Brien v Grapsas

[2004] FMCA 212

FEDERAL MAGISTRATES COURT OF AUSTRALIA

BRIEN v GRAPSAS & ORS [2004] FMCA 212

BANKRUPTCY – Property of bankrupt – whether vests in trustee- whether after trustee declared bankrupt property vests in Official Trustee – fiduciary duty – whether separate trust – whether indemnity as property of bankrupt which vests in trustee – whether right to claim indemnity and proceeds of property divisible amongst creditors.

Bankruptcy Act 1966, ss.27, 27(1), 43(1), 73, 74(5), 109(10), 116(1)(a), 116(2)(a), 156A

Transfer of Land Act 1958 (Vic), s.51
Property Law Act 1958 (Vic), ss.3, 221

Turner v Official Trustee in Bankruptcy [1999] FCA 1817 (23 December 1999)

Hospital Products v United States Surgical Corporation & Ors (1984) 55 ALR 417

Re Densham (1975) 1 WLR 1519
Re Sharpe (1980) 1 WLR 219
Morgan v Swansea Urban Sanitary Authority (1878) 9 ChD 582
Cummings v Claremont Petroleum NL (1996) 185 CLR 124
Fuller v Beach Petroleum NL (1993) 117 ALR 235
Re Silverstein (1998) 322 FCA (13 March 1998)
Barclays Bank Ltd v Quist Close Investments Ltd (1970) AC 567
Re Hudson Ex parte Australia & New Zealand Banking Group Ltd & Anor v Bird (1994) 50 FCR 281

Carvalho v Byrne 4 Barnes & Adolphus 382 at 393

Jennings v Mather (1902) 1 KB 1
St Thomas’ Hospital v Richardson (1910) 1 KB 271
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
Re Matheson; Ex parte Worrell (1994) 49 FCR 454, 121 ALR 605
Tattersalls Hotel Penrith Pty Ltd v Permanent Trustee Co of NSW Ltd (1942) 42 SR (NSW) 104
Sands & McDougall Wholesale Pty Ltd (In liq) v Commissioner of Taxation (1999) 2 VR 489

Applicant: RICHARD BRIEN (A BANKRUPT) (FORMERLY TRUSTEE OF THE ESTATE OF PETER GRAPSAS)

Respondents: PETER GRAPSAS, CATHERINA JOHANNA GRAPSAS and THE OFFICIAL TRUSTEE IN BANKRUPTCY FOR THE BANKRUPTCY DISTRICT OF NEW SOUTH WALES

File No: MZ 293 of 2002

Delivered on: 8 April 2004

Delivered at: Melbourne

Hearing Date: 27 November 2003

Judgment of: McInnis FM

REPRESENTATION

Counsel for the Applicant: Mr S O’Meara

Solicitors for the Applicant: Deacons

Counsel for the First and Second Respondents: Mr G Nash

Solicitors for the First and Second Respondents: Irlicht & Broberg

Counsel for the Third Respondent: Mr P Fary

Solicitors for the Third Respondent: Gadens Lawyers

ORDERS

1. That the property described in Certificate of Title Volume 8423 Folio 791 being the property situate at and known as 12 Montpellier Drive Highton (property) has been and is vested in the Applicant to secure his remuneration and legal costs with respect to the administration of the bankrupt estate of Peter Grapsas.

2. That the Applicant’s interest in the property is held on trust by the Applicant for Victoria Legal Aid pursuant to the terms of a deed of indemnity dated 10 April 1995, and accordingly the property does not form part of the Applicant’s divisible property for the purposes of the Bankruptcy Act 1966.

3. That at all material times, both pursuant to orders of the County Court of Victoria and the terms of Peter Grapsas’ composition pursuant to s.73 of the Bankruptcy Act 1966, the Applicant has been entitled to deal with and to effect a sale of the property.

IT IS ORDERED THAT:

1. The Applicant have possession of the property.

2. The First and Second Respondents account to the Applicant for all rents and profits earned by them in relation to the property since
   16 November 1999 and that such account be provided to the Applicant by 14 May 2004.

3. The First and Second Respondents pay to the Applicant’s solicitors all rents and profits earned by them in relation to the property since 16 November 1999 and up to and including 21 May 2004, which sum of rents and profits is to be held on trust subject to further order of the Court.

4. The sum of $1861.95 held in Westpac Banking Corporation Account no. 033 000 38 1806 be retained in that account until further order.

5. The Applicant shall file and serve any further affidavit material upon which he seeks to rely by 30 April 2004.

6. The Respondents shall file and serve any further affidavit material upon which they seek to rely by 14 May 2004.

7. The matter be otherwise adjourned for hearing on 21 May 2004 at
   10 a.m.

8. The proceedings shall be the subject of mediation on or before 19 May 2004 with the mediation to be conducted by a registrar of the court appointed by the registrar of the court as mediator.

9. That orders 4 and 6 hereof be stayed pending further order of the court.

10. The issue of costs, including the costs of this day, is reserved.

11. Liberty to apply is granted to the parties in relation to any matters arising out of these orders.

THE COURT NOTES:

The Applicant has indicated today by its Counsel that he will not oppose any extension of time for leave to appeal made after 21 May 2004 in respect of Orders 1, 2 and 3 made today.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MZ 293 of 2002

RICHARD BRIEN (A BANKRUPT) (FORMERLY TRUSTEE OF THE ESTATE OF PETER GRAPSAS)

Applicant

and

PETER GRAPSAS, CATHERINA JOHANNA GRAPSAS and THE OFFICIAL TRUSTEE IN BANKRUPTCY FOR THE BANKRUPTCY DISTRICT OF NEW SOUTH WALES

Respondents

REASONS FOR JUDGMENT

1. In this matter Richard Brien (the Applicant) (formerly trustee of the bankrupt estate of Peter Grapsas) by an amended application seeks various declarations and orders to give effect to the terms of a composition or arrangement entered into by Peter Grapsas on 16 November 1999 pursuant to s.73 of the Bankruptcy Act 1966 (the Bankruptcy Act). The Applicant at the time of making the application is a bankrupt. In particular orders are sought for the sale of the property described in Certificate of Title Volume 8423 Folio 791, being the property situate at and known as 12 Montpellier Drive, Highton ("the property").

2. The application had been docketed to another federal magistrate who unfortunately was not able to hear the matter and accordingly a great deal of the material filed prior to the hearing of the matter, upon transfer to my docket, had to be considered after the hearing, which has meant some significant delay in delivery of judgment.

3. For convenience the applicant has provided a court book comprising pleadings and orders, affidavits and exhibits and submissions by the parties, some 450 pages.  The proceedings had been commenced in the Federal Court on 10 July 2001 and were then subject to an order transferring the proceedings to the Federal Magistrates Court on 26 March 2002.  Orders were made by the docketed federal magistrate who was to hear the matter on 24 April 2002 permitting the applicant to file and serve an amended application and the respondents to file and serve a response to that amended application, together with any costs claim and verifying affidavit material.  Further directions were then made on 26 June 2002 adjusting the timetable for the filing and serving of documents and otherwise adjourning the matter for hearing on a date to be fixed.

4. As indicated, due to the unavailability of the docketed federal magistrate, the matter was heard before me on 27 November 2002, with further directions being given to the parties for the filing and serving of lists of authority, together with brief supplementary submissions.

5. The third respondent was joined in these proceedings by order made on 24 April 2002 pursuant to Order 6 Rule 8 of the Federal Court Rules in response to a notice of motion filed by the applicant.  The applicant has relied upon contentions of fact and law dated 8 February 2002.  The first and second respondents rely upon contentions of fact and law dated 22 February 2002 and supplementary submissions filed 2 December 2002 and a document entitled, "Summary of First and Second Respondents' Submission," which is undated, though comprising 21 pages, referred to during the course of oral submissions.  The applicant has further relied upon a document entitled, "Applicant's Reply to Respondents' Contentions of Fact and Law," dated 13 March 2002, together with a document entitled, "Applicant's Reply to First and Second Respondents' Supplementary Submission," dated 5 December 2002.

The amended application

1. The amended application provides the following:-

   “This application seeks various declarations and orders to give effect to the terms of a composition or arrangement entered into by Peter Grapsas on 16 November 1999 pursuant to section 73 of the Bankruptcy Act 1966, and in particular, for orders for the sale of the property described in certificate of title volume 8423 folio 791 being the property situate at and known as 12 Montpellier Drive, Highton ("the Property").

   The legislative basis for the Court's jurisdiction to hear this application and to grant the relief sought is constituted by sections 30 and 75(3) of the Bankruptcy Act 1966. The applicant also relies upon the accrued jurisdiction of the Court to determine related claims in respect of possession and ownership of the Property including orders for sale of the property under Part IV of the Property Law Act (Vic) 1958”.

2. In the amended application the applicant provides details of claim as follows:-

   “On the grounds stated in the accompanying affidavits of Ross Whyte McClymont sworn 10 July 2001 and John Mole sworn 9 July 2001, the applicant claims:-

   1. A declaration that at all material times the Property has been vested in the applicant to secure his remuneration and legal costs with respect to the administration of the bankrupt estate of Peter Grapsas.

