Axess Debt Management Pty Ltd v Nottas (No.3) - [2015] FCCA 2618

FEDERAL CIRCUIT COURT OF AUSTRALIA

AXESS DEBT MANAGEMENT PTY LTD v NOTTAS (No.3)

[2015] FCCA 2618

Catchwords:
BANKRUPTCY – Controlling Trustee appointed pursuant to s.50 of the Bankruptcy Act 1966 (Cth) (“the Act”) – creditor indemnifies Controlling Trustee in relation to its costs and expenses – Debtor made self bankrupt on Debtor’s Petition – Joint Trustees appointed – Joint Trustees indicate may take proceedings against Controlling Trustees – whether certain creditors, namely the Applicant, should be given an advantage over other creditors under s.109(10) of the Act due to indemnities given to Controlling Trustee by the Applicant.

Legislation:

Bankruptcy Act 1966, s.109

Axess Debt Management Pty Ltd v Nottas [2014] FCCA 2746
Axess Debt Management Pty Ltd v Nottas(No.2) [2015] FCCA 406 [2010] FCA 550
Bavistock (1946) 14 ABC 30
Brierley; Ex parte Official Assignee (1898) 19 LR (NSW) B&P 25
Official Trustee in Bankruptcy v Deputy Commissioner of Taxation [1999] FCA 914
Reid (1946) 13 ABC 287

Applicant:

AXESS DEBT MANAGEMENT PTY LTD (ACN 061 791 786)

Respondent:

HARRIS NOTTAS

File Number:

ADG 336 of 2014

Judgment of:

Judge Simpson

Hearing date:

6 July 2015

Date of Last Submission:

6 July 2015

Delivered at:

Adelaide

Delivered on:

25 September 2015

REPRESENTATION

Counsel for the Applicant:

Mr M Douglas

Solicitors for the Applicant:

Wallmans Lawyers

Solicitors for the Controlling Trustee:

Mr Gretsas for Gretsas & Associates

Counsel for the Joint Trustees in Bankruptcy:

Mr I Thomas

Solicitors for the Joint Trustees in Bankruptcy:

Milton Graham Lawyers SA

ORDERS

Pursuant to s.109(10) of the Bankruptcy Act 1966 (Cth) (“the Act”) that the funds seized under the s.50 Controlled Estate and paid to the Applicant by order of this Court dated 2 December 2014, if later considered a preference payment or is otherwise recoverable by the Bankruptcy Trustee, then any amounts so recovered, be paid back to the Applicant as a priority in the estate by reason of the indemnity provided by the Applicant to the Controlling Trustee in respect of his fees and disbursements.
The Applicant’s costs up to the date of dismissal of the petition and incidental to the petition be fixed as agreed in the sum of $30,204.50 and are to be paid from the estate of the Respondent with the same priority as if the Respondent had become bankrupt on the petition.
The Applicant’s further costs following dismissal of the petition up to the date the controlled estate ends be fixed in the sum of $6,795.50 (the Controlled Estate Costs).
The Trustee of the Controlled Estate (the Controlled Estate Trustee) is forthwith authorised and directed to withdraw and pay to the Applicant an amount equal to the Controlled Estate Costs from the Controlled Estate contained in bank account number 12021424 held with the Commonwealth of Bank of Australia and attributed the account name “Colin Louis Ambrose ATF Harris Nottas” (the Controlled Estate Account);
That the Bank of Queensland forthwith pay to the Controlled Estate Trustee the sum of $2,222.95 representing 50% of the original balance of the funds held in a bank account in the name of the respondent and his wife Mrs Nottas, being account number 20333152 and which sum is arrived at after taking into account the sum of $1,000 already paid to Mrs Nottas in November 2014 with the consent of the Controlled Estate Trustee.
The balance, if any, in the Controlled Estate Account be paid to Andrew Aravanis and Ronal Prakash Roy as the joint and several trustees in bankruptcy of the Respondent.
That the s.50 control order in relation to the Respondent be terminated upon the payments referred to in these orders having been made.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT ADELAIDE

ADG 336 of 2014

AXESS DEBT MANAGEMENT PTY LTD (ACN 061 791 786)

Applicant

And

HARRIS NOTTAS

Respondent

REASONS FOR JUDGMENT

Introduction

In my earlier decisions,[1] I gave reasons why an order that I made pursuant to s.50 of the Bankruptcy Act 1966 (Cth) (“the Act”) for the appointment of a Trustee to take control of the debtor’s property, should not be set aside and in Axess Debt Management Pty Ltd v Nottas (No.2) I gave reasons why I made costs orders in the applicant’s favour after the petitioning creditor’s petition was dismissed by consent.
[1] Axess Debt Management Pty Ltd v Nottas [2014] FCCA 2746; Axess Debt Management Pty Ltd v Nottas (No.2) [2015] FCCA 406.

