Michael Wilson & Partners Limited v Cronan - [2023] NSWSC 1050 - NSWSC 2023 case summary — Zoe

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Michael Wilson & Partners Limited v Cronan

[2023] NSWSC 1050

Supreme Court of NSW|2023-08-17|Before: Schmidt AJ, Mr P

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2023-08-17

Before

Schmidt AJ, Mr P

Catchwords

[2004] HCA 61 CGU Insurance Limited v Blakeley (2016) 259 CLR 339
[2014] NSWCA 211 Felton v Mulligan (1971) 124 CLR 367
[1983] HCA 31 McEwan v Burke [2023] QSC 114 Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380
[2015] FCAFC 70 Turner v Gorkowski (2014) 46 VR 609

Source

Original judgment source is linked above.

Catchwords

[2004] HCA 61 CGU Insurance Limited v Blakeley (2016) 259 CLR 339[2014] NSWCA 211 Felton v Mulligan (1971) 124 CLR 367[1983] HCA 31 McEwan v Burke [2023] QSC 114 Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380[2015] FCAFC 70 Turner v Gorkowski (2014) 46 VR 609

Judgment (14 paragraphs)

[1]

gh v Khan [2021] NSWCA 281 Truthful Endeavour Pty Ltd v Condon (2015) 233 FCR 174; [2015] FCAFC 70 Turner v Gorkowski (2014) 46 VR 609; [2014] VSCA 248 Category: Procedural rulings Parties: Michael Wilson & Partners Limited (Plaintiff) Jason Cronan (First Defendant) Terrence Van der Velde (Second Defendant) Jason Porter (Third Defendant) Richard Moretti (Fourth Defendant) Representation: Counsel: Mr P Braham SC w Mr D Neggo (Plaintiff) Ms N Bailey (Defendants) Solicitors: Mr M Wilson (Plaintiff) Mills Oakley (Defendants) File Number(s): 2023/32656

[2]

[3]

