Crossman v Taylor

IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 32 of 2010

JUDGE: LANDER J DATE: 4 JUNE 2013 PLACE: ADELAIDE

REASONS FOR JUDGMENT 1 On 5 April 2013, the fourth defendant, Mr Peter Walker, applied to the Court for orders that the plaintiff, Ms Lynette Crossman, pay his costs between 13 September 2011 and 15 March 2012 on an indemnity basis, and for an order that Mr Robert William Naudi and Mr Peter Ivan Macks, the joint and several trustees of the estate of Mr Brendan Taylor, who was the first defendant in the proceeding, pay Mr Walker's costs from 16 March 2012 to 12 June 2012 also on an indemnity basis. 2 During the hearing of the application, Mr Walker abandoned his claim for costs against Ms Crossman and instead accepted a costs order, made without opposition by the trustees of the estate of Mr Taylor, against the bankrupt's estate on a party/party basis. 3 There remains, therefore, for decision only, whether Mr Walker should have his costs against the trustees of the estate of Mr Taylor and, if so, on what basis. 4 Ms Crossman commenced this proceeding on 26 March 2010 against her former partner, Mr Taylor, and White Marina Pty Ltd, seeking orders pursuant to s 233 of the Corporations Act 2001 (Cth) (Corporations Act), and damages pursuant to s 87 of the Fair Trading Act 1987 (SA) (Fair Trading Act) or the Corporations Act. 5 On 30 March 2010, during the course of the proceeding, Besanko J made freezing orders restraining Mr Taylor from dealing with the assets identified in the orders except in accordance with the order. 6 One of Mr Taylor's assets at the time was a houseboat named "Flat White". Another asset of Mr Taylor's at the time included his shares in Maritime Ten Pty Ltd, which was the registered owner of another houseboat "White Water". He was the sole director of that company. Both houseboats were subject to separate chattel mortgages in favour of Capital Finance Australia Limited (Capital Finance). 7 On 29 June 2011, Besanko J published his reasons for finding that Ms Crossman had made out her claim that Mr Taylor had contravened the Fair Trading Act and was entitled to damages as a consequence of those contraventions: Crossman v Taylor (No 3) [2011] FCA 734. 8 After hearing the parties on 11 July 2011, Besanko J entered judgment for Ms Crossman in the amount of $955,305.76. He also ordered Mr Taylor to pay Ms Crossman's costs. 9 On 14 July 2011, Mr Taylor filed a notice of appeal against the orders made by Besanko J (the appellate proceeding). 10 On 9 August 2011, Ms Crossman caused a bankruptcy notice to be served on Mr Taylor. 11 On 10 August 2011, Capital Finance served a notice of intention to repossess Flat White relying upon Mr Taylor being in arrears in the sum of $7,036.53. The amount then owing to Capital Finance in relation to the chattel mortgage was approximately $180,000. 12 On 30 August 2011, Ms Crossman made two applications. First, she applied in the appellate proceeding for an order dismissing Mr Taylor's appeal or, in the alternative, for an order that the appeal be permanently stayed on the ground that Mr Taylor's appeal was an abuse of process. 13 She claimed in that application that Mr Taylor had, contrary to the freezing orders made by Besanko J, procured acts that resulted in the sale of the two houseboats by Capital Finance with the deliberate and contumacious intention of defeating his creditors and avoiding the freezing orders. 14 On 7 November 2011, that application was dismissed by the Full Court, although the Full Court indicated that the sale of the houseboats "certainly invites careful scrutiny": Taylor v Crossman [2011] FCAFC 139 at [31]. 15 The second application made on 30 August 2011 was an ex parte application in this proceeding for orders including an order that Mr Taylor provide an affidavit stating the circumstances in which he sold Flat White. 16 In an affidavit filed in support of that application, Ms Crossman said that she had spoken to an officer of Capital Finance on 29 August 2011 and had been told that Mr Taylor had sold Flat White on 22 August 2011. 17 On 31 August 2011, Besanko J ordered Mr Taylor to file an affidavit by 2 September 2011 addressing the status of his compliance with the freezing orders, disclosing his assets, providing details of the sale of the two houseboats, and providing details as to whether the existence of the freezing orders was made known to the purchasers including Mr Walker. 