Official Trustee in Bankruptcy & Galanis & Anor

[2014] FamCA 832

FAMILY COURT OF AUSTRALIA

OFFICIAL TRUSTEE IN BANKRUPTCY & GALANIS AND ANOR [2014] FamCA 832

FAMILY LAW – JURISDICTION – BANKRUPTCY – Application to set aside a financial agreement – Where the husband and wife entered into a financial agreement after the husband was discharged from bankruptcy – Where property was transferred to the wife pursuant to the financial agreement – Where the Official Trustee in Bankruptcy applied to set aside the financial agreement – Where the wife disputed that there was jurisdiction for the Official Trustee to bring the application pursuant to the Family Law Act 1975 (Cth) –Whether the application of the Official Trustee falls within the definition of a “matrimonial cause” – Whether the husband is a “bankrupt party” for the purposes of the Act – Whether the Official Trustee is a “government body” for the purposes of the Act – Where it was found that the Official Trustee did not have standing to bring the application – Application dismissed.

FAMILY LAW – COSTS – Consideration of the difference between party/party, solicitor/client and indemnity costs – Where the Official Trustee in Bankruptcy declined to specify the jurisdictional basis of its application when requested to do so by the wife – Consideration of the unequal financial circumstances of the parties – Orders made for Official Trustee to pay costs of the wife on a solicitor/client basis.

Bankruptcy Act 1966 (Cth) ss 5 18, 18A, 18AA, 43, 55, 127 153, 160
Family Law Act 1975 (Cth) ss 4, 4A, 90D
Family Law Rules 2004, rule 19.18
Public Governance, Performance and Accountability Act 2013 (Cth) s 10

Hand & Bodilly [2013] FamCAFC 98
Prantage & Prantage (2013) FLC 93-544

APPLICANT: Official Trustee in Bankruptcy

FIRST RESPONDENT:

SECOND RESPONDENT

Ms Galanis

Mr Dukas

FILE NUMBER: SYC 3738 of 2013

DATE DELIVERED: 1 October 2014

PLACE DELIVERED: Sydney

PLACE HEARD: Sydney

JUDGMENT OF: Rees J

HEARING DATE: 15 September 2014

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr Paul Livingstone

SOLICITOR FOR THE APPLICANT: Lobban McNally Lawyers

COUNSEL FOR THE FIRST RESPONDENT: Ms Lowson

SOLICITOR FOR THE FIRST

RESPONDENT:

Konstan Lawyers

Orders

IT IS ORDERED

1. That the application of the Official Trustee in Bankruptcy filed in the Federal Circuit Court on 4 July 2013 and transferred to the Family Court of Australia on 10 April 2014 is dismissed.

2. That the Orders of the Federal Circuit Court made 13 August 2013 be vacated.

3. That the Official Trustee in Bankruptcy pay the wife’s costs of the proceedings calculated on a solicitor and client basis as assessed or agreed.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Official Trustee in Bankruptcy & Galanis and Anor has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT

FILE NUMBER: SYC 3738 of 2013

Official Trustee in Bankruptcy  

Applicant

And

Ms Galanis

First Respondent

And

Mr Dukas
Second Respondent

REASONS FOR JUDGMENT

1. Ms Galanis (“the wife”) and Mr Dukas (“the husband”) commenced a relationship in 1999, married in 2006 and separated in October 2011.

2. In 2002 they purchased a property at B Street, Suburb C (“the C property”) as tenants in common as to 60 per cent to the wife and 40 per cent to the husband. The whole of the purchase price was provided by the wife.

3. In 2008 the husband became bankrupt and the trustee in bankruptcy was the Official Trustee in Bankruptcy (“Official Trustee”). In his statement of financial affairs the husband advised the Official Trustee that he held 40 per cent of the C property on trust for the wife.

