Reid v Hubbard
[2003] FMCA 266
•3 July 2003
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| REID & ANOR v HUBBARD & ANOR | [2003] FMCA 266 |
| BANKRUPTCY – Application to set aside the appointment of controlling trustee – appointment of controlling trustee an abuse of process – special circumstances pursuant to s.208 of the Bankruptcy Act to release property from control of respondent. Bankruptcy Act 1966, ss.118, 187, 187(1)A, 188, 188A, 188(1), 188(5), 189, 189A 189(2)(a), 189AB(1), 189AB(7), 190(2)(d), 190(4), 208, 208(a), 208(b) Laurence v Mulroney (1987) 15 FCR 271 |
| First Applicant: | SUSAN REID |
| Second Applicant: | MICHAEL JAMES REID (by his litigation guardian Susan Reid) |
| First Respondent: | JOHN HAROLD HUBBARD |
| Second Respondent: | RICHARD GELL MANSELL (in his capacity as controlling trustee of John Harold Hubbard) |
| File No: | MZ643 of 2003 |
| Delivered on: | 3 July 2003 |
| Delivered at: | Melbourne |
| Hearing Dates: | 18 & 20 June 2003 |
| Judgment of: | Bryant CFM |
REPRESENTATION
| Counsel for the First Applicant: | Ms C Molyneux QC and Mr A Kirby |
| Solicitors for the First Applicant: | Marshalls & Dent |
| Counsel for the Second Applicant: | Ms C Molyneux QC and Mr A Kirby |
| Solicitors for the Second Applicant: | Marshalls & Dent |
| Counsel for the First Respondent: | In person |
| Solicitors for the First Respondent: | In person |
| Counsel for the Second Respondent: | Ms K Knights |
| Solicitors for the Second Respondent: | Best Hooper |
ORDERS
The property of John Harold Hubbard (“the Debtor”) be released from the control of Richard Gell Mansell (“the second Respondent”) who was appointed controlling trustee by authority signed the 20/5/2003.
The second Respondent withdraw caveats lodged by him over the Debtors property in Certificated of Title Volume 2200 Folio 802 and Volume 3057 Folio 088.
The application be adjourned to Thursday 3 July 2003 at 9am.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MZ643 of 2003
| SUSAN REID |
First Applicant
And
| MICHAEL JAMES REID |
Second Applicant
And
| JOHN HAROLD HUBBARD |
First Respondent
And
| RICHARD GELL MANSELL |
Second Respondent
REASONS FOR JUDGMENT
Application
The first and second applicants whose interests are identical and who were represented by the same counsel, sought relief under Part X of the Bankruptcy Act 1966 (the Act) to set aside the appointment of the second respondent (Mansell) as controlling trustee of the affairs of the first respondent (Hubbard), having been appointed by Hubbard on
20 May 2003 pursuant to s 188 of the Act. The application seeks relief on alternate grounds, namely:
a)that the authority signed by Hubbard on 20 May 2003 be set aside as an abuse of process; and
b)that pursuant to s.208 of the Act there are special circumstances which justify the Court in releasing Hubbard's property from control of Mansell.
Section 188(1) of the Act enables a debtor who desires that his or her affairs be dealt with under Part X of the Act without his or her estate being sequestrated may sign an authority authorising a registered trustee to call a meeting of the debtor's creditors and to take control of the debtor's property. Pursuant to this section Hubbard appointed Mansell as his controlling trustee. In accordance with s.188(5) Mansell consented to exercise the powers given by the authority and within the requisite period registered that authority with the Insolvency Trustee Service of Australia.
In accordance with s.188A of the Act Hubbard provided Mansell with a statement of his affairs and proposal for dealing with them under Part X. In accordance with his powers as controlling trustee Mansell called a meeting of creditors for 23 June 2003 at 10.30 am.
Section 189 of the Act provides that once an authority given by a debtor under s.188 becomes effective, the property of the debtor becomes subject to control under this Division. Section 189(1A) provides that control continues until one of the following events occurs:
a)the creditors resolve in a meeting called under this Part that the property cease to be subject to control;
b)the debtor and the trustee make a deed of assignment or a deed of arrangement following a special resolution of creditors;
c)the creditors accept a composition under this Division;
d)four months pass since the authority under s.188 became effective;
e)the Court under s.208, releases the property from control;
f)the debtor becomes a bankrupt;
g)the debtor dies.
Section 208 of the Act provides that:
“The Court may make an order releasing the debtor's property from control under this Division if:
a)an interested person applies to the Court for such an order; and
b)the Court is satisfied that special circumstances justifying it making the order.”
The application is opposed by Hubbard, who appeared for himself, and by Mansell who was represented by counsel.
Background
The matter has a complex background. In 1997 the father of the first applicant and Hubbard (the father) established a discretionary trust called the J R H Family Trust. The trustee of that trust is a company called Hubbard Holdings Pty Ltd. In 1997 a solicitor, Colin Boltman, and Hubbard were appointed director of Hubbard Holdings Pty Ltd. The primary beneficiaries of the trust are the first applicant and Hubbard. They are siblings. The class of general beneficiaries includes wider relations.
