Newman as trustee for the Bankrupt Estate of Keet v Bain

BETWEEN: PHILIP NEWMAN AS TRUSTEE FOR THE BANKRUPT ESTATE OF JOHN FRANCIS DESMOND KEET

JUDGE: GILMOUR J DATE: 10 JUNE 2013 PLACE: PERTH

REASONS FOR JUDGMENT 1 The appellant is the Trustee of the bankrupt estate of Mr John Keet (Trustee) and appeals from the judgment of a Federal Magistrate (as he then was) dismissing the Trustee's application under s 33(1)(c) of the Bankruptcy Act 1966 (Cth) (the Act) for an extension of time for him to make an election pursuant to s 60(3) of the Act to prosecute proceedings in respect of a third party action (the third party action) pending as against the respondent, Clive Stewart Bain (Bain), in the Supreme Court of Western Australia. 2 There is a question whether the Trustee needs the leave of the Court to appeal. If he does, he will also require an extension of time for bringing the application for leave. 3 The appeal is brought pursuant s 24(1)(d) Federal Court of Australia Act 1976 (Cth) (the FCA Act). An appeal under s 24(1) is by way of a rehearing. 4 The decision below, which is discretionary in nature, requires the Trustee to establish that an error of the kind referred to in House v R (1936) 55 CLR 499 at 504-5 was made by the Federal Magistrate before the Court will conduct a rehearing.

Background 5 A sequestration order was made on 19 September 2011 against Keet's estate. The Official Trustee in Bankruptcy, the Insolvency and Trustee Service Australia (ITSA), became trustee for the bankrupt estate. 6 When the sequestration order was made the third party action was still pending. 7 The third party action arose as a result of proceedings brought in the Supreme Court of Western Australia against Keet on behalf of former clients of his accounting practice. The plaintiffs sought damages as a result of alleged misappropriation of funds by one of Keet's employees from a trust account operated by the practice. 8 The proceedings in the main action were resolved by default. Keet failed to comply with certain Supreme Court springing orders. Default judgment dated 20 April 2010 was, for that reason, entered for the plaintiffs against Keet for an amount of approximately $836,000 including interest. Keet's other contribution proceedings against the National Australia Bank were likewise dismissed because of his non-compliance with Court orders. Keet's application to set aside each of those judgments was dismissed by a judge of the Supreme Court on 6 October 2010. 9 The third party action against Bain was for an indemnity or contribution in relation to his liability to the plaintiffs in the main action together with interest and costs. Keet alleged that Bain had conducted an audit of the relevant trust account and provided him with an unqualified report in relation to the trust account for a period during which a number of the relevant misappropriations had occurred. Keet claimed that, had the audit been conducted by Bain to the required standard, Bain would have discovered the unauthorised withdrawals from the trust account, thereby allowing Keet the opportunity to pursue the monies already misappropriated and further allowing him the opportunity to prevent the additional misappropriation of funds that occurred after the audit had been performed.

Section 60 of the Act 10 The third party action was, by virtue of s 60(2) of the Act, stayed until such time as the Trustee might make an election, in writing, relevantly, to prosecute the action. 11 Relevantly, s 60(3) of the Act provides that if the bankrupt's trustee does not make such an election within 28 days after notice of the action is served upon him by a defendant or other party to the action then he shall be deemed to have abandoned the action. The third party action is an action for the purposes of s 60(3). 12 On about 26 September 2011, ITSA was served with such a notice by letter from Bain's solicitors, DLA Piper (the notice). Although not obliged to do so, the letter also pointed out to ITSA the effect of s 60(2) and s 60(3) of the Act. 13 ITSA did not make any election within the prescribed period of 28 days, which expired on 24 October 2011. 14 On 5 October 2011, before the expiry of the 28 day period, Corser & Corser, Keet's solicitors in the Supreme Court Proceedings prior to the sequestration order, sent a letter to DLA Piper enquiring as to whether they had sent notice under s 60(3) of the Act to Keet's trustee in bankruptcy. Acting on Bain's instructions his solicitors did not respond to this request. 15 The Trustee was appointed on 31 October 2011, seven days after the expiry of the 28 day period under s 60(3), to replace ITSA as trustee of Keet's bankrupt estate. The Trustee was notified by ITSA of this appointment on 3 November 2011. ITSA did not inform him of the existence of the notice under s 60(3), or the third party action in the Supreme Court. 16 The Trustee also received notice in early November 2011 from ITSA that Keet had applied to the Federal Magistrates Court for a review of the sequestration order. 17 Keet's application was dismissed on 6 December 2011 by the Federal Magistrates Court, and the sequestration order was confirmed. 