Butler, J.H. v Ex parte Taylor, A.R
[1995] FCA 420
•23 JUNE 1995
CATCHWORDS
BANKRUPTCY - Whether indemnity for costs of litigation within meaning of s.109(10)(a) Bankruptcy Act 1966 (Cth) given by certain creditors - promise to pay debt a method of effecting indemnity against a liability - offer to fund litigation may be indemnity for costs within s.109(10) - indemnity must be in relation to litigation for the recovery of property to which s.116 Bankruptcy Act 1966 (Cth) applies.
BANKRUPTCY - Court's discretion limited to order in respect of specific property or proceeds of property recovered by the litigation - whether just and equitable to make order depends on facts and circumstances - consideration of risk to which indemnifying creditors exposed - that other creditors not given notice of litigation nor opportunity to join in indemnity a circumstance weighing against making order.
Bankruptcy Act 1966 (Cth) ss.108, 109, 116
Re Hudson Ex parte Australia and New Zealand Banking Group Ltd. v. Bird (1994) 50 FCR 281 - Appl.
Re Serra-Sanfelin Ex parte The Official Trustee in Bankruptcy Unreported, Lee J., No. WB171 of 1980, 30 June, 1988 - Appl.
Re Allied Glass Manufacturers Ltd (1936) 9 ABC 21 - Dist.
Wren v. Mahony (1972) 126 CLR 212
In Re Genese Ex parte Kearsley (1886) 17 QBD 1
In Re Grenfell Ex parte Plender (1915) HBC 74
Re Kerrisk Ex parte Duus (1993) 41 FCR 276
In Re Yagerphone Limited [1935] 1 Ch. 392
N.A. Kratzmann Pty Ltd (In Liq.) v. Tucker [No. 2] (1968) 123 CLR 295
McColl's Wholesale Pty Ltd v. State Bank of New South Wales [1984] 3 NSWLR 365
Re Davis Ex parte Official Trustee Unreported, Spender J. No. QB374 of 1986, 20 March, 1992
Re Lance (1900) 21 LR (NSW) (B & P) 29
In Re Ivermee Ex parte Official Receiver (1974) 36 FLR 187
Re James Harkness Butler, Ex parte Alan Richard Taylor
No. QB2668 of 1991
Re Noel Braithwaite Eustace, Ex parte Alan Richard Taylor
No. QB2302 of 1991
Cooper J., Brisbane, 23 June 1995
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
No. QB 2668 of 1991
RE:
JAMES HARKNESS BUTLER
Bankrupt
EX PARTE:
ALAN RICHARD TAYLOR
Applicant
No. QB2302 of 1991
RE:
NOEL BRAITHWAITE EUSTACE
Bankrupt
EX PARTE:
ALAN RICHARD TAYLOR
Applicant
JUDGE MAKING ORDER: Cooper J.
WHERE MADE: Brisbane
DATE OF ORDER: 23 June 1995
MINUTES OF ORDER
In Estate QB2668 of 1991 :-
THE COURT ORDERS THAT:
In the administration of the Estate of JAMES HARKNESS BUTLER, upon realisation of the share held in the share capital of Transborder Transport Pty Ltd by the trustee, after payment of the costs, expenses and charges incurred in the proceedings to recover the share and costs of realisation, Abermere Pty Ltd, North Pine Motors Pty Ltd and Sungold Petroleum Pty Ltd, be paid the sum of FIFTEEN THOUSAND DOLLARS ($15,000.00) to be shared rateably between them in proportion to their debts and the balance of the net proceeds of realisation after payment of costs and expenses of administration be paid and distributed in accordance with the order of priorities set out in section 109 of the Bankruptcy Act 1966 (Cth).
The costs of ALAN RICHARD TAYLOR and of the BANK OF NEW ZEALAND LIMITED of and incidental to the application in QB2668 of
1991 be costs in the administration of the estate and be paid out of the estate.
In Estate No. QB2302 of 1991 :-
THE COURT ORDERS THAT:
In the administration of the estate of NOEL BRAITHWAITE EUSTACE, upon realisation of the share held in the share capital of Transborder Pty Ltd by the trustee, after payment of the costs, expenses and charges incurred in the proceedings to recover the share and costs of realisation, Abermere Pty Ltd, North Pine Motors Pty Ltd and Sungold Petroleum Pty Ltd, be paid the sum of FIFTEEN THOUSAND DOLLARS ($15,000.00) to be shared rateably between them in proportion to their debts and the balance of the net proceeds of realisation after payment of costs and expenses of administration be paid and distributed in accordance with the order of priorities set out in section 109 of the Bankruptcy Act 1966 (Cth).
