Federal Magistrates Court of Australia|2003-07-03

The applicant's affidavit was detailed and gave a detailed explanation of the background to the Supreme Court proceedings and it is clear from that affidavit why the Mareva injunction was granted. In particular, the affidavit (par 155) refers to the deed of charge and guarantee by which Hubbard has guaranteed the loans from Billingsby to the J R H trust. As Mansell had seen this affidavit prior to his report, the omission of Hubbard Holdings as a debtor is even more puzzling.

47. The other matter which is missing from Mansell's report is the interest of Hubbard in Billingsby. True it is that it is difficult to determine precisely what interest he has at this stage and what the assets of Billingsby may turn out to be. There are many complications but Hubbard admits that he is a primary beneficiary being the spouse of Elizabeth Anne Hubbard. The position of Billingsby will no doubt be the subject of litigation in the Family Court, as Mrs Hubbard has now apparently filed an application, and possibly in the proceedings in the Supreme Court. The evidence given before me was limited of necessity because of the matters in issue and the need for a determination fairly quickly before the creditors meeting took place. However, even from the short evidence I have heard there are concerning accounts relating to Hubbard's interest in Billingsby. Those matters include: -

a) an affidavit filed by Elizabeth Anne Hubbard in the proceedings to set aside the statutory demand in which she in essence indicates that although she had nominal and legal control of Billingsby Estate Pty Ltd, Hubbard was the real financial controller;

b) Hubbard's evidence that he exercised no control although he had access to all of the accounts including all of the bookkeeper's records;

c) the blatant absurdity that someone would advance millions of dollars unsecured, to an entity in which he had no expectation of any interest and then guarantee the advances;

d) his evidence that he was expecting the money would ultimately be returned to him when the vineyard became profitable.

48. The question of Hubbard's interest in Billingsby and Billingsby's own affairs obviously need further consideration. However, I note that Mansell made no mention in his report of any possible interest of Hubbard in Billingsby which is consistent with him accepting whatever Hubbard told him about his financial affairs without any real scrutiny.

49. The applicants contend that the abuse of process is constituted by the following:

a) The appointment of a controlling trustee by Hubbard, on advice, as a means of circumventing the Mareva injunction and obtaining access to funds otherwise set aside for preservation of assets pending the applicants' litigation in the Supreme Court;

b) Collusion between Best Hooper and Strongman and Crouch to obtain payment in full of the latter's costs which are said now to total about $90,000 and to secure funds to act in the ongoing litigation, thereby dissipating the assets available to meet the claim of the applicants.

50. The effect of funding his legal representation, it is contended, would simply be to use remaining assets which would be otherwise available for creditors, including the applicants, on an unmeritorious defence thereby dissipating their assets which have been protected by the Mareva injunction.

51. The respondents, particularly the second respondent, contend that the appointment of the second respondent is merely an avenue open to the applicant under the Act and one which in the present circumstances is appropriate. Appropriate because it will enable creditors to be paid and provide a defence to litigation by the applicants to be pursued with legal representation. The creditors can vote at a creditor's meeting and decide whether some arrangements under Part X of the Act are to be put into place.

52. It is clear that the main purpose of the appointment of the controlling trustee is to circumvent the Mareva injunction. The respondents contend that this is permissible under the Act (as the injunction does not operate in rem) and appropriate, so that creditors can be paid and so that Hubbard can instruct solicitors to act for him in defence of the applicant's claim in the Supreme Court.

53. There are many features about the appointment of Mansell, his proposals to realize Hubbards assets and his report, which are troubling. The controlling trustee has made no investigation of Billingsby's affairs and in particular whether it can meet its liabilities totalling about $10 million. This would seem to be a crucial investigation in deciding whether to fund the Supreme Court litigation.

54. Nevertheless, Mansell's report makes no reference to the financial position of Billingsby. This is also relevant in a consideration of whether Hubbard owes Hubbard Holdings Pty Ltd $9.128 million and relates directly to his solvency. The only reference to this by Mansell is reference to the deed of charge and guarantee by which Hubbard has guaranteed loans owing by Billingsby Estate to Hubbard Holdings. Mansell simply notes that Hubbard said he signed the document under duress and that the enforceability of the document has not been determined at law. He apparently made no further investigation. Having heard Hubbard's evidence as to the duress he alleges, and the likelihood of the validity of the charge and guarantee, I find Mansell's omission in this respect is also significant. In determining to spend large sums on defending the applicants claims, it is not just a matter of considering whether the applicant might or might not succeed in her Supreme Court action (and the extent to which she might succeed) but also a consideration of whether the loans made to Billingsby can be recovered. A prudent trustee would be unlikely to fund litigation which was unlikely to benefit Hubbard and could prejudice his other creditors.

