Question 1: From the commencement of the Supreme Court proceedings in [September] 2006 until [their] final resolution in August 2009, has the respondent engaged in litigation on a substantially misconceived basis and in a manner which was unnecessary and extravagant?
157 The applicants' primary submission in this regard is that the respondent should not have engaged in adversarial litigation. Whilst they acknowledge that the Supreme Court proceedings can be considered to have been commenced by "the Ferella family", they submit that those proceedings were made necessary "only by the respondent's insistence that the Ferella family prove the provenance of the Point Piper [funds]".
158 In this connection the applicants submit that, when the respondent received and banked the Point Piper funds in June 2006, there were only three reasonable positions for it to adopt. First, if it was of the view that the Point Piper land had been beneficially owned by the applicants, the respondent was under a duty to administer the applicants' bankrupt estates "with alacrity", knowing that the undoubted surplus assets would bear interest for the Crown but not for the applicants: s 20J(1) of the Bankruptcy Act. Secondly, if the respondent was of the view that the Point Piper funds were a trust asset, with the respondent's only interest being a right of indemnity supported by a charge or right of lien over those funds, it should have retained a sum sufficient to cover the indemnity and paid the surplus to the trustee. Thirdly, if the respondent was of the view that the Point Piper funds were a trust asset, but was in doubt about the identity of the trustee, it should have paid the surplus into court or otherwise approached the Court for directions as to how to distribute the Point Piper funds. The applicants submit that the respondent did none of these things.
159 In aid of this submission the applicants point to various items of correspondence in which the respondent variously disputes the existence of a trust, concedes the possibility of a trust and, ultimately, accepts the existence of a trust (albeit that the identity of the trustee remained uncertain). They submit that this shows that the respondent was not acting competently. They submit that the respondent should have been more proactive in making inquiries to determine whether there was a trust. They submit that the respondent's final acceptance that there was a trust was a view that it could and should have taken at an early stage in the Supreme Court proceedings.
160 On this basis the applicants submit that the respondent should have retained a sufficient amount from the Point Piper funds to meet the indemnity it sought and immediately paid the surplus into court. The applicants submit that, had this been done, the issue of the identity of the trustee of the Cavallino Unit Trust and the issue of the potential liability for capital gains tax would have gone, and a fund would have been available to deal with all creditors in accordance with s 140(1) of the Bankruptcy Act. In this latter regard, as I have noted, the applicants point to the fact that, by 31 August 2006, the respondent was in a position to administer the estates in respect of all but one creditor, and that, by 21 December 2007, the respondent was in a position to administer the estates in respect of all creditors, who were ultimately paid in September 2008.
161 It is apparent that the applicants' submissions focus on the respondent's receipt of the Point Piper funds in June 2006 and what the respondent should then have done with those funds. In my view, it is necessary to have regard to the following matters to understand the position in which the respondent found itself in mid-2006.
162 First, at an early stage in the administration of their estates, the applicants were anxious to seek annulments of their bankruptcies. The evidence shows that, in order to achieve those annulments, the applicants wanted the Point Piper land to be used to refinance the existing mortgage held by Key Nominees. That was the basis on which Mr Stomo approached Mr Madden, and Mr Madden wrote to Mr Stomo, on 8 March 2006. The course of correspondence shows that the applicants accepted that the only way in which all the bankrupts' debts could be paid in full, and their bankruptcies annulled, was from funds derived from the refinancing transaction that was proposed. In that regard, the applicants accepted that all unsecured creditors, whose proofs of debt had been accepted by then, should be paid from the funds that would be available from the proposed refinancing transaction. I do not ignore the fact that, in March 2006, the respondent received a number of payments totalling $323,977.54. However, I am satisfied on the evidence before me that that sum was insufficient to achieve the annulments that the applicants were seeking. In any event, as I have recorded, Nida Ferella later made a claim on those moneys and sought to have them paid to her, with interest.
163 Secondly, when the refinancing transaction did not proceed and the Point Piper land was sold by Key Nominees as mortgagee, the applicants' position changed markedly. They were not prepared to accept that any of the Point Piper funds should be used to pay any creditors whose debts had been proved in their bankruptcies. The reason for adopting that position seems to have been the applicants' concern that the Point Piper funds were assets of the Cavallino Unit Trust and that, contrary to what they had stated in their statements of affairs, Agusta was now the trustee of that trust. It was their view that Agusta was entitled to all the Point Piper funds, without deduction. The applicants apparently did not know, or did not accept, that pre-bankruptcy debts incurred by them as trustees were provable in their bankruptcies, or that the respondent, as their trustee in bankruptcy, was entitled to exercise the right each had to be indemnified out of trust assets in respect of those debts and, to that end, to assert a charge or lien over those assets.
