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[2001] FCA 51
Federal Court of Australia
1990-09-04
Carr J
Original judgment source is linked above.
INTRODUCTION 1 This is an application by the trustee of the above-mentioned estate for an order, under s 109(10) of the Bankruptcy Act 1966 (Cth) ("the Act"), to the effect that two indemnifying creditors be given priority in the distribution of the assets of the estate realised by the trustee.
factual background 2 Mr Lawrence Robert Connell ("the Deceased") died on 27 February 1996. On 9 July 1996 this Court ordered that the estate of the Deceased be administered under Part XI of the Act. The applicant became trustee of the estate by the operation of s 156A(3) of the Act. 3 According to a statement of affairs dated 9 August 1996 prepared by the executor of the Deceased's will, as at 9 July 1996 the estate had (relatively speaking) negligible assets and a net asset deficiency of approximately $341 million. The applicant has since received further claims against the estate totalling approximately $60 million. He has not yet adjudicated on all the proofs of debt lodged in respect of these further claims. 4 In his first report to creditors, dated 23 July 1996, the applicant informed them that there were insufficient funds in the estate to meet the costs of any investigations into the affairs of the Deceased. The applicant requested expressions of interest from creditors willing to indemnify him for the costs and expenses of the administration of the estate including the costs of any investigations or proceedings to recover assets of the estate. On 21 August 1996, in a further report to creditors, the applicant informed them of his preliminary investigations into the affairs of the Deceased and his associated entities and identified two particular transactions which he believed warranted further detailed investigation. In that further report the applicant repeated his request for expressions of interest from creditors willing to indemnify him for the costs and expenses of the administration of the estate including the costs of expenses of further investigations and any asset recovery actions commenced as a result of those investigations. 5 In response to those requests, the Commonwealth of Australia, via the Australian Taxation Office, ("the Commonwealth"), Rothwells Limited (in liquidation) ("Rothwells") and Bond Corporation Pty Ltd ("Bond") each expressed an interest in providing the applicant with funding and indemnities. The applicant admitted the Commonwealth as a creditor for an amount of $140.7 million and Rothwells for an amount of approximately $12 million. The applicant disputed Bond's proof of debt, but eventually settled that dispute in November 1998. Apart from Bond's initial expression of interest in 1996, the possibility of Bond indemnifying the applicant was never raised again and was not pursued by Bond. No other creditor expressed any interest in becoming an indemnifying creditor. 6 In about August 1996 the applicant commenced negotiations with the Commonwealth and Rothwells about the terms of the indemnities which they contemplated. In the meantime, in September 1996, it became necessary for the applicant to commence proceedings in this Court under ss 120 and 121 of the Act. As the terms of the indemnities to be provided by the Commonwealth and Rothwells had not yet been finalised, the applicant sought and obtained from each of them interim indemnities which were intended to be later subsumed by a formal deed of indemnity. On or about 23 December 1996 the applicant, the Commonwealth and Rothwells executed a deed of indemnity. That deed is in evidence, but it is not necessary to refer in detail to its terms. In summary, the Commonwealth and Rothwells undertook (in the respective proportions of 80:20) to indemnify the applicant in respect of his reasonable costs and expenses for the conduct of the estate including the conduct of any "approved Proceedings" (a term defined in the deed) for the recovery, realisation or preservation of the property of the estate. 7 The applicant's evidence is that he had considerable difficulty investigating the affairs of the Deceased and his associated entities with a view to identifying assets available to the estate. He has, in a supporting affidavit, described some of those difficulties which included: · the fact that the Deceased had arranged his business and domestic affairs in a complex manner, with numerous associated identities, a significant number of which were resident offshore; · that the Deceased and his associated entities had been involved in numerous transactions which had to be reconstructed from documents obtained from various sources; and · the fact that because the Deceased had been the subject of various enquiries, investigations and court proceedings, the overwhelming majority of documents relating to the affairs of the Deceased and his associated entities were in the possession of the Deceased's former lawyers, accountants and various State and Federal government authorities. 8 Obtaining possession of or access to most of those documents was not, so the applicant has deposed, always easy as there were often issues involving claims of legal professional privilege by parties other than the Deceased and confidentiality undertakings given by Australian authorities which had to be dealt with. 9 On 25 September 1996 the applicant commenced proceedings in this Court (being the proceedings referred to in paragraph 6 above) to set aside the disposition by the Deceased of his home in Peppermint Grove, Perth and the transfer and assignments by the Deceased of various items of property effected by two agreements registered under s 86 of the Family Law Act 1975 (Cth). I shall refer to those proceedings as "the Federal Court applications". The applicant was successful in obtaining urgent interim injunctions and, subsequently, an undertaking from the respondents to the Federal Court applications preventing them from dealing in any way with the property the subject of those proceedings. 