Brady v OfficialTrustee in Bankruptcy (No.1)
[2001] FMCA 63
•22 August 2001
FEDERAL MAGISTRATES COURT OF AUSTRALIA
BRADY v OFFICIAL TRUSTEE IN BANKRUPTCY (No.1) [2001] FMCA 63
BANKRUPTCY – Conversion – Claim against Trustee pursuant to s 176 Bankruptcy Act 1966 – Damages – Exemplary Damages refused.
Hillesden Securities Ltd v Ryjack Ltd (1983) 1WLR 959
Uren V John Fairfax & Sons Pty Ltd (1965) 117 CLR 118
Lamb v Cotogno (1987) 164 CLR 1
Gray v Motor Accident Commission (1998) 196 CLR 1
Bankruptcy Act 1966 (Cth) s 176
| Applicant: | PETER JOHN BRADY |
| Respondent: | OFFICIAL TRUSTEE IN BANKRUPTCY |
| File No: | WZ 7 of 2001 |
| Delivered on: | 22 August 2001 |
| Delivered at: | Melbourne |
| Hearing Dates: | 1, 2, 3 and 4 May 2001 |
| Judgment of: | McInnis FM |
REPRESENTATION
| Counsel for the Applicant: | Mr I Viner QC with Mr AJ Power |
| Solicitors for the Applicant: | H Kremer & Co |
| Counsel for the Respondent: | Mr A Beech |
| Solicitors for the Respondent: | Australian Government Solicitor |
ORDERS
That the Respondent pursuant to s 176 of the Bankruptcy Act 1966(Cth) pay the Applicant damages of $17,550.
The Respondent pay the Applicant interest at the rate of 10.5% on and from 23 March 1995 to the date of this order in relation to the damages of $17,550 pursuant to Order 35 Rule 8 of the Federal Court Rules.
The Respondent pay the Applicant’s costs to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH
WZ 7 of 2001
PETER JOHN BRADY
Applicant
And
OFFICIAL TRUSTEE IN BANKRUPTCY
Respondent
REASONS FOR JUDGMENT
Introduction
PETER JOHN BRADY (the Applicant) applies for an order pursuant to s 176 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) against the Official Trustee in Bankruptcy (the Respondent).
The Applicant’s claim against the Respondent arises as a consequence of the Respondent being trustee of the estates of the bankrupts, namely STANLEY FREDERICK LEEDER (Leeder) who was declared bankrupt on 25 March 1993 and KIM RODERICK MITCHELL (Mitchell) who was declared bankrupt on 30 March 1993 (the bankrupt estates).
The Applicant alleges that the trustee has been guilty of a breach of duty and makes a claim in conversion based upon an allegation that the Applicant was a secured creditor by virtue of being the holder of a mortgage debenture. In the alternative the breach of duty has arisen where the Applicant claims the Respondent was negligent in the administration of the assets of the bankrupt estates thereby causing loss to the Applicant as an unsecured creditor of the bankrupt estates.
The Applicant seeks an order for damages being the loss and damage arising out of the alleged breach of duty based upon conversion and/or damages arising out of the breach of duty constituted by the negligence of the Respondent. In addition the Applicant claims exemplary damages.
The matter was commenced in the Federal Court when the Application was filed on 24 March 1999. It was transferred to the Federal Magistrates Court of Australia by Order of the Federal Court made on 31 January 2001.
Initially the Applicant was represented by solicitors who ceased to act by notice dated 9 August 1999. Thereafter the Applicant was unrepresented until recently when he appointed the solicitors now on record to act on his behalf by Notice of Appointment filed 13 February 2001. Hence for a significant time during the preparation of documents the Applicant was unrepresented. I make due allowance for that fact though note that at the hearing the Applicant was represented by Mr Viner QC with Mr Power of Counsel and the Respondent represented by Mr Beech.
The Applicant was granted leave to amend his Statement of Claim to claim damages of $83,406.00. The Applicant asserts that between January and December 1990 he loaned Leeder and Mitchell jointly and severally amounts which are now said to total $83,406.00. The loans were allegedly made pursuant to a Joint Venture Agreement signed by the Applicant, Leeder and Mitchell dated 2 February 1990.
According to the Applicant the purpose of the loans was to permit Leeder and Mitchell to develop a goldmine located at Peninsula Western Australia being gold mining lease number 63/2313 (the gold mine).
The Applicant relied upon a document which he asserts is properly characterised as a ‘mortgage debenture’ being a document said to have been executed on 25 June 1990 by the Applicant, Leeder and Mitchell.
In his Statement of Claim dated 30 September 2000 entitled “Corrected Minute of Proposed Re-Amended Statement of Claim” (the Statement of Claim) the Applicant asserts that by virtue of the mortgage debenture Leeder and Mitchell as joint beneficial owners of certain plant and equipment and lease transferred those items to the Applicant and his wife June Mary Brady for the purpose of securing the money loaned to Leeder and Mitchell by the Applicant.
The particulars given of the plant and equipment and lease in the Statement of Claim are as follows:
“(a)All plant equipment buildings and stock present at the mine site of gold mining lease 83/2319 both above and below ground surface;
(b)Without limiting the generality of (a) the plant and equipment included a Mitsubishi MY1678, Toyota Utility 6NC404, a Foden Truck AL10818, three air blasters (ex Australis), a compressor, a drilling unit, a bogger, a Statesman DeVille Holden and mining equipment situated at 35 Brockman Street;
(c)Gold mining lease 63/2319.”
