Scott (Trustee), in the matter of Cannon (Bankrupt) v Cannon (No 2)
[2025] FedCFamC2G 619
•30 April 2025
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Scott (Trustee), in the matter of Cannon (Bankrupt) v Cannon (No 2) [2025] FedCFamC2G 619
File number: MLG 1514 of 2021 Judgment of: JUDGE SYMONS Date of judgment: 30 April 2025 Catchwords: BANKRUPTCY – where parties invited to provide draft form of orders to give effect to findings recorded in substantive judgment – where substantive judgment recorded finding that failure of Trustee to obtain advice on capital gains tax engaged the supervisory jurisdiction of the Court – where substantive judgment contemplated that Trustee’s power of sale would be varied to oblige the Trustee to obtain updated valuations of real estate and to offer the second respondent a first right of refusal to purchase the Trustee’s 50% interest in the property – where parties failed to agree on appropriate form of order – where orders sought by the second respondent travelled beyond findings recorded in the substantive judgment – where sale orders made in substantially the form sought by the Trustee – where order made for the Trustee to pay the second respondent’s costs of the substantive proceeding despite the second respondent not enjoying success on every “issue” Legislation: Bankruptcy Act 1966 (Cth), s 104
Evidence Act 1995 (Cth), s 131Cases cited: Re Hallett’s Estate (1880) 13 ChD 696
Scott (Trustee), in the matter of Cannon (Bankrupt) v Cannon [2024] FedCFamC2G 7Division: Division 2 General Federal Law Number of paragraphs: 51 Date of last submission: 16 April 2025 Date of hearing: 16 April 2025 Place: Melbourne Counsel for the Applicant: Mr A Silver Solicitor for the Applicant: Mills Oakley Solicitor for the First Respondent: The First Respondent did not take an active role in the proceeding Solicitor for the Second Respondent: Diamonds Solicitors ORDERS
MLG 1514 of 2021 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
IN THE MATTER OF CANNON (BANKRUPT) V CANNON
BETWEEN: ANDREW JOHN SCOTT AS TRUSTEE OF THE BANKRUPT ESTATE OF JOHN GEORGE CANNON
Applicant
AND: JOHN GEORGE CANNON
First Respondent
LYNETTE CANNON
Second Respondent
ORDER MADE BY:
JUDGE SYMONS
DATE OF ORDER:
30 APRIL 2025
THE COURT ORDERS THAT:
1.The applicant (Trustee) obtain updated valuations of 75 Wappa Falls Road, Yandina, Queensland (Yandina Property) and Unit 5, 2 Skinner Street, Hastings, Victoria (Hastings Property) and provide those updated valuations to the second respondent by 21 May 2025.
2.The second respondent do all things necessary to assist the Trustee to obtain a valuation of the Hastings Property noting that it is currently tenanted, in particular to liaise with the tenant to allow access to the valuer to the Hastings Property.
3.The second respondent provide any offer to purchase the Trustee’s interest in the Yandina and/or Hastings Properties by 18 June 2025, as follows:
(a)in the sum of 50% of the total value of the Yandina Property as advised in the updated valuation less the mortgage held by BankWest (Yandina Offer) on condition that the Bankrupt’s liability under the BankWest Mortgage is discharged by the second respondent at settlement out of her own funds (or by way of refinance by her) so that the Trustee receives the whole of the funds comprising the Yandina Offer; and/or
(b)in the sum of 50% of the value of the Hastings Property as advised in the updated valuation.
4.In the event that the second respondent makes an offer to purchase the Trustee’s interest in either or both the Yandina and Hastings Properties in accordance with order 3 above, the parties enter into a contract for sale of land by 25 June 2025, which provides for the following:
(a)a deposit payable of 10% of the purchase price on execution of the contract;
(b)settlement to occur by no later than 42 days after execution of the contract.
5.If the second respondent fails to make an offer or an offer in accordance with order 3 above or fails to complete any contract for sale entered into by the parties, the Trustee be at liberty to sell both the Yandina and Hastings Properties in accordance with the orders of Judge McNab (as his Honour then was) dated 16 November 2021 (original orders).
