Tapp v LawCover Insurance Pty Ltd

Federal Court of Australia|2013-01-04|Before: Rares J

Background 2 Mr Gray was made bankrupt on 9 April 2009. Earlier, on 29 June 2007, his practising certificate had been suspended. In December 2009, the Federal Magistrates Court granted the applicants leave to commence proceedings under s 58(3) of the Bankruptcy Act 1966 (Cth) in respect of, inter alia, a claim for professional negligence against Mr Gray in respect of his conduct during the period between 1994 and 2007. On 20 January 2010, the applicants brought proceedings against Mr Gray in the Supreme Court of New South Wales. Mr Gray had given notice of the applicants' claim to LawCover prior to 3 November 2009. The policy was a 'claims made' policy. Initially, LawCover instructed solicitors to act on Mr Gray's behalf in the Supreme Court. However, on 6 September 2010, LawCover's solicitors wrote to the applicants' solicitors informing them that their client had decided to decline indemnity on the claim. LawCover alleged that the claim arose, at least indirectly, from dishonesty by Mr Gray, which was a circumstance excluded from indemnity under cl 20 of his Runoff Professional Indemnity Insurance Policy 2009/10. 3 Subsequently, on 12 November 2010, the Supreme Court ordered default judgment in favour of the applicants with damages to be assessed. On 7 February 2011, that Court assessed damages at $290,845.50 and awarded $298,821.31 in pre-judgment interest as well as costs in favour of the applicants: Tapp v Gray [2011] NSWSC 44. The applicants sought unsuccessfully to persuade LawCover to reverse its earlier declinature decision. But by its solicitor's letter of 14 April 2011, LawCover adhered to its declinature. The applicants and their solicitors then diverted their attention to pursuing other complex litigation. 4 On 11 July 2012, the applicants' solicitors wrote to the trustee informing it of the Supreme Court judgment and inquiring when it had received the bankrupt's statement of affairs. On 20 July 2012 the trustee wrote back, wrongly asserting that it could not provide this information to the solicitors, but that it was available on the National Personal Insolvency Index. Belatedly, on 22 October 2012, the applicants' solicitors wrote to the trustee pointing out that its reply was erroneous. They inquired as to when Mr Gray would be discharged from bankruptcy and they provided the trustee with another copy of the Supreme Court's judgment and the information that LawCover had declined indemnity. The solicitors drew the trustee's attention to the applicants' rights under s 117 of the Act to receive all moneys paid to Mr Grays' estate by LawCover in respect of their claim. The letter then stated that the applicants required the trustee to take proceedings against LawCover on the basis that they would indemnify the trustee, including in respect of any adverse costs orders, and would themselves conduct the proceedings. The letter stated if the trustee refused to bring the proceedings, the applicants would reluctantly have to apply to the Court to compel the trustee to do so. 5 On 24 October 2012, the trustee emailed the applicants' solicitors with the information that Mr Gray had filed a statement of affairs on 21 January 2010 and was expected to be discharged from bankruptcy on 22 January 2013. On 31 October 2012, the trustee's solicitors wrote to the applicants' solicitors saying they were awaiting instructions on the other matters raised in their letter of 22 October 2012. The applicants' solicitors responded the next day and enclosed a copy of LawCover's solicitor's letter of declinature of 6 September 2010, adding that they were instructed to assist the trustee's solicitors in any way they could. 6 The trustee's solicitors took until 23 November 2012 to make any substantive reply. On that day, they wrote that the trustee would not bring proceedings against LawCover on behalf of the applicants. Their letter concluded: "However, the Official Trustee will neither consent to nor oppose your clients seeking declarations from the Court to the following effect: 1. that Mr Gray's right to indemnity under the policy has vested in the Official Trustee in circumstances where LawCover has denied indemnity; and 2. the Official Trustee's rights to pursue LawCover be assigned to your clients on the basis that they meet all of the Official Trustee's costs including any adverse costs order." 7 I will return to this unfortunate letter later. On 27 November 2012, the applicants' solicitors wrote back, correctly, suggesting that the Court was unlikely to make the second declaration in the trustee's proposed proceedings, especially where there had been no assignment. They asked the trustee to agree to a formal assignment of the rights vested in the trustee by s 117 of the Act under s 12 of the Conveyancing Act 1919 (NSW). They also raised what they saw as a risk to the applicants' rights to pursue recovery from LawCover under s 117, if Mr Gray were discharged, and asked the trustee to object to that occurring. 8 On 30 November 2012, the trustee's solicitors replied, correctly, that no ground of objection was available to a trustee under s 149D of the Act so as to enable a creditor to pursue a claim for indemnity under the Act. The letter ignored the applicants' solicitors' suggestion of an assignment and repeated the earlier proposal of 23 November 2012. 9 On 5 December 2012, the applicants commenced these proceedings seeking:

The relevant operation of the Bankruptcy Act 12 In general terms, s 58(1) of the Act vests the property of the bankrupt forthwith, at the time the debtor becomes bankrupt, in the Official Trustee or, if applicable, the registered trustee (I will refer to these as simply as the trustee). That provision also vests in the trustee after-acquired property of the bankrupt as soon as it is acquired by, or devolves on, the bankrupt. Ordinarily, the right of a bankrupt to make claims upon, and to receive, indemnity from a liability insurer could be expected to vest in the trustee under s 58(1). But, the Act makes specific provision in s 117 for what is to happen to a particular right of a bankrupt to indemnity under a contract of insurance against liabilities to third parties where the bankrupt incurred such a liability either before or after becoming bankrupt. Relevantly, s 117 provides that the bankrupt's right of indemnity for such a liability vests in the trustee and creates a duty of the trustee to use any amount the trustee receives from the insurer to pay the claim of the particular creditor in respect of which the liability policy responds. The section provides: (1) Where: (a) a bankrupt is or was insured under a contract of insurance against liabilities to third parties; and (b) a liability against which he or she is or was so insured has been incurred (whether before or after he or she became a bankrupt); the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party to whom it has been incurred. (2) Subsection (1) does not limit the rights of the third party in respect of any balance due to him or her after the payment referred to in that subsection has been made. (3) This section applies notwithstanding any agreement to the contrary, whether entered into before or after the commencement of this Act. 13 Thus, s 117 creates a preferential treatment for the third party creditor over all other creditors. The section segregates the proceeds of the policy from amenability to distribution among the general body of the bankrupt's creditors and obliges the trustee to pay those proceeds to the creditor whose claim against the bankrupt was insured: cf as to the analogous provisions of s 562 of the Corporations Act 2001 (Cth), AssetInsure Pty Limited v New Cap Reinsurance Corporation Limited (In liq) (2006) 225 CLR 331 at 358-359 [78]-[80] per Kirby and Hayne JJ with whom on this point, Gleeson CJ, Heydon and Crennan JJ agreed at 343 [28]. 14 Importantly, s 117(1) is a separate and distinct provision that vests property of the bankrupt in the trustee in a way different to the general provisions for the vesting of all other available property of the bankrupt provided for in s 58. The specific requirements of s 117 derogate from the general principle underlying the Act that the property of the bankrupt be vested in the trustee for equal distribution to the general body of creditors. Accordingly, the trustee has only one power to deal with the property consisting of a right to indemnity under insurance policies to which s 117 applies and that power is to pay the particular creditor in preference to all other creditors of the bankrupt's estate: Anthony Hordern & Sons Limited v The Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1 at 7 per Gavan Duffy CJ and Dixon J, Plaintiff M70/2011 v Minister for Immigration and Citizenship (2011) 244 CLR 144 at 187-188 [84] per Gummow, Hayne, Crennan and Bell JJ. 15 The trustee's duties prescribed inclusively in s 19(1) of the Act require the trustee to take appropriate steps to recover property for the benefit of the estate, administer the estate as efficiently as possibly by avoiding unnecessary expense, and exercise powers and perform functions in a commercially sound way (s 19(1)(f), (j) and (k)). The trustee has a range of powers under the Act, including those in s 134. These include the power in s 134(4) to apply to the Court for directions at any time in respect of a matter arising in connection with the administration of the estate. 16 A trustee in bankruptcy has dual functions, first to administer the estate in the interest of creditors and the bankrupt, and secondly to exercise as a public duty and for the public welfare, certain powers given and duties imposed by the Act. The trustee's conduct is subject to the supervision of the Court, including under Div 4 of Pt VIII of the Act. And, historically, a trustee in bankruptcy has been regarded as an officer of the Court. He or she must bring reasonable skill to the performance of his or her duties. These principles were collated by Northrop, Wilcox and Cooper JJ in Adsett v Berlouis (1992) 37 FCR 201 at 208 and have been applied many times since, such as by ML Foster, von Doussa and Sundberg JJ in Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 560D-G. 17 A trustee in bankruptcy is governed by the general law relating to trustees, save to the extent that the Act modifies the trustee's position: Adsett 37 FCR at 209. A trustee must exercise judgment, so as to save the estate unnecessary expenditure of money, but must also discharge the public duty imposed by the Act conformably with the trustee's obligation to administer the estate, to maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt: Citicorp 71 FCR at 560G-561A. 18 Where a trustee is asked to assign a claim or cause of action vested in him or her, the trustee ordinarily will not be in a position to undertake a detailed analysis of the possible cause or causes of action and their prospects of success. As the Full Court explained in Citicorp 71 FCR at 562B-565E, the trustee must take a practical approach. But, unless the claim or cause of action is frivolous, vexatious, an abuse of process, or has no reasonable prospect of success, if the bankrupt or a third party is willing to prosecute the action and the trustee is not, the trustee ordinarily will assign or sell the right to bring the proceedings, perhaps on terms of receiving some of the proceeds: 71 FCR 563D-564F; see also Re Nguyen; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320 (French J). 19 The discharge of the bankrupt from bankruptcy effected under s 153 does not affect the applicants' rights as creditors to prove in the administration of assets vested in the trustee, but unrealised at the time of discharge. As Hill J, with whom Lockhart and Einfeld JJ agreed, said in Tarea Management (North Shore) Pty Limited (In liq) v Glass (1991) 28 FCR 93 at 99, the mere fact that the debtor is released from a debt does not mean that the debt did not remain a provable debt in the bankruptcy that has been discharged. He held that there is no reason in principle why a creditor cannot lodge a proof of debt after the bankrupt's discharge from bankruptcy. Justice Hill said that the administration of a bankrupt's estate may not have come to an end on discharge, particularly where the discharge arose by operation of the Act at the expiration of three years. 20 Moreover, if, after the discharge of the bankrupt, additional assets that vested in the trustee by force of a provision of the Act, such as ss 58 or 117, came into the trustee's hands, a discharged debt is treated as a liability of the estate that is payable out of it. That is because the release effected by s 153(1) operates only to release the former bankrupt and does not operate to release the estate: Re Kavich; Kavich v Official Trustee in Bankruptcy (1995) 58 FCR 82 at 86D per Hill J. Accordingly, where the bankrupt has a cause of action that vested in the trustee and on which the trustee has not obtained judgment at the time the bankrupt is discharged under s 153, the trustee remains entitled to continue to pursue the action. And, if the trustee recovers money or assets for the estate at any time, he or she must then distribute that money or the proceeds of those assets among the creditors who had debts provable in the bankruptcy. The intervening discharge from bankruptcy and the release of the bankrupt cannot alter the existing rights of the trustee, and the creditors in respect of, at least, the property of the bankrupt that vested in the trustee before the discharge.

