Leroy (Trustee), in the matter of Vitale and Vitale (Bankrupts)

Case [2016] FCA 999

FEDERAL COURT OF AUSTRALIA

Leroy (Trustee), in the matter of Vitale and Vitale (Bankrupts)

[2016] FCA 999

File number: NSD 1142 of 2016
Judge: WIGNEY  J
Date of judgment: 25 July 2016
Catchwords: BANKRUPTCY AND INSOLVENCY – whether trustee is justified in entering into settlement of primary proceedings – where settlement proceedings did not involve all creditors – whether the Court should issue a direction under Bankruptcy Act 1966 (Cth), s 134(4) that the trustee is justified in entering into the written agreement
Legislation:

Bankruptcy Act 1966 (Cth), ss 73, 121, 188, 134(4)

Federal Court of Australia Act 1976 (Cth), s 37AE

Cases cited: Reidy (Trustee), in the matter of Hawksford (Bankrupt) [2015] FCA 432
Date of hearing: 20 and 25 July 2016
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: General & Personal Insolvency
Category: Catchwords
Number of paragraphs: 46
Counsel for the Applicant: Mr R D Marshall
Solicitor for the Applicant: Mills Oakley Lawyers

ORDERS

NSD 1142 of 2016
IN THE MATTER OF THE BANKRUPT ESTATES OF ANTHONY VITALE AND GIULIANA VITALE

PAUL LEROY AS TRUSTEE FOR THE BANKRUPT ESTATES OF ANTHONY VITALE AND GIULIANA VITALE
Applicant

JUDGE:

WIGNEY  J

DATE OF ORDER:

25 JULY 2016

THE COURT ORDERS THAT:

1.A direction pursuant to s 134(4) of the Bankruptcy Act 1966 that Mr Paul Leroy, in his capacity as trustee of the bankrupt estates of Mr Anthony Vitale and Mrs Giuliana Vitale, would be justified in entering into the written agreement with Anthony Vitale, Giuliana Vitale and Allianz Australia Insurance Limited, a copy of which is annexed to the applicant’s affidavit sworn 13 July 2016 and marked “A”.

2.Pursuant to s 37AE of the Federal Court of Australia Act 1976 (Cth), the contents behind Tab 9 (pages 151 to 166) to exhibit PL-Y to the affidavit of Paul Leroy sworn 25 July 2016 not be available for inspection by any person except with the leave of the Court.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


REASONS FOR JUDGMENT
(Delivered ex tempore, revised from transcript)

WIGNEY J:

  1. Mr Paul Leroy is the trustee in bankruptcy of the bankrupt estates of Mr Anthony Vitale and Mrs Giuliana Vitale.  In that capacity he has been embroiled in somewhat complex litigation against Mr and Mrs Vitale, and various companies that are, or have been, associated in some way with them.  The proceedings were initially commenced in the Supreme Court of New South Wales, but were subsequently transferred to this Court.  The principal relief sought in those proceedings included declarations that both a purported loan by one of the companies to Mr and Mrs Vitale, and a purported mortgage over a property owned by Mrs Vitale to secure the loan to her, were void.  If successful in those proceedings, Mr Leroy would be able to sell the property unencumbered for the benefit of the creditors of Mrs Vitale, and the company would not be able to…

Details
AGLC
Leroy (Trustee), in the matter of Vitale and Vitale (Bankrupts) [2016] FCA 999
Case
[2016] FCA 999
Decision Date

CaseChat Overview and Summary

In the matter of Leroy (Trustee), in the matter of Vitale and Vitale (Bankrupts), the Federal Court was presented with an application for a direction under section 134(4) of the Bankruptcy Act 1966 (Cth). The application was brought by Mr Paul Leroy, the trustee in bankruptcy of Mr Anthony Vitale and Mrs Giuliana Vitale, seeking authorisation to enter into a settlement agreement with the Vitales and Allianz Australia Insurance Limited. The primary legal issue for the court was whether the trustee was justified in entering into the settlement, particularly considering that not all creditors were involved in the settlement proceedings.

