NOTE: Case notes are necessarily incomplete. The only authoritative pronouncement of the Court's reasons and conclusions is that contained in the published reasons for judgment.
Barodawala v Perinparajah [2022] VSCA 198
Issue
This matter concerns the proper construction and application of s 153(2)(b) of the Bankruptcy Act 1996 (Cth) (and the exception to discharge from bankruptcy in relation to a ‘debt incurred by means of fraud or a fraudulent breach’).
Section 153 relevantly provides that:
- Subject to this section, where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally.
- The discharge of a bankrupt from a bankruptcy does not:
(b) release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he or she was a party or a debt of which he or she has obtained forbearance by fraud
Background
In 2010 Mr Barodawala (the applicant) sued Ms Perinparajah (the respondent) in the New South Wales Supreme Court (NSW proceeding). He alleged that in 2008 she had engaged in misleading or deceptive conduct, amongst other things, in breach of the Trade Practices Act 1974 (Cth) (TPA). He made no express allegation of common law or equitable fraud in this NSW proceeding.
In 2011 Mr Barodawala, obtained a judgment under s 82 of the TPA against Ms Perinparajah, for being knowingly concerned in her company’s misleading or deceptive conduct. The Court entered judgment against Ms Perinparajah in the sum of $127,591.90. It also ordered Ms Perinparajah to pay Mr Barodawala’s costs. In March 2012, Mr Barodawala registered the NSW judgment in Victoria.[1]
Ms Perinparajah declared bankruptcy in April 2012 and, in November 2012, the trustee in bankruptcy admitted Mr Barodawala to vote in the amount of approximately $253,000 (reflecting the judgment debt and costs). Mr Barodawala received his petitioning creditor’s costs as a priority in the bankruptcy. However, it appears that he did not receive any amount referable to the judgment debt.[2]
On 18 May 2015, Ms Perinparajah was discharged from that bankruptcy.
Barodawala v Perinparajah [2021] VSC 387:
In March 2020, Mr Barodawala sought leave to enforce the NSW judgment against Ms Perinparajah by way of warrant of execution. Leave was granted in April 2020 and a warrant was issued in July 2020. In March 2021, Ms Perinparajah sought to set aside the warrant on the basis that she had been released from her provable debts by reason of her discharge from bankruptcy.[3]
Mr Barodawala submitted that Ms Perinparajah’s debt to him was incurred by means of fraud and thus section 153(2)(b) applied, such that Ms Perinparajah was not released from the debt. In July 2021 a judicial registrar rejected Mr Barodawala’s submissions and set aside the warrant.[4]
Barodawala v Perinparajah (No 2) [2022] VSC 247:
Mr Barodawala appealed from the decision of the judicial registrar to a judge in the Trial Division on the basis that Ms Perinparajah’s debt to him was incurred by means of fraud and thus s 153(2)(b) applied.
The primary judge dismissed that appeal, on the following two bases:
- Mr Barodawala’s claim and cause of action had merged in the NSW judgment and become res judicata, so that s 153(2)(b) was not engaged (following Power v Kenny[5], a 1977 decision of a single judge of the Supreme Court of Western Australia); and
- there was no debt incurred by means of fraud because no finding of fraud at common law or in equity was considered or made in the NSW proceeding.[6]
Analysis
As described above, Mr Barodawala sought leave to appeal from the primary judge’s decision on two proposed grounds:
- Ground 1: The primary judge erred in concluding that, because Mr Barodawala’s claim and cause of action had merged in the NSW judgment, there was no ‘debt incurred by means of fraud’ within the meaning of s 153(2)(b). By this ground Mr Barodawala contended that Power v Kenny was wrongly decided and should not be followed.
- Ground 2: The primary judge erred in concluding that, because no finding of fraud at common law or in equity was considered or made in the NSW proceeding, there was no ‘debt incurred by means of fraud’ within the meaning of s 153(2)(b).
Mr Barodawala accepted that he needed to succeed on both grounds in order to succeed in his proposed appeal.
