Federal Court: October 2021

BANKRUPTCY

Company director insured under contract providing for director’s liability cover – director became bankrupt and subsequently discharged from bankruptcy – provable debt – effect of discharge

Taylor (liquidator), in the matter of Heading Contractors Pty Ltd (in liq) v Heading [2021] FCA 770 (8 July 2021, Charlesworth J)

Background: Mr Peter Heading was the sole director of the second plaintiff, Heading Contractors Pty Ltd (‘the Company’). The Company went into voluntary liquidation and Mr Heading was declared bankrupt on his own petition.

The liquidator of the Company alleged that Mr Heading contravened s 588G(2) of the Corporations Act 2001 (Cth) (‘CA’) by failing to prevent the Company from incurring debts whilst it was insolvent. The liquidator brought the proceedings pursuant to s 588M of the CA against Mr Heading’s estate in bankruptcy (‘the Estate’) seeking to recover an amount equal to the loss or damage incurred from the alleged insolvent trading as a debt due to the Company of approximately $4 million.

By the date the proceedings commenced, Mr Heading had been discharged from bankruptcy by the operation of s 149 Bankruptcy Act 1966 (‘BA’). Prior to his discharge, no liability of Mr Heading to the plaintiffs under s 588M of the CA had been established by a court order, arbitral award or settlement.

As at the date of the alleged contravention, there existed a policy of insurance in which Mr Heading was insured against conduct performed in his capacity as a director or officer of the Company. ‘Extension 2(g)’ of the policy was as follows:

‘Spousal / Legal Representatives Cover

This Policy shall apply in the event the lawful spouse of any Director or Officer is the subject of enforcement proceedings in respect of a judgment against such Director or Officer for a Wrongful Act of that Director or Officer for which he would have received cover under this Policy and at his request.

This Policy shall apply in the event of the death or incompetency or bankruptcy of a Director or Officer to their estate, heirs, legal representatives or assigns, for Loss incurred due to any Wrongful Act of such Director or Officer for which he would have received cover under this Policy.’ [emphasis in original, showing defined terms] (‘Policy’)

The issue determined by the Court by way of separate question was whether, if the contravention alleged against Mr Heading were to be established, a liability pursuant to s 588M(2) of the CA incurred by Mr Heading prior to his discharge from bankruptcy would be a liability to which the Policy would respond in respect of the Estate, notwithstanding his personal discharge from bankruptcy. Determination turned upon consideration of relevant provisions of the BA and construction of the Policy.

Principles of bankruptcy law: There was considerable common ground as to the proper construction of the BA and as to background facts. In particular, it was common ground that any liability of Mr Heading pursuant to s 588M(2) of the CA to the Company was, and remains, a debt provable in the Estate by virtue of s 82 of the BA notwithstanding his discharge from bankruptcy (see Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93).

Accordingly, a liability of a bankrupt incurred prior to the date of bankruptcy is converted into a claim for proof. To the extent that a bankrupt estate is unable to meet all creditors’ claims, the bankrupt is released from the debt upon his or her discharge. The discharge operates to release the former bankrupt but not to release the estate.