Otvosi v Angelo Ferella

[2008] FMCA 1250

FEDERAL MAGISTRATES COURT OF AUSTRALIA

OTVOSI & ANOR v ANGELO FERELLA [2008] FMCA 1250

BANKRUPTCY – Application for leave to take a fresh step in Supreme Court proceedings – no provable debt – leave under s.58(3)(b) of the BankruptcyAct 1966 not required – application for a declaration – whether necessary for the purposes of carrying out or giving effect to the Bankruptcy Act.

Bankruptcy Act 1966 (Cth), ss.27, 30, 58, 82

Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust v The Official Trustee in Bankruptcy as trustee of the bankrupt estates of Gustavo Ferella and Angelo Ferella [2008] NSWSC 685
Ferella v Otvosi (2005) 64 NSWLR 101
Foots v Southern Cross Mine Management (2007) 82 ALJR 173
Fraser v Commissioner of Taxation and Another (1996) 69 FCR 99
Green v Schneller and Another (2001) 164 FLR 82
In Re British Gold Fields of West Africa [1899] 2 Ch. 7
In Re Pitchford [1924] 2 Ch. 260
Melnik v Melnik (2005) 144 FCR 141
Norilya Minerals Pty Ltd, In the matter of Dean Edward Ireland v Adam Jonathon Ireland as named Executor of the Estate of Dean Edward Ireland [2006] FCA 1235
Otvosi & Anor v Angelo Ferella (No 2) [2005] FMCA 1647
Otvosi v Gustavo Ferella (2005) 225 ALR 301; [2005] FMCA 1653
Re McMaster; Ex parte McMaster (1991) 33 FCR 70
Storey v Lane (1981) 147 CLR 549

Applicants: ERVIN OTVOSI & KEIKO OTVOSI

Respondent: ANGELO FERELLA

File Number: SYG 2381 of 2005

Judgment of: Barnes FM

Hearing date: 15 August 2008

Delivered at: Sydney

Delivered on: 5 September 2008

REPRESENTATION

Counsel for the Applicants: Mr J. Johnson

Solicitors for the Applicants: Landerer and Company

Counsel for the Respondent: Mr D. Ash

Solicitors for the Respondent: Colin Biggers & Paisley

ORDERS

1. That the application for leave under s.58(3)(b) of the Bankruptcy Act 1966 to take a fresh step in Supreme Court proceedings No. 2583 of 2003 be dismissed.

2. That the application for a declaration be dismissed. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 2381 of 2005

ERVIN OTVOSI & KEIKO OTVOSI

Applicants

And

ANGELO FERELLA

Respondent

REASONS FOR JUDGMENT

Background

1. By interim applications filed on 29 July 2008 the Otvosis seek leave under s.58(3)(b) of the Bankruptcy Act 1966 (Cth) to take a fresh step in Supreme Court of New South Wales proceedings (No. 2583 of 2003) to make an application for a costs order following upon the judgment of 23 September 2005 of Hamilton J in Ferella v Otvosi (2005) 64 NSWLR 101 in which the Otvosis succeeded in a cross-claim against Gustavo Ferella and his son Angelo Ferella. The Messrs Ferella are separately represented in these proceedings but did not object to the proceedings being heard together with evidence in one matter being evidence in the other.

2. Sequestration orders were made by a Registrar of this Court on 14 October 2005 in relation to the estates of each of the Ferellas. The Otvosis were the petitioning creditors. The Official Trustee in Bankruptcy, who is the trustee of each of the bankrupt estates, did not appear in these proceedings, but sought that certain conditions be imposed as a term of any leave.

