Horne, Stirling Lindley v Concore Australia Pty Ltd
[1997] FCA 503
•6 JUNE 1997
CATCHWORDS
BANKRUPTCY LAW - Order relating to property of entity - Order relating to entity’s net worth - Trustee of family trust controlled by bankrupt - Attempted distribution from trustee to director of trustee - Interim injunction to prevent use of the proceeds of distribution - Proper test for grant of interim injunction in favour of the trustee in bankruptcy - Serious issue to be tried or lesser standard - Serious issue established - Control of entity - Remuneration less than arm’s length - Bankrupt used or derived a benefit - Entity acquired property or substantial change in net worth - Injunction against third party - Requirements where no cause of action against third party
Bankruptcy Act 1988 ss 5F, 30, 139A, 139D, 139E
Deputy Commissioner of Taxation v David Patrick Ousley (1992) 23 ATR 176;
Re Bayliss; ex parte Official Trustee in Bankruptcy (1987) 73 ALR 455;
Winter & Anor v Marac Aust Ltd (1986) 6 NSWLR 11.
HORNE v CONCORE AUSTRALIA PTY LTD & Anor
VG 7124 of 1997
Before: NORTH J
Place: MELBOURNE
Date: 6 JUNE 1997
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF VICTORIA
VG 7124 of 1997
B E T W E E N :
STIRLING LINDLEY HORNE
as Trustee of the Bankrupt Estate of Donald Ralph Musto
Applicant
AND
CONCORE AUSTRALIA PTY LTD (ACN 052 927 509)
First Respondent
AND
BETH LORAINE MUSTO
Second Respondent
MINUTES OF ORDERS
BEFORE: North J
PLACE: Melbourne
DATE: 20 March 1997
THE COURT ORDERS THAT:
The order made on 5 March 1997 as against the second respondent be continued until the hearing of this proceeding save that the second respondent shall be permitted to pay:
(a)an amount not exceeding $50,000.00 in respect of the first and second respondents’ reasonable legal costs of and incidental to proceeding No VG 7124 and VG 7136; and
(b)an amount not exceeding $13,523.00 per calendar month commencing 21 March 1997 in respect of:
(i) the second respondent’s essential living expenses; and
(ii) advances to be made from time to time by the second respondent to the first respondent for the payment of the first respondent’s operating expenses,
such costs and expenses to be paid from her investment account.
Until the hearing of this proceeding or further order, the second respondent, whether by herself, her servants and agents, be restrained from disposing of, transferring, charging or dealing with VicRoads numberplate “46”.
On or before 4 pm on 26 March 1997, the second respondent make and swear a further affidavit stating:
(a)the whereabouts and what has become of the sum of $615,247.00 referred to in paragraph 11 of the affidavit of the second respondent, sworn on her own behalf on 18 March 1997 (the sum);
(b)the date or dates upon which the second respondent was notified of the distribution of the sum to her by the first respondent; and
(c)the date or dates upon which the sum was received by the second respondent.
The applicant file and serve an amended application and statement of claim by 26 March 1997.
The second respondent make, file and serve a defence by 9 April 1997.
The applicant make, file and serve any reply by 23 April 1997.
The second respondent make, file and serve any affidavits in opposition by 27 April 1997.
The applicant make, file and serve any affidavits in reply by 7 May 1997.
The parties provide discovery by 16 May 1997, with inspection to be completed by 30 May 1997.
The dates for completion of the various interlocutory steps as between the applicant and the first respondent, as set out in the orders of the Honourable Justice Sundberg made 5 March 1997, be extended to accord with the dates referred to herein.
The application be adjourned to 4 June 1997.
Each party have liberty to apply on the giving of 48 hours notice in writing to the other party.
The costs of the application be reserved.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF VICTORIA
VG 7124 of 1997
B E T W E E N :
STIRLING LINDLEY HORNE
as Trustee of the Bankrupt Estate of Donald Ralph Musto
Applicant
AND
CONCORE AUSTRALIA PTY LTD (ACN 052 927 509)
First Respondent
AND
BETH LORAINE MUSTO
Second Respondent
BEFORE: North J
PLACE: Melbourne
DATE: 6 June 1997
REASONS FOR JUDGMENT
This is an application for the extension of an interim injunction against the second respondent granted by Sundberg J on 5 March 1997.
