Pascoe v Official Trustee in Bankruptcy
[2006] FMCA 1099
•16 August 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| PASCOE & ANOR v OFFICIAL TRUSTEE IN BANKRUPTCY & ORS | [2006] FMCA 1099 |
| BANKRUPTCY – Trustee’s powers – assignment of cause of action – review by Court – proposed assignment to undischarged bankrupt – whether ineffective – whether advice should be given on propriety of assignment – decision to assign set aside. |
Bankruptcy Act 1966 (Cth), ss.58, 58(1), 58(6), 60, 60(2), 60(3), 60(4), 116, 116(1), 116(2), 116(2B), 120, 121, 134, 134(1), 134(3), 134(4), 178
Legal Profession Act 2004 (NSW), ss.345, 347
Citicorp Australia Ltd & Ors v Official Trustee in Bankruptcy & Anor (1996) 71 FCR 550
Cotterill v Bank of Singapore (Australia) Ltd(1995) 37 NSWLR 238
Freeman v Joiner [2005] FCAFC 149
Jambrecina v Official Trustee in Bankruptcy [2003] FCA 1352
Pascoe v Leite (No. 3) [2005] FMCA 969
Re Cirillo & Anor; Ex parte Official Trustee in Bankruptcy (1996) 65 FCR 576
Re Nguyen; Ex parte Official Trustee in Bankruptcy, Re Luu; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320
Temsign Pty Ltd & Anor v Biscen Pty Ltd & Ors (1998) 20 WAR 47, (1998) 157 ALR 83
Willoughby & Ors v Clayton Utz [2005] WASC 47, (2005) 193 FLR 373
| First Applicant: | SCOTT DARREN PASCOE |
| Second Applicant: | GYPSET PTY LTD (IN LIQUIDATION) (ACN 061 840 275) |
| First Respondent: | OFFICIAL TRUSTEE IN BANKRUPTCY |
| Second Respondents: | ANTONIO LEITE, LUIS LEITE AND PAULO LEITE |
| File Number: | SYG1012 of 2006 |
| Judgment of: | Smith FM |
| Hearing dates: | 16 June 2006, 24 July 2006 |
| Delivered at: | Sydney |
| Delivered on: | 16 August 2006 |
REPRESENTATION
| Counsel for the Applicants: | Mr B Skinner |
| Solicitors for the Applicants: | Turks Legal |
| Counsel for the First Respondent: | Mr S Golledge |
| Solicitors for the First Respondent: | Insolvency & Trustee Service of Australia |
| Counsel for the Second Respondent: | Mr B Washington |
| Solicitors for the Second Respondent: | Youngs Attorneys |
ORDERS
The decision of the first respondent notified to the applicant by letter dated 2 February 2006 and confirmed by letter dated 31 March 2006, to make an assignment to Paulo Leite, Luis Leite and Antonio Leite of the chose in action identified in their application received on 16 December 2005, is set aside under s.178 of the Bankruptcy Act 1966 (Cth).
The first respondent is directed not to make the assignment requested in that application for so long as the proposed assignees are undischarged bankrupts.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG1012 of 2006
| SCOTT DARREN PASCOE |
First Applicant
| GYPSET PTY LTD (IN LIQUIDATION) (ACN 061 840 275) |
Second Applicant
And
| OFFICIAL TRUSTEE IN BANKRUPTCY |
First Respondent
| ANTONIO LEITE, LUIS LEITE AND PAULO LEITE |
Second Respondents
REASONS FOR JUDGMENT
This is an application filed on 5 April 2006, invoking the Court’s jurisdiction under s.178 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). That section provides:
178Appeal to Court against trustee’s decision etc.
(1)If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.
(2)The application must be made not later than 60 days after the day on which the person became aware of the trustee’s act, omission or decision.
The applicants, who are creditors in the bankrupt estates of the three second respondents, seek orders under this provision that I review and set aside a decision of the trustee of their bankrupt estates. In that decision, the trustee decided to assign to the bankrupts their property rights in relation to causes of action for damages which they wish to pursue in proposed litigation against the applicants.
The evidence in the matter is voluminous, and the background is complex. Lengthy chronologies of relevant events are provided in the affidavits, and in the Application for Assignment which was the subject of the trustee’s decision. I have concluded that I can decide the application before the Court upon a short point, and that it is unnecessary for me to do more than provide a brief summary of the factual background to the case.
The first applicant is an official liquidator who in 2002 was appointed to wind-up an insolvent company of which the second respondents, Paulo, Luis and Antonio Leite (hereafter “the Leites”) were directors. The second applicant is that company. In 2004 the applicants successfully obtained judgment in the District Court against the Leites, following their execution on 19 July 2004 of terms of settlement reached in proceedings alleging breaches of directors’ duties in relation to insolvent trading. The applicants on 7 June 2005 and 4 August 2005 successfully obtained sequestration orders against each of the Leites, based on the judgment debt (see the judgment of Raphael FM in Pascoe v Leite (No. 3) [2005] FMCA 969). The first respondent is the trustee of their bankrupt estates (“the trustee”).
Before their bankruptcies, the Leites had commenced proceedings in the Supreme Court of NSW alleging misfeasance by the first applicant in his official conduct as liquidator of the second applicant, in particular, by oppressive conduct in relation to the District Court proceedings. Their initiating documents included an unparticularised claim for damages associated with causes of action under the Corporations Act, the common law tort of misfeasance in public office, and equitable or common law wrongs constituted by unconscionable conduct.