Orders sought

I am now asked by the Applicant to make the following orders:
“1.An order pursuant to Section 109 (10) that the funds seized under the section 50 Controlled Estate and paid to the Applicant by order of this Court dated 2 December 2014, if later considered a preference payment or is otherwise recoverable by the Bankruptcy Trustee, then any amounts so recovered, be paid back to the Applicant as a priority in the estate by reason of the indemnity provided by the Applicant to the Controlling Trustee in respect of his fees and disbursements;
2.The Applicant’s costs up to the date of dismissal of the petition and incidental to the petition be fixed as agreed in the sum of $30,204.50 and are to be paid from the estate of the Respondent with the same priority as if the Respondent had become bankrupt on the petition;
3.The Applicant’s further costs following dismissal of the petition up to the date the controlled estate (the Controlled Estate) ends be fixed in the sum of $6,795.50 (the Controlled Estate Costs);
4.The Trustee of the Controlled Estate (the Controlled Estate Trustee) is forthwith authorised and directed to withdraw and pay to the Applicant an amount equal to the Controlled Estate Costs from the Controlled Estate contained in bank account number 12021424 held with the Commonwealth of Bank of Australia and attributed the account name “Colin Louis Ambrose ATF Harris Nottas” (the Controlled Estate Account);
4.1In the alternative, as a priority in the estate pursuant to Section 109 (10).
5.That the Bank of Queensland forthwith pay to the Controlled Estate Trustee the sum of $2,222.95 representing 50% of the original balance of the funds held in a bank account in the name of the respondent and his wife Mrs Nottas, account number 20333152 and which sum is arrived at after taking into account the sum of $1,000 already paid to Mrs Nottas in November 2014 with the consent of the Controlled Estate Trustee;
6.The balance, if any, in the Controlled Estate Account be paid to Andrew Aravanis and Ronal Prakash Roy the joint and several trustees in bankruptcy of the Respondent.
7.That the section 50 control order in relation to the Respondent be terminated upon the payments referred to in these orders having been made.”