10 I am satisfied from the evidence before the Court that the Federal Court applications involved complex issues of fact and law. 11 Eventually those proceedings were settled. The settlement was made the subject of a deed of settlement dated 22 October 1999. The applicant has received, pursuant to the terms of that settlement, a substantial amount being the largest of various sums recovered on behalf of the estate. 12 The applicant also became involved in certain proceedings in the Supreme Court of Western Australia relating to a subdivision known as "the Brigadoon Estate". Various disputes relating to those proceedings were also resolved by a settlement deed which was entered into on 13 November 1998. But for the fact that the Commissioner of Taxation used his powers under s 218 of the Income Tax Assessment Act 1936 (Cth), the applicant stood to recover a substantial amount pursuant to the terms of that deed. However, the Commissioner's claim to that amount was made part of the settlement of the Federal Court applications. 13 In March 1998 the applicant applied for and obtained a warrant under s 130 of the Act to seize certain artworks which, so his investigations had revealed, formed part of the Deceased's estate. Various parties laid claims to some of the artworks. Once those claims were resolved, the balance of the artworks were sold with a net recovery of about $30,000. 14 Finally, the applicant continued the pursuit of an action which the Deceased had commenced in the Supreme Court of Western Australia against a Mr Peter Briggs to recover $150,000. The applicant obtained orders that he be substituted as the plaintiff in that action. By a deed of settlement dated 10 November 1998 the applicant reached a settlement of those proceedings with Mr Briggs. The terms of settlement involved the payment of a reasonably substantial amount of money. 15 Those terms of settlement, and the terms of settlement of the Supreme Court proceedings concerning the Brigadoon Estate and the Federal Court applications included confidentiality covenants. At a directions hearing the District Registrar made an interim order which preserved that confidentiality. I have read the three deeds of settlement, referred to above, which were annexed to the applicant's affidavit. I considered whether it was in the interests of justice to disclose the individual amounts referred to in each of the deeds, but decided that it was not necessary to do so. 16 After payment of charges under the Bankruptcy (Estate Charges) Act 1997 (Cth) and other costs and expenses in the administration, the applicant currently holds approximately $2.7 million in the estate bank account. In addition to the monies recovered and described above, the applicant has recovered some $33,614 by means which were not funded by the two indemnifying creditors. 17 The applicant's evidence is that in conducting the investigations and examinations which led to the various sums recovered he incurred costs totalling $741,183.97 excluding legal costs which totalled $1,207,056.95. 18 To date the two indemnifying creditors have advanced to the applicant a total of $1,899,847. The Commonwealth advanced $1,521,361.23 of that amount and Rothwells advanced the balance of $378,486.38. Excluding proofs of debt which the applicant has rejected, the two indemnifying creditors' proofs of debt constitute 73.6% of the total proofs of debt received to date. 19 The applicant has sworn that but for the indemnities provided by the two indemnifying creditors, he would have had no funds available to him as trustee to undertake the investigations or commence the proceedings which have resulted in the recovery of the assets to which he deposes in his affidavit. The applicant further swore that had he not been able to undertake the investigations and commence the proceedings which have resulted in the recovery of the assets to which he has deposed in his affidavit, the net asset deficiency of the estate would have been such that no dividend would have been payable to the creditors of the estate. I accept all of that evidence. 20 On 3 November 2000, before making this application, the applicant issued a circular to all known creditors of the estate notifying them of his intention to make this application and setting out the orders sought in it. The application was filed on 24 November 2000. Pursuant to directions made on 11 December 2000 the applicant has served a copy of the application on all known creditors of the estate. No creditor has sought to intervene or oppose the orders sought. The orders sought are, relevantly, that the property recovered by the estate under the indemnity provided by the indemnifying creditors be applied as follows: · first in repayment to the indemnifying creditors of the amounts advanced by them to the applicant under the terms of the deed of indemnity; · secondly in payment of nine-tenths of the balance remaining to be shared between them rateably in the amounts advanced by each of them to the applicant; and · thirdly in payment of the balance in the order provided by s 109(1) of the Act. 21 In round figures, the effect of the first two of the above orders would be to repay approximately $1.9 million of costs advanced by the two indemnifying creditors and to pay them a priority distribution of approximately $710,000. This would leave a balance of approximately $79,000 for distribution in accordance with s 109(1) of the Act.
