Tapp v Official Trustee in Bankruptcy
[2009] FMCA 1264
•2 December 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| TAPP & ANOR v OFFICIAL TRUSTEE IN BANKRUPTCY | [2009] FMCA 1264 |
| BANKRUPTCY – Application for leave to commence and take fresh steps in Supreme Court proceedings against bankrupt former solicitor – where proposed claim in contract and in tort. |
| Bankruptcy Act 1966 (Cth), ss.58, 82, 117 Law Reform (Miscellaneous Provisions) Act 1946 (NSW), s.6 |
| Allanson v Midland Credit Ltd and Another (1977) 30 FLR 108; [1977] FCA 14 Fraser v Commissioner of Taxation and Another (1996) 69 FCR 99 JN Taylor Holdings Limited (in liquidation) & Anor v Bond & Others (No. 11) [1992] SASC 3692 Lovell v Penkin (a bankrupt) and Another (2008) 101 ALD 335; [2008] FCA 637 Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834 Pucar & Ors v Grubb [2004] FMCA 42 Re Peter Lyle Sharp; Ex Parte: Tietyens Investments Pty Ltd (in liq) & Anor [1998] FCA 1367 The Owners - Strata Plan No.50530 v. Walter Construction Group Limited (In Liquidation) & Ors. [2007] NSWCA 124 |
| Applicants: | PETER TAPP, KEITH TAPP |
| Respondent: | THE OFFICIAL TRUSTEE IN BANKRUPTCY (AS TRUSTEE OF THE ESTATE OF ROGER WINCHESTER GRAY) |
| File Number: | SYG2303 of 2009 |
| Judgment of: | Barnes FM |
| Hearing date: | 2 December 2009 |
| Delivered at: | Sydney |
| Delivered on: | 2 December 2009 |
REPRESENTATION
| Counsel for the Applicants: | Mr N Furlan |
| Solicitors for the Applicants: | Mason Lawyers |
| Respondent: | No appearance |
ORDERS
Subject to Orders 2 and 3 the applicants have leave pursuant to s.58(3) of the Bankruptcy Act 1966 (Cth) to commence proceedings in the Supreme Court of New South Wales for damages against Roger Winchester Gray by filing a statement of claim substantially in terms of the draft statement of claim annexed to the affidavit of Conrad Curray sworn on 16 September 2009 and marked “C” and to take any steps in those proceedings.
The grant of leave is conditional upon the applicants undertaking to the Court in writing within 14 days that:
(a)they will not seek final relief in the proceedings without having given 7 days notice to the Office of the Official Trustee; and
(b)they will not oppose any application by the Official Trustee to be joined or heard in the official proceedings.
Such leave does not extend to the taking of any step to enforce any judgment obtained in the proceedings without leave first being obtained in this Court.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG2303 of 2009
| PETER TAPP, KEITH TAPP |
Applicants
And
| THE OFFICIAL TRUSTEE IN BANKRUPTCY (AS TRUSTEE OF THE ESTATE OF ROGER WINCHESTER GRAY) |
Respondent
REASONS FOR JUDGMENT
(Revised from transcript)
The applicants, Peter and Keith Tapp, are brothers. Roger Winchester Gray was their solicitor between about 1994 and 29 June 2007 on which date, following a complaint by the Law Society of New South Wales to the office of the Legal Services Commissioner, Mr Gray’s practising certificate was suspended and a receiver appointed to manage his legal practice. Mr Gray was made bankrupt in April 2009.
The applicants seek leave to commence proceedings against Mr Gray in the Supreme Court of New South Wales. They rely on two affidavits of Mr Conrad Curry and an affidavit of service on the respondent, who did not appear in these proceedings.
Annexed to Mr Curry’s affidavit of 16 September 2009 is a draft statement of claim in relation to the foreshadowed proceedings, which indicates an intention on the part of the Tapps to seek damages in respect of Mr Gray’s alleged professional negligence in the handling of a matter on their behalf and on behalf of a company in which they were involved. It is also contended that there was a breach of the contract of retainer between the Tapps and Mr Gray.
The applicants have instructed Mr Curry, their solicitor, to commence the Supreme Court proceedings at the first available opportunity, being concerned that such proceedings will become statute barred in mid-2010. They seek leave of this Court to commence such proceedings pursuant to s.58(3) of the Bankruptcy Act 1966 (Cth).
