Young v Thomson (Trustee), in the matter of Young (Bankrupt) (No 2) - [2017] FCA 8

FEDERAL COURT OF AUSTRALIA
Young v Thomson (Trustee), in the matter of Young (Bankrupt) (No 2) [2017] FCA 8

File number: NSD 1738 of 2016

Judge: FARRELL J

Date of judgment: 17 January 2017

Catchwords: BANKRUPTCY – application under s 178 of the Bankruptcy Act 1966 (Cth) by creditor of bankrupt’s estate to set aside a litigation funding agreement entered into by the trustee in bankruptcy or, alternatively, for an inquiry into the conduct of the trustee under s 179 – where applicant former wife of the bankrupt and overwhelming creditor of the bankrupt estate – where trustee involved in multiple pieces of litigation – where trustee unfunded for two years – where no response from creditors to request from trustee for funds – where applicant impecunious – where trustee gave creditors notice of intention to enter into funding agreement – where timeframe for objections five days – whether adequate notice given – whether funding agreement commercial – whether parties to funding agreement understand its terms – application dismissed

Legislation:
Bankruptcy Act 1966 (Cth) ss 19, 30, 58(3), 77A, 134, 178, 179

Federal Court of Australia Act 1976 (Cth) s 23, Pt VAA

Federal Court Rules 2011 (Cth) r 7.01

Real Property Act 1900 (NSW) s 57(2)(b)

Conveyancing Act 1919 (NSW) s 37A

Trustee Act 1925 (NSW) s 63

Cases cited:
Adsett v Berlouis (1992) 37 FCR 201; [1992] FCA 368

Frost v Sheahan (Trustee) [2009] FCAFC 20

Hacker v Weston [2015] FCA 363

Joanne Elizabeth Young v Josephine Aapa Smith [2015] NSWSC 400

Macchia v Nilant (2001) 110 FCR 101; [2001] FCA 7

Moore v Macks [2007] FCA 10

Patel v Ruhe [2016] FCA 520

Re Wheeler; Ex parte Wheeler v Halse (1994) 54 FCR 166; [1994] FCA 1348

Willoughby v Official Trustee in Bankruptcy [2001] FCA 753

Young v State of New South Wales; Young v Young (No 2) [2013] NSWSC 330

Young v Smith [2016] NSWSC 1051

Young v Smith (No 2) [2015] NSWSC 1267

Young v Thomson (Trustee), in the matter of Young (bankrupt) [2016] FCA 1410

Date of hearing: 2 and 6 December 2016

Date of last submissions: 12 December 2016

Registry: New South Wales

Division: General Division

National Practice Area: Commercial and Corporations

Sub-area: General and Personal Insolvency

Category: Catchwords

Number of paragraphs: 124

Counsel for the Applicant: Mr J Sheller

Solicitor for the Applicant: Greg Walsh & Co Solicitors

Counsel for the First Respondent: Mr D Eardley

Solicitor for the First Respondent: Mercantile Legal

Counsel for the Second Respondent: Mr S Golledge

Solicitor for the Second Respondent: William James Lawyers

ORDERS

NSD 1738 of 2016

IN THE MATTER OF LESLIE JAMES YOUNG, A BANKRUPT

BETWEEN:
JOANNE YOUNG

Applicant

AND:
LOUISE THOMSON AS TRUSTEE OF THE PROPERTY OF LESLIE JAMES YOUNG, A BANKRUPT

First Respondent

IRONBARK FUNDING RED PTY LTD ACN 606 518 656

Second Respondent

JUDGE:

FARRELL J

DATE OF ORDER:

17 JANUARY 2017

THE COURT NOTES THAT:
The substantive proceedings were dismissed by order made on 19 December 2016.

THE COURT ORDERS THAT:
1.Publication of the reasons for the Court’s order made on 19 December 2016 be restricted to the Official Trustee in Bankruptcy, the parties and their legal advisors pursuant to Div 2 of Part VAA of the Federal Court of Australia Act 1976 (Cth), in order to prevent prejudice to the proper administration of justice. This order is made as a non-publication order as defined in s 37AA of that Act.
2.Order 1 has effect until 5.00 pm on Monday, 23 January 2017 (Sydney time) or until further order.
3.The parties must file any brief written submissions they wish to make in relation to the duration of the non-publication order no later than noon on Friday, 20 January 2017 (Sydney time).

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT
FARRELL J:
DRAMATIS PERSONAE

The first respondent (Ms Thomson or trustee) is the trustee of the estate of Mr Leslie James Young, a bankrupt. She was appointed as trustee of the estate on 2 September 2014 following the presentation of a debtor’s petition by Mr Young. The applicant (Ms Young) is Mr Young’s former wife. Mr and Ms Young separated in 1999. It is not in contest in these proceedings that, at least from that time, Mr Young and Ms Josephine Aapa Smith were and possibly still are de facto partners.
APPLICATION
By an application filed on 19 October 2016, Ms Young sought the following relief under the Bankruptcy Act 1966 (Cth):
·Pursuant to s 178, an order setting aside a litigation funding agreement which Ms Thomson as trustee entered into with the second respondent (Ironbark) on 30 September 2016.
·Alternatively, an inquiry pursuant to s 179 into Ms Thomson’s conduct, with one or more orders, including setting aside the funding agreement and removing Ms Thomson from office.
On 19 December 2016, I dismissed that application for the reasons set out below.
Ongoing matters
As at 30 September 2016, Ms Thomson was involved in three pieces of litigation as well as a number of costs assessments for costs orders made in actions involving the estate (ongoing matters). The three pieces of litigation were:
·An application filed by Ms Thomson on 22 April 2016 in the New South Wales Supreme Court (NSWSC) seeking to wind up Smith & Young Pty Limited (the Winding Up Proceedings).
·Proceedings in the Family Court of Australia commenced by Ms Smith in February 2016 seeking adjustment of property rights as between herself and Ms Thomson as trustee of Mr Young’s bankrupt estate (the Family Law Proceedings).
·The Brookfield Claim (see [21] below).
Procedural background to the application
On Friday 7 October 2016, Ms Young applied for urgent relief before the commencement of a proceeding under s 23 of the Federal Court of Australia Act 1976 (Cth) and r 7.01 of the Federal Court Rules 2011 (Cth) (urgent relief application). This matter came before me as duty judge and after a very brief hearing that afternoon, a copy of the funding agreement was provided to Ms Young’s legal advisors on a confidential basis. As 7 October 2016 was the last day of the “cooling off” period under the funding agreement, Ms Thomson and Ironbark agreed to extend the “cooling off” period to 11 October 2016.
Following brief hearings on 10 and 11 October 2016 I made orders restraining Ms Thomson from incurring costs under the funding agreement until 2 December 2016 save for the Winding Up Proceedings and the Family Law proceedings. Since then:
·the final hearing of the Winding Up Proceedings was held on 11 October 2016. Justice Brereton dismissed the proceedings and made a costs order against Ms Thomson; and
·strike out proceedings in the Family Law Proceedings set down for hearing on 2 December 2016 were stood over and leave was granted to Ms Young to intervene.
On 19 October 2016, Ms Young filed the application for final relief and the hearing of that application was set down for 3 November 2016. In submissions filed on the same day, counsel for Ms Young said (as written):
Mrs Young has fought long and hard to achieve justice against first Mr Young (the judgment of Justice Adamson) and then against Mr Young in conjunction with Ms Smith (the judgment of Justice Sackar). She has seen no tangible reward to date. Now, at a time when Mrs Young is potentially closing in on some reward, she finds out that Ms Thomson has burdened that reward by over 50%. Moreover, an analysis of the litigation funding agreement … shows that the funder will receive a return many multiples of its investment in the litigation to which Ms Thomson is a party.
Unsurprisingly, Mrs Young no longer wants Ms Thomson as the trustee. She seeks relief pursuant to ss 178 and 179 of the Bankruptcy Act 1966 (Cth) (“the Act”). The primary basis of her argument is that Ms Thomson has breached s 19(1)(j) of the Act. She requires an urgent hearing date for the disposal of those applications which include the setting aside of the funding agreement to which Ms Thomson has agreed. The urgency behind that ultimate application, and the reason for interim relief, is to limit any more damage being done to the value of the assets of Mr Young’s bankrupt estate which Ms Thomson has control of as a result of Mrs Young’s successful legal proceedings and for which Mrs Young is the principal creditor.
…
Ironbark is entitled to its share irrespective of what amount it advances by way of costs such that if all of the litigation which is outstanding falls over, for example because Ms Smith is gaoled for contempt, then Ironbark gets its share. For all intents and purposes Ironbark’s money is in the bank. It is just a question of how much.
… An available inference, at an ultimate hearing, is that Ms Thomson was prepared to negotiate away Mrs Young’s hard earned achievements and interest in what has been recovered to date at any price so long as Ms Thomson is covered for prospective legal fees.
Section 19(1)(j) of the Bankruptcy Act imposes a duty on the trustee of a bankrupt estate to administer the estate as efficiently as possible by avoiding unnecessary expense.
On 3 November 2016, the hearing of the application for final relief was adjourned and leave was granted to Ms Young to join Ironbark as a party to the proceedings. The hearing was subsequently set down for 2 December 2016.
On 7 November 2016 Ms Thomson issued a report to creditors which annexed a notice to creditors of a meeting to be held at 2.30 pm on 21 November 2016. In accordance with requests by Ms Young, the meeting was to consider a resolution to remove Ms Thomson as trustee.
Ms Thomson filed an application on 15 November 2016 seeking advice and directions under ss 30 and 134(4) of the Bankruptcy Act and s 63 of the Trustee Act 1925 (NSW) that she would be justified in deferring the meeting until after Ms Young’s application under ss 178 and 179 had been heard. Ms Young filed an interlocutory application the following day seeking orders that the 2 December 2016 hearing date be vacated and that the matter be adjourned to a date at the commencement of term in 2017. Ms Young said this time was required for Ms Thomson’s proposed replacement, Mr Stewart Free, to familiarise himself with the affairs of the estate. On the morning of 21 November 2016 I delivered judgment advising Ms Thomson that she would be justified in adjourning the creditors’ meeting until after the hearing of Ms Young’s application which remained set down for 2 December 2016: see Young v Thomson (Trustee), in the matter of Young (bankrupt) [2016] FCA 1410.
Funding Agreement
Under the funding agreement:
·There is a seven day “cooling off” period exercisable by the trustee: clause 3.
·Relevant terms are defined in clause 1 as follows:
Adverse Costs Order means any costs order made against the Trustee in the Proceedings in respect of costs and/or disbursements incurred during the term of this Agreement, including any GST.
Agreed Proportion means 35% (excl GST) of any Resolution Sum received by the Trustee.
Claims means the claim or claims in which the Trustee is involved concerning Josephine Aapa Smith and/or Smith & Smith Investments Pty Ltd and/or the Property and includes the preservation, realisation, enforcing and all steps necessary to protect and realise the Trustee’s interest in the Property and includes Louise Thomson as Trustee of the Estate of Leslie James Young, a Bankrupt -ats- Josephine Smith (Smith & Smith Investments Pty Ltd), New South Wales Supreme Court proceeding 2014/272808, the Family Law Proceedings, the Brookfield Claim, the Winding Up Proceedings and the Costs Assessment Matter.
Costs Assessment Matter means applications for Costs Assessment to be made in respect of costs orders made in favour of Louise Thomson in the Proceedings.
General Attendances means any work undertaken by Mercantile Legal in relation to advising the Trustee and obtaining information on behalf of the Trustee in respect of the Proceedings.
Proceedings means any action taken to obtain information about the Claims, and any Claims and appeals of the Claims and enforcement of any judgment arising from the Claims that are funded by Ironbark.
Resolution means when all or any part of the Resolution Sum is received by the Trustee and where the Resolution Sum is received in parts, a “Resolution” occurs each time a part is received.
Resolution Sum means the gross amount or amounts, or the value of goods or services or benefit, for which the Claims are resolved, settled, or for which judgment is given, in favour of the Trustee, including any interest amount and any Costs Order without any deductions.
Winding Up Proceedings means Louise Thomson as trustee of the Estate of Leslie James Young, a Bankrupt -v- Smith & Young Pty Ltd & Josephine Aapa Smith, New South Wales Supreme Court case number 2016/124955.
·Ironbark agrees to provide funding for Ms Thomson’s legal costs and disbursements. The maximum amounts which may be expended on the Brookfield Claim, the Costs Assessment Matter, the Family Law Proceedings and General Attendances are specified but amounts unexpended on an allocated matter may be reallocated within the maximum aggregate amount of $253,900: clause 4. The Winding Up Proceedings are not mentioned expressly in clause 4.
·Ironbark agrees to provide Ms Thomson with an indemnity for Adverse Costs Orders. The indemnity is uncapped. Ironbark may obtain a bank guarantee or insurance policy to meet this obligation: clause 16.
·Ironbark’s fee is the Agreed Proportion of any Resolution Sum which the trustee receives.
·The order of priority of distribution of any Resolution Sum is set out in clause 7 as follows:
(1)Reimbursing Ironbark for legal costs and disbursements and any Adverse Costs Order which Ironbark has paid;
(2)Reimbursing Ironbark for any amounts paid to make provision for an Adverse Costs Order or as security for the other side’s costs;
(3)Paying Ironbark the Agreed Proportion of the Resolution Sum;
(4)Paying legal costs and disbursements which are due and payable but unpaid;
(5)Paying the trustee’s fees which are due and payable but unpaid;
(6)Paying expert’s fees and disbursements which are due and payable but unpaid; and
(7)Distributing to the trustee any balance of the Resolution Sum.
It is common ground that Ironbark is not liable to pay Ms Thomson any of her legal costs or disbursements incurred before 30 September 2016.
There was debate at the hearing as to whether Ironbark would be liable for the costs of Ms Thomson’s adversary incurred before 30 September 2016 if an Adverse Costs Order is made after that date. In his affidavit sworn on 24 November 2016, Mr Douglas Hayter, the managing director of Ironbark, accepts that Ironbark has liability under the funding agreement for the payment of the costs order made by Brereton J in the Winding Up Proceedings, (see [6] above). However, in cross-examination Mr Hayter said that he has not yet given proper thought to the issue of the extent of Ironbark’s liability. Mr Hamish McLeod of Mercantile Legal (Ms Thomson’s solicitors), estimates that the defendant’s costs payable by Ms Thomson in the Winding Up Proceedings may exceed $50,000. Mr Sheller, counsel for Ms Young, submitted that Ironbark does not have liability for costs incurred by “the other side” before 30 September 2016 even if Ironbark is otherwise liable to pay an Adverse Costs Order made after that date and the failure of the parties to recognise that indicates that they do not understand the agreement they have entered into.
Ms Thomson stated in evidence that there is an insurance policy in her name for adverse costs orders in respect of the proceedings on foot. However, Mr Hayter’s evidence is that, while he has agreed to obtain insurance for the benefit of Ms Thomson as trustee (subject to the agreement of individual insurers), no insurance policies have yet been taken out due to the orders made on 11 October 2016 restraining Ms Thomson from incurring costs under the funding agreement and inability to access documents relevant to the funded litigation.
Ms Thomson’s counsel and solicitors have submitted invoices in relation to the Winding Up Proceedings and the Family Law Proceedings for an aggregate of $26,656.64. The invoices were paid promptly by Ironbark on 7 and 15 November 2016.
BACKGROUND
Ms Young
Although Ms Thomson has not yet adjudicated on proofs of debt, it is not contested that Ms Young is the substantial unsecured creditor of the bankrupt estate arising from an unsatisfied judgment she obtained in April 2013 in Young v State of New South Wales; Young v Young (No 2) [2013] NSWSC 330. Justice Adamson made orders that Mr Young pay Ms Young $2,663,000 arising out of family law proceedings 2008/286909 and that Mr Young and his company (Jetobee Pty Limited) pay Ms Young $165,000 in damages in common law proceedings which were heard together with the family law proceedings 2008/286909. The common law proceedings against Mr Young were for tortious conduct (including malicious procurement of a search warrant executed against Ms Young on 17 July 2006), false imprisonment and malicious prosecution of charges brought by NSW police against Ms Young for larceny which were dismissed by the Local Court in October 2008. Despite evidence given by Mr Gregory Walsh (Ms Young’s solicitor) in support of the urgent relief application that Ms Young had received nothing, it is now common ground that, to date, Mr Young has paid Ms Young $58,000 of the judgment debt and Jetobee has paid nothing. Ms Young lodged a proof of debt with Ms Thomson dated 10 November 2016 in which she claimed an aggregate of $3,016,264.39 for the amount yet to be paid by Mr Young plus interest.
In his letter to Ms Thomson’s lawyers on 12 October 2016, Mr Walsh says that Ms Young has not been able to work since 2006 as a result of the actions of Mr Young and Ms Smith. She has been in receipt of social security benefits since then and lives in “very modest” accommodation with her sister and brother in law. Both her sister and daughter have been ill. She is not in a position to pay any costs, disbursements and outlays because of her personal and financial circumstances. Mr Walsh has given all evidence tendered on behalf of Ms Young in these proceedings; Ms Young has given no evidence on her own behalf.
Pyrmont apartment
Ms Smith and Mr Young acquired an apartment at Pyrmont in New South Wales (Pyrmont apartment or Property) in May 2007 as joint tenants. It was and may still be their principal place of residence.
Ms Thomson’s interest in the Property is the principal asset of the estate. That interest was established as a result of the s 37A Proceedings described more fully at [24] below.
Brookfield Claim
In 2011, Mr Young and Ms Smith commenced proceedings in the NSWSC against Brookfield Multiplex (2011/35996) (the Brookfield Claim). It is a claim for damage to the Pyrmont apartment. Ms Thomson elected to continue the action as trustee of the estate following Ms Smith’s agreement to indemnify Ms Thomson against costs of the action, including adverse costs orders. This agreement was memorialised in a deed in relation to the prosecution of the Brookfield Claim dated 6 March 2015. The hearing of that claim is set down for 10 days in February 2017.
Freezing orders, s 37A Proceedings and the Westpac mortgage
On 7 August 2014, Ms Smith (as attorney for Mr Young) executed a transfer of Mr Young’s half share in the Pyrmont apartment to Ms Smith. Ms Smith became the registered proprietor of the Property.