164 Thirdly, the respondent had conflicting evidence before it about whether the Point Piper funds were an asset of a trust. It also had conflicting evidence before it as to the identity of any such trust and of its trustee or trustees. The respondent could have no confidence in the correctness of what it had been told by the applicants in light of the deficient and inaccurate statements of affairs they had filed, and the confusing and contradictory information it had been given by them about the claimed trust and the identity of its trustee or trustees.
165 Fourthly, by July 2006 the respondent had formed the view, no doubt assisted by the legal advice it had obtained, that it was not satisfied that the Point Piper funds were an asset of a trust. The respondent's solicitors informed Mr Stomo of that fact and of the respondent's intention to pay dividends from the Point Piper funds (namely, the first option which the applicants say was a "reasonable position" to adopt). In August 2006 the respondent informed the applicants of its decision that, unless an application was made by them to the Court to determine whether the Point Piper funds were trust funds or divisible property in the applicants' estates, it would distribute an interim dividend to those creditors whose proofs of debt had been admitted, using the Point Piper funds.
166 In my view it was not unreasonable for the respondent to come to this view or to take this approach. It was a matter for the respondent to determine whether it was satisfied that the Point Piper funds were a trust asset, acting on legal advice and using prudent commercial judgment. Its determination that it could not be satisfied, at that time, that the Point Piper funds were a trust asset, was one that was reasonably open to it to make. The reasonableness of that conclusion is not gainsaid by the respondent's later acceptance, on the facts then known to it, including the evidentiary material that had been filed in the Supreme Court proceedings, that the funds were or were likely to be a trust asset, or by Nicholas J's finding to the effect that the Point Piper funds were a trust asset on the evidence adduced at the hearing of the Supreme Court proceedings.
167 The position the respondent adopted in August 2006, when it could not be satisfied that the Point Piper funds were a trust asset, was to place the onus on the applicants to make good their claim by way of judicial determination of that question. The applicants (or, indeed, any of the other plaintiffs in the Supreme Court proceedings) could have done this by proceedings commenced under s 178 of the Bankruptcy Act to challenge the respondent's decision. The Supreme Court proceedings were an alternative means of obtaining such a determination. It would also have been open to the applicants (or any of the other plaintiffs in the Supreme Court proceedings) or the respondent itself to invoke the jurisdiction conferred by s 27(1) of the Bankruptcy Act and to seek declarations and other appropriate relief in respect of the ownership of, or entitlement to use, the Point Piper funds: Scott v Bagshaw (2000) 99 FCR 573 at [17]-[22]; see also s 31(1)(f) of the Bankruptcy Act. The respondent could also have applied for directions pursuant to s 134(4) of the Bankruptcy Act.
168 There were, therefore, various means by which a judicial determination could have been sought on the question of the ownership of, or entitlement to use, the Point Piper funds. In the circumstances in which it found itself, it was not unreasonable for the respondent to place the onus on the applicants to take steps to vindicate the rights they claimed.
169 In this connection, there is no reason to think that, in light of the history of the Supreme Court proceedings, the issues that would have been raised in proceedings invoking these other modes of judicial determination would have differed in any substantial way from the issues raised in the Supreme Court proceedings, or to think that the other possible proceedings would have been heard and determined substantially more quickly than the Supreme Court proceedings, or with less expense. Indeed, as the moving party in the Supreme Court proceedings, Agusta had chosen its preferred forum for litigating its claims and was in a position to exert some measure of influence over when those proceedings were made ready for hearing.
170 It is also necessary in this connection to focus attention on the relief that was claimed in the Supreme Court proceedings at the time they were commenced in September 2006. Amongst other relief that was claimed, Agusta was claiming a declaration that all funds held by the respondent were held on trust for the Cavallino Unit Trust, and a mandatory injunction requiring the respondent to pay to Agusta, as trustee of the Cavallino Unit Trust, all funds held by the respondent in the estate accounts of the applicants. Also, in December 2006, Agusta amended its summons to claim damages against the respondent.