Issues

What is now in issue between the parties concerns: 1. the Court's jurisdiction; 2. whether what is advanced by the statement of claim concerns a "special federal matter" to which s 6 of the Cross-vesting Act applies; and 3. if it does not, what the interests of justice require in all of the circumstances.
What is not in issue includes that: 1. The common law duties of trustees include the duty to achieve the maximum return for the assets of the bankrupt estate to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt: Adsett v Berlouis (1992) 37 FCR 201. 2. This Court has been given general federal jurisdiction by subs 39(2) of the Judiciary Act 1903 (Cth). 3. The enactment of s 27 of the Bankruptcy Act 1966 (Cth) repealed subs 39(2) of the Judiciary Act insofar as it had earlier conferred jurisdiction on this Court "in bankruptcy": Singh v Khan [2021] NSWCA 281 at [14]. "Bankruptcy" is defined to mean "any jurisdiction or proceedings under or by virtue of this Act": s 5 of the Bankruptcy Act. 4. It is the Federal Court and the Federal Circuit Court which now have exclusive "concurrent jurisdiction in bankruptcy": s 27 of the Bankruptcy Act, Truthful Endeavour Pty Ltd v Condon (2015) 233 FCR 174; [2015] FCAFC 70 at [45]; and Coshott v Parker [2017] NSWSC 1098 at [13]. 5. On an application such as this account must still be taken of the difference between jurisdiction "in bankruptcy" and "a matter arising under" the Bankruptcy Act. That is because to the extent that a matter arising under that Act does not involve the exercise of jurisdiction "in bankruptcy", s 27 does not prevent a State court from exercising the jurisdiction conferred on it by subs 39(2) of the Judiciary Act: Morris Finance Ltd v Brown (2016) 93 NSWLR 551; [2016] NSWCA 343 at [32]. 6. A matter arises under a federal law "if the right or duty in question in the matter owes its existence to federal law or depends upon federal law for its enforcement, whether or not the determination of the controversy involves the interpretation (or validity) of the law": CGU Insurance Limited v Blakeley (2016) 259 CLR 339; [2016] HCA 2 at [28]. 7. A matter does not arise under a federal law merely because its interpretation is involved. It is if the right or duty in question owes its existence or depends upon a federal law for its enforcement, or if the source of a defence of immunity from the liability or obligation alleged depends on such a law, that the matter arises under that law: LNC Industries Ltd v BMW (Australia) Ltd (1983) 151 CLR 575; [1983] HCA 31 at 581 applying Felton v Mulligan (1971) 124 CLR 367; [1971] HCA 39 at 408. The parties also agreed that what is in issue in these proceedings thus does arise under the Bankruptcy Act. 8. Not all "matters arising under" the Bankruptcy Act are "proceedings under or by virtue of" that Act, so as to involve the exercise of jurisdiction "in bankruptcy": Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380; [2008] FCAFC 172 at [172]; and Morris Finance at [32]. 9. In the result this Court still has jurisdiction to deal with some matters arising under the Bankruptcy Act. For example, it not only has the jurisdiction to make orders staying an appeal from an appeal panel of the New South Wales Civil and Administrative Tribunal by reason of the operation of subs 60(2) of the Bankruptcy Act, but also to hear an appeal from such an order. Even though that also involves a matter arising under the Bankruptcy Act, this Court is still invested with that jurisdiction under subs 39(2) of the Judiciary Act, that being recognised by subs 7(3) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth): Singh at [22]. 10. Not every case where the operation of the Bankruptcy Act arises for consideration is thus beyond this Court's jurisdiction. Cases where what is raised involves at most "the recognition of the effect of the Bankruptcy Act" thus remain within this Court's jurisdiction: Preston v Diaspora Holdings Pty Ltd [2019] NSWSC 651 at [47]. 11. On a cross-vesting application this Court must transfer to the Federal Court a "special federal matter", unless satisfied that special reasons for not doing so exist in the particular circumstances, other than reasons relevant to the convenience of the parties: s 6 of the NSW Cross-vesting Act. The parties agreed that there are no such special reasons. 12. If a matter involves the exercise of the jurisdiction "in bankruptcy", it will be a "special federal matter". 13. "Special federal matter" is defined in the Cross-vesting Act to have the same meaning as in the Commonwealth Cross-vesting Act: s 3. Relevantly, (e) of that definition includes "a matter that is within the original jurisdiction of the Federal Court by virtue of section 39B of the Judiciary Act 1903": subs 3(1). 14. That includes any matter "arising under any laws made by the Parliament, other than a matter in respect of which a criminal prosecution is instituted or any other criminal matter": subs 39B(1A)(c) of the Judiciary Act.

[4]