The Supreme Court proceedings encountered a set‑back, when on 28 July 2005 Bergin J refused to grant interlocutory relief, and ordered that the claim for damages be struck out due to the absence in the pleadings of a certificate by a legal practitioner under s.347 of the Legal Profession Act 2004 (NSW). This provides:
347Restrictions on commencing proceedings without reasonable prospects of success
…
(2)A law practice cannot file court documentation on a claim or defence of a claim for damages unless a principal of the practice, or a legal practitioner associate responsible for the provision of the legal service concerned, certifies that there are reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success.
(3)Court documentation on a claim or defence of a claim for damages is not to be accepted for lodgment unless accompanied by the certification required by this section. Rules of court may make provision for or with respect to the form of that certification.
…
Bergin J’s reasons appear in a transcript which she ordered to be placed on the file. Addressing the Leites’ solicitor, she said:
HER HONOUR: Mr Hall, I don’t know whether you appreciate how serious this is. You see, when a practitioner of this Court pleads a misfeasance case or comes into an open Court and makes an allegation of misfeasance in public office in respect of an officer of the Court one can’t simply do it with smoke and mirrors. It’s a most serious allegation and it has to be the subject of a certificate under the Legal Profession Act. That hasn’t happened, firstly and, secondly, there is no proper pleading that fits within the allegation. That’s the attitude that I take and it’s best that you know that because there is little chance of me exercising my discretion in your client’s favour on what you have told me. So to save costs and ensure that what you’re now embarked upon becomes regularised, at the very least I would need to see a clear claim that you make in a proper form.
There is nothing to be preserved here. If your client doesn’t pay up that’s your client’s problem. If your client wants to make the serious allegations and have a roving enquiry into Mr Lysle or Mr Pascoe then that’s your client’s prerogative and his entitlement under the Corporations Act but at the moment I am not impressed by the delay nor what I’ve seen in the material so, as you might get the impression, I’m against your application at the moment.
For those reasons, and I can give you some reasons in due course, but it seems to me that at the very least, looking at the main claim that was filed on 2 June, no Court will allow it to go forward in the present form that it’s in. That’s why I’ve asked whether a judge has had a close look at this. It’s very important that happens and it needs to be pleaded properly. To allege a conspiracy of sorts between Mr Topp, Mr Lysle and Mr Pascoe it just can’t be done the way it has been. I’m afraid, Mr Hall, it’s of the most serious kind. If there is evidence to support such a thing then, of course, the Court will consider it most seriously but it does not fit at the moment. There’s proper pleading that fits within the authorities of misfeasance in public office.
… [after an adjournment]
HER HONOUR: I’m not going to allow that interlocutory process to remain on file, the June one, unless it’s going to be clear that it’s not claiming a misfeasance in public office. There’s no certificate. It shouldn’t have been allowed to be filed. I’m in breach, or the Court’s in breach for allowing it to be filed. You either get rid of the claim for damages or give me a certificate. I’ll strike out the claim for damages. I won’t strike it out so it affects you adversely. It can remain on file for the time being. That means when there’s no claim for damages there doesn’t have to be a certificate. I think the certificate is limited to the claim for damages.
On 4 August 2005, following the making of sequestration orders against all three Leites, they requested the trustee to elect under s.60(2) of the Bankruptcy Act to prosecute their Supreme Court proceeding. They later showed the trustee a draft Statement of Claim purporting to be prepared pursuant to the orders of Bergin J. However, it made no claim for damages, and did not suggest that its prospects of success would be certified by a legal practitioner. At around this time they also unsuccessfully attempted to obtain indemnities and funds to maintain the action from creditors in the bankrupt estates.
By letter dated 11 August 2005, the trustee responded to the s.60 request:
In accordance with Section 60(2) of the Bankruptcy Act 1966 (‘the Act’), extract attached, I advise that the Official Trustee in Bankruptcy, Trustee of the bankrupt estate will elect not to prosecute the Supreme Court of New South Wales, Equity Division Proceedings No 3712 of 02, as there would be no benefit to creditors in the bankrupt estate by so prosecuting the action.
The Supreme Court proceedings were then dismissed on 12 August 2005.
In reports dated 20 October 2005, the trustee reported to creditors in all the Leite estates that each estate showed very substantial deficits, and that no dividends were expected to be paid. The trustee noted that each of the Leites in August 2004 had transferred their half interests in their matrimonial homes to their wives, and that there were strong prospects of recovery under ss.120 or 121 of the Bankruptcy Act. Litigation for this purpose would not, however, be commenced without “full creditor funding and indemnity”. The reports did not mention the claims previously made by the Leites against the present applicants.
On 31 October 2005, the Leites filed an interlocutory process in the Supreme Court seeking leave to proceed against the first applicant “by the filing of the accompanying proposed Statement of Claim”. The proposed pleading was in terms similar to the previous draft shown to the Trustee, making allegations of misfeasance in public office, misfeasance “for the purposes of the Corporations Act 2001 (Cth)”, “an abuse of the Court process”, and “unconscionable conduct within the meaning afforded this term under general law”. The pleading sought declarations to this effect, and an order that the first applicant and “any other person who may hereafter be appointed to the office of Liquidator” of the second applicant be restrained “from relying in any way upon” the terms of settlement and judgment in the District Court proceedings. Once again, the pleading included no claim for any damages, and did not suggest that its allegations would receive a lawyer’s certificate under the Legal Profession Act 2004 (NSW). It did, however, have an added prayer for:
6.ORDER that upon the making of Declarations 1 to 4 above, that these proceedings be placed in the Registrar’s list at a date to be determined for the purposes of directions being made for the Plaintiffs to plead and adduce evidence as to damages.
