Miller, D.E.E v The Official Trustee in Bankruptcy

[1994] FCA 653

RE: DORIS EMILY ELIZABETH MILLER
EX PARTE: THE OFFICIAL TRUSTEE IN BANKRUPTCY
No. NB739 of 1993
FED No. 653/94
Number of pages - 7
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE NEW SOUTH WALES
BEAZLEY J

CATCHWORDS

Bankruptcy - application under s 135(1)(b) of Bankruptcy Act 1966 - application for court to grant leave for the Official Trustee to sell interest that the trustee may have in an approval to operate nursing home beds - bankrupt treated as party to the application - factors to be taken into account in court granting leave for the trustee to proceed with the transaction.

Bankruptcy Act 1966

HEARING

SYDNEY, 28 September, 7, 8 and 9 March 1994
#DATE 2:9:1994

The applicant appeared in person.

Counsel for the Respondent: Mr J K Chippindall

Solicitors for the Respondent: Beilby Poulden Costello

ORDER

THE COURT ORDERS THAT:

1. The Official Trustee be granted leave pursuant to section 135(1)(b) of the Bankruptcy Act 1966 to sell for a sum of money or accept a sum of money in consideration for sale of any interest it may have in an approval pursuant to the National Health Act to operate Nursing Home beds referred to in the deed of release exhibited to the affidavit of Paul Dimitrios sworn on 27 August and filed in support of his application.

2. The costs of the application to paid be out of the estate of Doris Emily Elizabeth Miller.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

(Section 135 Application)
BEAZLEY J The Official Trustee in Bankruptcy (the trustee) as the trustee of the estate of Doris Emily Elizabeth Miller, has applied to the court for an order pursuant to the provisions of s135(1)(b) of the Bankruptcy Act 1966 for leave to sell any interest the trustee may have in an approval to operate certain nursing home beds at the Kiama Private Nursing Home in Victoria. The application arises out of and pursuant to the terms of a Deed of Release made 26 August 1993 (the Deed of Release) between the Official Trustee and one Nancy Charlotte Bartlett (Mrs Bartlett).

1. Section 135(1)(b) provides:
   

"The trustee may, with the permission of the creditors granted by resolution passed at a meeting of the creditors, with the permission of the committee of inspection or with the leave of the Court, do all or any of the following things:

...

(b) accept, without terms or conditions, or subject to terms and conditions, a sum of money payable at a future time as the consideration or part of the consideration for the sale of any property of the bankrupt;".

1. Mrs Miller opposes the grant of leave. Initially, the Official Trustee raised a question as to Mrs Miller's right to appear on the application. However, as Mrs Miller was named as a party to the application and apparently was served with it, and as no further argument was raised in respect of her right to do appear, she was treated as a party to the application with the right to call evidence, to cross-examine and to make submissions.

2. The Deed of Release recites that the trustee and Mrs Bartlett each claims either the approval to operate the Kiama Private Nursing Home located in Victoria, or the right to transfer the benefit of the approval. They each also claim to be entitled to certain chattels in the nursing home. By the Deed, the trustee and Mrs Bartlett have agreed to settle their respective claims in respect of the approval and the chattels. Clause 1 of the Deed of Release provides:
   

"(1) Subject to the payment of $25,000 ("the settlement sum") by Mrs Bartlett to the Official Trustee, the Official Trustee will upon payment release and will be deemed to release all of its claims and all interests it may have in:

(a) The Approval or right to transfer the benefit of the Approval;

(b) The Chattels

in favour of Mrs Bartlett."

1. The implementation of the release in clause 1 is expressly made subject to the Commonwealth Department of Health granting approval to Mrs Bartlett or her nominee to operate the nursing home beds at the premises of the Kiama Private Nursing Home and to the court granting leave pursuant to s135. The Deed of Release also contains a covenant by Mrs Bartlett that she will not institute any proceeding against the trustee nor join the trustee in any proceeding seeking damages, judgment, interest, costs or other orders consequent upon any action taken by the trustee in respect of the s135 application or otherwise in respect of the nursing home business, and, by the Deed releases the trustee from all such claims.

