SUPREME COURT OF VICTORIA

Lofthouse v Federal Commissioner of Taxation and Ors

Warren J

6 September 2001 - Melbourne

Warren J. The parties seek determination of a preliminary question and for that purpose the facts were agreed.

2 The proceeding commenced by way of writ filed in the County Court by David James Lofthouse as a liquidator of Main Jenkin Pty Ltd (in liq) against the Commissioner of Taxation. In the statement of claim the liquidator alleged that the company, Main Jenkin Pty Ltd (in liq) (the company) paid moneys to the Commissioner of Taxation when the company was insolvent. As a consequence, it was alleged that the payment constituted a voidable transaction within the meaning of s 588FE of the then Corporations Law, now the Corporations Act 2001 (Cth) (Act 50 of 2001).

3 By order of the court on 25 October 1999 the County Court proceeding was transferred to this court for jurisdictional reasons.

4 Subsequently, the Commissioner joined Colin Donald Main and Gwenneth Jean Main who were directors of the company as third parties to the proceeding. The Commissioner alleged that if an order was made in favour of the liquidator then the payment constituted a voidable transaction under s 588FF of the Corporations Law and, as a consequence, the third parties were liable to indemnify the Deputy Commissioner pursuant to s 588FGA of the Corporations Law.

The facts as agreed between the parties

5 The third parties Colin Main and Gwenneth Main were directors of the company during May 1998 to September 1998 inclusive. On 19 November 1998 the company appointed David James Lofthouse as administrator of the company pursuant to s 436A of the Corporations Law. On 3 February 1999, at a meeting of creditors of the company the creditors resolved that the company be placed in liquidation and the plaintiff was appointed the liquidator.

6 During the relevant period, the company had made certain payments to the Commissioner. They were:

Date	Amount
25 May 1998	$36,161.70
10 June 1998	$32,272.17
3 August 1998	$29,385.42
2 September 1998	$34,005.30

	$131,824.59

7 Each of the payments was made by the company in respect of and were applied by the Commissioner in discharge or partial discharge of debts owed to the Commonwealth in respect of the company's liability to pay pursuant to s 221F of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) amounts of deductions made by the company from salary and wages paid to its employees after 1 July 1993 (being the date of commencement of s 588FGA of the Corporations Law).

8 On 4 June 1999, the liquidator instituted proceedings against the Commissioner in the County Court of Victoria in proceeding No 9902888 claiming a declaration that the payments were void as insolvent transactions within the meaning of s 588FE of the Corporations Law and an order that the defendant pay to the plaintiff the sum of $131,824.59 interest and costs.

9 On 18 October 1999, the third parties signed authorities under s 188 of the Bankruptcy Act 1966 (Cth) (Act 33 of 1966) naming and authorising Mr J Loebenstein, a registered trustee, to call a meeting of the third parties' creditors and to take control of their property.

10 On 4 November 1999, the defendant received notification of the authority, the report of Mr J Loebenstein as controlling trustee pursuant to s 189A of the Bankruptcy Act 1966 (Cth) and notice of a meeting of creditors of the third parties to be held on 16 November 1999 to consider amongst other matters, a proposal by the third parties for their creditors to accept a composition in the terms specified. That report included the statement:

… 9.1 There are three creditors, each of whom has claims against both [third parties] as follows:

9.2 3. The [defendant] for $131,824.59, arising from a potential claim against the [third parties] pursuant to s 588FGA(3) of the Corporations Law. This section provides that where the [defendant] is liable to pay a liquidator of a company monies under s 588FF (voidable transactions) the [defendant] may recover those monies from the directors of the company as a debt. In this case, I am informed that the liquidator of [the company] has made a claim against the [defendant] for $131,824.59 and if successful it will be a debt payable by the [third parties] to the [defendant].

11 On 16 November 1999 the third parties' proposal for a composition was accepted by a special resolution of a meeting of their creditors called pursuant to the s 188 authority. The proposal was accepted by the National Australia Bank, a creditor of the third parties as guarantors for funds advanced by the National Australia Bank to the company and the liquidator of the company. Mr J Loebenstein was appointed trustee of the composition on that day. The resolutions were acknowledged in the Notice of Acceptance of Compositions under the hand of the trustee dated 24 November 1999. The Commissioner did not respond to the notice of meeting. Furthermore, the Commissioner did not attend or participate at the meeting of creditors.