55. Without such enquiry, it seems premature to suggest that one or more of the assets be sold and further legal costs incurred. No such enquiry has been made and indeed, the report does not mention this important issue.

56. There is also the question of whether and if so, what interest in the Billingsby Trust itself Hubbard has. The evidence on this issue is contradictory. On the one hand, although Mrs Hubbard asserts that Hubbard controlled the financial aspects of Billingsby, Hubbard denies that to be the case. There is his evidence that he lent vast sums of money, unsecured, to Billingsby, a company in which he asks the Court to accept that he has no legal interest. This is a matter which will no doubt be investigated further in the Family Court proceedings or in the Supreme Court proceedings. It seems to me highly questionable that Hubbard would have made the advances to Billingsby if he did not have an expectation of an interest in Billingsby and he is, pursuant to the terms of the Trust Deed, a primary beneficiary of the Trust of which Billingsby is the Trustee. None of this was raised in Mansell's Report.

57. Then there are the creditors themselves. The unsecured creditors total $350,592. They include a liability of $43,000 to the applicant which relates to an order for costs obtained in the Supreme Court and subject to taxation. There are counsel's fees and fees outstanding to Strongman and Crouch. There are also fees to Davies French Pty Ltd and Ernst & Young Accountants. In addition, two of the creditors are persons from whom Hubbard said he had borrowed money and there is no evidence that they are presently pressing for payment. None of the creditors has obtained a judgment.

58. The ANZ Bank have sent to Hubbard a letter dated 7 May 2003, as guarantor of Billingsby Estate Pty Ltd, which encloses a notice of default sent to Billingsby. The arrears under the mortgage are said to be $28,200. It is contended by Mansell and Hubbard that as Hubbard has signed a guarantee and mortgaged 1 Seymour Grove to secure this loan, the ANZ is a creditor who must now be paid. As Mansell has undertaken no assessment of Billingsby and its capacity to pay, it is difficult to see how he could assert that an immediate liability arises. Whatever Billingsby's asset position, Hubbard conceded in cross-examination that Billingsby was capable of leasing out its vineyard to provide income. There is simply no evidence that Billingsby cannot meet its liability to the bank and therefore whether the guarantee would be called upon in the short term.

59. In relation to the debt to the Australian Taxation Officer a notice of assessment from the Australian Taxation Office dated 30 July 2001 was relied upon. The amount payable by Hubbard is $9889.70. It does not appear that his income tax return for the year ended 30 June 2002 has yet been filed. It is also not clear why Hubbard has not chosen to pay this modest liability in the last 12 months when other liabilities have clearly been paid. In any event, other than a notice of assessment it does appear not that the ATO have taken any further action to recover the debt.

60. I accept that Strongman and Crouch will wish to be paid their legal fees. The applicant puts into issue what amounts are outstanding, but again at this stage no judgment has been obtained.

61. In a letter dated 28 May 2003 Best Hooper indicated that Mansell instructed them that he had formed the view that the following payments should be made for the purpose of safeguarding the value of the debtor's property and it would be in the interest of creditors generally if those payments were made:

a) Arrears of mortgage payments of about $10,000. These are the payments to the ANZ Bank for which Billingsby is primarily liable;

c) Engagement of Best Hooper to defend the Supreme Court action on the basis that if the claim is undefended, that is likely to disadvantage other creditors;

d) The payment of $90,000 to Strongman and Crouch to obtain their file.

62. Mansell proposes to create a fund for these payments by exercising his powers under s.190(4) and selling Hubbard's interest in Currawong Ski Lodge and 1 Seymour Grove, Brighton.