The costs of ALAN RICHARD TAYLOR and of the BANK OF NEW ZEALAND LIMITED of and incidental to the application in QB2302 of 1991 be costs in the administration of the estate and be paid out of the estate.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
No. QB 2668 of 1991
RE:
JAMES HARKNESS BUTLER
Bankrupt
EX PARTE:
ALAN RICHARD TAYLOR
Applicant
RE:
NOEL BRAITHWAITE EUSTACE
Bankrupt
EX PARTE:
ALAN RICHARD TAYLOR
Applicant
CORAM: Cooper J.
PLACE: Brisbane
DATE: 23 June 1995
REASONS FOR JUDGMENT
In each bankrupt's estate there is an application by Alan Richard Taylor under s.109(10) of the Bankruptcy Act 1966 ("the Act") for an order giving an advantage to Abermere Pty Ltd, North Pine Motors Pty Ltd and Sungold Petroleum Pty Ltd over other creditors of the bankrupt. Each application is based upon a claimed indemnity for costs given by the three companies to the trustee in relation to litigation which has resulted in property being recovered by the trustee.
On 10 October 1991 the applicant became trustee of the estate of Noel Braithwaite Eustace and on 21 November 1991, became trustee of the estate of James Harkness Butler. The trustee found in the course of his investigations that on 13 July
1991 Mr. Eustace had transferred one share in the issued share capital of Transborder Transport Pty Ltd ("Transborder") to Russell Charles Urwin and that on the same day Mr. Butler had transferred the other issued share in the company to Joan Urwin. At the relevant time Transborder was the sub-lessor of a service station site at Mt. Macedon in Victoria and entitled to rent under the sub-lease.
On 3 March 1992 a meeting of creditors of Messrs. Eustace and Butler was held. The material accompanying the notice of meeting included material which identified Eustace and Butler as directors and shareholders in Transborder. It stated that Transborder received in its bank account a monthly payment of approximately $7,402.00 and made regular monthly payments which were by two drawings of $3,500.00 each. The material stated that the trustee was without funds. However in the trustee's opinion the bankrupts' affairs required further investigation. Reference was made to the possibility of priority being ordered under s.109(10) of the Act in favour of an indemnifying creditor. The document under the heading "RECOMMENDATIONS" concluded :-
"Creditors are now asked if any creditor is prepared to indemnify and/or funds [sic] the Trustee in publicly examining the bankrupts."
The minutes for the meeting of 3 March 1992 record that one creditor attended in person and the representative of the trustee represented debts totalling $3,791,022.00 as recorded in the Attendance and Proxy Registers. The meeting was ultimately adjourned "To allow the Trustee to finalise his present investigations and report back to creditors."
On 16 March 1992 copies of the share transfers and the sub-lease from Transborder to the Shell Company of Australia Limited were delivered to the trustee. The reconvened meeting of creditors was held on 17 March 1992. The creditors were advised that the Butler and Eustace Unit Trust claimed that Transborder held the sub-lease as trustee only for the unit trust. At the meeting a Mr. S. Maitland on behalf of the Bank of New Zealand Limited undertook to fund $2,000.00 towards the trustee's costs to :-
(a)Inspect stamped documentation regarding the share transfers and trust transactions and see if these arrangements were implemented;
(b)Investigate the family trusts held by Butler and Eustace;
(c)Seek counsel's advice on the prospects of setting aside the share and trust transactions.
On 7 April, 1992 Minahcroft Pty Ltd ("Minahcroft"), by its solicitor, wrote to Mr. Walker, the solicitor for the trustee, in the following terms :-
"Dear Sir
Trans Border [sic] Transport Pty Ltd
We would appreciate your advices as to what action your clients purported to take last Friday in relation to the above company.
We advise that Messrs Eustace and Butler in pursuance of the powers conferred upon them in the Trust Deed have now removed Trans Border [sic] Transport Pty Ltd as Trustee of the Butler and Eustace Unit Trust and have appointed Minahcroft Pty Ltd as Trustee. A copy of the Notice is enclosed.
Accordingly should your client now claim to be in control of Trans Border [sic] Transport Pty Ltd they of course will be required to transfer the trust assets to the new trustee.
We look forward to hearing from you.
Yours faithfully ..."
The enclosed copy of the notice of appointment as trustee was dated 6 April, 1992.
On 13 April 1992 a notice of meeting was sent to creditors for a meeting to be held on 29 April 1992. No notice of meeting was sent to the Bank of New Zealand. No creditor attended the meeting on 29 April 1992 and it was abandoned for want of a quorum.
On 23 September 1992 the trustee wrote to the Bank of New Zealand a letter setting out the results of the investigation. The letter was accompanied by a copy of counsel's advice. The letter records that Mr. Michael Morrow of Clayton Utz was acting for Messrs. Eustace and Butler and the beneficiaries of the Butler and Eustace Unit Trust. The letter stated in part :-
"Pursuant to an unstamped Trust Deed dated 27 October 1989, Transborder purported to transfer its interest in the Mt Macedon lease from its personal capacity to Transborder Transport Pty Ltd in its capacity as Trustee as for the Butler and Eustace Unit Trust. No consideration for the assignment is visible on the deed (copy enclosed).
