Citicorp Aust Ltd & Ors v Official Trustee In Bankruptcy

[1997] HCATrans 244

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A2 of 1997

B e t w e e n -

CITICORP AUSTRALIA LIMITED, JOHN HAROLD HEARD and STEPHEN ELLIOTT YOUNG:  THE RECEIVERS AND MANAGERS OF C.W. CONSTRUCTION PTY LTD (RECEIVERS AND MANAGERS APPOINTED)(IN LIQUIDATION)

Applicants

and

OFFICIAL TRUSTEE IN BANKRUPTCY

First Respondent

VINCENZO CIRILLO

Second Respondent

Application for special leave to appeal

TOOHEY J
GAUDRON J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON THURSDAY, 4 SEPTEMBER 1997, AT 10.01 AM

Copyright in the High Court of Australia

________________________

MR W.J.N. WELLS, QC:   If the Court pleases, I appear with my learned friend, MR J.W.R. LAURIE, for the applicant.  (instructed by Finlaysons)

MS S.J. MAHARAJ:   If it please your Honours, I appear with MR G. GRETSAS, for the first respondent.  (instructed by the Australian Government Solicitor)

TOOHEY J:   Yes, thank you.  Yes, Mr Wells.

MR WELLS:   If the Court pleases.  The trading in bare causes of action has become somewhat popular in the current insolvency practice in the 1990s.  The effect of the statutory exception to the rule of public policy against maintenance and champerty is to remove in the area of insolvency - in particular, in this case, bankruptcies - the prohibition, and to replace it with a trustee’s or a liquidator’s discretion.

The principles, we submit, by which this balance which is now held in the discretion of the trustee or the liquidator is to be supervised are in disarray, and there are four important features, in our submission, of this disarray that arise in the case at bar.  The four features of disarray are these ‑ ‑ ‑

GAUDRON J:   Why would there be any principles, other than ordinary trustee principles, in terms of what the Trustee in Bankruptcy should or should not decide to do?

MR WELLS:   Your Honour, can I point out, in answer to that, what the four features are which provide exactly the answer to your Honour’s question?  First of all, the principles that have been developed in the area of liquidation - that is, in relation to liquidators - are now different from the principles that apply in relation to trustees. 

Liquidators, when considering whether to, for example, permit another to use the name of the company in an action, must be satisfied as to the prospects of the action.

GAUDRON J:   Where does that come from?

MR WELLS:   Your Honour, there are a number of authorities which establish that proposition.

McHUGH J:   The Privy Council said that back in the mid 30s, did it not?

MR WELLS:   Lloyd-Owen,and that decision, Lloyd-Owen in the Privy Council, has been consistently applied.  There are decisions, in particular, of the New South Wales Supreme Court.

GAUDRON J:   But does that requirement come from statute, or has it just been brought out of thin air?

MR WELLS:   It is a principle by which the liquidator is guided in the exercise of a discretion.

GAUDRON J:   But where does it come from?  It is all very well to say it comes from the Privy Council; where did the Privy Council get it from?  Did it come from statute, or did it come from some underlying legal principle, or out of thin air?

MR WELLS:   The answer is, from an underlying legal principle.

GAUDRON J:   What is the principle?

MR WELLS:   Your Honour, the principle is this; that the power that liquidators and trustees have to assign bare causes of action is a recognised exception to a rule of public policy against champerty and maintenance.  The fact that it is an exception does not mean that the reason why the rule of public policy is there suddenly disappears.  What it means is the way in which that rule of public policy is to be supervised and had regard to is a matter which is placed in the hands of the trustee or the liquidator.

GAUDRON J:   Subject to the supervision of the court.

MR WELLS:   Indeed, if your Honour please.  And, therefore, when the court has the responsibility also of reviewing the decisions that are made, it, too, is aware, and must be aware, that in the exercise of its very wide discretionary power of review and supervision that it is supervising a statutory exception to a rule of public policy. 

GAUDRON J:   It is hard to impose into the statute, is it not, a limitation with respect to the prospects of success of an action?  I mean, it may be that it is a matter to be taken into account, but it does not say you cannot do it, or can do it.