The respondent was named as the Insolvency Trustee Service Australia in the application filed on 21 September 2009. The applicant sought leave to file an amended application in which the respondent is correctly named as the Official Trustee in Bankruptcy. I am satisfied on the evidence before me of service of the application and the relevant correspondence between the applicant and the office of the official Trustee that the respondent is on notice of these proceedings and neither consents nor objects to the leave sought being granted.
The proposed Supreme Court proceedings arise out of what is said in the draft statement of claim to be an oral joint-venture agreement entered into between the Tapps and a Mr Harrison in about June 1993, pursuant to which the parties agreed to purchase, develop and sell properties and share the profits. Mr Keith Tapp was to make an initial financial contribution. It is alleged in the statement of claim that a property were purchased by a company known as Silpoll Pty Limited, of which Mr Keith Tapp and Mr Harrison were directors and shareholders, but that the property was sold and that thereafter the proceeds of sale were used to finance the purchase of a second property, but in the name of a different entity, Benloz Pty Limited, of which Mr Harrison was a director and shareholder and in which the Tapps had no interest.
The Tapps’ contention will be that they engaged Mr Gray to act for them in relation to their and Silpoll’s interests in the joint venture. It is alleged that subsequently in July 1998, and unbeknownst to them, Benloz sold the second property to a third party and that no moneys were paid to the Tapps or to Silpoll. The Tapps’ claim in essence is that at the time of that sale on about 2 July 1998, a right of action accrued to them against Mr Harrison for breach of the joint-venture agreement, to Silpoll against Mr Harrison in relation to breaches of his fiduciary duty and director’s duties and against Benloz for breach of trust. They intend to contend that Mr Gray, among other things, failed to properly advise them as to their and Silpoll’s rights and to protect those rights by initiating litigation prior to the date on which aspects of the claims became, or were likely to have become, statute barred, that is by 2 July 2004.
On the basis of these claims it is contended in the draft statement of claim that Mr Gray was negligent and breached both the contractual and tortious duty of care that he owed to the Tapps. Their claim is that the causes of action against Mr Gray first accrued on or about 2 July 2004, the date on which the claims against Mr Harrison and Benloz were likely to have become statute barred. Their concern is that the proposed claims will themselves become or are likely to become statute-barred on 2 July 2010.
It is in these circumstances that the applicants seek the leave of the court to proceed against Mr Gray who, having become bankrupt in April 2009, appears unlikely to be in a position to be discharged from bankruptcy before 2 July 2010 on the material presently before the court. I note in that respect that the respondent trustee has advised the applicants’ solicitor that as at 26 October 2009 the trustee had been unable to obtain a statement of affairs from Mr Gray and hence had not been able to ascertain or verify the true position as to assets and liabilities of Mr Gray’s estate.
The proceedings in this court are brought under s.58(3)(b) of the Bankruptcy Act, which relevantly provides that:
Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) …
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
The first issue is whether the foreshadowed claim against Mr Gray in the Supreme Court is in respect of a provable debt. Section 82(1) of the Bankruptcy Act provides that:
Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
Relevantly, subsection (2) provides that:
Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.
In determining whether the proposed proceedings are in respect of a provable debt, there is authority to suggest that that concept of “in respect of” is to be construed widely (see for example Fraser v Commissioner of Taxation and Another (1996) 69 FCR 99 at 112 – 114), having regard to the policy underlying s.58(3) and the Bankruptcy Act generally and also taking into account that the nexus required between the proceedings and the provable debt may be indirect.
While it is apparent that the claims in the draft statement of claim are in the nature of unliquidated damages, they are said to be at least partly based on the alleged contractual relationship between the Tapps and Mr Gray, based on a contract of retainer. On that basis the claims would not be outside the concept of provable debt by virtue of s.82(2) of the Bankruptcy Act (see Pucar & Ors v Grubb [2004] FMCA 42 and also Re Peter Lyle Sharp; Ex Parte: Tietyens Investments Pty Ltd (in liq) & Anor [1998] FCA 1367).
