Pearce v Clear Island Investments Pty Ltd
[2009] FMCA 532
•5 June 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| PEARCE v CLEAR ISLAND INVESTMENTS PTY LTD | [2009] FMCA 532 |
| BANKRUPTCY – Claim by trustee to superannuation asset of bankrupts – application for preservation of the fund until final hearing – nature of trustee’s claim – whether respondent should be entitled to pay legal expenses in defence of proceedings from assets sought to be recovered. |
| Bankruptcy Act 1966, ss.5, 30, 58, 116, 128B, 128C Federal Magistrates Court Rule 1.05 Federal Magistrates Court Act 1999, ss.14 and 15 |
| Cardile v LED Builders Pty Ltd (1999) 198 CLR 435 Official Trustee v Trevor Newton Small Superannuation Fund & Anor (2001) 114 FCR 160 Coverdale v Chorlton (1878) 4 QBD 104 Oliveri v Jones NSWCA 14.10.97 Re Brall; ex parte Norton (1893) 2 QB 381 NA Kratzmann Pty Ltd v Tucker (1966) 123 CLR 257 PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 A v C [1981] QB 596 Chief Constable of Kent v V [1983] QB 34 Badman v Drake [2008] NSWSC 968 Australian Receivables Ltd v Tekitu Pty Ltd [2008] NSWSC 433 |
| Applicant: | MARK WILLIAM PEARCE AS TRUSTEE OF THE BANKRUPT ESTATES OF NEIL IAN LEGGETT & JULIE LEGGETT |
| Respondent: | CLEAR ISLAND INVESTMENTS PTY LTD AS TRUSTEE OF THE CII SUPERANNUATION FUND |
| File Number: | BRG 310 of 2009 |
| Judgment of: | Wilson FM |
| Hearing date: | 14 May 2009 |
| Date of Last Submission: | 14 May 2009 |
| Delivered at: | Brisbane |
| Delivered on: | 5 June 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr Looney |
| Solicitors for the Applicant: | Shand Taylor Lawyers |
| Counsel for the Respondent: | N/A |
| Solicitors for the Respondent: | Hemming & Hart Lawyers |
ORDERS
That, subject to and conditional upon compliance with Order 2 hereof, Order 1 made on 14 May 2009 be varied to permit the respondent to meet its reasonable legal costs and expenses of defending these proceedings from the assets of the CII Superannuation Fund.
The solicitors for the respondent shall give to the solicitors for the applicant not less than seven (7) days notice in writing of any request for a payment by the respondent towards legal costs and expenses, specifying the amount of payment required and the date on which such payment is due.
Each parties’ costs of and incidental to the interlocutory application of 14 May 2009 are reserved.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 310 of 2009
| MARK WILLIAM PEARCE AS TRUSTEE OF THE BANKRUPT ESTATES OF NEIL IAN LEGGETT & JULIE LEGGETT |
Applicant
And
| CLEAR ISLAND INVESTMENTS PTY LTD AS TRUSTEE OF THE CII SUPERANNUATION FUND |
Respondent
REASONS FOR JUDGMENT
The applicant is the trustee of the bankrupt estates of Neil Ian Leggett and Julie Leggett, who became bankrupt on 11 September 2009. The bankrupts are the only members of the CII Superannuation Fund, a regulated superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993. The respondent is the trustee of the superannuation fund.
The applicant trustee seeks to have declared void, pursuant to ss.128B and 128C Bankruptcy Act 1966 (“the Act”), payments made to the superannuation fund totalling $589,220.17.
By application filed 8 May 2009, the applicant trustee sought interlocutory injunctive relief effectively to freeze (or, more properly, to preserve) the superannuation fund pending the final hearing and determination of the matter.
When the matter came before the Court, the respondent trustee did not seek to argue that an injunction should be refused. Rather, there was debate about its terms. An injunction was ordered on 14 May 2009, and I reserved my determination on one issue raised by the respondent; namely whether the respondent could have access to the superannuation fund to meet its legal costs of defending these proceedings. Such access was opposed by the applicant.