The Applicant claims in the Statement of Claim that Leeder and Mitchell failed to repay any amount advanced to them by the Applicant and accordingly in about January 1991 by reason of the failure of Leeder and/or Mitchell to repay the amount advanced the Applicant seized some of the plant and equipment.
Proceedings were commenced in the Supreme Court of Western Australia by Action No 1087 of 1991 by the Applicant against Leeder and Mitchell during which an interim order was made enabling Leeder and Mitchell to regain possession of some of the plant and equipment seized. That Supreme Court action was pending when Leeder and Mitchell became bankrupt. It is asserted that at the time when Leeder and Mitchell became bankrupt they owed the Applicant jointly and severally the sum of $83,406.00.
The Applicant claims that the Respondent had wrongly disposed of the plant and equipment and the gold mine to Mr Leeder by an agreement dated 23 March 1995 for $8,000. That sale in 1995 is claimed to be the conversion upon which the Applicant seeks damages. The Applicant claims the sum of $8000 substantially undervalued the assets.
A crucial issue in this case is whether the Applicant was either a secured or unsecured creditor. He asserts he was a secured creditor on the basis of a mortgage debenture to which I have previously referred. In the alternative if the mortgage debenture did not create a valid security then the Applicant claims to be an unsecured creditor of Leeder and Mitchell.
At the hearing the Applicant relied upon two Affidavits sworn by him on 2 August 2000 and 9 August 2000, the Affidavits of Alan Websdale sworn 31 July 2000 and 21 November 2000 and a further statement (Exhibit A9), the Affidavit of Allan Cox sworn 29 November 2000, the Affidavit of Keith Haslam sworn 7 August 2000.
The Respondent relied upon a statutory declaration of Stanley Frederick Leeder declared on 6 September 1994, an Affidavit of Susan Jane Mulholland sworn 4 December 2000, Affidavits of Kim Roderick Mitchell sworn 18 December 2000 and 2 May 2000 (subject to a ruling that paragraphs 3, 4, part of paragraphs 5, 6 and 9 excluded), an Affidavit of Ross Stephen Thomson sworn 14 September 2000, and Affidavits of Jeremy White sworn 14 September 2000 and 15 February 2001.
The Applicant gave evidence and also called in support of his claim Mr Alan Websdale and Mr Keith Haslam.
The Respondent called Susan Jane Mulholland, Kim Roderick Mitchell, Ross Stephen Thomson and Jeremy White.
Chronology
The issues in this matter have been the subject of significant litigation and exchange of correspondence. The Respondent through its Counsel provided an extremely useful chronology of events. In the absence of any objection I have relied upon most of that chronology in preparing the following:
1990
2 February“Joint Venture Agreement” signed.
25 JuneDate appearing on “mortgage debenture” document.
May/JuneFurther agreements governing further advances by applicant.
1993
25 March Leeder becomes bankrupt on own petition.
25 March Leeder files statement of affairs.
30 March Mitchell becomes bankrupt on own petition.
30 March Mitchell interviewed by Mulholland (ITSA).
30 MarchMitchell statement of affairs.
April – September Agreed focus for ITSA was determination of applicant’s status, in particular whether secured or unsecured; no relevant complaint regarding deterioration of assets made.
6 AprilITSA write to Leeder requesting details of company and partnership assets.
MayBrady writes to ITSA referring to his status as secured creditor and that plant being fully used commercially; “requested trustees to take their appropriate interest”.
28 MayITSA seeks advice from AGS regarding validity of mortgage debenture and nature of agreement between Brady and bankrupts.
19 JuneAGS provides advice.
23 JulyBrady writes to ITSA advising that Mitchell disposing of Mitsubishi vehicle and reiterating claim as secured creditor.
29 JulyITSA writes to bankrupts and Brady advising of advice that Brady not a secured creditor but inviting further information relevant to security issue.
29 JulyMulholland raises with Brady possible attachment of assets, but Brady declines.
4 AugustBrady provides written response to ITSA 29/7/93 letter, and substantially disagrees with it.
AugustBankrupts provide response by way of schedules of claims against (inter alia) Brady.
12 OctoberITSA writes to applicant advising that additional information obtained in response to letter of 29/7/93 had been referred to AGS.
12 OctoberBrady writes to ITSA advising that he was being prejudiced by delays.
1993 (cont’d)
18 November ITSA writes to Brady advising of AGS supplementary advice that partnership existed, and that, as surviving solvent partner, the applicant should wind the partnership up.
22 November Brady writes to ITSA, response to questions relating to possible partnership winding up, reasserts claim as secured creditor, and suggests arbitration.
2 DecemberMeeting between Brady and Thomson when issues in dispute discussed, and Thomson advised ITSA’s position that until dispute over security and partnership/joint venture issues resolved, it had no interest in assets; Brady provides letter of authority allowing ITSA to take possession/secure all items in mortgage debenture schedule.
1994
20 JanuaryITSA sends a copy of further AGS opinion (dated 7/1/94) to Brady, which reaffirms earlier advice.
21 JanuaryITSA writes to Brady indicating intention to realise assets and seeking Brady’s advice of suitable valuer to ascertain true values.
JanuaryITSA obtains information on Warren Macleary and Norseman Wreckers.