It is the case that the substance of the proposed proceedings in the Supreme Court would appear to be the professional negligence action in tort. There has been conflicting authority as to whether such an action of itself is in respect of a provable debt. That issue was examined in some detail by McKerracher J in Lovell v Penkin (a bankrupt) and Another (2008) 101 ALD 335; [2008] FCA 637. In that case the proceedings in respect of which leave was sought were proceedings which were in tort only and not in contract, in contrast to the position in this case. However, after considering conflicting authorities, his Honour proceeded on the basis that, as discussed in Allanson v Midland Credit Ltdand Another (1977) 30 FLR 108 at 115; [1977] FCA 14 at [27] “[w]here a court is given power to grant leave to perform a particular act or pursue a particular course of action and the question whether the need for such leave has arisen involves difficult and complicated questions of law or fact, it is permissible, in an appropriate case, to proceed on the basis that such leave is necessary rather than involve the parties in the futile exercise of determining, possibly after a series of appeals, whether the need for such leave has arisen.” His Honour made orders that to the extent that leave was necessary, the applicant in that case had leave to continue proceedings in tort that had been initiated and to take fresh steps in those proceedings.
In this case it is not, strictly speaking, necessary to decide whether the Tapps’ claim in tort is in respect of a provable debt, not only on the basis considered by McKerracher J in Lovell v Penkin, but also because the action involves an additional claim in contract. Were that not the case, I would be disposed to follow the approach of McKerracher J in relation to the claim in tort.
In determining whether to grant leave it is relevant to have regard to matters such as the complexity of issues in the proceedings, whether the issues are able to be resolved more thoroughly and expeditiously in the proceedings sought to be commenced than would be the case under the proof of debt process in respect of the bankrupt estate; whether there are a multiplicity of claims and whether they all ought to be resolved in one proceeding; whether there are or could be other parties to the proceedings; and whether there is another way in which the applicants in this case might recover (in particular whether they might bring a direct action against the insurer who is said to provide professional indemnity insurance in relation to legal services provided by Mr Gray).
In written submissions counsel for the applicants set out in some detail the evidence in relation to Mr Gray’s professional indemnity insurance cover. Law Cover Insurance Pty Limited is the compulsory professional indemnity insurer for New South Wales solicitors. Having ceased practice as a solicitor on the date that his practising certificate was suspended (29 June 2007) Mr Gray would appear to have the benefit of Law Cover’s standard run-off professional indemnity insurance cover. There is affidavit evidence that Mr Gray did not notify his insurer of the Tapps’ claims against him until some time after 1 July 2009, and on that basis it is said that the insurance policy under which he may be entitled to be indemnified in respect of the Tapps’ claims is that in effect for the 2009 – 2010 financial year. Under this policy a sole practitioner who ceased providing legal services prior to 1 July 2009 would be entitled, subject to certain exclusions, to be indemnified against civil liability for a claim that arose from the provision of legal services made during the period 1 July 2009 to 30 June 2010 up to an amount of two million dollars.
It is said to be relevant that if the Tapps are given leave to proceed against Mr Gray in bankruptcy and if they succeed, any moneys payable to Mr Gray’s estate by Law Cover under the professional indemnity insurance policy would be cordoned off from the pool of assets available to satisfy the claims of creditors generally and would have to be paid to the Tapps, pursuant to s.117 of the Bankruptcy Act. Such proceeds would not be divisible among all the creditors, but rather would be held by the trustee to be distributed to the party to whom the bankrupt was liable in the manner considered in JN Taylor Holdings Limited (in liquidation) & Anor v Bond & Others (No 11) [1992] SASC 3692.
As submitted for the applicants, the existence and availability of such an insurance policy in relation to the claims made by the Tapps against Mr Gray is a significant factor in favour of the grant of leave under s.58(3)(b) of the Bankruptcy Act.
In this context it is also relevant to have regard to the fact that it appears that the Tapps would not be able to proceed directly against Law Cover, having regard to s.6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), because the contract of insurance under which Mr Gray may be entitled to an indemnity came into existence on 1 July 2009, that being later than the event giving rise to his claimed liability to pay damages to the Tapps (failure to initiate litigation on their behalf prior to 2 July 2004). Such an approach to s.6 was taken by the New South Wales Court of Appeal in The Owners - Strata Plan No.50530 v. Walter Construction Group Limited (In Liquidation) & Ors. [2007] NSWCA 124, as considered and examined by McCallum J in Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834 at [18] and [19]. In Perpetual Trustees McCallum J pointed out that in comparable circumstances (where an earlier version of the Law Cover insurance policy was under consideration), the procedure under s.6 of the Law Reform (Miscellaneous Provisions) Act for proceeding in relation to an insurer was not available when the event giving rise to the liability of the insurer had occurred before entry into the relevant contract of insurance because no charge could arise over insurance moneys that might be payable under a contract that did not yet exist.