12 On 30 November 1999, the Commissioner filed the third party notice in these proceedings. The third parties filed a notice of appearance on 21 January 2000. On 19 April 2000 orders were made by consent between the liquidator and the Commissioner that the latter pay to the liquidator the sum of $100,000 pursuant to s 588FF of the Corporations Law in full and final settlement of the plaintiff's claim inclusive of costs and interest and that otherwise the proceeding was dismissed.

13 On 2 May 2000, the trustee served on the Commissioner a notice under s 145 of the Bankruptcy Act 1966 (Cth) giving notice of a first and final dividend in the composition. The Commissioner was advised that if he did not lodge a proof of debt on or before 29 May 2000 the trustee would declare a final dividend without regard to any claim by him. The Commissioner did not lodge any proof of debt in the composition. On 10 May 2000 the Commissioner paid the liquidator the sum of $100,000.

14 On 23 May 2000 the Commissioner filed an amended third party notice. On 7 August 2000 the third parties filed a defence to the amended third party notice together with a counter-claim. The defence alleged that if the third parties were indebted to the defendant then the said indebtedness was a contingent liability in the Pt X arrangement of the third parties and that such indebtedness had been compromised in the Pt X arrangement pursuant to the Bankruptcy Act 1966 (Cth).

15 Arising from these facts the parties seek determination by way of preliminary matter 2 questions:

1. Was the claim of the Deputy Commissioner as against the third parties a provable debt in the composition of those third parties accepted on 16 November 1999 under Pt X of the Bankruptcy Act 1966 (Cth)?

2. Did the composition of the third parties operate to release the third parties from the defendant's claim?

The Legislation

16 Relevantly, s 588FGA of the Corporations Act 2001 (Cth) provides:

s 588FGA

Directors to indemnify Commissioner of Taxation if certain payments set aside

(1) This section applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under any of the following provisions of the Income Tax Assessment Act 1936 (Cth):
(a) section 221F (except subsection 221F(12), section 221G (except subsection 221G(4A)) or section 221P;

(b) subsection 221YHDC(2);

(c) subsection 221YHZD(1) or (1A);

(d) subsection 221YN(1);

(e) section 222AHA;

or under a provision of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 (Cth).

(2) Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order.

(3) An amount payable to the Commissioner under subsection (2):
(a) is a debt due to the Commonwealth and payable to the Commissioner; and

(b) may be recovered in a court of competent jurisdiction by the Commissioner, or a Deputy Commissioner of Taxation, suing in his or her official name.

(4) The Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable by the person under subsection (2).

(5) A person who pays an amount under subsection (2) has the same rights:
(a) whether by way of indemnity, subrogation, contribution or otherwise; and

(b) against the company or anyone else;
as if the payment had been made under a guarantee:

(c) of the liability referred to in subsection (1); and

(d) under which the person and every other person who was a director of the company as mentioned in subsection (2) were jointly and severally liable as guarantors.

17 The Commissioner claimed he was entitled, in principle, to pursue the third parties as directors of the company by way of indemnity under s 588FGA for the moneys paid to the liquidator. A potential obstacle to the Commissioner claiming such indemnity arose from the Pt X compositions that the third parties had entered into under the Bankruptcy Act 1966 (Cth).

18 The determination of the preliminary questions involves a consideration of whether the Commissioner's claim the subject of the amended third party notice is a provable debt in the third parties' respective Pt X compositions. Section 82 of the Bankruptcy Act 1966 (Cth) makes provision for those debts that are provable in bankruptcy. It provides:

s 82(1) Subject to this Division, all debts and liabilities present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the fate of the bankruptcy, are provable in his or her bankruptcy.

