Johnston, in the matter of Gunasegaram
[2022] FedCFamC2G 549
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Johnston, in the matter of Gunasegaram [2022] FedCFamC2G 549
File number: SYG 680 of 2022 Judgment of: JUDGE CAMERON Date of judgment: 7 July 2022 Catchwords: BANKRUPTCY – Application by trustee for order under s.109(10) of the Bankruptcy Act 1966 (Cth) – whether indemnifying creditor should be paid in priority over all other unsecured creditors – relevant considerations. Legislation: Bankruptcy Act 1966 (Cth) s 109 Cases cited: Harrison v Nandicorp Pty Ltd [2021] FCA 1603
Re Woodgate, in the Matter of Eaton (a bankrupt) (2010) 8 ABC(NS) 65
Household Financial Services Ltd v Chase Medical Centre Pty Ltd (in liq) (1995) 18 ACSR 294
Division: General Division Number of paragraphs: 23 Date of hearing: 29 June 2022 Place: Sydney Solicitor for the Applicants: Mr C. Graham (Somerville Legal Pty Ltd) ORDERS
SYG 680 of 2022 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
IN THE MATTER OF THE BANKRUPT ESTATE OF ARUN GUNASEGARAM
BETWEEN: ADAM LEE JOHNSTON
First Applicant
PAUL JOHN COOK
Second Applicant
ORDER MADE BY:
JUDGE CAMERON
DATE OF ORDER:
7 JULY 2022
THE COURT ORDERS THAT:
1.After payment in the priority fixed by s.109(1)(a) of the Bankruptcy Act 1966 (Cth) of all the costs, charges and expenses of the administration of the bankruptcy, the balance of the funds held by the applicants as trustees of the bankrupt estate of Arun Gunasegaram be paid to Blue Visions Management Pty Ltd in priority over the admitted debts of all other unsecured creditors.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE CAMERON
INTRODUCTION
Adam Johnston, the first applicant, and Paul Cook, the second applicant, are the joint trustees (“Trustees”) of the bankrupt estate of the late Arun Gunasegaram (“Bankrupt Estate”). On 9 May 2022 the applicants commenced this proceeding seeking an order under s.109(10) of the Bankruptcy Act 1966 (Cth) (“Act”) that the funds held in the Bankrupt Estate be distributed to Blue Visions Management Pty Ltd (“Blue Visions”), an unsecured creditor, in priority over other admitted unsecured creditors.
FACTUAL BACKGROUND
The history of this matter appears in the affidavit of Mr Johnston sworn on 4 May 2022 as follows:
Supreme Court Proceedings
(a)on 30 June 2014, Blue Visions commenced proceedings against Mr Gunasegaram in the Supreme Court of NSW (“Supreme Court Proceedings”) and on 10 May 2017 the Court gave judgment for Blue Visions in the sum of $1,443,709.67 (“Judgment Debt”);
(b)on 14 August 2018 the New South Wales Court of Appeal dismissed Mr Gunasegaram’s appeal and released to Blue Visions $400,000 that Mr Gunasegaram had paid into the Court as security for the Judgment Debt;
Bankruptcy
(c)on 28 November 2018, Mr Gunasegaram became bankrupt upon presentation and acceptance of his debtor’s petition;
(d)on 10 April 2019, Brett Harrison was appointed trustee of the Bankrupt Estate in place of the Official Trustee;
(e)Mr Johnson had the day-to-day carriage of the administration of the Bankrupt Estate while Mr Harrison was trustee;
(f)Mr Gunasegaram died on 14 October 2019;
(g)on 21 February 2022, Mr Johnston and Mr Cook were appointed Trustees of the Bankrupt Estate;
Properties Owned by Mr Gunasegaram
(h)in the course of their investigations it was determined by Mr Harrison and Mr Johnston that Mr Gunasegaram owned the following properties:
(i)124 Lakeside Drive, Joondalup WA (“Joondalup Property”);
(ii)Unit 207, 108 Terrace Road, East Perth WA (“East Perth Property”);
(iii)24 Bow River Crescent, Burswood WA (“Burswood Property”); and
(iv)6 Daytona Drive, Iluka WA (“Iluka Property”);
(i)in his statement of affairs Mr Gunasegaram admitted to ownership of the Joondalup Property;
