Willoughby v The Official Trustee in Bankruptcy

REASONS FOR JUDGMENT 1 In this application, the applicants seek review of a decision of the first respondent ("the Trustee") and also seek the bankruptcies of the applicants be "declared annulled". It is appropriate these two claims be dealt with separately. Competency of claim to review Trustee's decision to transfer rights of action 2 In respect of this element of the claim I gave reasons at the hearing. The following are the reasons which were delivered. 3 The applicants bring an application pursuant to s 178 of the Bankruptcy Act 1966 (Cth) ("the Act"). That section provides: "If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court and the Court may make such order in the matter as it thinks just and equitable." 4 The first matter in respect of which relief is sought under that section appears in par 1 of the details of claim supporting the application which reads: "The Trustee's decision to transfer and vest the action, being WAG183 of 1998, and underlying causes of action of the above-named applicants to the solicitors of the respondent ... , be declared invalid." 5 It is not in dispute that the transfer referred to in this aspect of the details of claim is that effected by a deed dated 14 April 1999 between the Trustee and the second respondent. 6 The recitals of the deed set out the relevant history of the matter. The essential point is that on 22 December 1998 the applicants, together with Mark Robert Willoughby, commenced legal proceedings in this court against a firm of solicitors ("Clayton Utz"). The action is based on alleged acts or omissions by Clayton Utz said to have occurred in late 1993 prior to the discharge of the applicants from bankruptcies, being their first bankruptcies. The action is a chose in action which was vested in the Trustee pursuant to s 58 of the Act as an after-acquired asset in the first bankruptcies, and is recited as such. 7 The effect of the deed was that save for certain causes of action under the Trade Practices Act 1974 (Cth) and upon full payment being received under the deed, the Trustee transferred to and vested the action and underlying causes of action in the purchaser. The purchaser is the second respondent who is the professional indemnity insurer of Clayton Utz. The effect of the transfer to the second respondent is to bring an end to the causes of action which the applicants had in the action. It is not disputed that payment was duly made pursuant to the deed. 8 A preliminary point of competence is taken in respect of the applicants' application to review the Trustee's decision to enter into the deed. The point is a short one. It is founded on the decision of the Full Court of the Supreme Court of Victoria in the case of In Re Chirnside, Digby v Union Trustee Co of Australia Ltd [1929] VLR 217. The decision concerned the effect of s 80 of the Bankruptcy Act 1914 (4 & 5 Geo. V; Ch 59) ("The 1914 Act"). That section read: "If the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee he may apply to the Court and the Court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just." It will be observed that the only material differences for present purposes between s 80 of the 1914 Act and s 178 of the Act is that the former section refers only to an "act or decision" rather than "an act, omission or decision", and that the powers of the court in the act extend to granting orders which are "just and equitable" and not only "just". Neither of those differences is a relevant distinction for the purpose of the application of the competency point raised. 9 The effect of the decision of the Full Court (Irvine CJ, Cussen and Macarthur JJ) was that s 80 of the 1914 act in its reference to "act or decision" did not apply to allow the Court to set aside and rescind contracts of sale entered into by the Trustee under the provisions of the 1914 Act. The reasoning of the Full Court was firstly that it would defeat the whole intention of the 1914 Act if that was the position because the intention was to sell and to make title to purchasers of assets of the bankrupt for the purpose of the distribution of proceeds amongst creditors, and in that connection to get the best price possible which can only be obtained on the provision of a good title to the purchasers - see at 222. Secondly, it was said at the same page that if had it been intended to vest in the Bankruptcy Court a general jurisdiction to set aside contracts entered into, for any reason, either for fraud, or innocent misrepresentation, or for imprudence, or for carelessness, or other breach of duty on the part of the trustee, or for any other reason, the legislature would have adopted language much more apt for that purpose. It was the view of the Court that instead of saying that an act or decision may be "confirmed, reversed or modified", the legislature would have used words apt to express such a power with all its consequences necessary in respect of sale and transfer of title. 10 In his reasons of agreement, Cussen J at 223 said he did not understand the Court to be deciding that it would not be possible in some court to challenge a transaction between a trustee in bankruptcy and a purchaser on the ground of fraud or collusion. However, in agreeing with the reasons of Irvine CJ he accepted those matters could not be challenged under s 80 of the 1914 Act. 11 This decision of In Re Chirnside is cited in McDonald et al Australian Bankruptcy Law & Practice, 5th ed. 1996 at par 178.0.20 as a presently applicable authority so as to prevent s 178 being utilised to apply to a sale by a trustee under s 134(1)(a) which has been completed. There is no dispute that the sale under the deed is such a sale. 12 I can see no ground for distinguishing the decision of the Full Court in In Re Chirnside in relation to s 80 of the 1914 Act from application to s 178 of the Act. 13 Nevertheless, it was contended for the applicants that they wished to argue possible collusion. While I do not consider that can be argued pursuant to s 178, I nevertheless allowed them to draw my attention to those matters which they considered might give rise to collusion, that being an important allegation. In doing so, I had in mind they appeared unrepresented. 