19 Section 240(1) of the Bankruptcy Act 1966 (Cth) provides:

s 240(1) Subject to this section, a composition under this Part operates, unless set aside, declared void or terminated under this Part, to release the debtor from all provable debts, other than those (if any) that would not be released by his or her discharge from bankruptcy if he or she had become a bankrupt on the day on which the composition was accepted.

20 Section 243(1) of the Bankruptcy Act 1966 (Cth) provides:

s 243(1) Sections 81-107 (inclusive) and sections 140-147 (inclusive) apply, with the prescribed modifications (if any), in relation to a composition under this Part as if:
(a) a sequestration order had been made against the debtor on the day on which the special resolution accepting the resolution was passed; and

(b) the trustee of the composition were the trustee in his or her bankruptcy.

21 At the outset, the question of whether the Commissioner's claim against the third parties constituted a contingent liability requires consideration of s 82 of the Bankruptcy Act 1966 (Cth).

22 In Something Better Pty Ltd v Pyramid Building Society (in liq) [1996] 2 VR 352, the Court of Appeal considered the meaning of s 82 in the form modified for the purposes of compositions made under Pt X of the Bankruptcy Act 1966 (Cth) that applied at that time (but which modifications are no longer applicable). The decision of the Court of Appeal was reversed by the High Court in Pyramid Building Society (in liq) v Terry (1997) 189 CLR 176).

23 Nevertheless, the observations of the Court of Appeal as to the history of bankruptcy provisions remain apposite. Tadgell JA observed (at 368) following a brief exposition of the history of the extension of the provable debts to encompass contingent and future liabilities:

Debts and liabilities that were provable by virtue of the provisions of the 1869 Act, and the Acts that were modelled on it in this country before 1966, were provable debts for the purposes of compositions made under those Acts. In particular, the liability of a surety, though not ascertained at the time of his making a composition, and not a debt in respect of which an adjudication of bankruptcy could be sustained, was provable and the surety was therefore released by virtue of the composition: Wolmershausen v Gullick [1893] 2 Ch 514 at 518, per Wright J. While the present case would therefore have been clear had it to be decided under the Bankruptcy Act 1924 (Cth), the prescribed modifications of the Bankruptcy Act 1966 (Cth) made by r 84 create some little difficulty.

24 Tadgell JA traced also the history of the debts and liabilities provable in a bankruptcy to include contingent and future ones (at 369-72). After considering decisions of the Federal Court, Tadgell JA observed at 370:

Future and contingent debts and liabilities are, however, nowhere defined in the Bankruptcy Act 1966 (Cth) and I do not think that they can properly be treated as terms of art. There are more ways than one of describing a debt or a liability which is payable or to be discharged in futuro and a debt or liability which is payable or to be satisfied upon a contingency. Moreover, the contingencies to which a liability may be subject are so various that the adjective "contingent", when applied to it, is likely to be of imprecise connotation. It is to be remembered also that the statutory specification of provable debts, which is now contained in s 82 of the Bankruptcy Act 1966 (Cth), was one achieved by degrees over a long period of time. Lord Halsbury LC in Hardy v Fothergill (1888) 13 App Cas 351 at 355-6, referred to the engagement of the legislature for over 40 years up to 1869:

… in the effort to exhaust every conceivable possibility of liability under which a bankrupt might be, to make it provable in bankruptcy against his estate and relieve the bankrupt for the future from any liability in respect thereof.

… Mellish LJ in Re Hide; Ex parte Llynvi Coal and Iron Co (1871) LR 7 Ch App 28 at 33, referring to the 1869 Act, regarded it as "quite plain that the object of these sections is that the bankrupt shall be absolutely relieved from any liability under any contract he has ever entered into". Section 82, in unmodified form, is to be given a similarly wide signification with a view to providing for the result, as James LJ put it in Ex parte Llynvi Coal and Iron Co at 32 that:

… the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind.

25 The third parties in their defence contended that the claim by the Commissioner against them was a contingent liability in the Pt X arrangement of the third parties and that the indebtedness had been compromised in the Pt X arrangement pursuant to s 238 of the Bankruptcy Act 1966 (Cth). It is therefore necessary to assess whether the Commissioner's claim against the third parties was a "contingent liability" of the third parties on 16 November 1999.

