Commonwealth Bank of Australia v Shannon

Background

1. Litigation between the parties in various courts has been ongoing since 2009 when the CBA commenced proceedings in this Court claiming over $8,500,000 against the first defendant (proceedings no. 2009/296947).
2. For the purposes of determining this application, it is not necessary to set out the full history of the dispute. A detailed overview is included in his Honour Rothman J's judgment in D A Shannon v G A Shannon; D & W Shannon Pty Ltd v G A Shannon (No 2) [2013] NSWSC 1222. It is necessary, however, to set out the events of April and May 2013 leading to the entering of the judgments the plaintiff, the CBA, now seeks to set aside.
3. On 16 April 2013 the second defendant in these proceedings, Dallas Shannon, commenced proceedings in this Court against the first defendant claiming a liquidated sum of over $12,987,000 (proceedings no. 2013/117170). The evidence in those proceedings was that the debt was owed by the first defendant under five loan agreements entered into between 1995 and 2003. On 22 April 2013 the third defendant in these proceedings, D&W Shannon Pty Ltd also commenced proceedings against the first defendant claiming a liquidated sum of over $8,669,000 (proceedings no. 2913/123931) said to have been loaned pursuant to a loan agreement entered into in September 2003.
4. In both sets of proceedings, applications were made for summary judgment against Geoffrey Shannon on an urgent basis before the Duty Judge on 20‑21 May 2013. Summary judgments were entered in each by Davies J on 21 May 2013. It is those two judgments which the CBA now seeks to set aside.
5. It is the CBA's contention in the present proceedings that none of the loan agreements referred to above, giving rise to the alleged debts owed by the first defendant to the second and third defendants, were genuine. It is alleged that the agreements were "shams". It is alleged that the first and second defendants colluded to have the judgments entered so as to control the external administration of the debtor's estate in a favourable way and to maximise the voting power of creditors at meetings relating to the first defendant's external administration, so as to procure resolutions favourable to the first defendant. The CBA also alleges that the first and second defendants sought to achieve an outcome whereby the first defendant would have the benefit of having a personal insolvency agreement which was "extremely" favourable to him in any arrangement entered into under Part X of the Bankruptcy Act.
6. The first defendant was declared bankrupt on 16 December 2013 following a sequestration order made by Rares J in the Federal Court as a result of proceedings between him and the CBA. He was declared bankrupt at a time when these proceedings had been commenced but not finalised.

First Defendant's Submissions on Standing

1. It was submitted for the first defendant, Mr Geoffrey Shannon, that he has standing in the proceedings and an entitlement to defend himself for two main reasons: 1. The Statement of Claim filed by the CBA indicates an intention to seek indemnity costs against him. Any such costs would be the first defendant's personal liability rather than his estate. 2. The first defendant's character, reputation and credit are at stake because of the serious allegations being made by the bank against him.
2. With respect to the first, it is noted that the CBA at the hearing indicated that it would refrain from seeking any personal costs order against the first defendant in this litigation. For that reason, it is unnecessary to deal further with the costs point so far as it relates to the first defendant's locus standi in this litigation, though I note that in written submissions for the first defendant the validity of the undertaking given by the CBA was questioned: First Defendant's Further Submissions at [5.1]-[5.3].
3. As to the second reason said to give rise to the first defendant's standing, reliance was placed on the decision of Dodds-Streeton J in Re-Engine Pty Ltd v Fergusson [2007] VSC 57 and particularly observations made by her Honour at [66]: "In the present case, the allegations against Mr Fergusson involve breach of fiduciary duty, the creation of false invoices, contravention of the Fair Trading Act, and dishonesty. Although he has no interest in any property which will be available to satisfy the plaintiffs' claim, is not now personally liable to satisfy the plaintiffs' claim, and no further steps may be taken against him in the proceeding without leave by reason of his bankruptcy, Mr Fergusson is already a party and has not ceased to be such by virtue of his bankruptcy. The plaintiffs must establish the allegations of serious misconduct against Mr Fergusson in order to succeed against Della Court. Mr Fergusson has a subsisting interest in the preservation of his reputation and character. His trustee in bankruptcy did not object to his appearance."
4. The first defendant also relied upon the decision of Baulkham Hills Shire Council v Stankovic [2009] NSWCA 281 for the proposition that the first defendant has standing as a result of being named in the proceedings as a defendant. In that case Beazley JA (as her Honour then was) said at [15]: "Further, Mr Stankovic is a respondent to the appeal. He has not brought the appeal. He does not need the leave of the court administering the Bankruptcy Act to stay in the litigation. There is no suggestion that his Trustee proposes to defend his interests on the appeal, or even that the Trustee would have any such right to do so. Contrary to the Council's contention, Mr Stankovic has an interest in the proceedings and is the proper contradictor to the Council's contention that it could use the processes specified under s 124 to, in effect, enforce orders made by the Land and Environment Court personally against Mr Stankovic. Even if Mr Stankovic is not entitled as of right to appear as a party in the appeal, I would grant him leave to do so for the reason that he is a proper contradictor to the appeal."