Section 109(10) 22 Section 109(10) provides as follows: "Where in any bankruptcy: (a) property has been recovered, realized 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."
my reasoning 23 I am satisfied that the moneys recovered by the trustee and referred to in paragraphs 11, 13 and 14 above constitute property or expenses (or both) which have been recovered under an indemnity for costs of such litigation and expenses given by the two indemnifying creditors - see the authorities discussed by Lee J in Serra-Sanfelin (Federal Court of Australia, unreported, 30 June 1988, Judgment No. 349/88) at 9-13; see also Power Demolitions Pty Ltd v Tosich Construction Pty Ltd (1998) 16 ACLC 410 at 412-413 and Parkston Limited (In Liquidation) [2000] NSWSC 764 at paras 41-42. I accept the applicant's evidence and submissions to the effect that the indemnifying creditors assumed a significant risk at the time when they agreed to indemnify him so as to enable him to conduct investigations and instigate the Federal Court applications. I accept also that those applications raised complex matters of both law and fact. It was by no means certain that the applicant would have succeeded in those proceedings. It is not possible to assess the degree of risk involved in the proceedings referred to in paragraph 14 above. However, those proceedings were defended and I infer that they involved the usual hazards which accompany most litigation. The other creditors had ample opportunity to participate, but they declined. No amount would have been recovered but for the indemnities and the risk undertaken by the two indemnifying creditors was significant. Each of the indemnifying creditors was exposed to a substantial amount for costs. I take into account the fact that the combined admitted debts of the indemnifying creditors represent approximately 75% of the total value of proofs of debt lodged to date. I take into account, also, that no other creditor opposes the proposed orders, despite having been given two opportunities to do so. I refer also to the evidence, set out at paragraph 18 above, which I have accepted. 24 The policy behind s 109(10) has been identified as being at least twofold. First, to encourage creditors to indemnify trustees in bankruptcy who wished to pursue claims in the administration of bankrupt estates: Re Ken Godfrey Pty Ltd (1984) 12 ACLC 1071 [a case involving the equivalent of s 109(10) in the Corporations Law viz s 564]. Secondly, to reward creditors who bear the burden and take the risks of litigation: Re Glenisia Investments Pty Ltd (In Liquidation) (1996) 14 ACLC 237 and the cases there discussed. 25 As Wilcox J observed in Re Steven Abrahams (Federal Court of Australia, unreported 4 September 1990, Judgment No 542/90) at 4, the determination of what is a proper proportion to be awarded to the indemnifying creditors is very much a matter of impression. 26 Taking into account all of the above-mentioned factors and the general factual circumstances of the matter, I consider that the orders sought by the applicant are appropriate. There will be orders that: 1. Pursuant to s 109(10) of the Bankruptcy Act 1966, the applicant distribute the net amount after costs, remuneration and other expenses recovered and identified by him in paragraphs 40(c), 66 and 70 and quantified in total in paragraph 71 of his affidavit sworn 23 November 2000 in the following manner: (a) first, in repayment to the Commonwealth of Australia and Rothwells Limited (In Liquidation) of the amounts advanced by them to the applicant under the terms of a deed of indemnity dated 23 December 1996; (b) secondly, in payment to the Commonwealth of Australia and Rothwells Limited (In Liquidation) of nine-tenths (9/10ths) of the balance after payment of the amounts referred to in sub-paragraph (a) above to be shared between them rateably in the amounts advanced by each of them to the applicant under the above-mentioned deed; and (c) thirdly, in payment of the balance, after payment of the amounts referred to in sub-paragraphs (a) and (b) above, in the order provided by s 109(1) of the Bankruptcy Act 1966. 2. The costs of this application be costs in the administration of the estate and be paid out of the estate. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of Justice Carr.
Solicitor for the Applicant: Messrs Blake Dawson Waldron
Power Demolitions Pty Ltd
Tosich Construction Pty Ltd