The beneficiaries of the Butler and Eustace Unit Trust are two discretionary trusts known as the Butler Family Trust and the Eustace Family Trust. As yet, I have been unable to obtain copies of these trust deeds. The assignment is questionable because:-
·No consideration is given for the assignment
·The assignment is not stamped
·No balance sheets for the trust have ever been provide [sic] by Michael Morrow of Clayton Utz who acts for Butler and Eustace despite requests to provide same.
It may well be that the assignment in fact never occurred. Even if it did, there should be a debt arising between the trust and the company for the true consideration of the property transferred.
Counsels advices were sought on a course of action to adopt. That advice is enclosed for your noting.
After discussions with Mr Walker my solicitor and with Counsel, on 3 April 1992 an extraordinary general meeting of Transborder Transport Pty Ltd was held in my offices. At that meeting the meeting nominated Mr James Walker, solicitor and Mr Peter Bredhauer to act as directors of the company in place of Noel Eustace and James Butler.
Copies of minutes are enclosed.
The new directors of the company contacted the ANZ Bank (this bank was the recipient of the lease payments from Mt Macedon lease) and the account signatories were changed to the new directors.
As at 17 September 1992 the account has a credit balance of $44,479.95. A copy of statement is enclosed.
The difficult issue now is to derive some benefit for the estates from the funds held in the ANZ Account. It is not certain whether those funds are Trust monies (ie. belonging to the Butler and Eustace Unit Trust) or monies the property of Transborder. If it is the latter, then it is open to the present directors of Transborder to declare an interim dividend payable to the shareholders i.e. the Trustee in Bankruptcy after accounts are prepared. A further difficultly [sic] is ascertaining what other activities Transborder is engaged in since Mr Eustace has troubles in recalling anything about the company and Butler is in Manilla, the Phillipines [sic].
Both the estates of Butler and Eustace are impecunious and in fact I have personally funded all investigations to date and have no capacity to test these issues in court or otherwise.
Therefore I intend to attempt to reach a commercial compromise with Mr Michael Morrow of Clayton Utz to see if the Trust can settle the issue with me. A meeting will be shortly arranged with this in view.
-oOo-
I hope the above summary and the attached enclosures gives [sic] you a better understanding of where the investigations into the affairs of the estate presently sits [sic].
If you have any queries in relation to the matters raised above please do not hesitate to contact me.
Could I please request from you your contribution of $2,000 as referred to in the minutes of the meeting held on 17 March 1992. These costs would be utilised against the existing costs of the administration of obtaining counsel's opinion and instructing solicitors."
On 2 October 1992 the bank paid the $2,000.00 referred to in the letter as it had undertaken to do.
Mr. Geoffrey Johnson, an officer of the Bank of New Zealand, deposes in an affidavit filed 14 December 1994 that nothing further was received from the trustee until Mr. Johnson was advised by telephone on 8 August 1994 that a creditors meeting would be held the next day. I find that beyond the sum of $2,000.00 the trustee did not seek from the bank an indemnity or contribution to seek to recover property for the benefit of either bankrupt's estate and did not advise the bank that the trustee had sought or been given or promised any such indemnity or contribution by any other person. Mr. Johnson also deposes that the bank was at all times prepared to make contributions reasonably sought by the trustee and to give any indemnities reasonably sought. This statement has not been the subject of cross-examination or challenge and I accept it as correct.
Mr. James Walker, solicitor for the trustee and also for the creditors on whose behalf the advantage is sought, deposed in an affidavit filed 8 February 1995 :-
"2.In or about October, 1992 I had discussions with Mr. David Jackson of North Pine Motors Pty. Ltd., Mr. Ken Thompson of Sungold Petroleum Pty. Ltd. and with Mr. Peter Breadhauer [sic] of Abermere Pty. Ltd. North Pine Motors, Sungold Petroleum Pty. Ltd. and Abermere Pty. Ltd. [sic] three of the creditors of the bankrupt estates of N.B. Eustace and J.H. Butler.
3.I advised each of those persons that:
a.The bankrupts were the shareholders in a company called Transborder Transport Pty. Ltd. (`Transborder')
b.Transborder holds a lease of a service station in Mount Macedon in Victoria which is sub-leased to Shell Oil
Company. From that sub-lease Transborder receives a monthly income of approximately $7,460.00;
c.That the trustee had been provided with a declaration of trust purportedly executed by Transborder but that there was a prospect that the declaration might be declared void;
d.Although the trustee had been provided with a transfer of each of the shares in that company, there was a prospect that the transfers might be declared void and that the shares could then become part of the estate of the bankrupts;
e.That there were insufficient funds available to the trustee in each estate to permit him to embark on the necessary litigation;
f.In the event that the shares were recovered and realised there was a prospect of a return to the creditors of the estates;
g.Unless the trustee was given an indemnity for the costs of the necessary litigation, there was no prospect of a return for the creditors;
h.Pursuant to Section 109(10) of the Bankruptcy Act, the court had power to make such award as it thinks just and equitable with respect to the distribution of that property with a view to giving the indemnifying creditors an advantage over others in consideration of the risk assumed by the indemnifying creditors.