The parties' cases

The defendants' case was that despite the statement of claim not pleading breach of the Bankruptcy Act, what was alleged necessarily depended on its provisions. For example, in relation to the Nicholls estate, Mr Cronan and Mr Van der Velde's pleaded duties included having to "exercise, use and apply their statutory powers so as to identify, locate, trace secure, gather and bring in all of the assets" of the estate and to take other specified steps. Similar duties were pleaded in respect of Mr Porter and Mr Moretti in relation the Slater estate.
While the Bankruptcy Act was not a complete code, various of the claims advanced against them thus necessarily depended on the requirements of s 19 of the Bankruptcy Act, which specified what their duties were.
Further, the aide memoire on which the defendants relied analysed other provisions of that Act and the applicable Insolvency Practice Rules (Bankruptcy) 2016 (Cth), on which they claimed they were entitled to rely to resist the claimed breaches of their duties. Given what was claimed against them, their defences would necessarily raise questions of interpretation of such provisions of the Bankruptcy Act and Rules there identified, including as to their right to remuneration, given the work they had performed.
Resolution of such matters would necessarily involve the exercise of the Federal Court's jurisdiction in bankruptcy.
Reliance was also placed on Ms Farmer's affidavit, she being an experienced insolvency solicitor. The defendants contended that she had correctly identified in her affidavit questions which would arise for determination in the proceedings under the Bankruptcy Act. They concerned their conduct, the nature and extent of their powers and duties under that Act and the defences which they would advance under the legislative scheme in respect of their roles and actions.
The defendants also contended that while there were duties imposed upon them at common law as trustees, in reality the only reason that they were subject to this claim for breach of their duties was because of their appointments under the Bankruptcy Act. In the case of Mr Porter and Mr Moretti, as Australian representatives appointed by the Federal Court, as the result of the exercise of powers it was given by that Act.
In the result their ability to defend their conduct and refute the claims advanced against them, also depended on the operation of that Act and the applicable Rules.
It was also relevant that the Rules empowered the Federal Court to make orders of the kind here pursued against them: r 90-15. Its wide ranging powers thus included orders for damages in favour of Michael Wilson & Partners, if the alleged breaches of their duties were established. Further, if the cross-vesting order sought was made, the Federal Court would have jurisdiction in respect of the entire controversy and so could also exercise this Court's powers as part of the accrued jurisdiction.
Their circumstances were submitted to be akin to those dealt with in Turner v Gorkowski (2014) 46 VR 609; [2014] VSCA 248, where the source of the title to the property there in question, which had vested in the trustee for distribution to creditors, was the Bankruptcy Act. It was concluded that a claim for interest in that property was thus a "special federal matter", because the title there being challenged was the result of an order made under that Act by the Federal Court and the trustee had depended on that Act for the enforcement of his powers: at [33] and [41].
Reliance was also placed on Fewin Pty Ltd v Burke [2015] NSWSC 1411 at [39]; Gomez v Carrafa [2020] VSC 661 at [40]; Pekar v Juratowitch [2022] VSC 556 at [25]-[26]; and McEwan v Burke [2023] QSC 114 at [31]-[35] and [52]. In the latter cases, where similar claims to those here advanced were found to involve a special federal matter.
In all of those circumstances, even if the matter was not a special federal matter, the defendants contended that the interests of justice still required that the order sought be made.
On the case advanced for Michael Wilson & Partners, it was relevant that some of what it had pleaded had already been considered by Markovic J, who had left such claims to be available to it to pursue, as it now has in this Court: Porter, in the matter of Slater (No 3) [2021] FCA 688.
The relevant background was explained to include that it had funded all the defendants to pursue the assets of the bankrupts and the claim which it now pursued in this Court was that they had failed to act reasonably and with the required fidelity and diligence, in order to bring them in. That causing it the loss which it now pursues. It followed that what it advanced were claims of professional negligence and breach of fiduciary duty which do not depend on the Bankruptcy Act and fall within this Court's undoubted jurisdiction.
Reliance was placed on Adsett, where it was explained that trustees have a dual function, namely to administer the estate in the interests of the creditors and the bankrupt and also to exercise a public duty for the public welfare, powers having been given and duties imposed by the Bankruptcy Act: at 208. Such a trustee also has duties imposed at common law, including handling the assets of the bankrupt estate to achieve the maximum return to satisfy creditors' claims, as well as the best possible surplus for the bankrupt. Thus the trustee is governed by general law relating to trustees, except as modified by the Bankruptcy Act: at 209.
The standard of conduct thereby required in the exercise of the trustees' discretions ordinarily being "the standard required of a professional man and perhaps higher": Adsett at 209. Further, the trustee must take all reasonable and proper measures to obtain possession of trust property; to get in all debts and funds due to the trust estate; and to preserve it and secure it from loss, taking reasonable precautions to ensure it is not stolen or lost by default, executing the trust with fidelity and faith and as an ordinary prudent man of business would conduct his own affairs.
Michael Wilson & Partners claimed that this is what the defendants had failed to do, with the result that it was entitled to pursue those failures in this Court, it having the jurisdiction to deal with such alleged professional negligence, that not depending on the provisions of the Bankruptcy Act.
Reliance was also placed on In the matter of Galtari Pty Ltd (in liq) [2018] NSWSC 917, where claims for damages for equitable compensation under the Corporations Act 2001 (Cth) were defended by a release given under s 230 of the Bankruptcy Act, from all liabilities pleaded by the plaintiffs in their statement of claim: at [7]. A question there arose as to whether those proceedings involved a "special federal matter": at [21]. Gleeson JA concluding that it did not, the defence and the reply doing no more than asking this Court to recognise the legal effect of the pleaded provisions of the Bankruptcy Act: at [65]-[66]. This was submitted to be a similar case.
To resist the orders sought by the defendants, in the event that the Court concludes that it does have jurisdiction, the matter not being a special federal matter and thus exercise a discretion under s 5 of the NSW Cross-vesting Act, Michael Wilson & Partners relied on other proceedings it has brought in this Court against Mr Emmott. He is the other partner in the Temujin partnership, who is not a bankrupt.
It contended that the discretion would be exercised, those proceedings being dealt with in the Commercial list and there being a factual overlap with these proceedings, they could conveniently be heard together, even though the parties and issues in the two proceedings were not identical.

