Donnelly v John Joseph Scott and Another

REASONS FOR JUDGMENT (delivered orally and revised) 1 This is a notice of motion brought by Messrs Scott and Slattery to adjourn generally the summons served on each of them to attend and be examined under s 81 of the Bankruptcy Act 1966 (Cth). The notice of motion also seeks orders that each summons not be restored until after the completion of the taking of accounts by the Supreme Court of New South Wales Equity Division in proceedings 2000 of 1998. Mr Donnelly, who obtained the orders for examination under s 81, is the trustee of one Kenneth Livingstone. 2 The background of this matter is best understood by an appreciation of the proceedings in the Equity Division, 2000 of 1998. These are proceedings which were commenced in 1998 by a Dr McMahon against Mr Livingstone as the first defendant, Mr Scott as the second defendant and a company called Ophix Finance Corporation Pty Limited (Ophix) as the third defendant. Mr Slattery is not a party to the proceedings. He apparently did not give evidence in those proceedings. Mr Donnelly is the trustee in bankruptcy of Mr Livingstone. 3 On 16 February 2001 Windeyer J delivered judgment in those proceedings. These reasons should be read together with his Honour's reasons for judgment which were exhibited in the material before me on the motion. I do not set out exhaustively the matters to which his Honour refers. A brief outline of the proceedings will suffice for today's purposes. Dr McMahon was a retired dentist. Mr Livingstone was his accountant. Dr McMahon provided Mr Livingstone with a series of deposits of money for the purpose of investment over a period of about 14 years commencing in April 1982. The last recorded deposit was apparently made on 21 March 1996. The total amount of these deposits, with interest, was almost $2 million. 4 Mr Livingstone apparently paid this money, or most of it, into an account operated by Messrs Scott and Slattery. Mr Scott and Mr Slattery were also accountants and were Mr Livingstone's former employers. The account was referred to in Windeyer J's judgment as "the Scott and Slattery clearing account". Moneys from this account were lent to Ophix, which either lent the money to borrowers or used it to finance its own investments and development ventures. Mr Scott and Mr Slattery were the shareholders and directors of Ophix. In short, Mr Livingstone was unable to return the funds to Dr McMahon. 5 Dr McMahon sued Mr Livingstone and the other defendants alleging breach of fiduciary obligation and breach of trust. This much is plain from the reasons for judgment of Windeyer J. The upshot of the hearing was that his Honour made orders for the taking of accounts to determine the balance due by Mr Scott and Ophix to the estate of Mr Livingstone. His Honour also made an order that Mr Livingstone's trustee in bankruptcy be notified of the reasons and be asked to elect whether he, that is Mr Donnelly, the trustee in bankruptcy of Mr Livingstone's estate, wished to be joined as a plaintiff or be joined as a defendant to the accounting. This was in obvious recognition of the interest of Mr Donnelly as trustee of Mr Livingstone's estate as to the subject matter of the inquiry to be undertaken in the accounts. 6 Orders were shortly thereafter made which added Mr Donnelly as a defendant in the proceedings. Orders were made for the proceedings to be referred to the Master in Equity on the statement of account verified by Mr Scott from the previous year, to determine the balance due by Mr Scott and Ophix to the estate of Mr Livingstone. Various other directions were made to that end. There was an order that Mr Scott and Ophix pay to the trustee in bankruptcy of Mr Livingstone's estate the amount certified on the taking of accounts. 7 The orders also permitted the trustee in bankruptcy to file a cross-claim in the form initialled and placed with the file. A cross-claim has been filed and is in evidence before me. It is in short form reflecting a claim for such moneys as found to be owing after the taking of accounts. The cross-claim, by Mr Donnelly, is against Mr Scott and Ophix. 8 The parties have filed written submissions and addressed me orally through Mr Aldridge for Messrs Scott and Slattery and Mr Skinner for the trustee. The submissions on behalf of Mr Scott and Mr Slattery argue for the proposition that this is a clear case where the Court should adjourn the examinations until the process before the Equity Division has concluded. It should be noted that this is not put on the basis that the summonses constitute an abuse of process or that the filing of the summonses constitutes an abuse of process or that the trustee is seeking to use them improperly. The written submissions qualify those propositions by the phrases "at this stage" and "now". However, Mr Aldridge before me on a number of occasions quite properly indicated that it was not part of the matter before me that there had been any abuse of process and so I do not see these temporal qualifications in the written submissions as raising any particular issue. I proceed on the basis that it is not said that Mr Donnelly or those acting for him is or are in any way acting improperly. 