Background

Since my orders of 26 February 2015, the Respondent debtor, Harris Nottas (“the Respondent”), has been declared bankrupt on his Debtor’s Petition. Andrew Aravanis and Ronil Prakash Roy (“the Joint Trustees”) became joint and several trustees of the Respondent’s bankrupt estate. A Taxing Officer was to deal with the Applicant’s costs later in the day but, as a result of the debtor lodging his Debtor’s Petition in the morning, the taxation hearing did not proceed.
The Applicant creditor is understandably concerned that the Joint Trustees may argue that the monies seized under the s.50 Controlled Estate and other monies (being the Applicant’s costs and expenses of same) be declared void preferences pursuant to s.122(1) of the Act. This would result in the Applicant being denied the priority of payment of their fees and disbursements as they were clearly entitled to prior to the debtor’s bankruptcy. The Joint Trustees may argue that after their appointment the Applicant is now an unsecured creditor and that the Applicant should not be allowed to jump the queue. The first of the orders sought by the Applicant would result in the Applicant having priority over other creditors in the bankruptcy.
The Applicant argues that the Court has the power under s.109(10) of the Act to give them priority and that in the circumstances the orders sought should be made. The subsection states:
“(10) Where in any bankruptcy:
(a)property has been recovered, realised or preserved under an indemnity for costs of litigation given by a creditor or creditors; or
(b)expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;
The Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.”
It will be seen that s.109(10) gives the Court power to make such order as it thinks just and equitable with respect to distribution of the property of the bankrupt with a view to giving an indemnifying creditor an advantage over other creditors in consideration of the risk assumed by the creditor when providing the indemnity. The significant matters to be weighed up by the Court in deciding whether to make an order under s.109(10) have been summarised by Nicholson J in Re: Eaton[2] as follows:
[2] [2010] FCA 550 at 5; see also Re: Bavistock (1946) 14 ABC 30.
“•The risk run, and costs incurred, by the indemnifying creditor;
•The complexity of the proceedings in respect of which the indemnity is given;
•The sum recovered (or the value of the property recovered);
•The opportunity afforded to other creditors to provide indemnity;
•The failure of other creditors to pay indemnity;
•The proportions between the debts of the indemnifying creditor and other debts;
•The opposition or support of other creditors to the application for priority;
•The public interest in encouraging other creditors to provide indemnities so as to enable assets to be recovered.”
The Court has power to order that the whole amount that is recovered by litigation be distributed amongst the creditors that had indemnified the official assignee against the costs of the litigation whereby the assets had been recovered.[3]
[3] See Re: Brierley; Ex parte Official Signee (1898) 19 LR (NSW) B&P 25.
The discretion conferred by s.109(10) is “unqualified” and the Court can make an order for distribution of property that is confined only to indemnifying creditors.[4]
[4] See Official Trustee in Bankruptcy v Deputy Commissioner of Taxation [1999] FCA 914.
The advantage which may be given to indemnifying creditors is a right to a preference over other creditors in the distribution of the property recovered by means of the indemnity and the advantage is given to such creditors in consideration of the risk run by them in giving the indemnity.[5]
[5] See Re: Reid (1946) 13 ABC 287; Official Trustee in Bankruptcy v Deputy Commissioner in Taxation [1999] FCA 914 at [10].
As mentioned previously, the argument has proceeded on the basis that the Applicant provided the Controlling Trustee with an indemnity in respect of his fees and disbursements with the Controlled Estate. The Respondent argues that there is no evidence before the Court as to the terms of the indemnity provided by the Applicant. They say that the terms of the indemnity are relevant to the orders that the Court will make.
There is certainly a paucity of evidence provided in this case. Each of the parties filed a one page affidavit with annexures. To an extent, it has been left to the Court to try to fill the spaces.
Counsel for the Applicant submits that for well over 10 months the Court has been dealing with the matter on the basis of there being an indemnity provided by the Applicant. Counsel for the Applicant then said:
“In my submission, there can be no serious or proper challenge to the fact that my client gave that complete indemnity. I’m instructed that if called upon to confirm that indemnity, that the representative of the Controlling Trustee would do so and, in the circumstances, given that there’s no evidence that has been offered to you by the respondent that would cause your Honour to doubt what you’ve been told by a number of officers of the court, your Honour ought to, if necessary, exercise your powers under section 190 (sic) of the Act and simply accept that the indemnity has been given in the terms provided.”
The Respondent took no further step to challenge the existence and terms of the indemnity. In the circumstances, I am prepared to find on the balance of probabilities that the Applicant provided the Controlling Trustee with an indemnity for his fees and expenses.
The indemnity allowed the Controlling Trustees to take the steps necessary to recover certain property for the purpose of paying a debt that existed between the Applicant and the Respondent. On 2 December 2014, the Controlling Trustee was directed by the Court to pay the Applicant the amount of $23,621.29 from the Controlled Estate so as to satisfy the Respondent’s debt to the Applicant.
The risks run and costs incurred by the indemnifying creditor were not insignificant. There were no other creditors that provided an indemnity.
To be fair in this case, I consider it necessary that an order be made in terms of paragraph one of the minute of order that has been provided by the Applicant. A just and equitable result will not be achieved if those who provided the indemnity were not properly recompensed. It would be a result that would frustrate the intentions of s.109(10). The legislation, in particular s.109(10) is aimed at encouraging creditors to indemnify trustees in bankruptcy who wish to pursue claims in the administration of bankrupt estates and to reward creditors who bear the burden and take the risk of this litigation. As Mansfield J said in Official Trustee in Bankruptcy as Trustee of the Bankrupt Estate of Rodolfo Severio Pastro v Pastro:[6]
“It is in the public interest that the property of the bankrupt should be available to the creditors of the bankrupt including where the property of the bankrupt may be secured only through litigation. There is no presumption that the indemnity creditors should not receive the full benefit of the net proceeds of the property or expenses recovered under an indemnity for costs of litigation … The way in which the discretion should exercised is of course dependent upon the facts of the particular case and is often ultimately a matter of impression.”
[6] (2004) FCA 713.
For the above reasons I shall make the order that is proposed order 1 of the orders sought in the minute referred to at the beginning of these reasons.
The Court has the power in any proceedings before it, including a proceeding dismissed for want of jurisdiction, to make such orders as to costs as it thinks fit.
The following extracts from the Act are relevant to determinations of whether I should make orders in terms of the proposed orders 2, 3, 4, 5 and 6.
Section 32 of the Act provides:
“The Court may, in any proceeding before it, including proceedings dismissed for want of jurisdiction, make such orders as to the costs as it thinks fit.”
Section 51 of the Act provides:
“Subject to section 109, the prosecution of a creditor’s petition to and including the making of a sequestration order on the petition shall be at the expense of the creditor.”
Section 109 of the Act provides:
“Subject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following order:
(a)first, in the order prescribed by the regulations, in payment of the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee and the costs of any audit carried out under section 175 …;”