In 1997 the father of the first applicant and Hubbard advanced in excess of $8 million to Hubbard Holdings Pty Ltd on behalf of the J R H Family Trust by way of loan.
On 7 November 1998 the father of the first applicant and Hubbard died. By the terms of his will his residuary estate was to be divided into two equal parts, one part to form the corpus of a testamentary trust for Hubbard entitled “John’s Fund” and the other part to form the corpus of a testamentary trust for the Applicant entitled “Susan’s Fund”.
The beneficiaries of John's Fund are Hubbard, his wife and descendants (and their spouses). The general beneficiaries of Susan's Fund are the applicant and her descendants (and their spouses). Her only living descendant is the second-named applicant.
At 30 June 1998, just four months before the father died, the beneficiaries' loan accounts of the J R H Family Trust indicated a loan to the trust from the father the sum of $9,163,577. The balance sheet of the trust as at 30 June 1998 indicated that the assets and receivables of the trust included $5,600,000 in term deposits and $3,400,000 in shares in listed companies, units in listed and unlisted trusts and investment property. The assets of the trust thus according to the balance sheet totalled $9 million.
At no relevant time has the applicant been a director of Hubbard Holdings Pty Ltd and at all relevant times, since January 1997 Hubbard has been a director of Hubbard Holdings Pty Ltd.
In March 2002 Hubbard retained Ernst & Young Corporate Finance Pty Ltd to prepare a report in relation to the trust. The report estimated the total value of the trust and the applicant's father's estate and mother's estate to be in excess of $21 million. In particular, on information provided by Hubbard to Ernst & Young, they estimated the net assets of the father's estate to be approximately $10,005,000 made up of a loan to the family trust of $8,874,612 and the balance being net assets of the estate. There are other assets which the applicant contends were omitted which total about $2 million.
In March 1999 the executors of the father's estate, being Hubbard and Bruce Sundberg, a solicitor, met and signed the financial accounts of Hubbard Holdings for the financial year 30 June 1998. The accounts were prepared by Ernst & Young and recorded an asset of the father being his loan account standing to his credit in a sum in excess of $9 million.
Some time after March 1999 the accountants for the trust were changed from Ernst & Young to Davies French Pty Ltd. The first financial report they prepared, which was for the financial year ended 30 June 1999, did not record the father's loan account in the beneficiaries' loan account summary or the balance sheet. The –
receivables
simply recorded an asset of the trust as being loans to –
other persons
of $3,951,992. It is common ground that the –
other persons
is a company called Billingsby Pty Ltd (Billingsby). The applicant only recently became aware that Billingsby is the trustee for the Billingsby Estate Trust.
The sole director of Billingsby is Hubbard's wife, Elizabeth Anne Hubbard (Mrs Hubbard). She is the beneficial owner of all the issued shares of Billingsby. Billingsby owns and operates a vineyard known as Kirwan Bridge Wines set up on land owned by Currawong Consultants Pty Ltd. This company is the trustee of Hubbard's self-managed superannuation fund. Billingsby is not a beneficiary of the
J R H Family Trust.
In January 2002 the applicant engaged solicitors to enquire about the present state of her father's estate. It is common ground that she has received only $100,000 to date. As a result of conferences which took place after appointment of solicitors the applicant learned that the directors of Hubbard Holdings Pty Ltd had loaned $6 million to Billingsby by selling the Trust’s income producing assets and shares. In essence, instead of Hubbard as a director of Hubbard Holdings causing the trust to use its realisable assets to repay the loan account to the father's estate and as executor of the father's estate causing half of the repaid amount to go to Susan's fund (and half to John's fund) he transferred almost the entirety of the trust's assets to Billingsby. It has ultimately transpired that in addition to advances to Billingsby, which are unsecured, a loan of over $2 million has been made to a company called Resin Coated Sand Pty Ltd and Caddy Investments Pty Ltd which is also unsecured. In essence, it is the applicant's contention (largely conceded) that Hubbard Holdings advanced, unsecured and interest free, in excess of $6 million to Billingsby, and approximately $2.5 million to Resin Sand and Caddy Investments Pty Ltd.
The background is important because it indicates the circumstances in which the applicants claim against Hubbard in the Supreme Court of Victoria in proceedings 5682/02.