The court considered the principles established in previous cases regarding the application of section 134(4) of the Bankruptcy Act, which allows trustees to seek court direction in certain circumstances. The court noted that a direction is not automatically granted simply because a trustee requests one. Instead, the court must assess whether there is a legal issue or an attack on the propriety of the trustee's decision that requires judicial intervention. In this case, the court identified that the settlement involved complex legal questions, particularly in relation to the validity of transactions involving trusts and the potential impact on the creditors' rights.

The court concluded that this was an appropriate case for a direction under section 134(4). It found that Mr Leroy had demonstrated a genuine doubt about the propriety of the contemplated course of action and had sought professional advice and court guidance to protect his position. The court was satisfied that there was a legal issue at stake, warranting its intervention. Consequently, the court issued a direction pursuant to section 134(4) that Mr Leroy would be justified in entering into the written agreement with the Vitales and Allianz. Additionally, the court ordered that certain parts of the affidavit and exhibits remain confidential and not available for inspection without leave of the court.

This decision underscores the importance of judicial oversight in ensuring that trustees act within the scope of their duties and in the best interests of creditors, even when entering into settlement agreements that do not involve all creditors.

Orders

Orders of the court

1. A direction pursuant to s 134(4) of the Bankruptcy Act 1966 that Mr Paul Leroy, in his capacity as trustee of the bankrupt estates of Mr Anthony Vitale and Mrs Giuliana Vitale, would be justified in entering into the written agreement with Anthony Vitale, Giuliana Vitale and Allianz Australia Insurance Limited, a copy of which is annexed to the applicant’s affidavit sworn 13 July 2016 and marked “A”.

2. Pursuant to s 37AE of the Federal Court of Australia Act 1976 (Cth), the contents behind Tab 9 (pages 151 to 166) to exhibit PL-Y to the affidavit of Paul Leroy sworn 25 July 2016 not be available for inspection by any person except with the leave of the Court.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

For the reasons that follow, this is an appropriate case for a direction under s 134(4) of the Bankruptcy Act. The direction sought by Mr Leroy should be given in the terms sought. Factual background The factual background to the proceedings between Mr Leroy and Mr and Mrs Vitale, and the associated companies, and the proposal to settle those proceedings, is summarised in an affidavit filed by Mr Leroy in support of his application for directions. Mr Leroy's initial affidavit has also since been supplemented by a further affidavit that provides some more detail concerning his reasons for deciding to settle the proceedings. Mr Vitale was, and perhaps still is, a builder. He was a director and shareholder of a pair of companies that were involved in land development and building, including for the residential market. Those companies were called Avcon (NSW) Pty Ltd, and Avcon Property Group Pty Ltd. Allianz provided home warranty insurance for the Avcon companies. Mr and Mrs Vitale had agreed to indemnify Allianz for any claims made on Allianz under the home warranty insurance. One of the Avcon companies was involved in the construction of a strata unit development at Sylvania. Sometime between the completion of that development in 2004, and about November 2007, Mr Vitale received a number of complaints about building defects in that development. Those complaints culminated in Allianz receiving a claim under the home warranty insurance policy in November 2007. As indicated earlier, Mr and Mrs Vitale indemnified Allianz in relation to claims made under the policy. In July 2007, some months before the November 2007 claims on Allianz, but probably at around the time that such claims appeared likely, Mr and Mrs Vitale signed a series of documents that sought to settle two trusts and cause some loan and other transactions to take place with the companies that were to be trustees of the trusts. Mr Vitale was a director of each of the trustee companies. One of those companies was called Vitale Future Generations Pty Ltd. Vitale Future Generations was appointed trustee for the Vitale Future Generations Trust, which purported to be a unit trust. The other company involved in these arrangements was a company called AV Guardian Pty Ltd. That company was appointed trustee of another discretionary trust, the Vitale Family Trust. There was no provision in the Vitale Future Generations Trust trust deed for the trustee to issue any units in that trust. Notwithstanding the absence of any such provision, Vitale Future Generations, as trustee, purported to issue 2,250 units at $1000 each to Mrs Vitale. The units purportedly issued by Vitale Future Generations were issued on the condition that, if Mrs Vitale was sued for $50,000 or more, the voting and participation rights in the units would be forfeited. Vitale Future Generations also purportedly loaned Mrs Vitale the purchase price of $2,250,000 for those 2,250 units. In return, Mrs Vitale purportedly agreed to grant Vitale Future Generations a mortgage over her real property as security for the loan. Vitale Future Generations also purported to issue two units to AV Guardian Pty Limited, the trustee for the Vitale Family Trust.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

