James v Woodgate - [2012] FMCA 1214

FEDERAL MAGISTRATES COURT OF AUSTRALIA

JAMES v WOODGATE

[2012] FMCA 1214

BANKRUPTCY – Proof of debt – nature of review of rejection of proof of debt by trustee – nature of trustee’s role in admission of proofs of debt –whether trustee bound by admission of bankrupt as to debt owing – whether to vary trustee’s decision to reject proof of debt.

EVIDENCE – Admissibility – whether hearsay statements of bankrupt otherwise admissible as against trustee under ss 81 or 87 of Evidence Act 1995 (Cth).

Bankruptcy Act 1966 (Cth), s.104
Evidence Act 1995 (Cth), ss. 3, 81, 87
Federal Magistrates Court (Bankruptcy) Rules 2006

Daevys v Official Trustee in Bankruptcy [2011] FCA 398
Re Masters; Ex parte Gerovich (Unreported, 30 July 1985)
Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In Liq) [1967] 116 CLR 177
Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332

Applicant:

IAN RAYMOND JAMES

Respondent:

GILES GEOFFREY WOODGATE THE TRUSTEE OF THE BANKRUPT ESTATE OF STUART ALEXANDER WARR EATON

File Number:

SYG 411 of 2012

Judgment of:

Raphael FM

Hearing date:

11 October 2012

Date of Last Submission:

11 October 2012

Delivered at:

Sydney

Delivered on:

14 December 2012

REPRESENTATION

Counsel for the Applicant:

Mr M Stevens

Solicitors for the Applicant:

Makinson & d'Apice

Counsel for the Respondent:

Mr M Henry

Solicitors for the Respondent:

Turks Legal

ORDERS

Application dismissed.
Applicant to pay the costs of the Trustee, such costs to be taxed if not agreed pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 411 of 2012

