O'Kearney (Trustee), in the matter of Anthony (Bankrupt) v Property & Entertainment Corporation Pty Ltd

Introduction 1 The application before the Court today is for interim orders for discovery, the freezing of the respondent's assets and the provision of asset disclosure affidavits, although I am not sure the last form of relief is sought.

Background 2 The applicant, Mr O'Kearney, is the trustee of the bankrupt estate of Mark Anthony (Mr Anthony). The second respondent, Ms Julia Veronica Zammit (Ms Zammit) is Mr Anthony's mother. The first respondent, Property & Entertainment Corporation Pty Ltd (PEC) is the company of which Ms Zammit is both director and shareholder. 3 Mr Anthony was made bankrupt by a sequestration order on 15 October 2018. Mr O'Kearney, who was appointed as his trustee in bankruptcy, deposes that there are a number of significant creditors making claims upon his estate. Mr O'Kearney is also of the view that Mr Anthony has been insolvent since at least 2012. 4 Mr Anthony has been a director of at least four insolvent companies and he was disqualified from managing corporations by the Australian Securities and Investments Commission on 24 July 2017. The evidence before the Court discloses that the liquidators of a number of those companies have indicated an intention to pursue Mr Anthony for insolvent trading, engaging in uncommercial transactions and unreasonable director-related transactions. 5 Although Ms Zammit is presently the director of PEC, until 22 February 2007 Mr Anthony was also its director. Mr O'Kearney has deposed that Mr Anthony appears to continue to manage PEC. That allegation obtains some support from Mr Anthony's conduct during the previous case management hearing. He gave the appearance of conducting the litigation on behalf of PEC and his mother. Mr O'Kearney has deposed that Mr Anthony has previously conducted court proceedings on behalf of PEC long after his resignation as a director. That allegation has not been denied by any affidavit material. 6 It is apparent that Mr Anthony resides with Ms Zammit in an apartment owned by PEC and has done so since about 18 March 2016. Mr O'Kearney has also deposed that in the five years prior to Mr Anthony's bankruptcy he transferred considerable amounts of money in lump sums for no consideration. 7 First, he has identified the transfer of the sum of $547,822.87 to PEC by two transfers and, secondly, a transfer to Ms Zammit in the sum of $1.153 million by transferring that amount to her personal Westpac account. Mr O'Kearney deposes that there may well be further transfers or voidable transactions between the bankrupt and the respondents, however, Mr Anthony has failed to comply with his statutory duties or to provide sufficient information to Mr O'Kearney. 8 The transfers referred to have been admitted and it has been acknowledged by the bankrupt, PEC and Ms Zammit that they were made for no consideration. That acknowledgement may be subject to some qualification in that Ms Zammit perceives that, or has said that, the money paid to her was by way of a loan agreement. Whilst Mr Anthony had previously said that he made the transfers because he did not have any operative bank accounts at the time the transfers were made, that allegation has been shown to be false. Thereafter, Mr Anthony changed his explanation and said the transfer had occurred so that he could direct the respondents to deal with the funds on his behalf when he did not have time or the means to do so. 9 That has not been explained, but it might support the trustee's argument that the moneys truly belonged to Mr Anthony. Mr O'Kearney claims that the transfers are void against him as either undervalued transactions or transfers to defeat creditors pursuant to ss 120 and 121 of the Bankruptcy Act 1966 (Cth). Prima facie, there is some strength in that allegation. An alternative claim is made that Mr O'Kearney, as trustee in bankruptcy of Mr Anthony, has an equitable claim to the transfers or right to recover them as money had and received. There is no need to reach any conclusion on the strength of those claims at this stage, although the latter claim in relation to money had and received derives some support from one of Mr Anthony's explanations. 10 For the purposes of the freezing order, Mr O'Kearney deposes that he has concerns that, if such orders are not made, there is a risk that the assets will be dissipated. He identifies a number of factors which lead him to this conclusion being: (a) that the respondents have not sought to contradict any of his allegations by affidavit material filed in the proceedings and can, therefore, be assumed to have no good defence; (b) the respondents have failed to demonstrate any entitlement to the funds which they received, and the explanations as to why the money was transferred to them have been shown to be false; (c) the respondents have failed to comply with their statutory obligations under s 77A of the Bankruptcy Act to respond to Mr O'Kearney's request for information, books and records regarding their association with the bankrupt; (d) there is a risk that any judgment obtained by Mr O'Kearney will go unsatisfied because Mr Anthony's conduct in the past shows a predisposition towards not fulfilling his obligations to his creditors. Mr Anthony has demonstrated a predisposition to dissipating, diverting or concealing assets; (e) there is a risk that Mr Anthony will have access to and utilise the funds transferred through internet banking facilities. 11 The trustee in bankruptcy also observes that if the assets are dissipated he may suffer significant prejudice and, on the other hand, no obvious prejudice will be suffered by the respondents. The money does not appear prima facie to belong to them and, in any event, they may apply to lift the freezing orders, either wholly or partially, on an application to the Court. Mr O'Kearney has also offered an undertaking as to damages.

