Grandsky Pty Ltd v Horne in his Capacity as Trustee for the Bankrupt Estate of Van Oost

DISCUSSION 35 The grounds of opposition of the ATO and Mr Coleman involved substantial overlap. They both contended that the order was inappropriate as it would solely benefit Grandsky leaving no funds for distribution to any other creditor. They also both contended that: - (i) they were not afforded a proper opportunity to give the trustee an indemnity (Mr Coleman alleging he was not allowed to see the funding agreement until 18 November 2013), (ii) the debt due to Grandsky had been disputed by Mr Van Oost and that dispute had not been resolved, (iii) the risk taken by Grandsky in providing funding was low as the proceedings were not complex and Grandsky was in an advantageous position relative to other creditors in respect of Mr Van Oost's dealings with the property, and (iv) Grandsky had already been repaid the full funding amount of $376,000 and was now seeking a return (in the form of the full amount held in trust for distribution) far in excess of that amount (about a 700% return on the investment of the funds for the litigation). 36 The ATO also contended that the order should not be made because the ATO is the largest creditor and had notified Mr Horne the order for priority would be opposed at the time of entry into the funding agreement. Mr Coleman contended further that Mr Horne had failed to make any proper recommendation as to the amount of any additional sum that should be paid to Grandsky and, in particular, had failed to have regard to the interests of other creditors. In addition, it was contended for Mr Coleman that Mr Horne did not keep creditors properly informed about the litigation and the funding or the costs of the litigation (which were not properly managed or taxed), with Mr Horne appearing to be subject to the exercise of direct control by Grandsky "thereby reducing the risk of adverse outcome to" Grandsky. Also, according to the submissions for Mr Coleman the property was sold at an undervalue in consultation with Grandsky but not the other creditors, so that the circumstances surrounding the sale call for investigation. 37 One problem that was not confronted by any of the submissions for the parties objecting to the proposed order was that Mr Horne provided affidavits explaining the details of all of his actions. He was not cross-examined about any matter. His unchallenged evidence included the following: (1) He had investigated Mr Van Oost's dispute about the debt owed to Grandsky and concluded the dispute had no merit. Mr Horne's letter to Mr Van Oost of 13 November 2013 said that: I have investigated this claim and sought legal (including Counsel's) advice on the merits of it. On the information available to me regarding the merits of the claim (with which I have instructed my legal advisers), I have been advised that the claim has no merit. I have expended a significant amount of time and costs in investigating this matter, both with engaging my staff to locate and access documents and in engaging external legal advisers. In view of the advice now received, I do not intend to pursue investigation of the claim further. (2) A report to creditors of 28 March 2013 which said: Extensive correspondence took place between my office and the ATO in relation to the proposed funding. Being a government body it took a significant amount of time before the matter could be assessed through the relevant channel. After an extended period of time I wrote to the ATO advising I required a commitment by no later than 19th March 2010. I was subsequently advised by the ATO that they were unable to meet the deadline and then advised that at this point in time the ATO was not in a position to provide the indemnity. Consequently I entered into a funding arrangement with Grandsky under which Grandsky made an amounts totalling $376,219.66 available to me to fund the investigations in relation to the transfer of the bankrupt's interest in the property and to pursue a claim under the antecedent provisions of the Act. … Upon obtaining vacant possession of the property on 24th August 2012 I engaged real estate agents, Hocking Stuart Albert Park to facilitate the sale of the property. I also engaged the services of Herron Todd White to provide a sworn valuation on the property. The valuation provided ascribed a value of $4 million to the property. On inspection of the property it was apparent it was not currently in an acceptable condition to enable the maximum return to be obtained from the sale. I arranged for the property to be cleaned and recarpeted. Furniture was hired for the purposes of enhancing the appeal of the property for the period of the sale campaign. The property was offered for sale by public auction held on 27th October 2012. The property as passed in at the auction. However, later the same day as a result of further negotiations with two interested parties who attended the auction, I received and subsequently accepted an offer to sell the property for the amount of $4.1 million with 30 day settlement terms. The sale of the property settled on 26th November 2012. 