Nicholls v Hopkins (A Bankrupt)
[2009] FMCA 1214
•15 December 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| NICHOLLS v HOPKINS (A BANKRUPT) | [2009] FMCA 1214 |
| BANKRUPTCY – Alleged assignment by trustee of action by bankrupt in Magistrates’ Court of Victoria – construction of Deed of Indemnity – application for rectification. |
| Bankruptcy Act 1966, ss.30, 60(2), 109(10), 178 |
| Freeman v National Australia Bank Ltd [2004] FCAFC 318 RHG Mortgage Securities Pty Ltd & Elektra Purchase No 19 Ltd [2009] NSWSC 258 |
| Applicant: | CARLEY NICHOLLS |
| Respondent: | THE TRUSTEE OF THE PROPERTY OF JAMES BARRIE STUART HOPKINS, A BANKRUPT |
| File Number: | MLG 1066 of 2009 |
| Judgment of: | Burchardt FM |
| Hearing date: | 18 November 2009 |
| Date of Last Submission: | 18 November 2009 |
| Delivered at: | Melbourne |
| Delivered on: | 15 December 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr J. Evans |
| Solicitors for the Applicant: | Voitin Lawyers |
| Counsel for the Respondent: | Mr M. Lhuede |
| Solicitors for the Respondent: | Piper Alderman |
ORDERS
The application be dismissed.
The applicant pay the respondent’s costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 1066 of 2009
| CARLEY NICHOLLS |
Applicant
And
| THE TRUSTEE OF THE PROPERTY OF JAMES BARRIE STUART HOPKINS(A BANKRUPT) |
Respondent
REASONS FOR JUDGMENT
The relief sought by Ms Nicholls, the applicant, is in two alternatives. Her primary position is that the Court declare that a cause of action in the name of her bankrupt husband, Mr Hopkins, in a Melbourne Magistrates’ Court proceeding, as having been assigned to her by the former trustee of the bankrupt.
Her alternative remedy sought is an order to rectify a Deed of Indemnity between Ms Nicholls and Desmond Anthony Ryan dated
27 February 2009 so that the assignment can be effective.
She also seeks, as an ancillary declaration, that the Court declare that the present trustee, the respondent, is wrongly obstructing the Magistrates’ Court proceeding and an injunction to restrain further such conduct.
For the reasons that follow, I do not think the Court should make the declarations that the applicant seeks, nor that the Deed of Indemnity should be rectified.
It should be noted that an alternative declaration, set out in paragraph 3 of the amended application filed in Court on 18 November 2009, was not pressed in oral argument. I would not have been minded to declare that the respondent is bound by the deed entered into by Ms Nicholls and Mr Ryan in any event.
The Facts
It is only possible to understand the arguments of the parties in this case if the facts are fully set out.
Although the pleadings are not before the Court (I did look at the statement of claim but handed it back), it is common cause that in 2006 the bankrupt started proceedings against his former employers for wrongful dismissal and other related matters. The quantum of the claim is asserted by the respondent to be between about $80,000 and $130,000.
By December 2008, according to Ms Nicholls, the bankrupt was to her knowledge in serious financial difficulty. At a time which more probably than otherwise was in December 2008, Ms Nicholls purported to enter into an arrangement with the bankrupt whereby the ongoing Magistrates’ Court action would be funded by her in return for 85 per cent of the profits. Ms Nicholls in her affidavit says that that agreement took place in late December or early January 2009 but in his statement of affairs signed on 22 December 2008 at paragraph 7, the bankrupt stated “Litigation funding arrangement in place.” And there can be no doubt that this was the arrangement to which he was referring.
According to the trustee in bankruptcy, the bankrupt had already committed an act of bankruptcy by that time, but he went bankrupt not on the consequential bankruptcy notice but on his own petition. His date of bankruptcy was 7 January 2009. A Mr Ryan was appointed as the trustee in bankruptcy.
On 27 February 2009, a document headed Deed of Indemnity was entered into between Mr Ryan and Ms Nicholls, the terms of which I shall return to in greater detail. It emerged in cross-examination of
Mr Ryan that that document was drawn by Voitin Lawyers, allegedly on Mr Ryan’s behalf, although they were the lawyers previously for the bankrupt. In a report to creditors dated 13 March 2009 (exhibit WBW-4), Mr Ryan stated at paragraph 8:
“Mr Hopkins indicated in his SOA that he commenced a legal action for unfair dismissal prior to the date of bankruptcy. It would appear that the legal action may be an asset of the bankrupt estate. I have advised the defendant’s solicitor that I intend to continue the legal action on behalf of creditors. I will advise creditors of any further developments in this regard.”
