Ferella v Official Trustee in Bankruptcy

[2015] NSWCA 411

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Ferella v Official Trustee in Bankruptcy [2015] NSWCA 411
Hearing dates:	17 November 2015
Decision date:	18 December 2015
Before:	Bergin CJ in Eq at [1] Tobias AJA at [2] Emmett AJA at [57]
Decision:	1 Appeal dismissed. 2 Direct the appellants on or before 5 February 2016 to file any submissions they wish to make as to why an order that they pay the first respondent’s costs of the appeal on an indemnity basis should not be made. In the event that no such submissions are filed by that date, an order for indemnity costs will be made accordingly.
Catchwords:	REAL PROPERTY – statutory trust for sale – co-ownership - application by Official Trustee in Bankruptcy under s 66G of the Conveyancing Act 1919 (NSW) – proceedings on foot in the Federal Court of Australia under s 179 of the Bankruptcy Act 1966 (Cth) that could render orders exorbitant or otiose – whether primary judge should have exercised discretion against making orders whilst the decision in the Federal Court proceedings was still pending
Legislation Cited:	Bankruptcy Act 1966 (Cth), ss 19, 58(1), 116, 153A, 154, 167, 179 Bankruptcy Regulations 1996 (Cth), reg 8.12E Civil Procedure Act 2005 (NSW), s 56(1) Conveyancing Act 1919 (NSW), ss 66F, 66G Real Property Act 1900 (NSW), s 90
Cases Cited:	Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [2009] NSWCA 12 Cain v Cain [2007] NSWSC 623; 13 BPR 24,963 Callahan v O’Neill [2002] NSWSC 877 Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619 Ferella v Official Trustee in Bankruptcy (No 4) [2015] FCA 712 Grizonic v Suttor [2004] NSWSC 137; 12 BPR 22,797 Hogan v Baseden (1997) 8 BPR 15,723 Pascoe v Dyason [2011] NSWSC 1217 Rambaldi v Woodward [2012] NSWSC 434 Ross v Ross [2010] NSWCA 301; 15 BPR 28,945 Stephens v Debney [1960] SR (NSW) 468 Tory v Tory [2007] NSWSC 1078 Williams v Legg (1993) 29 NSWLR 687
Category:	Principal judgment
Parties:	Nida Ferella (First Appellant) Gustavo Ferella (Second Appellant) The Official Trustee in Bankruptcy (First Respondent) The Registrar General (Second Respondent)
Representation:	Counsel: Mr RK Newton (First and Second Appellants) Mr T Lynch SC (First Respondent)   Solicitors: Zali Burrows Lawyers (First and Second Appellants) Craddock Murray Neumann Lawyers (First Respondent)
File Number(s):	2014/374828
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division Date of Decision: 18 December 2014 Before: Nicholas AJ File Number(s): 2014/204343

Judgment

1. BERGIN CJ in Eq: I agree with Tobias AJA.

2. TOBIAS AJA: The first and second appellants are husband and wife. Prior to the second appellant being made bankrupt on 14 October 2005, the appellants were the registered proprietors as tenants in common in equal shares of four properties being 3 Chester Street, Blacktown; 15 Chester Street, Blacktown; 2/20-32 Hutton Road, North Entrance; and 6 Alan Street, Box Hill (“the Properties”). They now appeal against orders made by Nicholas AJ on 18 December 2014 pursuant to s 66G of the Conveyancing Act 1919 (NSW) appointing trustees for sale of the Properties.

3. Upon the second appellant being made bankrupt, his one half interest in the Properties vested in the Official Trustee in Bankruptcy by virtue of the combined operation of s 58(1)(a) of the Bankruptcy Act 1966 (Cth) and s 90 of the Real Property Act 1900 (NSW): see s 58(2) of the Bankruptcy Act.

Background matters

4. The second appellant’s creditors were paid in full some years ago. He was discharged from bankruptcy on 3 December 2008 by operation of law. However, his bankruptcy has not yet been annulled.

5. By virtue of s 153A(1) of the Bankruptcy Act, if the trustee is satisfied that all the “bankrupt’s debts” have been paid in full, the bankruptcy is annulled by force of the section on the date on which the last such payment was made. The expression “bankrupt’s debts” is defined in s 153A(6) to mean, relevantly, all debts that have been proved in the bankruptcy and also the costs, charges and expenses of the administration of the bankruptcy including the remuneration and expenses of the trustee (“the costs and expenses”). The annulment of the second appellant’s bankruptcy has been held up as the costs and expenses of the Official Trustee have not been paid. As at 18 December 2014, they were said to amount to $939,277.24.

6. As at September 2014, the appraised values of the Properties (according to an affidavit of Angelo Ferella, the son of the appellants) were as follows:

1. 3 Chester Street, Blacktown      $750,000

2. 15 Chester Street, Blacktown      $850,000 - $950,000

3. 6 Alan Street, Box Hill         $4,000,000

4. 2/20-32 Hutton Road, North Entrance   $520,000 - $550,000

7. It is apparent from the foregoing that, upon the assumption that the Official Trustee’s costs and expenses in fact amount to some $900,000, in order to recoup that amount it would be necessary to effect a sale of at least two of the Properties (excluding the Box Hill property- see below at [22]).

8. By Summons filed on 10 July 2014, the Official Trustee sought an order under s 66G of the Conveyancing Act 1919 (NSW) for the appointment of trustees for sale of the Properties. The Summons joined as defendants both the first and second appellants. Given that the first appellant was a co-owner of a one half interest in each of the Properties, she was clearly properly joined. The second appellant ought not to have been joined as his one half interest in the Properties had vested in the Official Trustee.

