Provable Debts - A New Consideration

Provable Debts - A New Consideration By Luke Whiffen | February 2011 Area of Expertise | Commercial Disputes & Insolvency

Summary A debt incurred prior to the debtor entering into a personal insolvency agreement and which is provable in that administration is not enforceable against the debtor. But what happens if the debtor makes a latter promise supported by new and valuable consideration to pay the same amount as the original debt? The recent Federal Magistrates Court decision of QBE Insurance (Australia) Limited v Hector Ekes [2011] FMCA 46 considers whether giving new and valuable consideration for such a debt will give the creditor another basis of attack.

Who Does This Impact? This decision will be of interest to insolvency practitioners and unsecured creditors dealing with those under insolvency administration.

Facts The Personal Insolvency Agreement and the Consent Judgment The creditor issued proceedings against the debtor and his former wife in the District Court of New South Wales on 3 October 2008 alleging that they owed $106,500.00 under an indemnity in relation to a deposit bond issued in 2006. On 11 June 2009 a controlling trustee was appointed to the debtor’s estate under section 188 of the Bankruptcy Act (‘Act’). The controlling trustee’s report included the creditor as an undisclosed creditor in relation to a ‘deposit bond indemnity’ of $131,473.99. It was common ground that this was a reference to the liability which QBE had alleged in the District Court proceedings. On 16 July 2009 the debtor entered into a Personal Insolvency Agreement under Part X of the Act (‘PIA’). The creditor held security over the debtor’s interest in real property and contended that as a secured creditor it stood outside the operation of the PIA at least to the value of the security, a fact noted in its proof of debt lodged in respect of the PIA. The effect of the PIA was to bind QBE, to the extent it was unsecured, in accordance with sections 229 and 230 of the Act and therefore effectively release the debtor from QBE’s provable debt. On 2 September 2009, with the matter set down for hearing, the parties consented to judgment which:

1. gave a verdict with costs in favour of the debtor’s wife against the creditor; and

2. required the debtor to pay $150,000 to the creditor in five $30,000 instalments over the subsequent 12 months.

TU R K S L E G A L

TUR KA LER T

1

Provable Debts - A New Consideration by Luke Whiffen

It was noted in the terms of the consent judgment that the debtor’s obligation to pay the first $30,000 instalment was in consideration of the creditor agreeing to pay the debtor’s wife’s costs of the proceedings. It was also noted in the consent judgment that the debtor’s obligation to pay the second instalment of $30,000 was agreed to on the basis that such payment was to reimburse the creditor in respect of its costs, expenses and interest incurred after the entry by the debtor into the PIA. In relation to the third, fourth and fifth instalments of $30,000 the orders did not expressly record any agreed separate consideration. Creditor’s petition and the application opposing The debtor did not make the first payment under the consent judgment and as a result the creditor served on the debtor a bankruptcy notice, claiming the first instalment of $30,000 under the consent judgment, which subsequently expired and formed the basis of a creditor’s petition. The debtor opposed the making of a sequestration order on the grounds that the debt sought in the bankruptcy notice and the further amounts subsequently claimed at the hearing of the creditor’s petition (being the balance of the $150,000 due under the consent judgment plus interest and costs) were subsumed in the PIA and therefore not a debt due and payable by him to the creditor. Court’s decision In determining the debtor’s application to oppose the creditor’s petition the Court considered whether the liability of the debtor to the creditor under the consent judgment should be regarded as the same liability which (as the debtor contended) was released under section 230 of the Act or as a new and independently enforceable liability, incurred by the debtor to the creditor, after the commencement of the PIA. In deciding this issue, the Court held that there was good authority that the creditor may take steps to enforce a liability previously released (as an analogous example) by section 153 of the Act following a discharge from bankruptcy, or by the equivalent release given to a Part X debtor under Section 230(1) of the Act if ‘new and valuable consideration to pay the old debt released by the discharge has been given’. In such a case, the debtor’s liability arises under a new contract which is fully enforceable in law, and its enforcement is not precluded by the terms or policy of the Act. In particular, where after a discharge a debtor promises for new and valuable consideration to pay a debt released by the discharge, an action lies against him for the amount thereof: Jakeman v Cook (1878) 4 EX D 26 CF; Proudfoot v Drake (1882) 3 LR (NSW) 381; Watson v McFadden (1892) 13 LR (NSW) 128; Jones v Phelps (1871) 20 WR 92. In relation to the facts of the case before it, the Court found that in respect of the first and second instalments, which were accompanied by explicit notations, there was new and valuable consideration given by the creditor to support the new promises by the debtor even if they revived all or part of the liability previously released by his PIA (such release not being conceded at hearing by the creditor). In respect of the third, fourth and fifth instalments, the Court found that although the consent judgment did not record any agreed separate consideration given by the creditor as the ‘price’ for these liabilities being accepted by the debtor, Order 6 of the consent judgment, in which the creditor consented to a verdict in favour of the debtor’s former wife, implicitly explained and pointed to additional consideration being given by the creditor for the debtor accepting liability for the remaining instalments. The implication being that the creditor withdrew its claims against the debtor’s former wife in return for the debtor’s acceptance of the new liabilities. This constituted agreed separate consideration given by the creditor as the ‘price’ for these liabilities being accepted by the debtor.

TU R K S L E G A L

TUR KA LER T

2

Provable Debts - A New Consideration by Luke Whiffen

Accordingly, the Court found that the entire amount of the consent judgment, being $150,000, together with interest and costs, was a proper basis for the petition. It dismissed the debtorâ&#x20AC;&#x2122;s application opposing the petition and subsequently made a sequestration order against the debtor. The debtor has appealed the judgment to the Federal Court of Australia.

For more information, please contact: Luke Whiffen Senior Associate T: 02 8257 5722 luke.whiffen@turkslegal.com.au

www.turkslegal.com.au Th is Tur k Ale r t is cur rent at it s d ate o f p u b lic at io n . Wh i l e e ve r y c a re h a s be e n ta k e n i n th e pre pa rati o n o f th i s Tu r k Aler t i t does not con s titute leg a l a dvice a n d sh o u ld n o t b e relied u p o n fo r th i s pu r po s e. Spe c i f i c l e g a l a d v i ce s h o u l d be s o u g ht o n pa r ti c ular matter s. Tur ksLeg a l do es not a ccep t resp o n sib ilit y fo r a ny er ro r s i n o r o mi s s i o n s f ro m th i s Tu r k Al e r t. Th i s Tu r k Al e r t i s co py r ig ht and no par t m ay b e reproduced in a ny fo r m wit h o u t t h e p er m ission o f Tu r k s Le g a l. Fo r a ny e n qu i r i e s, pl e a s e co nta c t th e a u th o r o f thi s Tur k Aler t. ÂŠ Tu r k s Le g a l 2 0 1 1

Turn static files into dynamic content formats.

Create a flipbook