Green v Official Trustee in Bankruptcy, in the matter of Schneller

6. To notify the Official Trustee of any settlement proposed to be entered into in respect of the Supreme Court proceedings and not to enter such settlement unless consented to by the Official Trustee. [Emphasis added] 4 It is appropriate to note some observations of Hill J in his reasons. His Honour said at [4]: On 29 June 2001 Mr Green commenced the proceedings in the Equity Division of the Supreme Court which are numbered 3331 of 2001. An amended summons filed in those proceedings shows that Mr Green claimed a declaration that the transfer of Mrs Schneller's half interest in the Northwood property was voidable and also that the husband hold a one half interest in the property upon trust for Mrs Schneller. The proceedings sought in addition an order that Mr Schneller transfer the one half share in the property to his wife as tenants in common and an order for rectification. An order was also sought that following a judgment in favour of Mr Green the proceedings be adjourned to enable him to apply to the Local Court at Manly to set aside the consent orders made on or about 23 March 1998. Finally, clause 5 of the summons provides as follows: "In the alternative to Order 4 above, an order that the property be sold at public auction at a time specified by the Court and the proceeds of sale divided equally between the First and Second Defendants [Mrs and Mr Schneller] and an order that the First Defendant's share of the proceedings (sic) be forthwith applied in satisfaction or partial satisfaction of the Plaintiff's judgments against the First Defendant and for the costs of these proceedings." 5 His Honour later made specific reference to clause 5 in the summons when explaining why the fourth undertaking set out above was given (at [10]): The concern I have in the present case is largely directed at the order sought in clause 5 of the Supreme Court summons. While obviously there would be no objection in principle to the Supreme Court making an order for sale of the relevant property, assuming that Mr Green is successful, clearly the property, if indeed an asset of the bankrupt, vested in the Trustee in Bankruptcy pursuant to the provisions of s 58 of the Act. Before such an order was made it would be necessary for the Trustee to become a party. Further, it would be appropriate that any proceeds of sale be paid to the Trustee rather than applied as presently contemplated in clause 5. This concern is obviated by Mr Green, through his counsel, offering an undertaking to the Court, in addition to other undertakings I will refer to in a moment, that he not seek to pursue an order that in the event of sale of the property the proceeds be forthwith applied in satisfaction or partial satisfaction of the plaintiff's judgments against the first defendant and for the costs of the proceedings but, rather, if required by the Trustee, will join with the Trustee in seeking an amendment to the orders sought to the effect that the first defendant's share of proceeds be paid to the Trustee. 6 In July 2002, judgment was given in the Supreme Court proceedings in favour of the applicant, and a declaration made voiding the transfer of the Northwood home in August 2002. It may be accepted that the bankrupt's estate was significantly enriched by this declaration. In September 2002, the bankrupt and her husband were ordered to pay the applicant's costs of the Supreme Court proceedings. This judgment is presently under appeal in the Court of Appeal. 7 Counsel for the applicant submitted the applicant has a number of provable debts pursuant to s 82 of the Act in relation to the estate of the bankrupt: · Damages for the defamation (approximately $24,139, paid by the Trustee) · Assessed costs of the defamation and other proceedings (excluding the Supreme Court proceedings) (approximately $199,782, paid by the Trustee) · Interest on costs of the defamation proceedings to 30 December 2000 (approximately $16,297.27) · Post 7 August 2001 interest on the defamation damages (approximately $2,452.79) · Post 7 August 2001 interest on the defamation costs (approximately $13,639.89) 8 In addition, counsel for the applicant also contended that he has the following claims in relation to the bankrupt's estate: · Costs of the Federal Court application under s 58(3) of the Act, including the Trustee's costs which the applicant was ordered to pay (yet to be assessed) · Costs of the Supreme Court proceedings (yet to be assessed) · Costs of the taxation of the defamation costs conducted by the Trustee (yet to be assessed).