   2.A declaration that the applicant's interests in the Property is held on trust by the applicant for Victoria Legal Aid pursuant to the terms of a deed of indemnity dated 10 April 1995 and therefore does not form part of the applicant's divisible property for the purposes of the Bankruptcy Act 1966.

   2AIn the alternative to paragraph 2, a declaration that the applicant's interests in the Property has vested in the third respondent.

   3A declaration that at all material times, both pursuant to orders of the County Court in Victoria and the terms of Peter Grapsas' composition pursuant to section 73 of the Bankruptcy Act 1966, the applicant has been entitled to deal with and to effect a sale of the Property.

   4A declaration in the contract of sale with respect to the Property dated 12 February 2000 has been rescinded.

   5A declaration that the deposit paid by Peter Grapsas and Catherina Johanna Grapsas pursuant to the said contract of sale have been forfeited for the benefit of the applicant.

   5AIn the alternative to paragraph 5, a declaration that the deposit paid by Peter Grapsas and Catherina Johanna Grapsas pursuant to the said contract of sale have been forfeited to the benefit of the third respondent.

   6.An order that the applicant have possession of the Property.

   6A.In the alternative to paragraph 6, an order that the third respondent have possession of the Property.

   7.An order that the applicant forthwith sell the Property by public auction or private treaty.

   7A.In the alternative to paragraph 7, an order that the third respondent forthwith sell the Property by public auction or private treaty.

   7B.In the event that the third respondent is ordered to sell the Property in accordance with paragraph 7A, an order that the third respondent's costs of selling the Property be deducted from the proceeds of the sale with first priority.

   7C.In the event that the third respondent is ordered to sell the Property in accordance with paragraph 7A, an order that after payment of the existing encumbrances on the Property the net proceeds of sale of the Property be paid to Victoria Legal Aid as indemnifying creditor (by way of the terms of a deed of indemnity dated 10 April 1995) pursuant to section 109(10) of the Bankruptcy Act.

   8.An order preventing the first and second respondents, either directly or by their servants or agents, from attending at such an auction or bidding at any public auction of the Property.

   9.A declaration that Grapsas Corporation Pty Ltd has no entitlement for payment of any alleged outgoings from the net proceeds of sale of the property.

   10.An order that the first and second respondents pay the applicant's costs of this application on an indemnity basis, and that such costs, together with the costs ordered to be paid by the second respondent by His Honour Judge Meagher in the County Court of Victoria proceedings no. 9704310 and 9800221 on 26 August 1998 be paid out of the second respondent's share of the net proceeds of sale of the Property.

   11.An order that the first and second respondents account to the applicant for all rents and profits earned by them in relation to the Property since 16 November 1999.

   11A.In the alternative to paragraph 11, an order that the first and second respondents account to the third respondent for all rents and profits earned by them in relation to the Property since 16 November 1999.

   12.An order that the sum of $1861.95 held in Westpac Banking Corporation Account no. 033 000 38 1806 be paid to the applicant.

   12A.In the alternative to paragraph 12, an order that the sum of $1861.95 held in Westpac Banking Corporation Account no. 033 000 38 1806 be paid to the third respondent.

   13.A declaration that registered mortgage number M773097B with respect to the Property which was assigned to Violet Banner Pty Ltd on or about 3 November 2000 secures as against the applicant's interest in the Property the maximum sum of $4857.64.”

First and second respondents' notice of intention to oppose the amended application and cross-claim

1. The first and second respondents rely upon a notice of intention to oppose the amended application and cross-claim dated 27 May 2002.  In that notice the first and second respondents provide the following grounds of opposition to the amended application:-

   “1.The applicant has no standing to bring the application as the subject matter of the application is property which has vested in the Official Trustee as trustee of the bankrupt estate of the applicant.

   2.The first and second respondents specifically deny paragraph 2 of the application and say:-

   a) that an indemnity does not create a trust within the meaning of section 116(2)(a) of the Bankruptcy Act 1966, and

   b)     that in any event the remuneration referred to in the composition is wider than the remuneration referred to in the indemnity granted to the Victoria Legal Aid.

   2A.The first and second respondents admit paragraph 2(a) but say further that the interest is limited to enforcing security for the first respondent's liability under the composition for the payment of legal costs and remuneration.  Neither the applicant nor the third respondent has at any time made a demand for a correct sum for the payment of the said legal costs and remuneration, nor have provided the first respondent with the details of the claim for the said legal costs and remuneration.

   3.The first and second respondents contend that in any event this Honourable court has no jurisdiction to deal with or alternatively, ought not deal with the claims made in paragraphs 3, 6, 7, 8, 9, 10, 11 and 12 of the application by reason of the existence of an inconsistent order of the County Court of Victoria.

   4.The contract of sale has not been rescinded and the respondents having tendered the balance of purchase money on 12 May 2000 and the applicant having refused to accept that tender.

   5 & 5AGrapsas Corporation Pty Ltd has an entitlement to payment of outgoings pursuant to the terms of the order of the County Court made 26 August 1998 and is not a party to those proceedings.

   5.6 – 13 inclusive:

   The first respondent refers to and repeats paragraph 2A hereof.

CROSS-CLAIM

And by way of cross-claim on the ground stated in the affidavit of Peter Grapsas sworn 27 August 2001 and filed herein the applicant's cross-claim:

1The first respondent to the crossclaim or alternatively the second respondent to the crossclaim provide to the applicant a detailed and itemised bill of costs for legal costs payable by Peter Grapsas pursuant to his composition referred to in the application.

2An order that the first respondent to the crossclaim or alternatively the second respondent provide to the applicant details of the remuneration claimed as payable by Peter Grapsas pursuant to his composition.

3

A declaration that any of the said remuneration and of the said legal costs which were incurred unreasonably or otherwise improperly shall be disallowed and without limiting the generality hereof, that the costs and remuneration relating to the sale which took place on

16 November 1999, the costs and disbursements of the hearing before His Honour Judge F.B. Lewis to validate the said sale and costs and remuneration of and incidental to the summons issued by Peter Grapsas on 20 February 1999 all be disallowed.

4That this Honourable Court seeks the assistance of experts to ascertain the correct amount owing with respect to the said legal costs and the said remuneration alternatively orders same to be taxed and assessed by the Registrar of this Honourable court.

5A declaration that the proper legal costs as between solicitor and client in relation to the County Court cases numbered 9800221 and 9704310 be fixed at the sum of $31,855.31 in accordance with a certificate of the Registrar of the County Court.

6A declaration that on the payment of the amounts owing for the said legal costs and the said remuneration the said respondents have no claim whatsoever to the said property and to any of the assets referred to in the application.”

Background

1. In general terms, the issues raised on the material include whether the applicant has standing, the jurisdiction of the court and a determination after examining the material of the issue of in whom is what property vested.  The applicant claims that as between him and the respondents, the property either vests in the applicant or alternatively in the Official Trustee in Bankruptcy.

2. There is not a great deal of dispute in relation to the facts and chronology.  For convenience, I rely upon the summary set out in the applicant's original contentions of fact and law dated 8 February 2002.

3. The applicant as stated is the former trustee in bankruptcy of Peter Grapsas and is now himself bankrupt.  Together with Catherina Grapsas, the applicant is the proprietor of the property in his capacity as trustee of the estate of Peter Grapsas.

4. Peter Grapsas was subject to a sequestration order made against his estate pursuant to s.43(1) of the Bankruptcy Act on 23 November 1992. The applicant became trustee of the bankrupt's estate pursuant to s.156A of the Bankruptcy Act.

5. On 15 March 1993 pursuant to s.51 of the Transfer of Land Act 1958 (Vic) all the right, title and interest of Peter Grapsas in the property was vested in the applicant with the transmission being registered in the Office of Titles in dealing number S403011B.

6. It is common ground that since 23 December 1985 the Legal Aid Commission of Victoria (LACV) has claimed a charge over the property to secure Legal Aid funding made available to Peter Grapsas.  The interests of LACV as chargee is noted on the title pursuant to caveat number M796106D dated 15 April 1987.

7. By deed of indemnity between the applicant and LACV entered into on 10 April 1995, an agreement was reached whereby LACV would provide funding to the applicant for his remuneration costs, charges and expenses, including legal costs incurred for the purpose of the realisation of Peter Grapsas's interest in the property (“the indemnity”).  Specifically the deed provides an indemnity for the purpose of a realisation by the applicant of Peter Grapsas's interest in the property including "partition proceedings for the sale of the land and such other proceedings as are necessary to effect a sale of the land and such other steps as are necessary to realise the interest in the land".

1. As a result of the failure to successfully organise a joint sale of the property with Mrs Grapsas, the applicant issued proceedings on 3 July 1997 in the County Court of Victoria in proceeding number 9704310 ("the County Court proceedings"). The proceedings sought orders against Mrs Grapsas pursuant to s.221 of the Property Law Act 1958 for the sale of the property and various directions as to the distribution of the net proceeds of sale.

2. On 28 August 1997 Chief Judge Waldron ordered that all rental received, meaning tenant of the property as may from time to time occupy it, should be paid to a joint trust account in the names of the applicant's solicitors and the solicitors for Mrs Grapsas.

3. Pursuant to the orders made by Chief Judge Waldron on 28 August 1997, a cash management account was established in the name of the applicant's solicitors and the solicitors for Mrs Grapsas.  The account was opened on 8 September 1997 and as at 10 July 2001 there was an amount of $1861.95 standing in that account.