6.The second respondent do all things and provide all documents necessary to assist the Trustee to calculate and retain sufficient funds to pay any capital gains tax payable on the sale of either or both of the Yandina and Hastings Properties within 30 days of the execution of any contract for the sale of the Yandina and Hastings Properties.
7.Save for the matters reflected in the orders above, the second respondent’s application filed on 20 September 2022 is otherwise dismissed.
8.The Trustee pay the second respondent’s costs of the application filed on 20 September 2022 on a party/party basis to be taxed in default of agreement.
THE COURT NOTES THAT:
9.The Trustee has provided to the second respondent a final accounting of the settlement proceeds of the sale of the Somers Property on 23 August 2022 and 6 June 2023 in accordance with the original orders.
10.The Trustee proposes:
(a)to exercise a power of sale of both of the Yandina and Hastings Properties and to distribute the funds in accordance with the provisions of the Bankruptcy Act 1996 (Cth);
(b)To sell the Yandina Property first as it is vacant, then the Hastings Property as it is tenanted.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE SYMONS:
INTRODUCTION
On 12 January 2024 I published reasons for judgment in Scott (Trustee), in the matter of Cannon (Bankrupt) v Cannon [2024] FedCFamC2G 7 (substantive judgment). At the same time, I made orders that:
(1)On or before 9 February 2024 the parties:
(a)File and serve a joint form of draft orders, including as to costs, to give effect to the conclusions reached in the reasons for judgment published today; or
(b)In default of agreement, file and serve marked up draft orders (including as to costs), supplemented by written submissions limited to ten pages in support of their respective contentions.
The parties were not able to agree on a consent position. Instead:
(a)On 9 February 2024, the Trustee filed written submissions and an affidavit sworn on 9 February 2014 (Scott affidavit);
(b)On 19 February 2024, Mrs Cannon filed written submissions; and
(c)On 19 February 2024, the Trustee filed an affidavit sworn by Alwyn Narayan on the same date.
The matter was then listed for hearing before me on 27 March 2024 to hear submissions from the parties on their respective form of orders.
On 26 March 2024, the Court was informed that the first respondent, Mr John Cannon, had filed an application pursuant to s 104 of the Bankruptcy Act 1966 (Cth) (Act) in a related proceeding. The parties sought orders by consent that on Mr Cannon’s undertaking to prosecute the s 104 application expeditiously, the hearing listed on 27 March 2024 be adjourned until the s 104 application was determined. These orders were made.
On 12 September 2024, Judge Champion made orders dismissing Mr Cannon’s section 104 application and on 20 November 2024, his Honour published a judgment dealing with the costs of the application.
With the section 104 application now determined, the parties were invited on 28 January 2025 to notify chambers as to whether they wished for the matter to be re-listed to allow them to make brief oral submissions directed at the orders they sought to give effect to the substantive judgment or whether they were now content to have the matter determined “on the papers”.
The parties responded by informing the Court that they sought orders by consent that the matter be listed for a further directions hearing to allow them to continue discussions regarding the form of final order with a view to potentially reaching agreement about those matters. The Court listed the matter for a directions hearing on 20 March 2025.
Ahead of the directions hearing, the Trustee, Mr Scott, provided a set of proposed orders which were said to give effect to paragraphs [113]-[117] of the substantive judgment.
On 17 March 2025, the second respondent, Mrs Cannon, provided a set of proposed orders for the Court’s consideration. The first respondent, Mr Cannon, was not an active party to the substantive proceeding and has not participated in the post-judgment process.
The directions hearing took place on 20 March 2025. On this date, and in the absence of agreement between the parties as to the form of orders the Court should make, the matter was set down for a hearing on 16 April 2025 at which it was anticipated that brief oral submissions would be made concerning the parties’ competing orders. Orders were made that Mrs Cannon file and serve any written submissions by 3 April 2025, which she did. The Trustee indicated that he would make oral submissions only at the hearing and would otherwise rely on his written submissions filed on 9 February 2024 and the Scott affidavit.