3. The Supreme Court proceedings before Hamilton J between the Ferellas and the Otvosis included a cross-claim by the Otvosis for enforcement of a restrictive covenant by an injunction to restrain the carrying out of a development on land at Point Piper in relation to which the Ferellas were the registered proprietors.  On 23 September 2005 Hamilton J granted the injunction sought by the Otvosis stating (at [38]) that he would appoint a time for short minutes to be brought in to give effect to his decision and that any question as to costs may be raised at that time.  The proceedings were listed before his Honour on 1 November 2007 for the making of orders giving effect to the judgment.  However the sequestration orders were made by this Court on 14 October 2005. 

4. On 1 November 2005, by oral application during proceedings in this Court brought by each of the Messrs Ferella for review of the sequestration orders, the Otvosis sought leave under s.58(3)(b) to take a fresh step in the proceedings before Hamilton J. That application was unsuccessful. I noted that there may be some doubt as to whether the fresh step proposed was to be taken in proceedings in respect of a provable debt, but assumed for the purposes of those proceedings that the leave of the Court was required. However on the limited evidence before me I was not persuaded that it was an appropriate case in which I should exercise my discretion to grant the leave sought under s.58(3) of the Act. (See Otvosi v Gustavo Ferella (2005) 225 ALR 301; [2005] FMCA 1653 and Otvosi & Anor v Angelo Ferella (No 2) [2005] FMCA 1647). The Supreme Court proceedings had been stood over until 16 November 2005. On that day Hamilton J made a number of orders, but did not make the costs order sought by the Otvosis.

5. A draft bill of costs has been prepared for the Otvosis which calculates their legal costs incurred in the hearing of the cross-claim in proceedings No. 2583 of 2003 in the Supreme Court to be the sum $114,258.61. 

6. Subsequently proceedings were commenced in the Supreme Court by Agusta Pty Ltd as trustee for the Cavallino Unit Trust against the Official Trustee in Bankruptcy as trustee of the bankrupt estates of the Ferellas. The Ferellas were the original trustees of the Cavallino Unit Trust. The proceedings concerned issues arising out of the administration of the trust on the bankruptcy of the Ferellas, in particular in relation to the net proceeds of sale of the Point Piper property that had been the subject of the proceedings before Hamilton J.

7. In Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust v The Official Trustee in Bankruptcy as trustee of the bankrupt estates of Gustavo Ferella and Angelo Ferella [2008] NSWSC 685 Nicholas J found that the Point Piper property was purchased by the Ferellas as trustees of the Cavallino Unit Trust (which was then known as the Modena Unit Trust). His Honour found that while Riva NSW Pty Ltd became the trustee of the Cavallino Unit Trust on 19 April 2005 the trust property had not vested in it but remained vested in the Ferellas at the time of their bankruptcies. His Honour found (at [23]) that Agusta Pty Ltd could not have been validly appointed as trustee by the Ferellas after they became bankrupt.

8. The Point Piper property was sold by the mortgagee.  The net proceeds of $1,788,532 were received by the Official Trustee who claimed a lien as security for the payment of certain claims and expenses incurred by the bankrupts in their capacity as trustees of the Cavallino Unit Trust.  In the Agusta proceedings the Official Trustee claimed the right to be indemnified out of the fund against personal liabilities incurred by the Ferellas in the performance of their duties as trustees.  Among other things, the Official Trustee sought to pay the legal costs of the Otvosis incurred in the hearing of the cross-claim in Supreme Court proceedings No. 2583 of 2003 in the sum of $114,258.61 and sought recoupment from the fund.  The plaintiffs in Agusta (who included Gustavo and Angelo Ferella) accepted that this liability was incurred in litigation concerning the Point Piper property and thus arose in the course of the trust affairs.  They also accepted the amount (Agusta at [47]), but contended that the liability was neither actual nor contingent and that a lien could only extend to actual debts.