Application for discovery 12 Turning then to the application for discovery, Mr O'Kearney seeks orders for discovery from the respondents. He seeks either an order for standard discovery, being those documents identified in r 20.14 of the Federal Court Rules 2011 (Cth) which are directly relevant to the issues raised in the action and which, after a reasonable search, the party required to give discovery is aware, and that are or have been in that party's control. Alternatively, he seeks an order for discovery of certain specified documents. 13 Self-evidently, this proceeding will be resolved to a significant extent on the documentary evidence of the transfers, along with any other voidable transactions of which the trustee may not presently be aware. The transfers which are presently the subject of the application involve significant amounts of money and no reasonable commercial explanation has been provided by the respondents or by Mr Anthony for the transfer. 14 A trustee in bankruptcy is, of course, in a difficult position when pursuing transactions engaged in by the bankrupt. The trustee was not a party to the transaction and necessarily relies upon information obtained evidencing it. Here the transactions occurred between Mr Anthony and Ms Zammit and PEC and they were transactions to which Mr O'Kearney was not a party. Self-evidently this is a case where an order for discovery ought to be made. Whilst discovery is often not required where litigation is between the respective parties to a transaction, there is little scope for considering it to be inapplicable where the transaction has occurred in the absence of a party to the proceeding. The documents are needed for Mr O'Kearney to adequately establish his case. 15 The making of an order for discovery is discretionary. In this case the failure of Ms Zammit and PEC to comply with their obligations to provide information or documents requested by Mr O'Kearney only demonstrates the appropriateness of this order. 16 The respondents, and in particular Ms Zammit, have made some claim to privacy of their documents. They have, to date, provided some heavily redacted documents on the basis that they do not wish to disclose to the trustee in bankruptcy the personal affairs or expenditure of Ms Zammit. That, however, is not a sufficient explanation, nor a reason to refuse an order for discovery. 17 In the circumstances where the respondents have failed to comply with their obligation under the Bankruptcy Act and the respondents have not sought to answer the concerns raised about the impugned transactions, there appears to be a very good reason to require full and proper discovery in the standard form. The trustee in bankruptcy acts in a professional role, as do his legal advisers. They are subject to the usual undertaking not to use documents other than for the purposes of the litigation and there is no reason to think that any information disclosed in discovery would be misused. It follows that an order for discovery in the standard form ought to be made.