4.In the course of those discussions there was an agreement between Mr. David Jackson, Mr. Peter Bredhauer and Mr. Ken Thompson that:
a.each of the three creditors jointly could offer indemnity to the trustee to the extent of $25,000.00;
b.that the liability of each of the three creditors under that indemnity would be directly proportional to the amount of the debt owed to each creditor;
c.I should approach the trustee and advise him of their offer.
3.[sic]On or about the 19th October, 1992 I had a discussion with the trustee, Mr. A.R. Taylor, and told him that those three creditors of the bankrupts were prepared to indemnify the trustee in respect of the costs of the necessary applications to establish the title of Transborder to the lease of the Mt. Macedon property and the title
of the estates of the bankrupts to the shares of Transborder. Now produced and shown to me and marked with the letter `A' are three letters, dated 21st October, 1992 James Walker to A.R. Taylor, dated 26 October, 1992 A.R. Taylor to James Walker, and dated 2nd November, 1992 James Walker to A.R. Taylor.
4.[sic]I received a letter dated the 3rd November, 1992 from North Pine Motors on behalf of the three creditors previously mentioned agreeing to fund the costs to the extent of $25,000.00. Now produced and shown to me and marked with the letter `B' is a true copy of the said letter.
5.In addition to providing the indemnity the three Creditors advanced the sum of $6,450.00 to meet outlays.
6.By Application filed 12 December, 1991 naming the trustee as the sole respondent, Minahcroft Pty. Ltd. (`Minahcroft') sought a declaration that from 26 October, 1989 to 6 April, 1992 Transborder and thereafter Minahcroft held the right title and interest to the lease and sub-lease.
7.I advised the three creditors of the filing of the application by Minahcroft and said that were such application to be successful, the shares of Transborder would prove worthless. The three creditors advised me that their indemnity would extend to the costs of resisting the application by Minahcroft. I informed the Trustee on or about 3rd November, 1992."
The dates and sequence of events deposed to do not sit with the contemporaneous correspondence.
By letter dated 21 October 1992 Mr. Walker wrote to the trustee as follows :-
"Thank you for your letter of 16th October, 1992.
It is clear from your letter that you do not wish to act upon the assets of Trans Border [sic] under the current state of affairs. You also agree that it is no great task to set aside the transfers and I would suggest also that the position concerning the Trust could be remedied at the same time.
As the various creditors have failed to volunteer any support, I would like the opportunity of canvassing with my clients for support for this action on the basis that they, as the Creditors who support you, will receive the
proceeds, if any, of their endeavours.
At this stage, I am most anxious that you do not negotiate with Michael Morrow until our intended course of action is clear.
Would you be kind enough to authorise me to approach my clients, namely, Abermere Pty. Ltd., North Pine Motors Pty. Ltd. and Sunshine Fuel [sic] Pty. Ltd. to put you in funds for these purposes on the conditions outlined.
I look forward to your urgent response to this letter so that the appropriate course can be determined without further delay."
The trustee replied by letter dated 26 October 1992 :-
"I refer to your letter of 21 October 1992. I think it is appropriate for you to approach your clients to see if they will put you in funds, not only to get an opinion, but to take it further if legal action is deemed warranted and necessary."
On 2 November 1992 Mr. Walker wrote to the trustee :-
"Thank you for your letter of the 26th October, 1992 and I confirm our meeting for 3.00 o'clock on Tuesday 3rd November.
I anticipate that my three (3) clients will fund an Application for a Declaration which appears to be the appropriate relief."
On 3 November 1992 Mr. Jackson, the managing director of North Pine Motors Pty Ltd, wrote to Mr. Walker as follows :-
"I have had discussions with Peter Bredhauer of Abermere Pty Ltd and Ken Thompson of Sungold Petroleum Pty Ltd and it has been agreed that we will fund an application to the Supreme Court to validate the Trustees pocession [sic] of the Transborder Assets.
This undertaking is on the basis that such action will be conducted by James Walker and his costs will not exceed $25,000."
The three creditors provided $6,450.00 to Mr. Walker to cover outlays.
On 25 February 1993 an application was filed against Russell Urwin in QB2302 of 1991 and against Joan Urwin in QB2688 of 1991 seeking relief in relation to the transfer of the shares in Transborder by the bankrupts to the Urwins.
