Bovaird v Frost

MAX DONNELLY IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF THE LATE MAXWELL WALTER ALLEN FROST

JUDGE: PERRAM J DATE: 27 SEPTEMBER 2013 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The applicants are judgment creditors of the estate of the late Maxwell Walter Allen Frost which is being administered in insolvency under Pt XI of the Bankruptcy Act 1966 (Cth) ('the Act'). The first and second respondents are the estate's executors and the third respondent is the trustee under Pt XI of the Act. The judgment creditors are suing the executors in proceedings in the Equity Division of the Supreme Court of New South Wales entitled Bovaird v Frost No. 2010/41888. In those proceedings they allege that the executors have dissipated the assets of the estate and claim relief for devastavit. The Supreme Court proceedings are 'in respect of a debt provable in the administration'. Consequently, they cannot be prosecuted without the leave of a bankruptcy court, such as this Court: s 249(3) of the Act. The claim for devastavit by the judgment creditors against the executors is in respect of the judgment debt owed by the estate because the measure of loss suffered by them is necessarily a function of their debt: Bovaird v Frost (2010) 118 ALD 263; [2010] FCA 1159 at [21]. On 3 May 2011 this Court granted the judgment creditors leave to pursue the devastavit proceedings against the executors: Bovaird v The Trustee of the Bankrupt Estate of Frost (No 2) [2011] FCA 465. This was done for the reasons given in Bovaird v Frost (2010) 118 ALD 263 at [18]-[27]. 2 The judgment creditors now wish to amend their statement of claim in the devastavit proceedings. Although leave has already been granted to pursue those proceedings, the executors submit that an application to amend the pleadings in the Supreme Court is the taking of a 'fresh step' in that proceeding and requires, therefore, the leave of this Court before it can be made. The expression 'fresh step' appears in s 249(3) of the Act and is in these terms: 249 VESTING OF PROPERTY ON MAKING OF ORDER … (3) Except as provided by this Act, after an order has been made for the administration of the estate of a deceased person under this Part, it is not competent for a creditor: (a) to enforce any remedy against the estate in respect of a debt provable in the administration; or (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceedings in respect of such a debt or take any fresh step in such a proceeding. 3 The judgment creditors deny that they need leave but have brought the application in case a different view is ultimately reached in the Supreme Court. 4 What constitutes a 'fresh step' in provisions such as s 249(3) has often enough been considered. See, for example: Gertig v Davies (2003) 85 SASR 226 at 237, 238, 239; Fraser Property Developments Pty Ltd v Sommerfeld (No.2) (2005) 2 QdR 404 at 406, 409. However, that question does not arise in this case because there is no debate (if s 249(3) applies in the current circumstances) that the judgment creditors' proposed application to amend their statement of claim would be the taking of a fresh step. 5 Put another way, there is no doubt that the proposed amendment application is the taking of a fresh step. The judgment creditors' argument is not that it is not such a step, but rather, that s 249(3) does not apply at all because of the prior grant leave so that the fact that it is a 'fresh step' is irrelevant. 6 Mr Condon SC for the judgment creditors emphasised how impractical it would be if each interlocutory step in proceedings governed by s 249(3) (or its various equivalents in other insolvency contexts) had to be preceded by an application for leave to proceed. Mr Cotman SC, who appeared for the executors, sought to deflect this argument by submitting that a 'fresh step' was a step in a proceeding which was of sufficient significance such that the nature of the case was being altered. He did not submit that s 249(3) was limited always to such cases but proffered it, as I understood the submission, as an illustration of the kind of matter it dealt with. The advantage of this submission was that it explained why leave might be needed in a case such as the present where leave to amend a proceeding was sought but also why it would not be necessary in a case where some minor interlocutory action, such as an application to set aside a subpoena, was taken. The former would be a fresh step; the latter would not. 7 Although the submission has that merit, it is also somewhat problematic. The first problem is one of practicality. If the concept of a 'fresh step' is to be limited to those steps having some non-trivial impact on the substance of the allegations some matters to which s 249(3) is undoubtedly directed are thwarted. So, for example, on Mr Cotman's argument it would remain possible in a proceeding in relation to a proveable debt to take any step which was not substantial even after a sequestration order was made and even although no leave had been obtained to continue with the proceeding. This appears to be an unlikely operation for s 249(3) as it would mean that proceedings against the bankrupt in respect of a proveable debt might well have to be defended by the trustee, at least as to interlocutory fresh steps which were not substantial. One reading of s 249(3) is that the expense of doing so is what the provision is designed to protect against. 