The interlocutory process was shown to the trustee, who by letter dated 7 November 2005 wrote to the Leites’ solicitors:
I refer to the above bankrupt estates, and your letter dated 31 October 2005 which enclosed a copy of your clients’ Interlocutory Application filed in the Supreme Court of New South Wales 31 October 2005. The Application I note seeks the Supreme Court’s leave to commence essentially the same proceedings against Mr Pascoe and Gypset Pty Ltd (In Liquidation) that were previously finalised in accordance with Section 60 of the Bankruptcy Act 1966 (‘the Act’).
The Official Trustee notes its objection to your clients’ filing of the Application on the basis that your clients’ do not have the Locus Standi to commence any legal proceedings (apart from those proceedings contemplated at Paragraph 116(g) of the Act), as undischarged bankrupts, let alone proceedings that have already been finalised pursuant to Section 60 of the Act. The Official Trustee can foresee no other result than your clients’ Application being dismissed by the Court with an adverse costs order against them. I anticipate that as the bankrupts’ solicitors, you would have advised them similarly.
The Leites’ solicitor then corresponded with the trustee seeking to reverse his opinions. This culminated in the lodgement on 16 December 2005 of a 194‑page proposal, with arguments and supporting documents, for the assignment to the three bankrupt Leite brothers of “a cause of action to commence proceedings against” the present applicants, being the causes of action shown in the proposed statement of claim with “the inserting of a claim in damages”.
The application’s arguments addressed various issues, including the history of the matter, whether leave of the Supreme Court was needed to proceed against an official liquidator, whether the Leites’ proceeding was in relation to property vested in the trustee under s.58 of the Bankruptcy Act, the extent to which the trustee needed to consider the strength of the case against the applicants, the effect of the terms of settlement and unchallenged District Court judgment, and the duties of the trustee. Although all of these matters became the subject of legal opinions obtained by the trustee, and of argument before me, I have found it unnecessary to make rulings upon any of these aspects. It is therefore unnecessary for me to explain or consider them further.
The Leites’ application for assignment continued their ambivalence as to whether, when, and how they would formulate pleadings for their causes of action for damages, and gave no indication whatsoever as to the particulars and quantum of damages which they might hope to recover. The application contains the following statements about this:
Executive Summary
…
The statement of claim upon which it is proposed that the Leite parties will proceed is save the inserting of a claim in damages upon an assignment having been granted by the Official Receiver, that which is contained at Enclosure “D”. [This was in terms of the “proposed Statement of Claim” which I have described above, and for which leave was being sought in Supreme Court proceeding No. 3712 of 2002.]
For the reasons outlined in this executive summary and expanded upon in the enclosed application, the Official Receiver is respectfully requested (to the extent that assignment of the said cause of action may be necessary) to grant an assignment.
…
A.Application to ITSA for the Assignment of a Cause of Action by the Leite Parties against Gypset Pty Ltd (in liq) and Mr Scott Pascoe
…
2.Each of the bankrupts (previously being directors of Gypset) seek an assignment only to the extent that any right to bring the proposed action as set out in the proposed statement of claim (refer enclosure D) vests in the Official Receiver.
3.This application is made without admission that the bankrupts require the consent of the Trustee to bring an action in the form contemplated against either the Liquidator or Gypset in any proceedings in which they would seek declarations, an inquiry, and/or any other redress concerning the conduct of the Liquidator, save a specific claim being made for damages.
4.Accordingly, this application is filed with the Official Receiver for the purposes of avoiding what may or may not be any ambiguity as to in whom the action presently vests. The assignment (if granted) will then be furnished in any subsequent action for leave to bring proceedings and will enable also a claim for damages to be specifically asserted against the persons Scott Pascoe and/or Gypset.
5.It is proposed that the cause of action proposed to be assigned would be the cause of action pertaining to the facts and circumstances as pleaded per enclosure “D” with such amendments as may be necessary for the purposes of prosecuting the contemplated proceedings.
…
C1.Nature of the Proceedings
…
1.4Relevantly, the applicants intend to approach the Supreme Court for these declarations. The underlying purpose of seeking an assignment from the trustee is to avail the action to sound as a case in damages and to resolve any ambiguity as to in whom the action presently vests. It is anticipated that any successful action will then provide the opportunity to deliver a return to creditors.
…
C3.Property considerations per s.58 and the right of a bankrupt to commence an action/proceedings without the consent of the Trustee
3.5It follows that the right of a bankrupt to commence an action after bankruptcy would ordinarily vest in the trustee either because:
3.5.1the action amounts to property and therefore vests in the trustee under the general vesting power of s.58, or
3.5.2the action is itself property divisible amongst the creditors by virtue of the specific vesting power of s.116(1)(b).
3.6It is accordingly submitted that the action proposed by the bankrupts makes out an exception to these provisions in that it does not involve, pertain to, disturb or otherwise affect property rights. There is no claim for damages and nothing by which it could be said that the decision of the Court in the proposed action could amount to property.
3.7As stated previously, the claim in damages was struck out by Bergin J on 28 July 2005 without prejudice to the rights for the Leite parties/the bankrupts to reinstate the claim upon the filing of a certificate by a legal practitioner certifying the claim in damages. To date, neither the Official Receiver nor any other person has signed such a certificate. Relevantly, as discussed it was this very fact that pre‑empted the prompt election of the Official Receiver to disclaim the action.
…
3.15On the basis of the fore said matters the bankrupts contend their interlocutory process has the legal effect of being nothing more than a request for the Court to make a pronouncement on the conduct of the Liquidator. There is no claim in damages. The “action” is not property (refer s.58) and accordingly does not vest in the Trustee.
3.16The applicants proposed action, not being one that presently sounds in damages is properly characterised as being an action in the nature of a personal right seeking declarations and a review of the liquidator’s conduct by the Court. On this analysis, the proposed action may be run without the benefit of any express assignment, save the fact that an assignment of the action resolves the need to address the issue and provides a mechanism in which a return may be provided (ultimately) to creditors.