9. The Summons came on for hearing before the primary judge on 18 December 2014. The relief sought was opposed by the appellants on a number of grounds, one of which was that his Honour should have exercised his discretion to not grant the relief sought by the Official Trustee until the result was known of proceedings in the Federal Court of Australia between Angelo Ferella and the second appellant (as applicants) and the Official Trustee (as respondent) in respect of an inquiry conducted under s 179 of the Bankruptcy Act (“the Federal Court proceedings”). Those proceedings were heard by Yates J on 6 August 2014 and 8 September 2014. On the latter date his Honour reserved judgment. It remained reserved when the present matter was heard by the primary judge on 18 December 2014.

10. Angelo Ferella had also been declared bankrupt and the Official Trustee had been appointed trustee of his estate. It would appear that he, like the second appellant, has also been discharged from bankruptcy by operation of law but again, like his father, his bankruptcy has not been annulled.

11. Originally the s 179 application by Angelo Ferella and the second appellant sought to raise some 11 issues or questions relating to the conduct of the Official Trustee in relation to their bankruptcies for determination by the Federal Court. However, Yates J rejected an inquiry into all but one of the issues raised: Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619. His Honour limited the inquiry to the question as to whether the Official Trustee, in the course of administering the bankrupt estates of Messrs Ferella, was justified in not disclosing a letter from the Australian Taxation Office (the “ATO letter”) relating to a potential capital gains tax liability in certain proceedings in the Supreme Court of New South Wales and in the Court of Appeal (“the Supreme Court proceedings”). A further issue arose, if the first question was answered contrary to the Official Trustee, namely, if the Official Trustee was not justified in not disclosing the ATO letter to Messrs Ferella, what consequence, if any, did that non‑disclosure have for the orderly administration of their bankrupt estates and what relief, if any, should be granted pursuant to s 179(1) of the Bankruptcy Act.

12. As noted above it was contended before the primary judge on behalf of the appellants that it would be inappropriate for his Honour to grant a s 66G order in respect of the Properties whilst a decision in the Federal Court proceedings was still pending. It was submitted that in the event that Yates J found that the ATO letter should have been disclosed, then it was open to his Honour to find that that non-disclosure had material consequences for the orderly administration of the bankrupt estates of Messrs Ferella which could result in the Official Trustee being deprived of the costs and expenses incurred by him in the Supreme Court proceedings and charged to their bankrupt estates which in turn would have the effect of significantly reducing the amount of the costs and expenses of the Official Trustee alleged to be owing with respect to the administration of the second appellant’s bankrupt estate as at the date of the hearing of the Summons.

The course of the hearing before the primary judge

13. As the transcript of the proceedings before the primary judge reveals, it was submitted on behalf of the appellants that if Yates J accepted the submissions made on behalf of the applicants in the Federal Court proceedings, then it was likely that the consequences in terms of disallowing the costs paid to the Official Trustee’s own lawyers as well as the possibility of costs orders against him personally would have the effect of materially reducing the amount alleged to be owing in respect of the costs and expenses of the Official Trustee in administering the estate of the second appellant, the payment of which was holding up the application by that appellant for annulment of his bankruptcy. In fact, it was submitted that there was a possibility that it would be found that no further costs or expenses were owing to the Official Trustee and that the Official Trustee may even be required to refund monies to the second appellant – and all this without any of the Properties being sold.

14. Having stated the effect of s 153A of the Bankruptcy Act, the appellants then referred to s 154(1), which deals with the situation when the bankruptcy of a person is annulled. The effect of s 154 is, relevantly, that the trustee may apply the property of a former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee, and then subject to certain sub-sections not currently relevant, the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt. It was therefore submitted that the effect of s 154(1)(c) was to create a statutory trust in favour of the former bankrupt although, as the primary judge observed, that trust did not yet exist, if it could exist at all.

15. It was then submitted that it would be contrary to the duties of the Official Trustee contained in s 19(1)(j) and (k) of the Bankruptcy Act to seek an order under s 66G of the Conveyancing Act because of the Trustee’s duty to administer the bankrupt estate as efficiently as possible by avoiding unnecessary expense and by exercising powers and performing functions in a commercially sound way.

16. It was thus submitted that the most efficient way of moving forward with the administration of the estate of the second appellant in a manner which would incur minimum expense was, firstly, to ascertain exactly what has to be paid to discharge any monies properly payable to the Official Trustee and secondly, to defer the sale of any of the Properties until the precise amount had been ascertained. It was submitted that the amount claimed ($939,277) did not call for the wholesale realisation of all four of the Properties in circumstances where that amount was, on the evidence, substantially less than their combined value. There was substance in this last point and it was ultimately reflected in the orders made by the primary judge.

17. It was then contended that although an order under s 66G could not be opposed on the grounds of general unfairness, nevertheless in the present case the second appellant had an equity in relation to the proceeds of sale and the manner of their application given the total value of the Properties as against the amount alleged to be owing to the Official Trustee. However, despite the suggestion that the second appellant had some kind of undefined equity, it was not submitted that pursuant to s 116(2)(a) of the Bankruptcy Act, the interest of the second appellant in the Properties was not available for division amongst his creditors upon the ground that his interest in the Properties was held in trust for another person. No such equity of that kind was or could have been asserted.

18. It was finally submitted that, as a matter of discretion, the primary judge should take account of the interests of the second appellant as he was in the position of being, in effect, a residuary beneficiary of any property vested in the Official Trustee and not required for the payment of either his creditors or the costs and expenses of his trustee. It was thus submitted that to realise any of the Properties would be unnecessary and would be prejudicial to the first appellant, the other co-owner.