Nature of the current application 9 The current application seeks payment out of the bankrupt's estate of the applicant's costs in the Supreme Court proceedings, and also priority for his provable debts. As the applicant is the only creditor with a substantial provable debt, the second part of the application is, in substance, moot. The bankrupt's liability for costs of the Supreme Court proceedings, which have not yet been assessed, were incurred after the date of the bankruptcy. In addition, the applicant seeks to vacate or vary the orders of Hill J made in November 2001 in Green v Official Trustee in Bankruptcy, in the matter of Schneller (supra), and specifically, order 3, requiring the applicant to pay the costs to the Trustee. These orders have not been entered. 10 The further amended notice of motion seeks the following orders: 1. Pursuant to s 109(10) of the Bankruptcy Act and or pursuant to the rule in Re James ex parte Condon that Richard Green be given preference and priority in respect of his provable debt and his costs (as agreed or assessed) in Supreme Court action 3331 of 2001 and of these proceedings and this motion over all other creditors in the estate of Jennifer Schneller in any distribution in that estate. 2. Alternatively that Richard Green's costs (as agreed or assessed) in Supreme Court Action 3331 of 2001 and of those proceedings and this motion be paid out of the estate of Jennifer Schneller. 3. Vacate order of 6 November 2001 that the Official Receiver's costs of the application heard on 6 November 2001 be paid by Richard Green. 4. Order that the Official Receiver's costs of the application heard on 6 November 2001 be paid out of the estate of Jennifer Schneller. 11 It is convenient, at this stage, to set out s 109(10) of the Act which provides: Where in any bankruptcy: (a) property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or (b) expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered; the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.

Variation of orders made by Hill J 12 I first deal with orders 3 and 4 of the further amended notice of motion. As noted earlier the orders of Hill J of November 2001 have not yet been entered. As a result, both the Trustee and the applicant accept I have power to vary those orders under O 35 r 7(1) of the Federal Court Rules. 13 The Trustee opposed the orders of Hill J being set aside as a matter of discretion on the following basis. The relevant orders were made in relation to the application by the applicant seeking leave to continue the Supreme Court proceedings and did not involve the bankrupt or her husband. The Trustee was required to attend and address the Court on the imposition of terms on the conduct of the Supreme Court Proceedings. The Trustee was successful in having the Court impose the terms sought. 14 The grounds for varying orders under O 35 r 7(1) was discussed recently by Weinberg J in Nguyen v Minister for Health & Ageing [2002] FCA 1462, at [3]: There is authority for the proposition that the Court will exercise great caution before it varies an order. Indeed, it has been suggested that it is only in exceptional circumstances that the power will be exercised. 15 The applicant has not demonstrated any exceptional circumstances which warrant the variation of the orders made by Hill J. Counsel for the applicant submitted the Supreme Court proceedings were successful and subsequently enriched the bankrupt's estate, thereby benefiting the Trustee, and the applicant should not be left out of pocket as a result. However, the orders of Hill J reflected the possibility that the Supreme Court proceedings may have succeeded though, necessarily, they were made in circumstances where the outcome of those proceedings was unknown. However it is likely that his Honour balanced a range of considerations in making the costs orders and, in my opinion, it is not appropriate to disturb the order simply because the outcome of the proceedings is now known. I do not propose to make orders 3 and 4 sought in the present application.

Payment of costs of Supreme Court Proceedings 16 I turn now to consider the application that preference and priority be given to the applicant out of the bankrupt's estate in respect of the Supreme Court proceedings (order 1), or alternatively that the costs of the Supreme Court proceedings be paid out of the bankrupt's estate (order 2). The first issue is whether I have the power to make such orders. 17 It is accepted by Counsel for the applicant that he cannot submit a proof of debt pursuant to ss 82 and 83 of the Act to recover the costs of the Supreme Court proceedings from the estate of the bankrupt. Counsel for the applicant submitted that I have the power to make an order that the costs of the Supreme Court proceedings be paid out of the estate under s 109(10) of the Act and, or alternatively, by application of the rule in Re James Ex parte Condon (1874) L.R. 9 Ch. App. 609. The rule is described by James LJ at p 614: I am of the opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in hands money which in equity belongs to some one else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of Bankruptcy ought to be as honest as other people. 