26 There is no definition of the expression "contingent liabilities" in the Bankruptcy Act 1966 (Cth). The term "contingent creditor" was considered by the High Court in Community Development Pty Ltd v Enawirda Construction Co (1969) 120 CLR 455. Kitto J said at 459:

Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word "contingent" and I shall refer to one only. In Re William Hockley Ltd [1962] 2 All ER 111 at page 113, Pennycuick AJ suggested as a definition of a "contingent creditor" what is perhaps rather a definition of a "contingent or prospective creditor", saying that in his opinion it denoted "a person towards whom, under an existing obligation, the company may or will become subject to a present liability on the happening of some future event or at some future date". The importance of these words for present purposes lies in their insistence that there must be an existing obligation, and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen.

27 In Lyford & Anor v Carey & Anor (1985) 3 ACLC 515, Franklyn J of the Supreme Court of Western Australia, after reviewing the authorities referred to by the High Court in the Community Development case, observed (at 518):

It can be seen that in each of these judgments the concept of "an existing obligation" is seen to be essential to the existence of a contingent liability. This is in accord with the reasoning of Lord Reid in Sutherland's case as set out above and also that of Lord Guest in the same case.

In my view the reasoning in the above quoted cases is applicable to a determination to the meaning of contingent liabilities for the purposes of s 82 and in my opinion that expression for the purposes thereof imports the necessity that there be in existence at the date of the bankruptcy, an obligation (which may itself as its performance be suspended by the condition of the contingency), out of which a liability to pay money will arise on the happening of the contingency. That is to say there must be an obligation upon which the contingency can operate. For the purposes of section 82 that obligation (suspended or not) must exist as at the date of the bankruptcy.

28 On first blush it might seem that the facts of Lyford & Anor v Carey & Anor have similarities to the present case. In Lyford's case, a company had incurred debts before it was wound up. After the winding up the directors of the company entered into compositions with their creditors under Pt X of the Bankruptcy Act 1966 (Cth). Subsequent to entering into the compositions, each director was convicted under the provisions of s 374C of the Companies Act 1961 (WA) (Act 82 of 1961) in respect of the debts incurred by the company before its winding up. Section 374C(1) provided:

if an officer of a company to which this section applies was knowingly a party to the contracting of a debt by the company and had, at the time the debt was contracted, no reasonable or probable grounds of expectation after taking into consideration any other liabilities (if any) of the company at the time, of the company being able to pay the debt the officer shall be guilty of an offence against this Act.

29 The liquidators of the company applied for a declaration under s 374D of the Companies Act 1961 (WA) that the directors were responsible for payment to the company of sums in respect of which each of the directors was convicted of an offence under s 374C. Section 374D(1) provided:

Where a person has been convicted of an offence under subsection (1) or subsection (2) of section 374C the Court on the application of the Commissioner or a prescribed person may if it thinks proper to do so declare that the person shall be personally responsible without any limitation of liability -
(a) in the case of a conviction under subsection (1) of section 374C for the payment to the company of an amount equal to the whole or such part of the debt as the Court thinks fit in respect of which the conviction was made, and

(b) in the case of a conviction under subsection (2) of section 374C for the payment to the company of the amount required to satisfy all or any of the debts of the company as the Court directs.

30 In Lyford's case, the directors submitted that the liability that might have been imposed on them pursuant to the declaration under s 374D constituted a contingent liability to which each of them was subject as at the date of the composition, and thus was a provable debt within the meaning of the Bankruptcy Act 1966 (Cth) in respect of which they were released from liability by virtue of the composition. As is the case in this instance, the submission relied on, inter alia, the proposition that a composition operated to release the debtor from all provable debts other than those which would not have been released by his discharge from bankruptcy had be become a bankrupt on the day on which the composition was accepted. Franklyn J stated (at 518):

On the facts of the present case there was no obligation whatsoever on the part of either of the defendants to pay the debt the subject of the subsequent convictions under section 374C either at the date of the winding up or the date of the composition, and thus for the purposes of section 82, at the date of the bankruptcy. Consequently, such debts were not contingent liabilities from which the defendants were released by the composition.