9. Nicholas J found that because no order for costs had been made in proceedings No. 2583 of 2003, liability in respect of such costs was “within the category of potential or contingent liability which supports a lien over the fund” (at [49]).  On that basis the Official Trustee was entitled to have the fund remain available to it to protect its right of indemnity “until the liability has been ascertained or discharged” (at [49]).  His Honour held that the Official Trustee was entitled to a lien in respect of potential liability for the costs in the claimed amount of $114,258.61 and continued (at [50]): “Of course, unless and until the Otvosis obtain from the Court an order for costs on the cross- claim in their favour the defendant [the Official Trustee] incurs no liability to pay them.  As the defendant stands in the shoes of the Ferellas as trustees, in my opinion it has a duty to take all reasonable steps which are necessary to require the Otvosis to have the issues of liability and quantum finally determined one way or the other”.

10. The applicants in Agusta filed a notice of intention to appeal dated 25 July 2008 in the New South Wales Court of Appeal. 

Section 58(3) application 

1. Counsel for the applicants makes this further application for leave under s.58(3) of the Bankruptcy Act on the basis of what are said to be changed circumstances in light of the decision of Nicholas J in Agusta. In particular, the evidence before Nicholas J in relation to the existence of a trust and the findings as to the identification of the trustees in relation to this Point Piper property was not before the Court at the time of the earlier application for leave under s.58(3).

2. The applicants seek the leave of this Court on the basis that it is now apparent that the liabilities that gave rise to the claims they maintained against the Ferellas in the bankruptcy proceedings were in fact liabilities incurred by the Ferellas on behalf of the Cavallino Unit Trust and that there is a right of indemnity against the trust assets.  The Otvosis wish to obtain a costs order in the proceedings that were before Hamilton J, to have the costs assessed and recover against the trust assets held by the Official Trustee in accordance with the declaration made by Nicholas J that the Official Trustee held a lien over the assets of the trust in respect of certain liabilities including:  “The amount of $114,258.61, representing a contingent liability in respect of the unassessed legal costs of Mr and Mrs Otvosi incurred by them in the hearing of a cross-claim in proceedings number 2583 of 2003 in this Court”. 

3. Counsel for the Otvosis conceded, in light of Foots v Southern Cross Mine Management (2007) 82 ALJR 173, that it was now clear that if a costs order was made against the Ferellas by Hamilton J it would not be a provable debt in either of their bankruptcies.

4. It was contended that leave was nonetheless required under s.58(3) because the proceedings in which it was sought to take a fresh step were still proceedings against persons who were bankrupt, albeit the proceedings are not “in respect of a provable debt.” 

5. In effect it was submitted that the Otvosis were endeavouring to get into a position where a costs order could be made, calculated and enforced against the Cavallino Unit Trust assets. The impediment to this action was said to be that on a strict reading of s.58(3) (particularly paragraph (b)), the Otvosis could not take “any” fresh step in the Supreme Court proceedings before Hamilton J. 

6. The applicants contended that there were two components to s.58(3)(b) and that while the leave of the Court was required to “commence” legal proceedings only if they were in respect of a provable debt, leave was required in relation to “any” fresh step in proceedings against a bankrupt or the property of a bankrupt. 

7. The applicants submitted that leave of this Court should be granted given that the Official Trustee had a right of recovery against the trust fund by virtue of the lien which Nicholas J had declared to exist over the assets of the Cavallino Unit Trust.  It was pointed out that while a notice of intention to appeal had been filed in relation to the Agusta decision, if on appeal it was found that Riva NSW Pty Ltd was not properly appointed, then the Ferellas would remain the trustees. It was submitted that the present application was not inconsistent with the objectives of the Bankruptcy Act, given that what was sought was access by way of indemnity to the property of the Cavallino Unit Trust and that on that basis leave should be granted.

8. The solicitor for Gustavo Ferella was content to concur with the submissions of counsel for Angelo Ferella who submitted that the application for leave should be dismissed because it was now clear on the authority of the majority of the High Court in Foots that there was no provable debt and hence that leave was not required and could not be given by this Court under s.58(3) of the Bankruptcy Act.