The trustee's submissions 21 The trustee's submissions made pursuant to my directions of 24 December 2012 contained the following assertions: (a) the proposal in its solicitors' letters of 23 and 30 November 2012 accorded with the decision of the Full Court in Citicorp 71 FCR 550 and also of French J in Re Nguyen 35 FCR 250; (b) in requiring Court approval of any assignment, the trustee was cognisant that it had not reviewed the policy, ascertained whether the rights were assignable and that LawCover would contest any assignment, so exposing the trustee to costs; (c) on a basis of information available to it, the trustee could not make an assessment of the rights available under the policy; and (d) s 117 gave the applicants standing to seek a declaration and no assignment was necessary for them to be entitled to the proceeding; (e) accordingly, any costs incurred in the preparation of such an assignment would be wasted.

Consideration 22 The trustee's submissions were misconceived and of no substance. In writing the letter of 23 November 2010, the trustee and its solicitors were refusing to act for or assist the only persons for whom the trustee held a right to receive money under the policy. Instead, the trustee and its solicitors were asking the applicants to undertake litigation in which the Court would be asked to declare what the pellucid duty of the trustee was, namely, to take proceedings itself on the basis of a full indemnity proffered by the applicants, or to assign to them the only asset of the estate that offered them the chance to recover what s 117 of the Act entitled them to receive, provided that LawCover was obliged to indemnify. The trustee's solicitors' response created unnecessary cost and expense in this litigation that has predictably involved two innocent parties, the applicants and LawCover, not to mention the Court, in a waste of resources. 23 I inquired today of counsel for the trustee the reason why it proposed that an application be made to the Court for declarations that the rights be assigned to the applicants. Counsel said, on instructions, that the trustee did not have a copy of the policy and did not wish to engage in the expense of having a public servant write a letter to LawCover or the applicants to ascertain what rights had vested, if any, in the trustee under the policy by seeking a copy of the policy wording. It is plain the wording was available and readily able to be obtained. LawCover would have been obliged to provide a copy, on any such inquiry, to a person entitled to enforce rights under it, such as the trustee in this situation. The attitude of the Official Trustee in this regard was an egregious breach of its duty under s 19(1)(f), (j) and (k) of the Act to ascertain what the trust assets were which it was responsible for administering and to have regard to the interests of the statutorily preferred creditors in that asset. It is inexcusable that the trustee failed to obtain the policy wording. This would have involved no substantive expense or trouble in respect of an asset that offered a prospect of recovering the entire value of the Supreme Court judgment of over $600,000. 24 There was no evidence that the terms of the LawCover policy, as I have said, were not available. Indeed, the applicants' solicitor had annexed the wording to his affidavit of 4 December 2012. In the month of indecision by the trustee in dealing with its cestui que trust's rights before the letter of 23 November 2012 was written, it made no inquiry of the applicants about any of the shadows its submissions boxed at, including whether they could provide a copy of the wording. Moreover, where the trustee was in doubt about how to treat the person entitled, its duty was to apply to the Court for directions as to whether it would be justified in agreeing to assign or permit the applicants to take proceedings in its name. 25 The trustee and LawCover did not suggest that the issue of whether the declinature was valid was other than bona fide arguable. If the applicants took an assignment and that was somehow challenged, the trustee could, and should, have entered a submitting appearance except as to costs. However, in its submissions today in relation to costs, LawCover submitted that it had never suggested that it might contest an assignment to the applicants of the rights under s 117. The reason for that is obvious and should have been to the trustee, let alone to its lawyers. Moreover, in Citicorp 71 FCR at 562B-C, the Court said, appositely to this matter: "The proceedings in this case illustrate how expense can be run up by seeking to have a preliminary investigation of the merits of a bankrupt's allegations by the trustee and the Federal Court where there are wide ranging conflicts in sworn evidence about the alleged claims. The cases will be few where some decisive point exists on which the trustee or the Court can be satisfied that the claim has no reasonable prospect of success. The more likely result of a review of the evidence will be that the trustee, or the Court, cannot be satisfied that no possible cause of action could be made out, because the possibility cannot