Official Trustee in Bankruptcy v Selig and Selig
[2013] FCCA 1610
•2 October 2013
FEDERAL CIRCUIT COURT OF AUSTRALIA
| OFFICIAL TRUSTEE IN BANKRUPTCY v SELIG AND SELIG & ANOR | [2013] FCCA 1610 |
| Catchwords: BANKRUPTCY – Application by trustee in bankruptcy for directions – election by the trustee in bankruptcy whether to prosecute or discontinue appeal proceeding – no potential advantage to the bankrupt estate of litigation – exposure of the trustee in bankruptcy to a potential costs order – failure by interested third party to seek review of trustee’s decision to discontinue – failure by interested third party to intervene in appeal notwithstanding its action in prosecuting appeal for its bankrupt insured – conditional orders to discontinue appeal. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.60, 117, 134, 178 Federal Court Rules 2011 (Cth), r.9.09 Insurance Contracts Act 1984 (Cth), s.48 |
| Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 45 Moore v Macks [2007] FCA 10 Owens v ComLaw (No 62) Pty Ltd (2006) 201 FLR 275 Owners-Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 Re Duckworth; Ex parte Official Trustee in Bankruptcy [1995] FCA 1613 Re Lofthouse (2001) 107 FCR 151 |
| Applicant: | OFFICIAL TRUSTEE IN BANKRUPTCY |
| First Respondent: | RONALD SELIG AND JANNA SELIG |
| Second Respondent: | QBE INSURANCE (AUSTRALIA) LIMITED ACN 003 191 035 |
| File Number: | BRG 804 of 2013 |
| Judgment of: | Judge Burnett |
| Hearing date: | 26 September 2013, 1 October 2013 |
| Date of Last Submission: | 1 October 2013 |
| Delivered at: | Brisbane |
| Delivered on: | 2 October 2013 |
REPRESENTATION
| Counsel for the Applicant: | Mr P. McQuade |
| Solicitors for the Applicant: | Rodgers Barnes & Green |
| Senior Counsel for the First Respondent: Junior Counsel for the First Respondent: | Mr P. Heywood-Smith Q.C. Mr D. Rigall |
| Solicitors for the Respondent: | Radbone & Associates |
| Counsel for the Second Respondent: | Mr T. Cox S.C. |
| Solicitors for the Second Respondent: | Cosoff Cadmore Knox |
ORDERS
In default of the Second Respondent, QBE, making application on or before 10.00am on Thursday 3 October 2013 pursuant to FCR 9.09, or upon such other basis as it considers appropriate, to be joined in proceeding SAD 97 of 2013 the Applicant, the Official Trustee in Bankruptcy forthwith file a notice of discontinuance in SAD 97 of 2013.
Subject to Order 1, in the event the Court refuses any application by QBE to be joined as a party to SAD 97 of 2013 the Applicant, the Official Trustee in Bankruptcy forthwith file a notice of discontinuance in SAD 97 of 2013.
The Second Respondent pay the Applicant’s and the First Respondent’s costs of and incidental to this application to be assessed on the standard basis.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
BRG 804 of 2013
| OFFICIAL TRUSTEE IN BANKRUPTCY |
Applicant
And
| RONALD SELIG AND JANNA SELIG |
First Respondents
| QBE INSURANCE (AUSTRALIA) LIMITED ACN 003 191 035 |
Second Respondent
REASONS FOR JUDGMENT
(Revised from Transcript)
In this application the applicant, the Official Trustee in Bankruptcy, seeks directions. The bankrupt, Mr David Bertram, filed his own petition on 2 June 2013. In his petition he listed creditors of approximately $2 million. His largest creditor was Selig Pty Ltd. He probably meant Ronald Selig and Janna Selig, the First Respondents to the application, as on 18 April 2013 (about six weeks prior to the presentation of his petition) they obtained a judgment against him and others for a sum of approximately $1.7 million.