The Supreme Court proceedings
In May 2002 the applicants commenced proceedings in the Supreme Court of Victoria against Hubbard. On 4 June 2002 a Mareva injunction was granted by Beach J – the terms of that injunction are:
(1)“the defendant by himself, his servants or agents or howsoever otherwise be restrained until satisfaction by him of any judgment in favour of the plaintiffs in this proceeding or further order, from assigning, transferring, dealing with, encumbering, securing, disposing of or dissipating any interest of his in:
(a)the J R H Family Trust and its assets;
(b)the estates of the late John Rickett Hubbard and Minnie Isabelle Hubbard;
(c)the property "Norwood" situated at 52 South Road, Brighton in the State of Victoria;
(d)the property at 1 Seymour Grove, Brighton in the State of Victoria;
(e)shares in Currawong Consultants Pty Ltd;
(f)shares in Currawong Ski Club Pty Ltd;
(g)the trust of which Currawong Consultants Pty Ltd is trustee; and
(h)any trust of which Currawong Ski Club Pty Ltd is the trustee; and
(i)from removing from the State of Victoria by whatsoever means any of those assets.”
On 4 December 2002 Hubbard applied to the Supreme Court to vary the Mareva injunction, primarily in order to access funds for his legal costs in the said proceedings.
On 17 December 2002, Beach J refused Hubbard's application and in a short judgment said as follows:
“I do not propose to restate my findings which I made when I dealt with the plaintiff's original application for a Mareva injunction on 4 June last, save to remind the Court that at the hearing on that day the defendant's then counsel conceded that there had been reprehensible conduct on the part of the defendant up to February this year, conduct which could not be justified, and one could not but agree more.
Since my order of 4 June it has become clear that the large sum of money of the order of $6 million which the defendant advanced to the companies controlled by his wife, and from whom he is now separated, which I shall simply refer to as Billingsby, has been lost to the trust. So, rather than there be a sum of the order of $5 million to $6 million in the plaintiff's fund, as was the wish of the late father of the plaintiff and the defendant, if my calculations are anything like accurate, the sum which will ultimately become available in the trust to be invested for the benefit of the parties will in all probability, be less than $2 million.
Not only of course, did the defendant make the unsecured loans he did to Billingsby, he also arranged for Billingsby to obtain an advance of $600,000 from the ANZ Bank, such advance being secured by first mortgage over the defendant's own property at 1 Seymour Grove, Brighton. What the defendant swore in his first affidavit of 3 June 2002 in relation to that property, was, in my opinion, calculated to mislead the Court as to the true situation concerning. …
We know of course, that in March of 2002 the defendant mortgaged that property to the ANZ Bank for the purpose of securing the $600,000 loan to Billingsby. I should add, all loans made by the defendant to Billingsby are unsecured.
The defendant's behaviour to date in relation to his financial affairs has been such that I have no confidence that he has made a full disclosure of his assets to the Court; nor do I have any evidentiary material to demonstrate what actually became of the large sums of money advanced to Billingsby. In that situation I am not persuaded that it is appropriate to make any variation to the order of 4 June 2002 and the defendant's application in that regard is dismissed.”
Apparently on or about the date that judgment was delivered, Strongman and Crouch, Hubbard's solicitors, indicated that without funds they would not continue to act for him. On 26 April 2003 they filed a notice of seeking to act on his behalf. At or about the same time they referred him to Best Hooper Solicitors who in early May wrote to the applicant's solicitors advising that they were considering Hubbard's request that they represent him but in the meantime were proposing a mediation be arranged.
On 20 May 2003 Hubbard signed an authority under s.188 of the Act appointing Mansell as his controlling trustee and on the same day Mansell consented to act as controlling trustee.
On 27 May 2003 Hubbard completed and signed a statement of affairs.
On 28 May 2003 Best Hooper wrote to the applicant's solicitors indicating that they acted for Mansell. The letter written to the applicant's solicitors told them that Mansell had formed the view that it would be in the interests of creditors generally if the arrears of mortgage to the ANZ Bank in the sum of about $10,000 (now said to be approximately $30,000) and unpaid tax to the ATO of about $10,000 be paid and to engage in defending the applicant's proceedings in the Supreme Court as if the claim was undefended and the applicant obtained judgment, it would disadvantage other creditors.
The letter indicates that before Best Hooper could act they needed to obtain the file from Hubbard's former lawyers who are owed about $90,000 and have a lien over the documents until they are paid. The letter informed the applicant's solicitors that to create a fund for these payments the controlling trustee proposed to exercise his powers under s.190(4) of the Act and sell:
i)the debtor's interest in shares in Currawong Ski Lodge jointly owned with Mrs Hubbard; and
ii)1 Seymour Grove, Brighton.
The letter noted that both assets were subject to the Mareva injunction made on 4 June 2002 but pointed out that the order operates
in personamagainst Hubbard. Mansell contended that it does not act in rem against the assets themselves and now that the authority under s.188(1) of the Act has been given the injunction becomes unnecessary. This, the letter pointed out, was because all of Hubbard's property which includes the assets mentioned in the order has become subject to the trustee's control and under s.189(2)(a) it is an offence for Hubbard to remove, dispose of or deal in any way with his property except with the trustee's consent. The letter pointed out that under s.189AB(7) of the Act, the controlling trustee has power to sell any of Hubbard's assets and power to act as Hubbard's attorney for these purposes.
