Low v Barnet (Trustee)

Case [2017] FCAFC 60

FEDERAL COURT OF AUSTRALIA

Low v Barnet (Trustee) [2017] FCAFC 60

Appeal from:

Low v Barnet (Trustee); In the Matter of Mathai [2015] FCA 1386

Low v Barnet (Trustee); In the Matter of Mathai (No 2) [2016] FCA 736
File number: NSD 1133 of 2016
Judges: FLICK, JAGOT AND GLEESON JJ
Date of judgment: 13 April 2017
Catchwords:

BANKRUPTCY – the making of an order as to distribution of property between creditors – the payment of a “risk premium” to creditor in funding litigation – discretionary power confined to cases where there are competing creditors

PRACTICE AND PROCEDURE – leave to intervene – leave granted to former bankrupt to intervene

CONSTITUTIONAL LAW – a law with respect to bankruptcy and insolvency

Legislation:

Constitution s 51(xvii)

Bankruptcy Act1924 (Cth) s 84(2)

Bankruptcy Act 1996 (Cth) ss 91, 107, 108, 109, 109(10), 120, 121, 153, 154

Corporations Act2001 (Cth) ss 556, 559, 564

Federal Court Rules2011 (Cth) r 9.12

Bankruptcy Acts Amendment Act1896 (NSW) s 10

Cases cited:

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) [2009] HCA 41, (2009) 239 CLR 27

ATCO Controls Pty Ltd (In Liquidation) v Stewart [2013] VSCA 132

Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd [2006] NSWSC 25, (2006) 224 ALR 490

Cannane v J Cannane Pty Ltd (In Liquidation) [1998] HCA 26, (1998) 192 CLR 557

Deputy Commissioner of Taxation v Vintage Gold Investments Pty Ltd (In  Liquidation) [2009] FCA 967, (2009) 27 ACLC 1393

Green v CGU Insurance Ltd [2008] NSWCA 148, (2008) 67 ACSR 105

House v The King (1936) 55 CLR 499

Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28, (2004) 180 FLR 393

Low v Barnet (Trustee); In the matter of Mathai [2015] FCA 1386

Low v Barnet (Trustee); In the matter of Mathai (No 2) [2016] FCA 736

Mills v Meeking (1990) 169 CLR 214

Moore-McQuillan v Scott [2006] FCA 63, (2006) 149 FCR 486

Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364

Official Trustee in Bankruptcy v Pastro [2004] FCA 713, (2004) 2 ABC(NS) 257

Re Allied Glass Manufacturers Ltd (1936) 36 SR (NSW) 409

Re Bavistock (1946) 14 ABC 30

Re Cartco Pty Ltd (1994) 14 ACSR 357

Re Clarke; Ex parte Deputy Commissioner of Taxation (1981) 51 FLR 220

Re Geoghegan; Ex parte Official Assignee (1897) 18 LR (NSW) B & P 47

Re Glenisia Investments Pty Ltd (In Liquidation) (1996) 14 ACLC 237

Re Home Corp Projects [2002] NSWSC 879, (2002) 20 ACLC 1751

Re Ivermee; Ex parte Official Receiver (1974) 36 FLR 187

Re Lance; Ex parte The Official Assignee (1900) 21 LR (NSW) B & P 29; 17 WN (NSW) 201

Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) B & P 38

Re McMaster; Ex parte McMaster (1991) 33 FCR 70

Re Passmore; Ex parte Official Receiver in Bankruptcy (1984) 56 ALR 181

Re Ried

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AGLC
Low v Barnet (Trustee) [2017] FCAFC 60
Case
[2017] FCAFC 60
Decision Date

CaseChat Overview and Summary

Low v Barnet (Trustee) was a case before the court regarding the interpretation of the phrase "over others" in s 109(10) and s 564 of the relevant Act. The primary dispute was whether the term "others" referred to other creditors or if it had a broader meaning. The case also involved the discretionary power of the court to make orders regarding the distribution of property recovered by a creditor who funded litigation. Low, the sole creditor, sought an advantage over other creditors as a reward for the risk assumed by funding the litigation. The court rejected Low's claim, finding that s 109(10) only applied where there were competing creditors. The court concluded that the purpose of the section was to confer a comparative advantage to the indemnifying creditor, not to provide a windfall beyond what was necessary to compensate for the risk assumed.