MR WELLS:   We are not suggesting that.  What we are saying, with great respect, is the Full Court held that it was not a matter to take into account.  The result has been this ‑ ‑ ‑

GAUDRON J:   No, it did not.  It said in the circumstances of this case, where a decision in that regard involved examination of the facts - a lengthy examination - it was not necessary for it to be pursued further.

MR WELLS:   With great respect, your Honour, that was not, in our respectful submission, the conclusion that the Full Court came to.  The conclusion that the Full Court came to was that the onus was on the intended defendant to show that there were no prospects of success.

McHUGH J:   I am not even sure that that limitation should be imposed.  If somebody is prepared to pay for a cause of action, what does it matter?  Even if it is frivolous or vexatious in the opinion of the trustee or liquidator; the money is paid, it goes to the benefit of the creditors, the matter can then be dealt with by the ordinary courts.

MR WELLS:   Your Honour, can we say two things about that?  First of all, if that is so, then we have, at the moment, a conflict of authority on what the correct principle is as between liquidators and trustees.  That is the first thing.

The second point though, your Honour, which goes to someone who is prepared to pay the money, brings me to my second feature; the second feature being the nature of the offer.  Your Honours, in this case there were competing offers.  There was an offer of $10,000 non‑champertous.  “We will pay you $10,000 for, in effect, all causes of action against the intended defendant.”  On the other hand, the discharged bankrupt had made a champertous offer; allowable, permissible.  We are not saying it was not ‑ ‑ ‑

GAUDRON J:   Yes, but you talk about your offer.  I mean, can a cause of action be sold to a party against whom it is had?  It seems to me that the best you could have done was to seek a discharge of the cause of action, or a release upon payment of the sum; not that you could buy it.

MR WELLS:   With great respect, your Honour, let us accept that as so.  The question in the end is, which is the better offer from the point of view of the estate?

TOOHEY J:   Well, if that is the question, it is a singly inappropriate question to support a grant of special leave to appeal.

MR WELLS:   No, with great respect, your Honour, because what we are talking about in this area are champertous offers; that is, offers that are in part for money and in part for a share in proceeds.  The issue that is raised is, what is the correct role that is to be played by a trustee when making an assessment about that offer?  Now, what happened here was that the discharged bankrupt made the offer.  In fact, the initial form of that offer was $3,500 plus 10 per cent of the share of the proceedings after deducting all expenses, including the expenses of funding the litigation.  Initially that was from other people.

But putting that aside, the issue that becomes important to consider here is, in those circumstances - quite apart from the difficulties about liquidators and trustees and the principles that apply there - how can a trustee determine the value of such an offer for the estate without making some assessment of the prospects of success of the action?

McHUGH J:   But he does not have to.  If you had come along and offered $100,000, then the trustee, in all probability, would have said, “The plaintiff has got to get at least $1 million for me to do better than this offer.  I have got to take the $100,000,” and, if he had not, maybe a court would have set aside his order.  But the trustee has got no funds to investigate the matter and he has got to make a judgment, and he has made a judgment and he has decided to take the $3,500 plus the 10 per cent.  Now, you have offered $10,000, $6,500 more.  It is chicken feed.  The creditors are not going to get much advantage out of taking your extra $6,500.  Why should not the trustee do what he did?

MR WELLS:   Well, your Honour has raised two issues there.

McHUGH J:   Yes.

MR WELLS:   The first issue is the question, why should not they just take the punt?  What we are talking about is a trustee who has responsibilities, not someone who is going to engage in speculative trading.  The assessment at least has to be made ‑ ‑ ‑

McHUGH J:   No, he is not engaging in speculative trading; he is engaging in selling an asset, and he is selling it for the best price that he thinks he can get in the circumstances, even although it is based on a contingency.