63. The problem is that there is no inclusion of Hubbard Holdings as a significant creditor and any explanation of how its debt is to be paid. They are on any view the largest creditor. Similarly, although the applicants would be, if successful, the largest creditors, the amount owing to them at this stage is quite small, being only the amount of the order for costs which are yet to be taxed. The interests of the two largest creditors, albeit that one is a contingent creditor, have apparently been ignored by Mansell. Given that s.190(2)(d) empowers the controlling trustee to deal with the debtor's property in a way that would in the opinion of the trustee be in the interests of the creditors, it is difficult to see how payment in full of some creditors whilst the largest creditors may potentially receive nothing if Mansell's proposals are put into place, can be said to be in the interests of all of the creditors.

64. In addition, it is difficult to see why Mansell refers to the Supreme Court proceedings as being undefended in the event that funds are not made available to Hubbard to instruct solicitors. True it is that he may have to undertake his own defence, but he has done so in the proceedings before me and whilst he may wish to be represented, it is not correct to assert, as Mansell does, that the proceedings would be undefended. He may be at a disadvantage, but that is an entirely different thing from asserting that the proceedings will be undefended.

65. The concerning aspect of this matter is that the applicants have a cause of action which appears on the face of it, to have a likelihood of success (the extent to which I am unable to say). The Supreme Court have already identified the necessity to prevent further dissipation of Hubbard's funds so that there is, at the conclusion of the proceedings, some money available to meet the applicant's judgment. Spending most of that money in payment of his legal expenses (especially if it is an unmeritorious defence) is no less a dissipation than spending it in other ways. This has been clearly recognised by the Mareva injunction.

66. Finally, although I note that Hubbard has unsuccessfully applied to have the Mareva injunction lifted, discharged or varied, it is still open to him to make application to the Supreme Court for the release of funds for the purpose of his continuing representation and as it is the Supreme Court who is seized of the matter, it would be appropriate in my view, for that Court to determine whether Hubbard should be permitted to have recourse to any of his assets for that purpose. It is also open to him to seek a release of funds for payment of a specific liability or liabilities, should that imperative arise.

67. I am satisfied that the applicants are, in terms of s 208(a), interested persons and I am further satisfied, for the reasons expressed , that there are special circumstances pursuant to s 208(b) that justify the Court in making an order releasing the debtor's property from control under this Division.

68. In Laurence v Mulroney (1987) 15 FCR 271, Burchett J considered the circumstances in which the Court might determine whether when special circumstances are shown they are sufficient to justify an order releasing the debtor's property from control under Division 2 of Part X. His Honour pointed out that it was not necessary to appoint a controlling trustee for a meeting of creditors to be called and that it is relevant to consider whether the existence of a controlling trustee is likely in the particular circumstances of the case, to serve the purposes suggested by the Clyne Committee. His Honour said at page 271:

"The Committee referred to the "hiatus" which occurred under previous procedures because of the "unavoidable delays that take place in the holding of meetings and in obtaining assents to deeds". The Committee continued:

During this hiatus the debtor's affairs are out of control, assets are frequently dissipated and, where a business is involved, unnecessary losses are often incurred. In the situation described, neither the debtor nor the trustee is in a position to exercise effective control of the debtor's affairs."

"It seems to me that when special circumstances are shown, in order to determine whether they are sufficient to justify an order releasing the debtor's property from control under Division 2 of Part X, it is relevant to consider whether the existence of a controlling trustee is likely in the particular circumstances of the case, to serve the purposes suggested by the Clyne Committee."

70. This is a case in which for the reasons that I have outlined there are special circumstances. It is equally clear that the existence of a controlling trustee is unlikely to serve the purposes suggested by the Clyne Committee. The debtor's affairs are not out of control, assets are not being dissipated and unnecessary loss is not being incurred. Indeed the reverse is the case. The debtor's assets are not being dissipated because of the Mareva injunction. There are no business assets which need to be considered and the real gravamen of what the controlling trustee wants to do is to go behind the Mareva injunction, one of the effects of which would be to pay some creditors in full, at the expense of others.

71. It is not necessary for me to make a finding for the purposes of s.208 as to whether Hubbard is solvent or not. I note that Mansell opines in his report:

* "Were it not for the legal actions taken by Mrs Reid, he would be able to pay his debts as and when due.

* Even if the action by Mrs Reid is successful, it appears the debtor would be able to meet his financial obligations."

72. Of course Mansell has ignored Hubbard's guarantee of Billingsby's liability to Hubbard Holdings but he has also ignored any interest that Hubbard may have in the Billingsby Trust and is unaware of the financial position of Billingsby. Mansell's view is that Hubbard's inability to pay his current debts is due wholly to the existence of the Mareva Injunction.