38 In contrast, there was no evidence from Mr Coleman and no evidence from any officer of the ATO directly involved in the ATO's decision-making processes about the indemnity. Accordingly, insofar as there is any conflict between the direct evidence of Mr Horne and the submissions of any form of failing on his part, I prefer the evidence of Mr Horne. In particular, there is no evidence supporting Mr Coleman's allegations that he did not receive the initial report to creditors of 24 November 2009, was not kept informed about the litigation, or that Grandsky exercised control over Mr Horne in the conduct of the litigation. Insofar as the ATO is concerned the contemporaneous communications indicate that the ATO was given a lengthy period of time to consider its position, did not request any extension of time for the purpose of obtaining legal advice, and led Mr Horne to believe that it had decided not to grant indemnity because it was not persuaded of the merits of the claim. Nor does the evidence support an inference of any significant assistance by the ATO to Mr Horne in respect of the litigation. The fact that Mr Van Oost disputes Grandsky's debt is of little weight. Mr Horne assessed Mr Van Oost's alleged cross-claim against Grandsky and determined, with the benefit of legal advice, that it lacked merit. That the 2007 proceedings which Grandsky commenced remain undetermined is due to Mr Van Oost's bankruptcy and does not give the allegation any more merit than it would otherwise have. There is also an inconsistency in the position of the opponent creditors who, on the one hand contend that the proceedings were not particularly complex and that Grandsky was in an advantageous position compared to them because of its knowledge of the property and the 2007 proceedings and, on the other hand, that they were given insufficient time to decide whether they wished to be involved in providing an indemnity for the funding of the litigation. If, as the opponent creditors maintain, the proceedings were straightforward and low risk then it is difficult to understand why no-one but Grandsky offered indemnity in the period between 24 November 2009 and 19 March 2010. It cannot be the alleged special or advantageous position of Grandsky. The report to creditors of 24 November 2009 clearly exposed the potential problems with the transactions into which Mr Van Oost had entered in respect of the property. 39 Nor does it appear particularly relevant to me that the ATO is the largest creditor, at least in the sense that both Grandsky and the ATO are by far the largest creditors, with the ATO being owed 51.59% of the total debt and Grandsky 46.06%. As between the ATO and Grandsky there is an insufficient proportional difference to be material. The same cannot be said about Mr Coleman. Whilst not insignificant in and of itself, the amount owed to Mr Coleman is a fraction of the debts owed to the ATO and Grandsky (1.81% of the total). Further, it was common ground that Mr Coleman was Mr Van Oost's former solicitor. There was no evidence to support the notion that Mr Coleman would have funded any part of the litigation against his former client had he been given some further or different opportunity to do so. I do not accept the submissions made on Mr Coleman's behalf to that effect. For the same reasons, lack of evidence and evidence to the contrary, I do not accept the submission for Mr Coleman that the property was sold at an undervalue or in order to benefit Grandsky. Nor do I accept that Grandsky exercised inappropriate control over the litigation or that Mr Horne failed to exercise proper control over the costs of the litigation. These are mere assertions lacking any evidentiary foundation. 40 I also do not accept the generalised and sweeping propositions of the opposing creditors that the proceedings were simple, straightforward and low risk. All litigation, even on a strong case, is risky. While the claims appeared to have been well-founded the proceedings were relatively complex and interlocutory applications were required to protect the assets. The proceedings were fixed for hearing but settled before the hearing dates. However, further action had to be taken to enforce the settlement on two occasions. All of these steps involve further risk and further costs which Grandsky had to pay pursuant to the funding agreement. It is true that Grandsky has been paid the amount it funded but it was Grandsky alone that took the risk to fund the litigation, the fruits of which have provided funds in the estate for distribution. But for Grandsky there would have been nothing to distribute. 