18 The Trustee received a letter on 9 December 2011 from DLA Piper by which he, for the first time, came to know of the notice and the third party action. This letter also informed him of Bain's intention to apply to dismiss the third party action on the ground that it had been abandoned pursuant to the operation of s 60(3) of the Act. 19 The Trustee met with a solicitor at Corser & Corser on 13 December 2011 to discuss the notice and the third party action. Following this meeting, the Trustee telephoned DLA Piper and informed them, relevantly, that he would be opposing their proposed application. This was later confirmed by him in a letter to DLA Piper dated 15 December 2011. 20 Between 9 January 2012 and 6 February 2012, the Trustee was absent from his office on annual leave. He says that before leaving, he did not have the opportunity to obtain legal advice in relation to the merits of the third party action. 21 On 12 January 2012, Bain applied to dismiss the third party action on the ground that no election to prosecute the Supreme Court Proceedings was made in response to the notice, as required by s 60(3) of the Act. 22 The Trustee received legal advice on 6 February 2012 in relation to the third party action and several days later he retained Corser & Corser to act in relation to it. Corser & Corser, on 14 February 2012, sent a letter to DLA Piper notifying DLA Piper that the Trustee wished to prosecute the third party action. 23 Corser & Corser sent a further letter to DLA Piper on 8 March 2012, re-stating that the Trustee wished to prosecute the third party action and notifying them of his intention to apply to the Federal Magistrates Court for an extension of time to make the required election in response to the notice. 24 Federal Magistrate Lindsay, on 5 July 2012, dismissed the Trustee's application for an extension of time.

Is leave to appeal required? 25 Leave of the Court is required to appeal from an interlocutory judgment: s 24(1A) of the FCA Act. Leave to appeal may be given by a single judge of the Court: s 25(2)(a) of the FCA Act. The test in determining whether an order is final or interlocutory is whether it finally determines the rights of the parties. If it does, then it is a final order. If it does not, then it is an interlocutory order: Bienstein v Bienstein (2003) 195 ALR 225 at [25]. 26 The Trustee submits that s 60(3) of the Act deals with a trustee in bankruptcy's right to elect to prosecute court proceedings that were on foot at the time of the bankruptcy, and that upon the expiry of the time prescribed by s 60(3), the trustee's right to elect to prosecute the proceedings ceases to exist. He contends that s 33(1) of the Act empowers the Court to restore those rights upon a trustee being granted an extension of time. In considering an application to extend time the questions that fall for determination by the Court are whether there is a cogent reason for delay and whether it is just in all the circumstances to resurrect those rights. 27 The Trustee submits that the decision of the Federal Magistrate in finding against him on the factor of delay did not allow for a subsequent application to be brought in the Federal Magistrates Court and that accordingly, a decision to refuse an application to extend time therefore concluded the rights as between the parties. 28 I do not agree. In determining whether orders are interlocutory or final, the Court looks to the nature of the application and the legal effect of the orders made and not to the practical consequences: Dousi v Colgate Palmolive Pty Ltd (1987) 9 NSWLR 374 at 377-378, 380; Computer Edge Pty Ltd v Apple Computer Inc (1984) 54 ALR 767 at 767-768; Carr v Finance Corporation of Australia Limited (1981) 147 CLR 246 at 248, 256. 29 Orders made pursuant to statutory powers to extend time limits are typically categorised as interlocutory because they involve no final adjudication of substantive rights but deal with ancillary questions of procedure: Ferdinands v Chief of Army [2009] FCA 22 at [6]-[8]; Dousi v Colgate Palmolive Pty Ltd at 377-378, 380. 30 The application below was an application to extend a time limit provided for in s 60 of the Act made pursuant to s 33 of that Act. A deemed abandonment of proceedings for a failure to respond to a notice under s 60(3) of the Act does not itself determine the underlying cause of action: Worrell v Foodlink Ltd [1998] FCA 1814; Campbell v Metway Leasing Ltd (2001) 188 ALR 100; State of Queensland v Beames [2004] 2 Qd R 99. 31 A failure to respond to such a notice, therefore, does not result in a final adjudication of substantive rights. Rather, it is akin to the expiry of a "procedural" limitation period where the expiry of the limitation period bars a remedy without extinguishing the underlying right: see for example, Dousi v Colgate Palmolive Pty Ltd at 377-378, 380; State Energy Commission of Western Australia v Alcoa of Australia Ltd (1996) 17 WAR 131 at 139. 32 The effect of any extension granted pursuant to s 33 of the Act would be to extend the time for an election to be made by the trustee in bankruptcy pursuant to s 60(3) of the Act. 33 The Trustee cited the judgment of the Full Court in Paramasivam v Flynn (1998) 90 FCR 489. There the appellant had sought an order extending the limitation period attaching to his claims to the date of the issue of his writ. In Paramasivam the legal effect of the decision appealed from was that the appellant could not prosecute his claim. That is not this case. The legal effect is that there is a deemed abandonment of the third party action which of itself was not dispositive of the rights of the parties. 34 I accept Bain's submission that if a failure to respond to a notice under s 60(3) of the Act does not have the legal effect of a final adjudication of substantive rights, the outcome of any application made pursuant to s 33 of the Act could not have any such effect. As I mentioned, the authorities require the practical effect of the orders to be ignored. 