Re William Timothy Cape
[1997] FCA 1584
•14 OCTOBER 1997
CATCHWORDS
BANKRUPTCY - security for costs - whether security can be ordered against a bankrupt - impecuniosity not a bar to litigation - whether bankrupt is a nominal plaintiff - whether an order for security would necessarily stifle the litigation
Bankruptcy Act 1966 (Cth) s 30
General Steel Industries Inc v Commissioner for Railways (NSW) & Ors [1964] 112 CLR 125
Re Taylor; Ex parte Century 21 Real Estate Corporation [1994] 49 FCR 324
Equity Access Limited v Westpac Banking Corporation (1989) ATPR 50-631
Semler v Murphy [1968] 1 Ch 183
J & M O’Brien Enterprises Pty Ltd v The Shell Company of Australia Ltd (1983) 70 FLR 261
Re WILLIAM TIMOTHY CAPE; Ex parte WILLIAM TIMOTHY CAPE and PAUL DESMOND SWEENEY
No. NB 2488 of 1994
EINFELD J
SYDNEY
14 OCTOBER 1997
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NB 2488 of 1994
BANKRUPTCY DIVISION )
Re:WILLIAM TIMOTHY CAPE
Bankrupt
Ex parte: WILLIAM TIMOTHY CAPE
Applicant
And:PAUL DESMOND SWEENEY
Respondent
REASONS FOR JUDGMENT
EINFELD J SYDNEY 14 OCTOBER 1997
Introduction
On 19 November 1996 several applications were presented to the Court arising from the bankruptcy of William Timothy Cape (the bankrupt). These applications are the latest in a lengthy and complex series of proceedings spanning the past 8 years. To put them in context it is necessary to summarise, at least briefly, the events from which they have arisen.
Background
In 1983 the bankrupt and Robert George Maidment formed a company called Redarb Pty Limited (Redarb) in which both were directors and 50% shareholders. Maidment’s shareholding was held by Serendipity Pty Ltd (Serendipity), a family trust company. Among other commercial activities, Redarb conducted video hire shops in Canberra under the franchise name ‘Videoville’ in the suburbs of Erindale and Dickson. The Erindale store also conducted a Tattslotto Agency, selling ‘on line’ lottery tickets and off line ‘scratchie’ style tickets.
On 8 August 1989 Robert Yeomans, of the Chartered Accountants firm Duesburys (the Receiver), was appointed as Receiver and Manager of Redarb, following a dispute between Maidment and the bankrupt. The video store businesses, including the Tattslotto agency at Erindale, continued trading under the Receiver for a period of approximately six months. After that time the business was sold to Junstamp Pty Ltd, a company apparently controlled by Maidment (Junstamp).
There followed an extremely complicated series of legal proceedings involving the bankrupt, Maidment, the Receiver, Redarb and Serendipity. This litigation comprised disputes between the bankrupt and Maidment over financial entitlements; actions by the bankrupt against the Receiver for damages, fraud, negligence and breach of fiduciary duty; and challenges to the Receiver’s remuneration and accounts. A central tenet of all this litigation was the bankrupt’s claim that the Tattslotto franchise had been sold under value by the Receiver, thereby causing him loss and damage. During the course of this litigation, numerous costs orders were made against the bankrupt in favour of Maidment, the Receiver, Redarb, and Serendipity. One of these orders led to the present bankruptcy on 27 October 1994 following a creditor’s petition by Maidment dated 4 July 1994 based on a judgment debt pronounced by the Supreme Court of the Australian Capital Territory (ACT) on 28 September 1992. Paul Desmond Sweeney (the trustee) was appointed trustee of the bankrupt’s estate.
During the first half of 1995, the Receiver and the trustee came to an agreement as to the amount owed by the bankrupt to Redarb and the Receiver pursuant to the costs orders entered against the bankrupt during the period of litigation prior to the bankruptcy. The amount agreed upon was $693,000 and a proof of debt for this amount was lodged. On 5 December 1995 Justice Lockhart ordered that the agreement be ratified and that the trustee be granted leave to accept the proof of debt for the agreed amount.