Resolution

1. Section 58(3) of the Bankruptcy Act is as follows:

   Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

   (a)     to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

   (b)     except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

2. It is not disputed by the applicants that the costs order sought is not a provable debt. Hence it is not necessary for this Court to consider the scope of that concept in s.82 of the Act (cf Kirby J in dissent in Foots) or indeed the meaning of the expression “in respect of” in s.58(3)(b) (as to which see Melnik v Melnik (2005) 144 FCR 141).

3. The applicants’ primary contention is that the circumstances are within s.58(3)(b) on the basis that the words “or take any fresh step in such a proceeding” are not limited to proceedings in respect of a provable debt and that leave should be granted in the peculiar circumstances of this case or, at the least, out of an abundance of caution. 

4. I am not persuaded by this contention. No authority was cited in support of such an interpretation of s.58(3). It would give no meaning to the word “such” in s.58(3)(b) and is not consistent with the approach taken by the majority of the High Court in Foots. In that case the primary issue for determination was whether a costs order made after the appellant became bankrupt was a provable debt within the meaning of s.82 of the Bankruptcy Act. However their Honours also addressed the issue of whether the proceedings in which the costs order was sought were stayed pursuant to s.58(3) of the Bankruptcy Act in the absence of the leave of the Federal Court or this Court.

5. Importantly for the present purposes, the majority in Foots (Gleeson CJ, Gummow, Hayne and Crennan JJ) pointed out at [3], that if the costs order did not give rise to a provable debt the court in which the costs order was sought (in that case the Supreme Court of Queensland) was free to proceed, subject only to any requirements of Queensland procedure. Their Honours then held that a costs order made after bankruptcy had intervened where the appellants’ liability to meet that order did not arise from an obligation incurred before bankruptcy was not a provable debt. Relevantly their Honours stated at [67] “Thus, it was not a provable debt, and the stay contained in s 58(3) of the Bankruptcy Act was not engaged.”  On that basis the Supreme Court of Queensland was entitled to make the costs order against the appellant. 

6. In other words, their Honours proceeded on the basis that the taking of a fresh step in proceedings which had commenced before bankruptcy only required the leave of a court in bankruptcy (as to which see s.27 of the Act) under s.58(3) if those proceedings were in respect of a provable debt.

7. Their Honours rejected (at [36]) the proposition that the risk that an order for costs would be made against a party once legal proceedings had been commenced was a contingent liability within s.82(1) of the Bankruptcy Act on the basis that the order for costs itself was the source of the legal liability and there was no certainty that the court in question would decide to make such an order. That issue is distinct from that determined by Nicholas J in Agusta at [49] in relation to whether there was a contingent liability for the purposes of the trustee’s indemnity. Given the language of s.58(3) and the view of the majority in Foots, I am not persuaded that the fact that liability in respect of costs where no order for such costs has been made is within the category of a “potential or contingent liability” which supports a lien over trust funds is such as to bring s.58(3)(b) into play. Leave under s.58(3)(b) to take a fresh step in proceedings is not required if the proceedings are not in respect of a provable debt.

8. Prior to the decision of the High Court in Foots, the question of whether a potential or contingent liability for costs was a provable debt where an order for payment of the costs had not been made before bankruptcy was not clear (cf In Re British Gold Fields of West Africa [1899] 2 Ch. 7 and In Re Pitchford [1924] 2 Ch. 260). That lack of clarity provided an explanation for the basis on which leave of the Court was sought on the last occasion.

9. While the majority in Foots did not consider the scope of s.58(3), their Honours clearly proceeded on the basis that as there was no provable debt the stay in s.58(3) was not engaged. If the s.58(3) stay is not engaged, leave is not required.