(j)in the Supreme Court Proceedings Mr Gunasegaram led evidence that:
(i)he held the Burswood Property and the Iluka Property on trust for the TRM Investments 01 Trust; and
(ii)Nandicorp Pty Ltd (“Nandicorp”) was the trustee of the TRM Trust;
(k)on 18 April 2019, David Finney, solicitor acting for the TRM Investments 01 Trust and the TRM Trust, (“Two Trusts”) provided Mr Johnston with documents purporting to show that the East Perth Property was the property of the TRM Trust;
Federal Court Proceeding
(l)on 6 April 2020 Mr Harrison and Blue Visions entered into a Deed of Funding and Indemnity (“Deed”) so that Mr Harrison might take advice and perhaps initiate proceedings for declarations that the assets of the Two Trusts belonged to the Bankrupt Estate;
(m)on 3 July 2020 Mr Harrison commenced proceedings against Nandicorp and Mr Gunasegaram’s wife Deidre in the Federal Court of Australia (“Federal Court Proceedings”);
(n)on 13 November 2020 the Federal Court Proceedings were settled as against Mrs Gunasegaram on the basis that her ownership of units in the TRM Investments 01 Trust be transferred to Mr Harrison, as a result of which the dispute concerning the ownership of the Burswood and Iluka properties was resolved;
(o)in the Federal Court Proceedings on 17 December 2021, Perram J delivered judgment against Nandicorp: Harrison v Nandicorp Pty Ltd [2021] FCA 1603, and on 1 February 2022 his Honour made the following declarations and orders:
THE COURT DECLARES THAT:
1.The property known as Unit 207, 108 Terrace Road, East Perth, Western Australia, was an asset of the bankrupt estate of Arun Gunasegaram from the date of bankruptcy (28 November 2018) to the date it was sold by the Commonwealth Bank on 23 December 2021.
2.The payments:
a. on 30 April 2015 of the sum of $475,150.00 by the bankrupt, Arun Gunasegaram, in his personal capacity to himself as trustee for the TRM Investments 01 Trust; and
b. between 25 May 2015 and 15 July 2015 of the sum of $28,074.25 by the bankrupt, Arun Gunasegaram, in his personal capacity to himself as trustee of the TRM Investments 01 Trust;
each constitute an undervalued transaction within the meaning of s 120 of the Bankruptcy Act 1966 (Cth) and are void against the Applicant.
THE COURT ORDERS THAT:
3.The Applicant be granted an equitable charge over the proceeds of sale of the property known as 6 Daytona Drive, Iluka, Western Australia (‘the Proceeds of Sale’) to secure the sum of $503,224.25.
4.The Proceeds of Sale be paid to the Applicant.
5.The Respondent pay the Applicant's costs of the proceedings in the sum of $80,000;
(p)during the course of the Federal Court Proceedings the Joondalup, East Perth, Iluka and Burswood properties, which were subject to mortgages to the Commonwealth Bank of Australia (“CBA”), were sold by the CBA to satisfy the debts they secured and:
(i)the $1,954.51 net proceeds of sale of the Joondalup Property were paid to Mr Harrison;
(ii)Mr Harrison received the $366,911.80 net proceeds of sale of the Iluka Property;
(iii)the sales of the Burswood Property and the East Perth Property were insufficient to produce surpluses payable to the Bankrupt Estate; and
(q)on 24 February 2022 Mr Johnston’s solicitors received $80,000 from Nandicorp in respect of the costs of the Federal Court Proceedings.
PLEADINGS
As recorded earlier, the applicants sought the following relief:
An order pursuant to s 109(10) of the Bankruptcy Act 1966 (Cth) that the balance of the funds held by the applicant as trustee of the bankrupt estate of Arun Gunasegaram be paid to Blue Visions Management Pty Ltd in priority over the admitted debts of all other unsecured creditors, after payment of all the costs, charges and expenses of the administration of the bankruptcy in the priority fixed by s 109(1)(a) of the Bankruptcy Act 1966 (Cth).
