Re Heron, Robert James Ex Parte The Official Trustee in Bankruptcy

[1997] FCA 107

NOT FOR GENERAL DISTRIBUTION
                 NO QUESTION OF PRINCIPLE
BANKRUPTCY ACT

IN THE FEDERAL COURT OF AUSTRALIA )
EXERCISING FEDERAL JURISDICTION   )
IN BANKRUPTCY  )       No NB 1325 of 1991
GENERAL DIVISION                 )

Re:ROBERT JAMES HERON

Ex parte:THE OFFICIAL TRUSTEE IN BANKRUPTCY

CORAM:Lindgren J

PLACE:Sydney

DATE:4 February 1997

REASONS FOR JUDGMENT
  (ex tempore)
INTRODUCTION
The Official Trustee applies by an application dated 5 December 1996 for an order pursuant to sub-S 109(10) of the Bankruptcy Act 1966 ("the Act"). Sub-section 109 (10) reads as follows:

"109(10)  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."

The current form of the Official Trustee's application is an amended application which was filed on 17 December 1996.  It seeks the following orders:

"1.That the balance of the sum held by the Official Trustee in respect of the bankrupt Estate of Robert James Heron after payment of:-

(a)The payments set out in paragraph 16 of the Affidavit of George Lionel Caddy sworn 3rd December, 1996, amended by a letter from ITSA dated 16 December 1996

(b)The costs of this application.

the [sic - be] applied, first in the payment of a dividend of 100 cents in the dollar in respect of the proved debt of Jean Sayer in the sum of $211,986.00 (or such dividend as the balance of the sum of held by the Official Trustee permits.)

1. The remainder (if any) of the sum held by the Official Trustee after payment of the sums referred to in paragraph 1, shall be distributed pro-rata amongst the other creditors of the bankrupt Estate of Robert James Heron.

1. Costs."

On 3 June 1991, a sequestration order was made against the estate of Robert James Heron of lot 2, Princes Highway, Batemans Bay, New South Wales ("Mr Heron" and "the Bankrupt").  The Official Trustee is trustee of the estate.  Mr Heron was discharged from bankruptcy on 28 August 1994.

The present application arises out of the fact that one creditor, Jean Sayer, in her capacity as receiver of the trust property of Hugh Junior McHugh, solicitor, indemnified the Official Trustee to the extent of a sum of $8000 in respect of a proceeding taken by the Official Trustee to recover property of which Mr Heron disposed.  The proceeding was successful and resulted in the recovery of a sum of $301,000.  After allowing for priority payments, there remains a balance of $97,067.26.  This falls far short of the debt which was owed by the Bankrupt to Ms Sayer, which is $211,986.  In fact, if Ms Sayer is given priority to the extent of 100% of the debt, the sum of $97,067.26 will give her a dividend of only 45.79 cents in the dollar.

BACKGROUND
On 21 February 1994 the Official Trustee called a meeting of creditors of the Bankrupt for 16 March 1994.  In the agenda papers, the Official Trustee gave an account of a contract purportedly entered into by Mr Heron on 31 May 1991, that is to say, only four days before the sequestration order was made.  The contract provided for the sale of lot 2, Princes Highway, Batemans Bay, folio identifier 2/579293 ("the Land"), of which Mr Heron was the proprietor, to a company called Mid-Coast Holdings Pty Ltd, ("Mid-Coast") for a price of $105,000.  According to the notice to creditors, the Land was subject to the following interests:

(a)mortgage Q544564 to the Illawarra Mutual Building Society
("IMB") on which some $34,000 was owed;

(b)caveat R997025 lodged by Ms Jean Sayer in respect of an unregistered mortgage given by Mr Heron to Mr McHugh to secure an advance of $50,000, in respect of which Ms Sayer had obtained judgment;

(c)caveat Z347504 lodged by Dianne Heron, the wife of Mr Heron, in respect of an alleged interest as co-owner in equity with her husband of the Land.