Freezing orders 18 Mr O'Kearney further seeks freezing orders pursuant to Ch 2, Pt 7, Div 74 of the Federal Court Rules. In particular, Mr O'Kearney relies upon the following: 7.32 Freezing order (1) The Court may make an order (a freezing order), with or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. … 7.35 Order against judgment debtor or prospective judgment debtor or third party … (4) The Court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur: (a) the judgment debtor, prospective judgment debtor or another person absconds; (b) the assets of the judgment debtor, prospective judgment debtor or another person are: (i) removed from Australia or from a place inside or outside Australia; or (ii) disposed of, dealt with or diminished in value. … (6) Nothing in this rule affects the power of the Court to make a freezing order or ancillary order if the Court considers it is in the interests of justice to do so. 19 As was submitted by counsel for Mr O'Kearney, the threshold question is whether the applicant has a good arguable case on a prospective cause of action, being one that is more than barely capable of serious argument and yet not necessarily one which can be identified as having a better than 50 per cent chance of success. It is not necessary on an application of this nature that there be proof on the balance of probabilities: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, 325. 20 In the present case the necessary threshold step has been established. On the evidence presently before the Court, the transfers by Mr Anthony for no good consideration to Ms Zammit of PEC represent nothing more than a shifting of Mr Anthony's assets. His initial explanation for them indicates that such is the case. Prima facie the trustee in bankruptcy is entitled to the return of those funds. Further, Mr Anthony's failed explanations for the transfers gives rise to the suspicion that the money was transferred in an attempt to defeat his creditors. 21 It appears that the respondents have at some stage, albeit not on affidavit, raised some form of answer to that claim. They seem to have suggested previously that they had advanced $623,994.25 to Mr Anthony and that the transactions represented a repayment of that debt. Mr O'Kearney in his affidavit has observed there are some problems with that claim. First, the loan documentation produced to substantiate the alleged loan postdates the alleged repayment of the debt. That has not been explained. 22 Secondly, it appears that there has been no compliance with the loan agreement, as appears from its terms, as between the parties who are family members. It must also be added that the respondents have not adduced any evidence on this application to substantiate any answer to the trustee in bankruptcy's claim. They have not sought to answer it even in the most cursory manner. Further, as counsel for Mr O'Kearney points out, the proffered answer by the respondents that the transfers were the repayment of the loan is only referable to a portion of the amount claimed. It follows that a substantive case has been raised on the material before the Court. 23 The next question is whether there is evidence on which it can be concluded that there is a danger that the judgment or prospective judgment will be wholly or partially unsatisfied for a reason identified in r 7.35. Necessarily, on applications of this nature, the existence of such a danger will arise as a matter of inference from the circumstances. If circumstances exist from which a prudent sensible commercial person can properly infer a danger of dissipation, such danger can be inferred and that can arise in the case of fraudulent misappropriation of assets or serious wrongdoing which supports an inference that the respondent will not preserve its assets: Patterson v BTR Engineering at 321-322. 24 In Birketu Pty Ltd v Westpac Banking Corporation (No 2) [2018] NSWSC 494, Garling J observed that, where a plaintiff has a claim in the nature of a proprietary claim to money, there is an obvious risk of injustice to it if that money was expended on the defendant's living expenses and legal expenses. If the plaintiff is ultimately successful in obtaining relief, its funds would have been used to finance the defendant's unsuccessful defence, compounding the loss which has already been suffered. As his Honour identified, a careful and anxious judgment is required to assess whether any injustice to the plaintiff is outweighed by any potential injustice to the defendant if precluded from accessing funds and, therefore, denied the opportunity to advance an arguable defence. 25 As I mentioned, it appears that in dealings with the trustee in bankruptcy the respondents have raised some form of answer to the claims in relation to the transfer and they have suggested the existence of the loan, but that has not been adduced on evidence today.

