Gisborne v Gisborne

Facts 3 The relevant background facts to the Trustee's application are, it must be said, somewhat exceptional. They relate to a dispute between the Bankrupt and his brother, and interests associated with him, that has been festering in various guises in the Supreme Court of New South Wales for over a decade. It would not be inapposite, though it would perhaps be an exaggeration, to say that the dispute bears some resemblance to the fictional case of Jarndyce v Jarndyce in Charles Dickens' Bleak House. Of that dispute, Dickens said, Jarndyce and Jarndyce drones on. This scarecrow of a suit has, in course of time, become so complicated, that no man alive knows what it means. The parties to it understand it least; but it has been observed that no two Chancery lawyers can talk about it for five minutes, without coming to a total disagreement as to all the premises. 4 Following his appointment as trustee of the bankrupt estate on 20 August 2013, the Trustee became aware of the dispute. He now seeks to extricate himself from the ongoing dispute, and take steps to recover property that lies at the heart of the dispute, for the benefit of the estate. Given the history of disputation, the Trustee seeks, in effect, the protection of a direction under s 134(4) of the Act in respect of the course of action he has resolved to take. 5 The following recitation of the facts does not include any information which the Trustee wishes, for good reason, to remain confidential. That includes, of course, the content of legal advice received by him during the course of his administration and the content of without prejudice communications. 6 The Bankrupt passed away on 6 July 2009. Letters of administration of the Bankrupt's estate were granted by the Supreme Court of New South Wales on 13 September 2012 to two of the Bankrupt's children, Louise Hawksford and Matthew Hawksford-Miller. 7 The Bankrupt was, either in his own right or through companies controlled by him, the effective owner of 50% of the shares in Bremick Pty Limited (Bremick) and BMB Investments Pty Limited (BMB), a company whose principal asset is a shareholding in Bremick. The remaining shares of Bremick and BMB are owned by the Bankrupt's brother, Michael Hawksford, or companies under his control. 8 Bremick was and is in the business of supplying fasteners to the construction, manufacturing, mining, and petro-chemical industries. The estate's shareholding in Bremick and BMB is the estate's only significant asset. 9 As at the date of his death, the Bankrupt was a party to four sets of proceedings in the Supreme Court of New South Wales. The Bankrupt was represented in those proceedings by Mr Evangelos Patakas of Evangelos Patakas & Associates, who had, in turn, briefed Mr Christopher Bevan of counsel. 10 As an aside, it should be noted that Mr Patakas has apparently claimed that he is owed $2,000,000 for outstanding fees in relation to this litigation. Mr Bevan has also sought to prove, in the bankruptcy, a sizeable debt he claims is owed to him, no doubt in relation to his involvement in the litigation. This is mentioned only to give an indication of the nature and cost of the litigation that has been on foot. 11 The four sets of proceedings all relate, in one way or another, to a dispute between the Bankrupt and his brother regarding the control and management of Bremick. 12 The issues in the proceedings overlap, and the factual and legal issues are interconnected and complex. It would also appear that the proceedings have had a tortuous and somewhat lamentable procedural history. Exactly how so little progress has been made, in proceedings commenced over a decade ago in the Supreme Court of New South Wales, remains unclear on the evidence. It would seem, however, that the proceedings have been vigorously defended and hard-fought. 13 It is unnecessary to describe the nature of the proceedings in any great detail. After his appointment as trustee, the Trustee sought and obtained the advice of Mr Patakas concerning the proceedings. In due course, he received a detailed written advice from Mr Bevan. In his report to creditors of the estate dated 12 November 2013, the Trustee provided the following brief description of the proceedings, no doubt based in part on Mr Bevan's advice: 3.2 Brett Hawksford -v- Daley, Equity Division of the Supreme Court No. 5399 of 2003 This proceeding was commenced by the Bankrupt and BMB Investments Pty Limited (BMB") against Timothy Daley, the former solicitor acting for the Bankrupt, Michael Hawksford and the companies jointly owned by the bankrupt and Michael Hawksford, Bremick and BMB. In short, the bankrupt alleges Mr Daley was acting against the Bankrupt's interests in breach of Mr Daley's duty to avoid conflicts. The relief sought is directed at unwinding a transaction transferring a casting voting share in BMB from the Bankrupt to Mr Daley and restraining Mr Daley from acting for Bremick. 