Pursuant to s.189AB(1) of the Act Mansell lodged a caveat to record his statutory charge over the Seymour Grove property.
The substantive proceedings in the Supreme Court are apparently listed for hearing in September 2003.
On 2 May 2002, Sundberg was discharged as executor of the father's estate and on 16 May by consent Hubbard was discharged as an executor. On the same day Mr Charles Brett was appointed as administrator of the father's estate ad colligendum bona.
In September 2002 the applicant's solicitors wrote to Hubbard Holdings Pty Ltd asking what it was doing about obtaining repayment of all moneys advanced to Billingsby. On 17 February 2003, Hubbard Holdings served a statutory demand on Billingsby. On 7 March Mrs Hubbard, on behalf of Billingsby, swore an affidavit in support of an originating process seeking to set aside the statutory demand. On
25 March Hubbard wrote a letter to the solicitors for Hubbard Holdings instructing them to withdraw the statutory demand served on Billingsby. A copy of that letter had been sent to Billingsby and on
2 April 2003 the Senior Master set aside the statutory demand served by Hubbard Holdings on Billingsby. As a result, the applicant instructed her solicitor to make an application to the Supreme Court for Hubbard Holdings to be removed as trustee of the J R H Family Trust. That proceeding has apparently been opposed by Hubbard.
To complicate the matter even further, Hubbard has executed a resignation of director of Hubbard Holdings. There is some doubt as a matter of law whether or not that purported resignation is effective. Mansell believes that it is not because ASIC has not been notified. It has complicated the proceedings for the applicant. It is not a matter which was pursued in the evidence before me and will no doubt be the subject of continued proceedings in the Supreme Court.
The proceedings by the applicant in the Supreme Court to remove the trustee (and thus allow Hubbard Holdings to pursue Billingsby for the unsecured loans) has not yet been dealt with by the Supreme Court. Mansell has sought to be joined in the Hubbard Holdings proceeding and opposed the removal of Hubbard Holdings as trustee. Mansell prefers the appointment of new directors to Hubbard Holdings rather than the removal of Hubbard Holdings and appointment of a new trustee. He has opposed the appointment of the trustee proposed by the applicants.
Events since the appointment of the controlling trustee
On 11 June 2003 the trustee finalised a report pursuant to s.189A of the Act. The report notes by way of background that Hubbard was working as a consultant for Hubbard Holdings Pty Ltd when it acquired an interest in Caddy Sand Brisbane Pty Ltd and Resin Coated Sand Pty Ltd. The report noted he received $10,000 per annum in his role as a director of Hubbard Holdings Pty Ltd and received distributions as a beneficiary of the J R H Family Trust.
The report went on to note that the applicant had commenced an action in the Supreme Court in May 2002 with respect to Mr Hubbard's conduct in his capacity as director of Hubbard Holdings Pty Ltd and in his capacity as an executor of the estate of John Rickett Hubbard. It noted that she seeks damages, inter alia, of $5.8 million and that she had obtained a Mareva injunction:
“which has the effect of prohibiting the debtor from dealing with his property. Despite an attempt by the debtor in December 2002 to vary the injunction he was not successful.”
The report then notes that as a result of these actions and undertakings given, the debtor no longer has access to income from Hubbard Holdings Pty Ltd, has not been paid any entitlements from the J R H Family Trust or the deceased estates of his mother or father. The report goes on to note that:
“While he previously borrowed funds to defend the action against him, he is unable to borrow further and the injunction stops him from using his property to deal with creditors and meet the cost of defending himself in the action taken by Mrs Reid. He also faces proceedings in the Family Court.”
The report notes that whilst a Mareva injunction acts against an individual it does not act against others who are entitled to control those assets. The report says:
“Thus he has invoked the provisions of the Bankruptcy Act to deal with his debts and provide a mechanism whereby the claim of Mrs Reid can be properly dealt with.”
The report then summarises the debtor's statement of affairs. It notes in particular that the debtor asserts he has unsecured creditors of $350,592 and that there is a surplus (subject to costs and administration and claims of creditors and contingent creditors) of $12,490,591.
There are some curious comments in the report. Under the heading –
Deceased Estates
it says:
“The debtor is a beneficiary in the deceased estates of his parents and estimates his entitlement to be as follows:
· J R H Estate, $5,800,000
· M I Hubbard Estate, $4,250,000*
I refer to attachment A for potential variance of the interest he has in this estate. While there is no formal action at present, it may be that the will of M I Hubbard is challenged, which may affect the entitlement of the debtor. The ability to receive any entitlements in these estates is currently delayed pending the resolution of the proceeding commenced by Mrs Reid.”
I refer to that as a curious report because at least in relation to the father's estate, the ability to receive any entitlement is not delayed because of the proceeding commenced by the applicant but because most of the value of the estate is the money advanced by it to Hubbard Holdings Pty Ltd as trustee for the J R H Family Trust. That money was in turn advanced unsecured by Hubbard (the debtor) to Billingsby, a company in which there is a real issue as to any and if so what interest Hubbard has. He claims to have no interest. The fact that it is the debtor's conduct which has diminished the value of the estate is not mentioned by Mansell.