LEGISLATION
Section 109 of the Act relevantly provides:
109Priority payments
(1)Subject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following order:
(a) first, in the order prescribed by the regulations, in payment of the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee and the costs of any audit carried out under section 70-15 or 70-20 of Schedule 2;
…
(10) Where in any bankruptcy:
(a) property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or
(b) expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;
the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.
…
APPLICANTS’ EVIDENCE
Indemnity Agreement
In his affidavit sworn on 4 May 2022, Mr Johnston deposed that the former trustee Mr Harrison issued reports to the creditors dated 12 July 2019 and 26 August 2019 which invited them to provide funding for the costs of pursuing legal action to secure the East Perth, Burswood and Iluka Properties for the benefit of the creditors of the Bankrupt Estate. Mr Johnston’s evidence was that only Blue Visions offered to fund and indemnify Mr Harrison and that on 6 April 2020 they entered into the Deed.
Relevantly, the Deed stated:
RECITALS
…
D.Gunasegaram was the sole trustee of the TRM Investments 01 Trust and the TRM Trust. . It is the view of the Trustee that the assets of the TRM Investments 01 Trust and the TRM Trust form part of the bankrupt estate of Gunasegaram. Gunasegaram (now by his estate) opposes that position.
E.Blue Vision has agreed to fund the Trustee to firstly obtain advice from Senior Counsel and then if the advice warrants it to fund and indemnify the Trustee to initiate proceedings to seek declarations that the assets of the TRM Investments 01 Trust and the TRM Trust form part of the bankrupt estate of Gunasegaram.
…
3. FUNDING
3.1 Blue Visions Hereby agrees to provide the Funding to the Trustee to pay the following in respect of the Proceedings:
3.1.1 the Legal Costs and Disbursements (Inclusive of GST);
3.1.2 the Enforcement Costs;
3.1.3 any other cost incurred with the prior written consent of Blue Visions including but not limited to security for costs orders;
…
4.INDEMNITY
4.1 Blue Visions hereby indemnifies the Trustee from and against any Order for Costs made against the Trustee in the Proceedings for the period from the date of this Deed up to the date of termination or conclusion of this Deed.
…
The Trustee’s Legal Costs of the Federal Court Proceedings
Mr Johnston’s evidence was that throughout the Federal Court Proceedings, the invoices of Mr Harrison’s solicitors in a total amount of $161,947.18 were issued to Blue Visions which made payments totalling $140,751.55 to those solicitors on Mr Harrison’s behalf. He deposed that upon conclusion of the Federal Court Proceedings, he paid $140,751.55 to the solicitors’ trust account for the reimbursement of Blue Visions.
Funds Available in the Bankrupt Estate
A copy of the Trustees’ Account of Receipts and Payments for the Bankrupt Estate was annexed to Mr Johnston’s affidavit. The account shows that between 10 April 2019 and 17 March 2022, the Bankrupt Estate received the following funds:
Cash at Bank $250.12 Surplus funds received from mortgagee sale of Joondalup property $1,954.51 Funds received from leasing agent in respect of Joondalup property $3,617.72 Surplus funds received from mortgagee sale of Iluka property $366,911.80 Funds received from leasing agent in respect of Burswood property $10,029.40 Funds received from leasing agent in respect of East Perth property $12,618.00 Costs order $80,000.00 TOTAL $475,381.55
Mr Johnston’s evidence was that as at 26 April 2022 the balance of the Bankrupt Estate’s account was $75,359.30.
Future recoveries by the Bankrupt Estate
Mr Johnston deposed that on 1 March 2022 he demanded that Leasing Property WA, the former leasing agent of the East Perth Property, pay him $28,300.70 in rent earned by the East Perth Property and which it had paid to the late Mr Gunasegaram’s mother, Remamani Gunasegaram, despite having been advised that it was an asset of the Bankrupt Estate. His evidence was that at the time of swearing his 4 May 2022 affidavit, the dispute over these funds was unresolved.
