Coshott v Official Trustee in Bankruptcy, in the matter of the Bankrupt Estate of Michael Petrovic Lenin

Background 7 On 4 December 2015, the applicants commenced proceedings in the Supreme Court of New South Wales against the executrices of the Estate of Michael Petrovic Lenin (the executrices) in relation to debts in the nature of legal costs said to be outstanding to a partnership between Mr Coshott and his wife (the earlier proceedings). It was asserted that the executrices were aware of the debts and had nevertheless distributed the estate. Each debt arose from an invoice dated in 1992 or 1993. 8 The executrices pleaded s 14(1)(a) of the Limitation Act 1969 (NSW) in their defence. In reply, the applicants asserted that they had a lien over documents and that the debts were therefore "saved" by s 68 of the Limitation Act. 9 The earlier proceedings were transferred to this Court in August 2017. 10 On 9 October 2017, at the suit of the executrices, an order was made for the administration of the estate under Part XI of the Bankruptcy Act 1966 (Cth) and the respondent, the Official Trustee in Bankruptcy (the Official Trustee) became trustee of the estate. 11 The earlier proceedings came before Lee J on 6 April 2018, who ordered that the question of whether s 68 of the Limitation Act had the effect contended for by the applicants be dealt with as a preliminary issue. The executrices remained the defendants to what by then appeared to be an action in devastavit. 12 The preliminary question was outlined in [16] of the primary judge's decision as follows: Whether, as a matter of law, section 68 of the Limitation Act 1969 (NSW) has the effect that given the lien that has been maintained, the Respondents (as executrices of the Estate of the Deceased) were liable to pay the Second Applicant for any debts in respect of the invoices listed in Schedule 1 to the Agreed Statement of Facts. 13 The Official Trustee was not a party to the earlier proceedings. He took the position that leave pursuant to s 249(3) of the Bankruptcy Act was required and had communicated that view to the parties prior to the hearing without reaching agreement. 14 The Official Trustee then appeared before Lee J on the day fixed for the hearing of the preliminary issue. Senior Counsel for the applicants took the view that leave was not required, but rather than use the time to resolve that argument, consented (as did the executrices) to leave being granted as the most expeditious course. Senior Counsel also expressed the view that the Official Trustee should be bound by the Court's decision when and if a proof of debt was lodged. At least on one view, the Official Trustee accepted that and leave under s 249(3) of the Bankruptcy Act was granted on that basis. I will return to just what was agreed. 15 The preliminary issue was determined against the applicants and the earlier proceedings were dismissed on that day. The decision is reported as Coshott v Parker [2018] FCA 596. 16 The applicants appealed the decision dismissing the earlier proceedings on 14 May 2018 and also lodged a proof of debt on 16 May 2018. On 15 June 2018, the Official Trustee rejected that proof. 17 On 28 June 2018, the applicants commenced the proceedings which culminated in the judgment against which the applicants now seek to appeal. 18 In the meanwhile, on 8 February 2019 the Full Court dismissed the applicants' appeal from the decision of Lee J. The judgment of the Full Court is reported as Coshott v Parker [2019] FCAFC 14.