On 19 July 1996 this Court heard an application by the bankrupt to have the entire bankruptcy proceedings transferred to the ACT and to expunge the debt admitted by the trustee, allegedly ‘on behalf of Duesburys and Serendipity’. Justice Whitlam refused the change of venue and dismissed the application to expunge, principally on the basis that the debts admitted by the trustee were actually owed to the Receiver and to Redarb and not to Duesburys and Serendipity as alleged in the application.
During the course of the bankruptcy, the trustee issued several notices (the notices) under section 139ZQ of the Bankruptcy Act 1966 (Cth) (the Act) in respect of dispositions of land by the bankrupt to his children prior to his bankruptcy. In an application filed on 4 September 1996 the bankrupt sought to have the notices set aside. In a further application filed on 17 October 1996 the bankrupt sought a review of the trustee’s conduct under section 178 of the Act. On 6 November 1996 the trustee filed an application seeking to have both of the bankrupt’s applications dismissed and to have the property transactions, which were the subject of the section 139ZQ notices, declared void and set aside. The applications of both the bankrupt and the trustee were stood over to 19 November 1996.
The bankrupt filed a further application on 6 November 1996 in which he sought the following orders:
A.That my Trustee in Bankruptcy Paul Desmond Sweeney be joined as Respondent in this matter.
B.Pursuant to section 178 of the Bankruptcy Act 1966:
1.That the sale of the “Videoville” (Dickson and Erindale) video-hire business by Redarb Pty Limited to Junstamp Pty Limited on 12 January 1990 be declared void.
2.That all debts said to be owed by my estate to the Yeomans/Duesburys and Maidment/Serendipity interests be expunged.
3.That all activities by my Trustee Paul Desmond Sweeney pursuant to the order for bankruptcy made on 27 October 1994 be stayed until further order of the Court.
4.Such further orders as the Court may decide.
This application was also set down for hearing on 19 November 1996.
19 November 1996
In summary, the following applications were on foot when the various parties appeared before me on 19 November 1996:
1.An application by the bankrupt of 4 September 1996 to set aside the notices issued under section 139ZQ of the Act in respect of the property transactions. The trustee opposed this application.
2.An application filed by the bankrupt on 17 October 1996 for orders under section 178 of the Act. Although the trustee was the only named respondent, the Receiver, Maidment and Serendipity joined in opposing this application.
3.An application by the trustee of 6 November 1996 to dismiss the bankrupt’s applications of 4 September 1996 and 17 October 1996 and to declare void certain dispositions of property by the bankrupt to his children. The bankrupt opposed this application.
4.An application of 6 November 1996 by the bankrupt for further orders under section 178 of the Act. The application was opposed by the same parties as were opposing the application of 17 October 1996 (no. 2 above).
All the parties opposing the bankrupt made applications for summary dismissal of his application except the trustee who sought security for costs.
It has been a singular feature of the conduct of this matter that, at any particular time, it has been extremely difficult to ascertain the exact nature of the bankrupt’s justiciable claims. One such example occurred when in support of the third application, the bankrupt submitted that new evidence had come to light which established fraud in respect of the sale of the Tattslotto agency to Junstamp in 1990. The bankrupt was informed that the Court was not in a position to conduct an ad hoc inquiry into his allegations of fraud and that such allegations were a matter for the Australian Federal Police. An order was therefore made giving him an opportunity to file an amended application which sought relief within the purview of the Court. I ordered that all submissions on all applications be made in writing after the amended application was filed. The applications relating to the notices were stood over to the date on which judgment was given on the other matters.
The amended application
Pursuant to the order permitting an amended application, the bankrupt sent a letter to my Chambers dated 26 November 1996. It contained, inter alia, what was termed a ‘varied application’ (the amended application) in the following terms:
Application is made to the Court ..... for the following orders:
A.That my Trustee in Bankruptcy Paul Desmond Sweeney be joined as Respondent in this matter.
1.That the matter be stood over generally to allow the Australian Federal Police to investigate the various matters of fraud that have arisen.
2.That my Trustee assent to me being allowed to bring the matter of fraud to the attention of the ACT Supreme Court.