Ms Young applied for and obtained freezing orders from Bellew J in the NSWSC in August 2014 prohibiting Mr Young and Ms Smith from dealing in the Property. The freezing orders were maintained by Rothman J on 4 September 2014. The freezing orders were not noted on the title of the Property.
On 16 September 2014, Ms Young commenced proceedings (2014/272808) in the NSWSC against Ms Smith seeking a declaration that the purported transfer of Mr Young’s interest in the Pyrmont apartment to Ms Smith on 7 August 2014 was void under s 37A of the Conveyancing Act 1919 (NSW) and other relief (s 37A Proceedings). Ms Young notified Ms Thomson of her intention to join Ms Thomson to the proceedings; Ms Thomson subsequently filed a submitting notice.
The Pyrmont apartment is subject to a mortgage in favour of Westpac Banking Corporation which Ms Smith entered into on 2 February 2015 to secure a loan of $5.8 million to Smith & Smith Investments Pty Ltd to acquire the “Lucky Australian Hotel” (Westpac mortgage). That mortgage was in breach of the freezing orders and Ms Smith has subsequently been found guilty of contempt of court: see Young v Smith [2016] NSWSC 1051.
In a judgment delivered on 10 April 2015, Sackar J found that Ms Young was entitled to the relief she sought in the s 37A Proceedings: see Joanne Elizabeth Young v Josephine Aapa Smith [2015] NSWSC 400. He made orders to give effect to the judgment on 5 May 2015. In the course of his judgement, at [25], Sackar J said:
In the Debtor’s Petition which he signed on 1 September 2014 Mr Young said that as at 7 August 2014, his interest in the Property was worth 50% of $5.5 million and was sold for $1.8 million of which he had received nil. Mr Young identified Ms Smith as a secured creditor in the sum of approximately $4 million said to be pursuant to a Deed of Agreement dated in 2002 securing the Property. He stated that Ms Smith, as a secured creditor, had repossessed the asset. No such Deed was ever produced in evidence.
In the course of preparing draft orders, Ms Thomson’s advisors became aware of the existence of the Westpac mortgage. They advised Ms Young’s advisors of the mortgage and Westpac of the existence of the s 37A Proceedings.
Justice Sackar’s orders
On 11 May 2015, Sackar J made orders staying the orders he made on 5 May and allowing Westpac to intervene in the s 37A Proceedings. On 19 June 2015, Sackar J made revised orders to which Westpac, Ms Young and Ms Thomson consented. Those orders were to the following effect:
·A declaration that the Pyrmont apartment was held by Ms Smith subject to the Westpac mortgage and then as to one half share on trust for Ms Thomson.
·Any surplus proceeds of the sale of the Pyrmont apartment after payment of the costs of sale and amounts owing pursuant to the Westpac mortgage be paid to Ms Thomson “for the purposes of distribution of those proceeds pursuant to the provisions of the Bankruptcy Act 1996”.
·The Court notes the agreement between Ms Thomson and Westpac that Westpac will not take any further steps to sell the Pyrmont apartment “until [Westpac] has realised the security it holds under registered mortgage number AJ292079”. Mortgage numbered AJ292079 is a mortgage over the “Lucky Australian Hotel”.
·Ms Smith to pay the costs of Ms Thomson and Westpac.
·Ms Smith’s consent to Ms Thomson registering a caveat on the title to the Pyrmont apartment to secure Ms Thomson’s half-share interest in the Pyrmont apartment as trustee.
Ms Thomson’s caveat, the Westpac mortgage and a copy of Sackar J’s orders made on 11 May 2015 are noted on the title to the Pyrmont apartment.
On 2 September 2015, in Young v Smith (No 2) [2015] NSWSC 1267, Sackar J determined that Ms Smith should pay Ms Young’s costs of the s 37A Proceedings and the subsequent proceedings joining Westpac on an indemnity basis and on 25 November 2015, a gross sum order was made for the payment of $326,680.59 in costs. Mr Walsh says that Ms Smith has failed to comply with the order.
Ms Thomson has not enforced the costs order made by Sackar J in her favour. She explains this on the basis of needing to secure Ms Smith’s co-operation in relation to the Pyrmont apartment.
Reports to creditors before the commencement of these proceedings and correspondence between Mr Walsh and Ms Thomson and her representatives
On 10 September 2014 Mr Walsh wrote to Ms Thomson advising of the purported disposal by Mr Young of his interest in the Pyrmont apartment to Ms Smith and asking when Ms Thomson would be in a position to indicate whether she would endeavour to recover Mr Young’s interest. He noted that Mr Young was “subject to a judgment debt of in excess of $3 million (Mr Young statement that the judgment it [sic] is $2,316,000 in his Statement of Affairs is false)”. Mr Walsh enquired whether, if Ms Thomson was not going to proceed, she would consent to Ms Young making an application pursuant to s 58(3) of the Bankruptcy Act for leave to commence proceedings against Mr Young (and Ms Smith) pursuant to s 37A of the Conveyancing Act. He offered to meet with Ms Thomson, at her convenience, to discuss Mr Young’s estate.
On 15 September 2014, Ms Thomson responded (as written):
In your haste to send me a facsimile on the 10 September 2014, you neglected to advise of the further Orders you obtained from Justice Rothman in direct contravention of S.58(3) of the Bankruptcy Act 1966.
I would request you seek not to enforce those orders and immediately apply to have them dismissed.
Please be aware I do not have any expectation, at this stage, to summarily abrogate my obligations as the Trustee appointed to the Bankrupt Estate of Leslie James Young. I have only begun my investigations and your request is presumptive. I certainly have no intentions of granting a third party any rights to continue an action that would appear to be detrimental to the rights of all parties, in particular, the other creditors. It is likely I will seek from you, in due course, such information as to why you consider the course of action under the Conveyancing Act 1919 is preferable to a recovery under s.121 or 122 of the Bankruptcy Act 1966.
…
I understand the reference to Rothman J’s orders to be a reference to the freezing orders.
Ms Thomson’s first report to creditors, dated 29 September 2014, noted that Mr Young had disclosed in his Statement of Affairs that he owes Ms Smith $4 million and Ms Young $2,316,000.
Mr Walsh wrote to Ms Thomson on a number of occasions in June 2015, advising of receipt of funds by Ms Smith into accounts with the ANZ and St George banks, information derived from subpoenas in the s 37A Proceedings. Mr Walsh said that it was his expectation that Mr Young was involved and these transactions should be reviewed by Ms Thomson with consideration being given to action being taken to claw back those monies or claim interest in respect of the disposition. At the hearing, Mr Walsh said that he did not turn his mind to the fact that at this time, the estate was unfunded. He thought the monies in these accounts could have been frozen pending further investigation which, in his view, would not cost much.
Having just become aware of the Westpac mortgage, Mr Walsh wrote to Ms Thomson on 5 May 2015, expressing concern at Ms Thomson’s failure to “act appropriately” in the face of the conduct of Mr Young and Ms Smith. He said that he “would have thought that surely in the circumstances of this matter the Trustee … would have taken active steps to monitor this situation which has been the subject of repeated correspondence to her which has not resulted in one response”. On Ms Young’s behalf, he expressed no confidence that Ms Thomson would act in accordance with her duties under the Bankruptcy Act.
In relation to this complaint Ms Thomson submitted that as Ms Young had obtained the freezing orders in relation to the Pyrmont apartment, it was for her (or Mr Walsh) to take steps to record them on the title of the Property. Had they done so, this might have prevented Ms Smith from entering into the Westpac mortgage. In cross-examination, Mr Walsh ultimately accepted that his criticism of Ms Thomson on this ground was unfair and he had not appreciated that he was in a position to have the freezing orders noted on the title of the Pyrmont apartment.
Ms Thomson’s second report to creditors, dated 8 September 2015, stated that Mr Young had disclosed that Ms Smith was a secured creditor for $4 million, secured over the Pyrmont apartment pursuant to a Deed of Agreement. Ms Thomson also advised creditors that she had joined Ms Smith in the Brookfield Claim and (as a precondition to joining the action) she had required Ms Smith to indemnify her for any costs or costs orders.
Mr Walsh wrote a detailed letter to Ms Thomson dated 10 September 2015 in which he expressed concerns about Ms Thomson’s failure to disclose communications with Mr Young’s lawyer concerning refinancing the Pyrmont apartment. He also expressed the “gravest concern” that it was Ms Thomson’s view that Ms Smith was a secured creditor and that the best outcome for the estate would to be to sell the trustee’s interest in the Pyrmont apartment to Ms Smith as part of a refinance. Mr Walsh expressed dissatisfaction with the level of investigation of Ms Smith’s claims concerning ownership of a boat and motor vehicles (made in a financing application to Westpac), which Mr Walsh suggested were either Mr Young’s property or the property of Jetobee. He complained about the minimal disclosure concerning the Brookfield Claim and about the failure of the “possible offences” section of the second creditor’s report to deal with adverse findings made by Sackar J concerning Mr Young and Ms Smith. He expressed “absolutely no confidence in [Ms Thomson’s] approach” as trustee in this matter.
On 17 September 2015 Mr McLeod responded to Mr Walsh’s letter of 10 September 2015 saying:
·Ms Thomson is mindful of her obligations as trustee and has observed them. Her duties include an “equitable duty as fiduciary to protect the estate against unnecessary costs”, and with that in mind, for Ms Young and her advisors to narrow any issue that “remains for further consideration”.
·While it is a “trite position” that Ms Thomson is obliged to report to creditors and “give information regarding the administration of the estate to a creditor who reasonably requests it”, that obligation “does not extend to providing copies of each and every communication”; “to do so would be offensive to the obligation referred to above”.
·Ms Thomson had not yet received an offer “capable of acceptance” from Ms Smith; it was in “broad and presently untreatable terms”. “As it stands … there is little reason to think that anything less than payment in full of [the trustee’s] interest in the property as well as her costs would represent less than the best outcome to creditors”.
·Ms Thomson “is without funds in the administration and has been from the outset. Notwithstanding that [Ms Thomson], has at her cost, adopted an appropriate investigation of relevant matters”. Ms Thomson “intends to pursue relevant enquiries as appropriate”.
·In relation to the suggestion that Ms Thomson considers Ms Smith to be a secured creditor of the estate in the amount of $4 million:
To the extent [Ms Young] relies on paragraph 5.1 of the Report to come to this understanding; that is misconstrued. [Ms Thomson] clearly conveys the position disclosed by the bankrupt under that paragraph but does not herself adopt the truth of it. Indeed, as you are well aware, that is not the case nor has [Ms Thomson] ever asserted it to be. [Ms Thomson] again invites [Ms Young] to articulate her concern in this regard.
Ms Thomson has told the Court that she will adjudicate claims if and when a distribution is required. While she accepts that Ms Young is the majority creditor she is not in a position to be definitive as to by how much. I note that Ms Young’s proof of debt was lodged in November 2015.
The third report to creditors dated 23 October 2015 is not in evidence.
In the fourth report to creditors, dated 23 November 2015, Ms Thomson said (as written):
So that my position in the Property is restored, I am undergoing negotiations with Ms Smith who is currently seeking to refinance. I consider the best outcome is for the sale of my share in the Property to Ms Smith as part of the refinance as this will restore my position/value at the time of the Bankruptcy in accordance with Justice Sackar’s initial draft orders that were made without prior to the Court’s knowledge of the WBC mortgage.
A formal valuation of the Property was undertaken resulting in a value of $4,000,000 on an “as is” basis. A secondary valuation was given; for once the repairs (see section 4.1 Pyrmont Property Damage “Brookfield Matter” below) are completed resulting in a value of $4,800,000. The equity available in the Property has yet to be determined as the claim WBC may have is currently unknown. The equity may be as high as $3,800,000 and if the repairs claim is successful (being the Brookfield Matter), the equity could be as high as $4,600,000. The current agreed position for my share of the Property between Ms Smith and myself still remains as per my Third Report being the full $2,000,000 for the Property and a further $250,000 on any settlement of the Brookfield Matter.
The valuation to which Ms Thomson refers is a valuation by Hymans, Valuers & Auctioneers dated 15 September 2015, which is in evidence.
On 12 January 2016, Mr Walsh advised Mr McLeod that Ms Smith had asked that she be able to pay her judgment debt to Ms Young in instalments. The same letter queried why Ms Thomson would have instructed a solicitor to act for her as trustee in proceedings involving Ms Smith when that solicitor had previously acted for Mr Young and Ms Smith in proceedings in the NSWSC. No specific submissions addressed this issue.
On 1 March 2016, Ms Thomson advised Mr Walsh that Ms Smith had filed the application in the Family Law Proceedings. Ms Thomson also sought information from Ms Young under s 77A of the Bankruptcy Act to assist her and the liquidator of Jetobee in dealing with Ms Smith’s application in the Family Law Proceedings.
On 7 April 2016, Mr Walsh wrote to Mr McLeod. He indicated that the materials sought by Ms Thomson had been provided to the liquidator and suggested that Mr McLeod should communicate with the liquidator, but “if the liquidator will not assist then contact us and we will see what can be done”. He complained that it was not fair that someone in Ms Young’s circumstances should be required to fund the provision of those materials “absent some clear timeline from you as to the likely future course of the bankruptcy”. He complained that 18 months had passed since Ms Thomson’s appointment as trustee and (albeit that “much has happened in the meantime”) no significant realisations had been made and no distributions had occurred. Mr Walsh asked what enquiries Ms Thomson had made of the receivers who were selling the “Lucky Australian Hotel” and whether Ms Thomson was aware of the terms of any contract of sale. Mr Walsh also asked what steps Ms Thomson proposed to take to find out if the Westpac mortgage had been discharged and to realise the estate’s equity in the Pyrmont apartment. Mr Walsh asked what Ms Thomson would do to protect the interests of the estate “against any attempts of Westpac to sell it” if Westpac was still owed money after the sale of the “Lucky Australian Hotel” and the mortgage was not discharged. Mr Walsh said that it was important for his client to have a “sense of a timeline for realisation of assets in circumstances where she is overwhelmingly the principal creditor of Mr Young”.
Ms Thomson’s fifth report to creditors, dated 15 June 2016 stated (as written, emphasis added):
I encourage you to obtain legal advice in relation to the contents of this notice.
Creditors should be aware that over the course of this administration I have been involved in fifteen (15) different legal matters and have incurred legal fees in the amount of $312,068 to protect and realise assets which the Estate holds an interest in (“the Claims”). The total Claims combined are said to be worth in the vicinity of $2.5-$2.8 Mil and at present are tied up in litigation with six (6) of the fifteen (15) legal matters still ongoing.
Several of the ongoing legal matters are interrelated and are co-dependent on each other, thus making it difficult to summarise for creditors. In saying that, it is crucial for the Estate for each of these matters to continue in order to return an enhanced dividend to creditors. I do not intend to publish details of those matters in this notice to protect creditor’s interests though I encourage you to seek further details from me if you require.
It is my view that for the interest of creditors I seek to obtain funding to pursue these legal matters on behalf of creditors. It is also appropriate that I seek indemnities.
Please notify me in writing from fourteen days (14) days from the date of this notice if you are interested in funding matters on behalf of creditors. If I do not receive an expression of interest within that time, I intend to seek commercial funding.
Should you have any questions regarding the information contained in this notice please contact me by telephone on [number] or email on [address].
This is the only matter addressed in the fifth report to creditors.
Ms Thomson’s sixth report to creditors, dated, 23 September 2016 (a Friday) also only dealt with one matter (as written):
I have not received any response to my Report [of 15 June 2016].
I now advise-
1.That I have approached a number of commercial funders and arrived at terms with one of those that I consider would accommodate ongoing expenses to pursue the various litigations on behalf of creditors; and
2.I intend entering into an agreement with one of those funders on terms which include the following if do not receive any objections from creditors within the next 5 days.
a.That funding is available in the amount of $273,900.00; and
b.The proportion of recoveries entitled to the funder would be 35% plus GST; and
c.I will also have adverse costs insurance protection.
I must stress that this Report is strictly confidential and would ask you only make any enquiries to myself or [name] of my office only.
Should you have questions regarding the information contained in this notice please contact me by telephone on [number] or [email address].
I note that:
·The funding for Ms Thomson’s legal costs and disbursements available under the funding agreement is $253,900, not $273,900 stated in the sixth report to creditors.
·Ms Thomson says that she was in hospital in August and much of September 2016 and she was shown a version of the funding agreement as it existed on or about 22 September 2016. However, it was not the final form of the agreement and the statement that “I have arrived at terms with one of those” implies a maturity of negotiations which was not accurate.
·The sixth report does not disclose the order of priority in which a “Resolution Sum” will be paid (see [12] above).
·The period for response was five days, inclusive of a weekend. Ms Thomson offered no explanation for why this period was chosen. She accepted that creditors should have a “fair opportunity” to respond but offered no comment as to whether she thought this period was adequate.
·It is Ms Thomson’s evidence that if she had received objections, she would have “ceased all activity and the matter would have fallen apart and Ms Smith would have won everything”. It is not what Ms Thomson did on 7 October 2016 when the urgent relief application was filed and the parties first appeared before me as duty judge, nor did she exercise her right to terminate the funding agreement during the agreed extension of the “cooling off” period to 11 October 2016.
Correspondence between Ms Young’s advisors and Ms Thomson or her advisors after 23 September 2016 and before the urgent relief application filed by Ms Thomson on 7 October 2016