Amendment to the application 19 In the lead-up to the hearing before me today, submissions were prepared and filed personally by the second applicant. When the matter was called today, Mr Cook of counsel appeared on behalf of the applicants and explained that he had only recently been briefed in the matter. He sought leave to amend the applicants' application to extend time and for leave to appeal in the following respect: he sought the deletion of the existing grounds as set out in the application as paragraphs 1, 2 and 3 under the heading "Grounds of Application" on page 2 and the insertion of the following grounds: 1. An extension of time should be granted in circumstances where: a. The delay is very minor; b. The delay was inadvertent; c. Refusing the grant to the extension will cause substantial injustice to the applicants as the orders from which an appeal is sought are "final orders" and the effect of refusing an extension of time will shut the applicants out of having its claim determined on its merits; d. There is no known prejudice to the respondent occasioned by the delay. 2. Leave to appeal should be granted in circumstances where: a. The decision from which leave to appeal is sought is attended by sufficient doubt to justify it being reconsidered by the Full Court; b. The orders in respect of which leave to appeal is sought are 'final' orders such that refusing to grant leave to appeal will have the effect of finally determining the applicants' claim in those proceedings otherwise than on its merits. That effect will cause significant injustice to the applicants; ... 20 Mr Cook also sought on behalf of the applicants leave to make submissions beyond the written submissions and the draft notice of appeal that had been filed. The submissions which I will deal with in more detail later were the following. Firstly, that the primary judge had mischaracterised the nature of the earlier proceedings. Secondly, that the primary judge had mischaracterised the trustee's involvement in the earlier proceedings, in particular the trustee's commitment to be bound by the judgment on the preliminary question in the earlier proceedings, or the primary judge had mischaracterised the applicants' acceptance of the judgment on the preliminary question as being applicable to the issue before the judge. And thirdly, the primary judge had erred in holding that the debt in question did not exist. Mr Cook also sought leave to tender a few pages from the transcript of the hearing before Lee J. 21 Mr Spencer of counsel who appeared for the Official Trustee accepted that he would not be prejudiced if leave was granted in those three identified respects such as to require an adjournment. 22 I weighed up considerations of prejudice to the parties and the administration of justice and, in particular, the waste of time of the Court and the difficulties of finding a subsequent date to hear the matter and granted leave. 23 For the sake of completeness, the draft notice of appeal that had been filed with the applicants' application was relevantly in following terms: Grounds of Appeal 1. His Honour erred in dismissing proceedings NSD1133/2018 as the proceedings had no reasonable prospect of successfully prosecuting the proceeding 2. His Honour erred in dismissing proceedings NSD1133/2018 as being an abuse of process 3. His Honour failed to deal with/decide points raised by the applicants in their submissions 4. His Honour allowed the respondent to raise issues which were not in FCR 26.01(2) affidavit and did give summary judgment based on those issues

Extension of time 24 It is well-settled that the factors to be taken into account when considering whether an extension of time should be granted include the extent of the delay, the explanation for the delay, any prejudice a respondent might suffer because of the delay, and the merits of the proposed appeal: Hunter Valley Developments Pty Ltd v Cohen [1984] FCA 176; 3 FCR 344 at 348-349, adopted by the Full Court in Parker v R [2002] FCAFC 133 at [6]. It was put by Spender, O'Loughlin and Dowsett JJ in Parker at [6] as follows: 1. applications for an extension of time are not to be granted unless it is proper to do so; the legislated time limits are not to be ignored. The applicant must show an "acceptable explanation for the delay"; it must be "fair and equitable in the circumstances" to extend time; 2. action taken by the applicant, other than by way of making an application for review, is relevant to the consideration of the question whether an acceptable explanation for the delay has been furnished; 3. any prejudice to the respondent in defending the proceedings that is caused by the delay is a material factor militating against the grant of an extension; 4. however, the mere absence of prejudice is not enough to justify the grant of an extension; and 5. the merits of the substantial application are to be taken into account in considering whether an extension of time should be granted. 25 With some justification, the Official Trustee criticises the applicants' explanation for the delay as being terse. It is contained in only one paragraph of Mr Coshott's affidavit as follows: On 8 April 2019, I did attend the New South Wales Registry of this Court and sought to file a Notice of Appeal from the judgment in NSD1133/2018. The filing of the Notice of Appeal was rejected on the ground that leave was required to appeal and, in addition, an extension of time to file an application for leave to appeal was required as time to seek leave had expired. 26 As I have shown, the day that the applicants sought to file a notice of appeal was the last day to file an application for leave to appeal, which they then did the following day. In the circumstances, they are to be criticized not so much for their dilatoriness but for their inattention to the question of whether leave is required. 27 The view that I take is that the delay is so short as to be of little consequence so there is no reason why an extension of time should not be granted and the reason for that delay is, in the circumstances, sufficiently explained. I will according grant such an extension.

Leave to appeal 28 The principles to be applied in determining an application for leave to appeal are stated in Bienstein v Bienstein [2003] HCA 7; 195 ALR 225 per McHugh, Kirby and Callinan JJ at [29] as follows: An applicant for leave must establish that the decision in question is attended with sufficient doubt to warrant the grant of leave. The applicant must also show that substantial injustice will result from a refusal of leave to appeal. 29 Therefore, there are two considerations. First, whether in all the circumstances of the case, the decision is attended by sufficient doubt to warrant it being reconsidered by the Full Court; and second, whether substantial injustice would result if leave were refused supposing the decision to be wrong. 30 These two criteria, however, do not represent a "hard and fast rule" (Samsung Electronics Company Ltd v Apple Inc [2011] FCAFC 156; 217 FCR 238 at [29] per Dowsett, Foster and Yates JJ), but they nevertheless provide "general guidance which the Court should normally accept" (Rawson Finances Pty Ltd v Federal Commissioner of Taxation [2016] FCAFC 95; 103 ATR 630 at [39] per Robertson, Moshinsky and Bromwich JJ).

