Lyons, J.R. v Allpass, J.G
[1990] FCA 546
•28 SEPTEMBER 1990
Re: JOHN ROBERT LYONS
Ex Parte: JOHN GEOFFREY ALLPASS and NATIONAL AUSTRALIA BANK LIMITED
No. QE812 of 1985
FED No. 546
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Pincus J.(1)
CATCHWORDS
Bankruptcy - order sought for distribution of property recovered under indemnity - principles in exercising discretion to give indemnifying creditor a priority considered - form of order considered.
Bankruptcy Act 1966 s.109(10)
HEARING
BRISBANE
#DATE 28:9:1990
Counsel for the applicant: Mr. D.R. Boughen
Solicitors for the applicant: Blake Dawson Waldron
Counsel for the respondent: Mr. D.K. Boddice
Solicitors for the respondent: Goss Downey Carne
ORDER
1. The trustee's costs of and incidental to this application be taxed and paid out of the estate.
2. The costs of National Australia Bank Limited of and incidental to this application, fixed at $500, be paid out of the estate.
3. The balance of the applicant's costs in relation to the application heard by the Honourable Mr. Justice Spender, namely the sum of $2,657.60, be paid out of the estate.
4. Of the net amount available for distribution to unsecured creditors generally, one half be paid in the first place to National Australia Bank Limited.
5. National Australia Bank Limited also receive, with the other creditors, its proportionate share of the remaining funds available for distribution.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
This is an application, on behalf of the trustee of the estate of the bankrupt, for an order with respect to the distribution of property recovered under an indemnity. The order sought is that the National Australia Bank Limited ("the Bank"), an indemnifying creditor, receive the sum of $38,509.35 in priority to other unsecured creditors. At the hearing, I was informed that the applicant desires that the National Australia Bank Limited receive the sum of $32,621.77 rather than the sum set out in the application; the higher figure was apparently inserted in error.
The application is not opposed, but it is necessary to determine whether the order sought is a proper one, under s.109(10) of the Bankruptcy Act 1966, which reads in part as follows:
"Where in any bankruptcy -
(a) property has been recovered, realised or preserved under an indemnity for costs of litigation given by a creditor or creditors ... 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".
The trustee's case, which is supported by the Bank, is that it would be just and equitable to give the Bank the priority sought in the application.
The bankrupt attained that status by a sequestration order made on 28 October 1985. His statement of affairs disclosed unsecured creditors of about $150,000 and no assets. At the first meeting of creditors, held on 21 November 1985, the only creditors represented were the Bank, said to be owed $59,624.63, and Diners' Club Limited, said to be owed $10,456.84. One of the Bank's representatives was a Mr. Elsworthy who, according to the minutes, "inquired from the Chairman of any further action proposed in relation to the claim made by Qantas". The minutes then record:
"The Chairman advised that, as there were no funds available to conduct the bankruptcy, the trustee would limit his inquiry to seeking advice from Qantas as to the validity of their claim. Depending on that advice the matter may then become one which should be referred to the Registrar's office for further investigation".
The meaning of "claim made by Qantas" is not quite clear, but I note that the statement of affairs shows an amount of $76,000.00 due to Qantas Airways Ltd. and an amount of $73,000.00 due by Qantas Airways Ltd., the latter being described as "superannuation and long service leave". On 4 December 1985 (two weeks after the creditors' meeting) the trustee wrote to Qantas Airways Credit Union, referring to previous correspondence of which I have no copy. The letter said:
"At a meeting of creditors held on 21 November 1985, I was instructed to pursue this matter further".
The minutes which I have quoted seem to contemplate the trustee's seeking advice from Qantas Airways Ltd. as to the validity of a claim by that company. On 24 December 1985, the applicant trustee wrote to Messrs Goss Downey and Carne, Solicitors, asking for advice as to "a claim for an undue preference against the Credit Union in the amount of $74,961.03 in respect of that company's appropriation of the amount due to Mr. Lyons on his retirement from Qantas Airways Limited". Those solicitors replied on 14 January 1986, saying that the payment by the bankrupt "may very well constitute an undue preference which is voidable". The solicitors' letter went on to say:
"We have also discussed the question with our client, the National Australia Bank and believe that it is appropriate to seek to have such payments set aside".
Nothing then seems to have happened for ten months; in November, National Australia Bank agreed "to indemnify the trustee against all costs associated with proceedings in the Federal Court", apparently meaning proceedings of the kind foreshadowed. Shortly thereafter, an application was made in this Court and it was ultimately successful; on 9 May 1989, Spender J. made an order requiring payment by Qantas Staff Credit Union Limited of the sum of $64,379.94, together with interest at the rate of 12.5% from 28 October 1985 until the date of the order. The Court also required the respondent to pay certain costs; the interest ordered amounted to $24,362.95 and the costs were settled at $7,500.00. The Bank is liable under the indemnity to pay a sum of $2,657.60 by way of solicitors' costs on the application to Spender J.