171 In these circumstances, should the respondent simply have retained from the Point Piper funds a sum sufficient to cover the indemnity it claimed and then paid the surplus into court, as the applicants now contend it should have done? Or was the respondent justified in contesting Agusta's claims in the way that it did?
172 For the reasons which follow, I am of the view that the respondent was justified in contesting Agusta's claims in the way that it did. As I will explain, the course which the applicants now contend the respondent should have taken, was not realistically open to the respondent in the circumstances, and is quite contrary to the position that the applicants (through Agusta) were advocating in the Supreme Court proceedings.
173 The respondent had a sound basis for concluding that Agusta was not the trustee of the Cavallino Unit Trust. This position was vindicated in the Supreme Court proceedings. The respondent also had a clear interest in defending its position in that regard. It had a very real interest in ensuring that the Point Piper funds, on the assumption they were a trust asset, were paid to the person properly entitled to be trustee, rather than being paid away to a stranger to the trust who was not bound by the terms of the trust. After all, the applicants' units in the Cavallino Unit Trust comprised part of their bankrupt estates. Also, Agusta had asserted a right to claim damages against the respondent. It is to be remembered in this connection that, at this time, no other person in the interests of the Ferella family was then claiming to be the trustee of the Cavallino Unit Trust. The respondent was entitled to defend itself and the bankrupt estates against that claim, when it had sound reason to believe that Agusta had no standing to bring such a claim.
174 But perhaps more importantly for present purposes, the respondent had a sound basis for claiming that, if the Point Piper land had been a trust asset, it was entitled to exercise a right to be indemnified out of the Point Piper funds and to assert a lien over those funds to secure that indemnity, whoever the trustee of any proven trust may have been. Once again, this conclusion was vindicated in the Supreme Court proceedings. The then plaintiffs in those proceedings ultimately came to accept, as a general proposition, that the respondent was entitled to be indemnified out of the Point Piper funds and to assert a lien over them in respect of debts proved in the bankruptcies that had been incurred by the applicants as trust debts. This was a significant change in position by the applicants and the entities associated with them. However, this change in position was adopted only shortly before the commencement of the hearing of the Supreme Court proceedings in February 2008. In fact, it was only during the course of the hearing of those proceedings that the plaintiffs came to accept that that entitlement existed in relation to a number of debts that had been proved in the bankruptcies. At all other times, the applicants had steadfastly maintained the position that Agusta alone was entitled to all the Point Piper funds and that none of the debts which had been proved in the applicants' bankruptcies should be paid from those funds.
175 I do not leave out of account the fact that, at the hearing, the plaintiffs disputed the respondent's entitlement to be indemnified in respect of certain potential or contingent liabilities. At first instance, Nicholas J found that the respondent was so entitled. On appeal, the respondent conceded that it could not support the legal basis for that entitlement. That concession, however, must be viewed in light of the fact that it came to be made in circumstances where, on appeal, the appellants challenged that claimed entitlement on a basis that differed from the basis that they, as plaintiffs, had advanced at trial. The point of present relevance is that, in the face of the case that the applicants (through Agusta) had been maintaining, effectively up to the point of trial, it was necessary for the respondent to mount a defence to Agusta's claims in the Supreme Court proceedings so as to maintain its entitlement to be indemnified out of the Point Piper funds, at least in respect of a substantial number of debts that had been proved in the bankruptcies and which the plaintiffs belatedly came to accept were subject to the lien that the respondent was asserting.
176 Further, there is more than a touch of unreality in the applicants' contention that the respondent should not have defended the Supreme Court proceedings but should simply have retained a sum from the Point Piper funds, sufficient to cover the right of indemnity it asserted, and then paid the surplus into court. In light of the case that Agusta was maintaining and the relief that it was seeking, and in light of the refusal of the respondent's application for summary dismissal of those proceedings - which signified that Agusta's case raised triable issues - the respondent would not have been acting appropriately or prudently in pre-emptively arrogating to itself the right to determine that it was entitled to some part of the Point Piper funds and then paying out that part as dividends to unsecured creditors.