On 10 December 1993 Minahcroft filed proceedings QG210 of 1993 in the General Division of this court against the trustee seeking a declaration that from 26 October 1989 to 6 April 1992 Transborder and thereafter Minahcroft held the right title and interest to the sub-lease of the service station as trustee for the Butler and Eustace Unit Trust.
On 9 February 1994 Spender J. declared :-
"(i)the purported transfer of one share in Transborder Transport Pty Ltd by Noel Braithwaite Eustace to Russell Charles Urwin dated 13 July 1991 is void;
(ii)the transfer of one share in Transborder Transport Pty Ltd by James Harkness Butler to Joan Urwin dated 13 July 1991 is void;
(iii)Alan Richard Taylor as trustee of the estate of each of the bankrupts is entitled to a share in Transborder Transport Pty Ltd in consequence of the bankruptcy of each of Noel Braithwaite Eustace and James Harkness Butler; and
(iv)Alan Richard Taylor is the registered holder of one share in Transborder Transport Pty Ltd formerly held by Noel Braithwaite Eustace and James Harkness Butler respectively."
The litigation initiated by Minahcroft ended when it was given leave to file a notice of discontinuance on 11 April 1994.
On 9 August, 1994 Transborder declared a dividend of $130,000.00 of which half was paid to the estate of each bankrupt.
On 13 September 1994 the trustee refunded to the Bank of New Zealand the sum of $2,000.00 paid by the bank to the trustee to initiate further inquiries and to obtain counsel's original opinion. The sum of $6,450.00 has also been repaid to the three creditors.
In the estate of Eustace it is estimated that $143,703.39 will be available for distribution after receipt of all income by way of dividend over the life of the sub-lease to 30 December 1998. In the estate of Butler it is estimated that there will be $146,567.67 at the end of the same period.
The following tables show :-
PROPORTION OF DEBTS BETWEEN INDEMNIFYING
CREDITORS AND OTHER
NON-INDEMNIFYING CREDITORS
CreditorProof of Debt % of Total Proofs
Abermere$ 446,000 2.94%
North Pine Motors $ 1,004,910 6.61%
Sungold Petroleum $ 282,878 1.86%
BNZ$ 7,534,428 49.58%
Other Creditors $ 5,926,560 39.01%
TOTAL$ 15,194,776 100.00%
Proportion of debt of Indemnifying Creditors 11.41%
Proportion of debt of Non-Indemnifying Creditors 88.59%
MAXIMUM RISK OF INDEMNIFYING CREDITORS
CreditorDebt Percentage of Indemnity Total Risk
Abermere$ 446,000 26% $ 6,500
North Pine Motors $1,004,910 58% $14,500
Sungold Petroleum $ 282,878 16% $ 4,000
$1,733,788100% $25,000
The Bank of New Zealand opposed both applications on the grounds that there was no indemnity for costs given and that it would not be just and equitable in the circumstances which had occurred to give the three creditors an advantage over the bank and the other creditors.
Although Mr. Walker was not cross-examined on his affidavit, on its face it is incorrect in some serious respects. The proceedings filed by Minahcroft were not filed on 12 December 1991 as alleged in paragraph 6 of Mr. Walker's affidavit and paragraph 14 of the trustee's affidavit filed 7 November 1994. As appears from the copy of my order, Exhibit "F" to the trustee's affidavit, the proceedings were commenced in the general division of the court as QG 210 of 1993. Accordingly, it is impossible that Mr. Walker advised the trustee on 3 November 1992 that the three creditors had agreed to extend their indemnity to the costs of resisting the application by Minahcroft as deposed to by Mr. Walker in paragraph 7 of his affidavit.
The correspondence which has been produced to the court was apparently initiated by a letter from the trustee to the solicitor of 16 October 1992. That letter is not in evidence. However it is clear from the letter from the solicitor of 21 October 1992 that the problem was the taking of any action in respect of the entitlement of Transborder to the sub-lease and rental thereunder. The setting aside of the transfers was regarded as "no great task". The trustee was asked not to negotiate with Mr. Morrow until the solicitor had the opportunity to canvass his clients for support. That the trustee wished to arrive at a commercial settlement with Mr. Morrow, as trustee for the Eustace and Butler family trusts and solicitor for the Eustace and Butler interests, is consistent with the trustee's letter to the Bank of New Zealand of 23 September 1992. On its face the letter of 21 October is inconsistent with an offer of an indemnity having been made on 19 October 1992 as deposed to in the second paragraph 3 of Mr. Walker's affidavit. This is particularly so when the authority to approach the clients was sought on the basis of receiving "the proceeds, if any, of their endeavours". The identified endeavours were "to put you in funds for these purposes on the conditions outlined".