18 Section 109(10) of the Act has been described as conferring an "unqualified" discretion: see Official Trustee in Bankruptcy, in the matter of Matson v Deputy Commissioner of Taxation [1999] FCA 914 at [7]. The operation of the section, and a consideration of the policy underlying it, was recently discussed by Carr J in Re the Estate of Connell (Deceased) [2001] FCA 51. His Honour said at [24]: The policy behind s 109(10) has been identified as being at least twofold. First, to encourage creditors to indemnify trustees in bankruptcy who wished to pursue claims in the administration of bankrupt estates: Re Ken Godfrey Pty Ltd (1984) 12 ACLC 1071 [a case involving the equivalent of s 109(10) in the Corporations Law viz s 564]. Secondly, to reward creditors who bear the burden and take the risks of litigation: Re Glenisia Investments Pty Ltd (In Liquidation) (1996) 14 ACLC 237 and the cases there discussed. 19 Counsel for the applicant submitted that because the applicant had carriage of the proceedings in the Supreme Court which ultimately enriched the estate, he should be treated as if he had provided an indemnity to the Trustee to conduct the proceedings in the manner contemplated by s 109(10). 20 In support of the exercise of my discretion under s 109(10) in the applicant's favour, counsel for the applicant noted the significant risk the applicant had taken in conducting the Supreme Court proceedings, and referred to the observations of Heerey J in Matson, at [8]: No amount would have been recovered but for the indemnities. The risk undertaken was significant. [The second respondent] in particular, was exposed to a substantial amount for costs. The benefit to the indemnifying creditors should be real, as a reward for them in assuming the risk. 21 It was submitted by counsel for the applicant that if he had been unsuccessful in the Supreme Court proceedings, the applicant, and not the Trustee, would have almost certainly borne a considerable cost burden. For my part, I accept that in the present matter, there are factors pointing to the exercise of the discretion in the applicant's favour if s 109(10) had been enlivened. 22 The difficulty the applicant confronts is that s 109(10)(a) operates, in terms, in circumstances where property has been recovered under an indemnity for costs given by a creditor. While par (a) does not refer to an indemnity given to a trustee (unlike par (b)), it is fairly clear, in my opinion, that is what is intended by the provision. That is, a creditor who indemnifies a trustee for costs in litigation that results in property being recovered, realised or preserved can benefit (by way of being given an advantage) from an order of the Court concerning the distribution of the property. Counsel for the applicant invited me to take a broad view of what is meant by "indemnity" in s 109(10)(a). I accept that the provision should not be narrowly construed and the situation that has arisen in this case is not, at least in result, materially different from that addressed by s 109(10)(a). However the word "indemnity" in the expression "indemnity for the costs of litigation" must be given some meaning and would, ordinarily, be given its legal meaning: see Pearce and Geddes: Statutory Interpretation in Australia (fifth edition) at [4.11]-[4.12]. As to that meaning, it is sufficient to refer to a judgment of the Court of Appeal of New South Wales in Waterloo Holdings Pty Ltd v Tismo (Sheller & Powell JA & Sheppard AJA, 28 August 1997, unreported) concerning what is meant by "indemnify": As a matter of everyday language, the word "indemnify" denotes the provision of compensation for damage or loss sustained or expense incurred. The different uses of the term in law are discussed in Chitty on Contracts - Specific Contracts, 27th ed, para42-006-7. The application of s4 of the Statute of Frauds 1677 (UK) to contracts of guarantee has necessitated the drawing, in particular cases, of a distinction between contracts of guarantee and contracts of indemnity. In this dichotomy an indemnity has been described as "a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party"; per Mason CJ in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254 and the cases there referred to. In the present case, the applicant did not offer to meet the costs of litigation undertaken by the trustee: see Re Kyra Nominees Pty Ltd (in liq) (1987) 11 ACLR 767, but rather undertook the litigation himself. 