To determine the availability of part of the fund for the respondent’s legal expenses, it is first necessary to properly characterise the nature of the relief sought by the applicant.
The injunction sought in the application is in general terms, and gives no clue to the jurisdictional basis on which the injunctive relief is sought. However, in his written submissions, and before the Court, counsel for the applicant submitted that what was being sought was a ‘freezing order’ pursuant to FCR O. 25A r. 2. Such relief is, in statutory form, a Mareva order. I am satisfied that this Court has the power to make such an order, either by the application of Federal Magistrates Court Rule 1.05(2) picking up FCR O. 25A, or by the use of s.30(1)(b) Bankruptcy Act: see also Federal Magistrates Court Act 1999 ss.14 and 15.
It is well recognised that a Mareva order does not confer any form of security over a respondent’s assets, and is primarily granted in circumstances where there is a genuine fear that a respondent will dissipate assets so as to defeat a creditor’s claim. Despite the protests of the learned authors of Meagher Gummow & Lehane’s Equity Doctrines & Remedies at [21-435], the jurisdiction to grant a Mareva order in Australia is now well recognised: Cardile v LED Builders Pty Ltd (1999) 198 CLR 435.
It is a usual condition of a Mareva order that a respondent will be permitted to use his assets to meet his legal expenses, and ordinary living expenses.
In an effort to avoid this consequence, counsel for the applicant submitted that the applicant’s claim was in fact a proprietary claim to the assets of the superannuation fund controlled by the respondent, and that, in those circumstances, the respondent should not be permitted to utilise what was, in effect, the applicant’s property to meets its legal expenses and thereby deplete the asset. It was submitted that what was sought was effectively an injunction to preserve an asset in which there was a proprietary claim. I am satisfied that this Court has jurisdiction to grant such an injunction under either s.30(1) Bankruptcy Act or under the provisions of the Federal Magistrates Act to which I have already referred.
In support of his submission that a distinction should be drawn between proprietary claims (properly described) and cases in which a Mareva order is made, counsel for the applicant referred to Freezing and Search Orders: Mareva and Anton Piller Orders, P. Biscoe, 2008 at [6.75].
Section 58(1)(a) Bankruptcy Act provides:
(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
In s.5 of the Act, “the property of the bankrupt” is defined, relevantly, to mean the property divisible among the bankrupt’s creditors.
By s.116(1)(a) of the Act all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge is property divisible amongst the creditors of the bankrupt.
By s.116(2)(d)(ii)(A) of the Act the following property is excluded from that caught by s.116(1)(a) of the Act:
(2) Subsection (1) does not extend to the following property:
…
(d) subject to subsection (5):
…
(ii) the proceeds of such policies received on or after the date of the bankruptcy;
…
(A) a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993); or
…
Sections 128B and 128C operate to invalidate certain contributions made by persons who subsequently become bankrupts to superannuation funds, if the main purpose in making the contribution was that specified in s.128B(1)(c) or s.128C(1)(c) of the Act. These sections can now be used rather than ss.120 and 121 of the Act: see, for example, Official Trustee v Trevor Newton Small Superannuation Fund & Anor (2001) 114 FCR 160.
The use of the word “vests” in s.58(1) of the Act connotes a property interest in the bankrupt’s estate: Coverdale v Chorlton (1878) 4 QBD 104 at 120. This means that when property vests in the trustee in bankruptcy the trustee is immediately given a legal or equitable interest in the property, or both: Laws of Australia at [3.9.13] citing Oliveri v Jones NSWCA 14.10.97.
Where a transaction is stated to be void, this means it is voidable at the instance of the trustee in bankruptcy: Laws of Australia at [3.11.27] citing Re Brall; ex parte Norton (1893) 2 QB 381; NA Kratzmann Pty Ltd v Tucker (1966) 123 CLR 257 at 277.