3.That my Trustee assent to commencing action for gross negligence against the accountancy firm Duesburys.
4.That all activities by my Trustee Paul Desmond Sweeney pursuant to the order for bankruptcy made on 27 October 1994 be stayed until further order of the Court.
5.Such further orders as the Court may decide.
In light of the order giving leave to file an amended application, and of its actual terms, the so-called ‘varied application’ replaced the previous application of 6 November 1996 and is not cumulative upon it. Similarly, the bankrupt’s application of 6 November 1996 replaced the application of 17 October 1996. As the amended application now before the Court seeks orders only against the trustee, and seeks no orders against or involving Maidment, the Receiver, Redarb or Serendipity, I order that the applications filed by the bankrupt on 17 October 1996 and 6 November 1996 be dismissed with costs. It follows that in respect of the ‘varied application’, the voluminous submissions of the Receiver, Redarb, Serendipity and Maidment can be disregarded.
Security for costs
The trustee seeks an interlocutory order that the bankrupt provide security for the costs of the amended application in the sum of $17,091.40, on the basis that it has no merit and a negligible chance of success. The trustee has inexplicably not taken over or endorsed the other parties’ applications for summary dismissal.
Power to order security against a bankrupt
A threshold question is whether the Court has the power to order a bankrupt to provide security for costs. In Re Taylor ex parte Century 21 Real Estate Corporation [1994] 49 FCR 324 Justice Burchett held that security could be ordered in respect of proceedings under the Act pursuant to section 30(1):
The Court:
(a)has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and
(b)may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.
However, his Honour went on to observe:
It does not follow that an application for security will readily be granted in a case of the present kind...
In that case the party against whom security was sought was a foreign resident who was apparently not impecunious. Justice Burchett ordered that security be provided but limited the amount to the extra sum required to enforce an order for costs against a foreign resident.
Whether to order security
Presumably therefore a sufficient case still needs to be made out in each instance, based on the usual principles governing security.
(a) Impecuniosity
One of the most fundamental of those principles is that impecuniosity should not be a bar to litigation and therefore that security should not be ordered where it would have the effect of stifling litigation: Equity Access Limited v Westpac Banking Corporation [1989] ATPR 50-631. If this was the only basis for determining this application, it would seem inappropriate to order security, because it would be anomalous to order a bankrupt to provide security as a prerequisite to having his application heard when his bankruptcy would prima facie prevent him from doing so, at any rate without the permission of his trustee in bankruptcy. It seems unlikely that the trustee would agree in this case even if there was money available in the estate to meet any order. There is no evidence that the bankrupt could procure another person to supply security for him. It is true that the bankrupt has managed somehow to fund a volume of litigation for many years, but I do not think that I should speculate as to how this has been achieved. In this case an order would necessarily bring the litigation to an end.
The trustee made two other submissions in this connection. The first was that any impecuniosity on the part of the bankrupt was self-inflicted -- in the form of his disposition of land to his children -- thus removing one of the bars to ordering security. However, these transactions (and the associated s. 139ZQ notices) are themselves the subject of application to the Court, and prior to their hearing it is not possible to determine whether the bankrupt’s impecuniosity was in fact self-inflicted.
The second submission of the trustee related to the quantum of security as a factor in the exercise of the Court’s discretion. The trustee claimed that the amount sought was not so substantial as to be oppressive. However, in this case the quantum of security ordered is in my view irrelevant as an apparently impecunious bankrupt would not be in a position to provide any security at all, no matter how small an amount it may be.
(b) Benefit of litigation
A second principle governing applications for security is that the proceedings only be for the benefit of the moving party: Semler v Murphy [1968] 1 Ch 183. The trustee submitted that staying the administration of the estate would primarily benefit the bankrupt’s children because the trustee would not then be able to continue with repossession of the land which is the subject of the section 139ZQ notices. There is no evidence to support this submission. Indeed the validity of those notices is the subject of a separate application by the bankrupt. Thus the staying of the administration of his estate would prima facie benefit only the bankrupt and he will be the sole beneficiary of any relief obtained through the application currently before the Court.