4. A hearing of the County Court proceedings resulted in a judgment in that court before Judge Meagher on 20 August 1998.  Orders were made by Judge Meagher on 26 August 1998 which provided for the property to be sold with the sale of the property being conducted by agents appointed by the applicant by public auction on a date to be fixed with a reserve of $85,000.  Despite those orders by his Honour Judge Meagher, the applicant claims to have encountered difficulties obtaining vacant possession of the property for the purpose of arranging a sale.  A summons was then issued on 14 September 1999 in a County Court proceedings whereby the applicant sought orders for vacant possession of the property.  Judge F.B. Lewis made orders in those terms on 12 October 1999.  Having obtained the vacant possession of the property following those orders, the applicant through its agents marketed the property for sale.  An offer was made prior to auction to purchase the property for $96,000.  The offer was accepted by a contract of sale executed 15 November 1999 by the applicant and signed by the purchasers on 16 November 1999.

5. On 16 November 1999 the creditors of Peter Grapsas accepted a proposal made by him for a composition or arrangement pursuant to s.73 of the Bankruptcy Act. Accordingly, pursuant to s.74(5) of the Bankruptcy Act, the bankruptcy of Peter Grapsas was annulled on

   
   

   16 November 1999.  The precise wording of the resolution passed by the creditors was as follows:-

   The payment of a sum sufficient to allow a distribution to ordinary unsecured creditors, a pro rata distribution of 4.75 cents in the dollar.  Such payment to be made within seven days of the acceptance of the proposal at a duly convened meeting of my creditors;

   The bankrupt shall pay to the trustee the trustee's remuneration and his legal costs and to secure the payment of the legal costs and remuneration the trustee shall retain vested in him as trustee all the divisible property of the bankrupt as at the date of the acceptance of the proposal;

   The remuneration of the trustee of composition on acceptance be paid to an upper limit of $800 provided in priority of all creditors.

6. An objection was made by Mrs Grapsas to sale of the property by private treaty.  An application was then brought before the County Court to amend the orders made by Judge Meagher on 26 August 1998 to allow the sale to proceed by private treaty rather than public auction.  That application was heard by Judge F.B. Lewis on 25 November 1999.  Judge F.B. Lewis made an order that if the property failed to sell at auction for an amount exceeding the reserve price of $85,000, then the applicant would be at liberty to sell the property by private sale for an amount not less than the said reserve.  The application was otherwise dismissed though a further order was made that Peter Grapsas be restrained and an injunction be granted restraining him from attending within 500 metres of any auction of the property or from attempting, whether by himself or his servants or agents, to disrupt the auction in any way.

7. Peter Grapsas then sought to dissolve the injunction and issued a summons seeking orders to that effect on 20 December 1999.  That summons was heard by Judge Meagher on 23 December 1999.  On the basis of an undertaking given by Peter Grapsas that he would not attempt either by himself, or his agents to disrupt the auction of the property, the injunction granted by Judge F.B. Lewis on 25 November 1999 was dissolved.

8. On 8 February 2000 the taxation of costs awarded in the County Court proceedings and in another proceeding number 9800221 (being a proceeding brought against the applicant by Grapsas Corporation Pty Ltd) took place, at which time the applicant's costs in the County Court proceedings were taxed and allowed in the sum of $20,268 and his costs as defendant in the proceedings number 9800221 were taxed and allowed at $11,587.35.  Those costs were to be deducted from the proceeds of the sale of the property pursuant to orders made by Judge Meagher on 26 August 1998.

9. On 12 February 2000 the property proceeded to auction and was sold to Peter Grapsas and Mrs Grapsas for the sum of $113,000.  A deposit of $11,300 was received at that time.

10. On 14 February 2000 a sequestration order was made against the estate of the applicant and the Official Trustee in Bankruptcy was appointed as trustee of that estate.

11. A dispute arose in relation to the settlement date of the property and the distribution of proceeds in between March and May 2000.  On 12 May 2000 Peter Grapsas attended the applicant's solicitor's office purporting to tender the balance of the purchase price owing under the contract of sale of the property.

12. Up to 12 May 2000 there had been correspondence between the applicant's solicitors and the respondents' solicitors regarding settlement of the property and reference was made to the fact that instructions were sought from the Official Trustee in Bankruptcy in relation to settlement.  A letter dated 11 May 2000 from the respondents' solicitors to the applicant's solicitors states in part the following:-

    It is apparent that it will take some time for ITSA to assess the situation and provide you with instructions for a resolution of the outstanding matters connected with the sale.  For this reason we suggest that the most appropriate course is that settlement be extended for a further period until, say, 13 June 2000.  There can be no realistic prejudice to any party connected with the sale or with the bankrupt estate of Peter Grapsas by adopting this course.

13. The respondents' solicitors by further letter dated 11 May 2000 addressed to Mr Peter Dwyer of ITSA states in part the following:-

    It is our understanding that the Official Trustee in Bankruptcy has now assumed the administration of Mr Grapsas's bankrupt estate consequent upon the inability of Richard Brien to continue in that position.  We further note that Mr Grapsas contacted you earlier today to discuss the matter.  He has requested that we provide you with further information concerning the present position.

    The contract for purchase of the property by our client was entered into at the auction on 12 February 2000.  The property was sold pursuant to an order of the County Court of Victoria made on 26 August 1998.  We have been corresponding for some time with Dunhill Madden Butler on a number of outstanding issues connected with the sale.  They have acted on behalf of Mr Brien in his capacity as trustee and one of the vendors under the contract.

    The issues, which all remain unresolved, are as follows:

    (1) No settlement date was inserted in the contract when signed by the purchasers.  We have submitted that settlement should therefore be 90 days from the date of sale, making the due date tomorrow, 12 May 2000.  The court order provided that the terms for payment and the residue would be "at most 90 days".

    (2) A caveat is lodged on the title by Legal Aid Victoria.  We have had considerable correspondence with Dunhill Madden Butler regarding our contentions that the liability under the caveat should be against the bankrupt estate of Peter Grapsas and not against the share of proceeds from the sale attributable to the interest of Mrs Grapsas.

    (3) For many years outgoings on the property have been paid by Grapsas Corporation Pty Ltd.  They claim reimbursement from the sale proceeds for their outgoings.

14. By letter dated 26 June 2000 from the applicant's solicitors to the respondents' solicitors an attempt was made to achieve some resolution of the matter.  In that letter reference was made to the fact that the applicant had become bankrupt, with the effect that his trusteeship of the bankrupt estate of Peter Grapsas (to the extent that such a state continues to exist) has ceased.  In the letter the following then appears:-

    We also confirm that on 16 November 1999 Mr Grapsas's creditors accepted a composition under section 73 of the Bankruptcy Act 1966, as a consequence of which his bankruptcy was annulled. The composition included the following term:

    "The bankrupt shall pay to trustee the trustee's remuneration and his legal costs and to secure the payment of the legal costs and remuneration the trustee shall retain vested in him as trustee all the divisible property of the bankrupt as at the date of the acceptance of the proposal."

    Ordinarily under section 160 of the Bankruptcy Act the Official Trustee would assume the administration of Mr Grapsas's estate upon Mr Brien's bankruptcy. However, the Official Trustee position appears to be that as a consequence of the composition, there is no bankrupt estate to administer.

    In turn, the Official Trustee has expressed reluctance to adopt the contract of sale as trustee of Mr Brien's estate because, after payment to Bendigo Bank under its registered mortgage, Victoria Legal Aid under its charge and payment of Mr Brien's costs, there is unlikely to be money available for distribution to Brien's creditors.

15. That letter went on to refer to a proposal to resolve the matter and recommended distribution of the sale proceeds.

16. On 11 July 2000 the applicant forwarded a letter to the Official Trustee in Bankruptcy which in part stated the following:-

    In any event, the continuing failure to settle a contract because of the vacuum created by my bankruptcy is untenable.  In these circumstances I propose to instruct Dunhill Madden Butler to complete the contract of sale and to disburse the net proceeds to Victoria Legal Aid pursuant to its indemnity.  If I don't hear from you within seven days of the date of this letter, I will presume that you have no objection to this course of action.

17. It is asserted on behalf of the applicant that he had a conversation with Mr Dwyer of the Insolvency and Trustee Service Australia and was advised that there was no objection to the course of action proposed.  The applicant's solicitor then by letter dated 4 August 2000 addressed to the respondents' solicitor states in part the following:-

    Given that the Official Trustee has now indicated he had no objection to Mr Brien completing the sale, subject to resolving the issue with respect to outgoings, there would appear to be no barrier to settlement now being effected in accordance with the sale contract.

18. It would appear that no response to that letter of 4 August 2000 was received for some months.

19. Accordingly, on 15 November 2000 the solicitors for the applicant on instructions forwarded a letter to the respondents' solicitors enclosing a notice of recision with respect to the contract of sale.  The respondents' solicitors by letter dated 27 November 2000 to the applicant's solicitors rejected the applicant's entitlement to serve a notice of recision and otherwise challenged the validity of the notice.  The following issues arise in the correspondence:-

    (1) The vendor is an undischarged bankrupt.  There is nothing to indicate that the notice is given by or with the authority of his trustee.