9 The proposition that this is a clear case or a case for an adjournment is founded on what is said to be the effective identity between the issues likely to be the subject of examination under s 81 and the proceedings for the account in the Equity Division. The principles governing the issue and utilisation of summonses under s 81 of the Bankruptcy Act were set out by a Full Court of this Court in Karounis v Official Trustee (1988) 19 FCR 330 in a joint judgment of the Court constituted by Forster, Woodward and Spender JJ. 10 There, in particular at pages 335 and 336, the relevant principles were set out in 12 numbered paragraphs. I do not set out all these paragraphs but rather refer in particular to paragraphs 7, 8, 9, 10, 11 and 12. These were in the following terms: 7. If a person summoned believes that compliance with the summons would be oppressive or vexatious, he can apply to the court to have the summons set aside or adjourned to a more convenient time. Such an application to the court will usually be determined on a broad view of the issues in the particular case and a weighing of competing principles: see Re Castle New Homes Ltd [1979] 1 WLR 1075; 2 All ER 775 and cases there cited; ReJohn Arnold's Surf Shop (1979) 23 SASR 222; Re Nalanda Pty Ltd [1983] 1 Qd R 269. 8. Discharge or adjournment of a summons may be appropriate where there is litigation pending or likely to be instituted and it is alleged that: (a) the summons is being improperly sought as an aid to that litigation (cf Re Northern Australian Territory Co (1890) 45 ChD 87; Bletchley Boat Co Ltd [1974] 1 WLR 630 at 637; [1979] 1 All ER 1225 at 1232), where ordinary procedures of discovery, interrogation or subpoena would be fairer and more appropriate; or (b) it would be more just and equitable to defer the examination under s 81 of the Act until the particular piece of litigation has been disposed of. 9. If such an application is made to the court by a person summoned, the court must consider afresh, on the material before it, whether the summons should be set aside or adjourned to a more convenient time. It is not merely deciding whether, on the material before the Registrar, he correctly exercised his discretion. 10. There is no difference in principle between cases where proceedings have actually been instituted and where they are merely in contemplation (see ReHugh J Roberts Pty Ltd (In Liq) (1970) 91 WN (NSW) 537 at 541); but where litigation is afoot the issues will be clearer, procedures of discovery, inspection and subpoena available, and a time of hearing more certain. Any of these factors may affect the court's decision in a particular case. 11. Where litigation is pending or likely to be brought and the information sought under a summons could affect that litigation, there is no presumption that the summons will be set aside or adjourned. It would normally only be set aside if the application were defective in some way or the court found some improper motive behind the application. It would be adjourned if the balance of justice and convenience in the particular case so required. In some cases it might be appropriate to defer examination on a particular topic. In all cases the Registrar or the court will be careful to see that injustice is not occasioned in the course of examination by the particular questions asked: see, for example, Re Anderson; Ex parte Official Receiver (1937) 10 ABC 284 at 288-289; Re Andrews (1958) 18 ABC 181 at 184-185; Re Roberts (supra) at 539, 542. 12. Both the Registrar and the court will give due weight to the fact that a summons is sought by the Official Trustee, who will not be presumed to have acted unfairly or for an improper purpose except on convincing evidence: Re Price (No 3) (1948)14 ABC 152 at 141. The same is true of an official liquidator: see Re Castle New Homes Ltd (supra) at 791; Re John Arnold's Surf Shop (supra) at 229-230. But an application by the Official Trustee will still be subject to proper scrutiny and will be refused if the Registrar or court is not satisfied that it should be granted. 11 In argument before me it was effectively agreed that my task is to assess broadly whether it would be more just and equitable to defer the examinations until the taking of the accounts or not: see in particular paragraphs 8 and 11 in Karounis. In the light of these propositions I will consider the several matters nominated by counsel for Mr Slattery and Mr Scott for consideration. 12 This issue in recent years has attracted the attention of the courts, more frequently in the context of liquidator's powers under relevant company legislation: see for example Hong Kong Bank of Australia v Murphy (1992) 28 NSWLR 512 and Bell Group (in liquidation) v Westpac Banking Corporation [1998] FCA 849. Nothing in those cases complicates, in my view, the task of undertaking the exercise of the broad judicial discretion which I have identified. As the Full Court said in Karounis, an application of the kind before me will be determined on a broad view of the issues in the particular case. In many cases, an adjournment of a summons may be appropriate where there is litigation pending or likely to be instituted. However, it does not follow as a matter of course that, because there is a forum in which it is likely or it is the case that the issues will be ventilated, the trustee is then prevented from utilising his powers under s 81. 