19. At that point the primary judge suggested to the parties that, from a practical point of view, the sale of the Properties should be staged so that the first Blacktown property should be sold and, if the proceeds of that sale were sufficient to pay the costs and expenses of the Official Trustee, no further order would need to be made with respect to the other properties. If the proceeds of sale were insufficient, then the second Blacktown property could be sold or one of the other properties where it was accepted that the proceeds of sale would be sufficient to pay out any balance due to the Official Trustee. His Honour therefore suggested that the parties should discuss the matter and, in effect, come up with a solution that avoided the making of a s 66G order for sale.

20. Although it was submitted on behalf of the appellants that there should be complete deferment of any sale until “we know all the answers”, his Honour resisted that proposition whereupon counsel for the appellants requested an adjournment to obtain instructions, a course which his Honour encouraged.

21. After a short adjournment, his Honour was informed by counsel for the appellants that the adjournment had not produced an agreed outcome but had resulted in his side proposing a slight variation of the orders which might simplify matters. The following exchange then occurred between counsel for the appellants and his Honour:

“His Honour:   Well, Mr Newton, where are we?

Newton:   Well, your Honour, whilst I do not have instructions either to consent or oppose those orders, and I’d have to concede that to some extent the temporary excision of the Box Hill property would partly meet the submissions that I made earlier. It does seem to me a course which is potentially open to your Honour.

His Honour:   I entirely agree. And you are protected in this sense, or everybody is, because there’s liberty to apply in any event. But it does seem to me that that’s a absolutely commercially sensible and realistic way of going about things.

Newton:   As the Court pleases.

His Honour:   So I see no reason in the circumstances why I shouldn’t make these orders.

Newton:   Yes, your Honour.”

22. It is apparent from the foregoing exchange that there was agreement that the Box Hill property, which was clearly the most valuable of the Properties, was to be excised, at least temporarily, from the orders that his Honour should make in accordance with Short Minutes of Order provided to him by the parties. Apart from the appointment of trustees for sale of the Properties and the making of the usual consequential orders for the sale and the distribution of the proceeds, the orders included the right of the first appellant to acquire the Official Trustee’s interest in any of the Properties without the requirement for the payment of a deposit; an order that the trustees hold the net proceeds of sale on trust for the Official Trustee as trustee of the bankrupt estate of the second appellant and for the first appellant in equal shares; and, importantly, an order staying until further order the sale of the Box Hill property, being the most valuable.

23. In effect, counsel for the appellants consented to the making of those orders, or at least did not oppose them, which makes it somewhat difficult for the appellants to now assert that his Honour was in error in making them. In this respect that the orders were made, in effect, by consent is borne out by the fact that his Honour did not give reasons for the making of the orders and was not requested to do so. In other words, the appellants did not require the primary judge to consider or determine the various submissions which had been made initially in opposition to the Official Trustee’s application.

24. Notwithstanding the foregoing, the appellants have appealed against his Honour’s orders. A Notice of Intention to Appeal was filed on 19 December 2014, and the original Notice of Appeal was filed on 18 March 2015.

Subsequent events

25. The appellants’ case on appeal was somewhat undermined by the judgment of Yates J of 14 July 2015 with respect to the s 179 inquiry: Ferella v Official Trustee in Bankruptcy (No 4) [2015] FCA 712. His Honour held (at [92]) that he was not satisfied that, in the course of administering the applicants’ bankrupt estates, the Official Trustee was justified in not disclosing the ATO letter or its contents to the applicants during the pendency of the Court of Appeal proceedings in October 2008.

26. Yates J then turned his attention to what consequences this non-disclosure had for the orderly administration of the applicants’ bankrupt estates and what relief, if any, should be granted. His Honour was not satisfied that the non-disclosure had any material consequences for the orderly administration of their bankrupt estates. He thus held (at [95]) that he was not satisfied that the applicants had made out a case for the relief that they had sought. In particular, at [98], his Honour concluded that he was not satisfied that the applicants had made out a proper case for relief in the form of the Official Trustee’s remuneration being abated proportionately to reflect the time and effort directed to the Supreme Court proceedings as well as the inquiry.

27. At [99] his Honour held that overall he was not satisfied that the Official Trustee should be precluded from charging the applicants’ bankrupt estates with the costs ordered to be paid to the plaintiffs in the Supreme Court proceedings; the legal costs of the Official Trustee in those proceedings; the legal costs ordered to be paid by the Official Trustee to the appellants in the Court of Appeal or the legal costs of the Official Trustee in that court. The status quo in relation to those costs and the Official Trustee’s remuneration was thus maintained. It was not suggested that there has been any appeal lodged against the decision of Yates J, assuming one was available.

28. A further change in the circumstances which prevailed at the time the primary judge made his orders on 18 December 2014, was that subsequently the first appellant paid the Official Trustee $210,000 for the interest formerly held by the second appellant in the North Entrance property. Accordingly, the only properties which were then subject to the s 66G orders were the two Blacktown properties. The evidence before this Court, admitted subject to relevance, was that as a result of that payment the amount alleged to be owing to the Official Trustee in respect of his costs and expenses was reduced to the sum of $724,189.92 as at November 2015.

29. The following further events also transpired subsequent to 18 December 2014. First, the question of the costs of the s 179 inquiry before Yates J was determined by his Honour on 8 September 2015. In respect of the costs of and incidental to the hearing on 25 to 28 October 2010 as to which of the 11 issues his Honour was prepared to entertain, it was ordered that the applicants pay 10/11ths of the Official Trustee’s costs, and that his right of indemnity from the applicants’ bankrupt estates be limited accordingly.

