Tyler v Thomas
[2007] FMCA 1795
•17 October 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| TYLER & ORS v THOMAS | [2007] FMCA 1795 |
| BANKRUPTCY – Distribution of bankrupt estate to unsecured creditors – property obtained through litigation funded by some creditors – application for unqualified priority over claims of non-funding creditors – unopposed – orders granted as sought. |
| Bankruptcy Act 1966 (Cth), ss.108, 109, 120 |
Re Abrahams (unreported, Federal Court, 4 September 1990)
Re Connell [2001] FCA 51
Re Pastro [2004] FCA 713
Thomas v Tyler (No. 2) [2005] FMCA 342
Tyler v Thomas [2006] FCAFC 6
Tyler v Thomas [2006] HCA Trans 477
| First Applicant: | FREDERICK NOEL TYLER |
| Second Applicant: | AGTION CONSULTANCY SERVICES PTY LTD |
| Third Applicant: | ALLAN BRUCE HUTCHERSON |
| Fourth Applicant: | FOUR P INVESTMENT CO. PTY LTD |
| Fifth Applicant: | LYNTON HOWARD JOHNSON |
| Sixth Applicant: | COLIN GLANVILLE YOUNG |
| Respondent: | GAVIN THOMAS |
| File Number: | SYG 1508 of 2007 |
| Judgment of: | Smith FM |
| Hearing date: | 17 October 2007 |
| Delivered at: | Sydney |
| Delivered on: | 17 October 2007 |
REPRESENTATION
| Counsel for the Applicants: | Mr E Young |
| Solicitors for the Applicants: | J.P. Leong & Co, Solicitors |
| Counsel for the First Respondent: | Mr B Mackay |
| Solicitors for the Respondent: | Argyle Partnership |
ORDERS
Pursuant to s.109(10) of the Bankruptcy Act 1966 (Cth), the property recovered by the respondent for the benefit of the estate of the bankrupt as a consequence of the orders made by this Court in proceedings SYG1291 of 2004 shall be applied proportionately in payment of the admitted debts of the applicants in priority over the admitted debts of all other unsecured creditors, and otherwise in accordance with the provisions of the Act.
The parties have liberty to apply for further orders varying or clarifying order 1.
The applicants’ costs of this application, including all reserved costs, be paid from the estate of the applicant bankrupt in the priority fixed by s.109(1)(a) of the Bankruptcy Act 1966 (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1508 of 2007
| FREDERICK NOEL TYLER & ORS |
First Applicant
| AGTION CONSULTANCY SERVICES PTY LTD |
Second Applicant
| ALLAN BRUCE HUTCHERSON |
Third Applicant
| FOUR P INVESTMENT CO. PTY LTD |
Fourth Applicant
| LYNTON HOWARD JOHNSON |
Fifth Applicant
| COLIN GLANVILLE YOUNG |
Sixth Applicant
And
| GAVIN THOMAS |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
The six applicants are creditors in the bankrupt estate of Douglas Keith Tyler. Pursuant to deeds of agreement executed by them and the trustee of the bankrupt's estate, the respondent to the present proceeding, they agreed to provide funds to the trustee towards his expenses in relation to proceedings brought by him in this Court under ss.120 and 121 of the Bankruptcy Act 1966 (Cth). Their agreement also bound the applicants to indemnify the trustee to a maximum of $100,000 for any adverse costs orders made against him or the bankrupt estate in the proceedings. The proceedings eventually succeeded in bringing into the bankrupt estate nearly all of the receipts available for the costs of administration and for a dividend to unsecured creditors.
The applicants now apply to the Court for orders under s.109(10) of the Bankruptcy Act to give them unqualified priority in the payment of dividends over those other unsecured creditors who did not participate in the funding agreement with the trustee. Their application is unopposed, and I consider that it would be just and equitable to give them the orders which they seek.
The proceedings which were the subject of the funding agreement were SYG 1292 of 2004. The trustee sought orders to void a transfer of various parcels of land comprising a rural property between the bankrupt and Mr Michael Tyler, his nephew. After a contested hearing, Raphael FM made orders in favour of the trustee (see Thomas v Tyler (No. 2) [2005] FMCA 342). The trustee was also successful on an appeal (see Tyler v Thomas [2006] FCAFC 6), and in resisting an application for special leave to appeal to the High Court (see Tyler v Thomas [2006] HCA Trans 477).
As a result of his success, the trustee never needed to call upon the indemnity given by the applicants. However, because the trustee had no other available funds in the estate to maintain the litigation, nor to conduct other aspects of the administration of the estate, he called upon them to assist in the funding of the litigation. The applicants provided a total of $256,541.62, which was later repaid to them when the farming properties regained for the estate were sold. The proceeds of their sale, with some relatively less significant funds from the sale of cattle, horses and plant and equipment, brought a total of $1,749,021.78 into the estate accounts.