13 In the present case, if the trustee had been the moving party in the Supreme Court proceedings from the beginning and had chosen to bring relevant defendants to court and put them to the expense of the trial procedures in that court, there might be much to be said for the proposition that having chosen this field of battle, at this stage, he should remain where he originally chose to fight. However, the trustee was not the moving party in the above proceedings. Rather, the moving party was a creditor or possibly a creditor of the now bankrupt Mr Livingstone. I say possibly, because there is an issue as to whether Dr McMahon is properly analysed as a creditor of the estate of Mr Livingstone or as the beneficiary of a trust of which Mr Livingstone was trustee. In those circumstances questions arise, which may or may not be difficult, as to whether or not the property the subject of the trust properly falls within or without the estate of Mr Livingstone. 14 The trustee was brought into the proceedings late, at the point of the resolution of the questions of liability. The trustee, having been invited by Windeyer J, in effect has elected to take advantage of those proceedings at that point. Such a course was not only understandable, but prudent. While I use the verb "elected", which was the word used by Windeyer J in his orders, I do not view what Mr Donnelly did as a true illustration of the doctrine of election by adopting one inconsistent cause of action over another. This is not a case of the application of principles of election proper as set out in cases such as Sargent v ASL Developments (1974) 131 CLR 634. Further, Mr Slattery is not a party to the Equity Division proceedings. He may well be someone who has to give evidence in the accounting proceedings, but that is not at all clear to me at the moment. He did not give evidence before Windeyer J, I am told. It may be that he does not give evidence in the accounting procedure. 15 The accounting proceedings are not within the control of the trustee, or, at least, not within the sole control of the trustee. He is a participating party and they are at a stage which is not entirely mature. It is not clear to me how long they will take, nor is it entirely clear when precisely they will be heard, but I am prepared to assume that they will be heard later this year or perhaps early next year. 16 Importantly, there is an appeal which has been filed from the orders made by Windeyer J. It may be that that appeal process is either successful or, even if it is not successful, it may hold up or affect the conduct of the accounting procedure. 17 As to the trustee's participation in the taking of accounts, depending upon the procedure adopted for cross-examination, and, in particular, the control of cross-examination by different parties with a similar interest, it may be that the questioning of the parties to the accounting is substantially in the hands of parties other than the trustee. One cannot be clear about these things. Indeed, it is important to appreciate that at this stage the precise role the trustee will play in that accounting is not in any way crystal clear. 18 In the light of the fact that it is not said that the use of the s 81 summons is an abuse and upon the background of the kinds of issues displayed by the judgment of Windeyer J, I am far from persuaded that there is any just and equitable reason by Mr Scott and Mr Slattery should not undergo the process provided for by s 81, giving to the trustee, in proceedings of which the trustee has control, answers to questions, even if those questions and answers may significantly overlap with the Equity Division proceedings. 19 It may well be that the undertaking of the s 81 examinations facilitates the more rapid disposition of the Equity Division proceedings. It certainly may well be the case that the trustee, not having had the benefit of participation in the Equity Division proceedings thus far, will be better informed of what is likely to occur in the accounting proceedings. Indeed, Mr Skinner for the trustee indicated that the answers to questions in the examination proceedings may have a bearing on whether, and the extent to which, the trustee participates in the accounting proceedings at all. The fact that the questions will, to a significant degree, overlap with the subject matter of the accounting proceedings is not a basis for a conclusion that they in any way undermine or threaten the integrity of those accounting procedures in the Supreme Court. Indeed, it may be that they facilitate the accounting proceeding, as I have indicated. 20 It is put on behalf of Messrs Scott & Slattery that the s 81 proceedings could only possibly assist Dr McMahon, who, it is said, is necessarily a beneficiary of a trust of any funds recovered by Mr Donnelly. So, it is said, the examinations can be seen as not for the purposes of the general creditors of Mr Livingstone's estate, but for the purposes of another party and his recovery of property which is not strictly speaking part of the bankrupt's estate. If that could be clearly shown without any debate, it may be that that would lead to the conclusion that the utilisation of the summonses was a form of abuse foreign to the purposes of the general creditors, whom the trustee, in broad terms, represents. However, this body of propositions put on behalf of Mr Scott and Mr Slattery was contested by Mr Skinner. He pointed out that Mr Donnelly was not at the hearing proper and he did not agree that any recovery will necessarily be for the benefit of Dr McMahon. I am not in a position to answer that ultimate question. Nor is it appropriate that I attempt to do so. I do not see the judgment of Windeyer J as concluding this question, certainly not as against the trustee. 