Official Trustee in Bankruptcy, in the matter of Matson v Deputy Commissioner of Taxation

REASONS FOR JUDGMENT 1 The Official Trustee applies under s 109(10) of the Bankruptcy Act 1966 (Cth) for an order determining priority to be given to indemnifying creditors. The claim arises out of a transfer by the bankrupt of property in Barbour Road, Bracken Ridge to BMM Investments Pty Ltd. The Official Receiver examined the bankrupt in July 1997 and advised that the transfer was potentially void. He advised that the claim required further investigation at an estimated cost of $3000 to $5000. There were no funds in the estate. The Official Receiver requested creditors to provide funding of $8000. 2 On 9 October 1997, the second respondent, Prestige Litho Pty Ltd (Prestige), paid $5000. No other creditor provided funding. A further advice was taken which confirmed the prospects of success for a claim on the Barbour Road property. By this time the property had been sold and the proceeds of approximately $98,000 were held in a solicitor's trust account, along with other moneys, pursuant to undertakings given to the Federal Court in proceedings commenced by the Australian Securities Commission. 3 The Official Receiver requested creditors to provide funding with an initial amount of $10,000 to cover the costs of an application by the Official Trustee to the Federal Court. Prestige provided an unlimited indemnity. The Australian Taxation Office provided an indemnity limited to $3500. In reliance on those indemnities, the Official Trustee was joined to the Federal Court proceeding BMM went into liquidation and the liquidator claimed the proceeds. A settlement was reached with the liquidator in July 1998 under which the Official Trustee received $112,100. 4 American Express International Inc (Amex), the third respondent, verbally offered an indemnity in November 1997. In April 1998 the solicitor for the Official Trustee telephoned Amex again to request the indemnity. Amex replied by letter dated 24 April 1998 in these terms: "Subject: Re: ROGER GREGORY MATSON, Estate No 4539 of 1996. In reference to your recent telephone call, please accept this as acknowledgment that American Express is prepared to assist in the investigation of the above estate financially to the sum of $3400.00. Yours sincerely, IAN LUCIETTO, Accounts Control." 5 However, despite requests, Amex did not actually execute and return an indemnity form proffered by the Official Trustee's solicitors. The ATO declined to provide an increased indemnity. 6 After deduction of selling expenses and other costs, there is approximately $39,000 available for distribution to creditors. There are no priority creditors. The claims of the respective respondents are as follows: ATO $749,831.28 Prestige $149,841.89 Amex $84,625.11 (estimated) Other claims known to the Official Receiver amount to approximately $435,000. 7 I agree with the submission made on behalf of the Official Trustee that the whole of the available amount should go to the indemnifying creditors. Mr Bennett, who appeared for the Official Trustee, very properly informed me that there had, in the past, been a practice of the Court to decline to make an order confined only to indemnifying creditors but, in my opinion, such a practice could not override the unqualified discretion conferred by s 109(10) which is in the following terms: "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." 8 No amount would have been recovered but for the indemnities. The risk undertaken was significant. Prestige, 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. The proportions Mr Bennett submitted were that 90 per cent of the amount should go to Prestige and 10 per cent to the ATO. He said that Amex should receive no priority because the letter of 24 April 1998 was not a proper indemnity and, in any case, was provided very late. Amex has been notified that the Official Trustee would submit that it did not share in the priority amount and has not appeared in this proceeding. 9 However, it seems to me that the letter of 24 April 1998 was a sufficient indemnity to bring Amex within s 109(10). In Re Butler ex parte Taylor (1995) 57 FCR 499 at 507, Cooper J had to consider an offer by creditors to fund an application to the Supreme Court, concerning certain assets. His Honour held that an offer to fund costs of the trustee's solicitor was "an indemnity for costs of litigation" within the meaning of s 109(10). 10 I think the same reasoning would apply to the Amex offer. It is true that it did not sign and return a proffered indemnity form, but that is not a statutory requirement and the form of indemnity was not one prescribed by the Act. I note also that the amount offered by Amex was a much higher proportion of its debt than was the offer of the ATO. 11 So, for those reasons, I propose to vary the suggested distribution by dividing the 10 per cent between the ATO and Amex. There will be orders that: (1) pursuant to s 109(10) of the Bankruptcy Act, the applicant distribute the net amount after costs, remuneration and other expenses recovered from BMM Investments Proprietary Limited the subject of this application as to 5 per cent to the first respondent, as to 90 per cent to the second respondent and as to 5 per cent to the third respondent; (2) the respondents be permitted to share in any further distributions made out of the estate for the balance of their claims, pro rata with other creditors in the estate; (3) the applicant's costs of and incidental to this application be costs in the administration and be paid out of the bankrupt estate. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.