Future Costs in the Finalisation of the Estate
Mr Johnston’s evidence was that as at 4 May 2022, no dividend had been declared or paid to any creditor of the Bankrupt Estate and he estimated that the total funds available for distribution amongst unsecured creditors would be approximately $45,000 to $65,000.
Mr Johnston deposed that he estimated the future costs of the finalisation of the Bankrupt Estate to total between $10,000 to $30,000 including:
(a)$7,500 plus GST representing the Trustees’ work in progress;
(b)legal costs and Trustees’ costs associated with this application;
(c)legal costs and Trustees’ costs associated with pursuing the debt owed by Leasing Property WA; and
(d)tax liabilities associated with any rental income received from Leasing Property WA,
but they would be increased by between $5,000 and $10,000 if it became necessary to examine the unsecured creditors’ proofs of debt in order to effect a pro rata distribution.
Unsecured creditors of the estate
Mr Johnston’s affidavits identified the following as the Bankrupt Estate’s known unsecured creditors:
(a)Blue Visions Management Pty Ltd for the amount of $1,805,469.18;
(b)Remamani Gunasegaram for the amount of $826,510.82;
(c)Clayton Utz for the amount of $452,939.12;
(d)Brown Wright Stein Lawyers for the amount of $9,126.50; and
(e)Prime QLD Pty Ltd (in liquidation) for the amount of $930,644.42;
(f)Macquarie Leasing for the amount of $13,560.98; and
(g)CBA for an unknown amount.
The affidavit of service of Cameron Graham affirmed on 17 June 2022 indicates that Remamani Gunasegaram, Clayton Utz, Brown Wright Stein Lawyers, Prime QLD Pty Ltd (in liq), Macquarie Leasing Pty Ltd and the CBA have been notified of this proceeding and served with relevant documents. None has filed in this proceeding a notice of appearance or any other document.
CONSIDERATION
Relevantly for the present application, the Court’s power under s.109(10) of the Act is enlivened when:
(a)property has been “recovered, realized or preserved”; and
(b)the recovery, realisation or preservation occurred “under an indemnity for costs of litigation given by a creditor”.
Set out earlier in these reasons was the Trustees’ Account of Receipts and Payments for the Bankrupt Estate showing that between 10 April 2019 and 17 March 2022 the Bankrupt Estate received the following funds:
Cash at Bank $250.12 Surplus funds received from mortgagee sale of Joondalup property $1,954.51 Funds received from leasing agent in respect of Joondalup property $3,617.72 Surplus funds received from mortgagee sale of Iluka property $366,911.80 Funds received from leasing agent in respect of Burswood property $10,029.40 Funds received from leasing agent in respect of East Perth property $12,618.00 Costs order $80,000.00 TOTAL $475,381.55
The evidence indicates that the recovery of funds in relation to the Burswood, East Perth and Iluka properties and the $80,000 costs recovery arose out of Mr Harrison’s success in the Federal Court Proceedings so the question becomes whether those funds were recovered or realised under the Deed and its indemnity. In that regard the evidence of Mr Johnson, as the person who had the day-to-day administration of the Bankrupt Estate while Mr Harrison was its trustee, was that Mr Harrison sought creditors’ support for the bringing of recovery proceedings and commenced such an action, in the form of the Federal Court Proceedings, once Blue Visions provided the support sought. In can easily be inferred that the commencement of the Federal Court Proceedings depended on the execution of the Deed and that its indemnity for costs was an important factor in Mr Harrison’s decision to litigate. I draw those inferences.
Given those conclusions, I find that the funds recovered by the trustees from time to time of the Bankrupt Estate as a result of the Federal Court Proceedings were funds recovered, realized or preserved under the indemnity for costs given by Blue Visions in the Deed. I find that the criteria for the engagement of s.109(10) of the Act have been met.