The applicant, Stirling Lindley Horne, is the trustee of the bankrupt estate of Donald Ralph Musto. The first respondent, Concore Australia Pty Ltd (Concore), is the trustee of the Rock Trust, a family trust of the Musto family. The second respondent is the wife of the bankrupt. On 25 February 1997, the applicant filed an application against the first respondent, in reliance upon ss 139A, 139D and 139E of the Bankruptcy Act 1966 (Cth), which provide:
“139A The trustee of a bankrupt’s estate may, at any time within 6 years after the date of the bankruptcy, apply to the Court for an order under this Division in relation to an entity (in this Division called the ‘respondent entity’).”
“139D(1) Where, on an application under section 139A, the Court is satisfied that:
(a)the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services;
(b)either:
(i) the bankrupt received for those services no remuneration in money or other property; or
(ii) the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm’s length in relation to the supply of those services;
(c)during the examinable period, the entity acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply by the bankrupt of those services;
(d)the bankrupt used, or derived a benefit from, the property at a time or times during the examinable period when the bankrupt controlled the entity in relation to the property; and
(e)the entity still has an estate in the property;
subsections (2) and (3) have effect, whether or not the bankrupt has ever had an estate in the property.
139D(2) The Court may, by order, vest in the applicant:
(a)the entity’s estate in the whole, or in a specified part, of the property; or
(b)a specified estate in the whole, or in a specified part, of the property, being an estate that could, by virtue of the entity’s estate in the property, be so vested by or on behalf of the entity.
139D(3) The Court may make an order directing:
(a)the execution of an instrument;
(b)the production of documents of title; or
(c)the doing of any act or thing;
in order to give effect to an order under this section made on the application.
139E(1) Where, on an application under section 139A, the Court is satisfied that:
(a)the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services;
(b)either:
(i) the bankrupt received for those services no remuneration in money or other property; or
(ii) the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm’s length in relation to the supply of those services; and
(c)the entity’s net worth at a particular time during the examinable period exceeded by a substantial amount what might reasonably be expected to have been the entity’s net worth at the last-mentioned time if those services had not been supplied;
subsection (2) has effect.
139E(2)The Court may by order direct:
(a)if the entity is a partnership - a partner or partners in the partnership; or
(b)in any other case - the entity;
to pay to the applicant a specified amount not exceeding the amount referred to in paragraph (1)(c).”
In essence, the applicant alleges that Mr Musto conducted a property development business and used Concore in its capacity as trustee as a vehicle for the business. In the relevant period, Concore accumulated at least $1.1 million from the conduct of the business. The applicant contends that he is entitled to these moneys under ss 139D or 139E.
In January 1997, Concore attempted to pay a trust distribution of approximately $1.1 million to the second respondent. The interim injunction granted by Sundberg J restrained the second respondent from dealing with those moneys until 4.15 pm on 19 March 1997. On that day, I commenced the hearing of the application for an extension of the injunction and extended the injunction until the completion of the hearing on 20 March 1997. At the completion of the hearing, I granted the injunction sought by the applicant and said that I would deliver my reasons in due course. These are my reasons.
SECTION 30(1) BANKRUPTCY ACT 1966
The applicant relied on s 30(1) in his claim for an injunction against the second respondent. The section provides that:
”30(1) The Court:
......
(b)may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.”
The applicant accepted that it had to demonstrate a case against Concore in order to obtain an injunction under s 30(1). Mr Bigmore QC, who appeared with Mr Galvin for Concore, contended that the applicant had to establish a serious issue to be tried under s 139D or s 139E against Concore. Mr Sifris, who appeared with Mr Wotherspoon for the second respondent, argued that a trustee in bankruptcy in an application such as this needed to establish the case to some lesser degree, as held by Pincus J in Re Bayliss; ex parte Official Trustee in Bankruptcy (1987) 73 ALR 455, 457. I need not resolve this issue because, in my view, the applicant has established a serious issue to be tried against Concore under s 139D or s 139E.