35 This case is analogous to the situation in Ferdinands v Chief of Army [2009] FCA 22 at [6]-[7]. There, Mansfield J distinguished the case before him from the situation in Paramasivam in a way which is apt in the present case. 36 I am accordingly of the opinion that the orders made by the Federal Magistrate were interlocutory and leave to appeal is required. The heading in this proceeding will be amended to substitute "appellant" with "applicant". 37 As I mentioned, in these circumstances, the Trustee also requires an extension of time within which to bring his application for leave. 38 The particular submissions made on behalf of the Trustee, that an extension of time should be granted to apply for leave, are: (a) the appeal notice was filed within the time prescribed for the commencement of an appeal that does not require leave and only 5 days after the time prescribed for filing an application for leave to appeal; (b) Bain filed a notice of address for service in response to the appeal notice and did not file a notice of objection to the competency of the appeal; (c) the Trustee then submitted the appeal book indices for Parts A and B of the appeal book with Bain's consent; (d) Bain later raised the contention that leave may be required and agreed that a precautionary application for leave be filed by the Trustee and heard at the same time as the hearing for the appeal; (e) Bain was put on notice that the Trustee was considering an appeal of the judgment within the time for filing an application for leave to appeal; (f) in the above circumstances, there is no prejudice to Bain by granting an extension of time to apply for leave; (g) the Trustee has a strong case for leave being granted; and (h) in any event, the Trustee would have experienced difficulty in applying for leave within the prescribed time because the reasons for the judgment were only made available on the final day for the filing of an application for leave. 39 I am satisfied that an extension of time should be granted to enable the Trustee to make an application for leave to appeal. There is no prejudice to Bain. It cannot be said that this application is not arguable. The delay is minimal and was the result of the considered view taken by the Trustee that he did not require leave.

Leave to appeal 40 The principles generally applicable to an application for leave to appeal are well-established. An applicant requires to establish that, in all the circumstances, the decision in question is attended with sufficient doubt to warrant it being reconsidered by the Full Court and that substantial injustice would result if leave were refused, supposing the decision to be wrong: DÉcor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397. I will proceed on the basis that the second limb of the test is made out. The Trustee would be, in practical terms, prevented from pursuing his claim on behalf of the creditors. 41 There is an important distinction between an interlocutory decision on a point of practice, in relation to which a "tight rein" should be kept on appeals, and an interlocutory decision which, in effect, determines substantive rights: Bright v Femcare Ltd (2002) 195 ALR 574 at [2]; Rogers v Asset Loan Co Pty Ltd [2008] FCA 1304 at [16]-[17]. Leave to appeal is more readily granted in a case where a decision, if allowed to stand, will have the practical effect of determining a claim of an applicant, than in a case concerning practice and procedure only: Johnston v Cameron (2002) 124 FCR 160 at [8]. 42 In a case where judgment has the practical effect of finally determining a party's rights, a prima facie case exists for a grant of leave to appeal, but leave may be refused where the appeal would achieve no useful purpose: Ex parte Bucknell (1936) 56 CLR 221 at 225-226; Duncan v Secretary, Department of Family and Community Services (2007) 99 ALD 241 at [18]. 43 The abandonment of proceedings for failure to respond to a notice under s 60(3) of the Act determines the action but not the underlying cause(s) of action: State of Queensland v Beames at [12]-[17]; Stobbart v Mocnaj (1996) 16 WAR 318 at 322-323. 44 However, it is common ground that the decision of the Federal Magistrate would have had the practical effect of preventing the Trustee pursuing the underlying rights of action in the Supreme Court because Bain has a legitimate defence that the cause of action is subject to a statutory time bar. 45 As an appeal from the exercise of a discretionary judgment, the Trustee, in order to succeed, would need to demonstrate either an error in the exercise of the discretion of the kind referred to in House v R at 504-505, namely that the Federal Magistrate: (i) acted upon a wrong principle; (ii) allowed extraneous or irrelevant matters to guide or affect him or her; (iii) mistook the facts; or (iv) did not take into account some material consideration; or that the decision stands outside the limits of sound discretionary judgment: Norbis v Norbis (1986) 161 CLR 513 at 520; Cummings v Lewis (1993) 41 FCR 559 at 604. 46 I will, in accordance with the first limb in the test found in DÉcor, consider the merits of the Trustee's argument that the Federal Magistrate fell into such error. This will in turn involve a consideration, amongst other factors, of the merits of the third party action.