14 Normally such an allegation would require clear specification by way of pleading. Fraud and collusion, being serious matters, require great particularity and notice to the other side in order that they may be properly dealt with. Of course such particularity is not present in the application currently before me. 15 I was taken to two letters relevant to what the applicants contended could evidence collusion. The first is from the solicitors for the Trustee to the solicitors for the second respondent and to Mr John Willoughby of the applicants. It is dated 8 March 1999. It commences with the sentence: "The bankrupts have requested an assignment of the rights of action against Clayton Utz for a sum of a hundred dollars each, plus a percentage of the proceeds of the action if successful." The nub of the complaint of the applicants is that by that statement the nature of their tender was made known to the second respondents who ultimately were the successful tenderers. 16 The second letter which appears in evidence is that from Mr John Willoughby to the Insolvency Service dated 19 March 1999. It contains a fresh tender in paragraph 6. The fresh tender made a proposal in similar terms to that referred to in the first sentence of the letter of 8 March 1999. 17 The tender in that form was made in the knowledge that in the letter of 8 March 1999 it was stated on behalf of the Trustee that, for various reasons there set out, the Trustee would not accept a tender in terms of the proposal referred to in the first sentence of 8 March 1999. However, the letter of 8 March 1999 gave to the applicants a fresh opportunity to tender in the manner there stated as acceptable to the Trustee. What was sought was an offer by way of a fixed lump sum payable within 28 days with the assignment only to take effect upon payment being made. It was there pointed out that the Trustee was likely to accept what it considered to be the best offer. The applicants could not respond to this in the manner sought. 18 The applicants accept that the fresh tender made in paragraph 6 of the letter of 19 March 1999 was not the subject of disclosure and it is in that evidentiary context that any allegation of collusion by them must be examined. 19 Collusion is defined in the Oxford Companion to Law, Clarendon Press, Oxford 1980 at p 244 as - "an agreement between two or more persons to act to the prejudice of a third party or for an improper purpose." 20 There is no evidence before me which would found any finding of an agreement for a collusive purpose. I make that finding without any prejudice to the right of the applicants if, properly advised, they bring an action in another court as referred to by Cussen J on a properly pleaded case to establish collusion or fraud. All I find is that on the evidence before me at this time, on this application, no such finding can be made. Furthermore, as I have already held, that is not a matter which in any event could arise under s 178 of the Act. 21 As the applicants are unrepresented, I take the opportunity of emphasising a matter which their submissions have already made apparent they are very aware of: any action alleging fraud or collusion is not to be entered on lightly but only with surety that the particularity of evidence pleaded is likely to succeed. 22 For those reasons, I consider that the point of competency in relation to s 178 which has been taken by the second respondent is a valid point. Consequently I would dismiss the first ground of the details of claim in the present application. 23 That leaves the second ground which is that the bankruptcies of the above-named applicants referred to in this application be declared annulled. I reserved my reasons on this aspect and they now appear as follows. Application to annul Bankruptcies 24 Section 43(2) of the Act provides that when a debtor becomes a bankrupt he or she continues to be a bankrupt until (among other things): "his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B". 25 Subsection 74(5) provides that "[u]pon the passing of a special resolution at a meeting of creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed". Section 153A of the Act provides in subs (1) that "if the trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled, by force of this subsection, on the date on which the last such payment was made". Section 153B provides that "[i]f the Court is satisfied that a sequestration order ought not to have been made, or in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy". 26 It will be observed that only in the case of s 153B is the Court given any power to make an order annulling a bankruptcy. It is not the applicants' case that a sequestration order ought not to have been made nor is it the position that a debtor's petition was involved in the affairs of the applicants leading to their bankruptcy. 27 The short answer to the application on the second point therefore must be that, with s 153B having no application, there is no power in the Court to annul their bankruptcy. Both subs 74(5) and s 153A posit a set of circumstances upon the occurrence of, which by force of those sections, the bankruptcy is annulled. That requires no order being made by a Court. 