The bankrupt was a financial advisor. He was successfully sued in respect of financial advice given to the First Respondent judgment creditors by a corporation with which he was associated. The action was complicated, with the proceeding involving thirteen defendants, the last of which were a firm of solicitors. The action by the first respondent judgment creditors was dismissed against them. The order reserved the question of the first respondents’ entitlements to be indemnified by the bankrupt in respect of a costs order made against them for that part of the proceeding concerning the unsuccessful claim against the solicitors. I raise these background facts only to highlight not only the complexity of the original proceeding, which progressed to trial over almost three weeks, involved at least four groups of defendants and resulted in a 1300 paragraph, 253 page judgment, but also to highlight the axiomatic bearing those factors will have on costs. The costs issue has a significant practical impact in the context of this application.
The bankrupt was a financial planner and was an authorised representative of Wealthsure Pty Ltd (Wealthsure), an Australian financial services licensee. The first respondent judgment creditors were clients of the bankrupt. They commenced the primary action against, inter alia, Wealthsure and the bankrupt seeking damages in respect of certain financial planning advice which was provided to them. On 18 April 2013 Lander J delivered judgment in favour of the first respondents ordering, inter alia, that Wealthsure and the bankrupt pay the first respondents $1,760,512.00 as damages and interest up to the date of judgment. Costs orders were also made against Wealthsure and the bankrupt. On 9 May 2013, Wealthsure and the bankrupt commenced an appeal which was against the judgment made by Lander J on 16 April 2013 in the primary action. The appeal was to the Full Federal Court. The appeal is listed for hearing on 3 and 4 October 2013.
On an interlocutory application brought by Wealthsure and the bankrupt in the appeal, Besanko J ordered on 25 June 2013, on the condition that Wealthsure paid $500,000.00 into Court by 5 July 2013, that the execution of the judgment made by Lander J on 18 April 2013 in the primary action be stayed in respect of the damages and costs payable by Wealthsure and the bankrupt to the first respondents. On 8 July 2013 Mansfield J dismissed an application by the first respondents for leave to appeal the interlocutory orders made by Besanko J on 25 June 2013. However, Besanko J later discharged the stay as against the bankrupt on 21 August 2012 due to the bankruptcy being brought to his attention.
The second respondent, QBE Insurance (Australia) Limited (QBE), is Wealthsure’s insurer. Under an endorsement to the policy, that policy covers Wealthsure’s authorised representatives, including the bankrupt. Section 48 of the Insurance Contracts Act 1984 (Cth) provides that a person who is not a party to the contract of insurance but is named as an insured under the policy has a right to recover the amount of the person’s loss from the insurer in accordance with the policy but is under the same obligations as the insured party to the policy. The policy itself has a limit of liability of $3 million, inclusive of the insurer’s legal costs.
On 10 July 2013 the first respondents’ solicitors gave a written notice to the Official Trustee in Bankruptcy pursuant to s.60(3)of the Bankruptcy Act 1966 (Cth) (the Act) for the applicant to make an election within 28 days to either prosecute or discontinue the appeal, otherwise the appeal would be deemed to be abandoned by the Official Trustee. On 24 July 2013 the Official Trustee elected to discontinue the appeal under s.60(2) of the Act and informed the respondents that same day. In its correspondence of that day, the Official Trustee’s solicitors wrote:
“Reasons for Election
While our client is not required to provide any reasons for an election it makes under section 60(2) of the Act, it considers providing a short summary may assist your clients to understand the basis for our client’s election. However, this is not an exhaustive explanation of our client’s reasons for its election.
The case of Moore v Macks [2007] FCA 10 sets out factors that a trustee in bankruptcy ought to consider in making an election whether to prosecute or discontinue an action. Those factors are:
1. The merit of the action;
2. The cost of prosecuting the action;
3. Whether any funding has been offered to prosecute the action;
4. The assets and liabilities in the bankrupt estate;
5. Whether the bankrupt estate has funds to prosecute the action and to pay for any adverse costs order in the event the action is unsuccessful;
6. The fact that the trustee in bankruptcy is likely to be held personally liable for any adverse costs order if the action is ultimately unsuccessful and whether the estate has the funds to cover an adverse costs order;
7. Whether the action has any benefit to the bankrupt estate; and
8. Whether any indemnity has been offered to the trustee in the event that an adverse costs order is made against the trustee.
Insufficient information was provided to our client for it to be in a position to make an informed assessment of the merit of the Appeal.”