There is another curious aspect of the report. Under the heading –
Other Assets
Mansell refers to two loans. One is a debt by Currawong trust for $354,573, the funds Hubbard previously lent to it and the trust in turn lent to Billingsby Estate Pty Ltd. The second is a claim that Hubbard would have against Billingsby if the ANZ Bank exercised its rights under the mortgage which Hubbard provided (the moneys advanced to Billingsby) against 1 Seymour Grove, Brighton. The claim against Billinsgby Estate Pty Ltd arises because Billingsby has guaranteed the payment.
Under the heading –
Other Liabilities
Mansell says:
“I am advised that the debtor has signed a document titled "Charge and Guarantee" whereby he guarantees loans owning by Billingsby Estate Pty Ltd to Hubbard Holdings Pty. There is a debt owing of approximately $5.128 million and if this could not be paid then under this document the debtor would become liable. The debtor advises that he signed the document under duress and as such denies that he has any obligation. The enforceability of the document has not been determined at law.”
Mansell said in his evidence that he understood that Billingsby Estate Pty Ltd owed the $5 million to Hubbard Holdings and not Hubbard himself. His comment was made notwithstanding that Mansell was aware that there was a charge and guarantee executed by Hubbard guaranteeing Billingsby Estate Pty Ltd's loans to Hubbard Holdings. Mansell had made no investigation of Hubbard's claims that he signed the document under duress and took no steps to notify Hubbard Holdings of the creditors meeting. Given that the debt pursuant to the document executed by Hubbard was over $5 million this is an extraordinary oversight (in fact the deed itself refers to over $9 million). His omissions is even more surprising when Mansell included (as an asset of Hubbard), Billingsby’s liability to Hubbard similarly arising by virtue of a charge and guarantee.
When Hubbard was cross-examined and asked about the document he indicated that he had not sought to set it aside and that the duress came from Mr Sundberg, his solicitor, who he said asked him to sign it and applied –
mental pressure.
Although this is not a matter I am determining in the course of these proceedings, his evidence suggests that it is highly unlikely that he would ever succeed in having the document set aside on the basis of duress. In any event, the present position is the document does exist and as Mansell knew about its existence and therefore knew that Hubbard Holdings Pty Ltd was a creditor for at least $5 million it is curious that it was not included in the list of creditors nor given notice of the creditors meeting.
Mansell swore an affidavit on 13 June. He referred to the affidavit of the applicant and declared it to be –
largely irrelevant.
The applicant's affidavit was detailed and gave a detailed explanation of the background to the Supreme Court proceedings and it is clear from that affidavit why the Mareva injunction was granted. In particular, the affidavit (par 155) refers to the deed of charge and guarantee by which Hubbard has guaranteed the loans from Billingsby to the J R H trust. As Mansell had seen this affidavit prior to his report, the omission of Hubbard Holdings as a debtor is even more puzzling.
The other matter which is missing from Mansell's report is the interest of Hubbard in Billingsby. True it is that it is difficult to determine precisely what interest he has at this stage and what the assets of Billingsby may turn out to be. There are many complications but Hubbard admits that he is a primary beneficiary being the spouse of Elizabeth Anne Hubbard. The position of Billingsby will no doubt be the subject of litigation in the Family Court, as Mrs Hubbard has now apparently filed an application, and possibly in the proceedings in the Supreme Court. The evidence given before me was limited of necessity because of the matters in issue and the need for a determination fairly quickly before the creditors meeting took place. However, even from the short evidence I have heard there are concerning accounts relating to Hubbard's interest in Billingsby. Those matters include: -
a)an affidavit filed by Elizabeth Anne Hubbard in the proceedings to set aside the statutory demand in which she in essence indicates that although she had nominal and legal control of Billingsby Estate Pty Ltd, Hubbard was the real financial controller;
b)Hubbard's evidence that he exercised no control although he had access to all of the accounts including all of the bookkeeper's records;
c)the blatant absurdity that someone would advance millions of dollars unsecured, to an entity in which he had no expectation of any interest and then guarantee the advances;
d)his evidence that he was expecting the money would ultimately be returned to him when the vineyard became profitable.
The question of Hubbard’s interest in Billingsby and Billingsby's own affairs obviously need further consideration. However, I note that Mansell made no mention in his report of any possible interest of Hubbard in Billingsby which is consistent with him accepting whatever Hubbard told him about his financial affairs without any real scrutiny.
Contentions of the parties
The applicants contend that the abuse of process is constituted by the following:
a)The appointment of a controlling trustee by Hubbard, on advice, as a means of circumventing the Mareva injunction and obtaining access to funds otherwise set aside for preservation of assets pending the applicants' litigation in the Supreme Court;
b)Collusion between Best Hooper and Strongman and Crouch to obtain payment in full of the latter’s costs which are said now to total about $90,000 and to secure funds to act in the ongoing litigation, thereby dissipating the assets available to meet the claim of the applicants.