…
C12.Terms of an assignment and the benefit that this may hold for creditors
…
12.2The Leite parties will agree that the proposed assignment be conditional upon the whole part of damages flowing from an assignment be held in trust and applied;
i.To the legal costs and expenses incurred by the Leite parties in bringing and prosecuting the action;
ii.to the costs of the Trustee;
iii.to the creditors of the bankrupt estate as admitted by the Official Receiver;
iv.to the Leite parties after the due administration of their bankrupt estates.
After receipt of this application, the trustee sought advice from counsel, Mr Golledge, who also has represented the trustee before me. Mr Golledge gave a series of written opinions, which were the subject of detailed criticism before me by counsel for the applicants. In his concluding general advice, Mr Golledge said:
21It follows from the previous analysis that if the proposed assignment offers some prospect of benefit to creditors, without the risk inherently involved in the conduct of litigation and if it cannot be said, as I think must be the case in light of the view of senior counsel, that the action is obviously frivolous then my view is that it would be a proper exercise of the trustee’s powers to agree to the assignment. The commercial terms of the assignment are a matter for negotiation. …
Mr Golledge’s reference to the opinion of senior counsel, was to an affidavit by a solicitor sworn on 6 October 2005 deposing to attending upon his Honour, Judge Donovan QC in chambers on that date. He said that he showed the judge a draft affidavit, which the judge said “accords with my recollections in this matter”. In the draft affidavit, the judge recalls being requested by the solicitor for the Leites in October 2004 “to give an advice in relation to conduct” by the present first applicant, and being told various allegations about his official conduct. The draft affidavit recounts:
11.I recall that I was asked to advise on matters including whether: -
i.there was any prospective cause of action available against Mr Pascoe and / or Mr Topp as to the manner in which they administered the winding up of companys where an official liquidator with the firm of insolvency practitioners “Sim’s Partners” had been appointed as the company’s official liquidator ?
ii.the effect if any, that settlement of the District Court proceedings may have had on the right of the persons Paulo, Luis and / or Antonio Leite to bring any further proceedings ?
iii.the nature of any subsequent proceedings that may have been available against Mr Pascoe and / or Mr Topp, as to the implementation of the scheme developed by Mr Topp and that had been allegedly been applied in the case of the directors of Gypset in respect of the winding up of the company by Mr Pascoe ?
iv.whether an action, if filed, would have reasonable prospects of success ?
12.I recall that I expressed an opinion to the effect that: -
i.a proceeding may be actionable against Mr Pascoe in the tort of abuse of process, or for unconscionable conduct;
ii.such an action would involve an element of misfeasance in the administration of office by a liquidator;
iii.the effect of the settlement of the action could not be fully determined concerning an action for abuse of process without some further consideration of the matter, but that the settlement would probably be of lesser effect in relation to an unconscionable conduct proceeding;
iv.any such action as was proposed to be filed would have reasonable prospects of success, and that such conduct as had been briefed to me was properly the subject of a court proceeding.
13.I understand that subsequent to the obtaining of my advice, that a proceeding was commenced in the Common Law Division of the Supreme Court of New South Wales against each of Mr Pascoe and Mr Topp, proceedings no. 20463 of 04.
14.I recall being shown the statement of claim proposed to be filed in these proceedings and that I indicated that in my view the document was sufficient for the purposes of filing.
The decision of the Trustee in relation to which relief is sought in the present proceedings was communicated to the applicants by letter dated 2 February 2006. It said:
I refer to the above matter and previous correspondence in relation to same. The Trustee has received Mr Golledge’s advice in relation to the Application, under which the Trustee has been advised to assign the chose in action. I have asked Steve if he has any objection to the Trustee providing a copy of the advice to you, and should he not, I will forward same on.
Under Mr Golledge’s advice, the recent Full Court decision of Freeman v Joiner (2005) was principally cited.
It would be anticipated, that following Mr Golledge’s advice, and agreement between the Trustee and assignee(s) as to the terms of the assignment, the Trustee will in performing its duties under the Bankruptcy Act 1966, assign the chose in action. As the Trustee needs to consider the assignment on a commercial basis, a party offering a suitable amount up front for the assignment would need to be considered seriously by the Trustee, particularly as an up front amount received into the estate for an assignment, may enable the Trustee to take action in relation to the bankrupt’s transfer of Real Property prior to bankruptcy.
At the same time, the solicitor for the Leites was sent an email asking: “what in your opinion may be a likely amount in dollar terms, that would be awarded to your clients in the event the action against Mr Pascoe was assigned, and your clients were ultimately successful?” Mr Hall responded in one sentence: “the likely award in damages including exemplary damages may exceed the entirety of costs of administering the bankrupt estate, the reimbursement of all creditors claims, running into several hundreds of thousands of dollars”. He indicated that he had no instructions to offer an amount his clients “would be prepared to pay up front for an assignment”.
On 23 February 2006, the trustee wrote to the Leites’ solicitor, stating (emphasis in original):
I refer to the above bankrupt estates, and previous correspondence in relation to same.
As requested, I reiterate that the Trustee has received advice from Mr Golledge of Counsel, that the Chose in Action against Mr Pascoe & Ors may be assignable by the Trustee to your client bankrupts, however, there is no certainty that any such assignment to your bankrupt clients will be effective. The Trustee will offer no warranty as to the effectiveness of any Assignment. The Trustee’s advice is that the Trustee can be relatively certain that should the action be assigned, and your client bankrupts are unsuccessful in the action, the Trustee will not be exposed to adverse legal costs.
