Awattama and Trustee In Bankrupcy - [2018] FamCA 1073

FAMILY COURT OF AUSTRALIA

AWATTAMA & TRUSTEE IN BANKRUPCY

[2018] FamCA 1073

FAMILY LAW – PROPERTY – Where a trustee in bankruptcy seeks an application to set aside property orders under s 79A of the Family Law Act 1975 (Cth) – Where the wife seeks security for costs of the application – Where the interest of the Trustee, and public in protecting the interests of creditors outweigh the risk to the wife of recovering costs should the Trustee be wholly unsuccessful – Where an order for security for costs may stifle litigation - Application for security for costs dismissed.

Bankruptcy Act 1996 (Cth) s 19
Family Law Act 1975 (Cth) s 79A

Cowell v Thorogood (1885) 31 Ch D 34
Luadaka & Luadaka (1998) 148 FLR 421

APPLICANT:

Ms Awattama

RESPONDENT:

Mr Thorogood as Trustee in Bankruptcy of Mr Awattama

FILE NUMBER:

SYC

2638

2012

DATE DELIVERED:

17 December 2018

PLACE DELIVERED:

Sydney

PLACE HEARD:

Sydney

JUDGMENT OF:

Rees J

HEARING DATE:

10 December 2018

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr Lloyd SC

SOLICITOR FOR THE APPLICANT:

Clinch Long Woodbridge Lawyers

COUNSEL FOR THE RESPONDENT:

Mr Marshall SC

SOLICITOR FOR THE RESPONDENT:

O’Neill Partners Lawyers

Orders

IT IS ORDERED

That the application for security for costs filed 20 September 2018 be dismissed.
That the costs of both parties be reserved.

Note: The form of the order is subject to the entry of the order in the Court’s records.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Awattama & Thorogood has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

Note: This copy of the Court’s Reasons for Judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER: SYC 2638 of 2012

Ms Awattama

Applicant

And

Mr Thorogood as Trustee in Bankruptcy of Mr Awattama

Respondent

REASONS FOR JUDGMENT

The factual matrix of this application is somewhat unusual.
The applicant is Ms Awattama (“the wife”). The respondent is the Trustee in Bankruptcy of the husband (“the Trustee”).
The wife seeks an order that the Trustee lodge security for costs in relation to an application pursuant to s79A of the Family Law Act 1975 (Cth) in which the Trustee is the applicant.
In order to understand the competing submissions, it is necessary to briefly set out the relevant facts.
The husband and the wife separated in 2010.
In May 2012 the wife commenced an application for property settlement.
On 16 May 2012, the husband and the companies controlled by him which held his various investments, entered into an Asset Management Deed (“the Deed”) with the ANZ Bank. At Clause 2.1 the Deed acknowledged that the husband and his associated companies owed the ANZ Bank $58,433,165. The Trustee asserts that, in addition, the husband owed the National Australia Bank some $9,000,000. Thus the Trustee asserts that the husband had debts in excess of $67,000,000.
At Clause 4.2, the Deed provided that six named properties would be sold and provided for specific dates upon which contracts must be exchanged and on which sales must be completed.
The properties were not sold as provided for by the Deed and on 7 August 2012, the ANZ Bank notified the husband that he was in default and that his debts and those of his associated companies were now immediately due.
On 18 September 2012, consent orders were entered into by the husband and the wife.
The schedule of assets and liabilities annexed to the application for consent orders showed the wife receiving assets valued at $11,980,900. The wife had no debts and none of the assets to be transferred to her were encumbered.
The husband retained four substantial real estate assets with a nominated gross value of $57,500,000 and alleged encumbrances of $49,300,000. In addition, the husband retained various other assets of lesser significance and other liabilities. The schedule shows the husband retaining net assets of $7,482,106.
The provisions of the orders made 18 September 2012 were put into effect.
In September 2014, the wife completed the purchase of the husband’s interest in a property at B Street, Suburb C. That property is not mentioned in the schedule to the consent orders.
In November 2014, the husband became bankrupt on a debtor’s petition.
On 4 September 2017, the Trustee filed an application to set aside the consent orders pursuant to s79A of the Family Law Act 1975 (Cth).
The Trustee asserts that the husband, in the consent orders, understated his debts and overstated his assets. In so doing he failed to disclose his true financial position to the Court.
The trustee asserts that the husband failed to notify his creditors, including the ANZ Bank and the National Australia Bank, of his intention to enter into the consent orders and that, in so doing, he preferred the interests of the wife to the interests of his creditors.
After realising the assets in the bankrupt estate, the creditors are still owed some $24,000,000.
In relation to the application for security for costs, the Trustee has no funds from which such a payment could be made and submits that the making of an order for security for costs would have the effect of bringing the proceedings to an end, to the detriment of the creditors.
The Trustee relies on a decision of Cowell v Thorogood (1885) 31 Ch D 34 at 38
The general rule is that poverty is no bar to a litigant, that, from time immemorial, has been the rule at common law, and also, I believe, in equity. There is an exception in a case of appeals, but there the appellant has had the benefit of a decision ... and so an insolvent party is not excluded from the Courts, but only prevented, if he cannot find security, from dragging his opponent from one Court to another. There is also an exception introduced in order to prevent abuse, that if an insolvent sues as nominal plaintiff for the benefit of somebody else, he must give security. In that case the nominal plaintiff is a mere shadow. The two most familiar classes of cases of this kind are cases where a person has divested himself of his interest and handed it over to someone else that the transferee may sue for him, and cases where a person who has commenced a suit divests himself of his interests during the course of the suit in order that another person may carry it on for his benefit. ... In those cases Courts of Common Law required security for costs to be given. ... In the present case we have to determine whether security is to be required in the case of a plaintiff who is himself insolvent and sues as the trustee in bankruptcy of an insolvent estate. Are the doors of the Court to be closed against such a plaintiff till he gives security? It seems to me that such a case does not come within the principle on which the exception from the general rule is based, nor within the definition of that exception, so far as a definition can be extracted from the language of the Courts. It cannot be said that a trustee in bankruptcy is a mere nominal plaintiff, he is the person whose statutory right and duty it is to get in the assets. Nor does he come within the mischief against which the exception is intended to guard. He is not a mere shadow, he is a person who has a duty to perform, that of getting in the estate. It is not necessarily his duty to carry on litigation, but it is his duty to do so where litigation is requisite. I think, then, that there is good sense in not requiring him to give security. Then there has been an established practice both at law and in equity to allow a trustee in bankruptcy to sue without giving security for costs.
The principle that poverty should be no bar to litigation at first instance has been affirmed countless times in Australian superior courts.
This is not to say that the Court has no discretion to make an order for security for costs in appropriate circumstances. However, consideration must be given to the statutory duties and obligations of a Trustee in Bankruptcy as set out in s 19 of the Bankruptcy Act 1996 (Cth):
Duties etc. of trustee
(1) The duties of the trustee of the estate of a bankrupt include the following:
(a) notifying the bankrupt's creditors of the bankruptcy;
(b) determining whether the estate includes property that can be realised to pay a dividend to creditors;
(c) reporting to creditors within 3 months of the date of the bankruptcy on the likelihood of creditors receiving a dividend before the end of the bankruptcy;
(e) determining whether the bankrupt has made a transfer of property that is void against the trustee;
(f) taking appropriate steps to recover property for the benefit of the estate;
(g)taking whatever action is practicable to try to ensure that the bankrupt discharges all of the bankrupt's duties under this Act;
(h) considering whether the bankrupt has committed an offence against this Act;
(i) referring to the Inspector-General or to relevant law enforcement authorities any evidence of an offence by the bankrupt against this Act;
(j) administering the estate as efficiently as possible by avoiding unnecessary expense;
(k) exercising powers and performing functions in a commercially sound way;
(l) the duties imposed on the trustee under Schedule 2.