Grounds of opposition to the Section 135 Application
6. Mrs Miller opposes the application upon the following bases: (i) the sum referred to in the Deed is not a reasonable sum; (ii) the trustee had negotiated with Mrs Bartlett on the basis that she potentially owned whatever right subsisted in the approval to conduct the nursing home beds and threatened litigation to protect that right, with the consequence that the trustee had not negotiated for the best price reasonably obtainable; (iii) the trustee should have investigated a wider field of possible purchasers, so as to ensure that the best price reasonably obtainable was in fact obtained; (iv) and the trustee had failed to realise that there was a "hidden agenda" in the proposed purchase by Mrs Bartlett. In order to understand these various claims, and also to determine whether the court ought to grant leave it is necessary to have regard to the circumstances in which Mrs Bartlett and the trustee respectively claim her and his right to the approval arise.

Background
7. The allocation of beds to and the conduct of nursing homes, including the financing thereof, is governed by the provisions of the National Health Act 1953. That is complex legislation and this is not the occasion to examine its intricacies. However, there was evidence that the relevant effect of the legislation was that only an approved operator may operate a nursing home, that approval is given to approved operators to operate a specified number of nursing home beds within a nursing home and that from time to time, an approval is transferred from one approved nursing home operator to another. A transfer of nursing home beds can only occur with the assent of the Minister or the Minister's delegate. The issues which a delegate would usually take into account in determining whether to assent to the transfer of an approval are: the Department's established planning requirements in regard to the distribution of nursing home beds and the need for the applicant for approval to operate the nursing home beds to be or become an approved operator under the National Health Act. Matters which would be taken into account in considering an application for approved operator status include the applicant's experience in the aged care field, as well and an applicant's financial and legal integrity and ability to successfully operate such a nursing home facility. The Department is also entitled to revoke the approval granted in relation to any specified nursing home beds. However, the legal position as to what is "owned" by a person who becomes the licensee of a nursing home and precisely what can be sold, is unclear. Because of this uncertainty, the Deed of Release is framed in terms of "approval" or "right to transfer the benefit of the approval".

1. A sequestration order was made against the estate of Mrs Miller on 23 March 1993. Prior to the date of the sequestration order, Mrs Miller had conducted the Kiama Private Nursing Home at 15 Staniland Avenue, Malvern, Victoria. The real estate of the nursing home is owned by Mrs Bartlett, who purchased it from I A and E J McGoldrick, probably in April 1988.

2. Mrs Miller commenced her involvement with the Kiama Nursing Home when, on 1 April 1990, she became manager for a previous operator, Motack Pty Limited, who leased the nursing home premises. Shortly thereafter, Mrs Miller purchased the nursing home business from Motack and by Assignment of Lease dated 8 March 1991 entered into with Motack and Mrs Bartlett (the Assignment of Lease), Mrs Miller took an assignment of Motack's lease of the nursing home premises. Mrs Miller says that this Assignment of Lease was a temporary measure pending the negotiation of a new lease with Mrs Bartlett.

3. Mrs Miller was approved by the Department of Community Services and Health for the purposes of payment of Commonwealth Nursing Home Benefits in respect of the 18 beds at the Kiama Private Nursing Home as from 15 April 1990. On 4 May 1990 Mrs Miller was advised by the Health Department, Victoria, that approval had been granted on 3 May 1990 for the transfer of Registration/Proprietorship of the Kiama Private Nursing Home from Motack Pty Limited to her.

4. The details of the various leasing arrangements entered into by Mrs Miller and Mrs Bartlett are relevant and are probably the fundamental considerations in determining whether the court should give its approval to the trustee entering into the Deed of Release. The date of assignment recorded in the Assignment of Lease was 8 March 1991. The Assignment of Lease specified the lease which was being assigned as being a 5 year lease dated 15 April 1988 between Mrs Bartlett and Motack Pty Limited. There is other evidence that, by lease dated 28 March 1988, Motack Pty Limited leased the nursing home premises from I A McGoldrick and E J McGoldrick, the previous owners of the realty, for a term of 5 years commencing on 1 April 1988 (the McGoldrick/Motack lease). It is not known whether there is a clerical mistake in the Assignment of Lease or whether Mrs Bartlett and Motack Pty Limited entered into a new lease after she purchased the realty. If they did, the lease between Mrs Bartlett and Motack is not in evidence. Another confusion arises out of a letter written by Mrs Bartlett's solicitor dated 26 January 1993 in which they advise that the reference to the commencement date of 15 April 1988 in the Assignment of Lease was incorrect and should have been 1 April 1988.