On the basis of Mr Golledge’s advice, and taking into account the Trustee’s duties as set out under Paragraphs 19(1)(j) & (k) of the Bankruptcy Act 1966, which require the Trustee to avoid unnecessary expense and administer the estate in a commercially sound way, the Trustee will instruct Mr Golledge to act on the trustee’s behalf in drafting a Deed of Assignment, subject to:
1.an amount of $3,000 (‘sufficient funds’) being received into the estate to cover the costs of drafting a Deed of Assignment. The Trustee will not instruct Mr Golledge to draft the Deed without sufficient funds in the estate.
2.no other matter arising which would make an Assignment to your clients uncommercial.
Should your clients provide a cheque in the amount of $3,000, payable to the Official Trustee in Bankruptcy, within 14 days of the date of this letter, and there being no other matter arising which would make an Assignment to your clients uncommercial, the Trustee will instruct Mr Golledge to draft a Deed of Assignment. Any amendments that your clients would wish to make to any Deed drafted by Mr Golledge, would be a matter for negotiation, as is the usual course.
On 3 March 2006, the trustee wrote to the present applicants’ solicitor, rejecting their offer “to settle the alleged cause of action” for $12,000. The letter said that the trustee “has taken into consideration Mr Golledge’s advice and the cases cited therein, and the possibility that the bankrupts’ action may be successful and result in a significant return to the bankrupt estates”.
On 31 March 2006, the trustee wrote to them responding to a lengthy argument they presented on 14 March 2006 which urged consideration of various points suggesting that the proposed claim against their clients had no prospects of benefit to the bankrupt estates, and that they were “simply Mr Hall and/or HAL Lawyers attempt to continue their vexatious pursuit of my clients”. The trustee said:
I advise that the Trustee has not changed its decision from that set out in ITSA letter 3 March 2006, and consequently will continue with an assignment of chose in action to the bankrupts.
The Trustee will defend its decision, should your client appeal under Section 178 of the Bankruptcy Act 1966.
The present application under s.178 was then commenced, seeking review of the decision of the trustee communicated to the applicants in the above correspondence.
Among his numerous contentions seeking to demonstrate error in the trustee’s decision, counsel for the applicants presented the following argument in his written submission, and supported it in oral submissions:
VESTING OF CHOSE IN ACTION
28.Upon the making of a sequestration order vesting of property including rights of action occurs and thereafter all after acquired property vests in the trustee. The statutory scheme is directed “at absolute control of the bankrupt’s property for the benefit of creditors”. [citation omitted]
29.It is submitted that the chose of action the subject of a proposed assignment is property for the purposes of the Act and is vested in the trustee.
EFFECT OF ASSIGNMENT
30.None of the proposed plaintiffs has been discharged from bankruptcy and therefore the effect of the proposed assignment would, as a matter of statutory construction be to re‑vest the action in the trustee. See decision of Wheeler J. in Temsign Pty Limited & Ors v Biscen Pty Limited & Ors [1998] WASC 236 as applied by Bennett J. in Drago Jambrecina v Official Trustee in Bankruptcy [2003] FCA 1352 and followed by Master Newnes in Willoughby & Ors v Clayton Utz [2005] WASC 47.
31.The position where a party has been discharged is radically different as was demonstrated in Re Cirillo & Anor; Ex parte Official Trustee in Bankruptcy (1996) 65 FCR 576. See also Re Nguyen; Ex parte Official Trustee in Bankruptcy, Re Luu; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320.
32.The proposed assignment is thus contrary to the operation of the Act and for this reason alone should be disallowed.
Counsel for the trustee responded in his written submission (emphasis in original):
10.The criticisms made by the Applicants are put on both qualitative and procedural grounds. That is, it is said that the Trustee ought to have accepted that the proposed claims were, for a variety of reasons, hopeless and their prosecution would be vexatious. Additionally the Applicants criticize the conduct of the case officer who, at the time, had the day to day carriage of the administrations on the basis of an asserted failure to consult with apparently more experienced colleagues (who, the Applicants must be taken to suggest, would have recommended a different decision).
11.The Trustee proposes to respond to both criticisms. Before doing so, it is appropriate to deal with the argument which appears at Paragraphs 28‑32 of the Applicants’ Submissions–this is the argument that any assignment to the bankrupts would be ineffective (and thus should not proceed) because the causes of action would simply re–vest in the bankrupt estates as after acquired property and the assignees would still be unable to prosecute any claim. The Trustee accepts the validity of that submission. It was a matter which was dealt with in the original application from the 3 bankrupts and was the subject of detailed submissions from their lawyers. (See pages 11 and 17 of the original assignment submission). In approving the assignment the Official Trustee expressly disavowed any warranty as to the effectiveness of the assignment. That was a matter on which the assignees were to take and rely upon their own advice.
In his oral submissions, Mr Golledge did not retreat from his acceptance of Mr Skinner’s submission. He accepted that it would not be proper for the trustee to enter into a legally ineffective assignment of a chose in action to the bankrupts, and that the decision to do this should be set aside on that ground. He did not point to any evidence suggesting a prospect that the Leites could lose that status earlier than a discharge from bankruptcy by effluxion of time in 2008. Nor did he point to any evidence suggesting that they would be able to present a non‑bankrupt person who is interested in seeking an assignment of the alleged chose in action against the applicants, whether for valuable consideration or otherwise. However, he submitted that the Court should embark upon an assessment of the propriety of an assignment upon assumptions as to a hypothetical future request to the trustee for an assignment in similar terms to the present application by the Leites. He submitted that I should give a general direction in the following terms, and should otherwise dismiss the application with costs:
1.That pursuant to Section 178 of the Bankruptcy Act 1966, the Court orders that the Official Trustee is able to proceed with the assignment of the cause of action identified in the Application for Assignment of a Cause of Action dated 14 December 2005 provided such assignment is made to persons other than the Second Respondents, or any of them, whilst they remain undischarged from their bankruptcies.