On 27 February 2009, Mr Ryan had written to the solicitors for the defendants in the Magistrates’ Court proceeding stating relevantly:
“As previously advised, I do elect to continue with the legal action as scheduled. I have engaged John Voitin of Voitin Lawyers (contact details cited) to act on my behalf in this matter.”
It emerged in cross-examination of Mr Ryan that he had never in his time as an insolvency trustee previously dealt with a chose in action and that he had not sought any independent legal advice prior to entering into the Deed of Indemnity.
On 15 April 2009, Mr Ryan was effectively ejected as trustee in bankruptcy and the current respondent, Mr White, was appointed. It is of note that Mr White did not find in the papers bequeathed to him any copy of the Deed of Indemnity.
It seems clear that the first time the trustee became aware of the Deed of Indemnity was when he received a copy from Voitin Lawyers on
24 July 2009.
I also note that Voitin Lawyers have lodged a proof of debt in the bankrupt estate of the bankrupt claiming a sum for legal fees of $20,000 for the period ending 31 January 2009, which obviously seems likely to include some legal work performed after the bankruptcy itself.
The Deed of Indemnity
The Deed of Indemnity, exhibit CN2, contains the following recitals and agreed matters.
A)
James Hopkins was the Plaintiff in Magistrates’ Court
case No. U00660238 against Structural Admin Services Pty Ltd and Meridian Concrete Pty Ltd (“the proceeding”) and subsequently entered into bankruptcy;
B)Ryan was appointed the trustee in bankruptcy and elected to continue with the proceeding as it was deemed an asset of the estate;
C)Nicholls is a creditor of the bankrupt estate and has agreed to indemnify Ryan from all legal costs of the proceeding on the basis that Ryan elects to continue in the proceeding;
D)The parties agree to be bound by the terms contained in this Deed of Indemnity.
It is agreed as follows:
1)The Proceeding
Ryan elects to continue the proceeding on the basis that Nicholls indemnifies him from all legal costs incurred as a result of Ryan electing to continue.
2)Guarantee and Indemnity
Nicholls agrees to wholly guarantee and indemnify Ryan for all legal costs incurred as a result of Ryan electing to continue in the proceeding. The guarantee and indemnity is without exception and includes any costs awarded against the trustee. Further, Nicholls agrees to make payment of all legal fees incurred by the solicitors acting on behalf of Ryan and acknowledges that if there is a costs order made against Ryan, then Nicholls will be liable for the costs of Ryan’s solicitors as well as those ordered against Ryan. This guarantee and indemnity is irrevocable and is the basis of Ryan electing to continue with the proceeding.
3)Consideration.
In consideration of the guarantee and indemnity given by Nicholls, Ryan agrees that all and any money obtained by way of order or settlement from the proceeding shall be distributed as follows:
a. Firstly payment is to be made of all legal fees and disbursements
b. The balance to be split between Ryan (on behalf of the bankrupt estate of James Hopkins) and Nicholls in accordance with the agreement previously entered between Nicholls and James Hopkins, namely that Nicholls will receive 85% of the proceeds after legal costs and disbursements.
It should be noted in passing that there is no document other than the letter to the solicitors for the defendants in the Magistrates’ Court proceeding that is capable, in any way, of constituting the election referred to in recital B, and indeed the evidence suggests that there is no such document. It must be presumed to refer to a state of mind only.
It should also be noted that there has been no application to this Court or any other Court to proceed with the action in the Magistrates’ Court with leave of the Court. There has been no application to substitute either Mr Ryan and/or Ms Nicholls as the plaintiff in that proceeding.
It should also be noted that on 26 May 2009, following correspondence between the parties, the trustee Mr White informed Mr Voitin that:
“After careful consideration regarding the nature of the proceeding, I advise that I do not wish to continue with the action.
Notwithstanding this, I advise that I have no objection to the bankrupt continuing with the proceeding insofar as it would appear to represent a claim for unpaid income.”
Whatever the meaning of that last sentence, both parties expressly proceeded on the footing before me that the wrongful dismissal action in the Magistrates’ Court of Victoria was one which vested in the trustee in bankruptcy and was not personal to the bankrupt so that he could proceed with it without leave of the trustee and/or the Court on his own behalf.
Applicant’s Submissions
Both the applicant’s written and oral submissions, naturally enough, followed a similar line. The primary submission made was that the effect of the Deed of Indemnity was to effect an assignment by
Mr Ryan of all his rights in respect of the proceeding on the basis that
Ms Nicholls would pay for the costs and get 85 per cent of the net proceeds. She sought rectification in the alternative.
