Willoughby v Official Trustee in Bankruptcy

THE COURT: 1 The appellants were first declared bankrupt on 10 October 1990. On 16 January 1994 the appellants were discharged from bankruptcy by effluxion of time under s 149 of the Bankruptcy Act 1966 (Cth) ("the Act"). In August 1997 the first appellant was again made bankrupt. In November 1997 the second appellant was again made bankrupt. 2 By deed dated 9 February 1991 between the Trustee and the appellants the Trustee assigned back to the appellants their interest in a chose in action which the appellants and others had against Esanda at the time of their first bankruptcy, for alleged misrepresentation ("the Esanda claim"). The assignment was on the basis that the appellants would pay to the Trustee 80 per cent of any net proceeds they recovered from the action against Esanda. 3 In November 1993 the Esanda claim was settled for the sum of $1.9 million. Of that sum $400,000 was applied in payment of legal costs. $1.5 million was paid into a trust account of a firm of accountants on behalf of the claimants, and was said to include payments of $15,000 on behalf of the appellants. Shortly thereafter the Trustee received 80 per cent of that sum, viz $12,000. 4 The Trustee was dissatisfied with this outcome, and correspondence issued in relation to it. Ultimately, the Australian Government Solicitor ("AGS"), in a letter dated 25 May 1994 set out the terms of an agreement reached with the appellants' solicitor. That agreement provided for payment of the claims of various creditors of the first bankruptcy out of the proceeds of the Esanda claim, after which the balance of the monies were to be released to Willoughby Investments Pty Ltd. 5 The letter concluded: "Once all matters are finalised, a deed will be drawn between the Official Trustee and the bankrupts and their companies to finalise all matters including a release of the Official Trustee's claim to shares in Willoughby Investments Pty Ltd and Contractor Services Pty Ltd." No such deed was ever prepared. 6 It is common ground that: - the creditors referred to in the letter of 25 May 1994 were paid out of the proceeds of settlement of the Esanda claim; - there is no specific reference in the letter to a claim by a Mr Schneider. The significance of Mr Schneider will shortly appear; - at some stage in 1994 the balance of the proceeds of the Esanda claim were released to Willoughby Investments Pty Ltd, apparently with the acquiescence of the Trustee. 7 On 12 September 1994 the appellants' solicitors, Verma Associates, wrote to the Australian Government Solicitor confirming: - that Mr Schneider had been given until 18 September 1994 to substantiate his alleged claim against the appellants; - that AGS "would appreciate" a statutory declaration that the appellants have no other creditors; and there was some discussion on the topic of annulment of the first bankruptcy. The letter also stated that the balance of the settlement of the Esanda claim should be released if the Schneider claim was not substantiated within the time allowed. 8 The appellants' solicitor has asserted, and the Trustee has denied, that an assurance was given by the Trustee that provided all creditors of the first bankruptcy were paid, "annulment would follow as a matter of practice" under the Act. 9 The sum of $4,000 was credited to the account of each of the bankrupt estates on 20 December 1993, reflecting the $12,000 received from the Esanda claim. On 26 February 1996 debits of $1,269.10, $1,270.09 and $1,269.09 representing Trustee's fees were posted to the respective accounts for the individual bankrupt estates resulting, in each case, in a nil balance. 10 It is apparent from the AGS' letter of 23 October 1996 that earlier in that month there was some discussion with the appellants on the topic of annulment of the first bankruptcy. By that letter, AGS confirmed that the first bankruptcies could not be annulled until: - the issue of Mr Schneider's claim has been resolved; - Trustee's fees of about $1,845 for each of the three estates, totalling about $5,500 had been paid. 11 On 22 December 1998 the appellants together with Mark Robert Willoughby commenced proceedings in this Court against Clayton Utz in Action No WAG 183 of 1998 ("the Action"). The action was based upon acts or omissions of Clayton Utz said to have occurred in late 1993, prior to the discharge of the appellants from their first bankruptcy. The appellants and the first respondent ("the Trustee") proceeded upon the basis that the chose in action against Clayton Utz was after acquired-property in the 1990 bankruptcies (s 58(1)(b); 58(6)) and divisible property within s 116(1)(a). As such, the interests of the appellants in the chose in action vested in the Trustee, and remained vested in the Trustee notwithstanding the discharge of the appellants from bankruptcy: Daemar v Industrial Commission of NSW (1990) 99 ALR 789 at 793, 795. There was no challenge to any of these propositions in the present proceedings. 