According to the notice to creditors, Mid-Coast had obtained a valuation from a business associate for the Land in a sum of $106,000. At a public examination on 26 October 1993, Mr Chris Clarkson, a director of Mid-Coast, had conceded that he had been told by Mr Heron at the time of contracting that a creditor's petition had already been presented and that he (Mr Heron) needed to borrow $110,000 so that, after paying out IMB, he could pay $75,000 to Ms Sayer in full satisfaction of the debt owed to her, and settle some accounts.

Further, according to the notice to creditors, a registered valuer, Mr Lovell, retained by the Official Trustee, had valued the Land at the time of the transaction at $365,000 - more than three times the amount of the purchase price and of the valuation obtained by Mid-Coast. Perhaps not surprisingly, counsel had advised the Official Trustee that in his opinion an application under sub-s 120 (1) of the Act,
seeking to set aside the sale to Mid-Coast as a purchaser not for valuable consideration, was warranted on the evidence.  In the notice to creditors, the Official Trustee advised that his case was that the consideration provided by Mid-Coast was not real and substantial and was merely nominal, trivial or colourable, and further that it should be inferred that Mid-Coast purchased with notice of the fact that a fraud or fraudulent preference was intended.

Importantly for present purposes, the notice to creditors included two paragraphs reading as follows:

"As there are no funds in the estate nor any no [sic] other assets for realisation, before commencing any action to seek declarations as envisaged above the Official Trustee would require the costs of such application to be advanced by creditors and a suitable indemnity be provided.  The costs could be in the vicinity of $5,000.00 to $8,000.00 depending upon the result.

Should any creditor or creditors indemnify the Official Trustee the net proceeds from a successful Application are proposed to be distributed to indemnifying creditors to the extent of 100 cents in the dollar in accordance with the provisions of Section 109(10) of the Bankruptcy Act, 1966."

The notice concluded by inviting any creditor who wished to make further inquiries to contact Mr Studman of the Official Receiver's office.

I need not give a detailed account of events subsequently. It suffices to say that Ms Sayer, by a letter dated 15 March 1994, offered to indemnify the Official Trustee against the cost of a proceeding under s 120 of the Act up to a sum of $8,000, subject to a proviso not presently relevant. The Official Trustee launched proceeding NB1325 of 1991 in this Court seeking a declaration that Mrs Heron had no estate or interest in the Land, and relief under sub-s 120 (1) of the Act against Mid-Coast. The proceeding was settled. A deed of settlement dated 5 February 1996 expressed the terms of the settlement reached. The terms included a payment to Mrs Heron of 30% of the net proceeds of sale of the Land. The deed included promises by Mr and Mrs Heron not to impede the Official Trustee in selling the Land.

The Court made orders on 5 February 1996 in the form of a declaration that the contract of sale and purchase was and is void as against the Official Trustee and a declaration that the Official Trustee, as trustee of the bankrupt estate of Mr Heron, held the Land subject to an equitable charge in favour of Mrs Heron as to 30% of the net proceeds of sale.  The Land was sold in due course and, as I have said earlier, the result was a sum of $301,000. 

The evidence shows that four creditors lodged claims against Mr Heron's estate which were admitted in the following sums to rank as ordinary creditors for dividend purposes:

$

Jean Sayer211,986

Deputy Commissioner of Taxation      8,400

Kennedy & Cooke  10,250

Westpac Banking Corporation         15,212

245,848

The Bankrupt's statement of affairs disclosed three other creditors.  They did not lodge proofs of debt.  They were, according to the Official Receiver's affidavit:

"  $

AGC Limited  36,494.62      

ANZ Banking Group                 6,000.00      
     E. H. O'Brien     918.00      

Total  43,412.62 [sic]"

There is evidence showing that the creditors who were admitted as creditors in the bankrupt estate, that is, the Deputy Commissioner of Taxation, Kennedy & Cooke, and Westpac Banking Corporation, have all been served with documents drawing the current application by the Official Trustee to their attention.  As well, the notice to creditors to which I referred earlier indicated, perhaps a little presumptuously, that any creditor which indemnified the Official Trustee would obtain a dividend of 100 cents in the dollar. 