18 On 2 September 2011, Mr Taylor swore an affidavit in which he said he was unable to meet the lease payments for Flat White which were in the sum of $5,945.62 per month and, as a consequence, Flat White was repossessed by Capital Finance and sold. 19 On 5 September 2011, the time for compliance with the order made on 31 August 2011 was extended until 9 September 2011. 20 Also on 5 September 2011, Besanko J made an order joining Jacali Investments Pty Ltd (Jacali Investments) and Mr Walker as the defendants, restraining Jacali Investments from removing White Water from Australia or diminishing its value, and restraining Mr Walker from similarly dealing with Flat White. 21 In other affidavits filed in the proceeding, Mr Taylor had deposed that he had previously put the houseboat on the market at an asking price of $675,000 and that a realistic sale price would be between $450,000 to $650,000. 22 On 9 July 2011, which was two days before Besanko J made his orders entering the judgment sum of Ms Crossman, Mr Taylor inserted an advertisement in Adelaide's newspaper, "The Advertiser", which was headed "$425,000 due to forced sale". The advertisement represented that the houseboat would be sold with over $90,000 confirmed forward bookings. 23 Mr Taylor separately asserted in his statement of assets and liabilities that the houseboat was valued at $365,000. 24 In fact, on 22 August 2011, Flat White was sold to Pee Vee Nominees Pty Ltd (Pee Vee Nominees), a company controlled by Mr Walker, for $180,000. Pee Vee Nominees, trading as "Fantasy Houseboat Holidays", agreed to lease Flat White back to Mr Taylor for three years at monthly lease payments of $5,133.33. 25 At the time judgment was entered by Besanko J, Maritime Ten Pty Ltd, of which Mr Taylor was the sole director, was the registered owner of White Water. That houseboat had been built in April 2006 at a cost of $660,000 and a further $40,000 approximately was spent on fittings and furnishings. That houseboat was also subject to a chattel mortgage with Capital Finance. That houseboat was sold in July 2011 and was also leased back by Mr Taylor following the sale. 26 The two houseboats were sold to people known to Mr Taylor. 27 On 10 January 2012, Mr Walker filed an interlocutory application seeking to discharge and/or vary the freezing orders. That application was supported by an affidavit of Mr Walker. The application was never heard. 28 On 5 March 2012, a sequestration order was made against Mr Taylor's estate on the judgment obtained by Ms Crossman against Mr Taylor. Mr Naudi and Mr Macks were appointed the joint and several trustees of Mr Taylor's estate. 29 On 16 March 2012, the trustees in bankruptcy gave an undertaking to the Court as to damages and the freezing order directed to Mr Walker was continued, and Pee Vee Nominees was also restrained from dealing with Flat White. 30 Other orders were made to allow the trustees to take possession of Flat White and operate the houseboat, but on condition that the lease payments were paid into Court. 31 On 17 April 2012, the freezing orders were continued but the trustees were directed that if they were minded to bring a proceeding under s 120 or s 121 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) against Mr Walker, Pee Vee Nominees or Capital Finance, that those proceedings be brought by no later than 8 May 2012. 32 On 15 May 2012, the trustees disclaimed the lease from Pee Vee Nominees to Mr Taylor. 33 On 18 May 2012, no proceedings having been issued, the freezing orders were discharged. 34 Mr Ross-Smith, who appeared for Mr Walker, sought an order for costs against the trustees. He said that his client had been successful in the proceeding and that in those circumstances the trustees were obliged to pay his client's costs and, because of their conduct, the order should be on an indemnity basis. 35 He contended that his client would not receive his costs if an order were made that the costs were paid out of Mr Taylor's bankrupt estate. He contended that his client had been successful, because proceedings that were later brought by the trustees against Pee Vee Nominees and Capital Finance were settled on the basis that the trustees discontinued against Pee Vee Nominees. The trustees received an amount of $120,000 from Capital Finance, which I think reflected Capital Finance's assessment of the risk of it being found to have sold the houseboat at an undervaluation, in breach of the equitable duties it owed Mr Taylor. 