[6]

The earlier Federal Court proceedings

In Porter Markovic J had to deal with orders Michael Wilson & Partners sought in respect of claimed costs, charges and expenses of the administration; a payment proposed to be made to it; and the trustees' proposed discharge and release from future claims. The latter was disputed, but orders discharging them from their appointments were made.
Having dealt with the role Michael Wilson & Partners and Mr Wilson had played in the hearing of the matters which required the Court's determination, Markovic J noted that having sought and been granted leave to be heard as an interested party, it had also sought to broaden the proceedings to include an action for damages against Mr Porter and Mr Moretti: at [133]-[134]. That application failed.
Matters which her Honour dealt with included the sale and rental of property located in the ACT, proceedings pursued in this Court, as well as actions pursued by Michael Wilson & Partners, which her Honour described as having involved "obstructive behaviour". Still her Honour refused to make an order releasing Mr Porter and Mr Moretti from all liability in respect of any acts done or default by them in the administration. She noted that left open the option for Michael Wilson & Partners to bring an application against them in relation to their administration of Mr Slater's estate: at [112]-[113].
That is part of what is now pursued in these proceedings, leave to appeal from Markovic J's judgment having been refused: Michael Wilson & Partners Ltd v Porter [2022] FCA 336; an application to reconsider the orders there sought having been dismissed: Michael Wilson & Partners Ltd v Porter (No 2) [2022] FCA 901; an indemnity costs order having been made against Michael Wilson & Partners: Michael Wilson & Partners Ltd v Porter (No 3) [2022] FCA 998; and its application for special leave to appeal to the High Court having been refused by Keane J in August 2022. His Honour not accepting that the Federal Court had lacked jurisdiction to make the disputed orders, or that the High Court's discretion should be exercised, he considering that the decisions of the Federal Court were valid and unchallengeable.

[7]