The letter continues:
“Even if our client accepted that the prospects of the Appeal were reasonable, it would not change our client’s position given the matters set out below.
The legal fees incurred by Wealthsure and the bankrupt to date amount to $1.35 million. From the Affidavit of Wealthsure’s CEO filed in support of the application to stay execution of the Judgment, we note that he has not received a detailed estimate of the costs of running the Appeal, however those costs will be significant. The complainants in their solicitor’s letter to our client estimated that their costs of opposing the Appeal would be in the hundreds of thousands of dollars. Our client does not consider that to be an unreasonable estimate and the appellants’ costs are likely to be similar if not higher.
The only funding of the Appeal is that provided for under Wealthsure’s policy of insurance with QBE, which the bankrupt enjoys the benefit of under section 48(1) of the Insurance Contracts Act 1984. However, that insurance policy has a low limit of liability which, when taking the funds expended of legal fees incurred to date and money we assume was paid into court under the order of Justice Besanko made on 25 June 2013, is rapidly being approached.
…
As a result, while funding is available for the Appeal, the adequacy of that funding is not guaranteed.
We note that as QBE has not fully indemnified Wealthsure and the bankrupt for the judgment sum. As a result, it is not subrogated to their position but simply had the conduct of the Action and has had the conduct of the Appeal under its contractual rights under the policy of the insurance. In addition, if our client had elected to prosecute the Appeal and the funds available to do so became exhausted prior to the completion of the Appeal, our client would not have been able to then elect to discontinue the Appeal due to a lack of funding. Rather, it would have had to fund the Appeal out of the estate or its own pocket.
The bankrupt’s estate has minimal assets to be realised and, apart from the complainants, owes not insubstantial debts to other parties. The bankrupt’s estate does not have the ability to fund the Appeal nor to meet any adverse costs order made against the bankrupt, his estate or our client.
The Appeal has no benefit to the bankrupt’s estate. If it succeeds, all it will do is reduce the amount that the complainants can prove for in the estate. As it appears that no divided will be paid from the estate to creditors, any such indirect benefit will be of no utility anyway.
No indemnity for adverse costs orders has been offered to our client, except for the insurance policy. However, if the Appeal does not succeed, the limit of liability will be exhausted paying out the judgment sum and will not respond to any adverse costs orders made against the bankrupt’s estate or personally against our client. In the circumstances, the insurance policy offers our client no protection from an adverse costs order that will almost certainly be made if the Appeal is not successful.
Even if the Appeal is partially successful, it is still likely that adverse costs order will be made in favour of some of the respondents to the Appeal that the Appeal does not succeed against. If any adverse costs orders are made, then it is possible, if not likely, that they will be made against our client personally.
In circumstances where advancing the Appeal will bring negligible, if any, benefit to the bankrupt’s estate, funding for the Appeal is not guaranteed to be sufficient and the Appeal will considerably expose not just the estate but our client to the possibility of significant adverse costs orders, our client has elected to discontinue the Appeal.”
The respondents were informed that the applicant intended to wait until the 60 day period under s.178 of the Act had passed prior to filing a notice of discontinuance on behalf of the bankrupt in the appeal.
Under s.117 of the Act the bankrupt’s benefit under the policy vested in the Official Trustee and any amount recovered under the policy by the Official Trustee in respect of the liability of the bankrupt must be paid in full forthwith to the third party to whom the liability is owed. As a result, the policy is of no benefit to the general body of unsecured creditors of the bankrupt estate being administered by the Official Trustee. The policy is only of benefit to the first respondents, the Seligs.
After the Official Trustee made its election to discontinue the appeal, the Seligs requested that the Official Trustee transfer and assign to them all of its right, title and interest in the policy in respect of the bankrupt’s liability to them. The Official Trustee agreed to this request and the assignment was effected on 2 September 2013. QBE was given notice of the assignment on 2 September 2013. For these reasons, even if the appeal succeeds there is no advantage to the Official Trustee in that outcome. If it succeeds, it benefits only QBE vis-à-vis its present judgments obligation to the Seligs. If the appeal fails the arithmetic suggests a Pyrrhic victory to the Seligs because of the insurer’s liability cap. As their solicitors observed in a letter addressed by them to solicitors for the Official Trustee dated 10 July 2013:
“1. At all relevant times, Mr Bertram was covered by professional indemnity insurance policy issued by QBE Insurance (Australia) Limited (“QBE”) … Pursuant to the Financial Planners Authorised Representatives Endorsement … on page 6 of the Schedule, Mr Bertram was directly insured pursuant to the policy.