First submission 31 The applicants' first submission, which went to the question of summary dismissal, was that the decision in the earlier proceedings that the executrices were not liable to the applicants on the claim against them was made in the context of s 82 of the Probate and Administration Act 1898 (NSW), and not in the context of s 82 of the Bankruptcy Act which was the relevant provision in respect of the claim against the trustee. 32 In that regard, it was submitted that in the earlier proceedings that had been decided there was a debt, albeit with limitations, and that that was all that was required to prove it under s 82 of the Bankruptcy Act. Emphasis was placed on the words "all debts and liabilities, present or future, certain or contingent" in s 82(1) of the Bankruptcy Act. 33 Particular significance was placed on the following passage from the judgment of the Full Court in support of the proposition that it had been established that the applicants do have a debt notwithstanding the passage of time because of the saving provision constituted by s 68 of the Limitation Act 1969 (NSW): 37 As previously noted, the appellant did not take issue with the primary judge's conclusion (at [24] of his Honour's reasons) that the right and title to the debts that the lien supported were not extinguished "but only insofar as it is necessary to maintain the lien (that is, to exercise whatever rights the particular lien provides, given its nature)". 38 In this case, the debts were "saved from extinction … but only so far as is necessary to support and give effect to the lien" (s 68), that is, only to permit the appellant (or Mr Coshott) to retain possession of the deceased's papers. The parties were agreed (or it was the consequence of their agreement) that the debts were not "saved from extinction" so far as concerned the appellant's right to sue to recover the debts. Nor was it suggested that the appellant could enforce the debt in any other way. 34 The primary judge dealt with the same submission as follows: 43 This submission misunderstands his Honour's reasoning at [24] and ignores that of the Full Court at [38] (set out at [33] above). The right and title of Mr and Mrs Coshott to the debts is extinguished. That occurred by operation of s 63 on the expiry of the limitation period. The effect of s 68 is that the right and title to the debts is "saved from extinction … but only so far as is necessary to support and give effect to the lien". In all other respects, it is extinguished. If Mr Lenin had sought his documents after expiry of the limitation period, then Mr and Mrs Coshott could have resisted giving them to him because s 68 would have operated to "save" the extinguishment of the debts which had been effected by s 63(1) upon expiry of the limitation period, "but only so far as is necessary to support and give effect to the lien". In fact, however, that never happened and there is nothing to suggest his successors have any interest in documents relating to litigation now years old. … 45 Mr Coshott submitted, correctly, that neither Lee J nor the Full Court had directly decided whether there were debts which fell within s 82 of the Bankruptcy Act. That section relevantly provides: 82 Debts provable in bankruptcy (1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy. 46 Whilst that precise question was not decided, Mr and Mrs Coshott "have no reasonable prospect of successfully prosecuting the [current] proceeding", within the meaning of s 31A(2)(b) and Rule 26.01(1)(a), because it is inevitable that the Court will conclude that Mr and Mrs Coshott's right and title to the debts was, on expiry of the limitation period, extinguished by s 63(1) of the Limitation Act such that there is now no debt which falls within s 82(1) of the Bankruptcy Act. 35 There is no separately identifiable debt that can be proved under s 82 of the Bankruptcy Act. The characterisation of what remains in the hands of the applicants by the Full Court, which was not under question before the primary judge, leave them with nothing to claim against the trustee in respect of which there is any corresponding liability. If there was no liability of the executrices then, equally, there is no liability of the trustee, and if there is no liability then there is no "debt" that can be admitted to proof under s 82 of the Bankruptcy Act. 36 Counsel for the Official Trustee referred me to the following passage from the judgment of Kitto J in Motor Terms Company Pty Limited v Liberty Insurance Limited (in liquidation) [1967] HCA 9; 116 CLR 177 at 181: The fundamental notion that special modes of administering assets are for the benefit of those creditors only whose ordinary rights of recovery are withdrawn from them upon the initiation of the special administration was applied by the Court of Chancery in relation not only to bankruptcies and insolvencies but to trusts for creditors and administration decrees in respect of deceased estates. It is a necessary corollary that a person is not a creditor in the relevant sense if, at the time when a right to come in to receive payments under an official administration of the debtor's assets supersedes an existing right of action or suit, his right of enforcement by action or suit is barred by the Statute of Limitations (if the debt is legal), or would be denied by a Court of Equity on the analogy of the Statute (if the debt is equitable). This was held to be so in bankruptcy in Ex part Ross; Re Coles (1827) 2 Gl. & J. 330, and in administration proceedings in In re Greaves; Bray v Tofield (1881) 18 Ch. D. 551. See also In re Benzon; Bower v Chetwynd [1914] 2 Ch. 68 at p. 75, where the reference to the commencement of the bankruptcy seems clearly to mean the commencement of the administration in bankruptcy. 