177 Indeed, the applicants' submission that the respondent should have so acted, flies in the face of the case that they (through Agusta) were propounding up to the point of trial, which was that Agusta was entitled to, and should be paid, all of the Point Piper funds. The very conduct they now say the respondent should have engaged in (and criticise the respondent for not engaging in, thereby warranting an inquiry) is the very conduct they were seeking to prevent, and had effectively prevented, by Agusta's commencement of the Supreme Court proceedings.
178 Moreover, Angelo Ferella had threatened to obtain (presumably through Agusta) immediate injunctive relief against the respondent should it try to pay a dividend out of the Point Piper funds. I have no reason to doubt that the threat would have been carried out. I am satisfied, therefore, that it is highly likely that any attempt by the respondent to pay dividends from the Point Piper funds would have been met by an application for interlocutory injunctive relief against it, involving additional and unnecessary costs and expenses to the bankrupt estates.
179 The unreality of the applicants' contention is further highlighted by the fact that, by letter dated 2 February 2007, the respondent sought, unsuccessfully, to persuade the applicants to agree that it was unnecessary to determine whether the Point Piper land had been owned by the applicants as trustees or beneficially, and to agree that the Point Piper funds could be used to pay alleged trust debts, with the surplus being paid to Agusta. I am satisfied on the evidence that the applicants received, but made no response to, this proposal.
180 Later, by letter dated 7 May 2007, the respondent's solicitors advanced a settlement proposal which included a scheme for paying unsecured creditors and the costs and expenses relating to the administration of the bankruptcies, largely from the Point Piper funds, with the balance payable to Agusta. This proposal was rejected but, despite the respondent's solicitors' efforts on two subsequent occasions to get Agusta's solicitors to provide a formal response to the proposal, no such response was forthcoming.
181 In this proceeding the applicants made some criticisms of the respondent's solicitors' letter of 7 May 2007. These criticisms largely quibbled with the conceptual basis for some of the statements made in it. In my view these criticisms are of no moment or consequence, so far as the present proceeding is concerned.
182 The applicants also criticised the fact that the proposal did not mention the payment of interest on the surplus funds that would be paid to Agusta. They also criticised the fact that the proposal provided for a complete indemnity for the remuneration and expenses of the respondent.
183 These submissions simply divert attention from the fact that the respondent was seeking, in early 2007, to resolve the Supreme Court proceedings before further expense was incurred, including the expense to the respondent of preparing the affidavit evidence on which it proposed to rely. The respondent's settlement proposal involved using the Point Piper funds to pay creditors in relation to what were said to be trust debts. It is plain enough that the applicants (through Agusta) were not prepared to countenance a resolution of the Supreme Court proceedings along those lines and yet, in this proceeding, they contend that, nevertheless, the respondent should have paid those creditors from the Point Piper funds and paid the balance into court. The criticisms of the proposal made on 7 May 2007 articulated in this proceeding, if they be of any real substance, were not matters which the applicants were prepared to raise with the respondent to resolve the Supreme Court proceedings in any timely way.
184 In this connection the applicants do point to the fact that, on 4 December 2007, their solicitors (as solicitors for Agusta) wrote to the respondent's solicitors, suggesting that the respondent retain an amount from the Point Piper funds to cover the claimed indemnity and pay the surplus into court. However, as I have already noted, on the evidence before me, this seems to have been the first occasion on which the applicants (through Agusta) countenanced the idea that the respondent could or should retain any part of the Point Piper funds to pay trust creditors. This letter simply highlights the fact that, from the commencement of the Supreme Court proceedings until shortly before they came on for hearing in February 2008, the applicants adopted a quite contrary position to the one that they now advance in this proceeding to justify the inquiry they seek. In any event, as I have also noted, even at this time a dispute remained as to whether the claimed debts were trust debts and as to the respondent's entitlement to pay costs and expenses from those funds.
185 The evidence does not support the contention that, from the commencement of the Supreme Court proceedings in September 2006 until their final resolution in August 2009, the respondent engaged in litigation on a substantially misconceived basis, or in a manner which was unnecessary or extravagant. Quite to the contrary, I am satisfied that the respondent was justified in defending the Supreme Court proceedings in the way that it did and in prosecuting its claim to be entitled to be indemnified from the Point Piper funds.
186 I am not satisfied that there is any sound basis to order a general inquiry into the respondent's conduct of the Supreme Court proceedings on the basis advanced by the applicants. No other matter has come to my attention which would warrant such an inquiry.