5. The McGoldrick/Motack lease contained the following provision:
   

"17(f) At the end or other sooner determination of the said term (the Lessee shall) deliver the Licence of the said Nursing Home and premises to the Lessor or any Mortgagee and assign transfer and use its best endeavours to cause or procure the Licence and permit then in existence in respect of the said Nursing Home and premises to be assigned transferred or granted as cause may require unto the Lessor or any Mortgagee or unto such person as the Lessor or any Mortgagee shall appoint";

and the Assignment of Lease contained this provision:

"1. In consideration of these presents the Assignor as beneficial owner DOTH HEREBY with the consent of the Lessor hereby testified ASSIGN AND TRANSFER unto the Assignee ALL THAT the premises in the Lease comprised and thereby leased or intended so to be with the appurtenances and all the estate and interest of the Assignor therein and thereto which without limiting the generality of the foregoing shall include all options for further terms and rights of first refusal or options to purchase (if any) to HOLD the same unto the Assignee for the residue of ther (sic) term now to come and unexpired of the Lease subject henceforth to the payment of the rent reserved by the performance and observance of the covenants on the part of the Lessee and to the conditions contained in the Lease."

1. On 22 July 1992, by an Assignment of Lease, Mrs Miller (as Mrs Shearn) assigned her interest in the lease of the Kiama Private Nursing Home premises to her daughter-in-law (the second Assignment of Lease). Mrs Bartlett was a party to the second Assignment of Lease. Recital A to the second assignment of lease provided:
   

"By a Lease described in Item 2 of the Schedule ("the Lease") made between the Lessor of the one part and MOTACK PTY LIMITED ("the original Lessee") of the other part, the Lessor demised to the original Lessee ALL THOSE PREMISES THEREIN (being the Kiama Nursing Home premises)...and subject to the covenants, conditions and stipulations contained in the Lease".

The Lease described in Item 2 is one commencing on 15 April 1988 and otherwise is identical to that referred to in the Assignment of Lease. Mrs Hirtzel subsequently obtained funding to enable her to purchase the nursing home business. By letter dated 26 January 1993 from solicitors acting for Mrs Bartlett, Mrs Hirtzel was advised that she had failed to exercise the option for renewal of the lease in accordance with the option provisions in the lease. She was advised that Mrs Bartlett required the premises to be vacated and the delivery up of the licence pertaining to the nursing home. The latter obligation allegedly arose because of the existence of the term in the lease as contained in clause 17(f) of the McGoldrick/Motack lease. By letter of the same date, the same solicitors wrote to Mrs Hirtzel, advising that Mrs Bartlett was prepared to purchase all equipment used in connection with the running of the nursing home for the sum of $35,000, conditionally upon her application for a planning permit for extensions to the nursing home being successful.

1. By letter dated 26 March 1993 the Department wrote to Mrs Miller (as Mrs Shearn) reminding her of her responsibilities under the National Health Act and that the status of the Kiama Private Nursing Home as an approved nursing home was subject to her meeting the conditions of approval. The letter stated:
   

"This includes the requirement that care provided in the home satisfies the standards determined under the Act. Further, if the lease of the home expires I will be required to review the approval of the home. You should also note that the approval of the beds is dependant upon the approval of the home itself. If as a result of my review the approval of the home is cancelled there will be no prospect of you selling or transferring the bed rights."

1. Mrs Miller stated that by the end of March it was apparent to her that re-location of the nursing home was out of the question, and that the only option was to close the home to comply with the landlady's orders to surrender possession of the nursing home by 15 April 1993. On 5 April 1993, Mrs Miller wrote to the Commonwealth Department of Health, Housing and Community Services advising of the closure of the home and requesting support in the relocation of the residents, advising that the residents had to be relocated by 13 April 1993 as the lease owner was required to return the premises to the owner on 15 April 1993. On 8 April 1993 the applicant obtained Orders from this court restraining Mrs Hirtzel from disposing or in any way dealing with all or any of the property or the business operating as Kiama Private Nursing Home at 15 Staniland Avenue Malvern. By letter dated 8 April 1993, the Department of Health, Housing and Community Services advised Mrs Miller that the approval of the premises of the Kiama Private Nursing Home would be suspended until further notice commencing at 10am on Friday 9 April 1993. On that day, all residents at the nursing home were removed by the Department of Health from Kiama Nursing Home and relocated to the Caulfield Hospital.

2. Mrs Miller submitted that Mrs Bartlett has no entitlement to the approval for the nursing home beds and that a representative of the Department of Health, at a meeting held on 10 March 1993, had said that if there was no lease of the Kiama Nursing Home, the beds would not revert to Mrs Bartlett in accordance with the purported terms of the Lease.