Ground 1 47 Ground 1 alleges that: (a) the Federal Magistrate erred in the exercise of his discretion in failing to consider whether the period of delay for which an extension of time was being sought in the application caused or resulted in any actual or material prejudice to Bain; (b) there was no evidence that Bain suffered any actual or material prejudice as a result of the delay; and (c) as there was no evidence that Bain suffered any actual or material prejudice as a result of the delay, "the delay was of no moment". 48 The Trustee submits that this error is significant given that the factor of delay was held to be the most important factor, but that it was considered without reference to prejudice, a separate factor from which delay cannot be divorced. The Trustee submits that the decision below necessarily gives rise to a substantial injustice because the practical effect of the decision is to deny the Trustee the opportunity to pursue Bain in the third party action in relation to a claim said to be in excess of $1 million. The Trustee submits that the effect of the decision is to deny the creditors of Keet's estate the chance of obtaining a substantially greater distribution from the estate. 49 The Trustee submits that this is an error of the kind referred to in House v R, being a failure by the decision maker to take into account a material consideration in the exercise of his discretion. 50 He further contends that Bain raised no evidence of prejudice from the delay, therefore, the only discernable prejudice was that of the lack of finality which Bain could expect as a result of the deemed abandonment of the third party action under s 60(3) of the Act. 51 The Trustee submits that had the Federal Magistrate considered the factor of prejudice to Bain caused by the delay, he would have concluded that Bain had not identified any actual or material prejudice. Flowing from this, the Trustee submits that the Federal Magistrate should have found that delay was not the most significant factor in the exercise of his discretion, and that in any event, for the majority of the period of the delay, Bain acquiesced in relation to the delay. Additionally, the Trustee submits that the Federal Magistrate should have found that, for the majority of the period of delay, Bain was on notice of the fact that the Trustee was likely to seek an extension of time to respond to the Notice and, until Bain finally applied to dismiss the action in the Supreme Court, he did nothing to assert his rights. 52 The Trustee then contends that against this background the Federal Magistrate should have turned to the interest of the creditors, which, when combined with his finding that the claim in the Supreme Court was arguable, should have led him to the grant application for an extension of time. 53 The Trustee places considerable reliance upon the decision in Vince v Sellers [2004] FMCA 564 as providing guidance to the Court's exercise of discretion to grant an extension of time to respond to a notice served pursuant to s 60(3) of the Act. In that case the sole prejudice of a lack of finality regarding pending proceedings was outweighed by the responsibility of a trustee in bankruptcy to their creditors. 54 The Trustee also relies upon the decision in Abeyratne v Trkulja (1998) 90 FCR 253 where it was held that, in the absence of any evidence in relation to the prejudice caused by delay of about one year, an extension of time would not be refused on the ground of delay alone. This, the Trustee submits, is a case which is close factually to the present case. He contends that in the absence of any prejudice flowing from the delay in this case then, all other factors being favourable, the application should have been allowed. 55 The Trustee also submits that, where an application to extend time to respond to a notice issued under s 60(3) is made in circumstances where the determination of the relevant proceedings also extinguishes the underlying rights the subject of the Supreme Court proceedings of the fact that because further proceedings in relation to those rights are unable to be commenced because the rights are statute barred, then the Court should more readily grant this extension of time. This, the Trustee contends, is because the time limit set by s 60(3) of the Act specifies that a failure to respond to a notice within the prescribed time will result in the disposal of the relevant proceedings, but does not specify that a failure to respond should also dispose of the underlying substantive rights. 56 Where a time limit is prescribed by legislation, whether there is a satisfactory explanation for a failure to comply with that time limit is a relevant consideration in an application for an extension of time. 57 As to delay, the Federal Magistrate found that: (a) Even after the Trustee became aware of the necessity to do so, he failed to make a prompt application to the Court for an extension of time as would have been expected by a conscientious and prudent trustee; (b) The Trustee conducted himself as if he was unaware of the time limits or as if the time limit were meaningless or of no significance, or not requiring observation; and (c) There were significant periods of delay by the Trustee during which he was unable to offer any adequate explanation for his delay and, indeed, at one point, he decided to go on holiday rather than take any action. 