The court examined the statutory language and concluded that the term "others" in s 109(10) referred to "other creditors," meaning the section was only applicable where there were competing creditors. The court also considered the discretion available under s 109(10) and found that most of the discretionary factors were not present in this case. The court concluded that Low was entitled to reimbursement for her costs and interest on her provable debts but was not entitled to a risk premium. The appeal was dismissed, and Low was ordered to pay the costs of the appeal.

Orders

Orders of the court

1. The appeal is dismissed.

2. The Appellant is to pay the costs of the appeal of the Respondent.

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

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The confined question of statutory construction raised for resolution in the present appeal is the meaning of the phrase “over others”, an expression used in both ss 109(10) and 564. The decision of the primary Judge – s 109(10) confined to “over other creditors” The primary Judge rejected Ms Low’s claim. There were two bases upon which his Honour proceeded, namely:·Ms Low’s claim did not fall within s 109(10) because, as a matter of statutory construction, that subsection was confined to circumstances in which there were competing creditors and not – as on the facts before his Honour – where Ms Low was the only creditor; and·as a matter of discretion, the claim should be rejected. Of present concern is his Honour’s conclusion in respect to s 109(10) and the phrase “over others” being confined to “over other creditors”. The primary Judge reached this conclusion as follows:[112] Here, Ms Low is the only creditor of the bankrupt. There are no other persons who have made any claims upon the estate. She is a judgment creditor of the bankrupt and a claimant for reimbursement of additional outlays said to be recoverable from the estate.[113] The only property of the bankrupt in the estate are the two Wellington Street properties and rent derived from one of those properties. 68A Wellington Street has been sold. The net proceeds of sale have fallen into the estate.[114] Ms Low provided funds and gave indemnities to Mr Ryan and to Mr Nelson in respect of the s 121 proceedings and the appeals which followed.[115] In the circumstances, it follows (and I find) that property (the two Wellington Street properties) were recovered under an indemnity for costs of litigation (the s 121 proceedings and the subsequent appeals) given by a creditor (Ms Low) to the trustee. Thus, s 109(10) is prima facie engaged in the present case because the threshold requirements specified in s 109(10)(a) have been satisfied.[116] Ms Low also contends that the terms of s 109(10)(b) have also been satisfied.[117] The questions which then arise are whether, having regard to the terms of the balance of s 109(10), the statutory discretion is engaged at all and, if so, whether and how it should be exercised in the present case.[118] The order which may be made by the court pursuant to s 109(10) is an order with respect to the distribution of the property which has been recovered by reason of the indemnity (here the two Wellington Street properties) with a view to giving the indemnifying creditor an advantage over others in consideration of the risk assumed by that creditor. That is, the purpose or intent behind making an order under s 109(10) must be to provide an advantage to the indemnifying creditor as a reward for taking the risk on the recovery litigation.[119] The use of the word “advantage” in this context connotes a comparison. The indemnifying creditor is to be given something more than the “others”. The comparison invited by the subsection is a comparison between the position of the indemnifying creditor with respect to his proven debts and the position of the remaining creditors with respect to their proven debts.[120] In my opinion, s 109(10) contemplates that the indemnifying creditor is already a creditor with one or more provable debts at the time when the indemnity is given and the property is recovered. The subsection is directed to giving an “advantage” to the indemnifying creditor in respect of the payment of those provable debts. It does not operate as the basis for the creation of a new and independent liability in the estate in favour of the indemnifying creditor.[121] Section 109(10) appears in a part of the Act which addresses the order of the payment of proven debts. In particular, it is part of a section which, in terms, identifies the order in which those debts are to be paid thereby specifying a set of statutory rules for prioritising the payment of specified classes of proven debts.[122] The “advantage” to be given to an indemnifying creditor is designed to reward that creditor for taking the recovery risk. The intention is to encourage such indemnities to be given. Understood in this way, the preference or priority is over other creditors for it is they who would otherwise rank equally or proportionately (subject to s 109(1)) in the distribution of the recovered property.[123] Sections 108 and 109 are not concerned with claims by persons other than creditors.[124] In my view, the Trustee and the bankrupt were correct when they submitted that the word “others” in s 109(10) is a reference to “other creditors” and that the 1985 amendment to s 109(10) was never intended to bring about a substantive change to the definition of the class of persons over whom the advantage was to be given.[125] The “distribution” of the recovered property to which reference is made in s 109(10) is a distribution among creditors. The section simply does not speak to a circumstance where property might revert to the bankrupt upon annulment of the bankruptcy under s 153A and s 154 of the Act nor does it speak to the possibility of part of the recovered property being returned to the donee under an impugned transaction.[126] These conclusions are supported by the reasoning underlying the submissions made by the Trustee and by the bankrupt in relation the question of whether s 109(10) is engaged at all in the present case. Those submissions are correct and I accept them.His Honour then reviewed authorities going to the construction of s 109(10) and further concluded:[135] In light of the above conclusions, the question of discretion under s 109(10) does not arise. However, against the possibility that I am wrong in the conclusions which I have reached, I will briefly address discretion.[136] Here, most of the commonly found discretionary factors are not present (as to which, see [Woodgate, in the Matter of Eaton (a Bankrupt) [2010] FCA 550, (2010) 8 ABC(NS) 65] at 66 [5]).[137] Ms Low was the only person who would benefit from the recovery action which she undertook. She did not provide the indemnities which she gave in order to benefit the estate and thus the body of unsecured creditors generally—there were no other creditors. There was no possibility that the recovered property would ever have to be shared with any other creditor. As submitted by the Trustee, the funding of the investigations undertaken by the Trustee and the recovery litigation subsequently prosecuted served the self-interest of the creditor.[138] Ms Low is entitled to receive full reimbursement for all funds paid to the Trustee in connection with the recovery action undertaken by him and payment in full of her provable debts. She is also entitled to interest on those amounts where interest is properly payable. These are Ms Low’s entitlements under s 82 and s 109(1)(a) of the Act.[139] Once Ms Low has been paid all of the amounts to which I have referred at [138] above, she will have been amply and appropriately rewarded for the risks which she took. She is not entitled to more than this. She is not entitled to any risk premium. Section 109(10) – over others including the bankrupt

