g) the Bankruptcy Act 1966 (Cth) (“the Act”).
Section 116(2)(g) of the Act excludes from property that is divisible among a bankrupt’s creditors any right of the bankrupt to recover damages or compensation for personal injury or wrong done to the bankrupt and any damages or compensation recovered by the bankrupt in respect of such an injury or wrong.
Section 60(4) provides an exception to the rule set out in section 60(2) of the Act that an action commenced by a person who subsequently becomes bankrupt is stayed, upon that person becoming a bankrupt, until the trustee in bankruptcy makes an election in writing to prosecute or discontinue the action. Section 60(4) provides that a bankrupt may continue, in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of any personal injury or wrong done to the bankrupt.
The application of section 116(g)(2) and section 60(4) of the Act seems straightforward enough, however it becomes less clear when a bankrupt’s cause of action is “mixed” involving elements of both contract and tort in relation to personal injury.
This was the position that faced the Court in Berryman v Zurich Australia Ltd  WASC 196. The Court in this case was asked to consider whether a benefit payable pursuant to a bankrupt’s disability insurance policy fell outside the scope of property divisible amongst creditors and if so, whether the bankrupt could continue court action in his name to recover that benefit.
In the case Mr Berryman, who was self-employed, held a life insurance policy with Zurich. It was a term of the policy that in the event Mr Berryman became totally and permanently disabled within the meaning of the policy, Zurich would pay him a total and permanent disability benefit of $2,000,000.
In 2009 Mr Berryman suffered an injury at work and he subsequently made a claim on his policy for payment of the total and permanent disability benefit. This claim was declined by Zurich.
In August 2014, Mr Berryman commenced proceedings against Zurich seeking damages for breach of contract in the amount of $2,000,000 and during the course of the proceedings he became bankrupt.
Zurich sought to dismiss the proceedings on the basis that Mr Berryman’s trustee in bankruptcy was deemed to have abandoned the action having made no election to prosecute the proceedings pursuant to section 60(3).
The preliminary question for determination by the Court was whether Mr Berryman’s action fell within the exception in section 60(4) such that he was entitled to continue the proceedings, notwithstanding his bankruptcy. This in turn entailed the Court having to determine whether Mr Berryman’s action for breach of contract was an action involving property rights (such that it would be stayed by virtue of section 60(2)) or personal injury (falling in within the section 60(4) exception).
In considering these questions, the Court considered the case of Cox v Journeaux (No 2)  HCA 48; (1935) 52 CLR 713 which established that the test for what constitutes an action for personal injury or wrong within section 60(4) 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.” (per Dixon J).
The Court also considered the decision in Moss v Eaglestone  NSWCA 404; (2011) 83 NSWLR 476 in which his Honour Allsop P (as his Honour then was) made clear that the distinction between personal and proprietary rights is one of substance and that a bankrupt’s creditors should not benefit from a personal wrong to the bankrupt.
Ultimately the Court rejected the submissions of Zurich that Mr Berryman was seeking to enforce a contractual right and that the claim was linked to the conditions of the life insurance policy and not his personal injury, in finding that Mr Berryman’s claim fell within the exception of section 60(4) thus permitting him to continue the action in his own name.
In so finding, the Court concluded that whist Mr Berryman’s action was based in contract (pursuant to the life insurance policy), the substance and nature of his claim (that being for personal injury) was not altered by the interposition of the policy between the injury and his action.
The decision is important, particularly to bankruptcy trustees, as it provides some clear guidance as to the application of section 60(4) and section 116(g)(2) and when an action will be stayed in the context of a party’s bankruptcy, and also what payments under policies of insurance will nevertheless be available to creditors.
Read the judgment here(link is external)
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Andrew Ng at firstname.lastname@example.org or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or email@example.com
Stephen Mullette on (02) 9806 7459 or firstname.lastname@example.org