In Reidy (Trustee), in the matter of Hawksford (Bankrupt) (2015) FCA 432, a case in which a trustee in bankruptcy sought a s 134(4) direction in not dissimilar circumstances to this matter, I summarised the applicable principles in the following terms (at [44] – [45]):Section 134(4) is in similar terms to various provisions in the Corporations Act 2001 (Cth) (Corporations Act), which provide that external administrators of companies, such as liquidators, may approach a court for directions. One such provision is s 479(3) of the Corporations Act. There is much to be said for the view that s 134(4) should be construed in the same manner as those provisions of the Corporations Act: Sutherland (in the matter of Scutts) [1999] FCA 147 (Scutts) at [14].A review of the authorities relating to s 134(4) of the Act and cognate provisions in the Corporations Act suggests that the following principles apply to applications for directions by trustees in bankruptcy and external administrators of companies: (1)A court is not bound to give direction simply because a trustee or external administrator asks for them: Re Driller (1972) 21 FLR 159.(2)An application for directions is not an appropriate vehicle of itself to determine the substantive rights of creditors as against the trustee or administrator, or of creditors amongst themselves: Scutts at [14].(3)Historically, at least, it was said that the court will not typically give a direction to a trustee or administrator in respect of matters which involve no more than the exercise of his or her discretionary powers in relation to business or commercial decisions; Gisborne v Gisborne (1877) 2 App Cas 300 at 307; In re Pilling; Ex parte Salaman [1906] 2 KB 644 at 647. (4)It would appear, however, that the approach taken by this and other courts is now somewhat more flexible: Re Pasminco Ltd (No 2) (2004) 49 ACSR 470 at [3]. In an appropriate case, the court will give a trustee or external administrator advice regarding the manner in which he or she might exercise a discretionary power. (5)In Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 at 201, Lord Oliver said:A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court.Likewise, in Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117 Young J said that:… it is usually only proper to exercise that power where the matter involves guidance to the liquidator on matters of law or principle or to protect him against accusations of acting unreasonably.(6)It is, however, insufficient to attract an order giving directions that the liquidator or administrator has a feeling of mere apprehension or unease about the decision, and wants reassurance. There must be some legal issue that arises in relation to the decision. As Goldberg J put it in Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 (Ansett) at [65]:There must be an issue calling for the exercise of legal judgment.(7)It may be appropriate to give a trustee directions concerning the commencement, continuation or compromise of legal proceedings, even where that decision involves commercial judgment and the exercise of the trustee’s discretion, where a legal issue or an attack on the propriety of the decision is raised, or is likely to be raised: Re G B Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 677-680, Ansett at [46], Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357 at 363, Re Tietyens Investments Pty Ltd (in liq) (rec and mgr apptd) (1999) 31 ACSR 1 at 28-29, Re Lemon Tree Passage & Districts RSL and Citizens Club Co-operative Ltd (1987) 11 ACLR 796 (Lemon Tree Passage) at 799; cf Shiraz Nominees (in liq) v Collinson (1985) 10 ACLR 7.Application of the principles to the facts