and at 519 said:

No obligation on the part of either of the defendants to pay the debt to the subject of the convictions under section 374C can arise until a declaration is made under section 374D that they or both or either of them are or is personally responsible. Before such a declaration can be sought they (the defendants) must first have been convicted under section 374C on proof beyond reasonable doubt in the absence of a plea of guilty. On such conviction there is no liability, suspended or otherwise, on their part for payment to the company of the debts the subject thereof. The only penalty provided for an conviction is a fine or imprisonment On an application being made under section 374D (as has now been made) and proof of the conviction, the Court may, if it thinks it proper to do so clear them or either of them personally responsible for payment to the company of the amounts the subject of such charges.

31 Earlier, Tadgell J (as he then was) considered the question of contingent liabilities in Federal Commissioner of Taxation v Gosstray (1986) VR 876. There the Commissioner pursued a bankrupt taxpayer for an assessment under tax legislation enacted after the date of bankruptcy. Tadgell J held that because the relevant legislation was not enacted at the date of bankruptcy the relevant liability was not contingent and, therefore, not a provable debt under s 82 encompassed by the bankruptcy. For the purposes of the present case the learned judge made observations (at 879-80) as to contingent liabilities that are instructive:

In Re Northern Counties of England Fire Insurance Company; Macfarlane's Claim (1880) 17 Ch D 337 at p 340, Sir George Jessel MR said: "I should think the law in bankruptcy as to contingent liabilities was pretty plain, and that any liability contingent at the date of the adjudication which ripens into a debt during the bankruptcy is provable."

At attempt to formulate a universally applicable definition of a contingent debt or of a contingent creditor is difficult, and probably not very useful having regard to the variety of contingent claims that may properly be the subject of proof. A contingent creditor, like an elephant, is rather easier to recognize than to define. The following statement by Pennycuick J In Re William Hockley Ltd [1962] 1 WLR 555 at p 558; [1962] 2 All ER 111, is well known: "The expression "contingent creditor" is not defined in the Companies Act 1961 (WA), but must, I think, denote a person towards whom under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date." In Re Gasbourne Pty Ltd [1984] VR 801 at p 837, Nicholson J said that he did not regard that description as exhaustive, and with respect I would not disagree. In Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 at p 459 Kitto J, having observed that not much assistance is to be gained from observations to be found in reported cases as to the import of the word "contingent" in the context now being considered, regarded what Pennycuick J had said as being "perhaps rather a definition of "a contingent or prospective creditor"." Kitto J did, however, consider that the importance of the words of Pennycuick J "for the present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen". The same idea is, I think, inherent in the words of Sir George Jessel MR to which I have referred.

The notion that a contingent debt must be founded on an existing obligation is strengthened when it is realised that a monetary claim for it, if made the subject of a proof, is to be stated as on the date of the bankruptcy: Ellis & Co's Trustee v Dixson-Johnson [1924] 1 Ch 342 at p 357, per P O Lawrence J. If when the proof is lodged the contingency has not happened, the amount of the claim must be estimated as accurately as possible; ibid; and see s 82(4) of the Bankruptcy Act 1966 (Cth). If the value of the claim cannot be fairly estimated s 82(6) provides that the debt or liability should be deemed not to be provable. Of course, it is open to the court to assess the value of a claim at nil: Re Trepca Mines Ltd [1960] 1 WLR 1273 at p 1280; [1960] 3 All ER 304n. If, however, a claim were made not founded on an obligation of the bankrupt existing at the date of bankruptcy which could ripen into a debt upon a contingency, the proper conclusion, in my view, would be not that the provable claim should be assessed at nil but that there was no claim on the bankrupt estate at all.

32 In order for the third parties in this instance to have any obligation to pay the sums claimed, an order must first be made against the Commissioner. This follows from s 588FGA(1). It is only when such an order has been made that those persons who were directors of the company when the payment was made become contingently liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. If the Commissioner chooses to do so, he may, in the proceedings in which the order was made against him, seek an order that the person pay to him an amount in respect of the loss or damage resulting from the order. So much arises from s 588FGA(4). The question is whether once the Commissioner pays an amount to the liquidator in accordance with a court order under s 588FF, the directors of the company at the relevant time become liable to indemnify the Commissioner in respect of the amount of the payment?