be excluded that at trial on properly adduced and tested evidence facts sufficient to support a claim could be established. This was the conclusion of the trial judge in the present case." (emphasis added) 26 Similarly here, the applicants' rights to receive payment of any indemnity for which LawCover was liable to the trustee would only be able to be ascertained after a fully contested hearing of a bona fide dispute as to whether LawCover was entitled to decline liability. The trustee did not stand to benefit in any material way from the existence of the policy because of the applicants' rights to preferential statutory treatment in respect of its proceeds. There was therefore no reason, apart from being indemnified as to any costs it might incur in granting the assignment, why the trustee should not have assigned the bankrupt's rights to indemnity under the policy that had vested in it under s 117 well before, or at least by the time of, its solicitors' letter of 23 November 2012. 27 As I have said, s 19(1)(f), (j) and (k) obliged the trustee to take appropriate steps to recover the property for the benefit of the estate, administer the estate as efficiently as possible by avoiding unnecessary expense and exercise powers and perform functions in a commercially sound way. Its conduct in this instance fell well short of any attempt to fulfil such duties. It would have cost virtually nothing for the trustee to make any appropriate inquiries about its doubts as to the insurance policy's wording or appropriateness. The trustee knew that the one creditor with a liability against the bankrupt's estate to which that policy actually or potentially responded was owed over $600,000 under a judgment of the Supreme Court. Yet the trustee did nothing to take appropriate steps to recover that property or even to identify what rights under the policy were vested in it under s 117 by no later than the time the Supreme Court proceeding had been commenced against Mr Gray in December 2009. 28 Here, the only persons with an interest in the realisation of a claim under the LawCover policy were the applicants, so the estate, through the trustee, held the benefit of that claim entirely for them. If they were willing, as they were, to take an assignment of the trustee's cause or causes of action under the insurance policy with LawCover, the efficient, commercially sound, common sense course was for the trustee to grant such an assignment, provided that it was indemnified for the costs of perfecting it, which in any event would not have been great. The trustee must have very many precedents accumulated over the years to enable such a simple assignment to take place. If the trustee were in any doubt, then its only proper course was to apply to the Court for directions. 29 However here, an application for directions would have been very difficult to justify in the light of s 117, the decision in Citicorp 71 FCR 550 to which the trustee, itself, referred in its submissions and the willingness of the applicants to take the assignment. 30 Whether or not LawCover was entitled to refuse indemnity was the substantive issue that stood between the applicants being able to recover whatever indemnity the bankrupt had been entitled to, that is now vested in the trustee under s 117 of the Act. It was not for the trustee, however, to ignore the interests of the creditors with the potential to benefit from the right to pursue LawCover by refusing to assign the claim to them and then to require them to bring proceedings in the Court, in effect to obtain a declaration that the right be assigned, as the trustee's solicitors' letter of 23 November 2012 did. There was no need for the trustee, in the circumstances to fail to make the simple decision to assign the right to indemnity and instead to require litigation, in which it did not want to participate, to declare that it should do so. 31 The trustee here is a statutory officer holder that should have used its accumulated experience and expertise derived over the many years in which it has exercised its various functions under the Act. It has displayed none of that experience or expertise in this litigation. The trustee did not even understand its right to apply to the Court for directions where it was in doubt as to what it should do for the persons, being the applicants, for whom it held any rights under s 117 to claim and receive indemnity under the policy with LawCover. Typically, as Jacobs' Law of Trusts (7th ed) at [2134] points out, statutory provisions such as s 134 of the Act or s 63 of the Trustee Act 1925 (NSW) enable a trustee to seek judicial advice or directions when it is faced with litigation and desires advice whether to sue or defend or where it is in doubt as to the extent of a power of the sale and the manner in which it is to be exercised. 32 Given that the applicants were seeking to recover indemnity for a judgment debt of about $600,000 under the right the trustee held for their benefit under s 117, the trustee had a duty to act in their best interests. The applicants made all appropriate offers to indemnify and assist the trustee. They received no cooperation.

