Home > News > Debts incurred by fraud not extinguished by judgment debts: Ismail Barodawala v Sujeetha Perinparajah [2022] VSCA 198

Debts incurred by fraud not extinguished by judgment debts: Ismail Barodawala v Sujeetha Perinparajah [2022] VSCA 198

Spread the love

By Alicia Hill, Principal and Harriette Singh, Law Clerk

Introduction

On 16 September 2022, the Victorian Court of Appeal held, in the case of Ismail Barodawala v Sujeetha Perinparajah [2022] VSCA 198, that section 153(2)(b) of the Bankruptcy Act 1996 (Cth) encompasses judgment debts, if the original debt was incurred by fraudulent conduct of the debtor.

The Court overturned the Western Australian decision of Power v Kenny which stated that once a debt incurred by fraud had merged into a judgment debt,[1] the debt in fraud no longer existed.

Background

Mr Barodawala contracted with Sterco International Pty Ltd (Sterco) to purchase 72 tonnes of scrap stainless steel. However, Sterco never had the capacity or intention to deliver this order. Ms Perinparajah was the sole director and shareholder of Sterco.

In 2010, Mr Barodawala sued Ms Perinparajah in New South Wales, alleging that she had engaged in misleading and deceptive conduct, and been knowingly concerned in the misleading or deceptive conduct of Sterco.

The Court ordered Ms Perinparajah to pay Mr Barodawala $127,591.90 plus his legal costs (Judgment Debt). This judgment was then registered in Victoria Mr Barodawala (NSW Judgment).

In April 2012, Ms Perinparajah entered bankruptcy. Mr Barodawala received his petitioning creditor’s costs as a priority in the bankruptcy, but did not receive any amount referable to the Judgment Debt.

In May 2015, Mr Perinparajah was discharged from bankruptcy.

In March 2020, Mr Barodawala sought leave to enforce the Judgment Debt. This was granted and a warrant of execution was issued.

In March 2021, Ms Perinparajah sought to set aside the warrant on the basis that she had been released from her provable debts, including the Judgment Debt, because she had been discharged from bankruptcy.

Mr Barodawala argued that Mr Perinparajah’s debt to him had been incurred through means of fraud and therefore section 153(2)(b) of the Bankruptcy Act 1996 (Cth) (the Act) applied, meaning she was not released from his debt.

Section 153 of the Act relevantly states 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;

Mr Barodawala’s submissions were rejected by a judicial registrar in 2021, and again dismissed in appeal by a primary judge. Mr Barodawala then appealed to the Supreme Court of Victoria, which forms the basis of this case.

The primary judge dismissed the appeal, stating that section 153(2)(b) was not applicable as Mr Barodawala’s debt had merged into a judgment debt, following a Western Australian case of Power v Kenny. Additionally, his Honour stated that because there was no finding of fraud in common law or equity, the debt was not incurred by means of fraud, and the section was not applicable.

Power v Kenny held that where a debt was incurred by means of fraud but later had merged into a judgment debt, it extinguished the debt incurred by fraud. This had the effect that once the bankrupt was released from bankruptcy, the debt in fraud no longer existed. Application of this principle means that there would be no existing ‘debt incurred by means of fraud’ within the meaning of section 153(2)(b).

Issues

Mr Barodawala sought appeal to address the following issues:

  1. That the primary judge erred in concluding that, because his claim and cause of action had merged in the NSW Judgment, there was no debt incurred by means of fraud within the meaning of section 153(2)(b) of the Act, and argued that Power v Kenny was wrongly decided and should not be followed; and
  2. That the primary judge erred in concluding that, because no finding of fraud at common law or in equity was made in the NSW Judgment, there was no debt incurred by means of fraud within the meaning of section 153(2)(b).

Judgment and reasons

Mr Barodawala accepted that both issues on appeal would have to be accepted by the Court of Appeal for him to succeed in his appeal.

Issue 1

The Court of Appeal accepted the first issue raised by Mr Barodawala.

The Court held that a judgment debt can fall within the meaning of a ‘debt incurred by means of fraud’ as used in section 153(2)(b) of the Act and that the case of Power v Kenny was wrongly decided.

The Court stated that the judge in Power v Kenny failed to engage with the case law his Honour was provided, and misapplied the past cases to the facts of the case.

In assessing the proper construction of section 153(2)(b), the Court looked to the text of the legislation and its context. They held that section 153(2)(b) refers plainly to debts provable in bankruptcy.

The Court referred to section 82(1) of the Act, which is a wide provision, and shows that a judgment debt is capable of being provable in bankruptcy.

Additionally, the wording of a ‘debt incurred by means of fraud’ directs attention to the conduct of the person that created the debt, and not the legal source of the debt. This means that if the person’s conduct was fraudulent, the debt was incurred by fraud and section 153(2)(b) should be engaged.

The Court’s above interpretation of section 153(2)(b) is supported by the purpose of the Act, being to protect the honest but unfortunate debtor who has fallen on hard times, but not to permit dishonest debtors to escape their obligations. This confirmed the Court’s view that a creditor who has sought a court judgment should not be in a worse position than a creditor who has not sought a court judgment.

Issue 2

The Court of Appeal rejected the second issue raised by Mr Barodawala, and for this reason, the appeal failed.

The Court held that an allegation of fraud must be identified separately from an allegation of involvement in misleading and deceptive conduct. This confirms the position in Forrest v Australian Securities and Investments Commission that if actual fraud is alleged in proceedings,[2] it ought to be separately and clearly pleaded so that the defendant is aware of the serious allegations against them.

The Court also confirmed that it is not appropriate for a judge to make a finding of fraud where it is not pleaded. As Mr Barodawala did not plead fraud in the NSW judgment, the Court held that the NSW judge did not make any findings of fraud. Additionally, the NSW judge did not refer to the words ‘fraud’, did not reference leading fraud authorities such as Briginshaw v Briginshaw or section 140(2) of the Evidence Act 1995 (NSW) and even used language in the judgment which suggested there was not a finding of fraud.

As there was no original finding of a debt incurred by fraud, section 153(2)(b) of the Act was not engaged and the appeal failed.

Takeaways

This case has highlighted the proper construction of section 153(2)(b). The Court confirmed that a judgment debt can fall within the meaning of a ‘debt incurred by means of fraud’ in this section.

To determine whether a debt was incurred by means of fraud, you must look to the conduct of the person who created the debt, not the legal source of the debt.

Additionally, this case overturned the Western Australian case of Power v Kenny, stating that when a debt incurred by fraud is merged into a judgment debt, it is not extinguished. This means debts incurred by fraud can be enforced once a bankrupt comes out of bankruptcy.

If you have any questions regarding this decision or any matters raised by it, please feel free to get in contact with Alicia Hill of the MST Dispute Resolution and Litigation team on (03) 8540 0200, or by email at alicia.hill@mst.com.au.

[1] [1977] WAR 87.

[2] (2012) 247 CLR 486, 502-3.