37 It is abundantly clear that for a very long time the position has been that if a debt is statute barred against the bankrupt before the onset of bankruptcy then it is equally statute barred against his bankrupt estate. There is nothing in s 82 of the Bankruptcy Act to indicate any different consequence or intention. 38 Mr Cook submitted that since Motor Terms was decided on the law prior to the 1966 Bankruptcy Act it does not take account of the provisions of s 82 of that Act which are applicable to any debt, including a debt of the limited nature that is left. 39 The first Commonwealth bankruptcy legislation was the Bankruptcy Act 1924 (Cth). It was substantially based upon the 1883 UK Act (and the later 1914 UK Act) although it incorporated some aspects of the then State legislation: Morris Finance Ltd v Brown [2017] FCAFC 97 per Beach, Markovic and Moshinsky JJ at [32]. 40 The current Bankruptcy Act repealed the Bankruptcy Act 1924. Section 81(1) of the earlier Act dealt with the proof of debts as follows: All debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the date of the sequestration order, or to which he may become subject before his discharge by reason of any obligation incurred before the date of the sequestration order, shall be deemed to be debts provable in bankruptcy … 41 It is clear that s 81 of the Bankruptcy Act 1924 is in materially the same terms as s 82 of the current Bankruptcy Act. It cannot therefore be said that what was said by Kitto J in Motor Terms does not apply under the current provision. 42 In the circumstances, I am not persuaded that the judgment of the primary judge is attended by sufficient doubt to warrant leave to appeal against the summary dismissal of the applicants' proceeding. 43 From that it follows that it is not necessary for me to consider whether there would be any utility in an appeal on the assumption that the appeal would succeed. Strictly speaking, it is also not necessary for me to go on and consider the challenge to the alternative basis for the dismissal of the proceeding, namely abuse of process. I will however consider that ground for completeness.

Second submission 44 The applicants' submitted that the primary judge erred in his characterisation of what was agreed, or accepted, before the primary judge in the earlier proceedings. The relevant part of the transcript is at page 4, line 5 to page 5, line 35, which is as follows: MR CHESHIRE: Your Honour, just, if I may, one issue that does arise, which is the trustee in bankruptcy - whilst leave may be granted, the trustee in bankruptcy is not a - or the official trustee is not a party to the proceedings. Now, at the moment his concern was there are going to be findings about debts that concern the bankrupt estate. Now, if he's not a party to the proceedings or agrees to be bound by those findings, then arguably he would not be bound by them and he would be entitled to take different points above and beyond those that are argued in front of your Honour. It seems to me, in my submission, that if the trustee says, well, leave should be granted because they concern the debts about which I'm interested, the corollary should be "but I will agree to be bound by your Honour's findings", which can either be done by, as it were, agreeing to be bound or simply by being formerly joined to the proceedings as a second - or third respondent. I don't seek - and I will make clear I don't seek any relief against the trustee, but one could imagine a scenario where if I win against the first and second respondents, but can't enforce the debts, at least I'm entitled to say to the trustee, "Well, if you do recover any moneys in the bankruptcy, I should be entitled to a portion of those." I wouldn't want, as it were, the fight to be resurrected at that point. HIS HONOUR: Effectively, is that a roundabout way of saying that - the only circumstance where that could bias is if you put in a proof in respect of this amount. MR CHESHIRE: Yes. HIS HONOUR: And would be an argument in relation to whether or not that proof ought be accepted. MR CHESHIRE: Yes. HIS HONOUR: Is there any issue in relation to that? I mean, you're not going to sit there and then come back if a proof is lodged in circumstances outlined by Mr Cheshire and say that, well, we don't accept the findings that I've made in relation to this. MR McNALLY: Not that I would