3.3 Brett Hawksford & Ors -v- Michael Hawksford & Ors Equity Division of the Supreme Court No. 4348 of 2004 These proceedings were commenced by the Bankrupt and a related entity, Brett Hawksford Management Pty Limited ("BHM"), against Michael Hawksford, Bremick, BMB and Timothy Daley. Brett Hawksford alleges that Michael Hawksford and Bremick breached the shareholders agreement between the Bankrupt, Bremick and Michael Hawksford. Predominantly those alleged breaches are failure to pay dividends to shareholders of Bremick and excluding the Bankrupt from the management of Bremick. The relief sought is that Bremick declare dividends in accordance with the shareholders agreement. Bremick filed a cross-claim in the above matter against the bankrupt and a related entity BHM, alleging that BHM entered into a loan facility with the Commonwealth Bank for the sum of $250,000 secured by a guarantee given by Bremick, an equitable charge by the Bankrupt and BHM over shares in Bremick and a registered mortgage over the assets and undertakings of BHM ("Facility"). Following a demand by the Commonwealth Bank, Bremick repaid the Facility. The cross-claim sought judgment in an amount equal to the repayment or declarations to the effect that the charged shares be sold, Bremick be repaid the amount it paid to the Commonwealth Bank, and any excess be remitted to the Bankrupt and BHM. 3.5 Michael Jeffrey Hawksford & Ors v Brett Hawksford & Ors Equity Division of the Supreme Court No. 3487 of 2005 These proceedings were commenced by Michael Hawksford and his related entities seeking orders and declarations concerning the conduct and management of the affairs of Bremick including the defence of the above proceedings. Michael Hawksford also sought a declaration that Michael Hawksford as the first named joint holder with Brett Hawksford of 27 shares in BMB is entitled to vote those shares instead of Brett Hawksford. 3.6 Brett Hawksford & Ors -v- Michael Hawksford & Ors Equity Division of the Supreme Court No. 2422 of 2008 These proceedings were commenced by the Bankrupt and Brett Hawksford Management Pty Limited against Bremick and Michael Hawksford pursuant to sections 232 and 233 of the Corporations Act claiming frustration of the pre-emptive rights clause of the shareholders agreement between Bremick, the Bankrupt and Michael Hawksford, and seeking orders for the compulsory purchase of the Bankrupt's (and BHM) 50% interest in Bremick. 14 It should also be noted that since late September 2013, the Trustee has sought and obtained legal advice concerning the proceedings independent of the Bankrupt's former advisors, Mr Patakas and Mr Bevan. That advise has been sought and obtained from Mr Stephen Polczynski, of Polczynski Lawyers, who is the solicitor on the record for the Trustee in these proceedings. 15 No doubt one of the reasons that the Trustee sought legal advice, initially from Mr Patakas and then from his own solicitor, in relation to the proceedings was that he considered that, by reason of s 60(3) of the Act, he was required to elect whether to prosecute or discontinue the actions. Following discussions with Mr Patakas, Mr Bevan and Mr Polczynski in late October 2013, the Trustee became concerned about the commerciality of continuing the proceedings. Some of the matters that contributed to his concern were: the claim by Mr Patakas that he was owed $2,000,000 in fees; the fear that interests associated with Michael Hawksford may similarly have incurred significant legal costs which the Trustee may be liable for if the proceedings continued and were unsuccessful; and the fact that the Trustee had no clear idea about the value of the Bankrupt's shareholding in Bremick. 16 In the latter part of 2013, the Trustee took a number of further steps to investigate the prospects and commerciality of the proceedings. He called a meeting of creditors and sought expressions of interest as to the funding of the existing proceedings involving the Bankrupt. Ultimately, no significant offer was forthcoming. He obtained documentation from Mr Patakas in relation to the proceedings. He issued notices under s 77A of the Act and obtained documents from Bremick, BMB and Michael Hawksford. He instructed his lawyers to issue notices under s 77C of the Act and conduct examinations of a number of people, including Michael Hawksford, Michael Hawksford's son, Luke, who was at the time a director of Bremick, the former solicitor of Bremick, and two other senior officers of Bremick. The Trustee also sought and obtained a preliminary indicative valuation of the shares in Bremick. Finally, no doubt to accommodate the taking of these steps, the Trustee sought and obtained an order extending the time within which he was required to make an election concerning the proceedings under s 60 of the Act. 17 Having taken the above steps, the Trustee then sought and obtained legal advice from Mr Polczynski concerning the proceedings. In late January 2014, the Trustee decided not to pursue the proceedings. It would seem, however, that even that step became contentious. There was a dispute concerning the validity of the Trustee's election, and whether such an election was, in the circumstances, required. The lawyers for Michael Hawksford and Bremick contended that the Trustee's election was ineffective and applied for orders joining the Trustee as a party to at least one of the sets of proceedings. 18 It was at this point that the Trustee took a slightly different and perhaps more aggressive course. He threatened to commence proceedings against Michael Hawksford on the basis that since his appointment as trustee, Michael Hawksford had sought to use his de facto control of BMB and Bremick to advantage himself and his family, whilst oppressively disregarding and acting contrary to the interests of the Trustee as owner of 50% of the shares in BMB and Bremick. The Trustee indicated that if he commenced such proceedings, he would seek an order for the compulsory acquisition of the estate's shares in BMB and Bremick or the winding up of BMB and Bremick on just and equitable grounds. 