4 FebruaryBrady writes to ITSA advising three possible valuers.
25 February Australian Government Solicitor letter to Brady enclosing partnership ending up summary – an attempt to progress negotiations on the issues.
28 February Dwyer Thomas (Brady’s solicitors) write to ITSA advising them not to dispose of the assets until validity of the mortgage debenture properly established.
1 MarchBrady writes to AGS stating “get lost” and “see you in Court”.
8 MarchAGS writes to Brady seeking indication of aims and indicating even if his propositions were accepted a small dividend payable. Suggests that “the assets referred to in the mortgage debenture do not appear to have substantial value”.
10 MarchBrady instructs Dwyer Thomas to apply to Supreme Court for validation of mortgage debenture and vesting of property in him.
1994 (cont’d)
10 MarchBrady writes to ITSA proposing a joint application to the Supreme Court so that disposal can be effected; protests the bankrupts have use of the plant and equipment.
16 MarchBrady writes to AGS indicating values for the “secured” property between $5,000.00 and $15,000.00; says has requested solicitors to implement Supreme Court action.
30 MarchDwyer Thomas writes to ITSA seeking extension of existing undertaking to hold over action regarding assets and asking for better details of estate.
7 AprilAGS writes to Dwyer Thomas advising ITSA’s preference for items to be sold by auction with all parties entitled to bid.
13 AprilBrady writes to Dwyer Thomas questioning whether Leeder has assets in schedule, and providing Brady’s estimates for interest in tenement (“unestablishable”) and schedule items (between $10,000 and $25,000).
15 AprilITSA writes to Websdale as follow up to earlier letter and enclosing omitted schedule.
4 MayDwyer Thomas facsimile to AGS commenting on trustee not taking possession and allowing bankrupts to continue to use assets; threatening to seek relief if possible not taken within 10 days.
9 MayBrady writes to ITSA asking if bankrupts have provided a statement of details of plant equipment and property, also asking if property possession taken yet.
12 MayITSA writes to Brady to advise of information as to value received; refers to doubts over assets being capable of manual delivery, and of disputed ownership of items in any event, as obstacles to taking possession.
16 MayBrady writes to ITSA.
May – September Numerous items of correspondence from Brady to ITSA and AGS where Brady repeatedly asserts rights as secured creditor.
9 JuneAGS writes to Dwyer Thomas withdrawing earlier offer. Denies Official Trustee is obliged to repossess assets in light of Brady’s claim to be secured creditor, it not being cost effective to do so.
30 JuneITSA letters to Brady canvassing options.
1 JulyThomson allegedly speaks with Cocks regarding mine and its value.
1994 (cont’d)
22 JulyLetters Cole of AGS to Brady summarising position and responding to Brady’s letters. Sets out views re whether joint venture agreement was attached to mortgage debenture.
5 September Brady letter to ITSA enclosing his solicitors’ (Dwyer Thomas) letter of advice and seeking further discussion.
15 November Brady writes to ITSA seeking responses to series of ten questions, in default of a response action would be taken under s179A Bankruptcy Act.
15 November ITSA writes to Brady advising of intention to sell assets at a price to be determined by them to a person of their choice; Brady given 14 days in which to respond.
18 November Brady writes to ITSA objecting to proposed course and requesting meeting of creditors.
Approx November Request for creditors meeting denied.
25 November ITSA writes to Brady advising of second legal opinion to be sought; also advises arranging for bailiff to locate, identify and attach assets and seeking assistance.
1 DecemberReport from Norseman bailiff received, providing confirmation of evidence earlier obtained, and advises location of some items at Brady’s garage.
2 DecemberBrady writes to ITSA warning of possible attempts by bankrupts to mislead bailiff and repeating request for creditors meeting.
6 DecemberITSA letter to Brady advising no meeting of creditors until second opinion received; Brady responds with further questions and threatens action under s179(1).
21 December ITSA writes to Brady advising the second legal opinion supports AGS opinion, advises trustee will sell assets except for Toyota utility (property of company).
23 December ITSA writes to Leeder and company inviting an offer for schedule items.
1995
3 JanuaryBrady writes to ITSA protesting second opinion debased by defective instructions; advises sale will be at ITSA’s risk; suggest arbitration.
24 JanuaryLeeder makes offer to purchase most items for $8,000.
1995 (cont’d)
17 MarchITSA writes to Brady informing of Leeder’s offer of $8,000 for most of schedule items and indicating intention to accept within 7 days.
20 MarchBrady writes to ITSA making offer of $9,000.
20 MarchITSA letter to Brady.
23 MarchITSA writes to Brady advising of verbal acceptance of Leeder’s offer.
23 MarchITSA and Leeder execute sale of deed.
The claim for breach of duty against the trustee pursuant to s 176 of the Bankruptcy Act is essentially based upon two causes of action. The first is a conversion claim based upon the validity of the mortgage debenture. Secondly the Applicant claims breach of duty, negligence against the trustee causing loss to the Applicant as an unsecured creditor of the bankrupt estates of Leeder and Mitchell.
It should be noted that a significant issue arose as to the valid date of the document claimed to be a mortgage debenture. The document was dated 25 June 1990 although Mr Brady indicated in evidence that it was executed in September 1990 and backdated to 25 June 1990. In an Affidavit sworn in January 1991 he had indicated execution occurred on 25 June 1990. Despite my reservations about this aspect of the evidence I am prepared to find that the document is correctly dated 25 June 1990 in the sense that this date accurately reflects the day when agreement was reached by the parties.