The submissions and proposed orders of the Trustee
The Trustee seeks orders that would require him to obtain updated valuations of the Yandina and Hastings Properties and for Mrs Cannon, within a short period of receipt of the valuations, to provide any offer to purchase the Trustee’s interest in the Yandina and/or Hastings Properties calculated as follows:
(a)50% of the value of the Yandina Property less the mortgage held by Bank West (Yandina offer) and on the condition that the bankrupt’s liability under the Bank West mortgage is discharged by Mrs Cannon at settlement so that the Trustee receives the whole of the funds comprising the Yandina offer;
(b)50% of the value of the Hastings Property.
In the event that Mrs Cannon makes an offer to purchase the Trustee’s interest in either the Yandina or Hastings Property, the Trustee’s proposed orders make provision for a contract of sale to be executed by the parties on a short turnaround and on the payment of a 10% deposit with settlement to occur no later than 42 days after execution of the contract.
The Trustee’s orders contemplate that if Mrs Cannon does not make a complying offer or if she fails to complete any contract for sale entered into between the parties, that the Trustee be at liberty to sell both the Yandina and Hastings Properties in accordance with the orders made by Judge McNab on 16 November 2021.
As far as capital gains tax (CGT) is concerned, the proposed orders require Mrs Cannon to assist the Trustee to calculate CGT on the Yandina and Hastings Properties by the provision of all necessary documents.
The Trustee seeks orders that each party bear their own costs of the application filed on 20 September 2022.
In written submissions filed on 9 February 2024, the Trustee noted, by reference to the Scott affidavit, that unsecured debts to the value of $5,479,004 remained in the bankrupt estate of Mr Cannon as at that date. The debts included a significant debt owed to Statewide Secured Investments which was assigned in 2018 to Banksia Securities Limited, as well as amounts owing to the ATO relating to outstanding income tax returns. On 16 January 2024, Banksia lodged a proof of debt in the bankrupt estate for the sum of $5,342,205.
The Trustee noted that the sale of the Somers Property took place on 23 April 2022 at a public auction for $2,020,000 and settlement occurred on 22 June 2022. The Trustee deposed to having provided details of the proceeds of sale of the Somers Property and the breakdown of the funds paid to Mrs Cannon on 23 August 2022. The Trustee deposed to having provided further details of the proceeds of sale of the Somers Property and the breakdown of the funds paid to Mrs Cannon on 22 June 2023. This correspondence was not annexed to the Scott affidavit but was produced (without objection) at the hearing on 16 April 2025 and I have marked it as Exhibit A1. It is the evidence of the Trustee, Mr Scott, that despite providing these two accounts of how the Somers Property sale proceeds were disbursed, Mrs Cannon has not sought additional information from the Trustee in relation to the payment of her share of the proceeds from the sale of the Somers Property.
The Trustee says that he is unable to seek advice about the CGT consequences of selling the Yandina and Hasting Properties because he has not received any supporting material in respect of the CGT calculations provided in the email of Stephen Mooney provided to him on 11 May 2022.
The Trustee says that there is a mortgage secured over the Yandina Property in the sum of approximately $219,000. Given the creditors of the bankrupt estate, it is the Trustee’s view that the remaining properties must be sold to pay a dividend to unsecured creditors.
The Trustee says that of the five issues raised by Mrs Cannon in her application, she was successful on one issue, being the CGT issue; she was partially successful on another issue, being whether the Trustee considered practical commercial offers made by her; and was unsuccessful on the remaining three issues, that is, (i) the unnecessary and unauthorised demolition of buildings and improvements on properties the Trustee has obtained possession of; (ii) the payment by the Trustee to BankWest from the proceeds of the sale of the Somers property without Mrs Cannon’s authorisation and despite such payment not being required by the Bank of her debt secured against the Yandina Property; and (iii) the failure of the Trustee to either apply on Mrs Cannon’s behalf (as authorised by the Orders), or request Mrs Cannon to obtain, an ATO Clearance Certificate resulting in the payment from the proceeds of sale of the sum of $125,000 to the ATO on the basis that Mrs Cannon might be a foreign resident.
The Trustee submits that in circumstances where neither party has been entirely successful, the appropriate order is that each party bear their own costs.