25. With respect to the hearings on 6 August 2014, 8 September 2014 and 31 August 2015 (the latter being the hearing as to the costs of the inquiry), Yates J ordered the Official Trustee to pay the applicants’ costs, such costs as well as his own to be borne by him personally, with no right of indemnity from the applicants’ bankrupt estates. Subject to that order the applicants were to pay the Official Trustee’s costs of and incidental to the proceedings not otherwise addressed in the orders referred to above.

26. Secondly, it appears that the second appellant has recently commenced further proceedings in the Federal Court in which he seeks, inter alia, the annulment of his bankruptcy and a proper quantification of the costs and expenses properly owing to the Official Trustee. It was submitted that until those proceedings were concluded, it would not be possible to determine whether, or to what extent, monies remained payable to the Official Trustee in respect of the bankrupt estate of the second appellant as at 18 December 2014, or whether he was then (or subsequently) entitled to an annulment of his bankruptcy under s 153A of the Bankruptcy Act and a return to him pursuant to s 154(1)(c) of all surplus property held by the Official Trustee.

27. It goes without saying that these proceedings could have been instituted some years ago, and no explanation was forthcoming as to why they have been instituted now – apart from the obvious attempt to bolster the appellants’ case on the appeal from the orders of the primary judge.

28. Thirdly, a further significant matter said to have emerged but which was not placed before the primary judge, is that, utilising the freedom of information legislation, the second appellant and Angelo Ferella have obtained a number of documents from the Official Trustee’s own records which allegedly reveal the manner in which the costs and expenses originally charged against the bankrupt estate of Angelo Ferella have been reallocated to the bankrupt estate of the second appellant so as, it is alleged, to bring about an inflated claim in that estate. Again, counsel for the appellants, understandably, was unable to explain why the utilisation of the freedom of information legislation for the purpose referred to had not occurred years ago and certainly prior to the proceedings before the primary judge. In this respect, it was a constant refrain on the part of the appellants that it was suspected that costs and expenses charged against the estate of Angelo Ferella had been improperly reallocated by the Official Trustee to the estate of the second appellant.

29. To the extent to which it might be claimed that the amount of remuneration claimed by the Official Trustee was excessive, the second appellant had his remedy under s 167 of the Bankruptcy Act and reg 8.12E of the Bankruptcy Regulations 1996 (Cth). One can only assume that as no application to the Inspector General has been made under those provisions, the second appellant, at least at this point, has no complaint as to the amount of remuneration claimed by the Official Trustee in his bankrupt estate.

30. Finally, an Amended Notice of Appeal dated 5 June 2015 was filed on 1 July 2015. It contained the following grounds of appeal:

“1. The primary judge erred in not exercising his discretion to refuse relief to the first respondent under s 66G of the Conveyancing Act 1919.

2. The primary judge erred in not holding he had a discretion in the circumstances of the case not to make orders pursuant to s 66G of the Conveyancing Act 1919 in respect of the subject properties.

3. The primary judge erred in not holding it would be unconscionable and contrary to equity to make orders in favour of the respondent pursuant to s 66G of the Conveyancing Act 1919 in respect of the properties known as 3 Chester Street, Blacktown, 15 Chester Street, Blacktown and 2/20-32 Hutton Road, North Entrance (“the subject properties”).

4. The primary judge erred in not holding the categories for exercising a discretion to refuse relief under s 66G of the Conveyancing Act 1919 were not closed and that it was open in the circumstances of the case to exercise such a discretion.

5. The primary judge erred in not holding he had a discretion to either not make or to stay orders or defer the operation of orders under s 66G of the Conveyancing Act 1919 in the circumstances of the case until such time as there could be a proper ascertainment of the amount required to be paid in the bankrupt estate of the second appellant as would entitle the second appellant to an annulment of his bankruptcy and a re-vesting in him of the surplus assets in his bankrupt estate.

6. The primary judge erred in holding that the appellants’ interests could be protected by a simple accounting exercise after the exercise of the powers of sale conferred by orders made under s 66G of the Conveyancing Act or by the first appellant paying out the first respondent.

7.   The primary judge erred in not finding the first appellant (sic respondent) had a fiduciary duty to both appellants not to engage in sales of the subject properties which might be in excess of the realisations required for the annulment of the bankruptcy of the second appellant and a re-vesting in him of the surplus assets in his bankrupt estate.

8. The primary judge erred in not finding there was a reasonable prospect which may arise from the judgment by Justice Yates in [the Federal Court proceedings] between the [sic] Angelo Ferella and the second appellant as applicants and the present first respondent as respondent that the second appellant would be entitled to an annulment of his bankruptcy and a re-vesting in him of surplus assets without the necessity of the first respondent selling any or all of the co-owned interests claimed by the first respondent to be held by it in the subject properties.

9. The primary judge erred in failing to give any or proper weight to the possibility of orders being made in the said Federal Court proceedings rendering orders made below either exorbitant or otiose.”

For the reasons that follow, in my opinion each of these grounds of appeal is misconceived and should be rejected.

The relevant principles relating to s 66G of the Conveyancing Act

36. The principles applicable to the exercise of the discretion under s 66G to order trustees for sale of a co-owned property were conveniently summarised by Black J in Pascoe v Dyason [2011] NSWSC 1217 at [5]-[8]. Relevantly for present purposes, it is now well-established that although the Court has a discretion whether or not to make an order under the section, the grounds on which it will ordinarily refuse to make one are limited. In particular, there is no general jurisdiction to refuse to grant such an order on the basis of hardship or unfairness. An example of when the limited discretion to refuse to make an order can be exercised is where such an order would be inconsistent with a proprietary right or a contractual or fiduciary obligation: Grizonic v Suttor [2004] NSWSC 137; 12 BPR 22,797 at [8] per Campbell J.