The effect of funding his legal representation, it is contended, would simply be to use remaining assets which would be otherwise available for creditors, including the applicants, on an unmeritorious defence thereby dissipating their assets which have been protected by the Mareva injunction.
The respondents, particularly the second respondent, contend that the appointment of the second respondent is merely an avenue open to the applicant under the Act and one which in the present circumstances is appropriate. Appropriate because it will enable creditors to be paid and provide a defence to litigation by the applicants to be pursued with legal representation. The creditors can vote at a creditor's meeting and decide whether some arrangements under Part X of the Act are to be put into place.
Conclusion
It is clear that the main purpose of the appointment of the controlling trustee is to circumvent the Mareva injunction. The respondents contend that this is permissible under the Act (as the injunction does not operate in rem) and appropriate, so that creditors can be paid and so that Hubbard can instruct solicitors to act for him in defence of the applicant's claim in the Supreme Court.
Section 208
There are many features about the appointment of Mansell, his proposals to realize Hubbards assets and his report, which are troubling. The controlling trustee has made no investigation of Billingsby’s affairs and in particular whether it can meet its liabilities totalling about $10 million. This would seem to be a crucial investigation in deciding whether to fund the Supreme Court litigation.
Nevertheless, Mansell's report makes no reference to the financial position of Billingsby. This is also relevant in a consideration of whether Hubbard owes Hubbard Holdings Pty Ltd $9.128 million and relates directly to his solvency. The only reference to this by Mansell is reference to the deed of charge and guarantee by which Hubbard has guaranteed loans owing by Billingsby Estate to Hubbard Holdings. Mansell simply notes that Hubbard said he signed the document under duress and that the enforceability of the document has not been determined at law. He apparently made no further investigation. Having heard Hubbard's evidence as to the duress he alleges, and the likelihood of the validity of the charge and guarantee, I find Mansell's omission in this respect is also significant. In determining to spend large sums on defending the applicants claims, it is not just a matter of considering whether the applicant might or might not succeed in her Supreme Court action (and the extent to which she might succeed) but also a consideration of whether the loans made to Billingsby can be recovered. A prudent trustee would be unlikely to fund litigation which was unlikely to benefit Hubbard and could prejudice his other creditors.
Without such enquiry, it seems premature to suggest that one or more of the assets be sold and further legal costs incurred. No such enquiry has been made and indeed, the report does not mention this important issue.
There is also the question of whether and if so, what interest in the Billingsby Trust itself Hubbard has. The evidence on this issue is contradictory. On the one hand, although Mrs Hubbard asserts that Hubbard controlled the financial aspects of Billingsby, Hubbard denies that to be the case. There is his evidence that he lent vast sums of money, unsecured, to Billingsby, a company in which he asks the Court to accept that he has no legal interest. This is a matter which will no doubt be investigated further in the Family Court proceedings or in the Supreme Court proceedings. It seems to me highly questionable that Hubbard would have made the advances to Billingsby if he did not have an expectation of an interest in Billingsby and he is, pursuant to the terms of the Trust Deed, a primary beneficiary of the Trust of which Billingsby is the Trustee. None of this was raised in Mansell’s Report.
Then there are the creditors themselves. The unsecured creditors total $350,592. They include a liability of $43,000 to the applicant which relates to an order for costs obtained in the Supreme Court and subject to taxation. There are counsel's fees and fees outstanding to Strongman and Crouch. There are also fees to Davies French Pty Ltd and Ernst & Young Accountants. In addition, two of the creditors are persons from whom Hubbard said he had borrowed money and there is no evidence that they are presently pressing for payment. None of the creditors has obtained a judgment.
The ANZ Bank have sent to Hubbard a letter dated 7 May 2003, as guarantor of Billingsby Estate Pty Ltd, which encloses a notice of default sent to Billingsby. The arrears under the mortgage are said to be $28,200. It is contended by Mansell and Hubbard that as Hubbard has signed a guarantee and mortgaged 1 Seymour Grove to secure this loan, the ANZ is a creditor who must now be paid. As Mansell has undertaken no assessment of Billingsby and its capacity to pay, it is difficult to see how he could assert that an immediate liability arises. Whatever Billingsby's asset position, Hubbard conceded in cross-examination that Billingsby was capable of leasing out its vineyard to provide income. There is simply no evidence that Billingsby cannot meet its liability to the bank and therefore whether the guarantee would be called upon in the short term.
In relation to the debt to the Australian Taxation Officer a notice of assessment from the Australian Taxation Office dated 30 July 2001 was relied upon. The amount payable by Hubbard is $9889.70. It does not appear that his income tax return for the year ended 30 June 2002 has yet been filed. It is also not clear why Hubbard has not chosen to pay this modest liability in the last 12 months when other liabilities have clearly been paid. In any event, other than a notice of assessment it does appear not that the ATO have taken any further action to recover the debt.