(c) Merits of litigation
The crux of the trustee’s submission was that the bankrupt’s application had no or so little merit that security ought to be ordered. It is well established that this is a factor to be taken into account: J & M O’Brien Enterprises Pty Ltd v The Shell Company of Australia Ltd (1983) 70 FLR 261. It is not a determining factor, due to the obvious difficulties that confront the Court in assessing the merits of an application at an interlocutory stage of proceedings. Of course, if the application of the bankrupt has no merit, then it is an appropriate matter for summary dismissal: General Steel Industries Inc v Commissioner for Railways (NSW) & Ors [1964] 112 CLR 125.
At the time of the hearing, it was clear that the trustee was seeking security because he had previously been engaged in litigation with the bankrupt, which had ultimately proved futile but in which he had incurred significant costs. This was also the motivation for the applications for summary dismissal by others. I am not aware as to why the trustee did not follow the same course. It could not have been a motive of propriety or appropriateness because an order for security would have the same result.
The trustee’s claim that the application of the bankrupt has no merit such that security should be provided was argued in this way:
In December 1995, solicitors acting on behalf of Mr Cape wrote to the trustee seeking to pursue claims for fraud and negligence against the Receiver and Duesburys. An allegation was made that there was a time limitation period about to expire and that a writ needed to be issued urgently. In light of that demand, the trustee instructed the solicitors to issue the writ but not to pursue it until the allegations had been investigated by the trustee’s independent solicitors. Gadens Ridgeway were then instructed to investigate these matters and they prepared a report outlining their conclusions, including the following:
Bearing in mind that the bankrupt has proven quite resourceful in agitating issues over a number of years, we were anxious to ensure that the allegations which he is now making were clearly understood, represent the only remaining issues which the bankrupt considers relevant and are given a proper analysis even if it requires assumptions to be made which benefit a claim against the receiver.
and:
As mentioned above, we were careful to ensure that we understood these allegations as they were being made by the bankrupt so that there could be no suggestion at some later stage that we were not investigating the precise matters which were of concern to the bankrupt. In our discussions with the bankrupt and his solicitor, it was confirmed that we had a proper grasp of the issues raised by the bankrupt. It was also made clear that the determination of these issues by us would be a final determination of complaints against the receiver and so the bankrupt and his solicitor confirmed that there were no other matters which were required to be investigated.
Consequent upon the advice given to the trustee in the report, instructions were issued to the bankrupt’s solicitors to discontinue the writ. The issues which the bankrupt now seeks to agitate appear to be the very issues covered by the report and the trustee claimed that the allegations being made by the bankrupt would be the subject of a cause of action estoppel: Port of Melbourne Authority v Anshun Pty Ltd [1981] 147 CLR 589.
The trustee also contended that the orders sought by the bankrupt cannot be made, as any causes of action open to the bankrupt would have vested in the trustee at the date of bankruptcy pursuant to section 58 of the Act.
It was also submitted that the allegations cannot now be pursued due to the expiration of the six year limitation period on the causes of action.
A further argument was that a compromise was entered into by the trustee with the Receiver and Duesburys, with full knowledge of the facts alleged by the bankrupt. That agreement reduced the claim of the Receiver in the bankrupt’s estate by $25,000. The trustee claimed that the effect of the compromise is to prevent him from pursuing the matter any further with the Receiver or Duesburys.
The trustee also argued that if any claim is open to bankrupt, it could only be under section 178 of the Act:
If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he may apply to the Court, and the Court may make such an order in the matter as it thinks just and equitable.
Pursuant to this section the bankrupt may be able to review the trustee’s actions in not pursuing claims against the Receiver or Duesburys and the decision of the trustee to enter into the compromise agreement. However, the trustee claimed that an application under section 178 would also be unlikely to succeed, as the Court would not exercise a discretionary power to review what was, in light of the investigations conducted and reports made, a considered decision of the trustee not to pursue the bankrupt’s allegations.
Conclusion
As I see the position, there is considerable merit in at least some of these submissions, but they are more appropriate to the summary dismissal of the application than to an order for security. In fact I am uninclined to order security as it is unlikely to be available to the bankrupt and would therefore represent a backdoor way of bringing this litigation to an end.