The conversion claim
The document referred to as the mortgage debenture must be established as a valid and authentic document before I am able to consider whether the Applicant has a valid claim in conversion.
It was submitted on behalf of the Applicant that the pattern of conduct of the parties and the nature of the documents in this matter would suggest that the mortgage debenture is authentic in its entirety and that it was intended by the parties to be by way of security for the advances made by the Applicant to Leeder and Mitchell.
It was submitted on behalf of the Respondent that it was open to the Court not to accept the Applicant’s evidence in relation to the mortgage debenture and in particular the Respondent in paragraphs 8(a) and 10(a) of its Defence relied upon pleadings which had been the subject of a Defence by Leeder and Mitchell in the Supreme Court Act 1087 of 1991 whereby in effect it was asserted that the debenture agreement was entered into in September 1990 by the parties to safeguard equipment and defeat a claim by the Commonwealth Bank against Leeder in particular who had loans secured over two houses. It was said that the execution of the document was in order to avoid the bank’s actions which in turn would jeopardise the joint ventures between the parties.
In his Affidavit material Mr Mitchell had suggested that the mortgage debenture document did not have attached to it a joint venture agreement or any document which could reasonably be regarded as a memorandum of loan. In his evidence however he agreed when shown Exhibit A2 that the debenture agreement dated 25 June 1990 did have attached to it a document entitled “Joint Venture Agreement” though he had some doubt about whether it had the words “Memorandum of Loan” printed on the top of the page.
I was not impressed with the evidence of Mr Mitchell in relation to the ulterior motive for the document and I find that in fact the document was created as indicated by the Applicant for the purpose of providing security over the items referred to in the document. To find otherwise would be to make a finding that the parties had engaged in conduct which was effectively a ‘sham’ and designed to defeat a legitimate claim by a bank against one or other of the parties.
On the balance of probabilities I am not prepared to find that the documents were created for the purpose referred to by Mr Mitchell. I am further strengthened in that conclusion when one analyses the documents in question. Exhibit A2 comprised the Deed together with the attached document entitled “Memorandum of Loan” which had underneath it a sub heading “Joint Venture Agreement” being a document identical to Exhibit A1. When one looks at the Deed it is clearly an adaptation of a mortgage debenture document which one would normally expect to be used in relation to motor vehicles. It has been adapted in a somewhat robust fashion to cross reference first of all the Joint Venture Agreement entitled Memorandum of Loan so that it falls within the definition of agreement in the schedule and to then insert next to the details of the vehicle all the matters referred to in the schedule. The schedule includes a reference to the term “the vehicle” consistent with the agreement but then proceeds to recite the following:
“(a) ALL PLANT – EQUIPMENT - BUILDINGS – STOCK AT PRESENT AT MINE SITE GOLD MINING LEASE 63/2319 BOTH ABOVE AND BELOW THE SURFACE.
(b) GOLD MINING LEASE 63/2319
(c) WITHOUT LESSENING ANY PART OF A ABOVE DOES INCLUDE SPECIFICALLY AS WELL AS ANY FURTHER ITEMS HEREIN SCHEDULED
C 1 MITSUBISHI UTILITY MY 16782TOYOTA UTILITY 6NC 404
3FODEN TRUCK AL10818
43 AIR BLASTERS EX AUSTRALIS
5COMPRESSOR
6GENERATOR & SWITCHBOARD
7DRILLING UNIT
8BOGGER
9STATESMAN DEVILLE – HOLDEN
10MINING EQUIPMENT AT 35 BROCKMAN ST”
Although I note that there has been an addition and initials next to items 9 and 10 of the schedule it is clear that although the documentation is less than satisfactory it is sufficient in my view having regard to the evidence and the fact that I have rejected the evidence of Mr Mitchell and accepted the Applicant’s evidence in this regard that this was indeed a ‘mortgage debenture’ document designed to provide security to the Applicant who I find had advanced the monies to Leeder and Mitchell in accordance with the evidence.
It was properly conceded by the Respondent that in the event that I were to find that that there is a valid mortgage debenture then there has been conversion by the sale of the plant and equipment which occurred under instruction of the Respondent in March 1995.
It is therefore unnecessary for me to consider the issue of whether the Applicant could be regarded as an unsecured creditor and indeed whether in those circumstances there has been a breach of duty of care.
I am satisfied that by virtue of the conversion which has occurred whereby the goods which were the subject of the mortgage debenture were sold that the trustee has breached a duty of care to the Applicant in failing to recognise the Applicant as a secured creditor and dealing with the assets accordingly.
Damages
The claim for damages and evidence in support of that claim has been vague and unsatisfactory. The task of determining the precise nature of the damages has been made difficult by varying estimates of the value of the items referred to as plant and equipment and the lack of any of any adequate assessment of the value of the gold mine. It was also very difficult to reconcile the list of items in the Statement of Claim with the list of items in the schedule attached to the mortgage debenture agreement and then cross reference those items with the expert evidence which was ultimately relied upon by the Applicant from Mr Haslam.
A great deal of the Affidavit material and pleadings have been prepared by the Applicant prior to representation. Hence the task of the Court has been made extremely difficult as a consequence of the poor presentation of the material and lack of clarity in relation to the value of the assets.