41 In terms of the factors Nicholas J identified in Woodgate Grandsky's actions were in the public interest because they prevented a fraud on creditors being effected. The sum recovered (some $2.7 million) is substantial but dwarfed by the debts owed to the ATO and Grandsky who, between them, are owed the vast majority of the total debt (nearly 98%). The costs Grandsky incurred ($376,000) reflect the complexity of the proceeding and the difficulty of dealing with a potentially recalcitrant opponent, facts which would have been known to Grandsky when it decided to provide the funding but did not dissuade it from taking on the risks. Grandsky may have been in a slightly better position than the other creditors to assess the strength of its case at the time the first report to creditors was issued in November 2009, but by March 2010, it is difficult to conclude that this remained the case. Accordingly, by that time, all creditors had had an opportunity to obtain relevant information about the proposed litigation and were able to make an informed decision as to whether they wished to provide funding. In common with Grandsky, they would have been able to judge that the case was soundly based, that there were good prospects of ultimate success, but that as with all litigation the result was by no means certain. They could have expected that the opponents may prove difficult to deal with, making interlocutory and enforcement applications necessary, thereby increasing the potential cost. That said, they also would have been in a position to judge that the litigation was relatively confined in scope, would not expose them to unlimited costs, and should have been capable of resolution within a relatively limited period of time subject to court availability. The funding agreement ensured repayment of the costs incurred in the event that the litigation was successful and Grandsky has since been repaid the full funding amount. An important factor is also the opposition of the other creditors. Although they elected not to provide funding they remain creditors whose debts have been admitted including in the case of the ATO a very substantial debt. Another relevant factor is that there is a very large disparity between the amount Grandsky funded and its ultimate reward should 100% of the available funds be distributed to it. Weighing up all of the circumstances including the nature and magnitude of the risks Grandsky ran, the benefit to Grandsky should it receive 100% of the funds available for distribution appears disproportionate, even when substantial weight is given to the public interest in ensuring that creditors provide indemnities so as to enable assets to be recovered. 42 The evidence does not permit any analysis above and beyond an impression formed by all of the relevant factors but giving particular weight, as I am satisfied should be given in the circumstances of this case, to the debts owed, the risks Grandsky ran, the total amount recovered and the public interest. While there is no presumption that a creditor should not receive 100% of the amount recovered I am not satisfied that Grandsky has established that it is just and equitable for such an order to be made in this case. The advantage over others Grandsky would thereby obtain in consideration of the risk assumed by it would be excessive. That said, I also do not accept that the ATO's suggestion that any priority should be limited to 20% of the funds properly reflects the advantage over others Grandsky should obtain in consideration of the risk assumed by it. As noted, it was Grandsky's willingness to assume that risk that ensured funds are available for distribution. The risk was real given the nature of the case and enforcement difficulties were likely thereby increasing the potential costs and the risks of ultimate recovery. A priority as to 20% does not reflect what is just and equitable in all of the circumstances and would not fulfil the important public interest that is reflected in s 109(10). 43 Being satisfied that property has been recovered under an indemnity for costs of litigation given by Grandsky I consider that it is just and equitable with respect to the distribution of that property that Grandsky be given an advantage over others in consideration of the risk assumed by it as to 50% of the funds available for distribution after the payment of costs, remuneration and other expenses. The balance of the fund should be distributed proportionately to all creditors. Those proportions must take into account that Grandsky's proportion of the total debt and the total debt must be adjusted to reflect the priority payment to Grandsky. In other words, Grandsky's proportion will necessarily be reduced to reflect the fact that of its original debt of $6,894,343.56 (or $46.06% of the total debt) will be reduced by the amount which is 50% of the funds available for distribution after the payment of costs, remuneration and other expenses. 44 The parties should be given an opportunity to prepare orders which reflect these reasons for judgment. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.

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