MR WELLS:   Well, your Honour, for the best price he thinks he can get, certainly.  But how is that assessment to be made, given that we are talking about a trustee who has responsibilities?  How is that assessment going to be made?  Supposing, for example, that the cause of action, or causes of action - not identified, I might add - but supposing the causes of action have got no legs in them at all, supposing that is the truth of the matter, then no judgment is made by the trustee which would enable the trustee to say, “Well, this offer - the champertous offer - must be a better offer.”  It is put against us, well, $10,000 will not be distributed to the creditors, but that is not the whole - because it will only go to the expenses of the administration.

McHUGH J:   But in business people have to make these judgments every day, and this is a business matter.  There is not a set of mathematical formulae that will produce an answer for you; it is a judgment call, in a very difficult situation.

MR WELLS:   But, your Honour, it is not just a business matter, with great respect.  This is a trustee, who holds a public office and is, under statute, required to discharge duties responsibly for the benefit of the administration of the estate.  It is not, with great respect, correct to say, in those circumstances, that we are just talking about a business punt.  It is much more than that.  And if I may say so, with respect, the other issue that your Honour raised - namely, well, they have not got any funds to investigation; a matter which occupied the Full Court and weighed with the Full Court very much - is, in our respectful submission, not persuasive, for this reason; there is no need to undertake any investigation at all by the trustee who does not have funds.

If a trustee is considering the question of assigning a cause of action, then presumably the trustee must have a proposal put before him or her and, if the proposal is being put, then the trustee is in a position to say, “Well, I must be satisfied that there is at least a serious question in these causes of action.  You show me.”  No investigation on the trustee’s part required at all.  The work must be done by offeror.

McHUGH J:   But that is commercially unreal.  That is really commercially unreal; that people are going to have to be put in a position - a potential buyer is going to expend money investigating a cause of action to bring it before a trustee who may then say, “Sorry, I do not accept your judgment that there is a real cause, so the money is expended.”  No businessman in his senses is going to do that in many cases.

MR WELLS:   Well, your Honour, one asks the question why.  If the businessman - putting aside this case, where it is the discharged bankrupt who is interested - if the businessman is proposing to purchase this cause of action, then the businessman, in order to pay the money, must presumably make some assessment about whether it is worth paying the money in the first place.  Now, it is true that it may be a money down payment, with the promise of some share in the proceeds, but people who make those offers are not simply coming along with no intention of pursuing them; they are coming along with the intention of pursuing them.  And, if they come along with the intention of pursuing them, then presumably they must satisfy themselves that it is worth their while being involved in it.  So, in our respectful submission, there is no unreality at all in looking to the offeror to satisfy the trustee that there is - nothing more than this, we do not ask for anything higher - a serious question for the trustee to ‑ ‑ ‑

McHUGH J:   Well, there were 700 pages of material put before the court in this particular case, and Justice Branson apparently took the view that there was something there to be said.  I mean, there were denials and assertions on each side.

MR WELLS:   Your Honour, with great respect, her Honour did not do that.  Her Honour did not embark on the question.  She went to three of possible causes of action out of an unspecified array of them, and said, “In relation to these, I cannot say there is no prospect.  I cannot say there is no” ‑ the onus was on the uninformed intended defendant to persuade the court, in relation to unidentified causes of action, that there was no prospect of success in them.  Now, that, in our respectful submission, is not only unreasonable and illogical, but it is completely the opposite of what is required of the liquidator.

McHUGH J:   That assumes the liquidator is required to investigate the matter.

MR WELLS:   Yes.

McHUGH J:   And the consequence of your submission would often be that people in your clients’ position may well be able to evade liability, because nothing would happen.  Nothing would happen.  Indeed, it might be said it is in the public interest that this sort of assignment be encouraged because we know that, from time to time, receivers and others go in, sell off assets - there are always complaints about this sort of thing and, unless it is investigated, it is likely to continue.