A danger of dissipation of the assets 26 Mr O'Kearney has established on this application that there exists a real danger that, if a freezing order is not made, there is a real risk that he will be denied the benefits of any successful judgment. 27 Firstly, he points to Mr Anthony's unsatisfactory credit history. Mr Anthony has a predisposition to failing to meet the claimed creditors of a company of which he has control. He has been banned from managing companies, although there is a real possibility that he is also now managing PEC. That risk cannot be denied. 28 Secondly, the respondents to this application have refused and failed to comply with Mr O'Kearney's request pursuant to s 77A of the Bankruptcy Act to produce information, books and records regarding their association with the bankrupt. That is a strong indication that the respondents are attempting to prevent Mr O'Kearney understanding the transactions engaged in by Mr Anthony. 29 That will necessarily lead to delay and that is the obvious and necessary consequence of their conduct. The only reason that they could desire delay would appear to be to give them an opportunity to dissipate assets. That is an inference only, but in the absence of any adduced evidence by the respondents, it is one which arises clearly and the court should act on. 30 Thirdly, the respondents have been less than forthcoming in corresponding with Mr O'Kearney or responding to his letters of demand and that too evinces a predisposition towards attempting to avoid their obligations. 31 Fourthly, the respondents have failed to adequately explain the transactions to which I have referred. They have failed to adduce any relevant evidence before this court on Mr O'Kearney's application. His allegations go unexplained. They have produced a number of bank statements, which have been heavily redacted, and the loan document, which is of doubtful veracity. The respondents and Mr Anthony have not been able to explain the inconsistencies with that loan documentation. 32 Fifthly, the bankrupt, who seems to have significant control over the respondents, proffered a false explanation as to why the transfer of funds to PEC and Ms Zammit occurred. Neither he nor the respondents have given any explanation for that. 33 Mr O'Kearney has obtained some bank records which suggest that money is being transferred to Mr Anthony from the transferred funds. The transfers are identified as wages to Mr Anthony, although, as the trustee in bankruptcy points out, Mr Anthony claims to be unemployed. 34 The respondents have failed to adduce any evidence to this court as to the assets which they hold other than the funds transferred to them by Mr Anthony. They have not sought to show that any money that they have expended on day-to-day expenses or otherwise is derived from their own sources. 35 The absence of any documentation deposing to the assets of the respondents is, I think, a significant matter in this case. It should be recorded that Ms Zammit, who appeared for herself, constantly asserted from the bar table that she had no ability to make payments or engage lawyers without selling the apartment in which she presently lives. Now, I make no comment on the veracity of those statements, because I cannot act on them. They are not evidence before the Court. But I can say that on the material adduced before this Court on this application, I am left with a situation where the respondents have had the opportunity to explain to the Court their financial position but have chosen not to do so. 36 Finally, I accept the submission on behalf of the applicant that Mr Anthony's conduct of this litigation on behalf of his mother and on behalf of PEC, as I referred to earlier, raises a suspicion that he is attempting to act contrary to the interests of the trustee in bankruptcy and in that way trying to defeat his creditors. 37 It is also relevant that the trustee has formed a reasonable view that the pending sale of the property in which Ms Zammit and Mr Anthony live may represent an effort to divest PEC of its assets. 38 Again, before the Court today, Ms Zammit complained that she was not able to sell the land and required the trustee in bankruptcy to remove his caveat. It may be she does not understand conveyancing practice. But it is quite clear that the sale can proceed, and no doubt the caveat can be removed on settlement, in exchange for having the surplus funds payed to an appropriate account. 39 It is apparent there is no prejudice to the respondents if the order is made. That conclusion is reached because they failed to provide any affidavit evidence in response to this application which might suggest the existence of any detriment. In any event, if in time they wish to show that such is the case, they may apply to the Court to lift or vary the orders. In order to do so, they would need to go on oath in relation to the relevant issues and possibly subject themselves to cross-examination. 40 It would also be relevant in the exercise of that power, being to lift or vary the orders, to know whether the respondents have complied with their obligations under the Bankruptcy Act and the orders of this Court. Non-compliance with those obligations might suggest a continuing intention to attempt to defeat the trustee in bankruptcy. I add too that in the orders sought by the trustee in bankruptcy, appropriate carve-out provisions are made to ensure that living expenses are provided for, as is an opportunity to use funds to pay reasonable legal expenses. The orders also proposed enable the freezing order to be lifted if security is provided for the sums in respect of which the trustee in bankruptcy claims. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.