In his Statement of Claim the Applicant seeks damages and further makes a claim for interest. The precise details of the damages became the subject of further documentation and submissions.
The documentation included a document entitled “Schedule of Damages” wherein the Applicant referred to a claim for “consequential damages” of $40,000 which he refers to as being “the costs manditorily incurred by the Applicant between 3rd April 1993 and 1st April 1999 being for legal expenses (other than for the costs of preparation of the Summons in this matter) and for travelling expenses from Norseman to Perth on many occasions”..
In the same document the Applicant claims “exemplary punitive and aggravated damages” of $200,000. In relation to that claim the Applicant states “For years of unnatural stress and unfair strain caused by the Respondent who was supplied adequate information on the fourth of April 1993 and subsequently, to act correctly but deliberately did fail to observe and refused to act in accord with its statutory and legal obligations as a trustee”. The Applicant goes on to say in the same document. “Evidence will be submitted of oppression, violence (not physical but mental, malice, fraud, wicked actions and mental anguish”. He further asserts, “Evidence will be submitted that actions were carried out in a wanton manner of recklessness, heedless, malicious, undisciplined, perverse, total careless and with deliberate intent to mislead the Applicant and hide the true facts from emerging”.
In a further document entitled “Schedule of Damages dated
24 January 2001 the Applicant seeks “damages by reason of the Respondent’s unlawful retention and ultimate conversion of the Applicant’s property in a sum of amount as is finally determined as the value of the Applicant’s property up to the sum of $81,706.00 together with interest thereon at the rate of 18 per cent in accordance with mortgage debenture or at such other rate as shall be determined to be proper and reasonable as from 25 March 1993 or as from such other date as shall be found to be proper and reasonable until payment”. In the same document the applicant claims “in the alternative damages by reason of the Respondent’s breach of duty of care to the Applicant in the sum of $90,507.00 or such other amount as shall be determined to be proper dividend payable to the Applicant as an unsecured creditor of the bankrupt estate of Leeder and Mitchell in the event of such a finding together with interest thereon as from 1st June 1993 until payment at such rate as shall be found and determined to be proper and reasonable”. In that document the Applicant’s claim is for consequential damages of $41,214.00. He repeats his claim for exemplary damages of $200,000.When the matter of consequential damages was raised at the hearing the Applicant sought to rely upon a document entitled “Applicant’s Schedule of Consequential Damages” (Exhibit A6) which provided a total amount of damages of $35,704 and which included travelling expenditure from Norseman to Perth, accommodation, meals, together with legal and accounting fees.
In his closing address Mr Viner for and on behalf of the Applicant as I understood the submissions the Applicant claims that had the trustee undertaken a proper sale of the plant and equipment after obtaining appropriate valuations and if the matter had been dealt with by a person experienced in relation to mining equipment then the items could have been sold for a total amount of something in the order of $90,000. It was submitted and I accept that no proper valuation of the assets were obtained by the trustee. The trustee however relied upon the fact that it sought valuations from Leeder Mitchell and Brady in 1994 with only Leeder providing a value of the assets at around $10,000. Ultimately during the course of submissions Counsel for the Applicant relied upon a valuation provided by Mr Haslam of plant and equipment in the sum of $57,000 and then added to that 30 per cent of the $100,000 said to be the value of the lease which made a total of $87,500.
The Applicant claimed exemplary damages and in relation to exemplary damages apart from the amount of $200,000 referred to in the material Counsel indicated that when considering the quantum of the damages I was encouraged to make an award of a substantial amount.
In relation to the issue of damages the Respondent submitted that if I were to find as I have that the claim for conversion has been made out by the Applicant then damages for such conversion are “in an amount equal to the value of what was converted, assessed at the time of the conversion”. I was referred to Trindade and Cane – The Law of Torts in Australia (3rd Edition) (p.311-320) especially at p. 312. It was submitted that where the Applicant succeeds in the conversion claim the Respondent will not be liable for any deterioration in value of the property between the date when the bankruptcy first occurred and when the relevant property was sold in early 1995. The Respondent submitted and I accept that the appropriate date in relation to the value of property is the date when the property is converted and that in the circumstances I should have regard to the value of the property in March 1995. It was further submitted and I accept that one particular item namely a Caterpillar Truck Loader was not an item which was the subject to the mortgage debenture, was not listed in that document and therefore is not a relevant.
The Respondent in making an assessment of the values submits that “if all the Applicant’s valuation evidence of the plant and equipment were accepted the value is $22,500”. In relation to the value of the mine the Respondent submits that I should reject the evidence of Mr Websdale.
I further accept the submission on behalf of the Respondent that it should not be liable for any damages for deterioration, if any, in the value of the property between the date when the bankruptcy first occurred and when the relevant property was sold in early 1995. In the circumstances I further accept the submission made by the Respondent that the Applicant was not prevented from exercising rights which he had asserted under the mortgage debenture and that he took no steps to exercise those rights despite the fact that he already had taken Supreme Court proceedings which could have been continued. Whilst there has been conversion I do not accept that there has been “unlawful retention”.
