It is well-established that pursuant to section 60(2) of the Bankruptcy Act 1966 (Cth) (Act) any action which has been commenced by a person who becomes bankrupt becomes immediately stayed until the trustee in bankruptcy makes an election to continue or discontinue the action. In the absence of any election being made within 28 days after notice of the action has been served on the trustee (by a defendant or other party to the proceedings) the trustee is deemed to have abandoned the action pursuant to section 60(3) of the Act.

There is however provision in section 60(4) of the Act for a bankrupt to continue an action in his or her own name provided it was commenced before they were bankrupt and is in respect of:

• A personal injury or wrong done to the bankrupt, his or her spouse or de facto partner or member of his or her family; or

• The death of his or her spouse or de facto partner or of a member of his or her family.

Similarly, pursuant to section 116(2)(g) of the Act, property including any right of a bankrupt to recover damages or compensation for personal injury or wrong is not damages or compensation which is property divisible amongst a bankrupt’s creditors.

Sections 60(4) and 116(2)(g) of the Act recently came under scrutiny by the Western Australian Supreme Court in Berryman v Zurich Australia Ltd [2016] WASC 196 (Berryman).  It was considered for the first time whether or not a benefit payable to a bankrupt pursuant to a disability insurance policy fell within the exclusion of sections 60(4) and 116(2)(g) of the Act and therefore enabled the bankrupt to continue the action in their own name.

The case involved a self-employed carpenter with an insurance policy that provided for payment upon the policy holder becoming totally and permanently disabled. Mr Berryman’s claim had been initially declined and he had commenced proceedings prior to declaring bankruptcy. Although the claim related to a personal injury suffered by Mr Berryman, it was a claim made under contract.

The issue for the Court to determine was whether or not this was a contract claim or whether it was a claim for personal injury or wrong done to the bankrupt so as to come within sections 60(4) and 116(2)(g) of the Act.

The Court in Berryman accepted that Mr Berryman’s claim fell within the exceptions of sections 60(4) and 116(2)(g) of the Act and Mr Berryman was permitted to continue the action in his own name.  The claim although framed as a claim in respect of a contract of insurance was at its heart an action for personal injury and not part of the bankrupt’s estate available to creditors.

In considering whether the personal injury or wrong done to the bankrupt is one which falls within sections 60(4) and 116(2)(g) of the Act, the focus must be on the substance of the claim and it would not be correct for the Court to permit the form of the action to play a determinative role. The test for determining what constitutes a personal injury or wrong is whether the damages are estimated by reference to pain felt by the bankrupt in respect of mind, body or character without reference to the bankrupt’s rights of property.

The case provides useful guidance for Bankruptcy Trustees in characterising any claims which the Bankrupt may have commenced before appointment.  In particular, the case will assist trustees in differentiating between those claims which require the trustee to make an election and those claims in which the trustee has no interest at all.

For more information, please contact ERA Legal.