Ratio Decidendi

Legal Principle Established

The submissions advanced on behalf of Ms Low as to the natural and ordinary meaning of the words employed in s 109(10) are rejected. In consideration of the risk assumed This natural and ordinary meaning of the words employed in s 109(10) being a comparison between creditors is only reinforced when attention is focussed upon the concluding words of s 109(10). Section 109(10) recognises that when making an order for the “just and equitable” distribution of property, a Court may give “consideration of the risk assumed”. The “risk” there referred to is that the monies advanced by an indemnifying creditor to fund (for example) speculative litigation may be lost and the prospect that an order for costs may be made against the trustee. Section 109(10), it is concluded, should be confined to conferring a comparative “advantage” in respect to the “risk” assumed by the indemnifying creditor. It may not be “just and equitable” for one creditor to assume the “risk” of funding speculative litigation which ultimately proves successful and thereby increases the pool of property but to nevertheless leave that pool available for rateable distribution. But for the “risk” assumed by the indemnifying creditor, the pool of property may well be less than would otherwise be the case. Section 109(10), it is concluded, should not be construed as conferring a “windfall” upon an indemnifying creditor beyond that which is necessary to give effect to the “advantage” of the indemnifying creditor over other creditors. The concern of s 109(10) is to confer that “advantage” by reference to that “risk”; the concern of s 109(10) is not to confer an “advantage” upon the indemnifying creditor beyond the “risk” assumed. This approach to the construction of the term “risk” is supported by the following observations of Campbell JA in Green v CGU Insurance Ltd [2008] NSWCA 148, (2008) 67 ACSR 105 at 127 to128:[83] The background against which courts developed a policy of usually not requiring liquidators to provide security for costs when suing in their own name included:…(e)Even when the liquidator is being funded by a creditor, in circumstances where the creditor is entitled to a preferential dividend under s 564 Corporations Act by reason of having funded the litigation, the most that the creditor can recover for its own benefit is a return of its outlay for costs, and a 100% dividend on its proved debt. A creditor who funds the litigation in those circumstances is thus doing nothing more than protecting its own legal right to be paid its debt by the company.Such observations, it must be recognised, were obiter. Also, his Honour was there addressing the terms of s 564 of the Corporations Act and in the context of resolving an application for security for costs. It may be that in more recent times the discretion has been exercised not by reference to the “risk” assumed by an indemnifying creditor but by reference to providing the indemnifying creditor with an indemnity and the public interest in stripping a wrongdoer of his “ill-gotten gains” so that they would be available for distribution between creditors: Re Cartco Pty Ltd (1994) 14 ACSR 357 at 358. Young J there observed in respect to s 564 of the Corporations Act:An earlier form of this section was reviewed by A H Simpson J in Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) B & P 38 at 46, where his Honour said that one considers whether it is appropriate to give creditors funding or indemnifying the liquidator an advantage by “weighing all the circumstances, the amount of risk run, the amount recovered, the proportion between the debts of indemnifying creditors, and those non-indemnifying creditors and all other matters.”It would seem from later cases, such as Re Geoghegan; Ex parte Official Assignee (1897) 18 LR (NSW) B & P 47; Re Ried (1946) 13 ABC 287; Re Bavistock (1946) 14 ABC 30, that up to the 1940s courts took the view that where