In their originating application, the applicants did not join the bankrupt Leites as parties to the proceeding. However, the bankrupts applied for joinder, and this was not opposed by the other parties. I ordered this, reserving issues of costs arising from their joinder.
The Leites appeared at the hearing by counsel, who made submissions opposing the applicants’ contention that the assignment would be legally ineffective due to the revesting as after‑acquired property of any chose in action which had vested in the trustee and was capable of being assigned. I have considered his arguments, and reject them for the following reasons.
Sections 58(1) and (6) of the Bankruptcy Act provide:
58Vesting of property upon bankruptcy–general rule
(1)Subject to this Act, where a debtor becomes a bankrupt:
(a) the property of the bankrupt, not being after‑acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b) after‑acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
…
(6)In this section, after‑acquired property, in relation to a bankrupt, means property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt.
Sections 60(2), (3) and (4) provide:
60Stay of legal proceedings
…
(2)An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
(3)If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.
(4)Notwithstanding anything contained in this section, a bankrupt may continue, in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of:
(a) any personal injury or wrong done to the bankrupt, his or her spouse or a member of his or her family; or
(b) the death of his or her spouse or of a member of his or her family.
Section 116 of the Bankruptcy Act defines “property divisible amongst creditors”, to include:
116Property divisible among creditors [see Table B]
(1)Subject to this Act:
(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge;
(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge;
…
(2)Subsection (1) does not extend to the following property:
(a) property held by the bankrupt in trust for another person;
…
(g) any right of the bankrupt to recover damages or compensation:
(i)for personal injury or wrong done to the bankrupt, the spouse of the bankrupt or a member of the family of the bankrupt; or
(ii)in respect of the death of the spouse of the bankrupt or a member of the family of the bankrupt;
and any damages or compensation recovered by the bankrupt (whether before or after he or she became a bankrupt) in respect of such an injury or wrong or the death of such a person;
Sections 134(1) and (a), (aa), (j), (k), and (o) and (3) and (4) provide:
134Powers exercisable at discretion of trustee [see Table B]
(1)Subject to this Act, the trustee may do all or any of the following things:
(a) sell all or any part of the property of the bankrupt;
(aa) accept, without terms or conditions, or subject to terms and conditions, a sum of money payable at a future time as the consideration or part of the consideration for the sale of any property of the bankrupt;
…
(j) bring, institute or defend any action or other legal proceeding relating to the administration of the estate;
(k) execute powers of attorney, deeds or other instruments for the purpose of carrying the provisions of this Act into effect; and
…
(o) administer the property of the bankrupt in any other way.
…
(3)Subject to this Act, the trustee may use his or her own discretion in the administration of the estate.
(4)The trustee may at any time apply to the Court for directions in respect of a matter arising in connexion with the administration of the estate.
In the present case, the submissions of all counsel proceeded upon the assumption that the chose in action representing the Leites title to commence and proceed with claims for damages upon the causes of action suggested by the proposed statement of claim was property which had vested in the trustee under s.58(1)(a) or (b). The proposed assignment was required by the Leites, therefore, to give them a legal interest conferring a locus standi to commence a new proceeding relying upon those causes of action or to amend their current proceeding so as to include them. Although s.60(2) and (3) brought about the termination of the previous proceedings which were current at the date of their bankruptcies, its provisions were not directly relevant. It was not contended by the Leites that their causes of action in damages were preserved in their hands by s.60(4) or were property unavailable to creditors under s.116(2)(g). It was also common ground that the trustee had powers under s.134 to assign the chose in action upon any terms thought appropriate. Authorities for these propositions were cited to me, and I accept them.
In Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47, 157 ALR 83, Wheeler J in the Supreme Court of WA considered the standing of undischarged bankrupt plaintiffs to continue proceedings which the defendants argued should be deemed abandoned under s.60(3). The plaintiffs sought to rely upon a deed of assignment of the causes of action executed by their trustee, but the defendants argued that the assignment was legally ineffective. Wheeler J examined the relevant sections of the Bankruptcy Act, and the authorities which have upheld a trustee’s power to make an assignment of a chose in action to a bankrupt.
When discussing the legislative policies underlying the relevant provisions of the Bankruptcy Act, she concluded:
If the purpose of s 60 is the protection of other parties from litigation commenced by a bankrupt, in part for the reason that a bankrupt will neither be personally at risk as to costs, nor able to meet an order for costs, a power in the trustee to assign the action to the bankrupt would appear to be contrary to this objective. Similarly, such a power would not appear to promote orderly administration of the estate, nor to assist in removing uncertainty.
Wheeler J distinguished Re Cirillo & Anor; Ex parte Official Trustee in Bankruptcy (1996) 65 FCR 576 (“Cirillo”), upheld on appeal in Citicorp Australia Ltd & Ors v Official Trustee in Bankruptcy & Anor (1996) 71 FCR 550 (“Citicorp”), where Branson J authorised an assignment of choses in action to a person who had been divested of their title upon his bankruptcy. She pointed out that the bankrupt in Cirillo had been discharged from bankruptcy by force of law some months prior to the date upon which he offered to purchase the rights to the choses in action.
Wheeler J also considered the judgment of French J in Re Nguyen; Ex parte Official Trustee in Bankruptcy, Re Luu; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320, where one proposed assignee had also been discharged from bankruptcy before requesting an assignment of a chose in action, and the situation of the second assignee was unclear. She thought that the issue whether a chose in action assigned to a bankrupt would immediately revest in the trustee pursuant to s.58(1)(a) had not been addressed by French J.