37. In Hogan v Baseden (1997) 8 BPR 15,723, Mason P (at 15,723) having observed that it would not be a proper exercise of the power to decline relief under s 66G to refuse an application on grounds of hardship or general unfairness, noted that:

“[I]n the unhappy event that the parties are unable to settle their differences then the making of an order appointing trustees for sale seems inevitable unless the respondent could establish a legally binding agreement not to put her out of occupation of her home, or circumstances that would ground some estoppel to similar effect.”

38. In Cain v Cain [2007] NSWSC 623; 13 BPR 24,963 at [10], Young CJ in Eq noted that the categories of cases in which the Court has declined to grant such an order include: where the legal title is held by trustees and the trust instrument contained its own procedure for sale; where the plaintiff’s conduct rates as an estoppel against the sale; and where an order would be incompatible with a contractual or equitable duty binding the applicant. Furthermore, in Tory v Tory [2007] NSWSC 1078 at [42], White J noted that an order under s 66G:

“is almost as of right unless on settled principles it would be inequitable to allow the application”.

His Honour confirmed that an application would be refused if making the order would be inconsistent with a proprietary right or contractual or fiduciary obligation on the basis of conventional estoppel or equitable estoppel.

39. In Callahan v O’Neill [2002] NSWSC 877 at [8], Young CJ in Eq observed that, as a general rule, any co-owner holding at least 50 per cent of a parcel of real property is entitled almost as of right to an order for sale under s 66G and it is only in situations where it would, under settled principles, be inequitable to permit such an application that an order may be refused. His Honour cited Williams v Legg, which I refer to at [41] below. The appellants sought to gain some comfort from his Honour’s remarks suggesting that it could be inferred that where a co-owner held a greater interest than 50 per cent, that fact would be relevant in the exercise of the Court’s discretion to refuse the making of an order. Even if that be so, as appears below, it does not assist the appellants in the present case as the first appellant only held a 50 per cent interest in the Properties.

40. In any event, this Court in Ross v Ross [2010] NSWCA 301; 15 BPR 28,945 at [36] noted that the discretion to refuse relief under s 66G was a “limited one”.

41. In the course of argument on the appeal, reference was made by the appellants to the decision of this Court in Williams v Legg (1993) 29 NSWLR 687 at 693 where the Court (Handley, Sheller and Cripps JJA) approved the following observations of Myers J in Stephens v Debney [1960] SR (NSW) 468 at 469-470:

“…In my opinion the legislature could never have intended to make the right to an order dependent exclusively on the existence of co-ownership, or to prevent the Court from examining the circumstances in order to determine whether it was right, in any particular case, to make an order. Trustees, for example, are co-owners, but their powers of sale depend upon the terms of the trust instrument. If the remarks to which I have referred were taken literally it would mean that despite the terms of the trust instrument one of two trustees could force a sale of the trust property by merely making an application under s 66G.”

42. The Court then stated:

“For present purposes in describing the ambit of the discretion it is sufficient to say that it enables the court to refuse an order for sale where the order would be inconsistent with some proprietary right, or some contractual or fiduciary obligation.”

43. None of the principles stated in the above authorities assists the appellants in the present case. In other words, none of the categories in which the Court has exercised its discretion to decline to make an order under s 66G is applicable to the facts of this case. The appellants sought to negotiate that difficulty by asserting that the categories of case in which a court would decline to exercise its discretion are not closed. They then sought to assert the basis upon which new categories should be accepted.

The appellants’ argument

44. As I have already observed (at [23] above), what I would regard as the hopelessness of the appellants’ case is that they, in effect, consented to the making of the orders by the primary judge or at least did not oppose their making in accordance with Short Minutes of Order in the preparation of which they appeared to co-operate. In order to negotiate that obstacle the appellants sought to lead fresh evidence of the various events which had occurred since 18 December 2014 when the primary judge made his orders. Unless one or more of those events could be argued to constitute a new category upon which the limited discretion of the Court in declining to make an order under s 66G was acceptable, the appellants’ appeal must fail.

45. Notwithstanding the foregoing, the appellants sought to establish that the discretion of the primary judge had miscarried upon the basis that during the course of argument prior to the adjournment when the parties partially resolved their differences, comments were made by his Honour which, so it was asserted, conflated questions of quantum and accounting methods within the bankrupt estate of the second appellant with the right of the Official Trustee to be considered a co-owner for the purpose of s 66G. It was submitted that his Honour had become “overly absorbed” with the question of the quantum of the amount alleged to be owing to the Official Trustee rather than properly evaluating the nature of the right which he had as a co-owner and the operation of s 66G with respect thereto.

46. In my opinion this submission must be rejected. A proper reading of the transcript of the relevant part of the argument indicates that his Honour’s reference to accounting related to the position that once the Properties had been sold, there would then be an accounting as to the amount properly owing to the Official Trustee and the amount of the surplus, if any, which would be owing to the second appellant. In my view there was nothing unusual or inappropriate in the discussion between his Honour and counsel relating to that issue. Certainly, it had nothing to do with the ultimate exercise of his Honour’s discretion to make the orders. It was a nonsense for the appellants to submit that because his Honour had a discretion either to withhold the making of the order or to defer its making or otherwise to stay an order in relation to one or more of the Properties, he fell into error because ultimately, he did not stay the sale of all the Properties, but only one.