10. The interpretation of s.58(3) argued for by the applicants is not consistent with the plain words of s.58(3)(b), the context in which it appears and the purpose of such a provision in the Bankruptcy Act. The purpose of the Act is to ensure a fair distribution of a bankrupt’s assets among creditors, so that no one creditor receives an undue advantage and the bankrupt debtor is allowed a fresh start, free from existing debts (see Re McMaster; Ex parte McMaster (1991) 33 FCR 70 at 159 – 160 per Hill J and Fraser v Commissioner of Taxation and Another (1996) 69 FCR 99).

11. If a proposed legal proceeding in relation to a bankrupt or one in respect of which it is sought to take a fresh step is not in respect of a provable debt and is not such that it could enable one creditor of the bankrupt to obtain an advantage over another it is not the sort of proceeding which requires control by a provision such as s.58(3) for the purpose of preventing the scheme of the Bankruptcy Act from being defeated (cf Storey v Lane (1981) 147 CLR 549 at 555 per Gibbs CJ, Fraser v Commissioner of Taxation and Another (1996) 69 FCR 99 per Beaumont J and Green v Schneller and Another (2001) 164 FLR 82 per Barrett J).

12. Indeed, in circumstances such as those before the Court, given that the Supreme Court proceedings in question are not in respect of a provable debt, there is no reason of policy for the actions of the court exercising jurisdiction in bankruptcy to determine whether a fresh step should be taken in those proceedings. 

13. As there is no provable debt the occasion to exercise the power to grant leave under s.58(3) does not arise. Mr Ash, counsel for Angelo Ferella, indicated that he accepted that the leave of this Court under s.58(3)(b) was not necessary.

14. It has not been established that it is open to the Court to grant leave outside the circumstances in which s.58(3) applies. Were there still uncertainty about whether the Supreme Court proceedings in question were in respect of a provable debt such uncertainty could have been addressed as it was addressed by French J (as he then was) in Norilya Minerals Pty Ltd, In the matter of Dean Edward Ireland v Adam Jonathon Ireland as named Executor of the Estate of Dean Edward Ireland [2006] FCA 1235. On that basis leave could have been sought and granted if and to the extent to which the Supreme Court proceedings constituted or included a claim provable in the bankruptcy of the Ferellas. Had I been able to proceed on this basis I might well have granted leave on the evidence now before me, particularly given that it is now apparent that the objectives of the Bankruptcy Act will not be subverted by allowing the contemplated fresh step in the Supreme Court proceedings to be taken. However in light of the fact that it is properly conceded by the applicants that the Supreme Court proceedings are not in respect of a provable debt, such an approach is not open. Section 58(3)(b) is not applicable and this Court should not purport to grant leave out of an “abundance of caution” in such circumstances. 

1. In closing submissions counsel for the applicants suggested for the first time that if I did not accept the applicants’ submissions in relation to the interpretation of s.58(3)(b) I should exercise power under s.30 of the Bankruptcy Act to make a declaration that leave was not required and that the applicants were not precluded from moving for a costs order in respect of the proceedings in the Supreme Court.

2. The respondents opposed the making of a declaration as unnecessary. 

3. Section 30(1) of the Bankruptcy Act is as follows:

   The Court:

   (a)       has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and

   (b)       may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.

4. I am not persuaded that a declaration of the nature sought by the applicants is necessary for the purposes of carrying out or giving effect to the Bankruptcy Act within s.30(1)(b). It was acknowledged that the applicants did not seek to participate in the general assets of Mr Gustavo and Mr Angelo Ferella but rather to have a liability for costs determined which they then wish to recover from the trust fund. The applicants seek a declaration in relation to proceedings against persons who are bankrupt as a matter of comfort or out of an abundance of caution in relation to the anticipated return to the Supreme Court. This does not establish that it is necessary to make such a declaration for the purposes of this Court carrying out or giving effect to the Bankruptcy Act.

5. Hence each of the applications for leave under s.58(3) and the oral applications for declarations are dismissed. I will hear the parties in relation to costs.

I certify that the preceding thirty-seven (37) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate: 

Date:  5 September 2008