Wheeler J concluded that, as a matter of statutory construction:
(a)s 60(4), particularly read in combination with ss 58 and 116 of the Act, has the effect that there is no power in the trustee to assign a chose in action to the bankrupt; and further, in any event;
(b)if there is power to assign, it can arise only after the trustee has made an election within the meaning of s 60(2).
In my opinion, her Honour’s opinion in that case that the assignment was “invalid” also rested, in part, upon her opinions that an assignment to an undischarged bankrupt was legally ineffective due to the immediate revesting of the chose in action in the trustee as “after‑acquired property”.
In Willoughby & Ors v Clayton Utz [2005] WASC 47, (2005) 193 FLR 373, at [31] Master Newnes cited Wheeler J’s judgment in support of the proposition that causes of action forming part of a bankrupt’s estate under s.58 could not have been assigned to him until after his discharge from bankruptcy.
In Jambrecina v Official Trustee in Bankruptcy [2003] FCA 1352, Bennett J cited Wheeler J’s judgment for this proposition, expressing no disagreement:
[30]Further, while it is apparent that a right of action may be sold to the bankrupt (Cirillo at 585; Citicorp at 558) a question arises as to whether that assignment may take place during the period of the bankruptcy. Mr Jambrecina is presently bankrupt. In Cirillo and also in Re Nguyen; Ex parte Official Trustee in Bankruptcy, Re Luu; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320, the offer by the bankrupt to purchase the rights in the chose in action was made after discharge from bankruptcy by force of law.
[31]In Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47, Wheeler J considered whether there was power in the trustee to assign a chose in action to a bankrupt during the term of the bankruptcy and concluded (at 54) that there was no such power, noting that the scheme and purpose of the Act is directed at absolute control of the bankrupt’s property to the benefit of creditors. Her Honour observed (at 52) that there would appear to be difficulties with such an assignment as the chose in action could well fall into the category of ‘after acquired property’ (s 58(1)(b)) and immediately revest in the trustee and (at 54) that the Act seeks to protect other parties from litigation commenced by a bankrupt who will neither be personally at risk as to costs, nor able to meet an order for costs.
Counsel for the Leites argued that opinions inconsistent with this reasoning were expressed by Bainton J in Cotterill v Bank of Singapore (Australia) Ltd(1995) 37 NSWLR 238. In that case, Bainton J concluded that a trustee had power under the Bankruptcy Act to assign a chose in action, and that such an assignment would not be rendered ineffective as contrary to the public policy against champertous arrangements. In my opinion, his Honour’s reasoning did not address the present issue. Although he appears at p.250D to accept that the power could include an assignment to the bankrupt, he did not address the legal effectiveness of exercising it while the bankrupt was undischarged. Nor, on the facts of the case, was it necessary for him to address that situation, since the assignment in question was made to the son of the bankrupt.
I therefore do not accept that there is any conflict of authority in relation to this issue. With respect, I consider the opinions of Wheeler J are correct, and that an assignment of a chose in action to an undischarged bankrupt would be legally ineffective due to the provisions of s.58(1)(b). I therefore accept the submission of the present applicants, accepted by counsel for the trustee, that the present decision of the trustee was based upon a fundamental misconception of law, and that it should be set aside for that reason.
Counsel for the Leites submitted, to avoid the effect of s.58(1)(b), that there would not be immediate revesting in the trustee, since the proposed assignment was intended to transfer only the legal title to the chose in action, with its future benefits held in trust for the bankrupts’ estates. He argued that the property assigned would, therefore, not be “after‑acquired property” as defined in s.58(6), because it would be preserved from being property divisible amongst creditors as “property held by the bankrupt in trust for another person” within the exclusion in s.116(2)(a).
However, in my opinion, the terms of assignment proposed in cl.12.2 of the Application for Assignment (see above at [16]) do not show an intention that either the legal title to the assigned chose in action, or the whole benefit of the proceeds of the chose in action, should be held on trust for persons other than the Leites. In the terms of the proposal, the only trust which is proposed is in relation to the “damages flowing from an assignment”, and in relation to these the Leites are themselves identified as intended beneficiaries in relation to their “legal costs and expenses” and “after the due administration of their bankrupt estates”.
Moreover, if I were able to assume that the proposed assignment to the Leites in its final form would establish them only as bare trustees for the benefit of the bankrupt estate, this would, in my opinion, provide a clear objection to the assignment. In effect, this would appoint undischarged bankrupts as trustees in relation to their own estate in bankruptcy. In my opinion, this would plainly be contrary to the policy of the Bankruptcy Act, and in particular to the policy identified by Wheeler J in the above extract. If I were incorrect in thinking that the proposed assignment would be legally ineffective in its entirety, I would have set aside the decision to proceed with the requested assignment on this ground alone.
A further contention is made in a written submission which counsel for the Leites passed up, but did not address. This is that the Court could avoid the effect of s.58(1)(b), by ordering:
… in accordance with Section 116(2B) that the property subject of the proposed cause of action arising in these proceedings is, upon the making of this order, no longer divisible property in respect of the estates of the persons Paulo, Luis and Antonio Leite;
Section 116(2)(b), (c) and (ca) and s.116(2B) provide:
116Property divisible among creditors [see Table B]
…
(2)Subsection (1) does not extend to the following property:
…
(b) the bankrupt’s household property that is:
(i)of a kind prescribed by the regulations; or
(ii)identified by a resolution passed by the creditors before the trustee realises the property;
…
(c) the bankrupt’s property that is for use by the bankrupt in earning income by personal exertion and:
(i)does not have a total value greater than the limit prescribed by the regulations; or
(ii)is identified by a resolution passed by the creditors; or
(iii)is identified by an order made by the Court on an application by the bankrupt;
(ca) property used by the bankrupt primarily as a means of transport, being property whose aggregate value does not exceed the amount prescribed by the regulations or, if before the trustee realises the last‑mentioned property the creditors determine by resolution a greater amount in relation to that property, that greater amount;
…
(2B)Where, because of a resolution passed by the creditors, or an order made by the Court, under paragraph (2)(b), (c) or (ca), property that is vested in the trustee ceases at a particular time to be property divisible among the creditors, then, immediately after that time:
(a) the property revests in the bankrupt;
(b) the trustee is discharged from the trustee’s liabilities in respect of the property; and
(c) the bankrupt becomes subject to those liabilities.