According to the trustee's figures, the assets in the estate as at 11 July 1990 amount to $106,682.94; this is derived from the payment made under the orders of Spender J. and interest paid on the investment of those moneys. I assume that further interest will have accumulated by now, but its amount is unstated. The claims of the creditors (including the Bank) amount to $233,413.77. Costs are as follows:
Petitioning creditors taxed costs $ 1,597.00 Trustee's professional costs $25,000.00 Additional costs payable in respect of the successful application against Qantas Staff Credit Union Ltd. $ 2,657.60 Costs of the present application $ 6,000.00 ____________ $35,254.60 ____________
Of these figures, the largest two are estimates only. In addition, the trustee estimates disbursements (principally income tax) at $13,000, making the total deductions from the figure of $106,682.94 mentioned above, the sum of about $48,254.
In the result, if these estimates are correct, the amount available for distribution to creditors seems likely to be a little under $60,000. The amended sum sought to be paid to the Bank in priority to other unsecured creditors is arrived at by deducting all costs from the amount available for distribution, dividing the resultant figure ($59,928.34) in half and then adding on the balance of costs of the application, due to the Bank ($2,657.60).
The type of order sought was said to be based upon that which I made in Re Webb, Ex Parte Taylor (1987) 75 ALR 139. If it is made, then the Bank will get about $37,000, or over 60% of its debt, whereas the other creditors will receive only about 12% of theirs. Counsel pointed out that, to obtain this advantage, the Bank had undertaken a considerable risk in costs.
Apart from the Bank, there were other substantial creditors, including the Commonwealth Bank of Australia which was owed over $50,000. It does not appear that any of these creditors were invited to give an indemnity. It can be seen that, from an administrative point of view, a trustee may have difficulty in arranging to make available an opportunity to indemnify to the creditors generally. If the creditors are numerous, and a substantial proportion of them undertake to indemnify, then the trustee may have a difficult task in enforcing the indemnity, in the event that the indemnified proceedings prove to be unsuccessful. It is plainly much more convenient to take an indemnity from one, or perhaps two, substantial creditors, such as banks. It was argued that the authorities show that the trustee's not having approached any other creditor for an indemnity is an irrelevant circumstance. Reference was made to Re Lance, Ex Parte The Official Assignee (1900) 21 NSWLR 29. Under a similar provision, Walker J. held that the creditors who had been given no opportunity to indemnify had nothing to complain of. He said:
"The creditors say they did not know of the indemnity, but that only shews that they did not make the enquiries that a careful and prudent creditor might and should have made". (33)
At least as far as the present case is concerned, I do not see that any blame can attach to creditors who made no inquiries. There appeared to be little or nothing in the estate and one can understand other creditors, particularly the smaller ones, thinking that the administrative expense and trouble involved in keeping in touch with the trustee would not be justified. I would not accept that (as was submitted here) the trustee's failure to invite creditors generally to offer an indemnity is always irrelevant in exercising the discretion given by s.109(10). Sometimes the indemnity may relate to the recovery of sums which seem likely to be easily recoverable, or the circumstances may otherwise be such as to make it prudent and fair to inform the creditors generally as to the proposed proceedings, to enable them to join in as indemnifiers.
It should be added that here the claim which succeeded before Spender J. involved questions of some complexity; it was not straightforward and I take that into account in favour of the trustee's application. I also note that, although the other creditors have been informed of the making of the application, none of them has appeared nor indicated opposition in any other way.
I have said that the order sought is based upon that which I made in Re Webb - namely that the indemnifying creditor gets half the net amount recovered and the other half is distributed pro rata. The circumstances of the present case, although different from those dealt with in Re Webb are, considered as a whole, no less favourable to the applicant; it is my opinion that an order should be made along the same lines as in Re Webb.
It should be added that the Bank appeared to support the application. It was entitled to do so, but I would not wish it to be thought that parties appearing to support an application will necessarily obtain costs out of the estate. The Bank's costs of this application will be limited to $500.
In framing the orders, I have kept in mind that the amount mentioned in the application is based upon mere estimates of such items as trustee's costs. It seems to me safer to set out the principle of distribution in the order rather than to fix a precise figure, based on estimates of costs. It should further be noted that the whole of the sum available for distribution in the estate comes from the indemnified proceedings and that simplifies the form of order.
The orders will be as follows:
1. That the trustee's costs of and incidental to this application be taxed and paid out of the estate.
2. That the costs of National Australia Bank Limited of and incidental to this application, fixed at $500, be paid out of the estate.
3. That the balance of the applicant's costs in relation to the application heard by the Honourable Mr. Justice Spender, namely the sum of $2,657.60, be paid out of the estate.
4. Of the net amount available for distribution to unsecured creditors generally, one half be paid in the first place to National Australia Bank Limited.
5. That National Australia Bank Limited also receive, with the other creditors, its proportionate share of the remaining funds available for distribution.
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