Re Davis, T.L. Ex parte Official Trustee in Bankruptcy

[1992] FCA 281

Re: TREVOR LEON DAVIS (a Bankrupt)
Ex Parte: OFFICIAL TRUSTEE IN BANKRUPTCY
No. Q B374 of 1986
FED No. 281
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
Spender J.(1)

CATCHWORDS

Bankruptcy - distribution of assets recovered - application by trustee for order conferring advantage on indemnifying creditor - consideration of what is just and equitable, having regard to risk assumed.

Bankruptcy Act 1966 (Cth) s. 109.

Re: David Harold Serra-Sanfelin; Ex parte: The Official Trustee in Bankrupty (unreported), 30 June 1988, Lee J.)

HEARING

BRISBANE

#DATE 20:3:1992

Counsel for the applicant: Mr M. Harris

instructed by Australian

Government Solicitor

ORDER

The Court orders that:

1. The sum of $50,000.00 be distributed to the Deputy Commissioner of Taxation as an indemnifying creditor and the balance, after payment of costs and expenses of the administration and the fees and remuneration of the Official Trustee in Bankruptcy, be distributed to the creditors of the estate pro rata, the debt of the Deputy Commissioner of Taxation for the purposes of that distribution being reduced by the $50,000.00 paid as a priority to him.

2. Costs of the application to be the costs of the Official Trustee in Bankruptcy in his administration.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

This is an application on behalf of the Official Trustee in Bankruptcy for orders that the balance of the funds in the estate, after payment of the costs, expenses, fees and remuneration of the Official Trustee in Bankruptcy, be paid to the Deputy Commissioner of Taxation pursuant to the provisions of s. 109(10) of the Bankruptcy Act 1966 as amended, or such further or other orders as the Court deems fit.

1. Section 109(10) provides:
   " Where in any bankruptcy -
   

(a) property has been recovered, realized or preserved

under an indemnity for costs of litigation given by a creditor or creditors; or

(b) expenses in relation to which a creditor has, or

creditors have, indemnified a trustee have been

recovered,

the Court may, upon the application of the trustee or a

creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the

amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk

assumed by creditor or creditors. "

1. The Deputy Commissioner of Taxation was a creditor of Mr Trevor Leon Davis, in the amount of $106,482.00. According to the bankrupt's statement of affairs the total amount owed to unsecured creditors was $396,984.00. The accuracy of that amount may be questioned, because the Deputy Commissioner of Taxation is shown in the statement of affairs as a creditor to the extent of $67,000.00, whereas he has been admitted to proof in the total of $106,482.00. The debts which have been admitted to proof total $410,031.00.

2. The Deputy Commissioner of Taxation was the only creditor prepared to indemnify the Official Trustee in respect of proceedings brought in the Federal Court of Australia, whereby the Official Trustee in Bankruptcy as applicant sought certain declarations and orders.

3. On 4 December 1989, the Court approved a settlement of the proceedings. That deed of settlement, dated 11 December 1989, is exhibited to the affidavit of Mr Stephen Raymond Eleftheriou. As a consequence of the carrying out of the terms of that settlement, there have been realisations in the estate amounting to $151,454.37. All of this has been brought about as a result of the indemnity given by the Deputy Commissioner of Taxation.

4. From Mr Eleftheriou's affidavit, one can deduce that the net amount for distribution after all of the deductions for costs, expenses, fees and remuneration of the Official Trustee in Bankruptcy is of the order of $82,000.00. If there were no priority given pursuant to s. 109(10) to the Deputy Commissioner of Taxation, he would receive, as would the other creditors, a dividend of approximately 20 cents in the dollar; that is to say, he would receive something of the order of $21,000.00.

5. It is claimed on his behalf, that he be paid the full amount of the estate net of costs, expenses, fees and remuneration of the Official Trustee. In my opinion, it would not be just and equitable for him to receive a priority to that extent. But it has to be recognised that none of the other creditors were prepared to provide the indemnity, nor have any of them appeared today to resist an application that he be paid the entirety of the net estate.

6. On such an application, the Court has to make an order which it considers just and equitable with regard to the distribution of the property recovered, with a view to giving the indemnifying creditor an advantage over others in consideration of the risk that creditor has assumed.

7. In Re: David Harold Serra-Sanfelin; Ex parte: The Official Trustee in Bankruptcy, an unreported judgment of 30 June 1988, Lee J. said:
   

" ...each case must stand on its own facts and it is for the Court to weigh up all the circumstances including the amount of risk run by the indemnifying creditors, the amount

recovered, the proportion between the debts of the

indemnifying creditors and non-indemnifying creditors, and any other matters considered to be relevant. "

1. In that observation, his Honour approved Re Manson; Ex parte: the Official Assignee (1897) 18 LR (NSW) B and P 45. Lee J. noted that the Court should be careful not to rely too strongly on the benefit of hindsight in assessing the degree of risk borne by the indemnifying creditor.

2. In this particular case, the opinion of counsel suggested that the prospects of success in the litigation were reasonable.

3. In all the circumstances, I think it just and equitable if I order, pursuant to section 109(10), that the Deputy Commissioner have an advantage in the sum of $50,000.00, and that for the balance of his debt, he rank with the other unsecured creditors.

4. The effect of that is that he will receive, out of the approximately $82,000.00, $50,000.00 as a priority. The balance of the net estate, being $32,000.00 approximately, is to be distributed pro rata. The debt of the Deputy Commissioner of Taxation will then be of the order of $56,000.00, and the total of the unsecured creditors will be of the order of approximately $360,000.00, which means that the non-indemnifying creditors will receive approximately 9 cents in the dollar, but the Deputy Commissioner of Taxation will receive approximately $55,000.00, which represents a return to him of greater than 50 cents in the dollar.

5. I think it fair that the risk that he alone was prepared to undertake should be rewarded by orders, the effect of which is that he receives approximately $55,000.00 out of a total proof of $106,000.00, slightly more than 50 cents in the dollar, while those who chose to make no contribution to the recovery of the amount by litigation will receive about nine cents in the dollar.

6. The order that I make is that the sum of $50,000.00 be distributed to the Deputy Commissioner of Taxation as an indemnifying creditor and the balance after payment of costs and expenses of the administration and the fees and remuneration of the Official Trustee in Bankruptcy be distributed to the creditors of the estate pro rata, the debt of the Deputy Commissioner of Taxation for the purposes of that distribution being reduced by the $50,000.00 paid as a priority to him. As to the costs of the application, they will be the costs of the Official Trustee in Bankruptcy in his administration.