Plaintiff's Submissions on Standing

1. The CBA, in asserting that the first defendant has no standing in relation to these proceedings, relied upon s 58(1) of the Bankruptcy Act which provides: 58 Vesting of property upon bankruptcy - general rule (1) Subject to this Act, where a debtor becomes a bankrupt: (a) the property of the bankrupt, not being after‑acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and (b) after‑acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
2. Section 5 of the Act defines "the property of the bankrupt" as including both the property divisible among the bankrupt's creditors as well as "any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt".
3. The CBA submitted that because the two judgments which they seek to have set aside create or evidence a provable debt, the first defendant has no financial interest which would confer standing on him to make any application in connection with the judgments. Reliance in this respect was placed on a statement by the majority of the High Court (Brennan CJ, Gaudron and McHugh JJ) in Cummings v Claremont Petroleum (1996) 185 CLR 124 at 137-138 that: "So far as a judgment entered in an action against a bankrupt creates or evidences a provable debt, we respectfully agree that the bankrupt has no financial interest which would confer locus standi to appeal in his own name against the judgment. That is because it is fundamental to the law of bankruptcy that the bankrupt is divested of both his interest in his property and liability for his provable debts."
4. The CBA accepted that despite what it asserted to be the first defendant's lack of standing to take any action in the proceedings the Court has the discretion to permit a bankrupt individual to answer allegations of personal misconduct in certain circumstances. The CBA acknowledged an observation to that effect by Johnson J in National Australia Bank Limited v Strik [2009] NSWSC 184, his Honour there drawing upon the decision of Dodds-Streeton J in Re-Engine Pty Ltd v Fergusson [2007] VSC 57.
5. The CBA contrasted these decisions with Cummings v Claremont Petroleum, supra however, in which it was noted that the Court had held that the bankrupt directors in that case, against whom a judgment had been made, did not have standing to appeal against that decision despite the judgment involving damages for conspiracy and deceit, breaches of duty by them as company directors and contraventions of legislation: Plaintiff's Further Submissions on Standing of Mr Shannon at [3].
6. The plaintiff indicated their intention to join Mr Prentice, the first defendant's trustee in bankruptcy, and made the following submission in their Further Submissions at [7]: "…The Court should not allow (Mr Shannon) to participate as though he were a fully entitled non-bankrupt party, inconsistently with the decision of the High Court in Cummings. Rather, Mr Shannon's entitlement to participate ought to be quite limited and only fully evaluated after his trustee in Trustee in Bankruptcy is joined and indicates a final view as to what extent he wishes to participate in the proceedings."
7. The plaintiff relied upon the approach of Sloss J in Talacko v Talacko [2013] VSC 712 to the question of a bankrupt defendant's right to appear and particularly her Honour's comments at [74]-[75] as follows: "74 …the first defendant should be permitted to appear and be heard by way of defence to those claims for conspiracy and fraud. The extent of this limited right of audience is, however, something that will need to be the subject of case management by the Court and, in particular, the Judge hearing the trial. On the current pleadings, it is not possible to delineate a precise carve-out, and confine the right of audience to particular paragraphs of those pleadings. 75 Whether any greater right of audience should be permitted under the alternative ground advanced by the solicitor for first defendant, relying upon the inherent jurisdiction of the Court, will likely depend upon whether there is a proper contradictor before the Court."
8. It was further submitted on behalf of the CBA that the finding by Dodds-Streeton J in Re-Engine Pty Ltd of a discretion to give a bankrupt person a limited right to participate to give evidence answering serious allegations made against them, did not amount to authorisation for the proposition that a bankrupt could move the Court to dismiss proceedings or have them struck out pursuant to the UCPR.