Mr Walsh says that he received the sixth report to creditors on 29 September 2016, that is, on the sixth day after the date of the report, and therefore one day after the period for objections set by Ms Thomson ended.
On 30 September 2016, Mr Walsh sent a letter via email to Ms Thomson asking her to outline the scope of the intended litigation to be funded, stating his understanding that the major assets of the estate was Mr Young’s share of the Pyrmont apartment, a share of the damages from the Brookfield Claim and a potential distribution from Jetobee of which Mr Young had been the principal, but unsecured, creditor. The letter said it was difficult to understand why funding was required if there was a realistic prospect that the Brookfield Claim would settle resulting in a $200,000 benefit to the Trustee (which Mr Walsh says Mr McLeod had disclosed to him). Mr Walsh also asked if the proceeds of sale of the Pyrmont apartment (or other matters) would be included in the calculation of the litigation funder’s 35% fee. Ms Thomson says that she did not receive this letter until after the funding agreement was signed at the offices of Mercantile Legal at 11 am that day, but in any event, it was not an objection and it was out of time, since the five day period for objections set out in the sixth creditors report of 23 September 2016 had expired.
On 6 October 2016, Mr McLeod responded to Mr Walsh confirming that the litigation to which the funding agreement would relate was the Brookfield Claim, the Family Law Proceedings, the Winding Up Proceedings (described as providing Ms Thomson with the opportunity to receive distributions from discretionary trusts of which Smith & Young is the trustee); Costs Assessment Matters and General Attendances. Mr McLeod stated that Ms Thomson has been involved in many proceedings and, for the most part, has been unfunded, incurring significant liability and exposure to “considerable risk”. He said that the estate “lacks the resources necessary to maintain those proceedings or to pay for costs incurred to date”. The letter went on to say:
While there is a prospect of recoveries soon there is no imminence or certainty of that occurring. Indeed, our client is concerned that the actions of Ms Smith to date across matters involving her, your client and Jetobee Pty Ltd (in liquidation) have caused significant costs and served to frustrate recoveries.
Our client has issued notices to creditors on a number of occasions in relation to her need to obtain funding and indemnities. No funding proposal or other enquiry, save for your letter dated 30 September 2016, has been received.
Our client has entered into an agreement. Our client has the right to terminate the agreement pursuant to cooling off provisions. The time by which that right must be exercised is close of business tomorrow, 7 October 2016.
Under the agreement the funder is entitled to recover 35% plus GST which would include recoveries from the Pyrmont Property.
Please provide us with any further enquiry, objection or proposal on behalf of your client by 12.00 pm, Friday 7 October 2016.
We are happy to discuss this with you or Mr Sheller if you prefer.
On 6 October 2016, Mr Walsh wrote by email to Mr Christopher Morris, a lawyer at Mercantile Legal supervised by Mr McLeod. Mr Walsh stated: “We are instructed to object to the Trustee engaging a litigation funder … based on a lack of detail as to the following matters: (a) the Trustee’s legal fees incurred to date; (b) anticipated legal fees of the Trustee; (c) the value the Trustee ascribes to the current and future litigation which may be brought against Ms Smith, Smith & Young Pty Ltd and any other parties”.
Mr Walsh pointed out that if the Pyrmont apartment realised $5 million clear of expenses, Ms Thomson would be entitled to $2.5 million of which the funder would receive $875,000 although it appears that the sale of the Pyrmont apartment would not be a function of “any great activity by the Trustee but instead by the mortgagee, Westpac”, giving the funder a substantial windfall notwithstanding the likely minimal involvement of Ms Thomson in the sale. Mr Walsh said that Ms Young was not aware of “any tendering by the Trustee or otherwise research undertaken as to available funding agreements”. He invited Ms Thomson to exercise her rights to not proceed with the agreement under the “cooling off” period and reserved Ms Young’s position.
Negotiation of the funding agreement
None of the evidence filed on Ms Thomson’s behalf in these proceedings disclosed that Ms Thomson’s lawyers had been in correspondence with Mr Hayter in 2015. That fact was also not disclosed in any of the creditors’ reports which are in evidence for 2015.
Mr Hayter’s affidavit, sworn on 24 November 2016, disclosed that Mr McLeod approached him in mid-2015 concerning the possibility of Ironbark providing litigation funding to Ms Thomson. On 20 August 2015, Mr Hayter sent a draft funding agreement to Mercantile Legal (for Ms Thomson’s consideration) concerning funding for the “Pyrmont property dispute and realisation costs and the Smith & Smith litigation”. This did not include the Family Law Proceedings (which had not yet commenced) or the Brookfield Claim. The draft funding agreement provided that the “Agreed Proportion” (Ironbark’s premium for providing funding) was calculated on the basis of a matrix which had regard to the amount of costs paid by Ironbark and the time before it received payment. On 4 September 2015 Mr McLeod told Mr Hayter that Ms Thomson had received an offer from Ms Smith. It was Mr McLeod’s view that “Ms Smith would obviously be best served by moving quickly though the history suggests that a few weeks [negotiation in order to reach an agreement] may be conservative”. While “there is some work to be done to get it near settlement” Ms Thomson believed that there were “reasonable prospects of resolving this on the horizon”, however Mr McLeod noted that both Ms Thomson and Mercantile Legal had “been without funds for a long time and there is no certainty given the past”. Settlement was not reached.
On 29 June 2016, Mr McLeod sent a letter to Mr Hayter in which he made a renewed request for funding on Ms Thomson’s behalf. Attached to the letter was:
·A “schedule of references”, which explained the terms used in a “summary of matters” document which was also attached. The “summary of matters” was a background to past and current litigation in which the bankrupt estate had been involved.
·A summary of “outstanding costs” which showed that Mercantile Legal had issued invoices for $339,639.58 and was owed $310,174.75 with work in progress of $37,402.26, and there were outstanding counsels’ fees of $48,647.50, with an aggregate outstanding of $358,822.25.
·A summary of “estimated costs” for the Brookfield Claim, the Costs Assessment Matters, an “examination matter”, the Family Law Proceedings, General Attendances and the Winding Up Proceedings with an aggregate amount of $423,900. A detailed schedule for each of those matters was also prepared by Mr Morris.
·A schedule of possible outcomes.
Ms Thomson says she saw the letter a week or so after it was sent to Ironbark but did not consider the schedules. The letter advised that Ms Thomson “requires funding for her current and future costs and disbursements. She also requires to be indemnified in relation to all costs and disbursements as well as any adverse costs associated with this matter”. It noted that the fifth creditors’ report dated 15 June 2016 gave creditors until 29 June 2016 (that day) to respond as to whether they were willing to provide funding and indemnity. If not, Ms Thomson “will look to obtaining commercial funding”. It invited Mr Hayter to “provide us with your proposed funding agreement for our client’s consideration”.
In mid-August 2016, Mr McLeod approached two other litigation funders, one identified by Ms Thomson and one identified by Mr McLeod. Neither was prepared to provide funding on the basis requested.
Mr Hayter has been managing director of companies in the Ironbark group since October 2014. Before that, Mr Hayter practised as a solicitor between October 2001 and September 2014, primarily in insurance, insolvency and commercial litigation. Mr Hayter said that he assessed the risks of agreeing to fund the ongoing matters taking into account that:
·There are multiple pieces of litigation which adds complexity and risk, making the matter unusual and different from the first proposal.
·The Brookfield Claim is listed for a lengthy trial (10 days) with significant adverse costs risk which he explains in his affidavit. He is aware that an offer of settlement, in the vicinity of $800,000 had been made previously which gave him some comfort even though it had been rejected by Ms Smith. As at the end of September 2016, Mr Hayter thought there was sufficient time to deal with issues which might arise in relation to the Brookfield Claim.
·The nature of the Family Court jurisdiction and the difficulties faced by a trustee in bankruptcy in litigating matters arising from the personal relationships of the bankrupt. There was also the possibility that all gains from other litigation might be lost in the Family Law Proceedings.
·Ms Smith had made “a number of settlement overtures in the past which had amounted to nothing”.
Mr Hayter sought to justify the proposed “Agreed Proportion” of any “Resolution Sum” to be a reasonable rate of return because:
·The matters involving Ms Smith were no closer to resolution than it had been when Ms Thomson ceased to pursue her request for funding in 2015.
·It appeared to him that people involved in litigation with Ms Smith have to take all proceedings either to the door of the Court or to final judgment to obtain a result. He was not confident that Ms Smith would settle any aspect of the ongoing matters. His perception of her was that she was “uncooperative and obstructionist in the extreme”.
·The Ironbark Group was being asked to assume immediately a potentially significant adverse costs liability in the Brookfield Claim, with a potentially lengthy trial. He explained how he assessed the likely amount of adverse costs having regard to explanations from Messrs McLeod and Psaltis of Mercantile Legal of the number of defendants and the fact that it was a construction matter with numerous experts. Because the preparation for this case would already have started or would start soon after the funding agreement was signed, he considered that a matrix basis for the fee was not appropriate.
·Ironbark was being asked to accept adverse costs liability in the Winding Up Proceedings and the Family Law Proceedings.
Negotiation of the funding agreement took place between 1 and 30 September 2016. I note that Ms Thomson says she was in hospital for most of August and September 2016 and left hospital on 23 September 2016.
Correspondence in evidence indicates that (among other things):
·Although funds were specifically allocated to the Family Law Proceedings, the Brookfield Claim, the Costs Assessment Matters and General Attendances, reallocation could occur within the overall cap of $253,900.
·The amount for “General Attendances” was increased but the “cap” on funding for Ms Thomson’s expenditure on legal costs and disbursements is $20,000 less than the amount referred to in the sixth report to creditors dated 23 September 2016.
·A provision dealing with fees for appeals was amended.
·On 26 September 2016, Mr Morris indicated that the “response period” under the sixth report to creditors ended on 30 September 2016 and requested that the “cooling off” period be extended from seven to 14 days “in order that Ms Thomson may have sufficient time to consider any objections received from creditors”. That change was not made.
·On 27 September 2016, Mr Hayter confirmed that Ms Thomson’s indemnity for Adverse Costs Orders under the funding agreement is uncapped, and that “any insurance policy obtained will be enough to cover any likely adverse costs order” and that he “had expected to obtain that policy as the requirement for adverse costs protection became clearer”. He indicated his willingness to request that Ms Thomson be a named insured, but could not guarantee that an insurance company would be willing to provide insurance.
At mentioned above, Mr Hayter said that no adverse costs insurance has yet been obtained because the restraining orders obtained by Ms Young have limited expenditure, including in relation to obtaining access to documents necessary to secure that insurance.
It is not evident from the correspondence that the “Agreed Proportion” was negotiated and all versions of the funding agreement in evidence from August and September 2016 have the same definitions. However, Ms Thomson gave evidence at the hearing that the fee was negotiated down from 40% (plus GST) and Ms Thomson regards the “Agreed Proportion” of 35% (plus GST) of the “Resolution Sum” as competitive with funding agreements she has seen in relation to bankruptcy matters.
Mr Hayter says, and I accept, that he was not aware that Ms Smith and Ms Thomson entered into a deed on 6 March 2015 in relation to the prosecution of the Brookfield Claim at the time the funding agreement was being negotiated; he only became aware of it recently. Both Ms Thomson and Mr Hayter are sceptical that Ms Smith will observe her obligations under the deed. Ms Thomson considers that she needs the adverse costs protection afforded under the funding agreement for the Brookfield Claim.
At 11 am on 30 September 2016, Mr Hayter and Ms Thomson met to sign the funding agreement. It contains a seven day “cooling off” period. No explanation was given as to why it was necessary to enter into the funding agreement on that day.
Ms Thomson’s reasons for entering into the funding agreement
In her affidavit filed on 31 October 2016, Ms Thomson said that she “considered it necessary to enter into the funding agreement” because:
(1)The estate was involved in litigation.
(2)It is imperative that she defend the Family Court Proceedings as “a failure to do so could result in the Property being transferred back to” Ms Smith.
(3)Her experiences in the Family Court as a trustee in bankruptcy have been prolonged and expensive. Even where agreements are reached early, the minimum time frame is 12 months with some being as long as three or four years.
(4)Alternative funders were unwilling to enter into an agreement on terms she proposed.
Ms Thomson dismissed the need to seek creditors’ approval of the funding agreement on the basis that no creditor had responded to her fifth report dated 15 June 2016. She did not explain why she did not approach the Court for advice save to accept that she regarded herself as having “carte blanche” to enter into a funding agreement because of the failure of creditors to respond to her fifth and sixth reports within the timeframes specified in those reports.
Ms Thomson says that up until she received an offer from Ms Smith to purchase Ms Thomson’s interest in the Pyrmont apartment on 27 October 2016, she considered that the most cost effective way to realise her interest in the Property was to allow Westpac to exercise its power of sale “as contemplated by” Sackar J’s orders of 19 June 2015. At the time the funding agreement was being negotiated, she understood that Westpac was “tied up” in a complaint made by Ms Smith to the Financial Ombudsman’s Service (FOS). The terms of the complaint are not in evidence, nor are the terms of any response which Mr McLeod received to his enquiry of 12 October 2016 referred to at [75] below. Ms Thomson said that Westpac has not been responsive to enquiries but she could not identify any specific enquiries made immediately before the funding agreement was entered into. It is plain from the terms of the 12 October 2016 letter that some information had been obtained from Westpac’s advisors. Ms Thomson said that, despite the terms of Sackar J’s orders made on 19 June 2015, based on Ms Smith’s previous “form”, she had every expectation that if Westpac did sell the Pyrmont apartment, Ms Smith would make an application which would result in any proceeds being paid into court pending the determination of the Family Law Proceedings.
Events after urgent relief application
On 11 October 2016 Brereton J dismissed the Winding Up Proceedings and made a costs order against Ms Thomson.
On 12 October 2016, Mr McLeod wrote to Westpac’s lawyers, saying that he understood that Westpac’s security over the “Lucky Australian Hotel” had been realised and noted that Westpac was therefore free to take steps to sell the Pyrmont apartment as contemplated by orders made by Sackar J on 19 June 2015, noting that he understood from conversations with Westpac’s lawyers that steps had been taken to sell the Pyrmont apartment but it had “been delayed” because of Ms Smith’s complaint to the FOS. So that Ms Thomson may update creditors, Mr McLeod sought confirmation that Ms Smith had made an application to the FOS and a copy of the application and submissions. He also sought an estimate of when the Pyrmont apartment would be advertised for sale. No reply is in evidence. It is Ms Thomson’s evidence that Westpac has not been forthcoming in response to requests for information.
On 12 and 13 October 2016, Mr Walsh wrote to Mr McLeod and Ms Thomson respectively saying, (among other things):
·Mr Walsh made a detailed statement of Ms Young’s personal, familial and financial circumstances. This was in response to Mr McLeod having pointed out that the trustee had been offered no support from any of the creditors of the estate. Mr Walsh pointed out that it was through Ms Young’s efforts in the s 37A Proceedings that the trustee’s interest in the Pyrmont apartment had been secured.
·Since 2006, Ms Young “had not been in a position to pay any costs, disbursements and outlays by virtue of the [sic] personal and financial position”.
·Ms Thomson has incurred legal costs and trustee’s remuneration of approximately $600,000, with recoveries of “a few thousand dollars from bank accounts and shares and a $75,000 preference to the Australian Taxation Office”.
·Mr Walsh understands that Ms Thomson’s lawyers anticipate spending another $400,000 in the administration of the estate, with no attempt by Ms Thomson to “rein in her solicitors”.
·The Winding Up Proceedings have been lost.
·Ms Thomson had “chosen” to take no active steps to sell the estate’s interest in the Pyrmont apartment. Mr Walsh did not accept Mr McLeod’s explanation that Ms Thomson could do nothing because of the terms of Sackar J’s orders. He noted that he had formally complained about this previously and commented that “the Trustee and those that have represented her have acted in a truly “shambolic” manner”.
·No effort had been made by the trustee to recover assets and funds under the control of “possibly Les Young and Josephine Smith” which had been particularised by Mr Walsh.
·There had been insufficient reporting to creditors during the bankruptcy, the last report being in November 2015. That had been scant on detail, and in particular, it made no reference to the position of the unsecured creditors.
·“To the gross disadvantage of creditors” the proposed funding agreement which “burdens what assets are or will be in the bankrupt estate to the tune of 35% plus GST to the benefit of a litigation funder in circumstances where that litigation funder is only required to pay between $250,000 and $275,000 in costs (and these amounts are maximums)”.
·Ms Young asked Ms Thomson to convene a meeting of creditors of the estate so that the creditors could consider removing Ms Thomson and suggested 24 and 25 October 2016 as suitable dates.