3. Mrs Bartlett has maintained at all times that she has the benefit of a provision in the terms of clause 17(f) of the McGoldrick/Motack lease which is set out above and that she thereby acquired an entitlement to obtain a transfer to her of the approval given by the Department of Health to operate the nursing home beds. However, as the lease between Motack and Mrs Bartlett is not in evidence, I do not know whether, if there was such a lease, and if that is the lease which was assigned, it contained a provision in the terms of clause 17(f) of the McGoldrick/Motack lease. There was no clause in terms similar to clause 17(f) of the McGoldrick/Motack lease contained in the Assignment of Lease. A question also arises whether Mrs Bartlett maintained the benefit of such a provision (assuming of course that it was a term of whatever lease was assigned). However, Mrs Bartlett has threatened legal action to protect that interest.

4. There is no dispute between the parties that there was no renewal of whichever lease was subject of the Assignment of Lease at the expiration of the 5 year term. Nor is there any dispute that the transfer of the approvals to operate nursing home beds is subject to Departmental approval. As I have already stated there is a question whether there is any legal basis upon which beds can be transferred, notwithstanding that the right to transfer is subject to Departmental approval. Whatever be the legal position, there is no doubt that there is a market for bed licences/approvals, which carries a current value of approximately $8,000 to $10,000 per bed. As is clear from the letter from the Department dated 26 March 1993, the Department recognises this practice. Mrs Miller submitted that given the current market value of beds, the offer made by Mrs Bartlett to settle her rights in respect of the nursing home for the sum of $25,000 is inadequate. This is the more so when it is remembered that the amount includes certain equipment within the nursing home, which has been valued on an at auction basis of approximately $7,500, and on an in situ basis in a much higher amount and in respect of which Mrs Bartlett had conditionally offered to purchase at a price of $35,000. It should also be noted that Mrs Bartlett alleges that the items of equipment in question are fixtures and therefore part of the realty.

5. Mrs Miller further pointed to the evidence of a potential purchase by a Mrs Taubman who was prepared to pay $10,000 per bed, subject to an adjustment of the amount of any negative loadings which the Department might introduce into the subsequent payment for these nursing home beds. Currently, the Department has advised that the amount of negative loading is approximately $115,000. The Trustee asserts that Mrs Taubman's offer to purchase the approval for the nursing home beds was not an option which the Trustee could reasonably entertain, as Mrs Taubman refused to agree to indemnify the Trustee in respect of any claim that Mrs Bartlett might make, should the Trustee sell to Mrs Taubman, and secondly, Mrs Taubman insisted that the Trustee transfer to her its "approval in respect of the nursing home beds" rather than the Trustee's "interest" in the approval for the nursing home beds. This latter issue formed part of a consistent submission put by counsel for the Trustee, namely that the form of the legislation was such that it was difficult to define what it was that an operator of a nursing home "owned" which could be sold.

6. There is of course a vast difference between what the trustee will receive under the deed of release if the court gives its consent to the trustee entering into the Deed of Release and what the market value of the beds is, and what Mrs Miller contends is obtainable for the beds from a buyer such as Mrs Taubman. However, Mrs Bartlett has threatened legal proceedings against the trustee on the basis of the rights to those beds which she says are hers pursuant to a clause in the terms of clause 17(f). It is not possible on the evidence before me to determine the likelihood of success of those proceedings. However, the fact of the threat of the proceedings is a factor which should be taken into account in determining whether the court should give its approval to the transaction proposed in the Deed of Release, as is also the fact that Mrs Bartlett may in any event be entitled to the transfer of the approval without the payment of any consideration whatsoever. Further, there is no evidence of any other purchaser who is prepared to deal with the trustee on the terms the trustee requires, namely by accepting a transfer of the trustee's interest in the approval providing an indemnity in respect of any proceedings which Mrs Bartlett might bring. I should add here that I was concerned that the trustee had not taken sufficient action to determine whether there were other buyers in the market and I accordingly allowed an adjournment to allow Mrs Miller to present evidence of potential purchasers who had exhibited interest in the purchase of the approval. However, at the end of the day there it was only Mrs Taubman who materialises as a firm offeror, but, as I have said, upon terms not suitable to the trustee. I should add at this point that I consider that the trustee acted reasonably in insisting upon the terms which he did. There is also the evidence of Mrs Miller of what she was told by the Department of Health on 10 March 1993, namely, that if there was no lease in existence the beds would not revert to the owner, which is to be taken into account. Having regard to all of these circumstances I am of the opinion that the trustee should have leave to enter the transaction.