The submissions and proposed orders of Mrs Cannon
Mrs Cannon seeks orders that would require the Trustee to provide “a full and proper accounting” to her with respect to the “receipt and disposition of the proceeds of sale of the Somers Property”. Mrs Cannon submits that to satisfy this requirement, any accounting must:
(a)comply with Australian Accounting Standards, including specifically AASB 137 and the requirement to apply appropriate recognition criteria and measurement bases to provisions and contingent liabilities and that sufficient information is disclosed to enable users to understand their nature, timing and amount;
(b)ensure appropriate recognition and measurement of all accrued entitlements of Mrs Cannon, including those arising by virtue of her direct contributions to the maintenance of the Hastings Property, the Yandina Property and the Somers Property since the date of Mr Cannon’s bankruptcy and those arising by virtue of the equitable doctrine of exoneration having specific regard to the borrowings undertaken against those properties prior to his bankruptcy by Mr Cannon for his own benefit to the exclusion of Mrs Cannon;
(c)clearly apportion the costs and expenses incurred by the Trustee in connection with any sale or proposed sale of the Somers Property, the Hastings Property and the Yandina Property between costs properly incurred with respect to such sales or proposed sales and costs properly referable to the administration of Mr Cannon’s bankrupt estate.
Mrs Cannon’s proposed orders also make provision for the Trustee to transfer his interest in the Hastings Property and the Yandina Property, in the event that the accounting exercise referred to above indicates there is a sum to be paid to Mrs Cannon that exceeds the value of the Trustee’s equity in the Hastings and Yandina Properties. In the event that the same accounting exercise indicates that there is a sum to be paid to Mrs Cannon that is less than the value of the Trustee’s equity in the Hastings and Yandina Properties, the orders propose that Mrs Cannon elect to require the Trustee to account to her in cash for such sum or require a transfer to her of the Trustee’s interest in either the Hastings Property or the Yandina Property in partial settlement of the sum to be paid.
Mrs Cannon’s proposed orders contemplate that if it is necessary for the Trustee to sell his interest in either or both of the Hastings Property or the Yandina Property, he shall in the first instance “treat with the respondents” for the sale of such interest, having regard to valuations obtained by the Trustee and any sum payable by the Trustee to Mrs Cannon as a result of the accounting exercise referred to earlier. In the event that the Trustee and respondents are unable to agree on a sale, the Trustee shall be at liberty to sell the Hastings and/or Yandina Properties by public auction, provided that if Mrs Cannon is the highest bidder at such auction, she will only be required to pay a deposit of $100.
Mrs Cannon’s proposed orders provide that in the event the Trustee proposes to sell either the Hastings or the Yandina Property by private treaty, Mrs Cannon will have a right of first refusal exercisable within 14 days to purchase either Property on the same terms as those on which the Trustee proposes to contract with a third party.
Mrs Cannon seeks orders that the Trustee pay her costs of the application filed on 20 September 2022 that resulted in the substantive judgment.
Mrs Cannon submits that this entire suite of orders is appropriate having regard to the findings of the Court recorded in the substantive judgment and in particular the finding recorded at [105] that the supervisory jurisdiction of the Court was engaged and that the failure of the Trustee to seek CGT advice prior to the sale of the Somers Property involved conduct that offended against or fell short of:
(a)The duty contained in s 19(1)(k) of the Act to exercise powers and perform functions in a commercially sound way;
(b)The injunction contained in s 42-135 of the Inspector-General Practice Direction to distribute funds in a timely manner; and
(c)The general law requirement of the Trustee to execute the bankrupt estate with diligence and to a standard assimilated to that of an ordinary prudent businessperson.
Mrs Cannon submits that her proposed orders give effect to paragraph [113] of the substantive judgment which provides that “the Trustee provide the second respondent (if this has not already occurred) with a final accounting (including as to CGT liability) of the settlement proceeds of the sale of the Somers Property”.
Mrs Cannon submits that despite the passage of time, the Trustee has failed to properly and fully account for the sale of the Somers Property and that what purports to be an accounting – being the letter sent by the Trustee to Mrs Cannon on 23 August 2022 – is plainly insufficient.
Mrs Cannon refers in her written submissions to re Hallett’s Estate (1880) 13 ChD 696 where Lord Justice Jesel defined an accounting as “an account of the administration of the estate, showing the assets which have come to the hands of the accountant, the manner in which they have been deal with, and the distribution which has been made of them”.