In these proceedings, the trustee has taken action to avoid the dispositions of property by or on behalf of the bankrupts to the respondent superannuation fund. If correct in his arguments in the substantive proceedings, the trustee has a proprietary claim to the funds currently held by the respondent. Once set aside, the dispositions would be property of the bankrupts (that is, the property would devolve to them) that has vested in their trustee in bankruptcy pursuant to s.58(1) of the Act. The current value of the fund is less than the sum claimed by the applicant trustee. There is therefore no difficulty in quantifying the share of the fund to which the applicant trustee might arguable have a claim.
It is sufficient to observe, at this stage, that the evidence relied on by the trustee establishes a serious question to be tried in respect of his entitlement to the assets of the superannuation fund. The trustee therefore has an arguable proprietary entitlement to that property.
The argument that where a proprietary claim to assets exists, the defendant to such a claim cannot use the assets to fund a defence to those legal proceedings was dealt with, albeit in the context of an application for a Mareva order, by Lloyd J in PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158. His Honour noted that counsel for the plaintiff in the action before him sought to support the injunction that had been granted on the basis of a proprietary claim to the defendant’s assets. His Honour referred to A v C [1981] QB 596 and Chief Constable of Kent v V [1983] QB 34 and doubted whether the plaintiff in the case before him could bring itself within the ambit of those two decisions. His Honour stated, at 165:
“I further note that at the end of his judgment in Chief Constable of Kent v V [1982] 3 All ER 36 at 42, [1983] QB 34 at 44-45 (the case which can be regarded as the strongest authority in favour of the plaintiffs’ submission) Lord Denning MR specifically reserved the right of the defendant to apply to the court for release of such sum as he might need for his defence or otherwise.
In my view justice and convenience require in the present case that the first defendant should be allowed the means of defending himself, even if it could be said that the plaintiffs had laid claim to the whole of his assets as a trust fund. Similarly justice and convenience require that he should be able to pay his ordinary bills and continue to live as he has been accustomed to live heretofore. So whether the case is put on the basis of the Mareva jurisdiction or the so-called wider jurisdiction to trace in equity I reach the same conclusion.”
Thus, his Honour concluded that even if the injunction were granted in aid of a proprietary claim, the court retains the discretion to permit a defendant to access the asset sought to be recovered for the purpose of defending the proceedings brought against it.
That view has attracted the support of Brereton J in Badman v Drake [2008] NSWSC 968. His Honour said, at [6] – [8]:
“[6] In this respect, it is important to bear in mind that what is sought is not a Mareva injunction, but an injunction to preserve a specific fund which is the subject matter of the proceedings. If an injunction is wrongly declined, the subject matter of the proceedings will be diminished. In those circumstances, the principles applicable to a Mareva injunction, which dictate that an exception will always be made to permit expenditure on reasonable living expenses and legal costs, do not apply. In A v C (no 1) [1981] 1 QB 956, Robert Goff J, as his Lordship then was, first drew the distinction between a Mareva injunction and a conventional interlocutory injunction in aid of a proprietary claim to a fund, holding that the plaintiffs were entitled to an injunction to restrain the defendants from disposing of the trust fund or what remained of it, quite apart from the Mareva jurisdiction [see also PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 at 163h]. The basis of this distinction is that otherwise the trust fund might be dissipated before the action comes on for trial, and equity would have been invoked in vain. In PCW Ltd v Dixon, Lloyd J (at 164g) distinguished A v C on the basis that, whereas in that case the claim related to a specific identifiable bank account, in that case before him the claim was to the whole of the defendant’s assets (to which a constructive trust was alleged to attach). On the distinction between a claim for a Mareva injunction and an injunction in aid of a proprietary claim, see also Australian Receivables Ltd v Tekitu Pty Ltd [2008] NSWSC 433, [28]; and McCleary v Bullabidgee Pty Ltd [2008] NSWSC 534, [5]. The latter of those cases, however, also illustrates that notwithstanding that what is involved is a proprietary claim, ultimately there is a discretion as to the extent of any interlocutory injunction relief that will be granted.