The reply of the trustee of 26 October 1992 does not speak of any indemnity. It speaks of the approach to the clients being "to see if they will put you in funds, not only to get an opinion but to take it further if legal action is deemed warranted and necessary". The reply of the solicitor dated 2 November 1992 is important because it indicates that no commitment had been made by the clients at that time. The statement "I anticipate that my three (3) clients will fund an Application for a Declaration which appears to be the appropriate relief" is inconsistent with a firm offer having been made on 19 October 1992 or that there was any binding agreement that the three creditors
would indemnify. Rather, it demonstrates that the matters deposed to in the first paragraph 4 and the second paragraph 3 of Mr. Walker's affidavit were discussed in terms of possibilities and not offers of commitment capable of acceptance.
The offer of the three creditors is contained in the letter from Mr. Jackson of North Pine Motors Pty Ltd of 3 November 1992. The offer is to fund an application to the Supreme Court "to validate the Trustees pocession [sic] of the Transborder Assets." It is to be remembered that the demand made by Minahcroft in its solicitor's letter of 7 April 1992 was "to transfer the trust assets to the new trustee". The litigation was aimed at the entitlement to the sub-lease and the rental income which was the matter of concern to the trustee. What is offered is to fund the costs of Mr. Walker, also the trustee's solicitor, in a sum not to exceed $25,000.00. Does such an offer constitute "an indemnity for costs of litigation" within s.109(10)(a) of the Act?
The undertaking to fund Mr. Walker's costs was not to be a loan. The creditors jointly stood at risk of losing up to $25,000.00 in proportion to their debts. That the money was not a loan to the trustee distinguishes the case from Re Allied Glass Manufacturers Ltd (1936) 9 ABC 21 at 36-37. Although there may be a reason to draw a distinction between an indemnity against payment and an indemnity against a liability to pay (see Wren v. Mahony (1972) 126 CLR 212 at 226-229), a promise to pay a debt "is a method of effecting an indemnity against a liability" (per Barwick CJ. in Wren at 227). In the instant case the promise is to pay to the solicitor up to $25,000.00 to satisfy the trustee's liability to the solicitor for the legal costs and outlays of the trustee in prosecuting the claim to protect the assets of Transborder and the trustees interest in them
via the disputed shareholdings in Transborder.
Although it might be characterised as an indemnity against the trustee's cost of the litigation, is that a sufficient indemnity for the purpose of s.109(10)(a) or is the indemnity there referred to an indemnity against all liability for costs to which a trustee may be exposed including an adverse order for costs in the event of failure in the litigation? I was not referred to any case where this question has been considered. Nor have I been able to find any relevant authority on the point. The section would in its terms cover the situation where a trustee was unwilling to litigate and a creditor sought leave of the court to litigate in the name of the trustee conditional upon giving proper indemnity to the trustee against any liability for costs (In Re Genese Ex parte Kearsley (1886) 17 QBD 1 at 3; In Re Grenfell Ex parte Plender (1915) HBC 74). However there seems to be no reason in principle, where a trustee is willing to bring an action with a partial indemnity limited to his or her own costs of running the litigation, that the section should be construed as inapplicable to such a situation.
I therefore hold that an offer to fund litigation by a trustee may be an indemnity for costs within the meaning of s.109(10) of the Act. However the indemnity for costs must be in relation to litigation for the recovery of property which is property to which s.116 of the Act applies. It is property which ordinarily would be realised and paid out in accordance with the priorities laid out in s.109 and as between creditors equally or proportionally, depending upon the sufficiency of the fund satisfying the debts in full (s.108). The discretion in the court to depart from the ordinary situation where property has been recovered, realised or preserved under an indemnity for the costs of
litigation is limited to making an order in respect of the specific property or the proceeds of the property recovered by the litigation.
There is no power under s.109(10) to make preferential orders with respect to property other than that which is recovered, realised or preserved within the meaning of the sub-section (Re Hudson Ex parte Australia and New Zealand Banking Group Ltd. v. Bird (1994) 50 FCR 281).
In the instant case the only property of the bankrupt "recovered, realized or preserved" was the two shares in Transborder. The sub-lease of the service station at Mt. Macedon and the right to rent thereunder were not property to which s.116 of the Act applied; they were property of Transborder. The bankrupts and lately the trustee qua shareholder had no right to any identifiable property of the company. Their right qua shareholder was to participate in the distribution of any surplus on a winding up and to enjoy the rights attaching as incidents to the shares held in Transborder. Those rights included the right to receive any dividend which the directors saw fit to declare out of the profits, if any, of Transborder.
The funds agreed to be advanced to a maximum of $25,000.00, as the correspondence shows, were primarily to fund Transborder in litigation by it to protect its property against adverse claims. Additionally the trustee in his affidavit deposes that it was on the basis of the indemnity that he opposed the proceedings initiated by Minahcroft to obtain the beneficial interest in the sub-lease and the right to the rent under it.