Conclusion 33 For these reasons, I will make declarations in the form agreed by the parties. 34 The trustee informed the Court after I delivered the above reasons orally that it will assign its rights to indemnity under the policy to the applicants subject to any reasonable payment of costs. LawCover has sought that its costs of the interlocutory application be paid by the applicants and/or the trustee. The applicants and the trustee have reached an agreement that each bear their own costs. 35 In my opinion, the difficulties in these proceedings to date have been largely occasioned because of the failure of the trustee to carry out its duties under s 19(1) of the Act for the reasons that I have given. When I required submissions to be made by the trustee on 24 December 2012, I drew attention to Pt VB of the Federal Court of Australia Act. Belatedly, the trustee, which has been a party to this litigation from its inception, only this morning recognised its obligation to act in a way that confirms with the overarching purpose of the civil procedure provisions of the Act and the Federal Court Rules 2011 (Cth). In my opinion, the real reason for parties to have borne their substantial expenses in this litigation up to today has been due to the trustee's conduct. While the parties seem to have had some doubt as to what, in my opinion, was pellucid about the situation after the discharge of Mr Gray from bankruptcy, the trustee offered no assistance to them or the Court on a question that is fundamental to its functions under the Act. Hence, the utility in the declarations that I will make. 36 I am of opinion that the appropriate order in the circumstances of this case is that the trustee bear, and not to seek to recover from the estate of the bankrupt, the costs thrown away by reason of the proceedings before the docket judge and before me to date. It is also appropriate to order that the trustee pay LawCover's costs so thrown away. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

(Cth), Pt VB Federal Court Rules 2011(Cth)

Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 applied Anthony Hordern & Sons Limited v The Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1 applied Plaintiff M70/2011 v Minister for Immigration and Citizenship (2011) 244 CLR 144 applied Re Kavich; Kavich v Official Trustee in Bankruptcy (1995) 58 FCR 82 applied Re Nguyen; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320 applied Tapp v Gray [2011] NSWSC 44 referred to Tarea Management (North Shore) Pty Limited (In liq) v Glass (1991) 28 FCR 93 applied

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