[7] The present case is closer to A v C than to PCW Ltd v Dixon, in that what is in issue is a specific identifiable fund; but that specific identifiable fund appears to correspond with most of the Drakes’ realisable assets. The result is that while the Court is not bound to make an exception for living and legal expenses, as it would be in the claim were for a Mareva injunction, as a matter of discretion it may nonetheless do so.
[8] There is little doubt that an injunction if granted will have a serious impact on the ability of the Drakes to defend the proceedings, in circumstances where, just as Mrs Badman has a seriously arguable claim, I have concluded that the Drakes have a seriously arguable defence. To shut out a litigant from the means of defending proceedings is a very serious step, particularly when it cannot be said that their case is a manifestly weak one.”
His Honour refused access to the relevant fund in Australian Receivables Ltd v Tekitu Pty Ltd [2008] NSWSC 433, but it is apparent from [28] – [30] that was because his Honour was satisfied that the defendant could access funds elsewhere to defend the proceedings.
That is not the case here. The applicant trustee seeks to recover the whole of the respondent’s superannuation fund. The solicitor for the respondent frankly stated to the Court that if an order were not made permitting the respondent to have access to the superannuation fund for the purpose of meeting its legal expenses, the respondent would be forced to represent itself in the proceedings.
On the evidence presently available, I am satisfied that the assets of the superannuation fund are the only source of monies available to the respondent to defend these proceedings.
The determination of the issue before the Court therefore involves weighing the competing hardship to the parties if an order is or is not made to permit access to the fund for legal expenses. These considerations were referred to by Brereton J in Badman v Drake, supra. If an order is made permitting access to the fund for legal expenses the fund available to the applicant trustee, and therefore to the bankrupts’ creditors, will be depleted. However, on the current estimate of the respondent’s solicitor as to likely legal costs, which I regard as a very generous estimate, there will still be substantial funds remaining to the applicant trustee if he is successful in the proceedings. The legal costs will not consume the whole of the available asset, rendering the trustee’s success in the action illusory.
If access to the fund is not permitted, I am satisfied that the respondent will have considerable difficulty properly defending the proceedings, if that is the course that is taken. The issues involved are, from a reading of the preliminary material, not without their complexities. Further, I am cognisant of the fact that the Court presently has before it only the applicant trustee’s evidence and material. It would be unsafe, in those circumstances, to conclude that the respondent’s case is hopeless or bound to fail, or unmeritorious. It is, as Brereton J observed, a serious thing to shut out a litigant from the benefit of legal representation.
There is also the prospect that, with the benefit of considered legal advice, the respondent will take a course in the proceedings that will lead to its more efficient or expeditious resolution. Without the benefit of such advice, the proceedings may be more protracted, with the difficulties often encountered with self represented parties.
I am therefore persuaded that, in the exercise of my discretion, the respondent should be permitted access to the superannuation fund to meet its legal expenses of these proceedings. However, the respondent should not have carte blanche to incur needless or excessive expenses. The conduct of the litigation will need to be carefully monitored. The respondent’s lawyers will have to justify their costs and expenses to a taxing registrar. Much more detail will be required to determine what is a reasonable level of costs in proceedings such as these. I do not propose, at this stage, to set a cap or a limit to the legal costs that can be incurred. What I propose to permit is the incurring of reasonable legal costs and expenses, and a prior reporting of such expenses to the solicitors for the applicant. If the applicant has genuine concerns about the level of costs incurred it can apply to the Court for appropriate relief.
The proceedings are due to be reviewed on 4 September. By that time, the pleadings will have closed and the parties’ evidence in chief filed. If it is necessary to revisit either the quantum of costs or entitlement to access the fund for ongoing legal expenses, it can be more meaningfully considered at that time.
I certify that the preceding thirty (30) paragraphs are a true copy of the reasons for judgment of Wilson FM
Associate: Lynnette Chin
Date: 5 June 2009
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