4. In 2011 the husband was discharged from bankruptcy.

5. On 13 February 2013 the parties entered into a financial agreement under Part VIIIA of the Family Law Act 1975 (Cth) (“the Act”) pursuant to s 90D (“the financial agreement”). The financial agreement provided, inter alia, for the transfer to the wife of the husband’s 40 per cent interest in the C property.

6. In or about March 2013 the husband’s 40 per cent share in the C property was transferred to the wife.

7. On 4 July 2013 the applicant in the substantive proceedings, who is the Official Trustee, filed proceedings in the Federal Circuit Court seeking, inter alia, to set aside the financial agreement.

8. The Official Trustee in its Initiating Application seeks the following final orders:

   (1)An order that the financial agreement between the First Respondent and the Second Respondent dated 11 February 2013 be set aside.

   (2)An order that 40% of the net proceeds from the sale of the property situated at and known as [B] Street, [Suburb C], being the land contained in folio …, be paid to the Applicant for distribution amongst creditors in the bankrupt estate of the Second Respondent husband.

   (3)Costs.

9. I note that although the financial agreement was made on 13 February 2013, the orders sought by the Official Trustee refer to the date of the financial agreement as “11 February 2013”. The reason for this discrepancy is because the financial agreement appears to have been executed by the wife on 11 February 2013 and by the husband on 13 February 2013. However, it is clear that the financial agreement referred to in the orders sought by the Official Trustee is the same as the financial agreement referred to in paragraph 5 of these reasons and I will proceed on this basis.

10. On 12 July 2013 the wife entered into a contract to sell the C property to third party purchasers.

11. The husband has not participated in these proceedings.

12. On 13 August 2013, orders were made by consent in the Federal Circuit Court which allowed the sale of the C property to proceed but provided for 40 per cent of the net proceeds of the sale to be deposited in an interest bearing account in trust for the Official Trustee and the wife pending the determination of these proceedings.  

13. On 30 January 2014 the wife filed an Application in a Case in the Federal Circuit Court seeking, relevantly, an order that the Court determine the question of whether the Official Trustee had standing to bring the substantive application in these proceedings. The wife contended that the Official Trustee had no standing to bring the application and that application did not fall within the definition of a “matrimonial cause” in the Act. Thus the wife contended that the Court did not have jurisdiction with regard to the substantive proceedings commenced by the Official Trustee.

14. On 10 April 2014, the matter was transferred from the Federal Circuit Court to the Family Court of Australia and came before the Court in a Judicial Duty List on 15 September 2014. The parties were advised that it was the intention of the Court to hear and determine the issue of whether the Court had jurisdiction in relation to the substantive application of the Official Trustee as a preliminary matter.

THE OFFICIAL TRUSTEE’S CONTENTIONS AS TO JURISDICTION

1. On behalf of the Official Trustee it was argued that the jurisdiction to make order 1 of the orders sought in its Initiating Application, that is to set aside the financial agreement, was founded in s 4A(1) and in the definition of “matrimonial cause” in s 4(1)(cb) and, by implication, s 4(1)(eab) of the Act.

2. In relation to the second order sought by the Official Trustee in the substantive proceedings, that is that 40 per cent of the net proceeds from the sale of the C property be paid to the Official Trustee “for distribution amongst creditors of the bankrupt estate” of the husband, it was submitted that the jurisdiction could be found in the definition of “matrimonial cause” at s 4(1)(cb).

SECTION 4A(1)(b)(iii)

1. The terms of s 4A(1) are set out in full below.

FAMILY LAW ACT 1975 - SECT 4A

Third party proceedings to set aside financial agreement

(1) For the purposes of paragraph (eab) of the definition of matrimonial cause in subsection 4(1), third party proceedings means proceedings between: (a) any combination of:

(i) the parties to a financial agreement; and

(ii) the legal personal representatives of any of those parties who have died;

(including a combination consisting solely of parties or consisting solely of representatives); and

(b) any of the following:

(i) a creditor;

(ii) if a creditor is an individual who has died--the legal personal representative of the creditor;

(iii) a government body acting in the interests of a creditor;

being proceedings for the setting aside of the financial agreement on the ground specified in paragraph 90K(1)(aa).