Ground 1: As the phrase ‘debt incurred by means of fraud’ is used in s 153(2)(b) of the Bankruptcy Act, this appeal was to decide whether the judgement of debt falls within this scope. As a result, it questions whether Power v Kenny was wrongly decided.[7]
The primary judge held that there was no ‘debt incurred by means of fraud’ owed by Ms Perinparajah to Mr Barodawala upon Ms Perinparajah’s discharge from bankruptcy on 18 May 2015 because Mr Barodawala’s claim and cause of action had merged in the NSW judgment.[8]
Ground 2: The Court considered Ground 2 first and concluded, at paragraph 41:
that the NSW Reasons, upon which Mr Barodawala’s claim turns, do not support a conclusion that the debt owed by Ms Perinparajah to Mr Barodawala was ‘incurred by means of fraud’. That conclusion does not turn on any one single factor (such as the failure to expressly plead fraud, Ms Perinparajah’s failure to appear at the hearing of the NSW proceeding, or Ball J’s failure to make an express finding of fraud). Rather, it turns on the particular combination of factors present in this particular case.
Ground 2 was rejected by the Court, and Mr Barodawala’s proposed appeal couldn’t succeed. However, it was deemed appropriate for the Court to express their opinion on ground 1 in light of the importance of the issue and the fact that the point was fully argued before them.
In his reasons in support of that conclusion, his Honour commenced with a discussion of Power v Kenny.
At paragraph 62 of the judgement, the case is described as:
Power v Kenny concerned an attempt by the plaintiffs to enforce a judgment more than 12 years old. The judgment had followed a finding of fraudulent misrepresentation in the sale of a business by the defendant to the plaintiffs. The defendant failed to pay the sum of $6,975 (being the judgment debt and costs) and, as a result of the plaintiffs’ petition, the defendant’s estate was sequestered. During the administration of the defendant’s bankrupt estate the plaintiffs received $4,787 in dividends. In 1972, the defendant was discharged from bankruptcy. The plaintiffs submitted that the defendant’s discharge from bankruptcy had not released him from his debt to them, by reason of s 153(2)(b) of the Bankruptcy Act.[9]
The primary judge observed that Wallace J held that the debt incurred by means of fraud had merged into the judgment, thus becoming res judicata and extinguishing the cause of action in fraud. After release from bankruptcy, there was no existing ‘debt incurred by means of fraud’ within the meaning of s 153(2)(b) of the Act.[10]
The Court, in this instance, had to consider whether the applicant’s original claim under the TPA constituted ‘a debt incurred by means of fraud’ and, if that was affirmed, whether that character ceased upon judgment being entered in 2011 due to doctrines of merger by judgment and res judicata.
In its contemplation of the legislative provision, the Court in this proceeding noted, at paragraph 59, that:
the starting point in any exercise of statutory construction is the text of the provision. However, the text is to be considered in light of its context and purpose. Context includes the legislative context, because the meaning of a provision must be determined by reference to the entire Act.
Thorough consideration was given by the Court as to the context and purpose of the Bankruptcy Act 1996 (Cth) s153(2)(b) specifically, the Act generally and the consequences of competing interpretations, as well as consideration of comparative authorities from United Kingdom and Canada.
At paragraph 79, the Court accepts Mr Barodawala’s submission that, if Parliament had intended to exclude judgment debts from the operation of s 153(2)(b), it would have done so expressly.
At paragraph 113, the Court determines that “the approach adopted in Power v Kenny and by the primary judge does not advance the purpose of the Act and produces illogical consequences”.
The Court decided that doctrines of merger by judgment and res judicata did not mean a debt was not ’incurred by means of fraud’ and that there was no implied restriction in operation of s 153(2)(b), based on principles relating to finality in litigation.
Decision
In concluding, Sifris JA concluded that Mr Barodawala made good his case in relation to ground 1 and the Court determined, at paragraph 114, that:
a judgment debt will be a “debt that was incurred by means of fraud” within the meaning of section 153(2)(b) if the original debt on which the creditor sued was incurred by reason of the fraudulent conduct of the debtor.
Following that, the Court determined that Power v Kenny was wrongly decided.
However, as the Court rejected ground 2, the Court granted leave to appeal but dismissed the appeal.[11]
Footnotes:
[1] At paragraph 3
[2] At paragraph 4
[3] At paragraph 6
[4] Ibid
[5] [1977] WAR 87
[6] Barodawala v Perinparajah (No 2) [2022] VSC 247, [81] (‘Reasons’).
[7] At paragraph 43
[8] Barodawala v Perinparajah (No 2) [2022] VSC 247, [81] (‘Reasons’)
[9] Power v Kenny [1977] WAR 87, 88.
[10] Barodawala v Perinparajah (No 2) [2022] VSC 247, [23] (‘Reasons’)
[11] At paragraph 115