I accept that Strongman and Crouch will wish to be paid their legal fees. The applicant puts into issue what amounts are outstanding, but again at this stage no judgment has been obtained.
In a letter dated 28 May 2003 Best Hooper indicated that Mansell instructed them that he had formed the view that the following payments should be made for the purpose of safeguarding the value of the debtor's property and it would be in the interest of creditors generally if those payments were made:
a)Arrears of mortgage payments of about $10,000. These are the payments to the ANZ Bank for which Billingsby is primarily liable;
b)Unpaid income tax assessment of about $10,000;
c)Engagement of Best Hooper to defend the Supreme Court action on the basis that if the claim is undefended, that is likely to disadvantage other creditors;
d)The payment of $90,000 to Strongman and Crouch to obtain their file.
Mansell proposes to create a fund for these payments by exercising his powers under s.190(4) and selling Hubbard's interest in Currawong Ski Lodge and 1 Seymour Grove, Brighton.
The problem is that there is no inclusion of Hubbard Holdings as a significant creditor and any explanation of how its debt is to be paid. They are on any view the largest creditor. Similarly, although the applicants would be, if successful, the largest creditors, the amount owing to them at this stage is quite small, being only the amount of the order for costs which are yet to be taxed. The interests of the two largest creditors, albeit that one is a contingent creditor, have apparently been ignored by Mansell. Given that s.190(2)(d) empowers the controlling trustee to deal with the debtor's property in a way that would in the opinion of the trustee be in the interests of the creditors, it is difficult to see how payment in full of some creditors whilst the largest creditors may potentially receive nothing if Mansell's proposals are put into place, can be said to be in the interests of all of the creditors.
In addition, it is difficult to see why Mansell refers to the Supreme Court proceedings as being undefended in the event that funds are not made available to Hubbard to instruct solicitors. True it is that he may have to undertake his own defence, but he has done so in the proceedings before me and whilst he may wish to be represented, it is not correct to assert, as Mansell does, that the proceedings would be undefended. He may be at a disadvantage, but that is an entirely different thing from asserting that the proceedings will be undefended.
The concerning aspect of this matter is that the applicants have a cause of action which appears on the face of it, to have a likelihood of success (the extent to which I am unable to say). The Supreme Court have already identified the necessity to prevent further dissipation of Hubbard's funds so that there is, at the conclusion of the proceedings, some money available to meet the applicant's judgment. Spending most of that money in payment of his legal expenses (especially if it is an unmeritorious defence) is no less a dissipation than spending it in other ways. This has been clearly recognised by the Mareva injunction.
Finally, although I note that Hubbard has unsuccessfully applied to have the Mareva injunction lifted, discharged or varied, it is still open to him to make application to the Supreme Court for the release of funds for the purpose of his continuing representation and as it is the Supreme Court who is seized of the matter, it would be appropriate in my view, for that Court to determine whether Hubbard should be permitted to have recourse to any of his assets for that purpose. It is also open to him to seek a release of funds for payment of a specific liability or liabilities, should that imperative arise.
I am satisfied that the applicants are, in terms of s 208(a), interested persons and I am further satisfied, for the reasons expressed , that there are special circumstances pursuant to s 208(b) that justify the Court in making an order releasing the debtor's property from control under this Division.
In Laurence v Mulroney (1987) 15 FCR 271, Burchett J considered the circumstances in which the Court might determine whether when special circumstances are shown they are sufficient to justify an order releasing the debtor's property from control under Division 2 of Part X. His Honour pointed out that it was not necessary to appoint a controlling trustee for a meeting of creditors to be called and that it is relevant to consider whether the existence of a controlling trustee is likely in the particular circumstances of the case, to serve the purposes suggested by the Clyne Committee. His Honour said at page 271:
“The Committee referred to the "hiatus" which occurred under previous procedures because of the "unavoidable delays that take place in the holding of meetings and in obtaining assents to deeds". The Committee continued:
During this hiatus the debtor's affairs are out of control, assets are frequently dissipated and, where a business is involved, unnecessary losses are often incurred. In the situation described, neither the debtor nor the trustee is in a position to exercise effective control of the debtor's affairs."
His Honour then said:
“It seems to me that when special circumstances are shown, in order to determine whether they are sufficient to justify an order releasing the debtor's property from control under Division 2 of Part X, it is relevant to consider whether the existence of a controlling trustee is likely in the particular circumstances of the case, to serve the purposes suggested by the Clyne Committee.”
This is a case in which for the reasons that I have outlined there are special circumstances. It is equally clear that the existence of a controlling trustee is unlikely to serve the purposes suggested by the Clyne Committee. The debtor's affairs are not out of control, assets are not being dissipated and unnecessary loss is not being incurred. Indeed the reverse is the case. The debtor's assets are not being dissipated because of the Mareva injunction. There are no business assets which need to be considered and the real gravamen of what the controlling trustee wants to do is to go behind the Mareva injunction, one of the effects of which would be to pay some creditors in full, at the expense of others.