58 I do not disagree with the view of the Federal Magistrate that the Trustee's conduct and his explanation for his delay were unsatisfactory. He was also correct to find that the Trustee's submissions that Bain 'acquiesced' in the Trustee's conduct were misconceived. As the Federal Magistrate correctly found, if the Trustee had wished to make an application for an extension of time then he should have done so and done so promptly. 59 However, delay is but one of a number of relevant factors, and accordingly, it is not necessarily determinative. Prejudice is a factor although it is a related and usually overlapping consideration. So too, in a case such as this, is a consideration of the merits of the relevant proceeding: the third party action in the Supreme Court. 60 In the context of applications of the type before the Federal Magistrate, it has been recognised that defendants to the proceedings pending in the Supreme Court reasonably expect some degree of finality in the decision making by the trustee in bankruptcy and an extension of time will prejudice the interests of such persons by causing further uncertainty: Vince v Sellars at [9]. 61 The Federal Magistrate did consider such prejudice. In his reasons at [48], the Federal Magistrate expressly noted that this was an important matter for him to take into account, that the function of the time limit in the Act is to provide certainty for persons involved in litigation and such persons need to know whether the litigation is going to continue. 62 It is for the Trustee to establish that the third party action has real merit. He did not do so. The Federal Magistrate found, without stating why, that the third party action was "arguable". That is not a very high threshold and was a conclusion reached by the Federal Magistrate without any consideration of the expert evidence on the central issues in the third party action. Such evidence was before him. 63 The third party action involves allegations of negligence against Bain in the conduct of the audit of Keet's accounting practice. There was, in the evidence before the Federal Magistrate, an expert accounting report by Beverley Bahlmann, a Chartered Accountant and Associate Director of BDO Audit (WA) Pty Ltd, dated 26 August 2010, obtained by Keet's solicitors in aid of the third party action. It provides no support for the Trustee's claim against Bain. Indeed, the report contains a number of statements by Ms Bahlmann which, if anything, support Bain's defence. They include the following at pp 5-6: (a) … I cannot determine whether the unauthorised transactions made by Mr Smith [Keet's employee] would have been detected by the audit procedures carried out ... [I am] unable to conclude whether fraud would have been suspected. (b) … I am unable to determine whether the auditor would have identified the "cash" transactions. (d) … I am unable to determine whether any detected discrepancies or discovered issues in the audit work performed would have led to further enquiries. (e) … I cannot conclude whether the audit carried out by Mr Bain was in compliance with Australian Auditing Standards, and whether he exercised due skill and care required of an auditor in carrying out his procedures. . . . I am unable to conclude whether there was anything Mr Bain did not do which would have led him detecting the fraudulent transactions. 64 Moreover, the third party action has been on foot since February 2007. The Trustee's allegations in that action are denied in Bain's defence filed in April 2007. Positively, Bain alleged that, of the thirty-five impugned transactions pleaded in the plaintiffs' amended statement of claim, and upon which, in turn, the third party action relied, only six took place during the year ending 31 March 2002 which was the year of the relevant audit. Such evidence, as there is, demonstrates that the third party action had not progressed very far in the approximately 4½ years from its commencement till Keet's bankruptcy. Indeed, an amended statement of claim in the third party action was filed by Keet as late as 30 June 2011, a little over two months before his bankruptcy and some four years approximately since the third party action was instituted. 65 The prejudice to the Trustee needs to be seen in the context of the apparent lack of merit in the third party action and the meandering pace of its prosecution over more than 4½ years between its inception and Keet's bankruptcy when it was stayed. 66 Against that there is to be balanced the very significant prejudice to Bain should leave be granted given that he would no longer have a complete defence to the third party action on the ground that it is time barred. 67 In my view, the third party action has no demonstrated merit. It has not been prosecuted diligently as was the case by Keet in the main proceeding. 68 It is in these circumstances unnecessary to consider the other grounds of appeal. 69 I am not satisfied that the decision of the Federal Magistrate was attended with sufficient doubt to warrant its reconsideration on appeal. 70 The application for leave to appeal will be dismissed with costs. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.