A letter dated 16 December 1996 from the Insolvency and Trustee Service Australia ("ITSA") to Ms Sally Nash, the solicitor for the Official Trustee, set out the amounts received by the Official Trustee and the amount of expected payments as follows:

"Receipts	$	Payments	$
Advance against costs	1,500	Costs of petition	2,254.62
Sale of Property	301,000.00	Legal expenses	15,080.70
Costs of securing & protecting assets	48.50
Auctioneers & Agents charges	11,272.05
Postage, Stationery & printing	459.60
Miscellaneous payments	1,236.00
Refund of advance against costs	1,500.00
Trustee's remuneration Sub Regulation 16.07(3)	22,019.36
Official Fees Sub Regulation 16.13(3)	903.00
Schedule 10 fees	365.00
Prescribed 8% charge on receipts of $131,093.57	10,487.48
Discharge of mortgage on the Property	29,036.53
Payments pursuant to Deed of Settlement	100,421.59
Council Rates & other disbursements on sale of Property	10.348.31
__________	Balance	97,067.26
302,500.00	302,500.00"

The same letter also set out, as follows, the rates of dividend applicable to the indemnifying creditor, Ms Sayer, and other ordinary creditors, if the net balance of $97,067.26 were to be distributed on the basis of Ms Sayer's being granted priority to the extent of various percentages of the amount of the debt owed to her:

"Priority given to indemnifying creditor	Dividend to to indemnifying creditor	Dividend to all ordinary creditors from balance of funds	Total Dividend to indemnifying creditors
100%     priority 75%    priority 50%    priority 25%    priority No priority	45.79c in $ 34.34c in $ 22.89c in $ 11.45c in $ ----	--- 09.87c in $ 19.74c in $ 29.61c in $ 39.48c in $	45.79c in $ 44.21c in $ 42.63c in $ 41.06c in $ 39.48c in $"

It is clear that Ms Sayer's indemnity to the Official Trustee alone has made it possible for him to launch the proceeding against Mid-Coast.  That course of action has led to recovery of the net sum of $97,067.26.  Sub-section 109 (10) gives the Court wide discretion.  However, several cases demonstrate an inclination to view favourably the position of an indemnifying creditor.  The most recent decision of which I am aware is Re Corke; Ex parte Official Trustee in Bankruptcy, unreported, Sackville J, 15 March 1996.  Reference may also be made to Manettas v Dylcu Pty Ltd, unreported, Supreme Court of New South Wales, Brownie J, 29 September 1995 and Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 (NSW/Brownie J).

CONCLUSION
In all the circumstances I think it appropriate that an order should be made under sub-s 109 (10) for payment of a 100% priority dividend in respect of the balance of $97,067.26 in favour of Ms Sayer.

Accordingly, on the amended application of the Official Trustee filed 17 December 1996, I order, pursuant to sub-s 109 (10) of the Bankruptcy Act 1966, that there be distributed to Jean Sayer the amount of $97,067.26, referred to as "Balance" in letter dated 16 December 1996 from the Insolvency and Trustee Service Australia to Ms Sally Nash, a copy of which is annexed to the amended application, less the Official Trustee's costs of that application, and that any proceeds of property of the Bankrupt over and above the sum of $301,000 referred to in that letter which may become available to the Official Trustee for distribution to creditors, shall be distributed pro rata among the other creditors of the bankrupt estate of Robert James Heron, the priority payments referred to in the said letter having first been paid.

I certify that this and the preceding 9 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

Associate:

Dated:17 February 1997

Heard:       4 February 1997

Place:       Sydney

Decision:     4 February 1997

Appearances:  Ms Nash, solicitor, of Sally Nash & Co, appeared for the Official Trustee in Bankruptcy.