    (2) Our client made a tender of the purchase money on 12 May 2000, which tender was not accepted.  The vendor is therefore in no position to serve a notice of recision.

    (3) The delays of the vendor and his refusal to accept the tender in our view mean that time is no longer of the essence under the contract and no notice is being given by the vendor to make time of the essence once again.

    (4) The notice refers to a settlement date of 12 April 2000 and claims interest from that date.  The settlement date was not 12 April 2000 as we have indicated to you in previous correspondence.  The date was in fact left blank on the copy of the contract exchanged with our client at the auction.  Your notice therefore overstates the amount required to comply with the notice (even if the notice was otherwise valid, which we submit it is not).

20. In the same letter dated 27 November 2000 the respondents' solicitors state the following:-

    We do, however, suggest that there is a more fundamental problem faced by your client. The bankruptcy of Peter Grapsas was annulled on 16 November 1999 by the passing of a resolution to accept a composition under section 73(4) under the Bankruptcy Act 1966. The effect of the annulment, as has been consistently confirmed by the courts (see the decision of Northrop J in the case of Re Hudson (1994) 50 FCR 281) is to place the former bankrupt back into the position he would have been as if the bankruptcy had never occurred.

    Further, by section 74(6) any property of the bankrupt vested in the trustee revests in the bankrupt on annulment.  It is true that section 74(6) confirms the validity of acts done by the trustee prior to the annulment but as the purported sale occurred some time after the annulment, this has no effect on the consideration of the validity of that sale.

    The position is therefore that as from 16 November 1999 the interest of the bankrupt in the property at Montpellier Drive, Highton, revested in Peter Grapsas.  Richard Brien therefore had no entitlement to deal with that property or to purport to sell it by auction sale on 12 February 2000.

21. By letter dated 29 November 2000 from the applicant's solicitors to the respondents' solicitors by way of reply, comments were made in relation to the issues raised.  The issue of tender was denied and reference was made to other correspondence, part of which has been referred to earlier in this judgment.  The letter further joins issue in relation to the dispute over the settlement date.  The author then reiterates the followings:-

    (1)On 16 November 1999 your client's creditors accepted a composition under section 73 of the Bankruptcy Act 1966, as a consequence of which his bankruptcy was annulled. The composition included the following term:

    "The bankrupt shall pay to the trustee the trustee's remuneration and his legal costs and to secure the payment of the legal costs and remuneration the trustee shall retain vested in him as the trustee all the divisible property of the bankrupt as at the date of the acceptance of the proposal."

    (2)On this basis the interest of the bankrupt estate in the subject property has never revested in your client and our client has at all times been entitled to effect a sale of same, both pursuant to the terms of the composition and more particularly pursuant to the orders made in the County Court proceedings.

    (3) Mr Brien's interest in the property is held on trust by him for Victoria Legal Aid pursuant to the terms of the relevant indemnity, and therefore does not constitute divisible property of Mr Brien's estate for the purpose of the Bankruptcy Act.

    (4) In these circumstances, any application to the registrar of titles to revest the property in your client will be vigorously opposed, and no refund of the deposit paid will be made.

22. After that exchange of correspondence and lengthy disputes, an application was then filed in the Federal Court on 10 July 2001 seeking the relief referred to earlier in this judgment.

23. At the commencement of this hearing the parties agreed that they would rely upon a Court Book of material comprising some 461 pages and otherwise rely upon submissions in writing.  The Third Respondent had sought leave to withdraw having indicated that he would abide by the decision subject to any issue which may arise on the question of costs.

24. Whilst the parties initially referred to a threshold issue of determining in whom the property had vested as what might be described as a ‘preliminary issue’ it became evident that other issues were raised and had to be considered by the Court on behalf of the First and Second Respondents.  An issue to be determined later had been raised on the facts which related to the quantum of costs or expenses or remuneration of the Applicant in his capacity as trustee.  Apart from that issue the facts were not otherwise disputed in the form set out previously in this judgment.  The issues raised by the First and Second Respondents included the standing of the Applicant as an undischarged bankrupt to bring the proceeding, the question of whom the property is vested which it is agreed is a significant threshold issue and jurisdiction given that there is no bankrupt estate of Mr Grapsas to now administer as he is no longer bankrupt and that the Court is being asked to deal with issues raised where orders had been made by the County Court which may be described as interlocutory orders with liberty to apply. 

25. It is noted that in the Notice of Intention to Oppose the Amended Application there is also a crossclaim which has been the subject of submissions by the parties.  In summary the issues I propose to deal with in order are as follows:-

    ·            Jurisdiction

    ·            Applicant’s Standing

    ·            In Whom Does the Property Vest?

26. It seems to me that it is important to determine the issues of jurisdiction, standing and in whom the property vests and as indicated during the course of submissions made on behalf of the Applicant it would then be appropriate for the Court to consider the form of orders which follow from the Court’s determination of those matters before proceeding to consider further to the extent that it is able matters of quantum of the costs and expenses or remuneration of the Applicant as trustee and the Crossclaim.  Obviously matters raised in the Crossclaim may well be affected by the decision of the Court in relation to those issues previously identified.

Jurisdiction of the Court

1. It was submitted by the Applicant that the Court has jurisdiction to hear and determine matters arising under the Bankruptcy Act. Those matters cannot be vested in State Courts. Reference was made to s.27 of the Bankruptcy Act which provides as follows:-

   “27(1)The Federal Court and the Federal Magistrates Court have concurrent jurisdiction in bankruptcy, and that jurisdiction is exclusive of the jurisdiction of all courts other than the jurisdiction of the High Court under section 75 of the Constitution.”

2. It was submitted that the doctrine of accrued jurisdiction allows the Court when hearing a federal matter to decide any matter that would otherwise be non federal but which forms an inseparable part of the one controversy. The determination of the interest in the property and other orders dealing with the sale and distribution of proceeds of sale in the present case arise, it was submitted, in the context of the administration of the bankrupt estate of Peter Grapsas by the applicant prior to the applicant’s own sequestration. Orders obtained in the County Court by the Applicant dealing with the property prior to Peter Grapsas entering into a composition purporting to deal with the property and before the Applicant became bankrupt have given rise to a claim for relief under provisions of the Bankruptcy Act which are substantially interwoven with the facts and issues arising in what is described as the “non-federal claim”.

3. State Courts do not have jurisdiction to determine all of the issues in the controversy to the extent that there are questions to be determined and relief sought under provisions of the Bankruptcy Act.

1. The First and Second Respondents submitted that the only federal claims in the present application arise from the issue of who is the proper Applicant, that is has the cause of action vested in the Applicant or his trustee in bankruptcy. There is an issue of whether the First Respondent is in breach of terms of his composition. Otherwise the First and Second Respondents deny that the claims are interwoven with the facts and issues arising in the non-federal claim. It was submitted the Applicant’s claim is in effect one which raises two issues. The first is the parts of the County Court order which the Applicant wishes to rely upon sought to be federal orders. Secondly, it is suggested that those parts of the County Court orders which the Applicant does not like then the application seeks to vary. To the extent that there is an attempt to vary an existing valid order of the County Court it was submitted that this Court has no jurisdiction and in particular has no jurisdiction to make orders under the Property Law Act. Reference was made to the decision of Turner v Official Trustee in Bankruptcy [1999] FCA 1817 (23 December 1999) which it is claimed is authority for the proposition that the Federal Court and the Federal Magistrates Court have no jurisdiction under the New South Wales Property Law Act. It was submitted that accordingly the Court has no jurisdiction under the Victorian Property Law Act. It is useful to set out relevant paragraphs from the Full Court of the Federal Court’s decision in Turner:-

   “18.Although not adverted to in the course of submissions, we consider that as a consequence of the High Court decision in Re Wakim (1999) 163 ALR 270, there is a jurisdictional difficulty with respect to this Court’s power, on appeal, to make any determination with respect to the third order made by O’Loughlin J, which is expressed to be a direction to the New South Wales Registrar-General under s 138 of the Real Property Act 1900 (NSW). There is, of course, no jurisdictional difficulty with respect to the first two orders made by his Honour which arise in the determination of the controversy arising from the Official Trustee’s claim under the Bankruptcy Act 1966 (Cth) that he is entitled to have the property vested in him. That determination in turn involves interpretation of the effect of the orders made under the Family Law Act.  The determination of the Official Trustee’s claim (but not the s 138 direction) therefore  calls for the exercise of federal jurisdiction by a Chapter III Court in the sense that it requires the determination of a matter arising under the Bankruptcy Act.

   19.The third order of his Honour, however, raises different considerations. Absent any valid cross-vesting scheme whereby State jurisdiction is conferred on the Federal Court (which is the consequence of Re Wakim), this Court can only look to its accrued or associated jurisdiction to exercise a power under State legislation.  In this regard, the decision in Smith v Smith (1986) 161 CLR 217 requires consideration. In that case the High Court held that the Family Court had no accrued or other jurisdiction to exercise a power of approval that was conferred specifically on the Supreme Court of New South Wales by s 31 of the Family Provision Act 1982 (NSW). At p 241-242 Gibbs CJ, Wilson and Dawson JJ said:

   ‘We would accordingly hold: (a) that the release comprised in cl. 7 of the deed dated 18 November 1983 was not effective for the purposes of s. 31(3) of the Family Provision Act 1982 (N.S.W.), notwithstanding the approval of the deed by the Family Court; and (b) that the Family Court had no accrued, pendent or associated jurisdiction in the present matter itself to exercise the power of approval given by s 31 of the Family Provision Act 1982 (NSW).’