IAN RAYMOND JAMES

Applicant

And

GILES GEOFFREY WOODGATE THE TRUSTEE OF THE BANKRUPT ESTATE OF STUART ALEXANDER WARR EATON

Respondent

REASONS FOR JUDGMENT

On 18 March 2011 a Proof of Debt was lodged on behalf of the applicant with the respondent trustee of the bankrupt estate of Stuart Alexander Warr Eaton. The particulars of the alleged debt are found on page 3 of the Proof of Debt form exhibited to the affidavit of Richard d’Apice sworn 24 February 2012. The claim is for a sum of $301,856.71 made up of $200,000.00 principal and $101,856.71 interest. It is said that the debt was incurred on 5 November 2009 “Date of Sequestration Order” and that the details of the debt are described as “Loan Principal per attached Guarantee dated 17.5.01 $200,000.00”. There is a letter dated 17 May 2001 on the headed notepaper of “Eaton Group Pty Limited”. It is addressed to Mrs E W Eaton and states:
“This is to confirm that Stuart Eaton guarantees the sum of $200,000.00 (two hundred thousand dollars (two hundred thousand dollars). This sum will be secured by the assets of Stuart Eaton and the Eaton Group Pty Ltd. An interest rate equal to 50% of the difference between the 90 day Westpac term deposit rate and the rate that Eaton Group borrows from the NAB Bank. This rate is based on the Financial Review published cash rate plus the NAB’s margin rate of 1.75%.
Example: Eaton Group borrowing rate (EGBR) = Financial Review published cash rate (FRCR) + NAB margin. 4.5% + 1.75% = 6.25%
Westpac term deposit rate for 90days = 5%
Difference is 50% of 2.25% = 1.125%
Total interest payable to Mrs EW Eaton is 5% +1.125% = 6.125% PA
This interest will be paid into Mrs EW Eaton’s nominated Bank account every month and will be updated every 180 days to the current interest rate
Under the above example the amount of $12250.00 would be paid PA
This is $1020.83 per month. With no additional fees.
I Stuart Eaton guarantee the sum of $200,000.00.”
Although requested to do so by the trustee the applicant has not been able to produce any evidence directly establishing the payment of $200,000.00 to the Eaton Group or to Mr Stuart Eaton. On 3 February 2012 the respondent wrote to Mr d’Apice enclosing a rejection of the Proof of Debt which is relevantly in the following form:
“TAKE NOTICE that I, Giles Geoffrey Woodgate, as Trustee of the property of Stuart Alexander Eaton, a bankrupt pursuant to Section 102 of the Bankruptcy Act reject the whole of the Proof of Debt of $301,856.71 dated 14 March 2011 of the deceased estate of Elizabeth Winsome Eaton.
The reason for rejection of the said Proof of Debt is as follows:
(a)despite adequate time being provided, you have failed to provide to me a copy of documentary evidence showing the payment, in relation to which the claim is founded, to either Eaton Group Pty Ltd (CAN 087 476 024) or the bankrupt;
(b)failed to provide any evidence of interest being paid during the relevant period to the late Mrs Eaton; and
(c)lack of certainty in relation to the letter dated 17 May 2001 on the letterhead of Eaton Group Pty Ltd, a copy of which was attached to your Proof of Debt.”
The applicant has availed himself of the provisions of s.104 of the Bankruptcy Act 1966 (Cth)[1]:
“Appeal against decision of trustee in respect of proof [see Table B]
(1) A creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under subsection 102(1), (3) or (4) in respect of a proof of debt.
(2) The Court may, upon the application, confirm, reverse or vary the decision of the trustee.
(3) Subject to the power of the Court to extend the time, an application under this section to review a decision shall not be heard by the Court unless it was made within 21 days from the date on which the decision was made.”
[1] “Act”
The current law relating to the review of decisions upon the admission of Proofs of Debt has been helpfully set out in the decision of Flick J in Daevys v Official Trustee in Bankruptcy [2011] FCA 398. At [13] his Honour opined:
“[13]The nature of the “review” undertaken for the purposes of s 104 is a “review” not confined to the correctness or otherwise of the trustee’s decision. It is a “re-hearing”: P T Garuda Indonesia Pty Limited v Grellman[1994] FCA 913; (1994) 48 FCR 252 at 255 per Lockhart J. Thus, in Re D K Rogers; Ex parte CMV Parts Distributors Pty Ltd(1989) 20 FCR 561 at 562 to 563 von Doussa J cited with approval the following observations of Toohey J in Payne; Ex parte Levi (Unreported, Federal Court of Australia, Toohey J, 23 September 1986):
“[10] ... Section 104 of the present Bankruptcy Act empowers the Court to “review” a trustee’s decision and, in my view, that term carries with it the notion that the parties may place before the Court such material as they wish, provided of course that it is relevant and otherwise admissible. ... The function of the Court is not to consider the correctness or otherwise of the trustee’s decision in the light of the material before him but to determine, in the light of the material before it, whether the applicant has a debt that should be admitted to proof. Of course, inconsistencies in the material provided to the trustee and that offered to the Court may properly be taken into account.”
See also: BDT Holdings Pty Ltd v Piscopo[2009] FCA 151 at [4] per Rares J.”
At [14] his Honour approved of the views expressed by Toohey J in Re Masters; Ex parte Gerovich (Unreported, 30 July 1985) in which his Honour made it clear that s.104 required the court to review the decision of the trustee but:
“It was for the alleged creditor to satisfy the court that a decision rejecting a proof of debt should be reversed.”
“[14]There has been said to be an onus upon the party seeking “review” of a decision taken by the trustee. In circumstances where a creditor was seeking review of a decision to reject a proof of debt, in Re Masters; Ex parte Gerovich (Unreported, Federal Court of Australia, Toohey J, 30 July 1985) Toohey J thus concluded:
“[5] ... However, the trustee’s decision to reject the proof of debt in respect of the $16,000 must be confirmed, simply because there is no basis upon which it can be reversed. The claim for $16,000 is expressed in such vague terms and is so lacking in precision that it is not possible to characterize it as a claim arising by reason of a contract, promise or breach of trust. Even if it were possible so to characterize the claim, there is no information which would enable the Court to conclude that the trustee erred in rejecting the proof of debt. Section 104 requires the Court, on application, to review a decision of a trustee but it is for the alleged creditor to satisfy the Court that a decision rejecting a proof of debt should be reversed. The applicants have failed entirely in this regard.”
In respect to a separate claim, His Honour further concluded:
[9] How does the Court determine the application in the light of this contentious issue which is at the very heart of the applicants’ claim? Counsel for the applicants submitted that the Court must make a decision, however unsatisfactory and inadequate the materials made before it may be. This is no doubt true but equally it is for an applicant to persuade the Court that a trustee’s rejection of a proof of debt should be reversed. If an applicant fails to do this, the trustee’s decision must be affirmed. As it is the applicant who claims to be a creditor of the debtor, this approach seems to me to be inevitable. On ordinary principles of evidence, one who seeks the intervention of the Court to alter an existing situation, in this case the rejection of a proof of debt, carries the burden of persuading the Court that it should intervene.
[10] On the affidavits themselves, I must conclude that the applicants have failed to satisfy the onus that they bear.”
As the court has power under s.104(2) of the Act to vary the decision it is necessary to note the claim now being made by the trustee that part of the debt is statute barred. A creditor is not entitled to lodge a Proof of Debt in respect of a statute barred debt; Motor Terms Co Pty Ltd v Liberty Insurance Ltd (In Liq) (1967) 116 CLR 177 at [181]; Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332[2] at [339 – 344]. In the instant case the date of the sequestration order was 5 November 2009 and the Limitation Act covers a period of six years before that date. Thus any claim made in respect of interest prior to 5 November 2003 would be statute barred. The respondent has calculated that, in accordance with the schedule of interest prepared by the applicant which commences on 17 May 2001, $26,757.67 is statute barred. The respondent concedes that as the claim currently being made is in respect of a guarantee and no demand has been made upon it the principal is not statute barred.
[2] ‘Tanning’.
It is clear that the debt claimed in the Proof is based upon a guarantee. However, certain of the information or “evidence” provided to the court to establish the payment of the $200,000.00 suggests that if any payment was made it was made on a different basis. There is a letter dated 20 July 2004 prepared by the deceased’s daughter and signed by Mrs Eaton at a time when the daughter was concerned as to her mother’s affairs. The letter states:
“I Elizabeth Eaton wish to advise that I have loaned my son, Stuart Eaton in March 2001, the sum of $200,000.00. I am to be paid a monthly interest equivalent to the interest paid on moneys loaned at monthly call.
The principal sum of $200,000.00 is to be paid back to me on call or so as not to disadvantage my other two children, taken into account as part of my estate.”
This document makes no mention of a loan to companies or a guarantee by Stuart Eaton and, importantly, it refers to the loan being made in March 2001. The trustee argues that if that letter is to be accepted as good evidence of what occurred, firstly it does not support the Proof, which is based upon a guarantee and secondly the guarantee itself would fail for lack of consideration if the loan was actually made in March 2001 because the guarantee document is dated 17 May 2001:
“Past consideration is no consideration”.
Much of the time spent in hearing this interesting case was taken up with the consideration of whether or not certain statements made by the bankrupt were admissible as admissions against interest. These statements, if accepted as admissions, do not clarify the situation. Many of them are contained in an affidavit of Ian Raymond James and the “admissions” are in words such as the following:
“Don’t worry I know I owe mum the money and I will bring the details to the next meeting.”
“I know I owe mum the money and I agree that it will form part of her estate if it is not repaid before she dies.”
There is a statement allegedly made by the deceased:
“I am particularly concerned about the $200,000.00 I have already lent to Stuart which he has never accounted for.”
Another “admission” from the bankrupt was in the following form:
“The loan of $200,000.00 was made by my mother and I guarantee its repayment. I cannot produce any proof of this loan having been made.….”
It goes without saying that all the evidence of statements purportedly made by Mr Eaton, the bankrupt, are prima facie hearsay. Mr Eaton is alive and well and capable of giving evidence. But he was not called. The only possible way in which those statements could be admitted is pursuant to ss.81 and 87 of the Evidence Act 1995 (Cth), however, s.3 of that Act provides:
“Admission means a previous representation that is:
(a)made by a person who is or becomes a party to a proceeding (including a defendant in criminal proceedings) and;
(b)adverse to the person’s interest and the outcome of the proceeding.”
Mr Eaton is not a party to these proceedings and it cannot be said that when those alleged statements were made he had authority to make them from a person who might some years later become his trustee, so that s.87 cannot apply. Neither can it be said that Mr Eaton and the trustees’ interests are aligned. The question for consideration here is whether the estate of the late Mrs Eaton has a claim against the bankrupt estate of Mr Eaton. Mr Eaton is a beneficiary under the will of Mrs Eaton and would thus notionally benefit from the acceptance of the proof. Indeed Mr Eaton was aware of this because in one of the conversations deposed to by third parties he is alleged to have said to Mr James:
“I know I owe mum’s estate the money so can you please help me by lodging a proof of debt with my trustee in bankruptcy. You will be one of the largest creditors and I can then enlist your support to remove the trustee and appoint someone else who will be more reasonable to deal with.”
The question arises as to whether a trustee is bound to admit a proof of debt in circumstances where the bankrupt has himself or herself admitted to the supposed debt. I do not believe that a trustee is so bound. In Tanning, Brennan and Dawson JJ, in the majority, considered the role of a liquidator in his or her role in deciding proof of debts, and opined:
“In determining whether to admit or reject a proof of debt, a liquidator has been said to act in a quasi-judicial capacity (Re Britton & Millard Ltd (1957) 107 LJ 601) according to standards no less than the standards of a court or judge: Commr for Corporate Affairs v P W Harvey [1980] VR 669 at 696. This description of the liquidator's function reflects his duty to distribute the assets in his hands or under his control among the persons truly entitled. That duty was stated by Viscount Simonds in Government of India v Taylor [1955] AC 491 at 509:
I conceive that it is the duty of the liquidator to discharge out of the assets in his hands those claims which are legally enforceable, and to hand over any surplus to the contributories. I find no words which vest in him a discretion to meet claims which are not legally enforceable. It will be remembered that, so far as is relevant for this purpose, the law is the same whether the winding up is voluntary or by the court, whether the company is solvent or insolvent, and that an additional purpose of a winding up is to secure that creditors who have enforceable claims shall be treated equally, subject only to the priorities for which the statute provides.
The principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company to enforce that liability. Those principles include the law relating to the barring of actions by time: see, for example, Motor Terms Co Pty Ltd v Liberty Insurance Ltd (in liq) (1967) 116 CLR 177. But this general rule is qualified. As the parties whose interests are affected by admission of a proof of debt are the general body of creditors and the contributories rather than the company in liquidation, there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt lest the interests of creditors and contributories may be unjustly affected. A liquidator may properly reject a proof of debt if the liability, though enforceable against the company, is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution. In this respect, there is no reason to distinguish between the position of a liquidator and that of a trustee in bankruptcy: see Ayerst v C & K (Construction) Ltd [1976] AC 167. In Re Van Laun; Ex parte Chatterton [1907] 2 KB 23 at 31, Buckley LJ said:
Whether the creditor alleges that there has resulted, and that he relies upon an account stated, or a covenant entered into by the debtor, or a judgment which he has obtained, the principle, I apprehend, is exactly the same, and is this — that the trustee is not the person who has stated the account, is not the covenantor, is not the judgment debtor, but is entitled to say, ‘It is my business to see that those who seek to rank against this estate are persons who are really creditors of that estate’. If there be a judgment it is not necessary to shew fraud or collusion. It is sufficient, in the language of Lord Esher, to shew miscarriage of justice — that is to say, that for some good reason there ought not to have been a judgment. Exactly the same, I think, is true of an account stated or of a covenant.” [emphasis added]
Thus it can be said that a trustee will be bound to take into account the so-called admissions when considering the proof in his quasi-judicial role. But he must make his or her own judgement upon the value of those admissions in the same way as a court would assess evidence. In other words, vis à vis the claimant, these are not binding admissions, only evidence of possible indebtedness.
I am of the view that the content of the conversations is not admissible as an admission against the trustee and should not be taken into account by me in this review.
There is some further documentary evidence which was the subject of objections that consisted of notes of meetings with the deceased and others. Those minutes were unsigned and can only be accepted as evidence of what was said by the parties and not of the truth of the statements. They are of little assistance to me in those circumstances.
The applicant accepted the difficulty he had in establishing that any money was paid by the deceased to the bankrupt due to a lack of records from the banks or in the hands of the deceased or the bankrupt himself. Some evidence was provided of a $200,000.00 term deposit being available in 2000 having formed part of an account of Mr Ronald Warr Eaton, the deceased’s husband. That account was later transferred into a joint account which became the property of the deceased on the death of her husband. Other evidence which I have accepted into evidence does not to my mind assist in clarifying the situation. There is a letter dated 26 May 2009 from the deceased to the registry manager of the Family Court concerning a subpoena. This letter states:
“Dear Registry Manager
I am writing to reply to a subpoena to provide documents in the above case. I am a 87 year old widow and I live by myself. I wish to advise that I have not been able to locate the required documents at this time.
I can confirm that I have seen a copy of the loan contract document which is one of the documents requested in the subpoena. This document was sent to the court by M Stuart Eaton, and I verify that this is a true and accurate copy of the loan contract.
I understand that this loan document was sent to the court on the 15 of May 2009 and is marked item 11.
I confirm that this money plus interest is still outstanding and owed to me. I also confirm that this money was lent to my son Stuart Eaton and his wife Kristine Eaton to assist in the renovation of their family home.
I apologise for any inconvenience, and hope that this fulfils my obligation in this matter. I also hope that this has been of some assistance.
Sincerely
Mrs Elizabeth W Eaton”