12 The Trustee has power to sell or assign any part of the property of the bankrupt: s 134(1)(a). That power includes a power to sell or assign the chose in action against Clayton Utz either to the bankrupt or to a third party: Citicorp Australia Limited v Official Trustee in Bankruptcy (1996) 141 ALR 667. 13 In March 1999 the appellants requested the Trustee to assign the right of action against Clayton Utz to the appellants. The precise circumstances in which this occurred were not the subject of evidence. The Trustee's administration of the first bankruptcy had long since been completed, and with the possible exception of Mr Schneider, the debts of the first bankruptcy had been discharged out of the proceeds of the Esanda claim. The only other matter which might stand in the way of an annulment of the first bankruptcy was the fees due to the Trustee as notified in AGS' letter of 23 October 1996. 14 On 8 March 1999 the Trustee's solicitor wrote to Mr John Willoughby, and to the solicitors acting for the second respondent ("Lawcover"). The letter stated that the appellants have requested an assignment of the rights of action against Clayton Utz for a sum of $100 each plus a percentage of the proceeds of the action if successful. The letter advised that the Trustee does not wish to assign the rights of action for a percentage of the proceeds of the action, as this might conceivably lead to an argument that the Trustee should be liable for the cost of the action in the event that it is unsuccessful. For that reason, the Trustee advised that he was only prepared to assign the rights of action for a fixed sum payable within twenty eight days. The Trustee invited the appellants and Clayton Utz to submit any offers they might wish to make for the purchase of the causes of action which the appellants might have against Clayton Utz arising from the action against Esanda. Any such offer should be by way of a fixed lump sum payable within twenty eight days with the assignment only to take effect upon payment being made. The Trustee stated that he was likely to accept what he considered to be the best offer and did not propose to give either party a subsequent opportunity to increase its offer. Excluded from the chose in action proposed to be assigned were claims under the Trade Practices Act 1974 (Cth) which had apparently been brought outside the limitation period and which, in the assessment of the Trustee, had "demonstrably no prospects of success". 15 By letter dated 19 March 1999 the appellants responded to the Trustee's invitation. B F and J F Willoughby each offered to pay her and his second bankrupt estate the sum of $100 and full payment of all creditors to a maximum amount of 50 per cent of all funds received as a result of the prosecution of the claim against Clayton Utz. 16 On 24 March 1999 the Trustee informed Mr J F Willoughby that his offer of 19 March 1999 had not been accepted. An offer of $5,100 from Phillips Fox (the solicitors for Lawcover) had been accepted. The letter continued: "Pursuant to s 178 of the Bankruptcy Act 1966 you may appeal to the Court against the Trustee's decision." 17 On 14 April 1999 the Trustee and Lawcover executed a deed ("the deed"). The deed recited that the chose in action against Clayton Utz was an after-acquired asset in the first bankruptcies. The deed provided that upon full payment being received of the sum of $5,100 payable under the deed, the Trustee would thereby transfer and vest the action pending in the Federal Court against Clayton Utz under action number WAG 183 of 1998, and underlying causes of action (apart from causes of action under the Trade Practices Act), "to" Lawcover as purchaser. The Trustee undertook not to transfer or vest the Trade Practices Act claims "to" any person and consented to those claims being dismissed. 18 Clause 6 of the deed provided that if the "transfer and vesting" to Lawcover under the deed is set aside or declared invalid by a court for any reason, then the Trustee is to refund to Lawcover monies paid under the deed. 19 The effect of the deed (assuming that it operates according to its terms), was to put an end to the appellants' claims against Clayton Utz both under the Trade Practices Act and under the general law in return for a payment of $5,100 from Clayton Utz's professional indemnity insurer. 20 The $5,100 realised was applied to the estate of the appellants administered by the Trustee in respect of their joint debts and was appropriated in payment of the petitioning creditor's costs, fees due to the Trustee and other expenses. 21 On 18 June 1999 the appellants applied to the Court under s 178 of the Act for a review of the Trustee's decision to transfer and vest the action WAG 183 of 1998 and underlying causes of action to Lawcover, and sought a determination that the decision was invalid. The application also sought an order that the bankruptcies of the appellants be declared annulled.