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.
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.
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
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
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):
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.
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.
Tottle J rejected Zurich’s submissions and held that:
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.
[1] [2016] WASC 196.
[2] Bankruptcy Act 1966 (Cth) s 58.
[3] Ibid s 5.
[4] Re Nguyen; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320.
[5] Bankruptcy Act 1966 (Cth) s 5.
[6] Ibid s 60(2). Failing which the action is deemed to have been abandoned: section 60(3).
[7] Ibid s 60(4).
[8] Ibid s 116(2).
[9] Cox v Journeaux (No 2) (1935) 52 CLR 713.
[10] Moss v Eaglestone [2011] NSWCA 404.
[11] Cox v Journeaux (No 2) (1935) 52 CLR 713; Bryant v Commonwealth Bank of Australia (1997) 75 FCR 545.