1. It was conceded on behalf of the Official Trustee that the only provision in s 4A(1) which could apply to the present proceedings was s 4A(1)(b)(iii). On behalf of the Official Trustee it was submitted that the Official Trustee is a government body acting in the interests of the creditor but no authority or reasoning was provided for that submission.

2. The onus lies upon the Official Trustee to prove the jurisdictional facts upon which it relies – that is, that the Official Trustee is a “government body” for the purposes of s 4A(1)(b)(iii) of the Act.

3. The Official Trustee relied on an affidavit by a Senior Case Manager employed by the Australian Financial Security Authority (“AFSA”) who deposed:

   The Official Trustee is a body corporate created under the Commonwealth Bankruptcy Act. The power and functions of the Official Trustee are performed by the Official Receiver. The office of Official Receiver is a statutory office under the Commonwealth Bankruptcy Act. The Official receiver is an employee of AFSA.

4. Setting aside the question of whether there is a basis on which the deponent is qualified to give such evidence, on its face the evidence does not either assert or establish that the Official Trustee is a “government body”.

5. As will be seen from the terms of s 4A(2) of the Act, a government body is defined as being:

   (a)The Commonwealth, a State or a Territory; or

   (b)an official or authority of the Commonwealth, a State or a Territory.

6. Is the Official Trustee “an official or authority of the Commonwealth, a state or territory”?

7. Pursuant to s 160 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”), the Official Trustee is the statutory trustee appointed to manage a bankrupt’s affairs where there is no registered trustee.

8. S18(1) of the Bankruptcy Act provides that “The corporation sole known as the Official Trustee in Bankruptcy, that existed immediately before this subsection commenced, continues in existence as a body corporate with the same name.”

9. As the learned authors of Australian Bankruptcy Law and Practice, McDonald Henry and Meek, explain “The Official Trustee is constituted a Body Corporate with perpetual succession, the right to own property and the ability to sue and be sued.”

10. The Official Trustee is no more than a statutory trustee.

11. Nothing in the Bankruptcy Act suggests that the Official Trustee is a “government body”.

12. I am unable to conclude that the Official Trustee is a government body within the meaning of s 4A of the Act and therefore the Official Trustee cannot rely upon this section to ground the application.

13. I am comforted in that conclusion by two matters.

14. Firstly, a trustee in bankruptcy who is not the Official Trustee could not fall within the definition of “government body” for the purpose of s 4A(1)(b)(iii) of the Act. It would be completely anomalous if one category of trustee (the Official Trustee) were advantaged by the right to make an application under the Act in circumstances where another trustee had no such right. I accept the submission made by counsel for the wife that the legislature could not have intended that the Official Trustee to have standing as a third party to challenge financial agreements under the Act, but a registered trustee would not have standing.

15. Secondly, s 10 of the Public Governance, Performance and Accountability Act 2013 (Cth) (“the PGPA Act”), defines a “Commonwealth entity”. The definition provides that: (bold emphasis added)

    PUBLIC GOVERNANCE, PERFORMANCE AND ACCOUNTABILITY ACT 2013 (NO. 123, 2013) - SECT 10

    Commonwealth entities

    (1) A Commonwealth entity is:

    (a) a Department of State; or

    (b) a Parliamentary Department; or

    (c) a listed entity; or

    (d) a body corporate established by a law of the Commonwealth.

    Note: Paragraph (d) does not cover bodies corporate, such as Commonwealth companies, that are established under, but not by, a law of the Commonwealth.

    (2) However, the High Court and the Future Fund Board of Guardians are not Commonwealth entities.

16. S 18AA of the Bankruptcy Act provides that “Despite paragraph 10(1)(d) of the Public Governance, Performance and Accountability Act 2013, the Official Trustee is not a Commonwealth entity for the purpose of that Act.