2. The policy provided a limit of indemnity of $3,000,000.00 inclusive of all costs and expenses, including costs and expenses incurred in the defence of Mr and Mrs Selig’s claim.
3. Mr David Newman in paragraph 29 of his affidavit states that the policy cover is limited to $3,000,000.00, that to the time of his affidavit, the cover had been eroded by the costs and expenses of Mr Bertram’s solicitors by an amount of approximately $1.35 million. He noted that the defence costs continue to accrue. In paragraph 36 Mr Newman says that he has been informed by the solicitors for WealthSure Pty Ltd that the costs of the appeal “may be significant.”
On the 13 June 2013 the counsel for WealthSure Pty Ltd advised the Federal Court that due to the complex nature of the appeal the costs of the appeal, for which the appellants have briefed Mr Shavin Q.C., will be very significant. We estimate that they will be in the hundreds or [sic] thousands of dollars. We note from paragraph 15 of the affidavit of Mr Coyle sworn the 5th of June 2013 that Messers Cosoff Cudmore & Knox incurred costs of $330,000.00 between the 28th of January and 24th of March 2012. They incurred costs of $295,000.00 between the 24th of March and 18th of April 2012.”
The bankrupt’s costs together with those of QBE incurred to June 2013 total approximately $1.975 million. In addition, the Seligs have the benefit of a costs order from the trial. If they succeeded in resisting the appeal one assumes that they will also succeed in obtaining costs there. Even if the insured party incurred no further costs that would mean the total amount available to meet the Seligs’ judgment and costs stood at $1.025 million as at June 2013. Plainly it will be far less than that sum given that costs have been incurred since that time, and no doubt will be incurred by the insurers if they are permitted to prosecute the appeal. Putting aside any issues of entitlement to priority in respect of the sums available under the insured liability cap of $3 million, the facts remains that it appears that the lion’s share of the indemnity cap will be directed to the payment of costs and not the judgment that the Seligs have succeeded in obtaining. Accordingly, it appears, as was submitted for the Seligs, that there is no material benefit to them from their success in the primary action in the appeal proceeding. For reasons noted earlier, nor is there any benefit to the creditors generally.
Indeed, as the Trustee fears, if the costs blow out the estate could be left to fund the deficit that follows as the costs exceed the indemnity limit available under the policy. The Trustee has this fear despite the undertaking provided to it by QBE in its solicitors letter of 24 September 2013, where they noted:
“… QBE is prepared to offer the Official Trustee a full and unconditional indemnity against any adverse costs orders made personally against the Official Trustee in favour of any party as a result of QBE conducting the Appeal.”
Against that background, it is not difficult to understand why the Seligs consider the conduct of QBE to be deliberately undertaken to simply ensure that its indemnity is exhausted by costs, leaving them with no practical right of recovery of the judgment debt.
QBE, as the insurer for the bankrupt, asserts that under s.48 of the Insurance Contracts Act 1984 (Cth) and cl.5.2(b) of the contract of insurance that it is entitled to conduct the appeal on behalf of the bankrupt notwithstanding the applicant’s election to discontinue the appeal on behalf of the bankrupt. It is contended by QBE that the applicant’s election does not extinguish any right under the policy, that it does not require the applicant’s consent or approval to conduct the appeal in the bankrupt’s name, and that the applicant is not entitled to file a notice of discontinuance. The bankrupt’s interest in the policy of insurance with QBE vested in the applicant under s.117 of the Act upon bankruptcy. However, the applicant assigned its interest in the policy to the Seligs on 2 September 2013. On 3 and 4 September 2013 the Seligs demanded that the applicant file a notice of discontinuance in the appeal as they allege that it was delaying them enforcing the bankrupt’s right of indemnity against QBE. The Seligs contend that the notice of discontinuance ought be filed by the applicant. However, the Trustee says that it is inappropriate for the applicant to be exposed to potential liability due to circumstances created by the respondents wholly outside their control. The Seligs have been entitled to apply to dismiss the appeal as against the bankrupt since the election was made to discontinue the appeal by the Official Trustee. Likewise, QBE has been entitled to apply for a review of the Official Trustee’s election to discontinue the appeal since it was made. However, rather than doing so the Official Trustee says that the respondents have followed a course of wedging the Official Trustee between their competing claims.