expect, your Honour. My client has made the decision not to take an active role in this matter on the basis that the respondents are the contradictors to the whole claim and that will - that your Honour will be determining. HIS HONOUR: I understand that, but at the end of the day I have to be guided by the overarching purpose, which is the inexpensive - the just, inexpensive resolution of the dispute, and the dispute here is one which not only is important for determining the separate issues, but the so-called disputing that the resolution of the contested issues may be relevant to whether or not a proof should be accepted. Now, I don't want to go through a Kabuki dance, spending time dealing with this and then find out that the dispute is going to be reagitated at some point later down the track. MR McNALLY: Yes. Can I say, your Honour - - - HIS HONOUR: If that's the case, then I really think the trustee, given the special duties of the trustee, should be able to indicate one way or the other now whether or not they are not going to reagitate these things because if not, then perhaps I should join you. MR McNALLY: Yes. My instructions are the trustee's concern was about taking an active role in this matter where it had no funds in the estate. HIS HONOUR: Quite. MR McNALLY: To the extent that these are claims involving provable debts, my client was content to leave those issues to be resolved. HIS HONOUR: Well, if they're content, then I'm going to note that on the transcript. MR McNALLY: That would be appropriate, your Honour. HIS HONOUR: All right. Thank you. All right. Now, the transcript will record that exchange and the indication of the trustee that they're content to effectively sit on the sidelines and allow this issue to be resolved without any intention of reagitating these proceedings, and in those circumstances I propose to make an order that to the extent leave be necessary, the applicants have leave nunc pro tunc, pursuant to section 249(3) of the Bankruptcy Act 1966 (Cth), to take fresh steps after 9 October 2017 and continue the applicant's claim in the Federal Court of Australia proceedings number NSD 1460 of 2017 against the respondents Michelle Lena Parker and Christina Marie Collins for the purposes of the determination of the issue referred to in order 1 of the orders of the court made on 6 April 2018. All right. Well, you're excused, Mr McNally. 45 The primary judge in this proceeding characterised that exchange as follows at [55]: The Official Trustee agreed to be bound by the result of the determination of the preliminary issue by Lee J, at the insistence of Mr and Mrs Coshott. For practical purposes, the impression telegraphed on Mr and Mrs Coshott's behalf, objectively assessed, was that the preliminary issue, if decided against them, would resolve the question of whether they had debts which they could recover from the bankrupt estate of Mr Lenin. Mr and Mrs Coshott secured the result that, should they be successful with respect to the preliminary issue, the Official Trustee would be bound by the result; that is, the Official Trustee would not be able to say otherwise than that the debts were provable. 46 The primary judge then held as follows at [57]: The result is that Mr and Mrs Coshott, the executrices and the Official Trustee each conducted themselves on the basis that the preliminary issue would resolve the question of whether Mr and Mrs Coshott could recover the debts either from the executrices or prove the debts in the bankrupt estate. 47 In my view there was no mischaracterisation by the primary judge on the question of the Official Trustee and the applicants being bound by the decision on the preliminary question in the event that the applicants subsequently lodged a proof of debt. To now allow the applicants to reagitate the question of the liability, if any, that corresponds to the lien that, on the assumptions underlying the preliminary question, they still hold is clearly an abuse of process. 48 In the circumstances the primary judge's conclusion with regard to abuse of process is not attended with sufficient doubt to warrant leave to appeal. 49 Finally, the applicants submitted that the primary judge mischaracterised the finding of the FCAFC as being that the debt was extinguished when it had in truth been "saved from extinction" by s 68 of the Limitation Act and therefore it did exist. 50 At the relevant parts of his judgment, namely paragraphs [42] to [46], the primary judge clearly appreciated the nature of what was saved by s 68, and that was consistent with and in reliance on what had been held by the Full Court. There is no characterisation by him of the debt no longer existing that operates on his reasoning that does not take account of the limited way in which the "debt" lives on, i.e. only in as much as it keeps alive the solicitor's lien over books that arose from the original debt.

Conclusion 51 I therefore conclude that the application for leave to appeal must be dismissed. I certify that the preceding fifty one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stewart.