Then there are a series of Family Court documents in the proceedings between Mr Eaton and his wife, one of which makes reference to a loan from Betty Eaton of $200,000.00 described as a personal loan but the borrowers are described as “Eaton Group Pty Limited Guaranteed by Stuart Eaton. Your share 100%”. But in a balance sheet forming part of the same series of documents the loan from Mrs Eaton of $200,000.00 is subject to a note which states:
“All money was applied to the purchase of the former home at 4 Hay Street Vaucluse.”
Then, in another balance sheet, the loan becomes $350,000.00 and subject to the same note. Finally, in another Family Court financial statement signed by Mr Eaton and filed on 8 May 2009 he notes under the heading “Other Mortgages” with the borrowers being himself and his wife a liability of $100,000.00 being 50% of the total.
The proof of debt I am asked to review is one based upon a guarantee of a loan to a group of companies. There is no evidence whatsoever of the payment of this sum by the deceased to any company. Such evidence as there is from the deceased relates to a loantoher son. There is a document which came into being some months after the alleged loan was made to the companies in which the bankrupt purported to guarantee the loan. If that document is to be accepted then the guarantee cannot be valid because it does not purport to be some confirmation of an oral agreement, rather it purports to be the agreement itself and there was no consideration moving at that time from the lender to the borrower which would validate the guarantee given by Mr Eaton. I have not accepted the evidence of the so called admissions because to my mind admissions by the bankrupt cannot be an exception to the hearsay rule binding the trustee. The best evidence that could be obtained was that of Mr Eaton himself but he did not appear. Such evidence as could be said to be admissible only confuses the situation because it suggests a possibility of a loan directly to Mr Eaton or to his wife and Mr Eaton and not a debt based upon a guarantee. I do not believe that the applicant has satisfied the court that a debt based upon a valid guarantee does exist. It is clearly not for the court to reword the proof of debt in a manner that might be acceptable to the trustee. I am therefore of the view that the trustee was correct in rejecting the Proof and that the court should confirm the decision of the trustee pursuant to s.104(2). In these circumstances the application of the executor must be dismissed and the executor must pay the costs of the trustee, such costs to be taxed if not agreed pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.

I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Raphael FM

Date: 14 December 2012