It is for that reason that the Trustee seeks directions. The directions sought are as follows:
“1. Pursuant to sections 30 and 134 of the Bankruptcy Act 1966 (Cth) (Act) the applicant seeks directions from the Court in respect of Federal Court of Australia proceedings number SAD 97 of 2013 (Appeal):
a. In circumstances where the applicant has elected to discontinue the Appeal (insofar as the Appeal was instituted by the David Grahame Bertram (Bankrupt)) upon being given written notice of the Appeal by the first respondents under section 60(3) of the Act:
i. Does the applicant now have any discretion whether it should proceed to file a notice of discontinuance in the Appeal; and
ii. Are the first respondents entitled to insist upon the applicant filing a notice of discontinuance in the Appeal;
b. If the answer to question 1(a) is in the affirmative, whether the applicant is required to wait until the end of the review period under section 178 of the Act before filing the notice of discontinuance;
c. Is the second respondent, under the professional indemnity insurance policy number 7703221PID which it issued that names the Bankrupt as an insured, entitled to conduct the Appeal on behalf of the Bankrupt notwithstanding the election made by the applicant.
d. If the answer to question 1(c) is in the affirmative is the second respondent obliged to fully indemnify the applicant from any adverse costs order that may be made against the applicant in the Appeal
2. Any other order the Court considers appropriate
3. Costs.”
It is agreed by the parties that direction 1(a)(i) need not be made. It is accepted that the Official Trustee does have the discretion to file a notice of discontinuance in the appeal; the real issue is whether it ought to. Furthermore, by reason of the effluxion of time, there is no need to address the direction sought in 1(b). The review period under s.178 of the Act has now passed.
The Trustee identifies two legal issues to be resolved as relevant to the question of directions:
1. Whether the applicant may refrain from filing a notice discontinuing the appeal on behalf of the bankrupt given that the applicant has elected to discontinue the appeal and where no application seeking a review of the decision of the applicants to make the election has been filed (the first legal issue); and
2. Whether QBE is entitled without the Official Trustee’s consent and without fully indemnifying the Official Trustee for any adverse costs orders that may be made against it in the course of the appeal and for any claim that may be made against the Seligs to have the conduct of the appeal on behalf of the bankrupt given that the Official Trustee has made an election to discontinue the appeal (the second legal issue).
The First Legal Issue
The Official Trustee submits that, subject to those actions referred to in s.60(4), s.60(2) operates to stay an action commenced before bankruptcy by a bankrupt until a trustee makes an election to either prosecute or discontinue the appeal. The stay operates upon the person, namely the bankrupt, and restricts the rights of the bankrupt in relation to the appeal. The stay operates against all “actions” commenced by the bankrupt before bankruptcy; that includes appeals: Owens v ComLaw (No 62) Pty Ltd (2006) 201 FLR 275 at 285 per Ashley JA. There is no reference to, nor is the section confined by, whether the bankrupt sued in his or her personal capacity, or in some other capacity, or whether the action was being prosecuted in the name of the bankrupt pursuant to the terms of a policy of insurance. Section 60(5) makes it clear that the term “action” has a wide meaning and s.60(4) specifically prescribes those circumstances to which s.60(2) applies. That is consistent with the statutory purpose of the provisions. Accordingly, the determination of whether an action is prosecuted or discontinued is placed in the hands of the Trustee via s.60(2).