On 17 October 2016, Westpac issued a notice to Ms Smith under s 57(2)(b) of the Real Property Act 1900 (NSW) on the basis that she had failed to pay $804,648.42 to Westpac in accordance with a Notice of Demand dated 30 September 2016 and had therefore defaulted on the Westpac mortgage. The notice required Ms Smith to pay that amount within one month, failing which Westpac proposed to exercise its powers of sale.
On 27 October 2016, Ms Smith’s lawyers conveyed to Ms Thomson’s lawyers an offer to settle, noting that “it is in neither of our clients’ interests for Westpac to exercise its power of sale as Westpac’s costs will significantly reduce the equity available for distribution to Ms Smith and Ms Thomson (these costs are not limited to marketing fees, agent’s commission, receiver’s costs and the like)”. The offer can be summarised as follows:
·Ms Smith would purchase Ms Thomson’s interest in the Pyrmont apartment for $2 million on the basis that: (1) payment be made simultaneously with refinancing of the Westpac mortgage; (2) Ms Thomson withdraws her caveats on the title; (3) Ms Thomson provides a signed transfer of her interest to Ms Smith or provide an acknowledgment that upon payment of the $2 million that Ms Smith is the sole owner of the legal estate in the Pyrmont apartment; and (4) Ms Smith provides an indemnity in respect of any periodical outgoings and charges associated with the Pyrmont apartment.
·Ms Thomson would assign her interest in the Brookfield Claim to Ms Smith and Ms Smith would pay Ms Thomson $250,000 upon settlement, verdict or order or any other benefit accruing to Ms Smith in respect of the Brookfield Claim (provided such benefit is in excess of $250,000). Ms Smith would agree to a caveat being lodged on the Pyrmont apartment to secure this amount.
·The Family Law Proceedings would be terminated with no order as to costs and they would release each other with respect to those claims.
·The “parties” would release each other from all claims “arising from or in connection with” the s 37A Proceedings. This requirement is ambiguous as to whether it meant only that Ms Thomson would release Ms Smith from the costs order against her or whether it constituted a requirement that Ms Young also release Ms Smith from a costs order for $326,680.59 obtained in those proceedings (see [30] above).
The offer is subject to the conditions precedent that: (1) it is ratified by the creditors of Mr Young’s estate; (2) consent is given by all parties to the s 37A Proceedings and the proceedings which resulted in the freezing orders against dealings in the Pyrmont apartment by Ms Smith and Mr Young or those freezing orders being vacated or varied; and (3) each party is also required to pay its own negotiation costs and the costs incurred in preparing a deed of settlement.
Even though the offer would require further negotiation, Ms Thomson explained her reasons for wanting to accept Ms Smith’s offer of 27 October 2016:
(1)Her interest in the Pyrmont apartment was valued at approximately $2 million based on the ($4 million) valuation of the Property in September 2015. The valuation estimates the Pyrmont apartment to be worth $4,850,000 once rectification works the subject of the Brookfield Claim have been completed.
(2)The offer included an additional payment of $250,000 should Ms Smith successfully prosecute the Brookfield Claim which relates to rectification works as consideration for Ms Thomson assigning her interest in the Brookfield Claim to Ms Smith. Ms Thomson considered that offer commercial because it avoids the risk of further legal costs to the estate in maintaining that litigation.
(3)The effect of the offer is that the Westpac mortgage will be paid from the proceeds derived from Ms Smith’s interest in the Pyrmont apartment.
(4)The offer includes settlement of the Family Law Proceedings, also avoiding further legal costs. That litigation was a major reason for seeking funding.
On 28 October 2016, Mr McLeod wrote to Mr Walsh making the following points (among others):
·Mr Walsh acted for Ms Young when she consented to the orders made by Sackar J (see [28] above) so that Mr Walsh was “abundantly aware of the mechanism provided for in the Orders for the sale of the Pyrmont [apartment]; that is, that the sale is to occur after the mortgagee has realised the security it holds [over the “Lucky Australian Hotel”] given that your client consented to those very orders” (emphasis in the original).
·“There is little doubt that the cheapest and likely quickest way for the trustee to realise her interest in the Pyrmont [apartment] is to allow the mortgagee to complete its sale.” Notice has been received of the mortgagee’s intention to take possession.
·On 27 October 2016, Ms Smith made an offer to purchase the trustee’s interest in the Pyrmont apartment and it will expire on 1 November 2016. Mr McLeod enclosed a copy of the offer and asked whether Ms Young objects to Ms Thomson accepting it. Mercantile Legal had asked Ms Smith for an extension of time to accept the offer to a date after the hearing of Ms Young’s application to set aside the funding agreement, failing which they would approach the Court for directions as to whether the offer should be accepted.
·Mr Walsh should note clause 14.2(d) of the funding agreement. On Ms Thomson’s interpretation, the estate will be required to pay to Ironbark the “Agreed Proportion” of any “Resolution Sum” received within six years after termination.
On 31 October 2016, Mr Walsh advised Ms Thomson through Mr McLeod that Ms Young did not consent to Ms Smith’s offer being accepted. Mr Walsh said that:
·Ms Thomson had given no indication of whether the receipt of proceeds from Ms Smith for the Pyrmont apartment would be subject to the funding agreement. I note that this statement is not correct (see [55] above).
·Ms Thomson had previously advised Ms Young that there was an offer to resolve the Brookfield Claim for $850,000 inclusive of costs. Ms Smith is now only offering $250,000.
·There is no present valuation of the Pyrmont apartment, and one is needed. Mr Walsh noted local internet valuations which suggest that the value of the Pyrmont apartment “could be as high as $6.9 million”.
·Ms Smith’s offer was contingent on the trustee “wearing” its own costs in respect of all of its outstanding litigation against Ms Smith. Ms Young had not been provided with any detail of the value of the costs order which Ms Thomson has (or may have) against Ms Smith, so that Ms Young cannot value “what is being given away if the offer was to be accepted”.
·“Ms Young, as the overwhelming majority creditor, does not want Ms Thomson to be the Trustee anymore”, noting that Ms Young’s reasons for this are set out in Mr Walsh’s letter of 13 October 2016.
Ms Thomson issued her seventh report to creditors on 7 November 2016. That report included notice of a meeting of creditors to be convened on 21 November 2016 at 2.30 pm for the purpose of considering a resolution to remove Ms Thomson as trustee. It was also the first creditors’ report in evidence to disclose the existence of the Family Law Proceedings and the Winding Up Proceedings, although Mr Walsh had been advised of the Family Law Proceedings by letter dated 1 March 2016 and he was advised of the Winding Up Proceedings by Mr McLeod’s letter of 6 October 2016.
The seventh report to creditors disclosed:
·In relation to Mr Young’s contention in his statement of affairs that he is a creditor of Jetobee, Jetobee’s liquidator had indicated that he is still qualifying priority claims. Ms Thomson notes that she had sought evidence from the accountant and solicitor for Ms Young in relation to the alleged debt to Mr Young “however the accountant’s records do not readily identify any claim, and Mrs Young’s solicitor has declined to assist”. I take this latter remark to refer to the correspondence discussed at [47]-[48] above.
·The offer made by Ms Smith to settle which had been referred to in Ms Thomson’s fourth report to creditors in November 2015 had failed to complete even though it had been acceptable to creditors of the estate. This matter was set out at 5.1.2 of the seventh report.
·Westpac had issued a “Section 57(2)(b) Notice of Default” to Ms Smith, “thus indicating they intend to obtain possession of the property”.
·Although Ms Smith and Ms Thomson were originally represented by the same solicitors in the Brookfield Claim, Ms Smith, without consultation, dismissed her legal team and Ms Thomson “was forced” to engage her own solicitor and barrister. There is no indication in the report about when Ms Smith took that step.
·The Family Law proceedings could not be openly discussed but due to “the number of relationship assets held and the nature of this Estate”, extensive work is required to be done and unless settlement is reached, the matter will be protracted and costly for the estate.
·Following the sale of property owned by Smith & Young as trustee of the discretionary trusts (Smith family and Young family respectively), Ms Thomson sought to intervene to have Mr Young’s shares in Smith & Young transferred to her and apply to wind up the trustee company to preserve the funds. Ms Thomson considered that those assets would become part of the dispute in the Family Law Proceedings. Ms Thomson said in relation to the dismissal of the Winding Up Proceedings:
As information in the Family [Law Proceedings] is confidential, I could not provide this important evidence. Unfortunately the remainder of my evidence was considered by Justice Brereton in the Supreme Court of New South Wales, insufficient for the orders sought to be made.
·There is a costs order against the estate in the Winding Up Proceedings.
·Realisations made since Ms Thomson’s appointment amount to $81,194 of which $75,000 was settlement of a preference claim against the Australian Taxation Office.
·At the time of the issue of her sixth report to creditors on 23 September 2016, her legal costs were in excess of $315,000 and her remuneration was in excess of $270,000. Her “unpaid remuneration incurred to date is $274,412 plus disbursements of $3,729”.
·On 27 October 2016, Ms Smith’s lawyers conveyed an offer to Ms Thomson to settle matters pertaining to the Pyrmont apartment. She set out the detail of the offer as written and concluded: “The offer has not been accepted due to a number of conditions that I have sought. Further, Mr Walsh solicitor for [Ms] Young rejected it outright even though it was basically identical to the offer 5.1.2 above”.
Other matters
A bankruptcy notice was served by Ms Young on Ms Smith on 18 January 2016 which has given rise to litigation in the Federal Circuit Court of Australia.
LEGAL PRINCIPLES
Legislation
Sections 178 and 179 of the Bankruptcy Act 1966 provide as follows:
178 Appeal to Court against trustee’s decision etc.
(1)If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.
(2)The application must be made not later than 60 days after the day on which the person became aware of the trustee’s act, omission or decision.
179 Control of trustees by the Court