The subject matter of any order under s.109(10) is limited therefore to the shares or the proceeds of the shares upon realisation. Those shares carry with them the rights attaching to the shares under the Memorandum and Articles of Association of Transborder. The rights are exercisable by the registered holder of the shares. Thus, when any dividend is declared the right to receive the dividend is a right in the trustee qua registered shareholder and is enforceable by him as a debt (Re Kerrisk Ex parte Duus (1993) 41 FCR 276 at 280-281). The dividends are not property of the bankrupts recovered realised or preserved by litigation. Once the trustee became a registered shareholder in Transborder consequent upon the litigation, the recovery, realisation or preservation of the property of the bankrupts was complete. This occurred with the declarations of Spender J. on 9 February, 1994.
When Transborder declared a dividend on 9 August 1994 the debt which thereby arose was a debt enforceable by the trustee qua shareholder. The payment of the dividend was received by the trustee qua shareholder but subject to a trust to apply the monies for the benefit of the creditors generally in the proper administration of the estates of the bankrupts. By analogy, the trustee's position is the same as that of a trustee recovering monies in consequence of successful proceedings to set aside an undue preferential payment (see as to the undue preference situation, In Re Yagerphone Limited [1935] 1 Ch. 392 at 396; N.A. Kratzmann Pty Ltd (In Liq.) v. Tucker [No. 2] (1968) 123 CLR 295 at 300-301; McColl's Wholesale Pty Ltd v. State Bank of New South Wales [1984] 3 NSWLR 365 at 370).
There is no evidence before the court as to the realisable value of the
shares. If anything, the material would tend to indicate that the trustee intends to hold the shares over the life of the sub-lease to 30 December, 1998 in the expectation that Transborder will declare dividends over that period out of the profits generated by the rental payable. The trustee has sought orders that the three creditors, after the costs of administration, receive the balance of the dividends which are received by the estates from Transborder.
If any order is to be made in relation to the shares then s.109(10) requires that the making of an order is in the opinion of the court just and equitable and that relevant to that decision is a consideration of the risk to which the creditors were exposed. Additionally, the court looks at the amount recovered, the proportion between the debts of the indemnifying creditors and the non-indemnifying creditors and any other matters considered relevant (Re Serra-Sanfelin Ex parte The Official Trustee in Bankruptcy Unreported, Lee J., No. WB171 of 1980, 30 June, 1988). However, each case must ultimately depend upon its own facts and relevant circumstances.
In the instant case the maximum risk was $25,000.00 being the costs and expenses of the trustee's solicitor. However, that was not limited to the action taken against the Urwins to confirm the trustee's entitlement to the shares in Transborder or to have any transfer set aside and the trustee entered in the member's register as the holder of the shares. Although one must not with the benefit of hindsight minimise the risk (Re Serra-Sanfelin; Re Davis Ex parte Official Trustee Unreported, Spender J. No. QB374 of 1986, 20 March, 1992) in the instant case as the solicitor's letter of 21 October makes clear, there was no serious risk that the trustee would fail in the applications. In fact, the Urwins did not appear and oppose the applications when they came on before Spender J. No order for costs was made against either of the Urwins and the material is silent as to whether or not an order was sought. This circumstance weighs against the making of an order which would give any significant preference to the indemnifying creditors.
By the time the indemnity was given it was clear to the trustee, the solicitor and the three creditors that the contest, if any, was with Minahcroft. In the end result proceedings were not initiated by the trustee. Rather, Minahcroft filed an application seeking declaratory relief against the trustee alone in the general division of this court on 10 December 1993. Those proceedings were terminated by notice of discontinuance filed by Minahcroft by leave on 11 April 1994 which was the return date of a notice of motion seeking to have the proceedings dismissed or alternatively seeking security for costs. No further proceedings have initiated by or against Minahcroft. Nor has Transborder been threatened or interfered with in the enjoyment of the sub-lease including the receipt and application of the rent thereunder.
It was submitted that it was relevant to the issue of whether it was just and equitable to make an order that the Bank of New Zealand was unaware of the trustee's desire for an indemnity, that the three creditors had been approached for an indemnity and had agreed to give one or that legal proceedings were going to be taken to seek to recover the shares and maintain the assets in Transborder. I accept that such circumstances are relevant but of themselves they are not absolutely disentitling circumstances as the decisions in Re Lance (1900) 21 LR (NSW) (B & P) 29 at 33 and In Re Ivermee Ex parte Official Receiver (1974) 36 FLR 187 at 190 show. Equally relevant
is the fact that the Bank of New Zealand took no steps after sending its cheque for $2,000.00 to cover the costs of the original investigation to ascertain the status of the administration. Had it done so there is no reason to think that it would not have then had an opportunity to join in the indemnity. There is nothing in the material to support a finding that the trustee or the solicitor made a decision to consciously exclude the Bank of New Zealand from becoming an indemnifying creditor. The affidavit of the trustee filed 7 November, 1994 is consistent with an honest belief that notice of the meeting of April, 1992 was sent to the bank and that it had consciously failed to attend. Likewise the correspondence of October, 1992 passing between the solicitor and the trustee is consistent with the three creditors being approached because there were then no offers of cost indemnities from any creditors. That the other creditors were not specifically advised of the decision to litigate and were not given an opportunity to join with the three indemnifying creditors is a circumstance which weighs against making any order, the effect of which would be to exclude all other creditors from the fruits of the shareholding in Transborder.