   20.The same conclusion was reached by Mason, Brennan and Deane JJ who said at p 251:

   ‘It is sufficient for us to say that if the Family Court assumed an accrued jurisdiction to make an order under s. 31 of the Family Provision Act approving a release in a maintenance agreement, the order would none the less not be an order of the Supreme Court. It therefore would not amount to an approval by the “Court” which is referred to in s. 31(3), with the consequence that the release would have no effect by virtue of s. 31(2). It is quite impossible to read the reference to “Court” in s. 31, viewed in the light of the definition of “Court” in s. 6(1), otherwise than as a reference to the Supreme Court. It follows that the Family Court does not possess accrued jurisdiction to approve a release for the purposes of the State Act.’

   21.The consequences of the High Court decisions in Re Wakim and Smith were recently considered by the Full Federal Court in Edensor Nominees Pty Limited v Australian Securities & Investments Commission [1999] FCA 1722. In that case the Court decided that there was a common substratum of fact which conferred jurisdiction on the Court to decide the whole controversy between the parties and therefore it had accrued jurisdiction. However, the Full Court went on to decide that because the State power was conferred on the Federal Court only when exercising State jurisdiction there was no power in the Federal Court when exercising Federal jurisdiction to decide the matter.

   22.In the present matter, on a proper construction of s 138, the power to give directions is not available to the Federal Court.  The section itself refers simply to “the Court”.  However it is placed in Part 15 of the Act, which is entitled “Cancellation and Correction of Instruments”. In that Part only the Supreme Court of New South Wales is specifically referred to.  There are three sections in Part 15, being ss 136-138.  Section 136 refers to the Supreme Court in the context of it making an order for delivery up of a certificate of title or a duplicate registered dealing for cancellation.  Section 137 is a complementary power to s 136 to give effect to orders made by the Supreme Court under the latter section.  Elsewhere in the Act there are references to the New South Wales District Court and to the Land and Environment Court.  There is no relevant reference anywhere in the Act to the Federal Court. 

   23.In this context, it is apparent in our view that the reference to “the Court” in s 138 was not intended to confer power on the Federal Court.  Accordingly, the Federal Court is in our view precluded from exercising the power in s 138 of the Real Property Act, either as a part of its accrued jurisdiction or otherwise.

   24.Having regard to the above reasons, we consider that this Court should set aside the third order of Justice O’Loughlin made on 9 June 1999 for want of jurisdiction.  We note however, as was observed recently by the Full Court in Robins v Incentive Dynamics Pty Ltd [1999] FCA 1651, that on the suggested construction therein of s 4(2) of the Federal Courts (State Jurisdiction) Act 1999 (NSW) (“the State Jurisdiction Act”), any order made by this Court in exercise of its appellate jurisdiction is irrelevant to the operation of that Act.  Therefore, the setting aside of the order of the primary Judge in the case for want of jurisdiction would not, in our view, alter the character of his Honour’s order as an “ineffective judgement” for the purpose of its declared validity as a judgment of the Supreme Court of New South Wales under s 6(a) of the State Jurisdiction Act.

   25.Accordingly, while we consider that the Official Trustee is entitled to have the property vested in him and that the orders of the primary Judge to this effect making that declaration and vesting title remain in force, we think it necessary, while otherwise dismissing the appeal with costs, to set aside the third order of O’Loughlin J made on 9 June 1999 for want of jurisdiction.  We direct the respondent to serve a copy of these reasons and orders on the New South Wales Registrar-General.”

2. It is appropriate to set out for convenience the relevant extracts from the Property Law Act 1958 (Vic) as follows:-

   “3.Definition

   In this Act unless inconsistent with the context or subject-matter "Court" means the Supreme Court of Victoria and, in relation to property or an estate or interest in property the value of which property does not exceed the jurisdictional limit of the County Court, the Supreme Court or the County Court.

   ….

   222. Power to Court to order sale instead of division

   In an action for partition where if this Act or any corresponding previous enactment had not been passed a judgment for partition might have been made, then if it appears to the Court that by reason of the nature of the property to which the action relates or of the number of the parties interested or presumptively interested therein or of the absence or disability of some of those parties or of any other circumstance a sale of the property and a distribution of the proceeds would be more beneficial for the parties interested than a division of the property between or among them, the Court may if it thinks fit on the request of any of the parties interested, and notwithstanding the dissent or disability of any others of them, direct a sale of the property accordingly and may give all necessary or proper consequential directions.”

3. By way of reply the Applicant rejects the suggestion that there is any attempt to vary the orders of the County Court but rather that the application seeks to enforce those orders.  The Applicant reiterated that it is the accrued jurisdiction of the Court which is invoked and in the alternative if it is found that the Court does not have jurisdiction beyond the discreet bankruptcy matters raised in the application then consequential orders would need to be sought by the Applicant in the County Court of Victoria.

Reasoning

1. In my view it is clear that the Federal Court and the Federal Magistrates Court pursuant to s.27(1) of the Bankruptcy Act shares exclusive jurisdiction in bankruptcy.

2. Whilst the declaratory relief sought in the Amended Application relates to broad issues they are in my view clearly inter related to the issues which have been the subject of adjudication in the County Court though not inconsistent with the judgments delivered in that Court.  To the extent that the Court is required to rely upon its accrued jurisdiction in the exercise of its powers shared exclusively with the Federal Court, I am satisfied that this Court does in fact have jurisdiction to entertain the application and consider the declarations sought in this application.

3. This is not a case where the Court is specifically asked to make discrete orders arising out of the Victorian Property Law Act and to that extent in my view the Court may validly exercise jurisdiction under the Bankruptcy Act despite the decision of the Full Court of the Federal Court in Turner. In the present case I am satisfied that the declaration sought by the Applicant in the Amended Application essentially arise directly out of the Court’s exclusive powers under the Bankruptcy Act and the Court is not being asked to make directions to any government official similar to or equivalent to the Registrar General under the Rural Property Act of New South Wales. I am otherwise satisfied that what is required in the present case having regard to the history of litigation in the County Court is to ensure that issues raised both in the sense of declaratory relief arising from the Applicant’s performance of duties as trustee in the bankrupt estate of Peter Grapsas and the extent to which the Official Trustee may in the alternative be declared amongst other things to be the person in whom the property is vested are all matters which fall within this Court’s jurisdiction under the Bankruptcy Act. I have regard however to the extent and nature of orders which this Court may make which have the potential to go beyond the Court’s jurisdiction under the Bankruptcy Act. That does not mean the Court is without jurisdiction to consider the declaratory relief and other orders sought in this Amended Application.

4. I accept the Applicant’s submissions that in the present case there is no attempt to make orders which are inconsistent with the orders in the County Court nor indeed is there any attempt to vary those orders.  Instead the Court is being asked to make declarations and to the extent that it is necessary orders enforcing those matters arising out of the County Court judgments.  If the Court were to determine that it does not have jurisdiction in a matter of this kind then in my view the very real issues between the parties arising out of not only the bankruptcy of the Applicant but also his role as trustee of the Peter Grapsas bankrupt estate would not be capable of determination by any other Court save of course the Federal Court where this application was first commenced.

5. Accordingly it is my view the Court does have jurisdiction to hear and determine the matters raised in the Amended Application and indeed issues raised by the Respondents in the Notice of Intention to Oppose the Amended Application and Crossclaim.

6. I am otherwise satisfied that to the extent that there are what might be described as non-federal claims that they essentially arise in the context of the administration of the bankrupt estate of Peter Grapsas by the Applicant before his own sequestration.  Indeed it is noted that all the orders were made prior to 14 February 2000 and it is incumbent upon this Court to make declarations which at the very least deal with the administration of the bankrupt estate of Peter Grapsas by the Applicant prior to his own sequestration.  It is equally important for the Court to deal with issues which then arise in relation to the Official Trustee after the date of the sequestration of the Applicant.

Applicant’s standing

1. It was submitted on behalf of the Applicant that he does have standing to bring the application. Reference was made to s.116(1)(a) of the Bankruptcy Act which provides as follows:-

   “All property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge … is property divisible among the creditors of the bankrupt”.

2. It was submitted that s.116(2)(a) excludes from a bankrupt’s divisible property “property held by the bankrupt in trust for another person”.

3. In the present application it was submitted the Applicant seeks sale of the property inter alia pursuant to the terms of a composition or arrangement entered into by Peter Grapsas with his creditors pursuant to s.73 of the Bankruptcy Act on 16 November 1999.

4. The Applicant, it was submitted, in his capacity as trustee of the bankrupt estate of Peter Grapsas obtained an indemnity from LACV whereby LACV agreed to provide funding to the Applicant for his remuneration costs charges and expenses including legal costs incurred for the purpose of the realisation of Peter Grapsas’s interest in the property.  It was submitted on behalf of the Applicant that the indemnity has the effect of rendering the Applicant a fiduciary of LACV for the purpose of realising the property and reimbursing LACV for the monies expended by it under the indemnity out of the proceeds of the realisation.