(1)The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:
(a)remove the trustee from office; and
(b)make such order as it thinks proper.
(2)The Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs.
Section 178 and the functions of a trustee
In Frost v Sheahan (Trustee) [2009] FCAFC 20 at [8], the Full Court (Ryan, Mansfield and Jagot JJ) noted, without demur, that the principles which applied to an application under s 178 were not disputed by the parties and are as follows:
1.Section 178 confers a "supervisory jurisdiction over the conduct of the trustee": Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124 at 132 per Brennan CJ, Gaudron and McHugh JJ. The section confers on the Court a very wide discretion: McGoldrick v Official Trustee in Bankruptcy [1993] FCA 636; (1993) 47 FCR 547 at 552–553.
2.It is not necessary for an applicant for relief under the section to show that the trustee’s decision was absurd, or unreasonable or taken in bad faith. The Court has a wide discretion to make such order as seems appropriate in the circumstances of the case: Re Tyndall; Ex parte Official Receiver (1977) 30 FLR 6 at 9–10; [1977] FCA 15; 17 ALR 182 at 186 per Deane J. At the same time, the Court will be slow to make orders which will have the effect of interfering in the day-to-day administration of a bankrupt’s estate and, in cases involving an exercise of business or commercial judgment, will place considerable weight on the trustee’s decision. Furthermore, a Court will not intervene under s 178 simply because the Judge forms a different view from that of the trustee.
3.An order may be made under s 178 even if the trustee’s decision was correct on the material before him, if, for example, additional material is put before the Court.
In Moore v Macks [2007] FCA 10 at [28], Besanko J also summarised the principles relevant to the exercise of the Court’s jurisdiction under s 178 as follows:
… Its operation is to be understood in its historical context (Macchia v Nilant (2001) 110 FCR 101 (‘Macchia’) at 119 per French J), and in the context of the broader relationship between the court and the trustee in bankruptcy as an officer of the court (Macchia at 116). For present purposes it is sufficient to note the following points about the scope of the section:
1.Under the section, the court is fulfilling a supervisory role judicially, rather than an administrative role standing in the shoes of the trustee. As such, grounds for judicial review must be established by an applicant Re Wheeler; Ex parte Wheeler v Halse (1994) 54 FCR 166 (‘Wheeler’) at 170 per Lee J, and the exercise of the court’s power is wholly in its discretion. The court has the ‘widest possible discretion as to the appropriate order which should be made in the particular case’ (Re Tyndall; Ex parte Official Receiver (1977) 17 ALR 182 (‘Re Tyndall’) at 186 per Deane J).
2.The impugned act, omission or decision of the trustee in bankruptcy need not be absurd, unreasonable, or taken in bad faith before it is subject to review or a resultant order of the court under the section (Re Tyndall at 186 per Deane J). Indeed, the act, omission or decision of the trustee may be subject to review even though it was commercially sound at the time it was made: Macchia at 116 per French J. At the same time the trustee’s opinion will be a relevant factor in the exercise of the court’s discretion, and there is no presumption that the court will intervene in a given case. The fact that the court might have taken a different course to the trustee in bankruptcy at the relevant time is not, without more, a basis to disturb the trustee’s decision: Re Tyndall at 186 per Deane J; Macchia at 116 per French J.
3.The court is able to take into account information which was not available to the trustee at the time of an impugned act, omission or decision (Gray v Clout (1990) 27 FCR 141 at 144 per Pincus J).
4.The exercise of the discretion is subject to the principle that the court will not unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee in bankruptcy: Re Tyndall at 186 per Deane J.
5.The section does not provide an avenue for a bankrupt to pursue his or her personal interests at the expense of creditors (Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 139 per Brennan CJ, Gaudron and McHugh JJ) nor does it ‘create a cause of action which sounds in damages’, either in tort or under the general law (Macchia at 119). Both of these propositions reflect the purpose of the section which is to give the court a supervisory role with respect to a trustee in bankruptcy in the administration of the bankrupt’s estate.
6. Ultimately the question is what result would be ‘just and equitable’ in the circumstances of the case.
In Hacker v Weston [2015] FCA 363 at [10]-[13], Flick J summarised the functions and duties of a trustee in bankruptcy, taking into account dicta of the Full Court in Adsett v Berlouis (1992) 37 FCR 201 at 208:
[10]A trustee has a duty to administer the estate of a bankrupt in accordance with law and to exercise such statutory powers as are conferred. In doing so, a trustee is exposed to duties imposed by both the general law and the bankruptcy legislation enacted by the Commonwealth legislature.
[11]The fact that a trustee is exposed to both sources of duty cannot be questioned: Adsett v Berlouis (1992) 37 FCR 201at 208. Northrop, Wilcox and Cooper JJ there summarised the functions of a trustee as follows:
A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt’s estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules 1968 (Cth). The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; secondly, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act …
Their Honours went on to describe the duties of a trustee, when discharging these functions, as follows:
A trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee … The trustee is required to bring reasonable skill to the performance of his or her duties …
A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money … A trustee in bankruptcy is in no different position. The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee’s obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors’ claims and any possible surplus for the bankrupt. We adopt, as a correct statement of the duty of a trustee and the proper manner of its performance, the words of Smithers J in Mannigel v Aitken (1983) 77 FLR 406 at 408–9:
“In the case of bankruptcy the trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the trustee. It was said by Rogerson J in Re Ladyman (1981) 55 FLR 383at 394–396 that the standard of conduct required of the trustee will ordinarily be the standard required of a professional man and perhaps higher. The learned judge referred to ‘the high standard of conduct required of trustees’.”
In Re Brogden; Billing v Brogden [1888] 38 Ch D 546 Lord Justice Fry said (at 571):
“A trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion is never an absolute one. It is always limited by — the dominant duty — the guiding duty of recovering, securing and duly applying the trust fund; and no trustee can claim any right of discretion which does not agree with that paramount obligation.”
Where an order is sought that the trustee be removed and to make good the losses suffered by the estate, it must be established that the trustee has been guilty of a breach of duty to act “diligently and prudently in regard to the business of the Trust“: See Riley J in Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 at 285.
According to Halsbury’s Laws of England (3rd ed), Vol 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. The trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs. But beyond this he is not bound to adopt further precautions. It was said by their Honours Dixon CJ, McTiernan and Windeyer JJ in Elder’s Trustee and Executor Co Ltd v Commissioner of Taxation (Cth) (Higgins’ Case) (1963) 113 CLR 42 that:
“We are not to judge what the trustee then did or failed to do by the light of later events … The duty of the trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator’s estate … The argument that the trustee having, it was said, exercised a discretion, its conduct is now unchallengeable is sufficiently answered by a passage from the judgment of Fry LJ in Re Brogden… Whether or not one calls [the trustee’s action] an exercise of discretion, the question remains was it the act of a prudent trustee.”
A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act or Rules: Re Ladyman (1981) 55 FLR 383 at 394–396 … [(1992) 37 FCR at 208 to 209]
A trustee in bankruptcy is thus subject to the duties which govern trustees generally, except to the extent that those duties have been modified by the Bankruptcy Act. See also: Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 560 per Foster, von Doussa and Sundberg JJ; Mills v Sheahan [2007] SASC 365 at [16] to [17], (2007) 99 SASR 357 at 365 per Debelle J; Re Young; In the matter of Macryannis [2011] FCA 1272 at [27], (2011) 124 ALD 28 at 35 per Stone J; Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619 at [26] to [27] per Yates J; Dubow v Official Receiver (NSW) [2013] FCA 709 at [41] per Collier J.
[12]The duties imposed upon a trustee in bankruptcy by the Commonwealth legislature may be found relevantly in s 19 of the Bankruptcy Act and reg 16.03 of the Bankruptcy Regulations.
[13]Section 19 within Division 1 of Part II of the Bankruptcy Act sets forth the duties of a trustee of a bankrupt estate as follows:
Duties etc. of trustee
(1)The duties of the trustee of the estate of a bankrupt include the following:
(a)notifying the bankrupt’s creditors of the bankruptcy;
(b)determining whether the estate includes property that can be realised to pay a dividend to creditors;
(c)reporting to creditors within 3 months of the date of the bankruptcy on the likelihood of creditors receiving a dividend before the end of the bankruptcy;
(d)giving information about the administration of the estate to a creditor who reasonably requests it;
(e)determining whether the bankrupt has made a transfer of property that is void against the trustee;
(f)taking appropriate steps to recover property for the benefit of the estate;
(g)taking whatever action is practicable to try to ensure that the bankrupt discharges all of the bankrupt’s duties under this Act;
(h)considering whether the bankrupt has committed an offence against this Act;
(i)referring to the Inspector-General or to relevant law enforcement authorities any evidence of an offence by the bankrupt against this Act;
(j)administering the estate as efficiently as possible by avoiding unnecessary expense;
(k)exercising powers and performing functions in a commercially sound way.
(2)Where a person who became a bankrupt on a creditor’s petition is unable to prepare a proper statement of affairs, the trustee may employ, at the expense of the estate, a qualified person to assist in the preparation of the statement.
These duties are not exhaustive — but “inclusive”: Tapp v LawCover Insurance Pty Ltd [2013] FCA 35 per Rares J at [15] …
Section 179