The applicant relied on the decision of the Full Court in Luadaka & Luadaka (1998) 148 FLR 421 where the Court held:
62.1. … Ordinarily the means of the applicant is not alone sufficient to justify an order for costs because of the rule that poverty should be no bar to justice. This is reinforced by s.117(1). However, the financial circumstances of the applicant do not prevent an order being made if there are other grounds which justify an order.
However, their Honours went on to set out some circumstances where such an order might be made as follows:
(a)The prospect of success of the application;

(b) Whether the applicant’s claim is made bona fide;

(c)Whether an order for costs would be oppressive or stifle the litigation;
(d)Whether the litigation involves a matter of public importance;
(e)Whether there has been delay in bring the application for security;
(f)Any difficulties in enforcing an order for costs; and
(g)The amount of costs to be incurred.

Dealing with those considerations seriatim:
(a)The application of the trustee, on its face, has arguable prospects.
(b)It is not suggested that the Trustee is not acting bona fide in pursuing the claim of the creditors.
(c)An order for security for costs would stifle the litigation.
(d)The protection of the interests of creditors in family law proceedings is a matter of public importance.
(e)The application for security was filed on 20 September 2018, almost one year after the application of the Trustee seeking substantive orders was filed on 4 September 2017.
(f)The general rule in family law proceedings is that each party should bear his or her own costs. Although it is submitted that the applicant may not be able to recover costs against the Trustee, that submission is predicated upon there being a departure from the ordinary rule.
(g)The estimate of costs on each side is about $300,000. The Trustee in submissions indicated that all of his evidence has been filed and he is ready for trial. The Trustee relies on valuation evidence obtained contemporaneously with the events. The applicant relies on other valuations obtained for the purpose of the negotiations and the consent orders. The applicant has already incurred and paid significant costs..
There are three factors in the balance. Firstly, the risk to the applicant of not recovering costs which might, prospectively, be awarded against the Trustee if he is wholly unsuccessful, Secondly the interest of the Trustee, representing the creditors in pursuing their debts and, thirdly, the interest of the public that, in family law proceedings, the interests of creditors should properly be protected.
I consider that the second and third factors outweigh the first.
The application will be dismissed.
Each party sought costs. No submissions were directed to that issue but the costs of both parties will be reserved and will be costs in the cause.

I certify that the preceding thirty (30) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Rees delivered on 17 December 2018.

Associate:

Date: 17 December 2018