However, the estate’s expenses were significant, and much more than had been originally anticipated, due to the extent of the litigation and other difficulties encountered when realising the bankrupt estate. On the evidence before me, there is, at present, an amount of some $243,000 in cash available for some further expenses of the administration, and possibly also for distribution to creditors. There remains to the trustee the task of pursuing Mr Michael Tyler for outstanding costs orders and other claims, totalling in the region of $250,000. The trustee, has reason to doubt whether Mr Michael Tyler is able to meet all his liabilities to the estate, and there is also a possibility that he will resist recovery, thereby requiring further expenses, including, possibly, sequestration proceedings against Michael Tyler and then a need to fund litigation aimed at realising his assets.
The present situation of the estate is, therefore, not shown in any final accounting, but is sufficiently clearly set out in calculations provided by the trustee to the Court. These show potential dividends becoming payable to unsecured creditors according to various contingencies.
The six applicants who funded the proceedings against Michael Tyler have debts which have been admitted in the total amount of $681,742. The other unsecured creditors who did not participate in funding the proceedings have admitted total claims of $736,453.73. There are seven such claims. Two of them are made by Agtion Consultancy Services Pty Ltd, which is also one of the applicants. It has not opposed an order which might prevent it from participating in a dividend in relation to these two debts.
Of the other five admitted debts owed to non-funding creditors, the largest creditor by far is Custom Credit Corporation Ltd (in liquidation), which has been admitted with a claim of $417,203. The liquidator of this creditor was fully informed of the administration problems facing the trustee, and of his need to have support in his pursuit of Michael Tyler in the proceedings in this Court. At an early stage, the liquidator declined to provide that assistance and to participate in any funding agreement. The liquidator has not sought to be heard in opposition to the present application.
The next largest non‑funding creditor is the executor of the decreased estate of Frederick C Tyler, which has an admitted claim to $276,328.77. The executor is Neville Tyler, who is the father of Michael Tyler, and is the son of the deceased and the brother of the bankrupt. The deceased’s will which was admitted to probate, left interests in his estate to a number of his descendants. The executor and the descendants were all informed at early stages of the difficulties facing the bankrupt estate of Douglas Tyler, and of the need for a claim to be pursued through litigation against Michael Tyler before any dividend could become payable. Particular efforts were taken by the organisers of funding creditors to induce them to participate in the funding arrangements for the litigation. However, the executor declined to participate. The beneficiaries have no rights in the matter other than their rights in equity against the executor, but it appears that they may have acquiesced or agreed in his decision not to support a claim against his son. Neither the executor nor any beneficiary has sought to be heard in opposition to the present application.
The remaining three claims which have been admitted in the bankruptcy are from the Australian Taxation Office for a GST liability of $1,967, from a former solicitor of the bankrupt, Ms McKimm, who has been admitted on a claim for $7,214.68, and Michael Tyler who has been admitted for a claim of $17,028.
In relation to these three creditors, the Australian Taxation Office was expressly invited to support the proceedings against Michael Tyler, and declined to give that support. It has been notified of these present proceedings, and has not sought to be heard nor to present any submission or statement to the Court. Ms McKimm received fully informative reports from the trustee, and she did not seek to support the proceedings against Michael Tyler, nor be heard in opposition to the applicants’ present application for priority. Michael Tyler, as I have indicated, is the subject of further claims by the trustee on behalf of the estate far exceeding the amount of the debt for which he has been admitted. He also has not sought to be heard in opposition to the present application.
Section 109(10) provides:
Where in any bankruptcy:
(a) property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or
(b) expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;
the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.
Among the authorities concerning this provision to which I have been referred is the judgment of Mansfield J in Re Pastro [2004] FCA 713. At [20], his Honour identified the general policy and nature of the discretion given to the court:
In my view, in the circumstances the Court has power to order that the whole amount recovered by the litigation be distributed amongst the creditors who had indemnified the trustee against the costs of the litigation. The discretion under s.109(10) is unqualified. In Re: the Estate of Lawrence Robert Connell (Deceased) [2001] FCA 51, Carr J at [24] described the policy behind s 109(10) as being at least twofold: to encourage creditors to indemnify trustees in bankruptcy who wish to pursue claims in the administration of bankrupt estates, and to reward creditors who bear the burden and take the risks of litigation. See e.g. Re Glenisia Investments Pty Ltd (In Liquidation) (1996) 14 ACLC 237. It is in the public interest that the property of a bankrupt should be available to the creditors of the bankrupt, including where the property of the bankrupt may be secured only through litigation. There is no presumption that the indemnity creditors should not receive the full benefit of the net proceeds of the property or expenses recovered under an indemnity for costs of litigation: see the remarks of Barrett J in Re Home Corp Projects [2002] NSWSC 879 (Re Home Corp Projects) at [12]. That case concerned the provisions analogous to s 109(10) of the Act in s.564 of the Corporations Act 2001 (Cth).