73. Section 187 of the Act provides an interpretation of various terms used in Part X. Of particular relevance, debtor means person who is insolvent. Section 187(1)A defines insolvency to include temporary insolvency.

74. In Stankiewicz v Plata (2000) FCA 1185, the Full Court of the Federal Court of Australia considered (in the context of annulment of a sequestration order) the question of insolvency and at paragraph 29 said:

"in order to satisfy the court that he or she is "able to pay his or her debts" it is not necessary for the debtor to show that he or she has cash resources immediately available for this purpose. But the debtor must be able to realise assets sufficient to pay the debt with in a relatively short time. As Barwick CJ said in Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at 670, the resources to be considered:-

extend to monies which [the debtor] can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time that relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in it's entirety and generally speaking ought not to be drawn simply be drawn from evidence of a temporary a lack of liquidity. It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency".

75. Leaving aside the uncertain position of Billingsby and the possible interest of Hubbard, the debtor has assets from which he can meet his existing debts, but those assets are the subject of the Mariva Injunction. Whether he can get access to those funds to pay his debts as and when they fall due is a question which in my view is still open. In a differently presented case by Hubbard to the Supreme Court, if the circumstances were compelling, the Mariva Injunction might be varied. Thus at this time, I am not able to find conclusively that he is insolvent.

76. In submissions the Applicant alleges that Best Hooper and Mansell conspired with Hubbard to defeat the Mariva Injunction by commencing process to dissipate Hubbard's assets (see paragraph 52 of the Applicants out line of submissions).

77. In Clyne v The Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589 at 599, the High Court distinguished between the pursuit of "an ulterior private purpose" which may not necessarily amount to an abuse of process, and a purpose "foreign to the process in question" Clyne v The Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589 at 599.

78. In Re Jackson: Ex Parte Sterling Industry Ltd, (unreported Burchett J, 5 September 1986), Burchett J found an abuse of process had occurred when the debtor presented a petition under s.55 of the Act. In particular he found that:

"it is a purpose foreign to Bankruptcy Laws, and an abuse of procedure under section 55, for a debtor to present a petition for the purpose for making it impossible for an order of this Court, which it is within his capacity to obey, to be enforced by contempt proceedings against him. At least this must be so if he is not in fact insolvent".

79. In Re Mottee (1977) 29 FLR 406, Riley J said (at 415) on the right to file a debtors petition -

"that it will not extend to the length of allowing the debtor to use the Bankruptcy Law in order to assist him in committing frauds on his creditors".

80. Whilst the facts in Re Jackson: Ex Parte Sterling Industry Ltd were somewhat starker than the present case, I am satisfied that the appointment of the controlling trustee was for a purpose foreign to the Bankruptcy Laws. That purpose was to pay some creditors at the expense of others. The fact that there was another purpose to the use of the funds, namely to fund the defence in the ongoing Supreme Court proceedings does not detract from the fact that Hubbard intended to pay in full his current creditors in the knowledge that there were other creditors, particularly Hubbard Holdings Pty Ltd, who would thereby be disadvantaged.

81. However in my view the evidence does not support a finding that either Best Hooper or Mansell were parties to this abuse. Though they stood to gain a client and thereby potentially to profit in a commercial sense, this is far from an abuse of process. Though Mansell's examination of Hubbard's affairs may have been less rigorous than it might have been, in the end he relied upon the information provided by Hubbard and the position of the controlling trustee was in my view from Mansell's perspective a "use" rather than "an abuse" of the process.

82. The same can not be said for Hubbard however who was well aware of the effect that a payment to his existing creditors would have on his other creditors, particularly Hubbard Holdings. I am satisfied that the alternate ground has been made out and were it necessary I would have set aside the authority signed the 20 May 2003 pursuant to s.188 of the Act as an abuse of process.

I certify that the preceding eighty-two (82) paragraphs are a true copy of the reasons for judgment of Bryant CFM

Reid & Anor v Hubbard & Anor [2003] FMCA 266 (3 July 2003)

Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666

Clyne v The Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589

Reid & Anor v Hubbard & Anor [2003] FMCA 266

At a glance

Court

Decision date

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Judgment (56 paragraphs)

Parties

Cases Cited (7)

Reid & Anor v Hubbard & Anor [2003] FMCA 266 (3 July 2003)