8 Another difficulty would exist in seeking to find the line of demarcation between those interlocutory or trial steps which were 'fresh' in the sense submitted and those which were not. This highlights the real problem for Mr Cotman's argument which is that s 249(3) tells one which 'steps' it applies to and they are not 'substantial' steps but, rather, 'fresh' ones. The concepts of freshness and substantiality are quite distinct. 9 I do not think, therefore, that s 249(3) operates as the executors suggest. The prohibition on taking a fresh step is subject to an exemption: 'except with the leave of the Court'. Subject to the terms, if any, upon which the leave might be granted, a grant of leave will mean that the prohibition on taking a fresh step will be raised and further leave will not be necessary. This directs attention of course to the terms of the earlier grant of leave. If, in terms, it is limited to taking particular steps then, naturally, those terms must be given their effect. But if, on the other hand, the leave granted is ambulatory or otherwise unlimited this will not be so. 10 In this case the leave granted on 3 May 2011 was in these terms: The applicant is granted leave, nunc pro tunc, to proceed with Supreme Court of New South Wales Equity Division proceedings number 2010/41888. 11 This was not limited to identified steps or even causes of action but was at large. The grant of leave could have been limited to pursuit of the claims disclosed in the statement of claim but it was not. If that had been done, the terms upon which leave had been granted would mean that an application for leave to amend the proceedings would require the leave of this Court. But the grant of leave was not, in my opinion, so expressed. 12 I do not accept that a general grant of leave to pursue a proceeding is implicitly to be limited to the claims as they are pleaded at the time the leave is granted. 13 Against that conclusion Mr Cotman drew my attention to some remarks of Basten JA given in the course of dismissing the judgment creditors' appeal to the New South Wales Court of Appeal in Bovaird v Frost [2013] NSWCA 91 at [15]. His Honour said: The solicitor for the appellants claimed in his affidavit that he had instructions to "amend the devastavit proceedings" to allege that, but for the acts of devastavit, the estate would not have been insolvent and accordingly the cost of the bankruptcy would not have been incurred. No estimate of those costs was provided, but it is apparent from the judgment of Perram J that the appellants would be required to return to the Federal Court to obtain leave in order to make a further claim in the devastavit proceedings. The proposed amendment, coming as late in the day as it does, and in the context of claims as to whether or not success in those proceedings would render the estate solvent, cannot be given much weight. Nor is there any attempt to allow for the possibility that the devastavit proceedings will be less than wholly successful. (emphasis added) 14 The part of my earlier judgment to which this refers is in Bovaird v Frost (2010) 118 ALD 263 at [26]: I think this is a valid concern, however, I do not think it requires the refusal of leave. Assuming that the trustee in bankruptcy could maintain a suit against the executors for breach of duty, the present devastavit proceedings provide the potential for prejudice to the secured creditor. The risk is potential - it is not plain at this stage whether the executors will be entitled to be indemnified or, if so permitted, for how much. Further, it is possible that the two claims may not come into conflict. However, these matters cannot be known at this stage. In the circumstances, what I propose to do is to impose conditions similar to those imposed in Fraser which will require the creditors to undertake not to oppose any application by the trustee to be joined to the devastavit proceedings and also to undertake to keep the trustee informed of the orders which are to be sought. 