Mrs Cannon extrapolates from this statement that the assets in the hands of the Trustee include any assets properly forming part of Mr Cannon’s bankrupt estate, but also, by virtue of the orders of Judge McNab made on 16 November 2021 (original orders), certain assets belonging to Mrs Cannon. Mrs Cannon submits that an obligation to account arises whenever a person obtains property in circumstances where the entitlement to that property is qualified, namely, the person is not free to use the property for “his own selfish use”.
Mrs Cannon sought to substantiate her submission that the Trustee had (or was likely to have) assets that belonged to her, by relying on correspondence prepared by her accountant that was annexed to an affidavit sworn by Mr Cannon on 18 March 2025 and filed on the same date (Cannon affidavit). The Trustee objected to this correspondence being read on the basis that it offended the injunction in s 131(1) of the Evidence Act 1995 (Cth) that evidence of a communication made between persons in dispute, in connection with an attempt to negotiate a settlement of the dispute, not be adduced. I upheld the objection with the result that the affidavit of Mr Cannon was read but without reference to pages 1-12 inclusive of Annexure “JC-1”.
To the extent that it was admissible, the Cannon affidavit contained Mr Cannon’s assertions that he had borrowed funds against the Somers Property for his own benefit, including funds in the amount of $287,335 for materials and labour to complete units at Hastings and funds to pay for his legal defence in the County Court proceedings which led to his bankruptcy. Mr Cannon annexed a copy of the Historical Title Search for the Somers Property which recorded a registered mortgage in the name of Wilmoth Field and Warne, his then lawyers.
Mr Cannon deposed that since the date of his bankruptcy, Mrs Cannon had paid the rates and serviced the loans secured against the Hastings Property, the Yandina Property, and prior to its sale, the Somers Property.
Mrs Cannon submits that it does not meet the “ordinary prudent businessperson” test for the Trustee to incur the expense of selling properties belonging as to one half, to Mrs Cannon, in circumstances where it seems plain on the evidence of Mr Cannon that upon a proper accounting it will be shown that the Trustee has already appropriated funds rightly belonging to Mrs Cannon, of an amount in excess of any equity in the remaining properties which has vested in the Trustee.
Mrs Cannon submits that the orders proposed on behalf of the respondents are intended to ensure that the Trustee properly performs his fiduciary duties and that his accounting is brought to the direct attention of the Court in circumstances where the supervisory jurisdiction of the Court has already been enlivened.
On the question of costs, Mrs Cannon submits that because it was necessary for her to bring the Trustee’s conduct to the attention of the Court, she is entitled to her costs, on at least a standard basis.
What orders should the Court make?
Without wishing to rehearse unnecessarily the findings recorded in the substantive judgment it is nonetheless worth noting that they operate with limited compass and are intended, as stated, to place some parameters around the Orders that authorised the Trustee to exercise powers of sale of the Somers, Hastings and Yandina Properties.
Specifically, as recorded in paragraphs [113] to [115] of the substantive judgment, it was the concern of the Court to vary the Orders only to the extent of accommodating the following exigencies:
First, that the Trustee provide Mrs Cannon (if this had not already occurred) with a final accounting of the settlement proceeds of the sale of the Somers Property (including as to CGT liability).
Second, that the Trustee inform Mrs Cannon as to whether he proposes to exercise the power of sale with respect to the Yandina and Hastings Properties and in which order (if relevant) he proposes to do so.
Third, in the event that the Trustee proposes to exercise his power of sale in respect of one or both of the Yandina and the Hastings Properties, Mrs Cannon will have a right of first refusal to purchase the Trustee’s 50% interest in one or both of these properties (as applicable) for fair market value based on an updated valuation obtained by and at the Trustee’s expense.
Turning first then to the final accounting exercise, it is the case that when the substantive judgment was published, the only accounting of the settlement of proceeds of the sale of the Somers Property that had been provided to Mrs Cannon and about which the Court was aware was the accounting provided in the letter sent on behalf of the Trustee to the respondents on 23 August 2022. In the substantive judgment, this accounting exercise was characterised as “provisional” because it recorded a contingent position regarding the payment of capital gains tax.[1]
[1] Paragraph [90] of the substantive judgment.