For the Trustee, two points are made. The first is that the authorities demonstrate a very wide definition is afforded to the term “action.” I have earlier noted that authority supports the proposition that an action includes an appeal. Indeed, as counsel for the Official Trustee noted, the breadth is even wider. For instance, he referred to the decision Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 45, a decision of the Court of Appeal. In that case the court was discussing an action in the context of prerogative relief sought in respect of a tribunal decision directed to orders made in the Industrial Commission in the nature of damages. Kirby P (as he then was), with whom Samuels and Clark JJA concurred, specifically addressed the question of the precise ambit of the word “action” in his reasons. First he observed that the word “action” is given an extremely wide definition to embrace “Any civil proceeding, whether at law or in equity.”[1] Secondly, his Honour noted that even if the word were to be afforded some confinement, an “action” is one where a claimant “is undoubtedly one whereby he seeks relief affecting his property.”[2] In that instance, his Honour was considering a chose in action or the right he had to enforce the award which had been earlier determined in his favour by the Industrial Commission. In any event, his Honour was of the view that the word “action” should not be read down. At page 54, he stated:
“I cannot find any ambiguity which would justify a reading down in this case of the word “action.” On the contrary, I believe this to be the very kind of case that Parliament intended s 60(2) to apply to – leaving it to the trustee to elect whether to continue with it or not. It is not in form or nature an “appeal” from the Commission for it could not in law be so …”
[1] At page 54.
[2] At page 54.
It must be remembered that in that instance what was sought was the issue of a prerogative writ in respect of a decision made in favour of the bankrupt by the Industrial Commission.
Finally, in addressing the source of the dispute and the apparent disharmony between s.58 and s.60, his Honour continued:
“… If the section is clear, as I believe it to be, the fact that it may
sometimes provide a wider provision for a stay on proceedings commenced before bankruptcy than would effectively be secured by proceedings commenced after bankruptcy does not avail the claimant. Especially because the Parliament has specifically adumbrated the exceptions to the operation of the statutory stay, in the terms of s 60(4), this indicates that it attended to the way in which prior civil action should go forward at the option only of the trustee, or be stayed by the statute.”[3][3] At page 55.
Perhaps more relevant to this case is the decision in Re Lofthouse (2001) 107 FCR 151, a case involving an instance where the bankrupt sued in his capacity as trustee for a trust and not in a personal capacity. In Re Lofthouse the court was considering the question of whether “action” extended to circumstances where the bankrupt was not suing in his own right but rather as a trustee of a trustee and whether in those circumstances the bankrupt’s trustee in bankruptcy could make an election under s.60 in the proceedings in which the bankrupt purported to sue as a bare trustee, and accordingly would not enjoy any fruits of the successful litigation in a personal capacity. Commencing at page 157, Gray J said:
“Section 60 is an adjunct to the scheme of the Act whereby the property of a bankrupt passes to the bankrupt's trustee consequent upon a sequestration order. By s 58 of the Act, the property of a bankrupt vests forthwith in the Official Trustee or a trustee in bankruptcy when a debtor becomes a bankrupt. That section has the effect of vesting in the trustee in bankruptcy all rights of action in pending proceedings commenced by the bankrupt. Even if it be the case that property of which a bankrupt is a bare trustee for someone else does not pass to the trustee in bankruptcy (because such property is not available for distribution to the bankrupt's creditors), it does not follow that s 60 must be construed as excluding proceedings brought by the bankrupt as trustee.
Section 60 is not the provision that vests the right of action in the trustee in bankruptcy. It has a different, and in some respects wider, role. It operates to stay pending proceedings unless the trustee elects to prosecute or discontinue them. It also provides the machinery for a defendant or other party to a pending proceeding to force the making of an election. It is directed towards the protection of the bankrupt's creditors, by preventing the unnecessary dissipation of the assets of the estate in fruitless litigation. In my view, s 60 also has the purpose of protecting a defendant or other party to a pending proceeding. A defendant or other party to a pending proceeding suffers an immediate detriment upon the plaintiff becoming a bankrupt. The detriment is that if the defendant or other party should be successful in the proceeding, and should obtain an order that the plaintiff pay the costs of the proceeding, the order will be effectively unenforceable because of the bankruptcy. The rationale behind s 60(2) and (3) is therefore, at least in part, to protect those whom the bankrupt has been suing. Such protection would be lost if the word "action" in s 60 were to be construed as excluding a proceeding in which the bankrupt has sued as a trustee for someone else.