The value of the property converted as at early 1995 is extremely difficult to assess. In 1994 the Applicant had estimated the property to be worth somewhere between $5,000 and $15,000. In a letter dated 16 March 1994 the Applicant states, “I fully realise that $90.485.00 is now pie in the sky but I could get some value for the M/D property, 5,000, 10,000, 15,000? whereas ITSA will be conned down to a negligible amount far less”. In a further letter dated 13 April 1994 in dealing with the plant and equipment the Applicant refers to the possible value of $25,000 being “tops” and $10,000 being “bottom”.
The Applicant relied upon the Affidavit evidence of Keith Haslam who was also called to give evidence. In his Affidavit sworn 7 August 2000 Mr Haslam, a certified practising valuer of plant and machinery, referred to the `scope of valuation’ and stated that “The valuation of the equipment and vehicle has been carried out on the basis of “market value” as defined below as at April 1993”. Mr Haslam had to rely upon photographs of the equipment but not the vehicle and also relied upon brief details of models and serial numbers where they were known. He did not carry out an inspection of the plant and equipment and stated quite fairly in his report, “It is not normal for us to value equipment sight unseen however Mr Brady acknowledges our predicament and requests that we give our best estimate of value (sight unseen) as at April 1993”.
In his report Mr Haslam provides the following valuation:
1. “Eimco” 912B Deutz Engine Driven Bogger
Engine Number: 9201913-06004540 25,0002. “Ingersoll Rand” Model P375W-177L/S
Mobile Air Compressor Serial No 590.424 E 85 407 8,0003. “Ingersoll Rand” Air Track Drill 6,000
4. “Caterpillar” 933 Track Loader 10,000
5. Dolly Mill 1,500
6. “Lister” 25KVA 4 Cylinder Generator set 2,000
7. 1966 “Foden” 15 Ton 12 Wheel Tip Truck 5,000
TOTAL VALUE $57,500
It is clear from that report that the total valuation is $57,500. This is the amount now claimed for the plant and equipment despite the lack of correlation between these items in their entirety and the items referred to in the schedule to the mortgage debenture agreement and/or the items referred to in the Statement of Claim.
It is noted that the valuations are as at April 1993 and there is little evidence upon which I can rely to suggest there has been a significant deterioration in the value by 1995 being the date of conversion. I should also add for the sake of completeness that Mr Haslam conceded he had never given evidence previously in Court of the value of plant and equipment on a (sight unseen) basis. He assumed that all the equipment was in good sound working order and acknowledged deficiencies in his state of knowledge of the items which I shall deal with in some further detail.
In assessing damages for conversion I accept however as indicated earlier that it is not appropriate to include in the assessment the “Bogger” which was not converted. I further accept that the mortgage debenture did not include in its schedule the Caterpillar Track Loader. Hence my task is to assess the value as at the date of sale which is 1995. The items which are the subject of sale and conversion amount to $22,500.00.
A further attack has been made by Counsel for the Respondent in relation to the valuations. Specifically reference was made to the Foden Tip Truck. It was noted that Mr Haslam did not even have a photograph of this truck and that there was evidence from Mr Mitchell that the tip truck was “rusted through”. I was urged then to make a finding that damages should be something substantially less than $5,000. In the circumstances making due allowance for the poor condition of the tip truck I find that it has a value of less than half that placed upon it by Mr Haslam and fix a value of $2,000.
Although some criticism was made of the other valuations and in particular the reference was made to the “Dolly Mill” being over-valued, I am not prepared to make any further deductions from the remaining items. Hence the net value of the remaining items which I assess to be applicable as at 1995 would be $19,500. The Applicant is entitled to damages in that sum less a notional for costs of sale and disposition. Doing the best I can on the inadequate material before me I would further reduce the damages by 10% to make due allowance for those costs. Hence the amount of damages which I am prepared to award to the Applicant for the plant and equipment is $17,550.
The gold mine
In making a claim for $100,000 for the gold mine the Applicant relies upon evidence of Mr Websdale. It was claimed that the valuation of $100,000 should be used as a proper measure of the value of the gold mine and that 30% of this value should be added to the total damages claimed for plant and equipment thereby making a total of $87,500. The 30% calculation is based on the interest held in the mine by Mr Leeder. The remaining interest was held by two companies both of which have been in liquidation since 1989 to 1991.
The value of $100,000 arose from Mr Websdale’s Affidavit sworn
31 July 2001 where he states in relation to the gold mine, “I am familiar with the brilliant history of this small mine. I believe that properly managed it would have been well worth buying at $100,000 in 1993”. In his second Affidavit sworn 21 November 2000 and in his evidence he endeavoured to set out those matters which influenced his valuation. Significantly he added however that “to carry out a valuation as is effected by the majors, that to cover a drilling program, laboratory analysis and full feasibility would cost in the order of $100,000 plus”.
I was urged to rely upon Mr Websdale’s evidence and Affidavit material by the Applicant. Some significance was placed on Mr Websdale’s observations of ore which had been removed from the gold mine. At the end of his evidence however Mr Websdale conceded that the observations he made of the ore which had allegedly come from the gold mine had been made some years ago without the express purpose of valuing the gold mine and involved observations which took place for no more than about 5 minutes.
The Respondent submitted that Mr Websdale should not be relied upon. It was submitted and I accept as a matter of fact that Mr Websdale had never been down the mine, he did not have a sound knowledge or understanding of the particular difficulties operating that mine including difficulties encountered with the high level of water in the mine and the method of ground support employed. His observations of the ore were inadequate and at the time could be regarded as no more than a passing interest which he could not possibly have believed would later be used as in part a basis for making an assessment of the value.