15 The judgment creditors gave this undertaking on 3 May 2011 when leave was granted. The undertaking certainly served the purpose of ensuring that the trustee of the estate was kept informed, even if he was not a party, of changes to the relief sought. The purpose of this undertaking was to equip the trustee with knowledge of what was happening in the case lest developments require his intervention or his approach to this Court. I do not perceive in the reasons given by me at [26], the orders made on 3 May 2011 or the undertakings received that day from the judgment creditors any indication that the Court's grant of leave was limited to pursuit of the proceedings in the form they were in on 3 May 2011. Indeed, that the Court required and received an undertaking from the judgment creditors that they would notify the trustee if different relief was sought is inimical to that suggestion. It shows that further approaches to this Court were not contemplated and that the trustee was to serve as the party monitoring developments in the devastavit proceedings. 16 It is not obvious to me that this aspect of the matter was the subject of full argument before Basten JA or that the terms of the judgment creditors' undertaking to keep the trustee informed of any alterations to the relief claimed were the subject of developed submission. I do not read his Honour as expressing a concluded view. But to the extent that his Honour suggests that my earlier order required this Court to be approached prior to an amendment application being made, I must respectfully disagree. 17 For those reasons I do not accept that the judgment creditors require the leave of this Court to pursue their amendment application in the devastavit proceedings. As a matter of formality their application will be dismissed. 18 Against this possibility Mr Cotman applied from the bar table for an order varying the leave granted on 3 May 2011 so that the judgment creditors would not be entitled to pursue most of their amendment application. The making of the application from the bar table was not opposed by the judgment creditors. 19 Mr Cotman did not seek to prevent the proposed amendments to paragraph 1A, the particulars to paragraph 2, and paragraphs 9B, 10, 12B, 14A, 16B, 18A, 19A, 20A or 22A. He did, however, seek to vary the leave so that it did not extend to permitting an application to amend paragraphs 16C-16G, 20H-20S, 9A, 12A, 16A, 20B-20G, 20T-20W, 22B, 22C, 22D, 22E-L and certain aspects of the relief claimed. 20 The concern of this Court, as a court of bankruptcy, is not to superintend the behaviour of the parties to litigation relating to proveable debts. Rather, it is to ensure that the conduct of that kind of litigation is in the interests of the creditors as a whole. 21 There will be some suits to recover a proveable debt where it will obviously be best that the creditor lodges a proof of debt to be assessed by the trustee. Allowing such a proceeding to continue would consume unnecessarily estate funds. On the other hand, there will be other cases where permitting the suit to continue will make good sense. Cases where the estate has the benefit of an insurance policy may be an example. In each case the primary concern of the Court is the capacity of the proposed suit to prejudice unreasonably the assets of the estate. 22 In assessing that concern the opinion of the trustee as dominus litus is of importance for it is he or she who is best positioned to assess the effect on the estate of the suit. It was for that reasons that the leave granted in Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99 at 115 included, as it does in this case too, a requirement that the plaintiff keep the trustee informed about the nature of the relief sought. 23 In this case the trustee does not oppose the grant of leave. This suggests, but does not conclusively prove, that the proposed amendments pose no threat to the estate. The complaints made by the executors, in fact, relate to the adequacy of the pleading from a legal perspective. It is said that certain parts of the pleading are a collateral attack on the costs orders made by Brereton J in Bovaird v Frost [2009] NSWSC 337; are a collateral attempt to deny the executors their costs of the proceeding originally before me; that the proposed claim for an account and inquiry suffer from procedural deficiencies; that a complaint that judicial advice was not obtained cannot be the basis of a devastavit; that a claim with respect to a Holden Barina motor vehicle makes no sense; that a claim in relation to the conduct of allegedly meritorious litigation was itself hopeless; that certain claims for costs are inconsistent with the course of other proceedings in the New South Wales Court of Appeal; that an allegation that the executors ought to have filed a submitting appearance in some of the litigation is unmeritorious; and that claims in relation to the redevelopment of certain residential premises is subject to a res judicata or an Anshun estoppel. 