47. Ultimately, the appellants’ submission on the appeal was that his Honour should not have made the orders unless and until there was a determination as to the amount required, if any, to enable the second appellant’s bankruptcy to be annulled. His Honour should have provided both appellants with an opportunity to pay that sum, whatever it might turn out to be, rather than incur the costs of the trustees for sale as well as the expenses of a sale in circumstances where the Properties would possibly be unnecessarily sold in the event that it was ultimately determined that no costs and expenses were owing to the Official Trustee or, if there was an amount owing to him, the first appellant had the opportunity to pay it without the necessity of having the Properties in which she had a one half interest sold against her will.

48. This argument then morphed into a submission (not advanced in the same terms before the primary judge) that his Honour was concerned with questions of accounting after a sale rather than taking into account the equity of the first appellant as co-owner. It was submitted that the authorities have always given special attention to one co-owner who has a larger interest than the other co-owner. However, it was not submitted, nor could it have been, that the first appellant had a greater interest in the Properties, the subject of the order for sale, than the Official Trustee. As at the date of the second appellant’s bankruptcy, the appellants held the Properties as tenants in common in equal shares. It followed that upon the vesting of the second appellant’s interest in the Official Trustee, the Properties were held by the first appellant and the Official Trustee as tenants in common in equal shares. Accordingly, there is no merit in the appellants’ argument to the extent to which it was suggested, wrongly, that the first appellant had a larger interest in the Properties than the Official Trustee.

49. The balance of the appellants’ submissions may be summarised as follows:

1. Given the duty of the Official Trustee referred to in s 19(1)(j) and (k) of the Bankruptcy Act requiring him to administer the bankrupt’s estate as efficiently as possible by avoiding unnecessary expense and by exercising his powers and performing his functions in a commercially sound way, it would be inappropriate for the Properties to be sold until the true quantum of the costs and expenses, if any, owing to the Official Trustee had been ascertained and that this should occur before one embarked upon a sale of assets in which the Official Trustee had only a one half interest. Neither authority nor principle supports this submission.

2. Furthermore, the fiduciary nature of the Official Trustee’s obligations and the fact that as a trustee he is a fiduciary, required him to pause and consider all relevant factors before he applied to the Court for an order under s 66G. There was no evidence referred to the Court that he did not.

3. Although there was no specific authority to support the foregoing propositions, nevertheless in Rambaldi v Woodward [2012] NSWSC 434, Davies J at [35] made reference to s 19(1)(f) which imposed a duty upon the Official Trustee to take appropriate steps to recover property for the benefit of the estate. However, his Honour, no doubt because it was not relevant, made no reference to s 19(1)(j) and (k) upon which the appellants now rely. Nothing was said by Davies J in Rambaldi which in any way assists the appellants.

4. Although it was accepted that one must usually find an equitable entitlement, or something which was unconscionable on the part of the Official Trustee in seeking an order for sale under s 66G or there existed a contractual right or fiduciary obligation which any sale would breach, s 19(1)(j) and (k) nevertheless imposed a fiduciary obligation upon the Official Trustee not to embark on an exorbitant or wasteful realisation of assets where the second appellant was ultimately entitled at the end of the process under s 154 of the Bankruptcy Act to receive any of the Properties still vested in the Official Trustee after the payment of his costs and expenses. That obligation would not be fulfilled by the sale of the Properties in circumstances which might ultimately prove to be unnecessary and, therefore, wasteful. One of many difficulties with this submission is that whatever benefits, if any, to which the second appellant would be ultimately entitled if and when his bankruptcy is annulled, can hardly assist him in the present appeal in circumstances where he was inappropriately joined as a party and where he is no longer a co-owner of the Properties as a consequence of his bankruptcy. Once it is accepted that the second appellant was not a proper party and should never have been joined in the application, it follows that his position either now or in the future, is irrelevant as he has no standing given the nature of the proceedings. Whatever interests the second appellant might ultimately have in respect of the reversion to him of property vested in the Official Trustee or otherwise acquired is irrelevant to the exercise of the discretion provided by s 66G. He may have some form of remedy in the Federal Court but not in the present proceedings.

5. It was then submitted that his Honour should have exercised his discretion in favour of the first appellant as the other co-owner of the Properties in circumstances where she opposed their sale. It is however noteworthy that Order 5 made by the primary judge provided the opportunity for the first appellant to acquire the Official Trustee’s interest in the Properties and she in fact did so with respect to the North Entrance property. The making of that order exemplified the fact that the primary judge, in the exercise of his discretion, took into account the interests of the first appellant as a co-owner of the Properties.

50. Ultimately, the appellants accepted that the appropriate principle was that articulated by Campbell J in Grizonic to which I have referred at [36] above. When it was put to counsel for the appellants that there was no contractual or fiduciary obligation owed by the Official Trustee to the first appellant as co-owner, he responded by asserting that although there was neither a fiduciary nor contractual obligation owed by the Official Trustee to the first appellant, nevertheless it was “contrary to equity and good conscience”. That was certainly not the case so far as the first appellant as co-owner was concerned. It cannot be relevant to the second appellant who, in any event, had no equity that required protection. In particular, the mere fact that pursuant to s 154(1)(c) the second appellant, on the annulment of his bankruptcy, would be entitled to any surplus property vested in the Official Trustee does not give rise to an existing equity but, ultimately, if there be such a surplus, to a statutory right. The simple fact is that this is a matter for the future. The submission smacked of desperation and, in the present context with no or little of evidence to support it, was meaningless.