I accept the respondents’ submissions that, while Re Wheeler and Willoughby v Official Trustee are cases in which a trustee’s decision was set aside under s 178 for reasons which include what might be described as failures of process by the trustee, the Court intervened because it identified an alternative course of conduct which was to be preferred. In Re Wheeler, the trustee failed to take into account that the return of a passport might improve the bankrupt’s employment opportunities and prospects of earning income, thereby depriving the estate of the possibility of receiving increased contributions from the bankrupt. In Willoughby v Official Trustee the Court accepted that the bankrupts’ offer to purchase the trustee’s interest in a chose in action was preferable to the one accepted by the trustee because it offered a prospect of a better return to the estate.
What emerges from Mr Walsh’s correspondence with Ms Thomson and her legal advisors and the submissions made to this Court is that, in the view of Ms Young’s legal advisors, the only acceptable alternative to the funding agreement is that the trustee continues to undertake litigation unfunded. The argument that this represents a preferable course does not take into account that the trustee might cease to pursue litigation because the trustee is unfunded with consequent exposure to adverse costs awards and other detriments to the estate. It relies on Ms Young’s advisors’ assessment that the Agreed Proportion provides an inequitable return to the funder compared to the principal creditor (who, through the s 37A Proceedings, secured the primary asset for the estate) in circumstances where the funder’s liability to fund the trustee’s legal costs and disbursements is capped at $253,900. Ms Young’s advisors further contend that the sale of the Pyrmont apartment is imminent, the Family Law Proceedings have little prospect of success and the Agreed Proportion outweighs the benefit which might be obtained in pursuing the Brookfield Claim. This view takes no account of the benefit to the estate in the trustee being able to pursue the ongoing matters with funding and without fear of Adverse Costs Orders or that Ms Young’s advisors’ assessment of timeframes and the outcome of the litigation is “best case”.
I do not accept that Ms Young has established that setting aside the funding agreement is the preferable course requiring the Court’s intervention under s 178 for the following reasons.
First, I do not accept that entry into a litigation funding agreement on commercial terms breaches s 19(1)(j) if it is necessary to undertake appropriate litigation to protect or attempt to secure assets for the estate and neither the trustee nor another creditor is willing to provide funding. That Ms Young’s dividend in the bankruptcy is liable to be reduced as a result of the operation of the funding agreement is not, of itself, a reason to set it aside. Despite the terms of her initial submissions (see [7] above), Ms Young did not appear to press the argument that her personal history and circumstances are relevant to whether it is just and equitable to set aside the funding agreement. Ms Young’s financial circumstances plainly are relevant in so far as they demonstrate that she is incapable of funding the trustee. It is true that Ms Young’s personal circumstances, including the injustice she has suffered at the hands of her former husband and Ms Smith call on sympathy. However the fact that she was successful in the s 37A Proceedings thereby securing Mr Young’s interest in the Pyrmont apartment for the benefit of the estate and that she is personally in need, are not legally relevant considerations.
Second, Ms Thomson was not willing to continue to fund ongoing matters and creditors were either unable or unwilling to do so. In those circumstances, it was appropriate for Ms Thomson to seek commercial funding. It is Ms Thomson’s evidence that the Agreed Proportion is at the lower end of returns required by commercial litigation funders in bankruptcy matters; on Ms Thomson’s evidence the amount was arrived at after negotiation and it is an amount consistent with litigation funding arrangements which have been approved by courts in corporate insolvencies. Although Ms Young has secured the consent of Mr Stewart Free of Jirsch Sutherland to replace Ms Thomson, Ms Young has not led any evidence from Mr Free or any other experienced trustee in bankruptcy which challenges Ms Thomson’s view that the funding agreement is on commercial terms or whether they would have entered into an agreement of that kind in Ms Thomson’s circumstances. It is true that a sliding scale of return to the funder depending on the amount of funding (and Adverse Costs Orders) actually funded and the timeframe in which that occurred would be easier to justify, but Mr Hayter’s evidence is that he was not prepared to offer that arrangement in 2016 due to the matters set out in [64] above.
In light of these matters and having regard to the other issues which I address, I am not satisfied that Ms Thomson’s decision to enter into the funding agreement breaches s 19(1)(k) of the Bankruptcy Act.
Third, as Mr Walsh accepted in cross-examination, even though he and barristers he has instructed have been willing to act on the basis that any fees that they may charge Ms Young will only be determined and paid when she is paid a dividend from the estate, it is not the obligation of the trustee to fund ongoing litigation.
Fourth, the basis of Ms Young’s argument as to the preferable course relies on a “best case” scenario. However, in assessing the need for litigation funding Ms Thomson was entitled to take into account the following matters which Ms Young’s submissions do not take into account:
(1)If the Family Law Proceedings were not defended due to lack of funds, Ms Smith may become entitled to a greater share of the Pyrmont apartment (or the proceeds of its sale) to the detriment (and possibly to the exclusion) of the estate. Further, Ms Thomson’s experience of matters in the Family Court is that they are of long duration and it can be difficult for a trustee in bankruptcy where the matters in issue concern the relationship between the bankrupt and his partner. I do not accept Ms Young’s submission that the fact that the proceedings may be moving slowly or that Ms Thomson considers that she has strong prospects of success is a reason for the trustee not to entertain a litigation funding agreement if, having funded the estate for two years, she is no longer willing to continue to do so. None of the creditors is willing to provide funding and if the Family Law Proceedings are not defended the primary asset of the estate will be in substantial jeopardy. Ms Young’s recent intervention does not obviate the need for the trustee to have a role in those proceedings.
(2)The prospects of obtaining a return from the Brookfield Claim will be detrimentally affected if the litigation is not prosecuted effectively. Having regard to Ms Smith’s dismissal of the lawyers acting on the Brookfield Claim without consulting Ms Thomson, Ms Thomson is entitled to be concerned that the success of that claim may be prejudiced and the estate will be exposed to adverse costs awards for which Ms Smith’s indemnity may well prove inadequate and difficult to enforce. Ms Thomson’s own lawyers will need to assist her in dealing with this issue. I note that that assistance will have been frustrated by the restraining orders made on 11 October 2016 following the urgent relief application. The fact that Ms Thomson was not fully seized of the detail of the Brookfield Claim when she gave her evidence can be explained by the terms on which she agreed to become a party; those terms were designed to secure the benefit of the litigation at least cost to the estate in circumstances where the estate’s interests coincided with Ms Smith’s. I do not accept Ms Young’s criticisms of Ms Thomson on this issue; in my view her decision to enter into the funding agreement in September 2016 is consistent with an appreciation that work needed to be done to prepare for the hearing of the Brookfield Claim in February 2017 and Ms Smith could not be relied on.
(3)The tenacity with which Mr Young and Ms Smith have resisted enforcement of creditors’ claims and Ms Smith bringing the Family Law Proceedings. In cross-examination, Mr Walsh accepted that he had been surprised by many of the actions of Mr Young and Ms Smith. In those circumstances Ms Thomson could reasonably expect that, even following the sale of the Pyrmont apartment, the administration of the estate would continue to be attended by litigation in the absence of a settlement with Ms Smith. There is therefore no certainty about when proceeds of sale of the Pyrmont apartment will become available to the trustee to utilise in litigation or to distribute to creditors. While Mr Walsh considers that Ms Smith’s capacity to obstruct the realisation of the estate’s interests might be eliminated if she is gaoled for her contempt of the freezing orders, that result does not necessarily follow.
(4)Although the estate’s creditors approved Ms Smith’s settlement proposal in late 2015, she did not complete a settlement then and her capacity to make good any settlement offer on acceptable terms is uncertain. In any event, Ms Young now appears unwilling to approve a settlement on similar terms.
Fifth, although Ironbark has not taken out insurance against its liability to pay Adverse Costs Orders under the funding agreement, so that it is not yet in a position to have Ms Thomson’s interest as trustee noted on any insurance policy, the estate will nonetheless be protected against Adverse Costs Orders. There is no precondition to Ironbark’s liability under the funding agreement that Ironbark obtain such insurance. Ironbark has been impeded from getting that insurance by the orders made on 11 October 2016. It remains willing to note Ms Thomson’s interest on any policy when it obtains the insurance, if that is now possible. Further, in my view it is entirely open to Ms Thomson to be sceptical of Ms Smith’s willingness to perform her obligations under the deed dated 6 March 2015 so that obtaining protection against such orders in relation to the Brookfield Claim should not be regarded as imprudent or unnecessary.
Sixth, as to Ms Young’s claims that the parties to the funding agreement do not understand its terms, I do not accept that there is any material misunderstanding.
(1)I do not accept that Ironbark’s obligation to fund Adverse Costs Orders confers an illusory benefit on the trustee in the nature of a “money go round” (as contended by Ms Young) having regard to the order for priority for payment under clause 7 of the funding agreement. If the Family Court were to adjust property rights in Ms Smith’s favour, the funds available to the estate to reimburse Ironbark for payments it has made to fund Ms Thomson’s costs and disbursements and any Adverse Costs Orders may be inadequate to do so. Further, Ms Young has done nothing to demonstrate that the priority conferred by clause 7 of the funding agreement is inconsistent with other similar funding agreements.
(2)While Ms Young is correct to argue that there is no specific provision in clause 4 of the funding agreement which imposes an obligation on Ironbark to pay Ms Thomson’s legal costs and disbursements incurred in relation to the Winding Up Proceedings, it is clear from correspondence and the evidence of Ms Thomson and Mr Hayter that it was their intention that it be covered. On behalf of Ironbark, Mr Hayter is willing to allow the amount ascribed to “General Attendances” to be used as a fund available for a broad range of costs and he has in fact allowed it to be used to pay Ms Thomson’s costs in the Winding Up Proceedings incurred after 30 September 2016. Further, the Winding Up Proceedings are included in the definition of “Claims” in clause 1 of the funding agreement (see [12] above). This means that had Ms Thomson been successful in the Winding Up Proceedings, Ironbark would have shared in a “Resolution Sum”, having regard to its definition. Accordingly, the approach taken by Ironbark that those costs should be paid out of funds designed for “General Attendances” is equitable and consistent with the approach taken in the agreement in relation to other “Claims”.
(3)As to Mr Hayter’s acceptance that Ironbark is liable to fund the costs order made by Brereton J in the Winding Up Proceedings on 11 October 2016, having regard to the definition of Adverse Costs Order and Proceedings set out at [12] above, in my view Ironbark would not be liable for costs incurred by the opposing party prior to 30 September 2016 in “Proceedings” funded by Ironbark but it would be liable to fund the costs incurred after that date. In relation to the Winding Up Proceedings, I accept Ironbark’s closing submission at [10] that a significant portion of these costs are likely to be covered by the indemnity for Adverse Costs Orders, since much of the preparation for the hearing of the winding up application on 11 October 2016 will have occurred in the period after 30 September 2016 and for the reasons previously given, the Winding Up Proceedings are a “Claim” which is covered by the funding agreement. Mr Hayter’s evidence and Ironbark’s submissions confirm that Ironbark remains willing and able to perform its obligations under the funding agreement despite its capacity to terminate the agreement under clause 14 on seven days’ notice. If Ironbark terminates without cause, it remains entitled to recover from any “Resolution Sum” the legal costs and disbursements of the trustee and any Adverse Costs Orders or security actually paid by Ironbark but there is no provision for payment of the Agreed Proportion. In these circumstances, I do not consider that there is any relevant misunderstanding of the funding agreement or inequity in the approach.
(4)Last, as to Ms Young’s claims that Ironbark’s payment of invoiced fees was relevantly not in accordance with the protocol established by clause 6.4 of schedule 2 of the funding agreement, I accept Ironbark’s submission that the fact that the trustee did not observe the protocol strictly and Ironbark did not insist on strict compliance with the protocol is not material if the trustee’s legal costs and disbursements were otherwise properly payable by the trustee and the trustee had satisfied herself of that. I note also that in addition to the regime for invoicing established by clause 6.4, that clause also provides that “[Mercantile Legal] may also provide a copy of any tax invoice to Ironbark upon its issue”. Ms Thomson’s evidence is that she was aware of the fees and approved them, the fact that she was copied in on emails from Mercantile Legal to Ironbark attaching invoices for legal costs and disbursements is consistent with that and they are not in obviously inappropriate amounts. Having said that, the protocol in the funding agreement represents better practice and it should be adhered to so that it is clear that the trustee approves the payment of legal fees before funding is provided.
For completeness, in relation to other criticisms of Ms Thomson raised in the proceedings:
(1)Ms Thomson did not appear to seek formal confirmation of Westpac’s position with respect to the Pyrmont apartment until after the “cooling off” period under the funding agreement ended. However, she did know of Ms Smith’s application to the FOS and the impediment it created for Westpac in dealing with the Property following the sale of the “Lucky Australian Hotel”; so much is clear from the terms of the letter to Westpac. I accept Ms Thomson’s evidence that Westpac had not been forthcoming and I consider that she was entitled to the view that the existence of the Family Law Proceedings meant that even if Westpac effected a quick sale of the Pyrmont apartment, she would not be in a position to distribute the proceeds paid to her until Ms Smith’s claims on Mr Young’s estate had been dealt with.
(2)Ms Thomson did not seek a new valuation of the Pyrmont apartment before recommending Ms Smith’s most recent offer of settlement. However, the last valuation of the Pyrmont apartment was just 12 months old and the offer was in line with that valuation. The fact that a valuation obtained from the internet might indicate that a higher price is available for properties of that kind in that area is not to the point. Internet valuation cannot have the same status as a valuation obtained from a qualified valuer who had access to the apartment and who was in a position to understand the rectification work required which is the subject of the Brookfield Claim.
(3)The submission that Ms Thomson has failed in her obligation under s 19(1)(b) of “determining whether the estate includes property that can be realised to pay a dividend to creditors” has not been established. The fact that the fifth report to creditors in June 2016 indicated that the estate may have a range of values is not determinative of any failure of Ms Thomson to observe that obligation having regard to the complexity of Mr Young’s affairs, the fact that Ms Thomson has been unfunded and the circumstances surrounding the estate’s major asset.
(4)The abrupt tone of Ms Thomson’s correspondence from an early stage and the manner in which she gave evidence leads me to conclude that she is highly defensive of her position as trustee and does not readily give information to or accept input from others interested in the administration of the estate. Having said that:
(a)The tone and content of much of Mr Walsh’s correspondence might well induce a defensive response. His correspondence with Ms Thomson is immoderate. Much of it is based on the false premise that she was responsible for Ms Smith’s capacity to enter into the Westpac mortgage because of her failure to have the freezing orders obtained by Ms Young noted on the title to the Pyrmont apartment at the time they were made. It was only during his cross-examination in these proceedings on 2 December 2016 that Mr Walsh appears to have accepted that the task of having the freezing orders noted on the title fell to him in the proper performance of his role as solicitor to Ms Young in the s 37A Proceedings. Mr Walsh’s criticism that Ms Thomson could have done more to realise Mr Young’s interest in the Pyrmont apartment is also unfair and without due regard to the terms of Sackar J’s orders made on 19 June 2015, orders to which his client consented.
(b)Many of Mr Walsh’s criticisms of Ms Thomson take no account of the fact that she was unfunded for two years.
(c)Although the Winding Up Proceedings were not mentioned in the fifth or sixth report to creditors, Mr McLeod advised Mr Walsh of them in his letter of 6 October 2016 and those proceedings were commenced to get in assets which might not otherwise have been available to the estate. Mr Walsh’s current criticism of that activity no doubt relates to its outcome. Without more, Ms Young has failed to establish that pursuing these proceedings was inappropriate; the Court was not taken to any of the pleadings and Brereton J’s reasons are not available at this time.
(d)Ms Young’s criticism of Ms Thomson for failing to pursue Ms Smith in relation to the costs order made in her favour by Sackar J in the s 37A Proceedings is ill founded. It was open to Ms Thomson to adopt the view that she required Ms Smith’s co-operation to maximise the return to the estate by prosecuting the Brookfield Claim and ultimately in resolving the Family Law Proceedings. There is commercial justification for rolling up this issue in a general settlement with Ms Smith and thereby saving costs. I note that the costs order awarded in Ms Thomson’s favour in the s 37A Proceedings is one of the Costs Assessment Matters for which Ms Thomson has obtained funding from Ironbark.
(e)Ms Thomson had reason to be cautious about the content of her reports to creditors given the nature of Ms Smith’s conduct and the fact that there is a claim that Ms Smith is a creditor of the estate and she is a party (directly or indirectly) to much of the litigation. Moreover, Ms Thomson told Mr Walsh about the Family Law Proceedings soon after they commenced, albeit that she was not able to share much information about Ms Smith’s application. The material amount of Ms Thomson’s remuneration was detailed in her reports to creditors up to November 2015 and she disclosed her legal fees in the fifth report in June 2016. Having said that, as indicated above, Ms Thomson can fairly be criticised for the limited information she provided in relation to the funding agreement and its implications for the return to creditors.
(f)In my view, Mr Walsh’s anxiety to ensure that Ms Young reaped the rewards of the judgments she had received from Adamson and Sackar JJ gave rise to correspondence which intruded into the role of the trustee. Ms Thomson was entitled to deal with that correspondence sparingly and in a manner which did not involve undue costs to the estate. Ms Thomson (through Mr McLeod) responded to a number of Mr Walsh’s queries. No doubt the degree of Mr Walsh’s concerns was made worse by his misguided belief that Ms Thomson was responsible for failing to prevent Ms Smith from mortgaging the Pyrmont apartment. Subject to the matter discussed in the “Conclusion” section below, I do not accept that there is material cause for criticism of Ms Thomson’s reporting.

