Re Weiss, Z. v Ex parte Brien, R.C

[1989] FCA 182

L I M I T E D D I S T R I B U T I O N

CATCHWORDS

BANKRUPTCY - P r e f e r e n t l a l p a y m e n t t o l n d e m n l f y l n g credltors

- B a n k r u p t c y A c t 1966.

RE:  ZDENEK WEISS EX PARTE RICHARD CAMPBELL BRIEN

N o . 293 of 1 9 7 8

2 8 FEBRUARY 1989

LOCKHART J.
SYDNEY

LIMITED DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA	)
1
BANKRUPTCY DISTRICT OF THE STATE	) No. 293 of 1978
)
OF NEW SOUTH WALES AND THE	) )
AUSTRALIAN CAPITAL TERRITORY	)

BETWEEN:  ZDENEK WEISS

A Bankrupt

EX PARTE:  RICHARD CAMPBELL BRIEN

28 February 1989

REASONS FOR JUDGMENT

LOCKHART J.

This is an application by the trustee of the estate of

zdenek Weiss for orders that the trustee pay out of available

funds certain payments to the Deputy Commissioner of

Taxation, a creditor of the estate, in priority to other

unsecured creditors. The orders sought	are that the funds be
applied in the following order:

First, the trustee's taxed costs of this appllcatlon;

Second, $4,544.10 to the	Deputy	Commissioner	in
reimbursement of certain	of the costs and	expenses	of

earlier litigation in this Court to whlch reference

shall be made later;

Third, 100 cents in the dollar to the Deputy

Commissioner in respect of hls debt, or such other

dividends as the court thinks fit; and

Fourth, the balance of the funds in the order of payment

prescribed under the Bankruptcy Act 1966 and the

Bankruptcy Rules.

The application is opposed by the Law Society of New

South Wales, a creditor of the estate in various capacities

in sums which total some $75 ',311.42. The Deputy Commissloner

is a creditor in the sum of $49,114, but of that sum he has

deferred to other creditors In respect of late payment

penalties and additional tax, leaving the amount of his debt

for which he claims priority as $34,838.

The Law Society has no oblectlon to the payment of the

Trustee's	costs of this application or of the payment of the
sum of $4,544.10.	The dispute is as to whether 100 cents in

the dollar of the Deputy Commissioner's debt or any other sum

should be paid to the Deputy Commlssioner	In	priority to
other creditors.

A brlef statement of the facts of the matter is

necessary. On 28 April 1978 Mr. Weiss became bankrupt upon

presentation of his own petltron. The Offlclal Trustee

became trustee of the estate. By transfer of 1981,

registered in 1982, the bankrupt's mother became registered

as the proprietor of an estate in fee slmple in certaln land

at Victoria Road, Bellevue H111 ("the house").

In the course of the investigation of the estate, the

view was formed by the trustee that the house was divisible
amongst the creditors of the estate, being property acquired

by the bankrupt after the commencement of his bankruptcy and

before his discharge. A meeting of creditors was held on 30

July 1984. It was resolved at the meeting that the trustee
be authorized to institute proceedings in the Federal Court

for an order declaring that the house vest in the trustee as

after acquired property. The Deputy Commissioner, through

his proxy said at the meeting words to the effect that the

Deputy Commissioner would provide to the trustee an indemnity

of $4,000 for costs of the proposed proceedings and would

increase the amount of the indemnity if necessary. No other

creditors were prepared to indemnify the trustee in respect

of costs.

The proceedings were heard at first instance by me and I

found in favour of the trustee. The matter was taken on

appeal to a Full Court of this Court which dismissed the
appeal in July 1986. The financial posltion of the estate
needs brief mention. The moneys recelved in the estate total

approximately $96,000 of which $82,000 has come In as the

fruits of the litlgation over the house. Interest on an

interest bearing deposit is some $10,000, but that is, if not

in whole, certainly in the main, interest on that $82,000.