Standing: Consideration

1. As mentioned above, the CBA acknowledged the decision of National Australia Bank Limited v Strik in which Johnson J at [9]-[10] stated: "9 I am satisfied that the Defendant has no more than a bare legal interest in the Wollongong property which he holds for the benefit of the Official Trustee, and that he has no interest in the proceedings brought against him for possession of the property and has no standing to be heard in defence of the Plaintiff's claim: Farrow Mortgage Services Pty Ltd v Winfield (1992) 2 QdR 282 at 285; Bendigo Bank Ltd v Demaria [2001] VSC 218 at [18]. Mr White has drawn the Court's attention, appropriately, to the decision of Dodds-Streeton J of the Victorian Supreme Court in Re-Engine Pty Ltd v Fergusson (2007) 209 FLR 1 at 9-12 [50-[68], where reference was made to a number of decisions, including Farrow Mortgage Services Pty Ltd v Winfield and Bendigo Bank Ltd v Demaria. Dodds-Streeton J observed at 12 [67]-[68] that, although the authorities indicate that a bankrupt does not have locus standi or an entitlement to be heard, the Court has a discretion to permit a person to give evidence in answer to allegations of personal misconduct and that, in the unusual circumstances of that case, it would promote the due administration of justice to permit the person to be heard. Nothing said by her Honour undermines the principle concerning standing expressed in Farrow Mortgage Services Pty Ltd v Winfield and Bendigo Bank Ltd v Demaria. 10 The appropriate conclusion is that the Defendant has no standing to appear and make submissions and to tender evidence on the application. The Official Trustee has made clear its view that it does not wish to be heard and that the orders to be made are a matter for the Court."
2. Re-Engine does not stand for the proposition that a bankrupt has standing when their reputation and character are at stake though the first defendant has sought to rely upon it for that proposition. The relevant passages from Re-Engine are as follows: "66 In the present case, the allegations against Mr Fergusson involve breach of fiduciary duty, the creation of false invoices, contravention of the Fair Trading Act, and dishonesty. Although he has no interest in any property which will be available to satisfy the plaintiffs' claim, is not now personally liable to satisfy the plaintiffs' claim, and no further steps may be taken against him in the proceeding without leave by reason of his bankruptcy, Mr Fergusson is already a party and has not ceased to be such by virtue of his bankruptcy. The plaintiffs must establish the allegations of serious misconduct against Mr Fergusson in order to succeed against Della Court. Mr Fergusson has a subsisting interest in the preservation of his reputation and character. His trustee in bankruptcy did not object to his appearance. 67 Although the authorities indicate that a bankrupt does not have locus standi or an entitlement to be heard, the Court has a discretion to permit Mr Fergusson to give evidence in answer to the allegations. 68 In the unusual circumstances of this case, it would, in my view, promote the due administration of justice to permit Mr Fergusson to be heard, because the principles of natural justice favour giving him audience to answer the serious allegations of personal misconduct, the trustee in bankruptcy does not object to his participation, the trial will proceed in any event, the Court may be assisted by a contradictor and the bankrupt defendant's participation will not impose an undue costs burden on other parties."
3. As noted above, the first defendant relied upon what was said at [66]. In the context of the paragraphs immediately following [66] it is apparent that her Honour did not conclude that Mr Fergusson, as a bankrupt, had standing. It is clear from her Honour's judgment and from the passage quoted above from Strik that any entitlement to be heard is discretionary.
4. I accept the submission for the first defendant that the allegations made against him are serious in nature and that matters of character and reputation arise which he should be entitled to respond to. However, I consider, consistent with the above authorities, that the first defendant does not have standing in these proceedings by reason of his bankruptcy. This is so even in the context of this case where the CBA named Mr Shannon as first defendant and had, as at the time of the hearing, omitted to join Mr Shannon's Trustee in Bankruptcy to the proceedings (though I note that the CBA had indicated its intention to do so after resolving the leave question in the Federal Court). Order 2 of the Orders made by the Federal Court on 8 February 2016 specifically addresses the joinder of the Trustee of the Bankrupt Estate.
5. Though this case also involves "serious allegations of personal misconduct" the present situation can nonetheless be distinguished from the "unusual circumstances" described by Dodds-Streeton J in Re-Engine in that the Trustee in Bankruptcy in this case has not "not objected" to the proceedings (or to the first defendant's appearance in them), but rather has consented to the proceedings continuing, contrary to the first defendant's strike out application. Additionally, this matter is not at a stage where it can be said that it "will proceed in any event," given that the substantive hearing has not commenced and indeed, its commencement depended upon a grant of leave by the Federal Court.
6. I consider that whilst the first defendant does not have standing or a right to be heard, he should be given a limited right to participate in the proceedings in respect of adverse allegations of personal misconduct made against him.
7. I have referred in paragraph [3] above to the orders sought in the first defendant's Amended Notice of Motion. The issue of leave to the CBA to continue these proceedings has now been resolved by reason of the orders made by the Federal Court on 8 February 2016. Additionally, as stated in [35] above, I have concluded that the first defendant does not have locus standi or an entitlement to be heard by reason of his bankruptcy, but there exists a discretion to permit him to give evidence in answer to any allegations of personal misconduct.
8. Before making any orders to give effect to the conclusions expressed above, I propose to hear submissions from the parties as to: 1. The terms for the grant of leave to the first defendant to participate in the proceedings in light of these reasons on the Amended Notice of Motion filed on 15 July 2015; 2. The disposition of any remaining matters arising on the first defendant's Amended Notice of Motion dated 15 July 2015; 3. Remittal of the proceedings to the Registrar's List for case management; and 4. Costs.
9. I propose to re-list the proceedings before me in relation to the above matters at 9:30am on Thursday, 18 February 2016.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 February 2016