33 Hence, the Commissioner submitted that in these circumstances, as at the relevant date, that is, the date of the passing of the resolution accepting the third parties' composition, no order had been made against the Commissioner so as to bring into existence an obligation on the part of the third parties to indemnify him pursuant to s 588FGA(2). It was argued, therefore, that there was not, at that date, any contingent liability in existence that would be released by operation of the provisions of the Bankruptcy Act 1966 (Cth) referred to above.

34 In the instant case, all the objective circumstances that gave rise to the liability of the Commissioner under s 588FF of the Act, and thus the third parties under s 588FGA of the Act, had transpired prior to the composition. However, more had occurred. The liquidator had commenced proceedings to seek relief under s 588FF of the Act and the Commissioner had taken the step of obtaining an order transferring into the Supreme Court, the proceedings brought by the liquidator for the express purpose of joining the third parties to seek relief under the statutory indemnity.

35 In Lyford & Anor v Carey & Anor 3 ACLC 515 (SCWA) Franklyn J considered whether a liability arising because of the conviction of 2 directors of offences for insolvent trading under the then s 374C of the Companies Act 1961 (WA) was a liability in respect of which the directors were released by reason of their compositions under Pt X of the Bankruptcy Act 1966 (Cth). The liquidator sought a declaration under s 374D which, if granted, would have had the effect of requiring the directors to pay all or some part of amounts equal to the debts that gave rise to the relevant convictions.

36 I observe similar issues arose in CAC v Karounos (1985) 3 ACLC 410.

37 In each of Lyford and Karounos the court held that the compositions (as arose in Lyford) or bankruptcy (as arose in Karounos) of the directors did not prevent the making of declarations under s 374D, on the basis that liability to a declaration under s 374D did not constitute a provable debt within the meaning of s 82 of the Bankruptcy Act 1966 (Cth).

38 These cases are distinguishable from the present case on 2 clear grounds.

39 First, s 588FGA of the Corporations Law imposes an obligation in the nature of a statutory indemnity, akin to statutory contribution rights. Here, the only contingency is the effectuation of a legal liability on the part of the Commissioner to pay the liquidator. This contingency is determined by the objective circumstances of the transaction. Secondly, any liability to pay in the case of the directors in the case of s 374D depended upon conviction in relation to criminal offences, that is, a finding that the person knowingly engaged in insolvent trading. It depended also upon the exercise of discretion by the court that the conduct of the former director was such as to warrant an order that the person convicted pay some part or the whole or the debt or debts the incurring of which gave rise to the conviction. Hence, the observation in both Lyford and Karounos that the obligation is not incurred until the conviction (under s 374C) and the making of the order sought under the relevant section, s 374D. So much is clear from the following passage in those cases: Lyford (at 519):

No obligation on the part of either of the defendants to pay the debts the subject of the convictions under s 374C can arise until a declaration is made under s 374D that they or both or either of them are or is personally responsible. Before such a declaration can be sought they (the defendants) must first have been convicted under s 374C on proof beyond reasonable doubt in the absence of a plea of guilty. On such conviction there is no liability, suspended or otherwise, on their part for payment to the company of the debts the subject thereof. The only penalty provided for on conviction is a fine or imprisonment. On an application being made under s 374D (as has now been made) and proof of the conviction, the Court may if it thinks proper to do so, declare them or either of them personally responsible for payment to the company of the amounts of the debts the subject of such charges. Quite obviously there is a discretion in the Court to refuse to make such a declaration. In the exercise of its discretion, having regard to the matters proper to such an exercise, the Court may refuse to make the declaration or may make the declaration limited to part only of all or any such debts… The exercise of the discretion might well result in a refusal to make the declaration sought.