SERIOUS ISSUE TO BE TRIED UNDER SECTIONS 139D OR 139E
In order to establish an entitlement under s 139D or s 139E, it must be shown that the bankrupt controlled the entity at the relevant time. Section 5F sets out what amounts to control of an entity for the purposes of the Act. Counsel for the second respondent contended that Mr Musto did not have the necessary control of Concore as he was not a director or shareholder. However, for the purposes of this interlocutory proceeding, the evidence establishes that Mr Musto played an active role in Concore and his parents-in-law, who were the directors for most of the relevant period, did not. They signed documents which Mr Musto asked them to. The shares in Concore were held by Mr Musto’s accountant. There was no evidence from the second respondent to contradict the evidence that Mr Musto ran Concore. Thus, there is evidence from which an inference can be drawn that Mr Musto controlled Concore at the relevant time.
Both s 139D(1)(b)(ii) and s 139E(1)(b)(ii) require that the remuneration received by the bankrupt from the entity is less than would have been paid in an arm’s length arrangement. Mr Musto received $7,000 per annum to act as project manager for Concore. Counsel for the second respondent contended that there was no evidence of the remuneration of a project manager in a similar situation and, hence, no serious issue to be tried that $7,000 was less than would have been paid in an arm’s length agreement. The evidence, however, shows that Concore was engaged in property developments involving millions of dollars and produced a profit of at least $1.1 million in the relevant period. These facts establish that there is a serious issue to be tried that the remuneration of $7,000 per annum was less than would have been received in an arm’s length transaction.
Under s 139D(1)(d), it must also be shown that the bankrupt used or derived a benefit from the property of the entity controlled by the bankrupt. Counsel for the second respondent contended that no serious issue to be tried had been demonstrated by the applicant on this question. The applicant relied on evidence that, in the relevant period, Mr Musto had used the profits derived by Concore to fund a standard of living involving the expenditure of over $250,000 per year, had funded a defence to a protracted Supreme Court action, had made loans to himself, members of his family and associated entities, and had made various investments. The second respondent objected to much of the evidence on which these allegations were based, on the ground that the evidence was obtained during without prejudice negotiations. The admissibility of the evidence was not argued in full. There is other relevant evidence, however, including evidence from the second respondent, which was admitted without objection. For instance, there is evidence that Mr Musto was paid as project manager by Concore out of the profits of the property development business. Further, the details of beneficiaries’ accounts of the Rock Trust as at 30 June 1995, which was exhibited to an affidavit sworn by the second respondent on 18 March 1997, shows that the trust funds were used after March 1995 to pay a large number of personal expenses of Mr Musto. This evidence raises a serious issue to be tried as to the derivation of a benefit as required by s 139D(1)(d). In passing, I note that the requirement in s 139D(1)(d) is not found in s 139E. Thus, even if I am wrong in concluding that there is a serious issue to be tried under s 139D(1)(d), a serious issue to be tried could be found under s 139E without this element.
Finally, counsel for the second respondent contended that there was no evidence that Concore had acquired property as a result of the services provided by Mr Musto, as required by s 139D(1)(c), or that there was a substantial change in the net worth of Concore, as required by s 139E(1)(c). As I have already stated, the evidence established that, during the relevant period, Mr Musto was engaged in property development projects which made substantial profits, Concore was used as a vehicle for these operations, and Mr Musto was employed by Concore as project manager. Therefore, again without relying on the evidence to which objection was taken, a serious issue to be tried has been raised as to whether the assets and resultant worth of Concore were substantially increased during the relevant period due to the services of Mr Musto.
NECESSITY FOR THE GRANT OF AN INJUNCTION
The next matter is whether an injunction against the second respondent is necessary for the purposes of carrying out or giving effect to the Act.
The evidence in this case shows that, on 22 January 1997, the solicitors for the applicant advised the solicitors for the second respondent of the intention of the applicant to file an application under ss 139D or 139E. On 28 January 1997, Concore’s bankers were directed by Mr Musto to make payment of the distribution from the funds of Concore. The amount to be distributed represented most of the assets of Concore. The circumstances and timing of the attempted payment without explanation support an inference, for the purpose of interlocutory proceedings, that the distribution was a device to deplete the assets of Concore to avoid the operation of ss 139D or 139E. However, in an affidavit sworn on 7 March 1997, the second respondent deposed that the distribution was made pursuant to a resolution passed on 23 June 1995. This explanation is inconsistent with a statutory declaration made by the second respondent on 29 March 1996, in which she purported to disclose all assets, inter alia, in any trust in which she then held “a direct or indirect, actual, contingent and/or prospective financial interest”. The statutory declaration made no mention of any right to a distribution from the trust. Thus, the timing and circumstances of the distribution, together with the inconsistency in the sworn evidence of the second respondent, raise a serious issue to be tried that the distribution was made to Mrs Musto with the intention of defeating the claim of the applicant or defrauding the applicant. These matters also demonstrate that it is necessary to restrain Mrs Musto in order to carry out or give effect to the Act.