Is Hubbard insolvent?
It is not necessary for me to make a finding for the purposes of s.208 as to whether Hubbard is solvent or not. I note that Mansell opines in his report:
· “Were it not for the legal actions taken by Mrs Reid, he would be able to pay his debts as and when due.
· Even if the action by Mrs Reid is successful, it appears the debtor would be able to meet his financial obligations.”
Of course Mansell has ignored Hubbard's guarantee of Billingsby’s liability to Hubbard Holdings but he has also ignored any interest that Hubbard may have in the Billingsby Trust and is unaware of the financial position of Billingsby. Mansell’s view is that Hubbard’s inability to pay his current debts is due wholly to the existence of the Mareva Injunction.
Section 187 of the Act provides an interpretation of various terms used in Part X. Of particular relevance, debtor means person who is insolvent. Section 187(1)A defines insolvency to include temporary insolvency.
In Stankiewicz v Plata (2000) FCA 1185, the Full Court of the Federal Court of Australia considered (in the context of annulment of a sequestration order) the question of insolvency and at paragraph 29 said:
“in order to satisfy the court that he or she is “able to pay his or her debts” it is not necessary for the debtor to show that he or she has cash resources immediately available for this purpose. But the debtor must be able to realise assets sufficient to pay the debt with in a relatively short time. As Barwick CJ said in Sandell v Porter (1966) 115 CLR 666 at 670, the resources to be considered:-
extend to monies which [the debtor] can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time that relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in it’s entirety and generally speaking ought not to be drawn simply be drawn from evidence of a temporary a lack of liquidity. It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency”.
Leaving aside the uncertain position of Billingsby and the possible interest of Hubbard, the debtor has assets from which he can meet his existing debts, but those assets are the subject of the Mariva Injunction. Whether he can get access to those funds to pay his debts as and when they fall due is a question which in my view is still open. In a differently presented case by Hubbard to the Supreme Court, if the circumstances were compelling, the Mariva Injunction might be varied. Thus at this time, I am not able to find conclusively that he is insolvent.
Has there been an abuse of process?
In submissions the Applicant alleges that Best Hooper and Mansell conspired with Hubbard to defeat the Mariva Injunction by commencing process to dissipate Hubbard’s assets (see paragraph 52 of the Applicants out line of submissions).
In Clyne v The Deputy Commissioner of Taxation (1984) 154 CLR 589 at 599, the High Court distinguished between the pursuit of “an ulterior private purpose” which may not necessarily amount to an abuse of process, and a purpose “foreign to the process in question”Clyne v The Deputy Commissioner of Taxation (1984) 154 CLR 589 at 599.
In Re Jackson: Ex Parte Sterling Industry Ltd, (unreported Burchett J, 5 September 1986), Burchett J found an abuse of process had occurred when the debtor presented a petition under s.55 of the Act. In particular he found that:
“it is a purpose foreign to Bankruptcy Laws, and an abuse of procedure under section 55, for a debtor to present a petition for the purpose for making it impossible for an order of this Court, which it is within his capacity to obey, to be enforced by contempt proceedings against him. At least this must be so if he is not in fact insolvent”.
In Re Mottee (1977) 29 FLR 406, Riley J said (at 415) on the right to file a debtors petition –
“that it will not extend to the length of allowing the debtor to use the Bankruptcy Law in order to assist him in committing frauds on his creditors”.
Whilst the facts in Re Jackson: Ex Parte Sterling Industry Ltd were somewhat starker than the present case, I am satisfied that the appointment of the controlling trustee was for a purpose foreign to the Bankruptcy Laws. That purpose was to pay some creditors at the expense of others. The fact that there was another purpose to the use of the funds, namely to fund the defence in the ongoing Supreme Court proceedings does not detract from the fact that Hubbard intended to pay in full his current creditors in the knowledge that there were other creditors, particularly Hubbard Holdings Pty Ltd, who would thereby be disadvantaged.
However in my view the evidence does not support a finding that either Best Hooper or Mansell were parties to this abuse. Though they stood to gain a client and thereby potentially to profit in a commercial sense, this is far from an abuse of process. Though Mansell’s examination of Hubbard’s affairs may have been less rigorous than it might have been, in the end he relied upon the information provided by Hubbard and the position of the controlling trustee was in my view from Mansell’s perspective a “use” rather than “an abuse” of the process.
The same can not be said for Hubbard however who was well aware of the effect that a payment to his existing creditors would have on his other creditors, particularly Hubbard Holdings. I am satisfied that the alternate ground has been made out and were it necessary I would have set aside the authority signed the 20 May 2003 pursuant to s.188 of the Act as an abuse of process.
I certify that the preceding eighty-two (82) paragraphs are a true copy of the reasons for judgment of Bryant CFM
Associate: Peter Smith
Date: 3 July 2003
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