Proposed order 2

Proposed order 2 seeks an order for costs up to the date when the creditor’s petition was dismissed. Order 3 seeks orders for costs that post-date the creditor’s petition.
In relation to proposed order 2, there is agreement between the trustee of the bankrupt and the applicant as to the quantum of the costs for the period up to 2 December 2014 which they say should be fixed in the sum of $30,204.50. What is not agreed is whether the payment of that sum has a priority.
Counsel for the Applicant referred the Court to the case of Victorian Securities Corporation Limited[7] being a case that involved a debtor’s petition which was lodged by the Respondent therein prior to the creditor’s petition and a s.50 control estate in that matter having been finalised. His Honour FM Smith (as he then was), said:
“In relation to Victorian Securities’ legal costs in the matter, it is well established that the Court has power to award costs to a petitioning creditor notwithstanding the dismissal of its petition, and also to order that they be paid from the bankrupt estate of the debtor arising from his own petition [emphasis added], with the same priority that those costs would have had if the bankruptcy arose from a sequestration order. This was the opinion of Burchett J in Re Hankey; Ex parte Kratzmann (1986) 11 FCR 512, which has been followed in other cases, including by Finkelstein J in Equuscorp Pty Ltd v Chang [2000] FCA 486.”
[7] [2010] FMCA 113.
I agree with the submission of the Applicant that as the quantum of costs up till 2 December 2014 have now been agreed, these costs should be fixed by the Court in that sum and the costs should be paid with the same priority that the costs would have had if the bankruptcy had arisen from a sequestration order.
I clearly have power to order that the Applicant have the costs on a priority basis. That would have been in effect the outcome had no Debtor’s Petition been presented and my orders of 26 February 2015 being simply implemented. For much the same policy reasons as identified by Mansfield J in Rodolfo (supra) and given that the Applicant’s status as the creditor that indemnified the Controlling Trustee, there is no reason in principle to treat the primary claim in a different manner than the claim for costs. On the basis of policy and fairness in the circumstances of the case, I propose to make an order giving priority with respect to the costs incurred in funding the recovery.
I propose to make an order as sought by the Applicant in paragraph 2 of the minute provided.

Proposed orders 3 and 4

It follows from the previous paragraphs that the same approach should apply in relation to proposed order 3 and 4. These orders simply cover the balance of the costs which the Applicant has incurred with respect to the action. The Applicant says that it sought a separate order in relation to these costs because post-petition costs and costs incurred with respect to a petition are treated differently by the Act. Having made an order on 26 February 2014 that the Applicant have its whole costs of the action, it is in my view just and fair that the Applicant have the benefit of s.58(3) of the Act. This would capture amongst other things, the costs associated with getting the matter ready for the taxation that did not proceed between February and March 2015. There is, in my view, no good basis in principle why I should treat differently the priority claim to those post sequestration order costs and the costs that were incurred prior to the dismissal of the petition. In my view, it is appropriate to make orders in the terms of the Applicant’s proposed orders 3 and 4.

Proposed order 5

This order is not agreed to by the Respondent. They say that the Bank of Queensland is not a party to the application and the account referred to was not under the control of the Controlling Trustee. Instead they submit that the monies vested in the Joint Trustees at the commencement of the bankruptcy.

It follows from my earlier reasons that this order should be made.

Proposed orders 6 and 7

There is no opposition by the Respondent to orders 6 and 7.

Conclusion

I make the orders to be found at the beginning of these reasons.

I certify that the preceding thirty-three (33) paragraphs are a true copy of the reasons for judgment of Judge Simpson

Associate:

Date: 25 September 2015