5. The Court was referred to an extract from Ford and Lees Principles of the Law of Trusts (Second Edition) paragraph 2204 as follows:-

   “A person may become a fiduciary by occupying one of those recognised legal roles in assuming which he or she, by implication, undertakes to act for another person.  A person may also become a fiduciary without assuming any recognised role simply by undertaking to act in a particular manner for the benefit of another person (Re Coomber [1911] 1 Ch 723; Jenyns v Public Currator (Qld) (1953) 90 CLR 113; Hospital Products Limited v United Stats Surgical Corp (1984) 156 CLR 41).  Whether the undertaking is for reward or gratuitous is immaterial.”

6. It was submitted that the fact that persons are associated in the commercial relationship or transaction is not incompatible with one being a fiduciary in relation to the other.  Reference was made to the decision of the High Court in Hospital Products v United States Surgical Corporation & Ors (1984) 55 ALR 417.

7. It was submitted that accordingly the Applicant’s interest in the property and any proceeds of sale of the property obtained by the Applicant are held on a constructive trust for LACV.  The remedy, it was submitted, is proprietary because the principal namely LACV is able to claim specific property, being the property itself or the proceeds of its sale, rather than the position where the property received by the fiduciary is no longer in existence or is untraceable in which case the principals remedy is the personal remedy of an account of profits (See Ford and Lees Principles of the Law of Trusts (Second Edition paragraph 2212)).

8. It was submitted that it is clear that the trust referred to in s.116(2)(a) of the Bankruptcy Act may be a trust expressly created, a resulting trust or a constructive trust. Reference was made to Re Densham (1975) 1 WLR 1519; Re Sharpe (1980) 1 WLR 219). The asset represented by the Applicant’s interest in the property as it is held on constructive trust for LACV pursuant to the indemnity does not form part of the divisible property of the Applicant and therefore accordingly has not vested in the Official Trustee in Bankruptcy.

9. It was further submitted that s.116(2)(a) of the Bankruptcy Act prevents the passing to the Trustee in Bankruptcy of both the legal title and any equitable interest in the property concerned except possibly where Peter Grapsas himself has a possibility of an interest in the property in which case the legal estate may pass (Ford and Lees Principles of the Law of Trusts (Second Edition paragraph 1411; Morgan v Swansea Urban Sanitary Authority (1878) 9 ChD 582).

10. In the present application it was submitted that it is made clear on the affidavit material that there will be no surplus proceeds from the sale after payment of the existing encumbrances on the property and payment to LACV under the indemnity.  Therefore it was submitted and by extension his bankrupt estate has no beneficial interest in the property such that the legal title will not pass to the Official Trustee in Bankruptcy.

11. The First and Second Respondents claim that the Applicant has no standing to bring the application as the subject matter of the application is properly one which is vested in the Official Trustee as trustee of the bankrupt estate of the Applicant. It is claimed that any declaratory relief sought by the Applicant whereby it is claimed the property is held on trust by him for the LACV pursuant to the terms of the indemnity or that the property vested in the Third Respondent are claims that can be made against the Official Trustee in the Applicant’s bankruptcy. In those circumstances the First and Second Respondents would not be necessary or proper parties to any such application. The indemnity according to the Respondents’ submission does no more than entitle the LACV to apply to the Court pursuant to s.109(10) of the Bankruptcy Act for priority in the distribution of proceeds of litigation. It was submitted that the Applicant did not “undertake to act for another person”.

12. Specifically it was submitted that the Applicant has no standing to seek the orders claimed in the application save for the right in his own bankruptcy to claim as against his trustee in bankruptcy a declaration as to the vesting of the property either in him or in his trustee (see Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 144-148; Fuller v Beach Petroleum NL (1993) 117 ALR 235 at 241-242. It was submitted that the right of action passed to the official trustee is also borne out by Re Silverstein (1998) 322 FCA (13 March 1998).

Reasoning

1. In my view the Applicant’s submissions are correct in characterising what is sought to be achieved in the present application namely a sale of the property pursuant to the terms of the composition or arrangement entered into by Peter Grapsas with his creditors pursuant to s.73 of the Bankruptcy Act on 16 November 1999. The role of the Applicant as trustee in the bankrupt estate of Peter Grapsas involved obtaining the indemnity and in my view for reasons to which I shall refer later I am satisfied that the Applicant then became a fiduciary of LACV in order to realise the property and reimburse LACV for monies advanced by it to Peter Grapsas which were the subject of the charge on the property.

2. Upon resolution of that issue finding that there is a trust for the purposes of s.116(2)(a) it is clear in my view that that issue is one for determination by a Court in bankruptcy and given it arises out of consideration of the role of the Applicant in the administration of the bankruptcy estate and specifically out of a composition made pursuant to s.73 of the Bankruptcy Act, I am satisfied the Applicant has standing to bring this application.

3. I accept that the Applicant has standing to raise and have considered these issues under the Bankruptcy Act as it is difficult to contemplate proceeding being taken in a Court other than a Court of bankruptcy. Given the sufficient connection between the Applicant’s role as trustee in the bankrupt estate of Peter Grapsas and the declarations sought it is difficult to conclude that the Applicant would not have standing or that the Court would not be able to exercise the general powers it undoubtedly has under the Bankruptcy Act including those powers set out in s.30 of that Act.

In whom the property vests

1. It will be noted the Applicant had submitted in support of the submission concerning standing that the indemnity had created a trust within the meaning of s.116(2)(a) of the Bankruptcy Act. It was submitted that it is irrelevant that the remuneration referred to in Peter Grapsas’s composition is wider than the remuneration referred to in the indemnity. It was submitted this would only be relevant if there was to be surplus funds available to the Applicant and by extension his bankrupt estate after paying out all of the encumbrances over the property and the LACV interest under the indemnity. There is no residual interest of the Applicant in the property that vests in the Official Trustee of the bankruptcy in circumstances where there are no surplus funds.

2. Counsel for the Applicant referred the Court to s.116 of the Bankruptcy Act which provides as follows:-

   “116(1)Subject to this Act:

   (a)all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge;

   …

   is property divisible amongst the creditors of the bankrupt.”  (Emphasis added)

3. Sub-section (2) excludes certain property and in particular it was submitted the Court should have regard to s.116(2)(a) which excludes “property held by the bankrupt in trust for another person”.

4. It was noted that the question in the present proceedings is whether the Applicant held any property in trust at the time and whether it was vested in the Official Trustee upon the Applicant’s bankruptcy.  It was submitted that bankruptcy is not an automatic disqualification for the Applicant acting as trustee.  Reference was made to Jacobs Principles of Trust and in particular paragraph 1413 where the learned author states:-

   “There is no legislation in Australia preventing a bankrupt from being a trustee, although at common law a bankrupt is unfit to act as trustee and bankruptcy constitutes a ground for removal”.

5. It was submitted there has been no removal in the present case and the question is whether there is a trust.  There was no dispute that the Applicant until removal is able to act as a trustee despite bankruptcy.  Likewise it does not appear to be disputed that in reliance upon a number of authorities concerning fiduciary relationships that a fiduciary relationship may arise where a person undertakes to act in a particular matter for the benefit of another.  Counsel for the Applicant identified the real dispute as being whether on the facts of the present case the Applicant undertook to act in a particular matter for someone that gave rise to a trust.  It should be noted that there is no issue in the present case as to whether a fiduciary duty arose but rather whether the trust was created.  As I understood the Applicant’s submissions the fiduciary relationship having been established then leads to what can be described as a constructive trust.  The indemnity it was submitted either created a free standing trust or the composition created the trust or by combination both created successive trusts.

6. It was argued that if the indemnity merely created a security then that would not prevent what was described as the “intervention of equity”.  (see Barclays Bank Ltd v Quist Close Investments Ltd (1970) AC 567) (“Barclays Bank”). That case concerned a dispute over a loan by a company from a financier. It was held in that matter that the fact that the transaction was one of a loan giving rise to a legal action of debt did not exclude the implication of a trust enforceable in equity. It was held that the lender acquired an equitable right to see if it was applied for the primary designated purpose. When the purpose is being carried out the remedy is in debt. In that case the purpose had not been carried out and it was submitted that the situation is similar to the circumstance of the present application where LACV has paid money under the indemnity and the sale has not yet been effected. It was submitted that in the present case the mere fact that there is a security instrument that might give rise to an action in debt does not mean that a court of equity will not intervene in the circumstances of a particular case. During the course of discussion it was made clear that although the applicant held the property in his capacity as trustee, he has not realised the interest in the property and in that context it was submitted that he has an obligation under the indemnity to do so and in part the benefit of realising the property was to flow to the LACV. It was further submitted that the special resolution passed on 16 November 1999 at the meeting of creditors of the estate of Peter Grapsas confirmed the trust relationship by providing that the bankrupt (Peter Grapsas) should pay to the trustee the trustee’s remuneration and his legal cost and to secure the payment of the legal costs and remuneration the trustee shall retain vested in him as trustee all the divisible property of the bankrupt as at the date of acceptance of the proposal. It is not disputed that the proposal was accepted. It was submitted that on the face of it the resolution may well be regarded as simply creating an obligation although it was submitted for the applicant that it recognises that the applicant continues to hold the property as trustee.