17. The definition of “Commonwealth entity” in the PGPA Act has been adopted in other Commonwealth legislation including:

    Autonomous Sanctions Act 2011 (Cth): s 4;

    Auditor-General Act 1997 (Cth): s5; and

    Charter of the United Nations Act 1945: s 2.

    All the above provisions provide that:

    a “Commonwealth entity" has the same meaning as in the Public Governance, Performance and Accountability Act 2013.

18. If the Official Trustee is not a “Commonwealth entity” it is difficult to see how it could be a “government body”.

19. If the provisions of s 4A(1) of the Act, and accordingly, s 4(1)(eab) of the Act, are not available to the Official Trustee, are the proceedings otherwise a matrimonial cause?

DEFINITION OF MATRIMONIAL CAUSE – s. 4(1)(cb)

1. The Official Trustee relies on the definition of “matrimonial cause” contained in the provisions of s 4 of the Act and specifically the provisions of sub-section 4(1)(cb) of the definition. The provision is set out below:

   (cb) proceedings between:

   (i) a party to a marriage; and

   (ii) the bankruptcy trustee of a bankrupt party to the marriage;

   with respect to any vested bankruptcy property in relation to the bankrupt party, being proceedings:

   (iii) arising out of the marital relationship; or

   (iv) omitted; or

   (v) omitted.

2. The question then arises as to whether the reference to “bankrupt party” in sub-section (cb)(ii) is a reference to a party who is a bankrupt at the commencement of the subject proceedings or to a person who has, at any time in the past, been a bankrupt, including a discharged bankrupt.

3. The Bankruptcy Act at s 5 defines “bankrupt” as:

   (1)  In this Act, unless the contrary intention appears:

   "bankrupt" means a person:

   (a) against whose estate a sequestration order has been made; or

   b) who has become a bankrupt by virtue of the presentation of a debtor's petition.

4. However, the Bankruptcy Act also recognises that the bankruptcy has an “end” which is defined in s 5 as follows:

   (1)  In this Act, unless the contrary intention appears:

   "end" means:

   (a) in relation to a bankruptcy--the discharge of the bankrupt from the bankruptcy or the annulment of the bankruptcy;

5. S 43(2) of the Bankruptcy Act provides:

   Jurisdiction to make sequestration orders

   (2)  Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until:

   (a)  he or she is discharged by force of subsection 149(1); or

   (b) his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.

6. S 55(8) of the Bankruptcy Act provides:

   (8)  A person who becomes a bankrupt by force of this section continues to be a bankrupt until:

   (a)  he or she is discharged by force of subsection 149(1); or

   (b) his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.

7. S 153 of the Bankruptcy Act provides that, with certain qualifications:

   where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally.

8. The Official Trustee Practice Statement 4 titled “The end of Bankruptcy” (Issued 1 March 2013 updated 15 July 2014) states at paragraph 1.2 that (bold emphasis added):

   “Discharge from bankruptcy” means that the period of bankruptcy has finished and the debtor is no longer bankrupt. This usually occurs automatically, three years and one day after the debtor’s statement of affairs is accepted, although the period of bankruptcy can be extended. After discharge, the debtor is no longer subject to many of the provisions of the Bankruptcy Act 1966 (“the Act”) but does still have some ongoing obligations to the trustee. Discharge is outlined in section 149 of the Act.

9. The Bankruptcy Act imposes a limitation on the making of claims by a trustee (including the Official Trustee) as follows:

BANKRUPTCY ACT 1966 - SECT 127

Limitation of time for making claims by trustee etc.

(1)  After the expiration of 20 years from the date on which a person became a bankrupt, a claim shall not be made by the trustee in the bankruptcy to any property of the bankrupt, and that property shall, subject to the rights, if any, of a person other than the trustee in respect of the property, be deemed to be vested in the bankrupt, or a person claiming through or under him or her, as the case may be.

(2)  An action under subsection 118(9) with respect to a charge or charging order shall not be commenced by the trustee of the estate of a bankrupt after the expiration of 6 years from the date on which the bankrupt became a bankrupt.