28 Nevertheless the applicants seek to rely upon subs 153A(1). Their case is that all of their debts were paid in full so that the subsection should have applied in their favour at the point in time when they were so paid. 29 The applicants were each first declared bankrupt on 10 October 1990 on a creditor's petition. On the 9 February 1991, the Trustee assigned to them by deed certain rights of action on condition of payment to him of 80 per cent of the net proceeds recovered. In October 1993 the rights of action were settled in a manner which resulted in $12,000 being paid to the Trustee. That represented 80 per cent of the net proceeds of $15,000 recovered by the applicants in a total settlement involving $1.9m. 30 The applicants were all discharged from bankruptcy on 16 January 1994. Such discharge occurred automatically by operation of s 149 of the Act upon the expiration of the period of three years from the date on which the bankrupt filed his or her statement of affairs and in the absence of objection. The effect of such discharge is stated in s 153 of the Act. Subject to the section, the discharge operates so as to release a bankrupt from all debts including secured debts. However, the discharge does not have the effect of vesting back in a bankrupt property which was vested in the Trustee: s 127(1) and s 152 of the Act. Such property includes "a chose in action" and any "actions" commenced by a bankrupt before bankruptcy: Daemar v Industrial Commission of NSW and Another (No 2) (1990) 99 ALR 789. 31 On 25 May, 1994 the Australian Government Solicitor wrote to the solicitors for the applicants setting out the basis of what was said to be an agreement reached between the applicants, their companies and the acting Official Receiver. The letter stated:- "I confirm that it has been agreed as follows:

34 It was not until the 17 July 1999 that information was forwarded on behalf of the applicants to the Trustee which was arguably capable of supporting a conclusion by him that Mr. Scheider's claim was no longer maintained. 35 In relation to the claims for the Trustee's fees and expenses, the applicants take the position that, had they known of the liability at the time the balance of funds were released to them or their companies, they would have paid that liability. 36 On 18 August 1997 the first named applicant was again made bankrupt. On 25 November 1997, the second named applicant was also again made bankrupt. 37 The position reached by the agreement set out in the letter of 25 May 1994 from the Australian Government Solicitor to the solicitors for the applicant had the feature that it removed the Trustee from involvement in the payment of creditors and from administration of the funds used to pay creditors. That feature may have resulted in balance funds being paid to the applicants without full discharge of all creditors namely, the Trustee in respect of fees and expenses. The outstanding liability to the Trustee may well have come to light had the deed envisaged in the final paragraph of the quoted extract of the agreement been finalised. However the undisputed evidence is that no such deed was entered into. As a consequence, the assumption made by the applicant that all creditors had been paid was ill founded. 38 There is no evidence in the terms of the agreement which would support a finding that the Trustee had held out a position in relation to its costs and fees in relation to which it could be estopped. There was no evidence to support any finding of waiver by the Trustee of any right to recovery of such costs and fees. Indeed the applicants' acknowledgment that they would have paid the fees and expenses had they known of them at the time is an acknowledgment of the appropriateness of the debt. 39 In subs 153A(1) the expression "the bankrupts' debts" is defined in subs (6) to mean: "all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee" . For s 153A to apply it is necessary the Trustee be "satisfied all the bankrupt's debts have been paid in full". The satisfaction is to be derived from full payment of the debts. The release of the applicants from personal liability for outstanding debts affected by the discharge under s 145 did not create a factual circumstance where those debts were paid in full from the estate vested in the Trustee. While the costs, charges and expenses and remuneration and expenses of the Trustee remain unpaid, there is no proper basis for subs 153A(1) to have its statutory effect. 40 Accordingly I consider the second limb of the applicants' application cannot succeed. That is because, firstly, s 153B of the Act does not apply and the Court lacks power outside that section to annul a bankruptcy and, secondly, because in any event the grounds relied upon are not such as would otherwise have activated subs 153A or 153B. Costs 41 The Applicants having been wholly unsuccessful, the usual order would be that the applicants pay the costs of each of the respondents. Although the first and second named applicants are presently bankrupt, the third named applicant is not bankrupt so that the order could have efficacy. 42 On 24 March 1999, the Insolvency and Trustee Service Australia (Western Australia Branch) notified the applicants that "pursuant to section 178 of the Bankruptcy Act 1966 you may appeal to the Court against the Trustee's decision". That was a reference to the Trustee's decision to accept an offer of $5,100 on behalf of the second respondents and to transfer and assign the rights of action to that respondent. As a consequence of the reasons which I have delivered on the first limb of the application, that was incorrect advice to them. In those circumstances, given that they are unrepresented applicants, they should not be asked to bear the entire burden of costs. Accordingly I propose to order that the applicants pay the costs of the first and second respondents on the second limb of the application only. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice R D Nicholson.

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