7. It was submitted that an alternative way of considering the composition is that it created a trust in the applicant by which he remained vested with the divisible property of Peter Grapsas to secure his legal costs and remuneration and upon payment of that it reverted to Peter Grapsas.  A further way of considering the matter is that the terms of the composition of itself which was accepted by special resolution created a trust in which the applicant held the property as trustee to secure his legal costs and remuneration.

8. The Court was referred to the decision of the Federal Court in Re Hudson Ex parte Australia & New Zealand Banking Group Ltd & Anor v Bird (1994) 50 FCR 281 (Hudson). In that case reference was made to a clause in a deed of arrangement which was described as having “all the hallmarks of a composition” and in particular clause 1 which was headed “Settlement Sum”. That clause provided as follows:-

   “The bankrupt shall pay to the trustee the sum of $600,000 (the settlement sum) upon the bankrupt’s creditors accepting this proposal by a special resolution pursuant to s.73(4) of the Act”.

9. The Court’s attention was drawn to the decision of the Federal Court in Hudson where in considering that proposal the Court states at p.293 the following:

   “It follows that, on acceptance of the proposal, the trustee held the $600,000 as trustee to administer it under the scheme of arrangement or composition.”

10. In the circumstances it was submitted that although the bankruptcy has been annulled there is a separate trust to administer that has been established by which the trustee administers the $600,000 in the Hudson case.  It was submitted that in the present case the trust exists outside the bankruptcy since the bankruptcy had been annulled.

11. Counsel for the Applicant submitted that if the legal estate vested in the Applicant the question is whether upon the bankruptcy of the Applicant by operation of the Bankruptcy Act the legal estate in the property was transmitted to the Official Trustee. It was claimed that that issue is unsettled and reference was made by the Applicant to the decision of Octavo Investments Pty Ltd referred to earlier in this judgment and Re Matheson.  The Applicant submitted that Re Matheson supports the view that the legal estate was not so transmitted although the court in that instance did not have the benefit of argument on the question.  It was submitted the unsettled state of the law together with the shifting and oblique positions adopted by the First and Second Respondents and the passive position adopted by the Third Respondent have placed the Applicant in a position requiring him to come to Court to determine in whom the property vests.

12. To illustrate the unsettled nature of the law reference was made to the High Court decision in Octavo Investments and it was noted that the Court states in that case at p.370 the following:

    “Counsel for the appellant pressed the argument a step further however.  He submitted that in the case of an individual trustee becoming bankrupt the legal estate of the trust property does not pass to the trustee in bankruptcy, but remains vested in the bankrupt trustee.  Consequently the result of declaring void payments such as those in the present case would be that the money paid by way of preference would have to be repaid to the bankrupt trustee

    …

    Conflicting views have been expressed on the question of whether the legal title to trust property over which a bankrupt trustee has a charge vests in the trustee in bankruptcy.”

13. Unfortunately at page 371 the Court goes on to state:-

    “In our respectful opinion the controversy to which we have eluded is of little moment in the present case and we find it unnecessary to decide the particular question”.

14. Accordingly it was submitted in the present case that there is some degree of uncertainty as there is conflicting views as to whether the Applicant’s interest in the trust passed as divisible property of his own bankruptcy or not.  If it did pass then it vested in the Official Trustee and if it did not then it vested in him, according to the Applicant’s submissions.

15. Counsel for the Applicant referred the Court to an extract from Ford and Lees Principles of the Law of Trusts where the learned authors state at paragraph 2114 the following:-

    “The Bankruptcy Act 1966 (Cth) by s.116(2)(a) excepts from the property of the bankrupt divisible among the creditors the property held by him in trust for another person.  Nevertheless, from a series of authorities considered by the High Court in Octavo Investments Pty Ltd v Knight it appears that, to the extent that the bankrupt has, in respect of property held in trust, a right of indemnity for liabilities incurred as trustee, that right is a beneficial interest in the assets in question and it follows that the legal title thereto vests in the official receiver”.

16. Arising out of this conflict the Applicant submitted that the essential issue of in whom the property vests needs to be resolved so that then other submissions can be made as to the consequential orders that may arise from that determination.

17. Having considered the matter in further detail and reviewed the authorities, I agree with that proposition.  It seems to me that it is essential for the Court to consider in whom the property vests before considering further consequential orders and other matters raised by the parties.

18. In dealing with the orders of the County Court it was submitted that those orders are not inconsistent.  Reference was made to the affidavit of Ross Whyte McClymont sworn 10 July 2001 and specifically those orders referred to earlier in this judgment regarding the sale of the property being orders made on 26 August 1998, 12 October 1999,

    
    

    25 November 1999 and 23 November 1999.  It was submitted that the application currently seeks confirmation that since the date of Peter Grapsas’s composition he was entitled to deal with the property and that is consistent with the orders made by His Honour Justice Meagher on 26 August 1998.  Whilst it is noted that on 12 October 1999 His Honour Judge FB Lewis ordered the Applicant have possession of the property with vacant possession subsequently obtained, the facts demonstrate that the Respondents’ unilaterally resumed possession of the property.  The mere seeking by the Applicant of orders granting him possession of the property once more so that a sale can be effected is consistent with the orders made by Judge FB Lewis on 12 October 1999.

19. A significant issue between the parties was the question of whether the current contract with the Respondents’ has been rescinded.  It was asserted by the Applicants that it has been rescinded and an order that the property be sold is again consistent with the previous orders granted in the County Court.  Likewise any injunctive relief sought preventing the Respondents directly or indirectly from attending or bidding at any public auction of the property is consistent with the orders of the County Court and particularly significant having regard to the chronology of events which set out clearly the Respondents’ conduct over a number of years.

20. In support of the application for a declaration that Grapsas Corporation Pty Ltd has no entitlement for payment of any alleged outgoings from the net proceeds of the sale of the property, it was submitted that the County Court had never made any determination regarding the entitlement of that corporation for payment of outgoings and noted that Judge Meagher in his reasons for judgment found that the company had participated in a “sham transaction to defeat creditors of the interest in the property”.

21. The Applicant noted that the Respondents contend that Peter Grapsas attended at the office of Dunhill Madden Butler on 12 May 2000 to tender the purchase price for the property.  It was submitted that this misses the point in that it is not the Respondents’ failure to complete on 12 May 2000 that formed the basis of the rescission of the contract of sale but rather the Respondents’ repeated failure to complete since 4 August 2000.  Reference was made to the affidavit of Peter Grapsas sworn 27August 2001 where the deponent alleges that at no time since 12 May 2000 has the Respondents’ solicitors received any notice from the Applicant or his solicitors making time of the essence under the contract of sale.  That allegation is dealt with by an examination of correspondence forwarded to the Respondents’ solicitors by the Applicant’s solicitors leading to the Notice of Rescission being served on 15 November 2000.

22. On the issue of the purported rescission the Respondents submitted that on 15 November 2000 the Applicant’s solicitors forwarded a Notice of Rescission despite what is described as the tender of the price on

    
    

    12 May 2000 and the refusal of the Official Trustee to adopt the contract of sale on the basis that by reason of the composition there was no bankrupt estate to administer and that there is “unlikely to be money available for distribution” to the Applicant’s creditors.

23. The Respondents relied upon arguments advanced in correspondence that the vendor was an undischarged bankrupt, there was nothing to indicate the notice was given by or with the authority of his trustee, the purchase price has been tendered on 12 May 2000 but not accepted, the delays to the vendor and his refusal to accept tender meant that time was no longer of the essence and no notice had been given to make time of the essence and that the wrong settlement date is stated in the notice and interest was consequently miscalculated in the notice.  Further criticism was made of the suggestion that as from

    
    

    16 November the interest to Peter Grapsas in the property revested in Peter Grapsas.  It was further submitted that by letter dated

    
    

    29 November 2000 the applicant’s solicitors claimed the property had been vested in him to secure his remuneration and legal costs and is in turn held by him on trust for LACV and therefore does not form part of his divisible property for the purpose of the Bankruptcy Act. It was noted that on 3 November 2000 Bendigo Bank’s mortgage over the property was transferred to “Violet Banner Pty Ltd” which appears to be company in Peter Grapsas’s “camp”.

24. In the Respondents’ Summary of Submissions filed in Court it has been submitted that the interest of Mr Grapsas remained vested in the Applicant as security for his costs and fees.  Upon the bankruptcy of the Applicant it was submitted the interest passed to his trustees in bankruptcy.  The sale to Mr and Mrs Grapsas was within the power and within the terms of the order made by Judge Meagher and had not been validly rescinded.  By authorising the Applicant to continue acting as vendor the Official Trustee had adopted the sale and could not now disclaim “as an onerous contract”.