the risk was relatively nominal the court often considered it fair to give to the funding creditors 25% of the value of their debt over and above their normal dividend. In more recent cases courts have adopted a more liberal attitude in favour of creditors giving indemnity and are not as influenced by the risk factor. Courts tend to be more liberal towards creditors who, had they not intervened, would have left the officers of the company who were guilty of misfeasances to enjoy their ill-gotten gains; see Re Passmore; Ex parte OfficialReceiver (1984) 56 ALR 181 at 186. See also Re Allied Glass Manufacturers Ltd (1936) 36 SR (NSW) 409, Re Ivermee (1974) 36 FLR 187 and Re Clarke; Ex parte Deputy Commissioner of Taxation (1980) 51 FLR 220 at 229; 12 ATR 130. These authorities should be applied to s 564 of the Corporations Law. In the instant case the amount involved is relatively small, the creditors put up some 35% of the value of the amount recovered and it seems to me that it is just, within the meaning of the section, that the order sought should be made and they receive the whole of the benefit of the amount recovered in proportion to their contribution for funding the action. The decision there referred to by Young J, namely Re Passmore; Ex parte Official Receiver in Bankruptcy (1984) 56 ALR 181, only reinforces the conclusion that any distribution of monies from a bankrupt estate it to be by reference to the “risk” assumed. Although the entire “balance” of monies recovered was there distributed amongst the indemnifying creditors, the facts were such that that amount largely went to pay proved debts. Northrop J there said (at 186): The condition precedent having been established, the court is empowered to make “such order as it thinks just and equitable with respect to the distribution of the proceeds of that property with a view to giving the indemnifying … creditors an advantage over other creditors in consideration of the risk run by … them in giving the indemnity”. It is not necessary to refer to the many authorities dealing with the nature of the discretion conferred by s 109(6) and its application to particular facts; it is sufficient to refer to Re Ivermee; Ex parte Official Receiver (1978) 36 FLR 187 [sic]. A consideration of the authorities discloses that over the years the courts have tended to adopt a more liberal approach in favour of creditors giving indemnities. There has been a tendency to depart from the earlier approach of attempting to balance finally the degree of risk incurred by the indemnifying creditors and the proportion of the proceeds of the property recovered to determine what amount should be paid in priority among the indemnifying creditors: compare, for example, Re Reid (1946) 13 ABC 287 . Nevertheless, as a first step, it is necessary to consider the risk incurred by the creditors who gave indemnities. In order to consider the risk, it is necessary to refer to the Supreme Court proceedings.After having considered the “risk”, his Honour concluded as follows (at 187): In its application, the applicant is seeking an order that the net amount of the sum of $12,780.87, after deduction of certain expenses, should be distributed among the indemnifying creditors. All creditors knew that the applicant was seeking that order, but none has appeared to oppose the making of an order in that form. Having regard to all the circumstances, in my opinion it is just and equitable that the court should order that of the balance remaining of the sum of $12,780.87 received by the applicant by means of indemnities for costs given by the four indemnifying creditors after the deduction of the necessary disbursements and fees referred to in the order and the applicant’s taxed costs of this application, two-thirds be distributed preferentially pro rata among the indemnifying creditors. This should enable each of those creditors to receive a substantial payment if not payment in full of their proved debts.