THE GRANT OF AN INJUNCTION AGAINST A THIRD PARTY
Mr Bigmore drew attention to the fact that the injunction was sought against the second respondent, while the cause of action under ss 139D and 139E was asserted against Concore. In these circumstances, he contended, the principle expressed in Winter & Anor v Marac Aust Ltd (1986) 6 NSWLR 11, 12 applied. In that case, the New South Wales Court of Appeal held that, where the grant of a Mareva injunction is sought to restrain the disposal of assets held by third parties, it must be shown that the person against whom judgment may be obtained has some right in respect of, or control over, or other access, direct or indirect, to the relevant assets, so that they, or the proceeds of disposition, could be required to be applied in discharge of a judgment debt: see also Deputy Commissioner of Taxation v David Patrick Ousley (1992) 23 ATR 176.
Mr Bigmore argued that, even if the distribution to the second respondent was invalid, Concore may not fall within the principle expressed in Winter. He submitted that the trust deed governing the Rock Trust only provided for funds to be accumulated in the Trust if there was a declaration in writing by the trustee to that effect. There was no evidence of such a declaration. Consequently, he contended, the trust deed operated so that the funds were held on behalf of the beneficiaries who, at the relevant time, were members of the family of the bankrupt and companies associated with the family. In these circumstances, Concore would not have the necessary right in respect of, control over, or access to the proceeds. There is sufficient evidence to draw the inference, for the purpose of this interlocutory application, that the affairs of Concore have been manipulated to meet the immediate requirements of the bankrupt and the second respondent. The applicant is still investigating the affairs of Concore. It is possible that, after a full investigation, Concore will be shown to have a right to the proceeds of the distribution so that such proceeds would be available to satisfy a judgment against Concore. It is therefore necesssary, for the purposes of carrying out or giving effect to the Act, to grant the injunction sought.
DIRECT CLAIMS AGAINST THE SECOND RESPONDENT
The applicant has foreshadowed that it intends to make claims against the second respondent directly. He will allege that the second respondent acted in breach of her fiduciary duty as a director of Concore in respect of the distribution, and that she conspired to defraud the applicant of his entitlements under s 139D and s 139E. In my view, the grant of an injunction is justified in aid of these proposed causes of action against the second respondent even if, contrary to my view, the principle enunciated in Winter would not support the grant of an injunction against the second respondent in her capacity as an outsider to the cause of action between the applicant and the first respondent.
ORDERS
After I indicated to the parties that an injunction would be granted, there was some argument about the form of the orders. The parties had agreed that certain living and other expenses, and legal expenses, would be exempted from the terms of the injunction. They agreed on the amount of the legal expenses. I determined that the amount of the living and other expenses would be $13,523. The applicant sought an order that the second respondent provide security for the amount of the expenses exempted from the operation of the injunction to secure the applicant in the event that he was successful in the application. I rejected this argument because the amount of exempted expenses of about $80,000 was relatively small in the context of the entire proceeds of the distribution of $1.1 million, and the second respondent has personal assets which probably would be available to reimburse Concore if the applicant succeeds in the application. Subsequently, the parties agreed to a form of orders reflecting this decision.
I certify that this and the preceding
ten (10) pages are a true copy of the reasons
for judgment of his Honour Justice North.
Associate:
Dated: 6 June 1997
APPEARANCES
Counsel appearing for the applicant: Mr M. Sifris and Mr S. Wotherspoon
Solicitors for the applicant: Holding Redlich
Counsel appearing for the respondent: Mr G. Bigmore QC and Mr M. Galvin
Solicitors for the respondent: J.M. Smith & Emmerton
Date of hearing: 19 & 20 March 1997
Date of judgment: 20 March 1997
Date of delivery of reasons for judgment: 6 June 1997
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