I am satisfied that the three creditors should obtain some advantage over others in the distribution of the proceeds of realisation of the shares in Transborder. However, for reasons outlined above I do not consider their exposure under the indemnity was substantial in relation to the proceedings to establish the trustee's entitlement to the shares in Transborder. To the extent that they had any significant exposure in relation to the proceedings initiated by Minahcroft those were not proceedings relating to any property of the bankrupts and thus were proceedings outside the operation of section 109(10) and their contribution to the administration of the estate because of this is to be
recognised, if at all, by other means (Re Allied Glass Manufacturers at 36-37). Such exposure as they had in those proceedings has been removed by their payment as costs and the refund of monies paid on account of outlays by their payment as costs and expenses of the administration from the monies received by the trustee as dividends from Transborder.
Having regard to the ratio of the indemnifying creditor's debts to the debts of the other creditors, and the fact that in the end result, probably due to a misunderstanding as to the willingness of the bank to join in an indemnity, the bank was denied the opportunity to do so, it would not be just and equitable to deny to the bank and others any benefit from the realisation of the shares.
The contribution of the indemnifying creditors is sufficiently recognised if upon the realisation of the shares in Transborder, after payment of the costs, expenses and charges incurred in the proceedings to recover the shares and the costs of realisation, the three indemnifying creditors are paid from each estate the sum of $15,000.00 to be shared rateably between them in proportion to their debts and the balance of the net proceeds of the realisation of the shares after payment of costs and expenses of administration be paid and distributed in accordance with the order of priorities set forth in section 109 of the Act.
The application was a necessary application and the bank has been partially successful in resisting the quantum of the advancement sought. Therefore the costs of the application of both the trustee and the Bank of New Zealand Ltd will be costs in the
administration and be paid out of the estate.
In Estate QB2668 of 1991 :-
THE COURT ORDERS THAT:
In the administration of the Estate of JAMES HARKNESS BUTLER, upon realisation of the share held in the share capital of Transborder Transport Pty Ltd by the trustee, after payment of the costs, expenses and charges incurred in the proceedings to recover the share and costs of realisation, Abermere Pty Ltd, North Pine Motors Pty Ltd and Sungold Petroleum Pty Ltd, be paid the sum of FIFTEEN THOUSAND DOLLARS ($15,000.00) to be shared rateably between them in proportion to their debts and the balance of the net proceeds of realisation after payment of costs and expenses of administration be paid and distributed in accordance with the order of priorities set out in section 109 of the Bankruptcy Act 1966 (Cth).
The costs of ALAN RICHARD TAYLOR and of the BANK OF NEW ZEALAND LIMITED of and incidental to the application in QB2668 of 1991 be costs in the administration of the estate and be paid out of the estate.
In Estate No. QB2302 of 1991 :-
THE COURT ORDERS THAT:
In the administration of the estate of NOEL BRAITHWAITE EUSTACE, upon realisation of the share held in the share capital of Transborder Pty Ltd by the trustee, after payment of the costs, expenses and charges incurred in the proceedings to recover the share and costs of realisation,
Abermere Pty Ltd, North Pine Motors Pty Ltd and Sungold Petroleum Pty Ltd, be paid the sum of FIFTEEN THOUSAND DOLLARS ($15,000.00) to be shared rateably between them in proportion to their debts and the balance of the net proceeds of realisation after payment of costs and expenses of administration be paid and distributed in accordance with the order of priorities set out in section 109 of the Bankruptcy Act 1966 (Cth).The costs of ALAN RICHARD TAYLOR and of the BANK OF NEW ZEALAND LIMITED of and incidental to the application in QB2302 of 1991 be costs in the administration of the estate and be paid out of the estate.
I certify that this and the preceding twenty-two (22) pages are a true copy of the reasons for judgment herein of his Honour Justice Cooper.
Date:23 June 1995
Associate
Counsel for the Applicant Trustee
in both applications: Mr. F. Redmond
Solicitors for the Applicant Trustee
in both applications: James Walker, Solicitor
Counsel for the Respondent Bank of
New Zealand in both applications: Mr. D. Bates
Solicitor for the Respondent Bank
of New Zealand in both applications:: MacGillivrays, Solicitors
Date of Hearing: 10 February 1995
Place of Hearing: Brisbane
Date of Judgment: 23 June 1995
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