(3)  An action under section 120 with respect to a transfer shall not be commenced by the trustee of the estate of a bankrupt after the expiration of 6 years from the date on which the bankrupt became a bankrupt.

(4)  An action under section 121 with respect to a transfer of property may be commenced by the trustee of the estate of a bankrupt at any time.

(5)  An action under section 122 with respect to a transfer of property shall not be commenced by the trustee of the estate of a bankrupt after the expiration of 6 years from the date on which the bankrupt became a bankrupt.

1. It is not disputed that, in the present case, the husband has been discharged from bankruptcy.

2. Is it then the intention of the legislature that a trustee should be able to initiate proceedings against the discharged bankrupt at any time prior to the expiration of 20 years after the person became bankrupt?

3. The revised Explanatory Memorandum to the 2005 amendments to the Act (“the Explanatory Memorandum”) by which the expanded definition of matrimonial cause was inserted, says at paragraph 18 (emphasis added):

   18. The Bill also proposes amendments to ensure that financial agreements under Part VIIIA of the Family Law Act cannot be used to defeat the claims of creditors. One amendment will exclude financial agreements from the definition of `maintenance agreement' in the Bankruptcy Act to ensure that trustees can use the `clawback' provisions of that Act to recover property transferred prior to bankruptcy under such an agreement. A further amendment will introduce a new act of bankruptcy which will occur when a person is rendered insolvent as a result of assets being transferred under a financial agreement. This will mean that the person's bankruptcy will be taken to have commenced at the time of that transfer which will extend the `relation back' period. This will allow the trustee to claim property transferred under the agreement as divisible property in the bankrupt's estate. Other amendments to the Family Law Act in Schedule 5 to the Bill will require a separation declaration to be made in relation to binding financial agreements that deal with post-separation financial arrangements, before those aspects of the agreement come into effect.

4. The emphasis appears to be on closing off the avenue, which may have previously existed, that allowed a debtor to alienate property using a financial agreement so as to make that property unavailable, to his or her trustee in bankruptcy, for the payment of creditors.

1. If that be the intention, then it necessarily follows that the legislature intended that the “bankrupt party” referred to in s 4(1)(cb) of the Act is a person who is currently a bankrupt and not a person who has been discharged from bankruptcy, since the effect of discharge, as set out in s 153 of the Bankruptcy Act is to release the bankrupt from all debts provable in the bankruptcy.

2. Specifically, but not, in this instance, helpfully, in relation to clause (cb), the Explanatory Memorandum says at paragraph 36:

   36.      Item 12 would insert a new paragraph (cb) in the definition of matrimonial cause to include proceedings between a party to a marriage and the bankruptcy trustee with respect to the vested bankruptcy property (defined in item 17) of the bankrupt spouse.

3. If the legislature intended that the provisions of the Act would apply to give jurisdiction to the Family Court of Australia to deal with proceedings between a party to a marriage and the trustee in bankruptcy of a discharged bankrupt, then those words could have been included.

4. I am unable to conclude that the term “bankrupt party” in this context means a party to a marriage who has been discharged from bankruptcy.

5. Accordingly, I find that there is no jurisdiction to hear the application of the Official Trustee, which will be dismissed. It follows that the interim orders made in the Federal Circuit Court on 13 August 2013 will be discharged.

6. Counsel for the wife conceded that an order for costs made against the wife in the Federal Circuit Court, as a consequence of her failure to comply with directions for filing affidavits, should stand and that order will not be vacated.

COSTS

1. The wife seeks indemnity costs in the proceedings.

2. The Official Trustee is a publicly funded body corporate.

3. The wife has filed a financial statement in these proceedings. She is a person of modest means. She earns $2,000 per week and her expenses are $2,447.

4. The wife relies on the fact that the Official Trustee has been wholly unsuccessful in the proceedings and upon correspondence between the legal representatives in relation to the merits of its application.