I further accept the submission for and on behalf of the Respondent that it is relevant to look at the profitability of the mine and its history. There is no doubt that the mine had not been profitable. It had produced since 1990 about $39,000 of gold with a $10,000 profit without accounting for labour or plant and equipment. The two companies which had the balance of the interest in the mine had been in liquidation since 1989 and 1991. The tenement had never been sold and indeed was forfeited in early 1997.
The Respondent also refers relevantly to the Applicant’s value of the mine in his letter dated 13 April 1994 where he states that the value of the mine is “unestablishable”. In the agreement between the official trustee and Mr Leeder dated 23 March 1995 forwarded by facsimile to the Applicant on 19 April 1995 the ascribed value of the mine to Mr Leeder’s interest was $2,000.
In my view having regard to the inadequacy of the basis upon which the valuation was undertaken by Mr Websdale combined with his lack of knowledge of the profitability of the mine I do not accept that it had any value. I am strengthened in that conclusion by the history of the companies which had an interest in the mine together with the fact that the mine was forfeited in early 1997 and indeed never sold. In my view it is fanciful to place a value of $100,000 or indeed any value at all to the gold mine in those circumstances.
Consequential damages
The Applicant’s schedule of consequential damages (Exhibit A6) claims the total amount of $35,704.00. Travelling expenses are said to be $15,000, accommodation $400.00 and the balance being for legal and accounting fees.
Counsel for the Applicant referred me to the Decision of Hillesden Securities Ltd v Ryjack Ltd (1983) 1WLR 959 and in particular the following passage from Parker J where the Court states at p963:
“Although damages for conversion normally consist in the value of the goods at the time of conversion, consequential damages are always recoverable if not too remote”
The evidence concerning the consequential damages however seemed to me to be vague and unhelpful. It was not clear from the evidence whether the costs were incurred in pursuing legal action and/or in responding as required to requests from the trustee. In general I formed the view that the damages so claimed were far too remote to the claim in conversion and were not substantiated.
To that extent I accept the submission made by the Respondent that those expenses were more likely to be incurred in the course of a dispute and did not have a sufficient connection to the claim in conversion. There was a lack of detail as to the legal and accounting expenses and it was indicated that the award of costs in a claim of this kind would be adequate compensation provided those costs are directly related to the litigation. Legal costs for other advice and indeed advice before an action is commenced and correspondence are not usually recoverable and should not therefore be recoverable it was submitted by the Respondent in the present application.
Hence even if I were minded to accept the general submission that consequential damages may be recoverable in a conversion claim I am not satisfied that there is sufficient material before me to justify making an award for damages given that it has not been established by the Applicant that those damages were incurred as a consequence of the conversion and not for other reasons which would not permit recovery.
Therefore I am not prepared to accept that the Applicant should be liable for any consequential damages as claimed.
Exemplary damages
In this application I was urged by Counsel for the Applicant to award exemplary damages in the event that I were to find that there had been a breach of duty which as I have indicated has been found in terms of conversion.
Both Counsel made submissions in relation to the conduct of the Respondent and in particular whether the conversion constituting a breach of duty of care was conduct which would justify a finding that the Applicant was entitled to exemplary damages.
Wide ranging criticism was made by the Applicant of the Respondent in relation to the way in which it dealt with the assets of the bankrupt estates and furthermore the manner in which it had dealt with the claim by Mr Brady that he was a secured creditor. The lack of valuation of the assets and any real endeavour to determine the value and/or secure the various items was the subject of significant criticism in very strong submissions by Mr Viner for and on behalf of the Applicant. I was referred by Mr Viner to High Court Decision in Uren V John Fairfax & Sons Pty Ltd (1965) 117 CLR 118 at p 138 where the Court refers to circumstances where exemplary damages will be awarded. Specific reference was made to the concept of “conscious wrongdoing” and “contumelious disregard for another’s rights”. In general terms it was submitted on behalf of the Applicant that the Respondent had acted in contumelious disregard for the rights of the Applicant and indeed it was said that the Respondent acted in a high handed manner in its dealings with the Applicant and more importantly the manner in which it dealt with the assets over which he claimed to be a secured creditor.
In my view it is clear that both the Applicant and the Respondent had statutory remedies in relation to the securing of the assets and/or seeking declarations from the Court. The fact that neither pursued that course of action at an early stage may be a matter of regret but having regard to the facts and circumstances which involve an extraordinary exchange of correspondence between the Applicant and the Respondent over a number of years, I am satisfied that both parties had the opportunity to pursue other avenues at an early stage. The finding by this Court of conversion is a finding largely based upon the change in evidence from Mr Mitchell from the evidence in his Affidavit to the evidence in the witness box. It is easy to undertake a retrospective analysis and make a finding that the Respondent had behaved in a high handed or contumelious fashion or indeed to conclude that it acted in what might be described as a less than satisfactory manner towards the Applicant and the assets over which he claimed a secured interest. However it needs to be borne in mind that the Respondent has a duty to act in the interest of all creditors of an estate and to ensure that where there is a challenge to the assets it obtains appropriate legal advice and/or refers the matter to Court. The failure to refer the matter to Court does not necessarily mean that if an error occurs in its interpretation of creditor’s rights that the Applicant will automatically be exposed to the risk of exemplary damages which may flow from that error.