In my view, s 60 has been enacted deliberately as a broad provision, so as to encompass any proceeding brought by a bankrupt before bankruptcy. The exceptions have been expressed quite narrowly. The intention is that, once a bankruptcy occurs, no further costs should be incurred in a proceeding unless the trustee in bankruptcy makes an election to continue the proceeding. If such an election is made, the trustee in bankruptcy will ordinarily become substituted as plaintiff in the pending proceeding, in the capacity of trustee in bankruptcy for the former plaintiff. The trustee in bankruptcy will thereby become liable for the costs of the proceeding in the event that it is unsuccessful and a costs order is made in favour of the defendant in the proceeding or some other party to it. The trustee in bankruptcy may be entitled to an indemnity in respect of those costs out of the bankrupt estate, as expenses of the administration of the estate, to the extent to which the estate has assets. The trustee in bankruptcy will obviously consider whether continuing to prosecute the proceeding will be likely to have any benefit to the estate of the bankrupt, and therefore to the bankrupt's creditors. One of the elements that the trustee in bankruptcy will take into account is whether the bankrupt is suing in a personal capacity or some other capacity, particularly that of trustee for someone else. If the bankrupt has sued as trustee for another person, and the estate will not benefit, the trustee in bankruptcy would no doubt usually elect not to continue to prosecute the proceeding. This would protect any defendant, and perhaps other parties to the proceeding, with respect to costs. Of course, it may impact on the beneficiary of the trust of which the bankrupt claims to be trustee. The beneficiary may be forced to institute proceedings in his or her own right to enforce the trustee's legal right, as can be done where there are "exceptional circumstances". See Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432.”
Although this is a lengthy passage, in my view it neatly summarizes the relevant policy and principles behind the approach of the courts to such circumstances.
In particular, this case provides a very helpful analogy because the facts in Re Lofthouse have similarities to the facts in this instance. In Re Lofthouse, the bankrupt, as a trustee of a trust, was seeking to take action for the benefit of the trust and not himself personally. Here the bankrupt is in a similar position vis-à-vis the insurer by operation of s.48 of the Insurance Contracts Act 1984 (Cth) and cl.5.2(b). In essence, while the bankrupt stands as appellant in the appeal he does not do so in his own right but in the right of the insurer which would benefit upon any success in the appeal.
For QBE’s part, it contends that the judgment at first instance was adverse to both the bankrupt and Wealthsure. They have appealed and QBE has exercised its right under cl.5.2 of the policy to take over the conduct of the bankrupt’s appeal. Accordingly QBE contends those rights are preserved. They contend that QBE’s rights were created before Mr Bertram’s bankruptcy and were not lost by reason of that bankruptcy. They contend that QBE has a right to appeal and that matter is well supported by authority; see Owners-Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 per Lindsay J at [134]-[136] and [141]-[142]. In that regard the bankrupt had control of the appeal, subject to the rights of QBE. QBE accepts that after the bankruptcy control passed to the Official Trustee, but that it was subject to the continuing rights of QBE and, importantly, the bankruptcy did not extinguish QBE’s vested proprietary, statutory and contractual rights. It contends that is has exercised its contractual rights, which include its right to decide whether or not to continue the appeal, and that this is not a mere mechanical step but involves the exercise of a substantive right. QBE accepts that initially control passed to the Official Trustee but contends that control was recovered by it as a result of its decision of 4 September 2013. It says that by the Seligs demanding that the Official Trustee file a notice of discontinuance in the appeal the Official Trustee seeks to deny QBE its right to challenge the judgment against the bankrupt. It submits that s.60 should not be interpreted to divest QBE of its vested proprietary rights as to subrogation and vested contractual rights under the litigation clause, cl.5.2. Furthermore, it says that s.60 should not be interpreted to deny QBE the benefit of s.48 of the Insurance Contracts Act 1984 (Cth). It submits that s.60(2) advances no intention to interfere with the vested proprietary, statutory or contractual rights and should not be so interpreted. In order to do so it submits that very clear statutory language would be required.