MR WELLS:   Your Honour, the very reason why there are so many complaints about that is the reason why some guidelines need to be stated about the principles by which trustees, and no doubt liquidators, should be guided in dealing with dangerous commodities, and it has to be said they are, and can be.  I am not saying they are always.  It may well be that these causes of action have got legs in them, and well and good.  In that case, they should go forward.  But the whole reason for the rule of public policy is to ensure that there is not a profligate trading in causes of action and, just because that has been now committed to the responsibility of a public officer - a trustee or a liquidator - does not mean that those same evils do not have to be ‑ ‑ ‑

McHUGH J:   It seems to me there is also another problem which has not been explored in this case and, if one talks about public policy, it is sort of the public policy, I suppose, in the common law.  But here, this has got to be examined in a federation, and we are dealing with a federal statute here, which is authorised.  I am not sure that you have got to read the federal statute down in the way that you would contend, or against the background of this public policy, given the terms of section 134 and 135.

MR WELLS: Can I answer that in this way, your Honour; no one could suggest, we respectfully submit, that there is not a common law in Australia, and the common law has various means by which it upholds certain values and seeks to suppress those that are not desirable. There is, we respectfully submit, no reason why, in looking at a federal statute, one cannot, and does not, have regard to the Australian common law as the background. There is no reason why. After all, as has been said, common law is one of the foundations of the Constitution.

McHUGH J:   I know.  But, you see, historically, when these principles were developed in relation to trustees and liquidators, it was in a unitary system; they were all officers of the same court, which had the supervision both of their activities and, also, was the court in which actions were brought.  Here we have got two different legal systems, really. 

MR WELLS:   We would ask does it not here operate in exactly the same way because it is a federal statute?  It is the one law that is applying in relation to the whole of Australia.  There might be a different question asked if there were separate State Bankruptcy Acts, as there once were.

McHUGH J:   I know.  But these liquidators and trustees, they are officers of the Federal Court, are they not, for this purpose?  They are not officers of State Supreme Courts, for example.

MR WELLS:   Well, the liquidators quite often are.

McHUGH J:   Well, are, but in a different capacity.

MR WELLS:   Yes.  Well, your Honour, the response is the one that I have put to your Honour. 

McHUGH J:   Yes.

MR WELLS:   Could I just raise one final matter, which is the third picture that we had sought to place before the Court, and that is whether Stein v Blake, the decision of the House of Lords, is correct and, in particular, is correct in relation to the second matter that it dealt with.  Your Honours may recall that there were two issues in Stein v Blake; the first one was whether the choses in action - the causes of action - were, in fact, extinguished by the set‑off provisions of the Bankruptcy Act and replaced by a nett balance.

Following Gye v McIntyre, their Lordships held that that was the case.  Their Lordships also went on to hold that the nett balance was assignable, and that issue is not an issue that has been determined in Australia and, in our respectful submission, not only should it be examined, but our submission would be that a nett balance is not assignable.

McHUGH J:   Well, they said that it was done retrospectively, did they not?

MR WELLS:   Yes.  But there are some great difficulties in that kind of analysis, in our respectful submission, particularly when the retrospective calculation is carried out outside the supervision of the Bankruptcy Court itself.  There are other ways in which that can, and should, be done within the jurisdiction of the Bankruptcy Court.  So, the third feature here is the position of the intended defendant as creditor and that raises, we respectfully submit, completely the issue in Stein v Blake about the assignability of a nett balance; whether one undertakes the retrospective approach.

The fourth feature, if I can raise this quickly, if the Court pleases, is the matter that was raised by this Court briefly in Cummings’ Case and that is, what is the role of the Court under section 178?  In a case like this, if the Full Court is right, then there is no role for the Court to discharge under section 178 on a review; next to no role at all.  The whole issue of section 178, particularly in relation to the choses in action, in our respectful submission, calls for review.  If the Court pleases.

TOOHEY J:   Yes, thank you, Mr Wells.  We need not trouble you, Ms Maharaj. 

The decision of the Full Court of the Federal Court is not attended with sufficient doubt to warrant a grant of special leave to appeal.  Accordingly, the application is refused.

MR WELLS:   If the Court pleases.

TOOHEY J:   Are you seeking any other order?

MS MAHARAJ:   Yes, we are seeking costs, your Honours.

TOOHEY J:   Mr Wells?

MR WELLS:   I cannot resist that, your Honour.

TOOHEY J:   The application is refused with costs.

AT 10.23 AM THE MATTER WAS CONCLUDED