It was put that both Ms Nicholls and Mr Ryan, who were after all the parties to the Deed, had each sworn an affidavit from which their common intention could be gleaned. It was put that it was their intention that Ms Nicholls would continue to conduct the proceeding on behalf of the plaintiff and receive 85 per cent of the net proceeds for doing so.
It was put that the principal reason why the Court should come to the conclusion that an assignment was the net effect of the Deed was that in the event that it were otherwise, the agreement would be inconsistent with the provisions of s.109(10) of the Bankruptcy Act 1966
(“the Act”) which would make the application of any such funds discretionary to the Court. It was put in substance that rectification of the agreement was appropriate to give effect to the intention of the parties and thus recognise the true agreement between them.
It was submitted that once Mr Ryan had elected to continue the proceeding pursuant to s.60(2) of the Act, there was no scope for a second election by Mr White not to continue. It was put that if the ultimate outcome was an assignment to Ms Nicholls (whether through the Deed or by rectification), then Mr White’s conduct in advising that he did not intend to pursue the action was a wrongful interference with Ms Nicholls’ accrued rights in respect of the proceeding.
Respondent’s Submissions
The primary position adopted by the trustee was that the Deed of Indemnity spoke for itself and at best amounted to an assignment of the end proceeds of the action. It was submitted that s.109(10) of the Act concerns advances of moneys that have already occurred and that thus the section had no work to do since it is by no means clear that
Ms Nicholls has, indeed, advanced any moneys to Mr Ryan or otherwise.
Formal opposition was made to the amendment to the application on the footing that allegations against a trustee made under s.178 are sufficiently serious that it is inappropriate to allow late amendment. I do not uphold that submission, but I do accept that the authorities emphasise the serious nature of applications under s.178. The Full Court of the Federal Court in Freeman v National Australia Bank Ltd [2004] FCAFC 318 in the context of a refusal by a trustee to pursue litigation, appears to have upheld findings by Spender J that the Court would need to be satisfied “that the trustee has reached a perverse or necessarily wrong conclusion about the prospects of success of the proposed litigation being successful” or that the “decision of the trustee not to prosecute proceedings ..” be “shown to be either unjust or unreasonable.”
Without setting them out at length, I would incorporate, by reference, the respondent’s submissions set out at paragraphs 4 to 6 of his written submissions.
It should also be noted that, to the extent that it might be necessary, I would grant an extension of time to enable the s.178 application to be brought. Although the trustee formally opposed any such extension, it was not put that there was any prejudice occasioned thereby, and I think it is fair and reasonable to allow the applicant to ventilate her claims in full.
I have had due regard to all the matters raised by the respondent’s written submissions, which are comprehensive. Because of the conclusions at which I have arrived, it is not necessary to set them out in further detail.
The Meaning of the Deed
In my view, the Deed of Indemnity is perfectly straightforward and means what it says. Recital C says “that Ryan elects to continue in the proceeding”.
Paragraph numbered 1 of the agreement is, “Ryan elects to continue the proceeding on the basis that Nicholls indemnifies him …”
In paragraph 2 of the matters agreed it is relevantly stated that, “Nicholls agrees to wholly guarantee and indemnify Ryan for all legal costs incurred as a result of Ryan electing to continue in the proceeding.”
There is nothing in the Deed of Indemnity that contemplates an assignment of a chose in action. Rather, there is a commercial deal whereby in exchange for an indemnity for all costs, Mr Ryan elected to continue the proceeding and to give Ms Nicholls 85 per cent of the moneys gained thereby.
It should be noted that there is nothing in the Deed of Indemnity that requires Ms Nicholls to pay costs as and when they arise. Rather, it is an obligation on the part of Ms Nicholls wholly to reimburse Mr Ryan at the end of the proceeding, whether the case was successful or otherwise.
In my view, it is perfectly clear that on the words of the Deed of Indemnity on their face, there was no assignment of anything to anybody.
Rectification
In oral submissions, the applicant’s counsel went close to conceding that the Deed of Indemnity did not reflect the asserted agreement between the parties. It was on this footing that the alternative of rectification was sought.
I have been referred by the respondent to the decision of Einstein J in RHG Mortgage Securities Pty Ltd & Elektra Purchase No 19 Ltd [2009] NSWSC 258. I adopt, with respect, the submission of the respondent that that decision provides a helpful and concise setting out of some of the principles relating to the issue of rectification. I refer, in particular, without setting them out, to his Honour’s very helpful, if I may respectfully say so, remarks at [16]–[18].