5. On 11 November 2013, the wife’s solicitor wrote to the Official Trustee’s solicitor inviting them to indicate upon which provisions, of either the Bankruptcy Act or the Family Law Act, it relied. The letter further indicated that the wife intended to seek indemnity costs in respect of the Official Trustee’s application.

6. On 20 November 2013, the Official Trustee’s  solicitor wrote to the wife’s solicitor saying, inter alia, that the wife should file her affidavit material. No response was given to the enquiry as to the jurisdictional basis of the application.

7. I am satisfied that, because the Official Trustee has been wholly unsuccessful; because it declined to specify the jurisdictional basis of its application when this was requested by the wife’s solicitor; and because its means are disproportionate to the wife’s, it is appropriate that the Official Trustee pay the wife’s costs.

8. The circumstances in which indemnity costs should be ordered have been the subject of recent decisions in this Court, in particular the decision of the Full Court in Prantage and Prantage (2013) FLC 93-544. It is not necessary here to set out in full the principles to be applied. However the Full Court emphasised that:

   (a)the Court ought not to depart from the rule that costs be ordered on a party and party basis unless the circumstances of the case warrant the Court in departing from the usual course;

   (b)the circumstances which may warrant departure from the usual course arise as and when the justice of the case so requires or where there may be some special or unusual feature in the case to justify the Court in departing from the usual course;

   (c)whilst the circumstances in cases in which indemnity costs have been ordered offer a guide, the question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for costs other than on a party and party basis.

9. In my view there are two special or unusual features in the present case. The first is the unequal economic circumstances of a privately funded litigant on the one hand and a publicly funded body corporate on the other.  

10. The second matter is that, in circumstances where the issue of jurisdiction should have been foremost in the mind of the Official Trustee’s legal advisors, they declined to engage with the questions posed by the solicitors for the wife.

11. In Hand & Bodilly [2013] FamCAFC 98 (“Hand & Bodilly”) the Full Court (per Faulks DCJ, Ryan and Watts JJ) considered the appropriateness of an order for indemnity costs, where party/party costs or solicitor/client costs could be ordered. Rule 19.18 of the Rules provides:

    (1)That the court may order that a party is entitled to costs:

    (a) of a specific amount;

    (b) as assessed on a particular basis (eg lawyer and client, party/party or indemnity); …

12. In Hand & Bodilly, the difference between party/party costs and solicitor/client costs was accepted to be:

    91.…

    … that on a taxation between parties on a solicitor and client basis, the unsuccessful party has to pay all the costs incurred by his opponent excepting in respect of (1) costs and expenses incurred prior to the institution of the action; (2) journeys and expenses of which the party liable could have no knowledge, and which would not ordinarily be performed or incurred; (3) the employment of more counsel, or the payment to them of larger fees than the circumstances of the case warrant, including the giving of special retainers.

13. Their Honours went on to compare solicitor/client costs with indemnity costs in the following manner:

    102.… Sometimes that discussion equates “solicitor and client” costs with “indemnity” costs but as Santow JA said in Bouras v Grandelis (2005) 65 NSWLR 214:

    125. The weight of authority is that solicitor and client costs and indemnity costs are distinct, though the difference between them has been eroded by practice and by inconsistent amendments to the various legislative instruments that make up the costs assessment regime.

    126. An order for solicitor and client costs will allow all reasonable costs or all costs as fair justice to the other party will allow. The onus of proving that the costs are reasonable falls on the receiving party.

    127. Historically, solicitor and client costs were somewhat more generous than party/party costs. …

14. It follows that the distinction between indemnity costs and solicitor/client costs, is that the former order provides a complete indemnity for costs actually incurred, with no enquiry as to the reasonableness of the costs incurred. Whereas an order for solicitor/client costs requires an enquiry as to the reasonableness of the costs.

15. In my view, it is appropriate to order solicitor and client costs.

I certify that the preceding seventy (70) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Rees delivered on 1 October 2014.

Associate: 

Date:  1 October 2014