50. Finally, the appellants relied upon the material that they had obtained under the freedom of information legislation and which, so it was asserted, indicated that the costs and expenses incurred by the Official Trustee in the administration of the bankrupt estate of Angelo Ferella had been wrongly attributed to the second appellant. The Court was not referred to any evidence that supported this assertion; and it only was an assertion. The fact that the second appellant has now applied to the Federal Court for the annulment of his bankruptcy provided no support to any of the appellants’ contentions. The simple fact, as pointed out during the course of argument, was that that information was obtained and the institution of annulment proceedings could have occurred long before the Official Trustee sought the sale of the Properties under s 66G. In particular, counsel for the appellants accepted that as at December 2014 the question of annulment was “front and centre” but no application had then been made to the Federal Court for an annulment. Counsel was unable to explain the second appellant’s delay in making that application.

51. In my view, none of the foregoing submissions have the slightest merit. Submissions were put to this Court that were not put to the primary judge, and it was accepted that counsel made it perfectly clear to his Honour that he was not opposing the making of the orders in question. In these circumstances it hardly lies in the mouth of the appellants to challenge the exercise of the primary judge’s discretion in the making of those orders.

52. As the appellants clearly appreciate, what remedies, if any, they may have lie in the Federal Court and belatedly that now seems to be appreciated. Of course, it would be open to the appellants to apply to the Federal Court for an order restraining the Official Trustee from proceeding to sell the Blacktown Properties. But the fact that that opportunity exists, which I am certainly not seeking to encourage, cannot reflect upon the outcome of this appeal which, at all times, has been without a scintilla of merit.

Conclusion

54. In my view, each of the grounds of appeal contained in the Amended Notice of Appeal should be rejected. The appellants’ submissions on the appeal were, in my respectful view, hopeless to the point that they should not have been made. The Court’s time has been unnecessarily wasted, contrary to the mandate contained in s 56(1) of the Civil Procedure Act 2005 (NSW), a fact that I find disturbing.

55. It is now well established that a “party should pay costs on an indemnity… basis when it appears that an action (here an appeal) has been commenced or continued in circumstances where the moving party, properly advised, should have known that it had no chance of success”; see Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [2009] NSWCA 12 at [4] and cases there cited. In my view the arguments advanced by the appellants were so lacking in merit as to warrant an award of indemnity costs in favour of the Official Trustee. However, before imposing any such order the appellants should be given the opportunity of providing submissions as to why such an order should not be made. The matter will then be determined on the papers.

56. I would therefore propose the following order and direction:

1   Appeal dismissed.

2   Direct the appellants on or before 5 February 2016 to file any submissions they wish to make as to why an order that they pay the first respondent’s costs of the appeal on an indemnity basis should not be made. In the event that no such submissions are filed by that date, an order for indemnity costs will be made accordingly.

57. EMMETT AJA: This appeal is concerned with an application made under s 66G of the Conveyancing Act 1919 (NSW) (the Conveyancing Act) by the Official Trustee in Bankruptcy (the Official Trustee). The application related to four parcels of real property (the Properties) formerly held jointly by a bankrupt and his wife.

58. Section 66G(1) of the Conveyancing Act relevantly provides that, where any property is held in co-ownership, the Court may, on the application of any one or more of the co-owners, appoint trustees of the property and vest the same in such trustees to be held by them on the statutory trust for sale. Under s 66F, co-ownership means ownership, whether at law or in equity, in possession by two or more persons as joint tenants or as tenants in common. The term co-owner has a corresponding meaning and includes an encumbrancer of the interest of a joint tenant or tenant in common. Property held on the “statutory trust for sale” is to be held upon trust to sell the same and to stand possessed of the net proceeds of sale, after payment of costs and expenses and other outgoings, and subject to such powers and provisions as may be requisite for giving effect to the rights of the co-owners.

59. On 14 October 2005, a sequestration order was made in respect of the estate of Mr Gustavo Ferella (the Bankrupt). The Official Trustee became the trustee of the estate of the Bankrupt. At the time of the sequestration order, the Bankrupt was the registered proprietor of an undivided moiety in each of the Properties, being the land in the following titles:

Folio Identifier 5/25375, being the land known as 3 Chester Street, Blacktown;

Folio Identifier 11/25375, being the land known as 15 Chester Street, Blacktown;

Folio Identifier 121/10157, being the land known as 6 Alan Street, Box Hill (the Box Hill Property);

Folio Identifier 2/SP36549, being the land known as 2/20-32 Hutton Road, North Entrance (the North Entrance Property).

The registered proprietor of the other moiety in respect of the Properties was Mrs Nida Ferella, who is the Bankrupt’s wife (Mrs Ferella).

60. Following the bankruptcy, the Official Trustee became registered as the proprietor of the interest of the Bankrupt in the Properties pursuant to s 90 of the Real Property Act 1900 (NSW) and s 58(1)(a) of the Bankruptcy Act 1966 (Cth). Accordingly, each of the Properties became held by the Official Trustee and Mrs Ferella as tenants in common in equal shares.

61. It was common ground that all creditors of the Bankrupt have now been paid in full. However, there are still costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the Official Trustee, that have not been paid. The Official Trustee asserted that those costs and expenses amounted to more than $900,000, although that amount was disputed by the Bankrupt.