Paraphrasing rather clumsily, amongst those things of which the Court must be satisfied, there must be clear and convincing evidence that the document embodying the agreement does not reflect the parties’ common intention, and this sets a very high standard. It is for the applicant to establish that the true intention of both parties was something other than that recorded in the executed instrument, and that the document was executed through some form of mistake.
In her affidavit, relevantly, the applicant, Ms Nicholls says:
“5. In or about late December 2008 / early January 2009 it was evident that James was in serious financial difficulty, as a result of personal guarantees that were given in relation to Contek Pty Ltd (“In Liquidation”) of which he was a director.
6. During the course of 2008 I had assisted James with his legal fees in relation to the proceeding and in about late December early January, I had formalised an agreement with him to fund the litigation and receive in return 85% of any recovery from the litigation.”
Pausing here, one notes that the proceeding at that time was self-evidently in the name of the bankrupt. We know from the bankrupt’s statement of affairs that the formalisation of the agreement must have taken place in December of 2008 prior to his bankruptcy. We also know, quite clearly in my view, that the arrangement that was in place was one whereby the action proceeded in the name of the bankrupt, at least until his bankruptcy, and the deal was that Ms Nicholls would pay for the proceeding and receive 85 per cent of any of the money recovered.
Ms Nicholls’ affidavit goes on to say at paragraphs 10 and 11:
“I agreed with Mr Ryan that he and I would proceed in accordance with the agreement I’d already reached with James, namely that I’d receive 85% of the proceeds of James’ claim in the Melbourne Magistrates in return for paying all the legal costs associated with running it. Mr Ryan naturally wanted to be indemnified against those costs and, without being exposed to any financial risk, to receive the other 15% of the proceeds (if any) in due course.
11. From 27 February 2009, I have paid all legal expenses in relation to the proceeding and continued the proceeding as if I was running my own litigation in accordance with the Deed of Indemnity.”
While evidence of the intention of the parties is admissible in these circumstances, the authorities show that evidence of post-contractual facts requires caution in case the evidence does no more than establish a different, subsequently formed intention (RHG Mortgage Securities at [18]).
The difficulty with what Ms Nicholls says is that according to the Deed of Indemnity, she was not running the proceeding. This is also clear from the fact that, prior to the bankruptcy, on her material it seems reasonably clear that her husband was running the proceeding, but that she was paying for it. Agreement numbered paragraph 4 of the indemnity, to which I have not earlier referred, reads:
“(b) Both Nicholls and Ryan agree that the previous agreement with James Hopkins and Nicholls continues to be in force, subject to the terms contained in this deed.”
What Mr Ryan had to say in his affidavit was:
“3. It was my intention in executing the Deed that by doing so, Ms Nicholls would be responsible for the conduct of the Proceeding from that point on (it being my understanding that she had already been so for some time prior to Mr Hopkins’ bankruptcy), that she would be responsible for the payment of all legal costs associated with the conduct of the Proceeding to judgment, that she was required to indemnify me against any adverse costs orders which might affect me in the proceeding, and that if a judgment were obtained and satisfied in whole or in part, that after reimbursement or payment of all legal costs and disbursements incurred by Ms Nicholls in conducting the proceeding (whether before or after my appointment) that she would receive 85% of the proceeds, and I would receive 15% of the proceeds.
4. It was not my intention in executing the Deed that I would play any active part in the Proceedings. It was my intention in executing the Deed that by doing so, I was assigning to
Ms Nicholls the right to conduct the Proceedings, and retain the net proceeds, subject to an obligation that she pay to me 15% of any net proceeds.”
As with the observations of Ms Nicholls in her affidavit, the language now used by the deponent is plainly at odds with the terms of the deed itself. It is also, it would appear, contrary to the prior manner of the conduct of the proceeding by the bankrupt.
There is nothing in the terms of the agreement that suggest that it would constitute an assignment. It does not say so. It was drafted by lawyers. It plainly contemplates the proceeding continuing in the name of Mr Ryan.
What was not contemplated by the parties to the agreement, quite plainly, was the removal of Mr Ryan as trustee and his replacement by a more cautious and, in my view, prudent trustee.
I do not accept the force of the submissions made by the applicant about the effect of s.109(10) of the Act. The first thing to be said is that it has no effect upon the intention of the parties as they plainly never turned their minds to it.
Furthermore, s.109(10) speaks of circumstances where, to pursue the analogy here, the case has been conducted and a successful outcome achieved. It speaks of circumstances where “Property has been recovered, realised or preserved”, or “Expenses in relation to which a creditor has indemnified a trustee have been recovered.”