21 I think that the trustee is entitled to undertake responsible questioning which he thinks may be in the interests of general creditors. This questioning may well traverse subject matters that will be the considered by the parties in the accounting, but Mr Donnelly, not having been at the hearing, may well wish to understand better from questions and interrogation of which he has control, how the matter arose, the terms and obligations affecting the position of Mr Livingstone, and so his general creditors, and the status and nature of the transactions which were undertaken by Mr Livingstone with Messrs Scott and/or Slattery and/or Ophix. 22 It is not to be assumed that Mr Donnelly is acting unfairly or for an improper purpose. However, the conduct of the examination under s 81 will be subject to the scrutiny and control of the Registrar. Thus, even if I do not, as I do not propose to, stay the examinations, that is not an end to the control of the examinations. That control is manifested in, first of all, Mr Donnelly's recognition, as a responsible trustee, of the need to act properly and without abuse, a recognition of which I have no doubt he has. Secondly, the examinations will take place in the presence of the Registrar. Thirdly, there is ultimately the control of the Court. 23 The evidence which has been filed by Mr Scott and Mr Slattery amounts substantially to the proposition that there is an overlap of issues and there should not be what is referred to as a "dress rehearsal" for cross-examination. While I accept that there will be a significant overlap, for the reasons expressed above I do not see this as properly characterised or described as a "dress rehearsal." 24 There is no evidence before me as to any particular or personal financial injustice which will be suffered by either Mr Scott or Mr Slattery should the examinations go ahead. I do not need evidence that there will be some burden, and some burden in relation to legal costs. However, by identifying the fact that there is no particular evidence, I mean to focus on the fact that there is no particular matter of burden beyond what common sense dictates would occur to these particular gentlemen. 25 It is suggested that the lack of protection provided in relation to the privilege against self-incrimination under the examinations weighs in the balance against the examinations taking place. I do not agree. This is a consideration for recognising the public purpose of the examinations, and, if anything, it weighs in the balance, in my view, in favour of the examinations taking place. 26 As I have noted earlier, Mr Slattery was not a party and is not a party to the accounting procedure. Taking his position alone, there seems no reason to delay this examination; and if examination is to proceed in relation to Mr Slattery there is good reason, for the convenience of the trustee and the Court, that Mr Scott's examination should proceed at about the same time. 27 In dismissing this motion it should not be taken that I am forestalling or preventing any step in the future should Mr Scott or Mr Slattery see the position as having changed and further prejudice occurring. In saying that I am not expressing a view that I see this as a marginal case and one in which the balance could be tipped with a little more evidence. In my view the trustee is entitled to examine these people and justice and equity appears to be clearly on the side of the examinations taking place. 28 It sometimes seems unfair to litigants that trustees and liquidators have the wide powers of examinations they do. That is the product of legislative recognition of the public purposes behind the full and transparent examination of persons who may assist in the ascertainment, getting in and distribution of the estates the subject of insolvency regimes. Those wide powers, especially in the context of cognate litigation, come with co-relative responsibilities and obligations. For instance, if such powers are not availed of by trustees and liquidators, those whom they are suing may legitimately point to the choice of the non-exercise of the power in how evidence or other aspects of the litigation is or are to be treated. 29 Here, as I have indicated earlier, there is no suggestion of impropriety in the purpose of bringing the examinations and in the light of all the matters which I have discussed, taking into account all of the submissions put to me this morning and in writing, and taking into account the views of the Full Court of this Court in Karounis and Bell and the New South Wales Court of Appeal in Hong Kong Bank v Murphy, I am of the view that it would not be more just and equitable to defer the examinations under s 81 of the Bankruptcy Act until the accounting in the Equity Division is complete. 30 For those reasons I make the following orders: I dismiss the notice of motion dated 14 May 2001 brought by Mr Scott and Mr Slattery, and order that Mr Scott and Mr Slattery pay the costs of Mr Donnelly of that notice of motion. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.