Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd

Federal Court of Australia|1996-03-15|Before: Sackville J

The Legislation Section 109 of the Act is headed "Priority Payments". Section 109(10) provides as follows: "109(10) [Indemnity] Where in any bankruptcy: (a) property has been recovered, realised 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." Section 109(10) is substantially equivalent, in its terms, to s.564 of the Corporations Law, which applies in the winding up of a corporation. The Facts The respondent to the application was made bankrupt on 8 December 1987. At that time she was the registered proprietor, together with her husband, of certain residential premises ("the land"). On 4 November 1987 the bankrupt and her husband had entered into a maintenance agreement under s.86 of the Family Law Act 1975 (Cth). That agreement was duly registered in the Family Court of Australia, at Parramatta, on 5 November 1987. Sharp lodged a proof of debt claiming that it was owed $18,553.50. Five other unsecured creditors lodged proofs totalling $36,329. A secured creditor also claimed an interest in the land. On 5 March 1991 the Official Trustee became registered as proprietor of the land, in common with the bankrupt's husband. On 12 November 1991 the husband commenced proceedings in the Family Court against the bankrupt, asserting that he was entitled to an equitable interest in her share of the land, pursuant to the maintenance agreement. At about the same time, the husband instituted proceedings in this Court against the bankrupt and the Official Trustee, seeking orders that the maintenance agreement was valid against the Official Trustee. On 31 December 1991, all known creditors of the bankrupt's estate were given notice that the Official Receiver was seeking indemnities from creditors to finance the defence of the proceedings brought by the husband and to take the steps necessary to preserve the asset in the estate. The notice stated that, in due course, an application would be made to the Court for orders giving priority to creditors who provided an indemnity.

In response to the Official Receiver's notice, Sharp offered an indemnity of $10,000 to the Official Trustee for the purposes of financing the costs of the legal proceedings. No other creditors responded to the invitation from the Official Receiver. It is not necessary to trace the history of the proceedings in the Family Court and in this Court. It suffices to say that, ultimately, the Official Trustee succeeded against the husband. Subsequently, the Official Trustee transferred his right, title and interest in the land to the husband for the sum of $63,000. I was informed that the husband paid that sum not only to acquire the Official Trustee's interest in the land, but in satisfaction of all costs orders that had been made in favour of the Official Trustee against the husband. In the course of these somewhat protracted proceedings, a further indemnity in relation to costs was sought by the Official Trustee. On 25 June 1993, Sharp provided a further indemnity. Although this does not appear from the evidence, I was told that the indemnity was limited to $4,000. I was also told that Sharp actually paid $7,500 towards the costs of the proceedings, but that this amount was refunded to it, in a manner not made clear by the evidence or from the Bar table. A secured creditor was paid out of the sum of $63,000 in the hands of the Official Receiver, leaving a total of $51,389.73 available for distribution. After deducting costs, remuneration and fees computed in accordance with the Bankruptcy Rules, the sum of $21,396.05 remained for distribution by way of dividends to creditors. The following table shows the dividend rates applicable in relation to the indemnifying creditor and the ordinary creditors, depending on the extent of the priority (if any) afforded to Sharp. Priority given Dividend rate Dividend rate Total to to to all dividend to Indemnifying Indemnifying Ordinary Indemnifying Creditor Creditor Creditors Creditor 100% priority 100 cents in 7.5 cents in 18,554.00 the dollar the dollar 75% priority 75 cents in 18.25 cents in 14,763.00 the dollar the dollar 50% priority 50 cents in 26.5 cents in 11,742.00 the dollar the dollar 25% priority 25 cents in 33.55 cents in 9,280.00 the dollar the dollar Nil priority Nil 38.99 cents in 7,232.00 the dollar The Principles Section 109(10) applies where property has been recovered, realised or preserved under an indemnity for costs of litigation given by a creditor. On the evidence in the present case, I think that property, in the form of the bankrupt's interest in the land, of which the Official Trustee became the registered proprietor, was "realised or preserved" under the indemnities given by Sharp.

The authorities suggest that the discretion conferred by s.109(10) is broad and general in character, but is to be exercised having regard to the desirability, in the public interest, of encouraging creditors to indemnify the Official Trustee in relation to claims arising out of the bankruptcy: Re Ken Godfrey Pty Ltd (1994) 12 ACLC 1071 (S Ct Vic/Hayne J.), at 1072-1073. Appropriate recognition should be given to the risk undertaken by the indemnifying creditor, even if the creditor has been fully reimbursed: Re Kyra Nominees Pty Ltd (in liq.) (1987) 5 ACLC 811 (S Ct WA/Franklyn J.), at 819. In Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 (S Ct NSW/Brownie J.), a case under s.564 of the Corporations Law, Brownie J. stated the general principles this way (at 296-297): "The last words of s.564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors." In that case his Honour gave the indemnifying creditor, who was owed about $290,000, priority in relation to the whole of the available fund ($218,000). This left other unsecured external creditors, whose debts totalled $770,000, with no entitlement to a dividend. The Present Case Each case must rest on its own facts. Here Sharp was the only indemnifying creditor despite invitations extended to other creditors; it was exposed to a substantial risk by reason of the indemnity (under which its liability was not very much less than the amount due to it); I infer that the provision of the indemnity played a major part in preserving the asset ultimately realised; and the litigation supported by Sharp was prolonged and, in some respects, difficult. Having regard to the policy underlying s.109(10) of the Act, I think that the appropriate course is to give Sharp priority for 100 cents in the dollar in respect of its debt. Conclusion I propose to make orders that provide, subject to payment of costs, remuneration and fees, that the sum held by the Official Receiver be applied first in payment of a dividend of 100 cents in the dollar, in respect of the proved debt of Sharp in the sum of $18,533.50. I certify that this and the preceding 6 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: Dated: 15 March, 1996 Heard: 12 March, 1996 Place: Sydney Decision: 15 March, 1996 Appearances: Mr B.J. Skinner, instructed by Lobban McNally & Harney, Solicitors, appeared for the Official Trustee.

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