36 The circumstances surrounding Mr Taylor dealing with his own assets raises strong suspicion that Mr Taylor dealt with his assets to prevent Ms Crossman from recovering on the judgment. Effectively, Mr Taylor circumvented Besanko J's freezing orders made in 2010 by not meeting payments to the chattel mortgagee and thereby giving the chattel mortgagee, Capital Finance, a right to repossess and sell the two houseboats. 37 Having put himself in that position, Mr Taylor then introduced two purchasers to Capital Finance, both of whom were known to him. Those two purchasers, one of whom was Mr Walker who controlled Pee Vee Nominees, bought the two houseboats at the amount owing to Capital Finance. 38 The purchasers then leased the two houseboats back to Mr Taylor at a rental price not much less than that which Mr Taylor had been paying Capital Finance under the chattel mortgage. 39 Apparently Mr Taylor was able to pay those lease payments, but not the finance payments which, as I have said, were not much different. 40 The effect of the two transactions was that Mr Taylor remained in possession of the two houseboats. The legal position had changed from ownership to leasehold. If he had not entered into those two transactions, the houseboats would have been available in his bankrupt estate and would no doubt have been sold, and he would not in all probability have become the lessee of the houseboat. 41 The effect of these transactions was to put him in an advantageous position to the detriment of Ms Crossman. 42 In my opinion, Ms Crossman was entitled to suspect that these transactions had been entered into for the purpose of Mr Taylor avoiding the judgment debt and, as a consequence, she was entitled to seek the interlocutory injunction that she did which was granted on 5 September 2011. 43 When the trustees were appointed on 5 March 2012, they were entitled in my opinion to make inquiries to determine whether the transactions contravened either s 120 or s 121 of the Bankruptcy Act. They proceeded expeditiously. 44 They received no cooperation from Mr Taylor or, during the relevant period, from Capital Finance. True it is that during that period Mr Walker, on behalf of himself and Pee Vee Nominees, claimed that he was not a party to a breach of the Bankruptcy Act, but the trustees were entitled, in my opinion, to test that against whatever evidence they could find in the short time that was available to them. 45 Eventually they made the decision that they did not have sufficient evidence to bring a proceeding and allowed the interlocutory injunction to be discharged. 46 Later they formed the opinion that there was sufficient evidence to bring a proceeding, which they did but eventually that was settled after Capital Finance admitted, at a very late stage in the proceeding, that it did become the owner of Flat White and that it did sell the houseboat pursuant to the chattel mortgage for what turned out to be an undervaluation. 47 Mr Ross-Smith contended that the trustees were obliged to pay the costs because they did not, immediately upon being appointed, apply to the Court for the discharge of the orders. That default, so it was claimed, was enough to make them liable for the costs, and the fact that they sought the continuation of the orders pending their inquiry made them liable for indemnity costs. 48 That contention, in my opinion, must be rejected. It would be an impossible situation for a trustee appointed to the bankrupt estate of a party to a proceeding to be made personally liable as soon as the trustee was appointed for the consequences of the conduct of the bankrupt. 49 A trustee must be entitled to make inquiries in relation to the proceeding, and of and concerning the bankrupt's estate, to determine whether it is in the interests of the bankrupt's creditors to seek to continue an interlocutory injunction that has been made prior to their appointment. 50 In my opinion, it was Mr Taylor's conduct that caused Mr Walker to be joined as a party to this proceeding and, in those circumstances, the order for costs that should be made is against the estate of the bankrupt. 51 I therefore dismiss the application and order that Mr Walker's costs of the proceeding, other than the costs of this failed application, be paid out of the bankrupt estate of Mr Taylor on a party/party basis. 52 Mr Walker should pay the trustees' costs of this application on a party/party basis. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.