23 The applicant sought to rely on the judgment of Long Innes J In Re Allied Glass Manufacturers Ltd (1936) 9 ABC 21. In that matter a company went into voluntary liquidation. Certain creditors provided the liquidator with ₤260 for purposes of examining directors of the company in order to ascertain whether the validity of a debenture could be impeached. These proceedings ultimately led to the setting aside of the debenture. An issue arose about how the assets of the company should be distributed in the liquidation and, in particular, whether those creditors who provided the ₤260 should be given some preference or advantage. That question involved consideration of s 84(2) of the Bankruptcy Act 1924-1933 (Cth), which was a provision equivalent to s 109(10). Long Innes CJ said at 36-7: "The moneys advanced by Mr Roper's clients for the purposes of the examination under s. 123, and the services rendered by Messieurs Spora and Price, resulted in the setting aside of the debenture of the 5th October, 1934, without which the whole of the assets of the company would have been appropriated to the redemption of that debenture; under those circumstances, it appears to me that, although Mr. Roper's clients were not indemnifying creditors, within the meaning of s. 84(2) of the Bankruptcy Act, 1924-1933, and the examination under s. 123 was not "litigation" within the meaning of that term as used in s. 84(2); Re A. Shadler Ltd. ((1904) 5 S.R. (N.S.W.) 33), the claim of Mr. Roper's clients, and that of Messieurs Spora and Price, so far as the latter is attributable to the recovery of preservation of the assets of the company, in other words, to the setting aside of the debenture of the 5th October, 1934, should have, or be given, priority over all the remaining costs, charges and expenses of the liquidation; since without the advances made by Mr. Roper's clients, and the services of Messieurs Spora and Price, there would have been no assets available for distribution." [Emphasis added] 24 The creditors who provided the ₤260 were given third and fourth priority in the administration of the estate. What is not made express is the source of the Court's power to do what it did. I accept that a liberal interpretation of s 109(10) has been taken in relation to other aspects of its operation, for example, it has been held to comprehend the preliminary steps prior to litigation, such as writing letters, or preparing court papers: see Re Webb; Ex parte Taylor (1987) 75 ALR 139. However, I do not consider s 109(10) provides a source of power to make the order sought. 25 The final basis advanced by the applicant for making the proposed order was by reference to what has been described as the rule in Re James Ex parte Condon (supra). Counsel for the bankrupt and her husband submitted that this rule has been often invoked but rarely applied, and referred to Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (in Liq) (1948) 76 CLR 463 at 482. 26 I earlier set out what was said by James LJ in Re James Ex parte Condon (supra). An examination of the rule was undertaken by Morling J in Re Elias Ayoub; Ex parte Silvia (1983) 67 FLR 144. In his reasons, his Honour noted that the rule is not intended to operate to confer a preference on an unsecured creditor but to provide relief to a creditor who would otherwise have no remedy. Morling Jset out the circumstances in which the rule might operate adopting an analysis by Walton J in Re Clarke; Ex parte The Trustee v Texaco Ltd [1975] 1 WLR 559. His Honour said: First, there must be some form of enrichment of the assets of the bankrupt by the person seeking to have the rule applied. See Government of India v Taylor (1955) AC 491 per Lord Keith at 512-513. Next, except in the most unusual circumstances the claimant must not be in the position to submit an ordinary proof of debt. See Ex parte Whittaker, In re Shackelton (1875) 10 Ch. App. 446 and In re Gozzett, Ex parte Messenger & Co. Limited v The Trustee (1936) 1 All E.R. 79. The purpose of the rule is not to confer a preference on an otherwise unsecured creditor who would otherwise be without a remedy. Thirdly, and most importantly, it must be shown that it would be unfair for the Trustee to rely upon his strict legal rights. 27 In this matter, it might be thought the applicant has satisfied the first criteria because he has taken action which has enriched the estate of the bankrupt. However when one reads the judgment of Walton J in Re Clarke (supra), itis clear that the enrichment spoken of is actual or potential enrichment of the bankrupt's estate with property (often money) of the person seeking the benefit of the rule. That is, the trustee has or will obtain property or funds which, as a matter of fairness and equity (in the broadest of senses), ought be viewed as the property or funds of another in circumstances where it would be inequitable for the trustee to retain the property or funds as part of the bankrupt's estate. Expressions such as "which in point of moral justice and honest dealing belongs to someone else" are sometimes deployed to describe the property to which the rule might apply: see In re Tyler; Ex parte the Official Receiver [1907] 1 KB 865 at 873 per Buckley LJ. In the present matter, what the Trustee has, relevantly, is the half share of the real estate the bankrupt had purported to vest in her husband. On any view, it is not nor never was the property of the applicant in any sense. In my opinion the so called rule in Re James Ex parte Condon (supra) cannot be called in aid by the applicant to support the order sought. 28 The applicant has failed to make out a case for any of the orders sought. I dismiss the application with costs. I certify that the preceding twenty eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

Associate: Dated: 7 March 2003 Counsel for the Applicant: Mr T J Morahan Solicitor for the Applicant Harris & Company