However, in my opinion this contention misreads the effect of s.116(2B). In its clear terms, it operates to revest only limited classes of property in a bankrupt, being the classes addressed by paragraphs 116(2)(b), (c), or (ca). Under only paragraph (c), concerning property used in earning income by personal exertion, is the Court given power to identify a specific item as property which is not to be divisible amongst creditors. This power would not be available in relation to property of the nature of the chose in action which is presently under consideration. I therefore do not consider that the Court has any discretionary power which would be given effect under s.116(2B) to exempt from the effect of s.58(1)(b) an after‑acquired chose in action such as is sought by the Leites. Moreover, if I had that power, the policy of the Act which I have identified above, would cause me to decline to exercise it in the present circumstances.
For the above reasons, I accept the contention of the applicants that the proposed assignment would be legally ineffective or improper, due to the proposed assignees’ status as undischarged bankrupts. I am satisfied that it is therefore “just and equitable” for me under s.178 of the Bankruptcy Act to set aside the trustee’s decision and to direct the Official Trustee not to proceed with the proposed assignment.
I reject the request of counsel for the Official Trustee that I should also embark upon an assessment of the propriety of the trustee agreeing to an hypothetical future application for assignment. I consider that the Court should be cautious in allowing its s.178 jurisdiction to become an avenue for judicial advice in relation to matters which might in the future call for decision by the trustee, even if as a matter of jurisdiction this were within the scope of s.178. On the evidence before me, there is considerable doubt whether a future request for assignment will ever be made, the terms in which it would be made, and the circumstances which might exist at the time when it will be decided. I consider that it would be inappropriate for me to give any opinions based upon assumptions as to these elements. If a future request for assignment is made, I consider that it would be necessary for the trustee to make a fresh consideration of the relevant issues.
I would only observe, in response to the request of the trustee for guidance, and based on my reading of the material currently before me, that if a future request were received in the same terms as the present application but from a solvent supporter of the Leites, the trustee should reconsider whether there is indeed a real prospect, however intangible, that an assignment of their causes of action for damages “could result in some benefit to the creditors” (c.f. Citicorp (supra) at 559F and 563). For myself, I would not read the evidence as to his Honour Judge Donovan QC’s 2004 opinions as sufficiently addressing this issue. I also note that Mr Golledge’s advice avoided expressing an opinion on whether there was any prospect of benefit.
Moreover, I also consider the trustee should re‑address its public interest responsibilities. I consider that there are elements in the history which I have sketched above raising a clear issue whether the Leites’ claims for damages are vexatious within the principle referred to in Citicorp (supra) at 565D and explained by the Full Court in Freeman v Joiner [2005] FCAFC 149 (“Freeman”) at [18]‑[19]:
[18]Citicorp v Official Trustee holds that it is not incumbent upon a trustee to make enquiries about the prospects of success of an action when deciding whether to assign a cause of action (at 561). In many cases it will be more practical simply to assign it for a consideration, leaving the purchaser to risk costs. On the other hand it is an aspect of the trustee’s public duty that a claim with no reasonable prospect of success, the prosecution of which would be frivolous and vexatious, should not be assigned: Citicorp v Official Trustee at 565. Their Honours went on to observe that in most cases it will not be clear that a claim has no reasonable prospects. Where it is clear, however, the trustee as an officer of the Court, and the Court itself, should not allow the assignment to occur even where money is offered for it.
[19]It does not follow from Citicorp v Official Trustee that in a case where trustees are not certain about the prospects of a claim’s success, that an assignment should follow. Principles about what a trustee should do in a particular case cannot be stated as universal. Trustees will be faced with different factual scenarios to which the general principles relating to their duty and to practical issues will need to be addressed. The present case is unusual in that there are strong indications that the further pursuit of the actions may well be frivolous and vexatious.
In my opinion, it would be open to the trustee to take into account as reflecting upon both the nature of the Leites’ claims and their prospects of recovering damages, their deliberate avoidance in their past and proposed Supreme Court pleadings and the Application to the trustee, of any pleading of particularised causes of action in damages, and the absence of any written professional opinion addressing the requirements of ss.345 and 347 of the Legal Profession Act 2004 (NSW).
I would also commend to the trustee, if it is concerned about becoming embroiled in litigation between a supporter of the Leites and the applicants as to the merits of the proposed litigation, that it should consider the wisdom of the trustee’s approach endorsed by the Full Court in Freeman: of first requiring sufficient funds to allow the trustee fully to satisfy itself as to the prospect of some benefit to creditors and whether the assignment would be consistent with its responsibilities as an officer of the Court.
Beyond these observations, I do not consider that it is either necessary or “just and equitable” in this proceeding for me to offer the trustee any further comments upon the material and arguments presented to me.
I shall appoint a further listing to hear the parties in relation to costs.
I certify that the preceding fifty‑eight (58) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Lilian Khaw
Date: 16 August 2006
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