What is pleaded in the statement of claim

Damages are there pursued for alleged breaches of the duty of care which it is claimed that Michael Wilson & Partners, a creditor, was owed by the defendants. But no specified breach of requirements of the Bankruptcy Act is pleaded. In the case of Mr Cronan and Mr Van der Velde, what is pleaded includes: "a. A duty to comply with their statutory obligations as trustees under Australian law, to investigate, gather in and realise the property of the bankrupt Nicholls for the benefit of all his creditors; b. to exercise, use and apply their statutory powers so as to identify, locate, trace, secure, gather and bring in all of the assets of the Nicholls Estate, take steps to obtain ownership, possession, custody and control of the same, realise and bring all such to account and to cash for the benefit of the creditors of the estate; c. A duty of care towards MWP as a creditor of the Nicholls Estate in the carrying out and discharge of their duties as trustees; and d. A duty towards MWP, as a creditor of the Nicholls Estate, in the carrying out and discharge of their duties as trustees to act with due diligence, care and prudence in the management of the business of the Nicholls Estate, for the benefit of the creditors."
Conduct and breaches pleaded in relation to Mr Cronan and Mr Van der Velde concerned assets of Mr Nicholls, of which it is claimed they were or ought to have been aware. They include, pertinently, that he had been a 33% partner in the Temujin partnership with a Mr Emmott and Mr Slater from September 2005 and that the partnership owns assets in the Bahamas and Australia which the defendants had failed to identify, gather in or realise.
In the case of Mr Porter and Mr Moretti what is pleaded includes that they: "a. held, pursuant to the Orders, a position of authority, power and discretion (being that of Local Representatives) with respect to recovery of funds from the Slater Estate for the benefit of creditors including MWP; b. being representatives of the UK Trustee were not liable to take instructions from creditors including MWP; c. knew that MWP was a creditor of the Slater Estate; and d. knew that their decisions and actions as Local Representatives were capable of affecting, and would affect the interests of MWP."
Conduct and breaches pleaded in relation to Mr Porter and Mr Moretti include that they were aware that Mr Slater had rights, joint and several liability and in contribution against Mr Nicholls and Mr Emmott, his partners in the Temujin partnership from September 2005, he being a 33% shareholder in that partnership. Further, that they had failed to make reasonable enquiries to identify, get in and realise identified assets of the Slater estate.
Particulars of loss were specified to include the lost opportunity of recovering funds from the partnership, such as shares, interests and assets.

[8]

What was advanced by way of the aide memoire

The defendants' case was that what Michael Wilson & Partners claimed would necessarily raise for determination what regulated what was claimed against them, including:

s 19, which in subs (1) identifies specific matters included within the duties of a trustee, including taking appropriate steps to recover property for the benefit of the estate: (f);
s 19AA, which permits the trustee to investigate a bankrupt's conduct and affairs, as well as books, accounts and records kept;
s 58, which regulates the vesting of property and after acquired property of a bankrupt in the trustee;
s 109, which specifies the order of priority in which a trustee must make payments, as well as reg 25 of the Bankruptcy Regulations 2021 (Cth);
s 116, which identifies what property is divisible amongst creditors, including not only property belonging to or vested in the bankrupt, but also the capacity to exercise and to take proceedings for exercising all such powers in, over, or in respect of property, as might have been exercised by the bankrupt;
ss 120 and 121, which deal with circumstances in which specified transactions are void against a trustee;
s 133, which provides for circumstances in which a trustee may disclaim property of the bankrupt;
s 134, which specifies the discretions which a trustee may exercise in relation to things including property; a business or debts of the bankrupt creditors; winding up the estate; obtaining advice or pursuing arbitration; employing the bankrupt; and superintending the management of or administering the property;
rr 42-40, 42-45, 42-60, 42-175 and 42-180, which deal with realising assets, ownership or interest in assets, reasonable and necessary costs, identifying assets for vesting and protecting assets with commercial value;
r 42-135, which deals with distribution of estate funds;
Sch 2 to the Bankruptcy Act, cl 85-5, which deal with directions given by creditors; and
r 90-15, which provides for orders making good loss resulting from a breach of duty.

[10]

The proceedings do concern a "special federal matter"