His Honour's judgment, and other authorities, have identified considerations which may be relevant, according to the particular circumstances before the Court (see, for example, Re Abrahams (unreported, Federal Court, 4 September 1990) and Re Connell [2001] FCA 51). Other authorities are referred to in the bankruptcy service at paragraphs 109.10.10 and following.
A helpful written submission by counsel for the present applicants outlines particularly relevant considerations in the present case, and makes points favouring the orders sought. I accept all of his submissions and shall not repeat their details here.
It is clear that the power to exercise the discretion under s.109(10) is available, and that most of the receipts of the bankrupt estate derive from property recovered under an indemnity referred to in s.109(a).
The present case well illustrates a situation where it was vital to the trustee to obtain the support of creditors in funding litigation to obtain property for the payment of creditors, and also to allow the trustee to pursue the administration of a bankrupt estate so as to give effect to the general public interests reflected in the bankruptcy legislation. On the trustee's evidence, the support of the applicants was essential to the recovery of the bulk of the receipts by the estate. He deposes, and I accept, that he would not have been able to pursue the litigation without that support.
I also accept the submission by the applicants that they took a substantial risk when entering into the indemnity since, as the judgments cited above reveal, the outcome was by no means a foregone conclusion, and the applicants exposed themselves substantially to all of the risks inherent in hotly contested litigation. As I have indicated, the six applicants, as well as providing the indemnity, provided very substantial funds, which were essential to the day-to-day conduct of the proceedings and other aspects of administration of the estate.
The trustee’s calculations of possible dividends show that even if, as I propose, the applicants should be given an unqualified priority over other unsecured creditors, they may, at best, receive a dividend of some 72 cents in the dollar, and that this estimation is probably optimistic. On a worst scenario, they may only receive 35 cents in the dollar, and possibly less. I would not, therefore, in this case regard the making of an order, which had the effect of giving them unqualified priority to all the funds available for distribution to creditors, to be a disproportionate response to their support for the estate and the litigation (contrast Pastro at [26] and [31]).
In relation to other considerations supporting an unqualified priority being given to the funding creditors, I have noted above how the other creditors were consulted and given the opportunity to participate in, or at least support, the taking of the proceedings against Michael Tyler, and they declined to do that. I also note, very significantly, that there was no prospect at all that they would receive any dividend if the proceedings had not been pursued. It appears to me that the funds otherwise available to the trustee would probably have become rapidly exhausted and, indeed, that the trustee would have found it impossible to have completed his administration in this estate without the support of the present applicants or from equivalent support from other sources.
I have considered whether the presently unfinalised state of the estate should cause me to decline to make an order at this time. However, I am satisfied by the thorough presentation of material to the Court that the considerations which cause me to make an order today will not change as a result of the various contingencies facing the completion of the administration. As I have indicated, on the best scenario, a complete priority to the present applicants will give them only 72 cents in the dollar. If there was a distribution to all creditors equally, then all creditors would, in a best scenario, receive 34 cents in the dollar and, on a worst scenario, 17 cents in the dollar or less. By making an order at this time, it is possible that the trustee may be able to make an interim dividend to the applicants, who have now been waiting many years for an outcome to their claims.
In all the circumstances shown on the material before me, I am persuaded that it would be just and equitable in this case to make an order, whose effect would be to adjust the priorities within the class of unsecured creditors entitled to participate in a dividend under s.108 of the Bankruptcy Act, by giving the six present applicants unqualified priority to participate in the distributable estate so far as it derives from the proceedings which were the subject of the indemnity agreement. As I have indicated, the consequence will be that, even with the benefit of this order, they will not be able to receive a full payment of their debts and will have to participate proportionately. The consequence is also likely that there may be no funds available for distribution to the non‑supporting creditors derived from that property, nor possibly from any other property which came into the bankrupt estate.
I have discussed the form of an order which will give effect to my judgment, and shall reserve liberty to apply in the event that it needs further clarification or refinement. The applicants seek and, in my opinion, are entitled to have their costs in the proceedings paid out of the estate as an expense of administration and given priority under s.109(1)(a) of the Bankruptcy Act.
I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Michael Abood
Date: 26 October 2007
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