24 The conduct of litigation having those allegations within it does not directly effect the position of the estate. In Bovaird v Frost (2010) 118 ALD 263 the trustee sought directions as to whether he would be justified in indemnifying the executors out of the estate for their costs of defending the devastavit proceedings. My conclusion that he would not (at [36]-[37]) was not disturbed by the Full Court: Frost v Bovaird (2012) 203 FCR 95 at 109-110 [84]-[85]. Accordingly, the cost of the devastavit litigation does not at this stage fall upon the estate. I say 'at this stage' because whilst the executors do not presently have the benefit of access to the estate to pay their costs of defending the devastavit proceedings, it is not impossible that they might obtain such an indemnity in the future, possibly after the determination of the devastavit proceedings. Further, it may be accepted that the arguments advanced by the executors on this occasion would, if accepted, likely mean that those allegations would fail. This would enhance the prospects of them obtaining indemnity subsequently. 25 There is, therefore, a contingent risk that the pursuit of the amendment application may ultimately expose the estate to a future claim for indemnity from the executors. 26 If the claims which the judgment creditors now wish to pursue are as hopeless as the executors allege then the judgment creditors are unlikely to get leave to amend to raise them. The contingent costs risk to the estate therefore is most likely limited to the costs of the executors in resisting the amendment application. Since on that hypothesis the executors are likely to enjoy the benefit of a costs order in their favour this suggests that the extent of the potential liability is probably limited to the difference between the party-party costs recoverable from the judgment creditors and the executors' actual costs of the application. There will also be an increased exposure if the judgment creditors turn out to be insolvent. In any event, the exposure of the estate, if the executors are ultimately allowed their indemnity, will be modest. 27 I acknowledge the imperfection of this calculus. It excludes from consideration the possibility that the proposed claims, whilst not being strong, are nevertheless of sufficient merit to justify amendment. That scenario might open a larger potential liability for the estate. I did not apprehend, however, that this complex idea was what the executors' submissions were directed at. 28 Even if such a submission had been made, I do not think that the material I have before me would allow me to make the kind of fine judgment which would be necessary to assess such a subtle submission. 29 Given then that the argument advanced was that the proposed amendments did not warrant a grant of leave it seems to me that the estate is unlikely to suffer any real harm if that question is left to the Supreme Court. 30 This is significant because it is that Court which should control these kinds of decisions. It is not the role of a bankruptcy court to supervise the procedural steps of other courts who should be left, in an ordinary case, to deal with those issues. In this case, a better way of proceeding would have been for the judgment creditors to apply in the Supreme Court for leave to amend. If they were successful and if the executors believed such a case threatened the estate then the executors could have applied to this Court to remould the leave. 31 I therefore dismiss Mr Cotman's oral application to vary my earlier grant of leave to the judgment creditors. 32 The judgment creditors also pursued an application that I should cross-vest the entire application to the Supreme Court. Since I have resolved the leave question that is unnecessary. 33 I therefore dismiss all the applications before me. I will hear the parties on costs if they wish. However, my tentative view is that the executors should pay the costs of all three. 34 I turn then to the issue of mediation. This case is obviously a disaster for everyone involved. The sooner it is settled and the executors and judgment creditors can disentangle themselves from the litigation nightmare in which they now find themselves ensnared the better. 35 Attempts to mediate this case in the past have not proceeded. The judgment creditors, for their part, say that they cannot meaningfully mediate until they are provided with further discovery in the devastavit proceedings in respect of which it appears there is an application pending. The executors, on the other hand, do not object to mediation as a general proposition but seek, ideally, certain clarifications and the terms to which the mediation would be subject. 36 What I propose to do is to direct the parties to contact my Chambers when that application has been dealt with to finality whereupon I will order the parties to mediation. This is not an order I generally make but these parties need to be rescued from themselves. The terms of the mediation order may be raised with my associate. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.