Those pre-conditions have not yet been met because the action has not been concluded. Section 109 has, as yet, no part to play.
The case brought by the applicant for rectification is in my view inadequate. It does not provide clear and compelling evidence of any sort of mistake on the part of the parties who executed the Deed of Indemnity. It is equally consistent with, and indeed in my view accurately reflects, an agreement whereby Ms Nicholls was to give the indemnity and Mr Ryan was to prosecute the action.
If I am wrong as to all these matters, I would still not be minded to rectify the agreement. I will come to that matter when I deal with discretionary matters later in the judgment.
The Section 178 Application
Even if the original agreement was either construed to constitute an assignment or rectified to do so, it was plainly not one that benefited Mr White. Indeed, he had no knowledge of it until well after his appointment. It provides him with no guarantee or indemnity whatsoever.
Counsel for the applicant has suggested in reply that the applicant would need to give Mr White an indemnity in order for the matter to proceed. The fact that his concession is made only so late in the proceeding is of significance.
All that the present trustee has done is to indicate that he does not wish himself to proceed with the action. He has not in fact prohibited the applicant from proceeding should she so wish. It is a measure of the weakness of the applicant’s position that she did not simply seek to substitute either herself or Mr Ryan as the plaintiff in the proceeding in the Magistrates’ Court.
Going further, however, insofar as the application is pressed under s.178, it is in my view wholly without merit. The deal entered into by Mr Ryan was on its face extremely disadvantageous to creditors. If the action was good enough to be worth punting costs on, then the sale price, so to speak, was extremely low.
Although Ms Nicholls has deposed (and she was not required for cross-examination) that she has paid moneys since February 2009 in respect of the proceeding, it is noteworthy that Voitin Lawyers have submitted a debt of $20,000 to the estate of the bankrupt for work until the end of January 2009.
The indemnity that Ms Nicholls purports to offer is limited, on its face, to the end of the proceeding. There is no indication that she is in a position to meet any particular sum that may be ordered either against the estate or claimed by the lawyers who performed the conduct of the proceeding on behalf of the estate.
In my view, to suggest that the trustee has misconducted himself by declining to himself continue the action in these circumstances is completely misconceived.
Residuary Discretion
Although it is not stated in terms, the application is brought pursuant to the Court’s powers pursuant to s.30 of the Act. So much was surmised by counsel for the respondent and not gainsaid by counsel for the applicant.
Insofar as this application for rectification relies upon the Court’s general discretionary powers, in the exercise of which, self-evidently, equitable principles would in this circumstance have work to do, I would decline to order it.
The terms of the indemnity purportedly offered are, for the reasons I have indicated, unsatisfactory. They do not guarantee Mr Ryan and/or the current trustee a true indemnity in the sense that they could be completely confident that no financially adverse consequences could occur.
Furthermore, even if that difficulty were to be overcome by further evidence or some form of bond or surety, a deal giving 85% of what must, at least to those funding the proceeding, seem to be an exceptionally strong case, is utterly inadequate. It is not sufficient to assert, as the applicant does through counsel, that, as it were, Mr Ryan might be alone the subject of criticism for the poor bargain that he may have made.
I would not be prepared to give Ms Nicholls 85% of the benefits of such a proceeding for no more than an indemnity as to costs in circumstances where she must regard the chances of success as overwhelming.
The one thing that the parties in executing the Deed of Indemnity did not foresee was the replacement of Mr Ryan as trustee. Mr Ryan appears to have been an extremely complacent trustee. He would not have entered into the deal that he was prepared to enter into were it otherwise.
While it is possible that Ms Nicholls has suffered financial loss by contributing costs towards the proceeding in the interim between February 2009 and now, it appears that the Victorian Magistrates’ Court action is still on foot. It is open to her simply to seek to proceed with it by having herself substituted as the plaintiff, albeit that, in the face of these reasons for judgment, I would imagine such an application would face serious difficulty.
Nonetheless, even if Ms Nicholls has suffered some measure of loss, it does not alter the conclusions at which I arrive in respect of the respondent trustee. The trustee has done nothing for which he could be properly the subject of criticism. The trustee disavowed the agreement as soon as he was made aware of its terms. If that delay was occasioned by the ineptitude of Mr Ryan in failing to keep a copy of the agreement on his files, then Ms Nicholls’ remedies may lie elsewhere.
Nonetheless, and in any event, this application should be dismissed with costs.
I certify that the preceding sixty-eight (68) paragraphs are a true copy of the reasons for judgment of Burchardt FM
Associate: Ms B. Evans
Date: 15 December 2009
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