For the same reasons, I am not satisfied that Ms Young has identified misconduct of Ms Thomson which amounts to maladministration or is otherwise sufficient to warrant an inquiry under s 179 or the costs and distraction from the litigation in which the estate is currently involved.
It is certainly the case that Ms Thomson’s consultation with creditors concerning the funding agreement was inadequate, but Ms Young has not established that the funding agreement is uncommercial or that Ms Thomson had a preferable course open to her. Ms Thomson had communicated to creditors that she required funding and sought their assistance; however the estate’s creditors were either unwilling or unable to finance the ongoing matters. While it would have been appropriate for Ms Thomson to approach the Court for directions in the face of Ms Young’s refusal to consent to the funding agreement, it is not a dereliction of duty to fail to do so.
In so far as Ms Young claims that the costs in the “Westpac Mortgage Proceedings” and the Winding Up Proceedings justify an inquiry, the “Westpac Mortgage Proceedings” are the s 37A Proceedings, initiated by Ms Young. Ms Young, or at least her advisors, plainly knew what the proceedings were about. The costs incurred by Ms Thomson in those proceedings were, at least to a substantial degree, necessitated by Ms Smith’s breach of a freezing order facilitated by the failure of Ms Young’s advisors to record that freezing order on the title to the Pyrmont apartment, resulting in Westpac’s intervention in the s 37A Proceedings. I see no reason to think that Ms Thomson’s costs in those proceedings were not warranted. As to the Winding Up Proceedings, the fact that some part of the evidence on which Ms Thomson sought to rely was not available due to the confidential nature of the Family Law Proceedings, is not of itself, enough to establish maladministration or a basis for inquiry into Ms Thomson’s conduct.
If Ms Young replaces Ms Thomson, the replacement trustee will be in position to consider whether there are matters which would found an inquiry into Ms Thomson’s conduct.
CONCLUSION
In my view, while Ms Thomson was justified in entering into the funding agreement, she was wrong in her perception that she had “carte blanche” to act as she did simply because creditors had not responded to her request for expressions of interest to fund the estate. On the basis of the material currently before me, it appears that Ms Thomson has generally behaved appropriately as trustee in seeking to avoid cost while maximising returns to the estate having regard to the complexity of Mr Young’s personal and business affairs. However, the material in the sixth report to creditors on 23 September 2016 was plainly inadequate, as was the timeframe for responses and that deficit was never fully rectified in the correspondence between Ms Thomson or Mercantile Legal and Mr Walsh. Having regard to the terms of clause 17.8 of the funding agreement, there was no impediment to Ms Thomson providing a copy of the funding agreement or detailed information as to its terms to creditors of the estate for the purpose of securing approval to the funding agreement.
Ms Thomson’s failure to recognise Ms Young’s interest in the funding agreement as the overwhelming majority creditor of the estate and to advise Ms Young (through Mr Walsh) promptly, fairly and accurately and in a reasonable timeframe of the material terms of the funding agreement and its impact on the estate (having regard to the order of priority of payment of any Resolution Sum), was a significant factor leading to the instigation of the urgent relief application by Ms Young and ultimately, these proceedings. Unlike Ms Smith, there was no prejudice to the estate in Ms Young being given this information. I will seek submissions as to the manner in which this issue should be dealt with in determining any application for costs.
In the course of these reasons, it has been necessary to discuss a number of confidential matters relevant to pending litigation (primarily the Brookfield Claim). I will restrict publication of these reasons to the parties and their legal advisors for a limited period. During that time the parties will have the opportunity to provide submissions as to whether the confidential nature of information addressed in these reasons in relation to imminent litigation requires further orders to be made restricting publication in the interests of the due administration of justice.