25. The Respondent referred to the sale taking place pursuant to the order of His Honour Judge Meagher and that that order provided the proceeds of sale to be paid in settlement of the debt to the Bendigo Bank, in settlement of money secured by the charge to LACV and by payment of the costs of and incidental to the sale of the property including legal costs and disbursements together with payment of the Applicant’s costs of the two proceedings.  It was further provided that thereafter after determining the effect of the relative shares of the Applicant and Mrs Grapsas of principal and/or interest paid after 23 November 1992 to Bendigo Bank and of rental received by the Respondent and whether the debt of $20,902.51 to LACV should be deducted from the net proceeds or from the Applicant’s share the proceeds of sale should be distributed equally between Mrs Grapsas and the Applicant.  On execution of the deed of composition as I understand the submissions of the Respondent subject to the replacement of the Applicant with Mr Grapsas then the order still has effect subject to the fact that the property is vested in the Applicant to secure payment of his fees and costs as provided in the deed of composition.  The property therefore vests in the Applicant as security but subject to the Court order in respect to the distribution of proceeds referred to.

26. It was submitted by the Respondents that insofar as the Applicant held the property on security for a chose in action the property vested in the Official Trustee in the Applicant’s bankruptcy.  The rights of LACV under the indemnity extend only to the costs and remuneration met by LACV in relation to the realisation of the property.  It was claimed there was no evidence of this and the property itself must vest in the Official Trustee as the person entitled to the Applicant’s fees as an asset of his estate.  The Applicant submitted that there is no chose in action in the present case and otherwise reiterated that the Applicant held the property in trust and as such that property held by the Applicant on trust is property held by him as a bankrupt in trust for another person and is not therefore property divisible among the creditors of the Applicant after his bankruptcy and does not vest in the Official Trustee.

1. The Respondents submitted that to the extent that there is any claim by LACV arising out of the indemnity it does not create a trust nor does it prevent the asset passing to the Official Trustee (see Carvalho v Byrne 4 Barnes & Adolphus 382 at 393 and Jennings v Mather (1902) 1 KB 1 and St Thomas’ Hospital v Richardson (1910) 1 KB 271). It was submitted that the assumption that there will be no surplus after certain deductions are made is based on the erroneous assumptions that LACV takes priority over payment to the trustee in bankruptcy of the Applicant’s bankruptcy, that in the absence of any taxed costs and taxed fees it assumes no surplus and that it treats the indemnity as creating a trust.

2. It was submitted by the Respondents the indemnity does not create a trust express, implied or constructive.  The status of any payments made by LACV after the commencement of the bankruptcy is submitted to be dubious according to the Respondents.  It was further submitted that there is no admissible evidence of the proper costs paid by LACV prior to the commencement of the bankruptcy.

3. Otherwise it was submitted that orders sought in the Amended Application are in consistent with the orders of the County Court.  The orders effectively involve enforcement of a lien without putting any admissible evidence before the Court as to the amount of the remuneration and costs.  It was submitted the remuneration must be itemised and the costs set out in taxable form.  No evidence has been provided as to the amount if any which LACV has paid to the Applicant in relation to his costs and/or remuneration nor is there evidence as to when any such payments were made.  It was not disputed in the submissions that the trustee is entitled to costs charges and expenses properly incurred in the administration of the estate.

4. In the supplementary submissions filed by the Respondents it was further submitted in relation to the indemnity to LACV that it created a contractual obligation to pay to LACV any monies advanced by it and to use best endeavours to obtain an order under s.109(10) of the Bankruptcy Act.

5. The obligation to obtain that order became impossible according to the Respondents’ submissions upon the annulment of the bankruptcy.  The indemnity created a debt to LACV conditional on the property being realised.  When the Applicant became bankrupt on 14 February 2000 it was submitted the debt to LACV was then a contingent debt.  Any debt from Peter Grapsas to the Applicant created by clause 2 of Peter Grapsas’ proposal to creditors and the security for that debt passed to the Applicant’s trustee in bankruptcy together with the contingent liability to LACV.  From 16 November 1999 the Applicant it was submitted held the property of Peter Grapsas as security for the obligation of Peter Grapsas to pay the Applicant’s trustees remuneration and legal costs.  From that time the Applicant was neither trustee of the bankrupt estate nor trustee of a composition.

6. It was submitted that neither the debt owed by Peter Grapsas nor the security for the debt held over the property fell within s.116(2)(a) of the Bankruptcy Act (see Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 369-370; Re Matheson; Ex parte Worrell (1994) 49 FCR 454; 121 ALR 605; Tattersalls Hotel Penrith Pty Ltd v Permanent Trustee Co of NSW Ltd (1942) 42 SR (NSW) 104; Sands & McDougall Wholesale Pty Ltd (In liq) v Commissioner of Taxation (1999) 2 VR 489 at 499-504).

7. It should be noted that in written submissions the Third Respondent save for the question of costs neither consents nor opposed the relief sought in the Amended Application or the Crossclaim.  The Third Respondent otherwise made specific submissions in relation to costs which shall be dealt with later in this judgment.

Reasoning

1. In my view it is useful to recall the chronology in brief terms which for the purpose of this issue at least must start with the sequestration order made against Peter Grapsas on 23 November 1992 whereby the Applicant became trustee of the Peter Grapsas Estate in Bankruptcy. What followed was the vesting in the Applicant of the property which occurred on 15 March 1993 pursuant to s.51 of the Transfer of Land Act. There is no dispute that LACV claimed a charge over the property to secure Legal Aid funding made available to Peter Grapsas. It is then important to note that the indemnity clearly provided funding to the Applicant for his remuneration costs, charges and expenses for the purpose of realising the interest of Peter Grapsas in the property for the obvious purpose of ensuring that the charge to LACV could be dealt with upon sale of the property.

2. In my view the indemnity provided to the Applicant is clear and of course has been the subject of proceedings in the County Court.

3. The indemnity in my view does create an obligation on the part of the Applicant with in part a benefit of realising the property would pass to the LACV.

4. The effect of the special resolution passed on 16 November 1999 at the meeting of creditors of the estate of Peter Grapsas I accept may be interpreted as confirming a trust relationship but went further to concede that the Applicant would “retain vested in him as trustee all the divisible property of the bankrupt as at the date of acceptance of the proposal”.  Although the composition resulted in annulment, the special resolution must have some meaning and in my view the meaning which can properly be attached is that there is an acknowledgment of Peter Grapsas of the trust relationship which has arisen prior to the composition and the special resolution provides for payment to the Applicant of his remuneration and legal costs.  The fact that the property vests in the Applicant to secure the payment of the costs and remuneration recognises in my view that the Applicant continues to hold the property as trustee.

5. As to whether upon the Applicant’s bankruptcy that property then vests in the Official Trustee is difficult to answer considering what I accept to be the unsettled nature of the law.  I accept that arising out of the indemnity there is a fiduciary duty upon the Applicant.  I further accept that the property which remains vested in the Applicant as a result of the composition is held on constructive trust for LACV pursuant to the indemnity.

6. There is no dispute in the present case that at common law a bankrupt may continue to act as a trustee in the absence of any resignation or removal.

7. It is clear that in the present case the Applicant’s role at least until the composition and annulment arose directly from his capacity as trustee of the bankrupt estate of Peter Grapsas.  As I have indicated the Court in my view has jurisdiction and the Applicant has standing in this matter.

8. It next remains to consider whether s.116(2)(a) of the Bankruptcy Act prevents the passing to the trustee in bankruptcy.

9. In my view there is a separate trust which follows from the composition and of course is linked to the indemnity which in turn provides a duty to the Applicant to retain the property as security until such time as Peter Grapsas pays the Applicant’s remuneration and legal costs (see Hudson).

10. Although I have some reservations about the issue of whether the property vests in the Official Trustee having regard to the unsettled nature of the law, I am prepared to conclude in the present case having regard to the nature of the indemnity and the composition that the separate trust was established which continues and that the exception provided by s.116(2)(a) of the Bankruptcy Act applies so that the property vested pursuant to the trust albeit arising at one stage out of the Applicant’s role as trustee in the estate of Peter Grapsas continues and does not vest in the Official Trustee.

11. I otherwise accept that even if one were to interpret the indemnity as merely creating a security this would not prevent this Court as a Court of equity from intervening and I otherwise accept the submissions made in relation to the matter by the Applicant (see Barclays Bank).

12. In my view it is noteworthy and significant that the terms of the special resolution passed by creditors in accepting the composition whereby it is specifically stated that “the trustee shall retain vested in him as trustee” (emphasis added) all the divisible property of Peter Grapsas as at the date of acceptance of the proposal means what it says.  It is significant that both the Applicant’s role as trustee and the vesting of the property are both recognised in that resolution which in my view provides a proper basis for the conclusion I have reached both in relation to the standing of the applicant and the continuation of the trust as a separate trust after the composition.

Conclusion

1. It follows therefore that I am satisfied that the Court has jurisdiction to make declarations in the matter, that the Applicant has standing and as indicated the property vests at least to the extent of the share of Peter Grapsas in the Applicant as a result of the separate trust which has arisen in the circumstances described in submissions made for and on behalf of the Applicant.

2. I will hear from Counsel in relation to the precise declarations which may follow from the reasons for judgment and other orders that are sought though at present subject to further submissions I propose making declarations 1 and 2 and any consequential declarations.  Declarations in relation to the issue of the rescission of the contract of sale dated 12 February 2000 whilst agitated have not been finally determined in this judgment and it would be inappropriate to make further orders in relation to that issue until further submissions are made for and on behalf of the parties.

I certify that the preceding one hundred and fifteen (115) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate: 

Date:  8 April 2004