The bankrupt has already had to face applications by other parties for summary dismissal of his application of 6 November 1996 where he had the opportunity of answering them. The issues raised in that matter were directly related to the amended application of 26 November 1996. Yet he has not responded to these arguments, contenting himself with raising other matters altogether. As the trustee’s submissions in support of his application for security also make a clear assertion that the bankrupt’s amended application is without merit, it is thus strictly not necessary to permit the bankrupt a further opportunity to support its merits. However, there is at present no application before the Court for summary dismissal of the amended application, and the application for security appears irrelevant to resolve the issues it raises.
The resulting dilemma as to how best to proceed in those circumstances was compounded when on 20 June 1997 the bankrupt sent a letter to my Chambers as follows:
This matter was last before Justice Einfeld on 19 November 1996.
The matter is presently part-heard. There have been several important developments since the matter was last before the Court.
I would like to apply for that the (sic) matter be re-listed as soon as possible. I will be lodging an affidavit in support of the application as soon as possible.
I thereafter caused that letter to be brought to the attention of the trustee and waited for the bankrupt’s projected move. When nothing further was heard, I directed the Registrar to write to or otherwise seek to contact the bankrupt to ascertain his intentions. The Registrar wrote to the bankrupt on 18 August 1997 in the following terms:
I refer to your letter dated 16 June 1997 in which you request that your application be re-listed as soon as possible and you advise that you will be filing an affidavit in support of your application as soon as possible.
It appears from the Court file that you have not yet filed your affidavit. Would you please advise whether you will be filing an affidavit and whether you still wish to have your application re-listed.
There was no reply until a further letter from the bankrupt of 16 September 1997 as follows:
Thank you for your letter of 18 August 1997 regarding the re-listing of my application to your Court.
The matter was part heard before His Honour Mr Justice Einfeld in Sydney on 19 November 1996. I was then alleging then that a Court Appointed Receiver and Manager (Yeomans) had failed to bank certain sums of money when he had been the manager of a business that I had previously part owned.
Since the matter was before the Court the Receiver and Manager has accepted responsibility for this apparent shortfall in banking in his affidavit of 28 November 1996 which is at pages A61 and A62 of “SUBMISSIONS OF RESPONDENT YEOMANS”. This document is presently with His Honour.
The material constituting this fresh evidence was unknown to me by reason of the misconduct, during the litigation, of the Court Appointed Receiver and Manager, who was also a Chartered Accountant.
It is very clear that this fresh evidence would have produced an opposite verdict.
It can now be shown that, if the Receiver and the Manager (Mr Yeomans) had done his job properly at the time, there would have been no need for any litigation at all.
It was only the costs of litigation that caused my bankruptcy in the first place.
It is my understanding that, in the normal course, my bankruptcy which started on 27 October 1994 is due to end on 27 October this year.
Accordingly I still wish to have the application re-listed.
My solicitor Mr Crossin and I will both be filing affidavits in support of the application. These affidavits will be filed by the end of this week.
The two further affidavits were filed, albeit after the date promised, but neither of them appear to bear upon, still less improve, the bankrupt’s chances of success on the amended application. Hence another opportunity to argue the merits of his case has been passed up.
However, in view of the general importance of the matter, I propose to err on the side of caution and an abundance of natural justice by allowing a final opportunity in this regard. I therefore intend to adjourn the application for security, publish these reasons for judgment, and invite the trustee to consider amending his application for security to add an application for summary judgment. If that application is made by not later than 4pm on Friday October 17 1997, although I consider that the bankrupt has had ample opportunity to address the merits of his amended application, I shall allow him an additional 7 days to make any further submissions on the matter. I shall thereafter give judgment on the question of security and summary judgment. All of this should be achieved before his projected date of discharge from bankruptcy on 27 October 1997.
The bankrupt appeared in person
For the trustee: Mr Greg Rogers of Gadens Ridgeway, Solicitors Date of Hearing: 19 November 1996 Written submissions completed: 6 December 1996
Date of judgment: 14 October 1997
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