However, I accept the unchallenged evidence of the Trustee that on 6 June 2023 and following receipt of a notice of assessment from Mrs Cannon for the 2022 tax year which crystallised the CGT in respect of the Somers Property, the Trustee through his lawyers provided to Mrs Cannon a further accounting of the sale of the Somers Property that recognised a further and final payment to her of the amount of $226,187.50. This accounting and payment reflected the CGT assessment recorded in the notice of assessment.
In these circumstances, and where the substantive judgment and the finding that the Court’s supervisory jurisdiction was engaged principally reflected the concern of the Court that the Trustee had failed to properly account for and make inquiries in relation to, his and Mrs Cannon’s CGT exposure relating to the sale of the Properties, I am not persuaded that the Trustee is obliged to do anything more than he has already done through the accounting documented in the letters dated 23 August 2022 and 6 June 2023.
The accounting sought by Mrs Cannon in her proposed orders extends well beyond the findings recorded in the substantive judgment and the matters which were agitated by Mrs Cannon and which informed the Court’s decision. Furthermore, there is no evidence before the Court that there have been items of expenditure that would require some form of reconciliation by the Trustee so as to justify a further accounting and recalibration of the ledger. I am satisfied therefore that there is no justification for an order of the kind sought by Mrs Cannon, in her proposed orders 1 and 2, and instead the approach that commends itself is to include as a notation to the orders words to the effect suggested by the Trustee, namely, that “The Trustee has provided to the second respondent a final accounting of the settlement proceeds of the sale of the Somers Property on 23 August 2022 and 6 June 2023 in accordance with the orders of Judge McNab” to put the position, once and for all, beyond doubt.
Turning then to the second of the matters addressed in the substantive judgment, being that the Trustee inform Mrs Cannon as to whether he proposes to exercise the power of sale of the Yandina and Hastings Property and if so, in what order, that this issue is properly accommodated by a notation of the kind suggested by the Trustee in his proposed form of orders that the Trustee proposes to exercise a power of sale of both of the Yandina and Hastings Properties and to distribute the funds in accordance with the provisions of the Act and that he proposes to sell the Yandina Property first as it is vacant, and then the Hastings Property as it is tenanted.
Mrs Cannon, by her proposed form of orders, seeks to introduce arguments that were not seriously ventilated in her application in a proceeding filed on 20 September 2022 and therefore not the subject of findings in the substantive judgment. Perhaps more importantly, they involve arguments that were not supported by any evidence. They devolve to the assertion that there are costs in the administration of the first respondent’s estate or debts incurred by Mr Cannon, that should not be absorbed or applied in reduction of Mrs Cannon’s interest.
There is no reason that finds support in the substantive judgment or in the submissions and limited evidence adduced by Mrs Cannon, to make orders of the kind reflected in paragraphs 6 and 7 of Mrs Cannon’s proposed orders. To begin with, I have earlier found that there is no necessity to make orders for a further accounting of the proceeds of the sale of the Somers Property. I am also satisfied that the Trustee has demonstrated a continuing case for the sale of the Yandina and Hastings Properties. There is a significant debt owed to unsecured creditors of Mr Cannon and the Trustee is duty bound to sell the Properties to maximise the return to these creditors. Mrs Cannon will have the opportunity to make an offer to purchase the Trustee’s interest in an amount reflecting the updated valuation and on terms that are common to sale of land transactions. There is no need that I can ascertain to further circumscribe the inevitable sale process or to allow it to be held up any longer.
On the question of costs, while I have some sympathy for the point made by the Trustee, that on an issues-based evaluation, Mrs Cannon did not enjoy complete success, this was a case nonetheless by which the Court was satisfied that its supervisory jurisdiction was engaged and orders have been made, the effect of which is to recalibrate the original orders to make provision for Mrs Cannon’s interests in a way that was not originally made explicit.
I will order that the Trustee pay Mrs Cannon’s costs on a party party basis in an amount to be taxed in default of agreement.
I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Symons. Associate:
Dated: 30 April 2025
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