In my view this clearly illustrates the impossibility of there being a contingent liability …

Karounos (at 412):

An order made under s 374d [sic] certainly gives rise to a liability, but it is not a debt or a liability to which the bankrupt was subject at the date of the bankruptcy. The offences occurred before the date of the bankruptcy but the liability resulting from any order I make is contingent upon the conviction of 15 August 1984. My order and conviction are both after the date of the bankruptcy… The obligation is not incurred until after the conviction and the order now sought.

…

The Court's power to make the order as to some part or the whole of the amounts of the debts referred to in the convictions, is discretionary. But the exercise of that discretion in favour of the respondent "must equally be based upon evidence of some fact which tends to reduce the propriety of making (the respondent) responsible for the whole". [citing Needham J in Klintworth]

40 Turning to Gaffney v Commissioner of Taxation (1998) FCR 574; 38 ATR 594; 98 ATC 4659, that was a case of a bankrupt being convicted of offences under the ITAA 1936 for non-payment of group tax. Upon that conviction the court exercised its discretion under s 21B(1) of the Crimes Act 1914 (Cth) (Act of 1914) that the bankrupt be ordered to make reparation in respect of the loss suffered by the Commonwealth by reason of the offence, namely, the non-payment of group tax. The Commissioner obtained judgment on the basis of the reparation order and after the discharge of the initial bankruptcy which was brought about by reason of a debt due under a guarantee not connected with the group tax. Mansfield J considered the impact of the judgments in Official Trustee in Bankruptcy v C S & G J Handby Pty Ltd (1989) 21 FCR 19 and Vale v TNW Haulage Pty Ltd (1993) 31 NSWLR 702. In each of those cases the court had to consider whether a liability of a director under the then s 556(1) of the Companies Code (Vic) could constitute a provable debt for the purposes of s 82 of the Bankruptcy Act 1966 (Cth). In each instance, it was found that such a liability could constitute a provable debt. His Honour went on to juxtapose the outcomes in Vale and Handby in relation to the former s 556(1) with those in Lyford and Karounos in relation to the former s 374D. Mansfield J observed at 581B-D:

The point of difference between decisions under s 74D of the Companies Act 1961 (WA) and under s 57 of the Companies Code is that under the former liability for the company's debts depends upon some judicial determination as to personal responsibility whereas, under the latter, no such determination is necessary: see for example Giles J in CCA Systems Pty Ltd v Communications & Peripherals (Aust) Pty Ltd (1989) 15 ACLR 720 at 728).

That difference is relevant here. Consistent with the views of Franklyn J in Lyford and Prior J in Karounos, I consider that the circumstances as they existed as the date of bankruptcy did not give rise to any obligation incurred by that time. I have set out above the process by which the reparation order was made. Whatever the expression "obligation" might encompass, I do not think it can be properly used to describe what was no more than a vulnerability to a criminal prosecution and conviction which might in turn give rise to a reparation order. The need for critical decisions to be made both to prosecute the applicant, and to convict him (I do not see that the outcome would be different depending upon whether the conviction was by plea or after a trial), and then to make a reparation order, in my view all remove the circumstances at the bankruptcy of the applicant from constituting at the time an obligation by the applicant to the respondent in respect of the liability which the bankruptcy notice now seeks to recover.

41 In my view, the observations in Gaffney support the contentions for distinguishing the Lyford line of authorities from the circumstances that I must consider in addressing the question of whether a liability under s 588FGA is a contingent liability within the meaning of s 82(1) of the Bankruptcy Act 1966 (Cth) and thus a provable debt.

42 Turning to the steps required under s 588FGA of the Corporations Act 2001 (Cth) and ss 82, 240 and 242 of the Bankruptcy Act 1966 (Cth) certain threshold matters are beyond doubt. First, by order of this court an order was made on 19 April 2000 against the Commissioner under s 588FF of the Corporations Act 2001 (Cth). Whilst not specified, it seems to have been accepted by the parties that the order was made pursuant to a liability under s 221F of the ITAA 1936 in accordance with s 588FGA(1)(a) of the Corporations Act 2001 (Cth). Secondly, the Commissioner was aware of a critical matter: the notice of the meeting of creditors to be held on 16 November 1999. He elected not to attend or participate in the meeting. Rather, he acquiesced to the composition resolved by the creditors of the third parties on 16 November 1999. Even so, only 14 days later, the Commissioner filed the third party notice in this proceeding the Commissioner did not take any step then or since to set aside or vary the composition resolved on 16 November 1999. Further, notwithstanding notice of a final dividend in the composition and the intention of the trustee to declare a final dividend without regard to any claim by the Commissioner, no action or step was taken by the latter. Such acquiescence occurred even though the third party claim by that stage had been on foot for 6 months.