Even so, the granting of the priority sought by Blue Visions is discretionary, not automatic, the subsection providing that the Court:
… may … make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered …
In that connection in Re Woodgate, in the Matter of Eaton (a bankrupt) (2010) 8 ABC(NS) 65, Nicholas J said:
There are a number of matters that are of significance in an application of this kind which are weighed up when deciding whether to make an order under s 109(10). These include:
•the risk run, and costs incurred, by the indemnifying creditor;
•the complexity of the proceedings in respect of which the indemnity is given;
•the sum recovered (or the value of the property recovered);
•the opportunity afforded to other creditors to provide indemnity;
•the failure of other creditors to provide indemnity;
•the proportions between the debts of the indemnifying creditor and the other debts;
•the opposition or support of other creditors to the application for priority; and
•the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered. (at 66 [5])
The Trustees submitted in relation to those considerations:
(a)Risk run & costs incurred – the indemnity provided by Blue Visions was not subject to any limitation. The risk was substantial, with Blue Visions paying a total of $140,751.55 in legal costs and disbursements throughout the course of the Federal Court proceedings.
(b)Complexity of the proceedings – it is apparent from Perram J’s judgment in Harrison v Nandicorp that the issues in dispute in the Federal Court proceedings were complex, with the trustee being partially unsuccessful in relation to its attempt to obtain an indemnity out of the assets of the TRM Trust.
(c)Sums recovered – the sums recovered under the Indemnity represent the vast majority of the total funds recovered by the Bankrupt Estate. The “Cash at Bank” and funds received via the Joondalup property represent only around 1.2% of the total funds recovered by the Bankrupt Estate. The total amount recovered by the Bankrupt Estate from all sources of $475,381.55 is only a minor proportion of the amount of the unsecured debt owed by the bankrupt to Blue Visions.
(d)Opportunity provided to other creditors & failure of other creditors to provide indemnity – the trustee made a request for funding in the report to creditors dated 12 July 2019, which was repeated in the report to creditors dated 26 August 2019. The first of these requests specifically referred to the possibility of an application under s 109(10) of the Act. The evidence shows that only Blue Visions offered to provide funding or an indemnity.
(e)Proportion of competing debts – Blue Visions is, by far, the largest unsecured creditor of the Bankrupt Estate, with a claimed amount of $1,805,469.18. However, the First Applicant’s evidence is that, at most, the total funds available for distribution will be between $45,000 and $65,000. In the event that the amount available is $65,000 and this is paid to Blue Visions, the return to Blue Visions will be approximately 3.6 cents on the dollar, which is not markedly greater than the 0 cents on the dollar which will be recovered by all other unsecured creditors. The recovery by Blue Visions could not be described as a windfall.
(f)Opposition/support of other creditors – all known unsecured creditors have been served with the application in these proceedings. No creditor has sought to intervene. … (references omitted)
I accept those submissions.
The Trustees went on to submit that it would be just and equitable if the entire balance of the funds held by the Bankrupt Estate available for distribution amongst the unsecured creditors be paid as a priority to Blue Visions. The facts of this case echo the circumstances considered in Household Financial Services Ltd v Chase Medical Centre Pty Ltd (in liq) (1995) 18 ACSR 294 and Re Woodgate where it was considered appropriate make a similar order in favour of the singular creditors who indemnified the relevant trustees for the recovery proceedings they brought, thereby making possible any recovery at all, in circumstances where none of the other unsecured creditors offered an indemnity or expressed objection to an order for priority being made.
CONCLUSION
I conclude that in those circumstances, and where:
(a)only a small sum is available for distribution amongst unsecured creditors; and
(b)any rateable distribution amongst all unsecured creditors would require the Trustees to incur costs of between $5,000 to $10,000 in examining in admitting proofs of debt,
it is just and equitable that, after payment in the priority fixed by s.109(1)(a) of the Act of all the costs, charges and expenses of the administration of the bankruptcy, the funds available for distribution amongst unsecured creditors be paid to Blue Visions in priority over the admitted debts of all other unsecured creditors.
There will be an order accordingly.
I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Cameron. Associate:
Dated: 7 July 2022
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