This is another factor in favour of leave being granted in relation to the proceedings against Mr Gray. I also bear in mind that if leave is not granted it appears that the Tapps’ cause of action may expire on or about 2 July 2010. If that were to occur they would have no means of recovering damages in respect of the alleged actions of Mr Gray, other than to prove in the bankruptcy.
That brings me generally to the considerations that I have referred to as relevant to the exercise of the discretion whether to grant leave under s.58(3)(b). I refer again to Allanson and Re Sharp, in particular the general principle that the court may grant leave where the issues would be better or more comprehensively dealt with by a contested trial in the other court than could possibly be the case if the matter had to be determined in this court after the creditors had lodged proofs of debt in respect of their claim.
In determining whether to grant leave, the court is not required to consider the merits of the issues raised, but rather to determine whether the issues are complex and able to be resolved more thoroughly and expeditiously in the other proceedings. I am satisfied that the issues are complex and would be resolved more thoroughly and expeditiously in the proposed Supreme Court proceedings. It is relevant to have regard to the fact that there are multiple claims arising in the proceedings. They all ought to be resolved at once. While, insofar as the claim is based in contract, that would be a provable debt, the proceedings also raise a claim in tort for unliquidated damages. The proceedings raise a number of matters that would more properly be dealt with by the Supreme Court.
The proposed proceedings will be complicated factually, having regard to the time at which the matters that are intended to be relied on occurred. There is some complexity in the number of parties and entities involved. The proceedings are also legally complex, having regard to some novelty in aspects of the proposed professional negligence claims. I am satisfied that these claims would be better or more comprehensively dealt with in a contested trial in the Supreme Court (and see the remarks of McKerracher J in Lovell v Penkin in relation to the fact that negligence actions against legal practitioners would more customarily be heard in a State Supreme Court, rather than by the alternative procedure of requiring the creditors to lodge a proof of debt and then having to bring proceedings in this court or the Federal Court to determine relevant issues). Moreover, given that there is factual complexity, it is desirable that the proposed claims be prosecuted with the active participation of the bankrupt, Mr Gray.
In addition, it is relevant to have regard to the fact that the Official Trustee does not oppose the Tapps having leave to proceed (albeit he also does not consent). By virtue of s.117 of the Bankruptcy Act the outcome of the foreshadowed proceedings is unlikely to adversely affect the interests of other creditors of the estate because, as discussed in Pucar & Ors v Grubb, there is at least a reasonable probability that the professional indemnity insurance provided by Law Cover will respond to this claim. As indicated, it is also relevant that it appears that the Tapps cannot proceed directly against the insurer under s.6 of the Law Reform (Miscellaneous Provisions) Act and that limitation periods in respect of the Tapps’ claims against Mr Gray may expire before Mr Gray is likely to be discharged from bankruptcy.
In all of the circumstances I am satisfied that the grant of leave in this case would not be contrary to the purposes of s.58(3) or of the Act generally. On balance, having regard to all of the circumstances, and the fact that the trustee has not expressed any concerns from perspective of trustee or in relation to the interests of other creditors, I consider that it is appropriate that leave be granted to the applicants to commence the foreshadowed Supreme Court proceedings.
I also consider that, as discussed with counsel for the applicants, it would be appropriate to impose conditions on such leave to ensure that the applicants not take steps to enforce any judgment obtained in the foreshadowed Supreme Court proceedings without obtaining leave of this court and also to ensure that they would not oppose the Official Trustee, as trustee of the estate of Mr Gray, from being joined in the Supreme Court proceedings should that be sought. In addition the Official Trustee should be kept informed of the progress of the Supreme Court proceedings, so that any opportunity to participate is a meaningful opportunity. It has been indicated to me from the bar table that the applicants would be prepared to provide undertakings to the court to that effect.
Accordingly I propose to grant the leave sought on such conditions. I will hear submissions in relation to the precise wording of the orders.
I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Barnes FM
Associate:
Date: 22 December 2009
10
2