I certify that the preceding one hundred and twenty-four (124) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.
Associate:
Dated: 17 January 2017

File number:	NSD 1738 of 2016
Judge:	FARRELL J
Date of judgment:	17 January 2017
Catchwords:	BANKRUPTCY – application under s 178 of the Bankruptcy Act 1966 (Cth) by creditor of bankrupt’s estate to set aside a litigation funding agreement entered into by the trustee in bankruptcy or, alternatively, for an inquiry into the conduct of the trustee under s 179 – where applicant former wife of the bankrupt and overwhelming creditor of the bankrupt estate – where trustee involved in multiple pieces of litigation – where trustee unfunded for two years – where no response from creditors to request from trustee for funds – where applicant impecunious – where trustee gave creditors notice of intention to enter into funding agreement – where timeframe for objections five days – whether adequate notice given – whether funding agreement commercial – whether parties to funding agreement understand its terms – application dismissed
Legislation:	Bankruptcy Act 1966 (Cth) ss 19, 30, 58(3), 77A, 134, 178, 179 Federal Court of Australia Act 1976 (Cth) s 23, Pt VAA Federal Court Rules 2011 (Cth) r 7.01 Real Property Act 1900 (NSW) s 57(2)(b) Conveyancing Act 1919 (NSW) s 37A Trustee Act 1925 (NSW) s 63
Cases cited:	Adsett v Berlouis (1992) 37 FCR 201; [1992] FCA 368 Frost v Sheahan (Trustee) [2009] FCAFC 20 Hacker v Weston [2015] FCA 363 Joanne Elizabeth Young v Josephine Aapa Smith [2015] NSWSC 400 Macchia v Nilant (2001) 110 FCR 101; [2001] FCA 7 Moore v Macks [2007] FCA 10 Patel v Ruhe [2016] FCA 520 Re Wheeler; Ex parte Wheeler v Halse (1994) 54 FCR 166; [1994] FCA 1348 Willoughby v Official Trustee in Bankruptcy [2001] FCA 753 Young v State of New South Wales; Young v Young (No 2) [2013] NSWSC 330 Young v Smith [2016] NSWSC 1051 Young v Smith (No 2) [2015] NSWSC 1267 Young v Thomson (Trustee), in the matter of Young (bankrupt) [2016] FCA 1410
Date of hearing:	2 and 6 December 2016
Date of last submissions:	12 December 2016
Registry:	New South Wales
Division:	General Division
National Practice Area:	Commercial and Corporations
Sub-area:	General and Personal Insolvency
Category:	Catchwords
Number of paragraphs:	124
Counsel for the Applicant:	Mr J Sheller
Solicitor for the Applicant:	Greg Walsh & Co Solicitors
Counsel for the First Respondent:	Mr D Eardley
Solicitor for the First Respondent:	Mercantile Legal
Counsel for the Second Respondent:	Mr S Golledge
Solicitor for the Second Respondent:	William James Lawyers

NSD 1738 of 2016
IN THE MATTER OF LESLIE JAMES YOUNG, A BANKRUPT
BETWEEN:	JOANNE YOUNG Applicant
AND:	LOUISE THOMSON AS TRUSTEE OF THE PROPERTY OF LESLIE JAMES YOUNG, A BANKRUPT First Respondent IRONBARK FUNDING RED PTY LTD ACN 606 518 656 Second Respondent

JUDGE:	FARRELL J
DATE OF ORDER:	17 JANUARY 2017