I am also satisfied that it must be accepted that matters arising in these proceedings do constitute "special federal matters" with the result, accordingly, that the cross-vesting orders which s 6 of the NSW Cross-vesting Act requires, must be made.
The Federal Court has already heard some of the complaints here made about the defendants' conduct, now again claimed to have breached their duties. That resulted in the refusal of orders which they sought of that Court, releasing them from claims such as those now pursued against them in these proceedings.
I am satisfied that the alleged conduct and failures which Michael Wilson & Partners here pursues as evidencing the breaches of the duties it claims it was owed, as well as the defences of those claims will also, to a significant extent, depend on the operation of the legislative regime established by the Bankruptcy Act.
What is necessarily raised for determination will not merely require this Court to recognise the effect of provisions of the Bankruptcy Act, as was the position in cases such as Singh, Preston and Galtari. Nor is it merely disputes over the interpretation of particular provisions of that Act and the rules and regulations made under it, which will have to be resolved.
The parties appear to be bound by conclusions which Markovic J has reached about certain matters over which they have already joined issue. That is not altered by the defendants having been discharged as trustees and now being sued by one of the beneficiaries of the bankrupt estates in this Court, rather than in the Federal Court.
What the statutory and regulatory provisions which will arise for consideration required the defendants to do, in the particular circumstances with which they had to deal when administering the two estates, given the extent and limits of the various statutory duties imposed upon them, will have to be resolved in these proceedings.
That legislative scheme has not only altered and added to the common law duties in a variety of ways, as was recognised in Adsett. It also envisages orders being made by the Federal Court in respect of alleged breaches of the duties it imposes. Its powers do not depend on the cross-vesting orders sought.
I am thus satisfied that the claims here pursued are "special federal matters" with the result, accordingly, that cross-vesting orders must be made.

[11]

The discretion

Even if I had not reached these conclusions, in all of the circumstances I have discussed I would have exercised the discretion to make the cross-vesting order, notwithstanding the other proceedings Michael Wilson & Partners is pursuing in this Court, in respect of the Temujin partnership.
That is because of the nature of the issues which will have to be determined in these proceedings, which do not arise in the Equity proceedings; the Federal Court's now recognised greater expertise in bankruptcy matters, given the serious bankruptcy matters now there litigated, which Davies J discussed in Credit Suisse AG v Gu (No 2) [2022] NSWSC 198 at [26]; what has already been litigated by these parties in the Federal Court about the defendants' actions; and that Mr Emmott, the defendant to the Equity proceedings, is not a party to these proceedings.
The claims here advanced appear to raise questions about the nature and operation of various of the duties imposed on trustees by the Bankruptcy Act in respect of a partnership which has overseas assets. What is determined could, it also appears to me, have precedent value for other trustees dealing with such assets.
I consider that supports the conclusion that the Federal Court is the more appropriate forum to determine the issues which here arise, not only the interests of the competing parties arising for consideration on an application such as this: BHP Billiton Ltd v Schultz (2004) 221 CLR 400; [2004] HCA 61 at [13]-[15].
That conclusion also accords with the parties having already been heard by the Federal Court about some of the matters here pursued, that resulting in Markovic J's refusal of orders Mr Porter and Mr Moretti had sought, releasing them from all liability in respect of any acts done or default by them in the administration of the estate of which they were trustee.
I am also not persuaded that what Michael Wilson & Partners seeks to pursue in the Equity proceedings would be a proper basis for refusing to make the orders here sought, notwithstanding that there may be factual overlaps in the two sets of proceedings. To the contrary, it would seem that given what is sought be pursued in the Equity proceedings, to which the defendants are not parties, would make both case managing and hearing them together with these proceedings not only potentially difficult, but costly. Some light on the complexity of those proceedings is shed by what arose to be considered in Michael Wilson & Partners Ltd v Emmott [2021] NSWCA 315.
That was underscored by the submission that the relevant factual history in the Equity proceedings is quite dense, given "the behaviour of Mr Nicholls, Mr Slater and Mr Emmott and their relationship with Mr Wilson and the nature of the Temujin partnership and the location of its assets". That these were all matters which the defendants knew about, or ought to have known about does not appear to be relevant to the Equity proceedings. Some of these matters are plainly of limited, if of any, relevance in these proceedings.
In the result, I do not consider that the discretionary considerations which arise would favour the refusal of the orders which Michael Wilson & Partners resists, if the Court's discretion does arise to be exercised. Accordingly I would exercise that discretion to make the following orders.

Michael Wilson & Partners Limited v Cronan

At a glance

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Catchwords

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Judgment (14 paragraphs)

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Legislation Cited (7)

Cases Cited (34)