19 Perhaps surprisingly, given the litigious and combative history of the matter, there was, at this stage, an outbreak of common sense. The response of the Michael Hawksford related parties, including BMB and Bremick, to the threat of further litigation was to propose a mediation. Whilst there was a dispute concerning some of the proposed preconditions for the mediation, ultimately a mediation took place. Importantly, the parties agreed that they would each seek valuations of the estate's shares in Bremick and BMB for the purposes of the mediation. 20 Regrettably, but unfortunately not atypically, the respective expert valuers produced valuations that differed wildly. Again not atypically, the difference in the valuations turned largely on the valuation methodology that the respective valuers chose to utilise. The Trustee's valuer, Mr Wayne Lonergan, a particularly well-known and experienced valuer, applied a net asset value method and arrived at a valuation of $12,520,000 for the shares in Bremick held by the estate. 21 The Michael Hawksford related parties produced valuations from Ms Deborah Cartwright of Pitcher Partners and Mr Richard Stewart of PriceWaterhouseCoopers. These valuers employed different methodologies which resulted in different valuations. Ms Cartwright used a capitalisation of future maintainable earnings methodology and produced a valuation range of $nil to $1,107,563. Mr Stewart applied a market comparable methodology and a First Principles PE methodology and came up with a valuation range of between $374,000 to $1,668,000. 22 Both Ms Cartwright and Mr Stewart also produced reports that were critical of aspects of Mr Lonergan's methodology. In short, they expressed the opinion that the methodology employed by Mr Lonergan was not appropriate to determine the market value or fair market value of the shares. 23 A mediation occurred in late August 2014. Settlement was not reached at the mediation, however, following further without prejudice communications, agreement in principle was reached. In due course, various deeds which recorded and effected the settlement were prepared and executed by the parties. 24 The main deed, the deed of settlement and release (the Deed), was executed by the parties on or around 23 January 2015. The terms of the Deed are said to be confidential. The Deed has been tendered as part of a confidential exhibit. It is, however, possible to set out the basic terms of the settlement recorded in the Deed without disclosing any truly confidential information. The basic terms of the settlement would appear not to be confidential given that they are referred to in an affidavit sworn and relied on by the Trustee without any claim of confidentiality. Some aspects of the settlement were also referred to in open court during this application without any claim of confidentiality. It is also noted that the Deed permits disclosure of the terms of the Deed for the purposes of Court approval. The basic terms of the settlement have also been disclosed to the creditors and beneficiaries of the estate. 25 Under the terms of the settlement: (a) Bremick and BMB agree to buy-back the Bremick and BMB shares respectively for the sale price of $5,900,000. It should be noted that this is approximately the mid-point of the competing valuations of the shares. (b) The parties, including the Trustee, the estate, Bremick, and the Michael Hawksford related parties each agree to release each other from any claims that had been the subject of the past or threatened litigation, or that might arise from the administration of the estate; (c) Effectively, Bremick also releases the Trustee and the estate from any claim that Bremick may have had against the estate in respect of securities relating to a debt of about $500,000 owed by BHM to Bremick; and (d) Consent orders would be filed in the Supreme Court proceedings, which would have the effect of bringing those proceedings to an end without any adverse costs orders. 26 Importantly, the parties to the Deed agree that, if the Court does not approve the Deed, and determines that it is inappropriate for the Trustee to enter into the Deed, the settlement is to be treated as void ab initio, unless the parties otherwise agree. To an extent, therefore, the outcome of this application for directions may determine whether or not the settlement proceeds. 27 The Trustee has sought and been provided with both legal and taxation advice in relation to the settlement. That advice has been tendered in support of this application on a confidential basis. 28 The Trustee has analysed the legal and commercial implications and risks in proceeding with the settlement, as opposed to such alternatives as are feasible. His analysis, in summary, is as follows. 29 The Trustee considers that, given that a sale of the shares to a third party is unlikely to be feasible, the only real alternative to settlement and realisation in accordance with the Deed is proceeding with the threatened litigation against the Michael Hawksford related parties, with a view to obtaining an order for compulsory purchase of the estate's holding in Bremick and BMB. 30 The Trustee estimates that if the settlement proceeds, that will result in him having somewhere between $3,150,000 and $3,800,000 available to distribute to creditors, subject to income tax and any other costs that are unaccounted for at this time. 31 It should be noted in this context that the Trustee has reason to believe that the potential claims by creditors of the estate may exceed $7,000,000. 