43 A fundamental misconception underlies the submissions for the Commissioner. They were premised on the assertion that no entitlement to an indemnity arose under s 588FGA of the Corporations Act 2001 (Cth) until an order was made. Such analysis disregards entirely the requirements of s 82 of the Bankruptcy Act 1966 (Cth), and, for present purposes, the key word in the section being the word "contingent". The Shorter Oxford English Dictionary defines "contingent", inter alia, as meaning "a thing that may or may not happen, a possibility of the future". In my view it was beyond dispute that as at 16 November 1999, the date of the composition, a liability by the third parties to the Commissioner under s 588FGA may or may not have happened, it was, at that stage a possibility of the future.

44 As a consequence, when the composition was resolved by the creditors of the third parties, the Commissioner became subject to its ramifications. In the words of James LJ ^[1] the third parties were "freed not only from debts, but contracts, liabilities, engagement and contingencies of every kind", including any contingent liability to the Commissioner under s 588FGA of the Corporations Act 2001 (Cth)^[2] The circumstances in the present matter fall clearly within the ambit described by Kitto J in Community Development, that is to say, there was an existing obligation upon the third parties at the time of 16 November 1999 to pay a sum of money to the Commissioner that would arise in a future event. In my view it was an event that must happen or may happen dependent only upon the trigger event, namely, the order of this court under s 588FGA of the Corporations Act 2001 (Cth). It was a liability capable of quantification. In the words of Tadgell J in FCT v Gosstray it was an obligation which "could ripen into a debt upon a contingency", namely, a court order under s 588FGA.

Conclusion

45 The potential liability of the third parties in this proceeding is a contingent liability within the meaning of s 82(1) of the Bankruptcy Act 1966 (Cth) because the potential liability arose from an obligation pursuant to an indemnity. Furthermore, all the objective circumstances giving rise to the potential for the invocation of the chose in action represented by the right to indemnity had transpired prior to the third parties entering into their composition under Pt X of the Bankruptcy Act 1966 (Cth).

46 The circumstances of a liability under s 588FGA are clearly distinguishable from those arising under the former s 374D and considered in Lyford and Karounos. Gaffney is similarly distinguishable.

47 Once it is established the liability sued for by the Commissioner is a provable debt, it follows that the compositions of 16 November 1999 operated to release the third parties from the liability sued for by the Commissioner.

48 It follows from these reasons that the preliminary questions are answered as follows:

2. Did the composition of the third parties operate to release the third parties from the defendant's claim? Yes.

49 There is a remaining consideration that was not raised by either of the parties. On 19 April 2000 orders were made by consent of the liquidator as plaintiff and the Commissioner of Taxation as defendant, inter alia, ordering the defendant to pay the plaintiff the sum of $100,000 "in full and final settlement of the plaintiff's claim". It was further ordered that "the proceeding is otherwise dismissed". Chapter I of the Supreme Court (General Civil Procedure) Rules 1996 defines "proceeding" in r 1.13 as meaning "any matter in the Court commenced by writ or originating motion or as otherwise provided by or under any Act or these Rules". Rule 11.04 provides that upon the filing of a third party notice such third party "shall become a party to the proceeding". No continuation, exclusion or exception was ordered with respect to the third party notices. The third parties were not party to the orders made on 19 April 2000. No issue was raised by the Commissioner or the third parties before me as to whether the Commissioner was now estopped or otherwise precluded from pursuing the third parties on the basis that the proceeding stands dismissed. However, as the parties have not pursued this aspect it appears unnecessary for me to consider it further.