Thus, by far and away the greatest asset in the estate is the

money received from the litigation, which was indemnlfied	by
the Deputy Commissioner of Taxation.	It 1s estimated that if

the bankruptcy proceeds in its Ordinary course unsecured

creditors will receive a dividend of 13.21 cents in the

dollar and that if the indemnity sought by the Deputy

Commissioner of 100 cents in the dollar	of his debt is paid,
creditors will receive some 5.6 cents in the dollar; that	is
less than half what they would otherwise recelve.

The relevant principles to be taken Into account in

applications of this nature are clear and well established.

It is sufficient if I make brief reference to several cases.

In Re Ranson; Ex parte The Official Assignee (1897) 18

LR(NSW)B and P at 45 Simpson J. sald of the section in the Bankrutpcy Act Amendment Act 1896 (NSW) which was equivalent

to S. 109 of the Bankruptcy Act 1966 that:

"The section itself leaves the matter entirely in
the discretion of the Judge, and does not indicate

in any way what the extent of the advantage given

to the indemnifying creditors should be. Each

case must, therefore, stand on its own footing,

and the Judge must arrive at the best conclusion

he can after weighing all the clrcumstances, the

amount of risk run, the amount recovered, the

proportion between the debts of the Indemnifying

creditors, and these non-indemnifying creditors

and all other matters."

This passage was cited with approval by Clyne J. in Re M.L.

- Reid, (1946) 13 ABC 287 at p 289. Principles to the same

effect were approved by Riley J. in Re Ivermee; Ex parte

Official Receiver (1974) 36 FLR 187 at 190-1.

In Re Passmore; Ex parte Offlclal Receiver in Bankruptcy

(1984) 56 ALR 181, Northrop J. said at 186:

"A consideration of the authorities discloses that

over the years the courts tended to adopt a more

liberal approach in favour of creditors giving

indemnities. There has been a tendency to depart

from the earlier approach of attempting to balance

finally the degree of risk incurred by the

indemnifying creditors and the	proportion of the
proceeds of	the property recovered to determine
what amount should be	paid in priority among the

indemnifying creditors ..."

In the present proceedings it cannot be said that the

risk run by the Deputy Commissioner was slight. It is, of

course, easy to	be	wise after the event in cases of	this
nature, but the	outcome of the	litigation commenced by	the

trustee was far from certain at the outset. Ultimately the

Trustee was successful both	at first instance and on appeal.
It was, however, a case that involved not only questions	of

fact, but also some fine questions	of law.	The risk was	by
no means negligible.

It is true that the payment of 100 cents in the dollar

to	the Deputy Commissioner would substantially reduce the
dividend otherwise available to	the creditors, but then, were

it not for the indemnlty there would have been no litigation

and nothing whatever for the creditors. In my opinion, the

case has been established that the Deputy Commissioner should

receive the whole of the 100 cents in the dollar as a

priority payment for the risk run by him.

.	V .
.

I also take into account the submission on behalf of the

Law Society that the Deputy Commissioner is a government

agency and is a substantial body. I do not regard that fact as being a relevant conslderation in this case; the big and rich should be rewarded for the assumption of risk as should

other creditors. Such a fact may be relevant in some cases

where priority is sought but not this case. Even if it were

relevant here, I would exercise my discretion the same way.

The Law Society is a creditor essentially because of the

Solicitors Fidelity Fund. It 1s a creditor which protects

the public interests, but that is I think a conslderation of

little significance in the light of the application that is

before the court today. Accordingly, the appllcation

succeeds.

The Court therefore orders that the trustee pay out of

the funds available for payment of dividends:

(a) the trustee's taxed costs of this application;

(b) $4,544.10 to the Deputy Commissioner of Taxatlon in

reimbursement of certain of the costs and expenses of

the earlier litigation before this Court;

(c) 100 cents in the dollar to the Deputy Commissioner

of Taxation in respect of the debt due by the bankrupt
to the Deputy Commissioner; and

l .

.

(d ) the ba lance of the funds In t h e order of payment

prescribed under the Bankruptcy Act 1966 and the

Bankruptcy Rules.

I	c e r t i f y t h a t t h i s	and	the	preceding	s l x
( 6 ) pages	are	a true	copy	of the	reasons

f o r judgment here in of the Honourable Mr.

Just ice	Lockhart	.
Dated:	28 February	1989