32 As for the alternative to settlement, there are a number of obvious risks and difficulties that may arise if the Trustee pursues litigation against the Michael Hawksford related parties. 33 First, there is the risk inherent in any contested litigation. It may safely be inferred here that any proceedings commenced by the Trustee will be vigorously contested by the Michael Hawksford related parties. If the Trustee was ultimately unsuccessful in the proceedings, he would almost certainly have to meet a sizeable adverse costs order. 34 Second, even if the Trustee succeeds in persuading the court that he is entitled to an order for compulsory purchase of the shares, there is a risk that the court would not accept the Lonergan valuation, but would accept either the Cartwright or Stewart valuations. Mr Lonergan has sworn an affidavit, which has been relied on in these proceedings, in which he accepts that there is a real risk that a court may adopt the valuation methodology in either the Cartwright or Stewart reports. In that case, Mr Lonergan accepts that the amount that the court values the shares at may well be less than $5,900,000. 35 Third, if the litigation was to proceed, the Trustee would need to obtain litigation funding. That would require the Trustee to agree to the payment of a litigation premium to the funder. That litigation premium would need to be deducted from any proceeds obtained from the sale of the shares. 36 Fourth, even if he is successful and obtains an order for compulsory acquisition of the shares at the Lonergan valuation, there is a risk that the Michael Hawksford related parties may be unable to pay that amount. 37 Having regard to these and other matters, the Trustee estimates that if wholly successful in the litigation, he would get in about $4,700,000 for distribution to the creditors. If unsuccessful, the estate would, in effect, be in deficit. If ultimately a midpoint valuation was accepted in the litigation, the Trustee estimates that he would get in about $1,500,000. 38 Having regard to this analysis of the possible outcomes of the litigation, the Trustee is of the opinion that litigation against the Michael Hawksford related parties does not offer a sufficient potential benefit to the estate to justify the risk to which it would expose the estate. The Trustee is also of the opinion that it is in the best interests of the creditors of the estate for the settlement to proceed. He is of the belief that the terms of the settlement are reasonable, that the interests of creditors are reasonably protected, and that the settlement is the best commercial outcome when compared with the risks and uncertainties associated with the alternative course of pursuing litigation. Important, too, is the fact that the settlement brings to an end litigation that has been on foot in the Supreme Court of New South Wales for over a decade. 39 The one concern for the Trustee, and the essential reason for this application, relates to the position of the beneficiaries of the estate. The likely result of the Trustee's actions in agreeing to the settlement is that there will, ultimately, be no surplus to distribute to the beneficiaries of the estate. The potential beneficiaries are members of the immediate family of the Bankrupt. It would appear that three children of the Bankrupt, and two former de facto spouses, have commenced proceedings in the Supreme Court of New South Wales under either the Succession Act 2006 (NSW), or the Family Provision Act 1982 (NSW). 40 The Trustee believes that there is a real risk that some or all of the prospective beneficiaries may commence proceedings against him should the settlement proceed. That is because they are unlikely to receive anything from the estate if the settlement proceeds. The fact that they have commenced proceedings in the Supreme Court of New South Wales suggests, however, that the beneficiaries expect or believe that they are entitled to receive something from the estate. The Trustee believes that the beneficiaries might challenge the reasonableness or propriety of his actions in settling the matter, given that Mr Lonergan's valuation values the shares at a much higher figure than the amount provided for under the settlement. 41 The Trustee also apparently believes that there is a risk that some creditors may also challenge the reasonableness and propriety of his decision to execute the settlement deed. That concern again arises from the fact that the creditors are unlikely to recover all their outstanding debts if the settlement proceeds. They would be likely to receive a greater distribution if the Trustee successfully pursued the litigation and recovered the Lonergan valuation amount. 42 The risk of any such litigation, however, must be assessed in light of the fact that there has been no actual threat of litigation by any beneficiary or creditor. Indeed, no opposition to the settlement has been voiced by anyone. That is despite the fact that the beneficiaries and the creditors have been notified of the essential terms of the settlement by the Trustee. They were also given prior notification that the Trustee intended to seek directions from the Court and were told the date on which the Trustee's application was listed for hearing. The Trustee has not been advised of any objection to the settlement, nor have any of the beneficiaries or creditors sought to be heard on this application.

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