62. By summons filed on 10 July 2014, the Official Trustee claimed an order under s 66G of the Conveyancing Act that Messrs Steven Nicols and Richard Brien (the Sale Trustees) be appointed as trustees for the sale of the Properties. For reasons that are not clear, the Bankrupt and the Registrar-General were joined as defendants in the proceedings, as well as Mrs Ferella. Following a hearing on 18 December 2014, a judge of the Equity Division (the primary judge) made orders under s 66G appointing the Sale Trustees as trustees for sale in terms of the prayers for relief in the summons. The primary judge also ordered that, in respect of the Box Hill Property, the order be stayed pending further order. His Honour reserved liberty to apply on three days’ notice and ordered Mrs Ferella and the Bankrupt to pay the costs of the Official Trustee.

63. In the course of argument, the primary judge said that he could see “no obstacle whatsoever” to making an order under s 66G, but could see a lot of sense in working out a structure by which the Properties would be marketed in order to get to the point that the Official Trustee wanted to get to, namely, to realise proceeds sufficient to meet its costs and expenses of the administration of the Bankrupt’s estate. Counsel who appeared for Mrs Ferella and the Bankrupt indicated that, whilst he did not have instructions either to consent or oppose the orders, he would have to concede that, to some extent, the temporary excision of the Box Hill property would partly meet the submissions that he had earlier made. Counsel said that it seemed to be a course that was potentially open to his Honour. His Honour then made the orders sought by the Official Trustee. However, neither party asked his Honour to give reasons for making the orders and his Honour did not give reasons. Further, as Tobias AJA has explained, the appellants in effect consented to the orders made by the primary judge, or at least did not oppose them.

64. By notice of appeal filed on 18 March 2015, Mrs Ferella and the Bankrupt appealed from the orders made by the primary judge. An amended notice of appeal was filed on 1 July 2015. I do not consider that the Bankrupt was a proper party to the application under s 66G. Further, I do not consider that he has standing to appeal from the orders made by the primary judge.

65. The grounds of appeal complain about the failure of the primary judge to exercise a discretion said to arise in the circumstances of the case not to make orders under s 66G in respect of the Properties. In essence, the complaints relate to the administration of the Bankrupt’s estate. No complaint is made concerning the absence of reasons.

66. The thrust of the complaint made to this Court by the Bankrupt is that the amount of the costs and expenses claimed by the Official Trustee is excessive. He points out that he would be entitled, upon the payment of all outstanding costs and expenses and the consequential annulment of his bankruptcy, to any surplus remaining in the estate. The Bankrupt has no standing to make that complaint in these proceedings. So far as the Supreme Court is concerned, the only persons interested in the properties are the co-owners, being the Official Trustee and Mrs Ferella. The administration of the bankrupt estate is a matter entirely for the court of bankruptcy, in the present case, the Federal Court of Australia. It is not a matter that is relevant to the exercise of the jurisdiction conferred on the Supreme Court by s 66G of the Conveyancing Act.

67. Following the orders made by the primary judge, the Bankrupt belatedly applied to the Federal Court seeking, among other orders, orders under s 178 and s 179 of the Bankruptcy Act. Section 178 relevantly provides that, if a bankrupt is affected by an act, omission or decision of the bankrupt’s trustee, the bankrupt may apply to the court of bankruptcy, which may make such order in the matter as it thinks just and equitable. Such an application must be made not later than 60 days after the date on which the bankrupt became aware of the trustee’s act, omission or decision. Section 179 relevantly provides that the court of bankruptcy may, on the application of a bankrupt, enquire into the conduct of the trustee in relation to a bankruptcy and may make such order as it thinks proper.

68. In the application made to the Federal Court on 16 October 2015, the Bankrupt claimed, in addition to other orders, the following:

• a declaration that the Official Trustee was not justified in commencing proceedings against Mrs Ferella and the Bankrupt in the Supreme Court; and

• an order that the Official Trustee forthwith consent to the setting aside of orders made by the primary judge in the Supreme Court proceedings.

69. The Supreme Court has a limited discretion to refuse to make an order under s 66G, for example, where it would be inconsistent with a proprietary right or a contractual or fiduciary obligation. However, there is no general jurisdiction to refuse to grant an order under s 66G on the basis of hardship or unfairness. [1] No suggestion has been made in the present case that the making of orders under s 66G is inconsistent with any proprietary right of Mrs Ferella, as co-owner. Nor has it been suggested that the Official Trustee owes a contractual or fiduciary obligation to Mrs Ferella with which an order under s 66G would be inconsistent. In the circumstances, it is impossible to glean any legitimate ground of complaint.

    1. Grizonic v Suttor [2004] NSWSC 137; 12 BPR 22,797 at [8].

70. One of the orders made by the primary judge, as sought in the summons by the Official Trustee, was that any sale by the Sale Trustees may be made to Mrs Ferella, either as a result of sale at auction or by private treaty, without the requirement for the payment of a deposit and upon such terms as to the payment of the balance of the purchase price as the Sale Trustees consider appropriate. Pursuant to that power, the interest of the Official Trustee in the North Entrance Property was sold to Mrs Ferella. The price paid was applied in reduction of the amounts owing in respect of costs and expenses of the administration of the Bankrupt’s estate. However, according to the Official trustee, that left a substantial balance owing. There is no reason in principle why Mrs Ferella could not offer to buy the interest of the Official Trustee in all of the Properties.

71. I have had the advantage of reading in draft the proposed reasons of Tobias AJA. I agree with his Honour that none of the grounds of appeal has any substance and that the appeal should be dismissed. I agree with the order and direction proposed by his Honour.

**********

Endnote

Amendments

23 February 2016 - [5] - date "on" which

[21] - first line "appellants" not "respondents"

[50] - last sentence "a lot" replaced with "no"

03 February 2016 - Paras [69] and [70] are now bullet points to [68]

Decision last updated: 23 February 2016