In my view at all material times the Respondent was entitled to regard the gold mine as having little or no value as I have found. It was further entitled to find that the assets were of limited value and that a cost effective method of disposition of those assets would be appropriate in the circumstances.
Whilst I was concerned about the fact that the Respondent did not reveal one of the legal opinions it sought in relation to the status of the Applicant’s security, that does not in itself provide a sufficient basis upon which I should conclude that the conduct of the Respondent was sufficient to attract the award of exemplary damages.
The Respondent’s Counsel referred me to the decision of Lamb v Cotogno (1987) 164 CLR 1 and Gray v Motor Accident Commission (1998) 196 CLR 1 and it was submitted that based upon those authorities it is not necessary that the Court should find malice for an award of exemplary damages. In Gray v Motor Accident Commission my attention was drawn to pages 6 and 7 where the following appears:
“Exemplary damages are awarded rarely. They recognise and punish fault, but not every finding of fault warrants their award. Something more must be found. Although they are awarded rarely, they have been awarded in very different kinds of cases: ranging from abuse of governmental power exemplified by Wilkes v Wood and its associated cases through defamation cases of the kind considered in Uren, to assault cases such as Fontin v Katapodis. And the examples could be multiplied.
….
Because the kinds of case in which exemplary damages might be awarded are so varied, it may be doubted whether a single formula adequately describes the boundaries of the field in which they may properly be awarded. Nevertheless, the phrase adopted by Knox CJ in Whitfeld v De Lauret & Co Ltd of `conscious wrong doing in contumelious disregard of another’s rights’ describes at least the greater part of the relevant field”.
It was submitted and I accept that it is conduct not the character of the Respondent which leads to an award of exemplary damages (See Uren v John Fairfax Pty Ltd (1965) 117 CLR 118 at 132). It was further submitted that negligence is not a sufficient basis for the award of exemplary damages (See Gray v Motor Accident Commission at p22). I accept the submission of the Respondent that the failure to seek directions from the Court concerning competing alleged rights is not a proper basis for a claim in exemplary damages. As indicated both parties had the opportunity to seek remedies in Court and indeed it is noted the Applicant failed to continue Supreme Court proceedings which he had commenced in order to seize the property in issue. A secured creditor clearly has rights under s90 of the Bankruptcy Act. It was submitted and I accept that the Applicant purporting to be a secured creditor could have indicated any time that he surrendered the security to the trustee for the benefits of creditors generally and that in the present case he did not do so. It was further submitted that resolution of the claim by the Applicant that he was a secured creditor would not have involved a simple direction but rather a costly and complex trial of an action. In those circumstances it was submitted that the Applicant was not prejudiced by the failure of the Respondent to bring the matter before the Court.
It was further submitted by the Respondent that a failure to act with due diligence is not a proper basis for exemplary damages. In any event the Respondent submits that if anything its conduct was excessively cautious and/or indecisive or indeed may have failed to act with due diligence. All of these matters it is submitted do not justify an award of exemplary damages.
As indicated I accept the Respondent’s submissions in relation to the issue of exemplary damages. In my view the Applicant’s obvious dissatisfaction with the manner in which the bankrupt estates were dealt with by the Respondent together with his view as to the true character the mortgage debenture are both understandable in all the circumstances. However the fact remains that the documentary material was less than adequate. The Respondent was faced with the prospect of making an assessment of that inadequate material and indeed sought legal advice which at times appeared to be in conflict. The estates on any assessment were modest and the cost and expense of disposing of the estates were potentially significant. As I have indicated a retrospective analysis based upon the evidence at hearing of Mr Mitchell (rather than his Affidavit evidence) might have led the Respondent to a different conclusion. However, at the time when the Respondent was placed in the position of making a decision about this matter it was confronted with a wide range of allegations including fraud, forgery together with endeavouring to deal with documents concerning a business venture which were inadequate and in circumstances where none of the parties had sought or received appropriate legal advice in order to properly formalise their relationship. It is little wonder that the Respondent hesitated and to some extent procrastinated in this matter ultimately to the detriment of the Applicant to the extent that I have now found that the Applicant was indeed a secured creditor based upon the mortgage debenture.
In my view however without reciting in detail the complex history in this matter I am not satisfied that there is sufficient evidence to properly justify an award of exemplary damages.
Conclusion
A claim was made in this matter for interest. It is not clear from the submissions whether the Applicant seeks to pursue the claim for interest at the rate of 18% which was referred to in the mortgage debenture document. I do not accept that a rate of interest in that document is appropriate in assessing interest for the purpose of the damages which I have awarded in this judgment. In the circumstances I will order that interest be payable at the rate of 10.5% from the date of conversion which is 23 March 1995. The rate of interest is the rate which applies pursuant to Order 35 Rule 8 of the Federal Court Rules.
It is appropriate therefore that I make orders as follows:
(1)That the Respondent pursuant to s 176 of the Bankruptcy Act 1966 (Cth) pay the Applicant damages of $17,550.
(2)The Respondent pay the Applicant interest at the rate of 10.5% on and from 23 March 1995 to the date of this order in relation to the damages of $17,550 pursuant to Order 35 Rule 8 of the Federal Court Rules
(3)The Respondent pay the Applicant’s costs to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
I certify that the preceding seventy eight (78) paragraphs are a true copy of the reasons for judgment of McInnis FM
Associate:
Date: 22 August 2001
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