Finally, it submits that the authorities on s.60 referred to by the applicant are distinguishable in that they do not address the situation of vested proprietary, statutory and contractual rights. They do not purport to address the position of insurers taking over the conduct of proceeding in the exercise of their vested rights and that policy reasons sought to be adduced from those cases are inapplicable when an insurer has taken over the conduct of the action, the policy has been assigned to a third party and the bankrupt estate has no interest in the appeal.
Respectfully however, QBE’s submissions mischaracterise the Trustee’s application. The Trustee does not deny QBE’s rights and entitlements. The Trustee is simply disinterested, as he ought be for the reasons stated in Moore v Macks [2007] FCA 10. It follows that I do not accept the submission that s.60 would serve to divest QBE of its interest. Its interest remains alive and open for it to enforce. Secondly, QBE has not taken control of the proceeding from the Trustee as it contends. The Trustee remains the operative party to the litigation. That is entirely consistent with the principles in Re Lofthouse and, by reason of the analogy drawn earlier, the fact remains that a process is available for QBE to be joined in the appeal to enforce the rights it contends that is has. In particular, I am mindful of Rule 9.09 of the Federal Court Rules 2011 (Cth). Relevantly, it provides:
“Death, bankruptcy or transmission of interest
(1) If a party dies, or becomes bankrupt, during a proceeding but a cause of action in the proceeding survives, the proceeding is not dismissed only because of the party’s death or bankruptcy.
(2) If the interest or liability of a party passes to another person during a proceeding, by assignment, transmission, devolution or by any other means, the party or the person may apply to the Court for an order for the joinder of the person as a party or for the removal of the party.
(3) If a person is joined as a party under this rule, the start date of the proceeding for the person is the date on which the order is made.
Note The Court may make an order for the future conduct of the proceeding.”
I am informed that QBE has not sought to exercise its rights to apply under r.9.09. Further, QBE complains that for the Trustee to file a notice of discontinuance in the circumstances would constitute an abuse of process. I do not agree. The Trustee made an election. It gave QBE 60 days to act upon its decision by seeking a s.184 review. QBE did not exercise that right.
In response, QBE says that it has extended to the Trustee an indemnity in respect of its costs. However, the Trustee is plainly not satisfied with an indemnity. He fears being draw into an internecine dispute between QBE and the Seligs. He has no funds and does not wish to be personally exposed. That position is quite reasonable, particularly given that the estate will enjoy no advantage from the litigation, especially if the appeal fails and assuming there are insufficient funds available under the indemnity cap to address all costs issues. The prospect of an unconditional indemnity does not necessarily protect the Official Trustee from the prospect of being adversely exposed in some unexpected way in the outcome of the appeal. Here I am satisfied that the indemnity is simply insufficient.
In summary, the critical facts are these:
1.The Trustee has elected to discontinue the appeal;
2.The appeal is an action in respect of which the Official Trustee could make an election;
3.QBE does have a prima facie interest in the subject matter of the appeal by operation of s. 48 of the Insurance Contracts Act 1984 (Cth) and cl.5.2 of the contract of insurance;
4.The Official Trustee was afforded, and in my view reasonably refused, an offer of indemnity by QBE to conduct the appeal;
5.Despite not having sought a review of the Official Trustee’s decision pursuant to s.178 to discontinue the appeal, QBE have undertaken all steps to prepare for the appeal which will commence tomorrow; and
6.Court rules could permit QBE to be joined in the appeal proceedings.
In Re Duckworth; Ex parte Official Trustee in Bankruptcy [1995] FCA 1613, referred to in Re Lofthouse at page 155, Gray J observed that s.134(4) ordinarily should not be used as a vehicle for the primary determination of substantive issues, and that substantive issues should only be determined if necessary for the giving of directions. Here the rights of QBE are contended to be substantive rights. I do not need to determine that issue in order to issue directions and I do not intend to determine that matter. Issues such as whether QBE ought be estopped by election from prosecuting the appeal, or indeed whether it has any rights to be joined in the appeal, are matters for elsewhere. It is against the background of the critical facts and the principle that determinations of questions of fact or law ought not be made in the context of applications by trustees for directions pursuant to s.134 that I make my orders.
I certify that the preceding thirty (30) paragraphs are a true copy of the reasons for judgment of Judge Burnett
Date: 23 October 2013
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