FEDERAL COURT OF AUSTRALIA

Grandsky Pty Ltd v Horne in his Capacity as Trustee for the Bankrupt Estate of Van Oost [2014] FCA 119

THE COURT ORDERS THAT:

1.    The respondent file and serve proposed orders reflecting the reasons for judgment published today within 7 days.

2.    The applicant and the opposing creditors file and serve any response to the proposed orders within a further 7 days.

3.    The proceeding be listed for the making of final orders on a date to be notified to the parties thereafter.

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

REASONS FOR JUDGMENT

1.    THE APPLICATION

1    This is an application by which one creditor of the bankrupt estate of Paull Van Oost, being Grandsky Pty Ltd (Grandsky), seeks an order under s 109(10) of the Bankruptcy Act 1966 (Cth) (the Act) that the respondent Stirling Lindley Horne, who is the trustee of the bankrupt estate, pay to Grandsky the total amount currently held in the estate for distribution to creditors.

2    The application is opposed by two of the other creditors, the Deputy Commissioner of Taxation represented by the Australian Taxation Office (the ATO) and Anthony Robert Coleman, Mr Van Oost’s former solicitor.

3    Mr Van Oost also sought to oppose the application, arguing that he had an interest in the proper administration of his bankrupt estate and did not accept that Grandsky was a creditor. However, s 109(1) concerns priority between creditors. Mr Van Oost is not a creditor of his bankrupt estate. The administration of the bankrupt estate is the responsibility of Mr Horne, the trustee. Mr Horne, the respondent to the application, provided three affidavits setting out the relevant material in respect of his administration of the estate. At the commencement of the hearing I heard from the parties about the involvement of Mr Van Oost and his application to adjourn the hearing on the ground that he had not been served with all of the relevant material by the applicant. I accepted Grandsky’s submission that Mr Van Oost had no standing to be heard on the application. Accordingly, I refused Mr Van Oost leave to take any further role in the hearing, other than as an observer, and refused to adjourn the hearing.

4    Mr Coleman, who was legally represented, also sought to adjourn the hearing on the ground that further time was required to undertake inquiries about the debt to Grandsky which the trustee, Mr Horne, had admitted. I refused this application also. First, directions had been made requiring all evidence to be filed well before the hearing and Mr Coleman had been on notice of these directions. Second, I do not accept that the width of the discretion under s 109(1) (which has been described as an unlimited discretion) is an invitation to second-guess the admission of a proof of debt by a trustee based on nothing more than speculation and guesswork about a possible counter-claim by the bankrupt against the creditor which the trustee had thoroughly examined and dismissed.

5    The hearing thus proceeded on the basis that both the ATO and Mr Coleman opposed the order for priority sought by Grandsky.

2.    STATUTORY PROVISION AND PRINCIPLES

6    Section 109(1) of the Act provides for the orderly distribution of the proceeds of a bankrupt estate. By s 109(11), insofar as relevant, “the debts in each of the classes specified in subsection (1) rank equally between themselves and shall be paid in full unless the proceeds of the property of the bankrupt are insufficient to meet them, in which case they shall be paid proportionately”. Section 109(10), however, provides that:

Where in any bankruptcy:

(a)    property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or

(b)    expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;

the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.

7    The funds in the bankrupt estate of Mr Van Oost resulted from the trustee’s sale of a property recovered from Mr Van Oost and his former partner, Ms McCooke, as a result of litigation taken by the trustee funded by Grandsky pursuant to a funding agreement containing an indemnity from Grandsky (and its directors and shareholders as guarantors) to the trustee for the costs of the litigation. But for that recovery action, there would be no funds in the bankrupt estate available for distribution to any creditor. This is the foundation of Grandsky’s application for priority in respect of the whole of the funds in the bankrupt estate.

8    Section 109(10) has been the subject of judicial consideration in numerous cases.

9    In Re Corke, Ex Parte Official Trustee in Bankruptcy [1996] FCA 156 Sackville J said at [15]:

The authorities suggest that the discretion conferred by s.109(10) is broad and general in character, but is to be exercised having regard to the desirability, in the public interest, of encouraging creditors to indemnify the Official Trustee in relation to claims arising out of the bankruptcy: Re Ken Godfrey Pty Ltd (1994) 12 ACLC 1071 (S Ct Vic/Hayne J.), at 1072-1073. Appropriate recognition should be given to the risk undertaken by the indemnifying creditor, even if the creditor has been fully reimbursed: Re Kyra Nominees Pty Ltd (in liq.) (1987) 5 ACLC 811 (S Ct WA/Franklyn J), at 819. In Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 (S Ct NSW/Brownie J.), a case under s.564 of the Corporations Law, Brownie J stated the general principles this way (at 296-297):

The last words of s.564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors.

10    In Re the Estate of Lawrence Robert Connell (Deceased) [2001] FCA 51 Carr J made the same points at [24] and at [25] said:

As Wilcox J observed in Re Steven Abrahams (Federal Court of Australia, unreported 4 September 1990, Judgment No 542/90) at 4, the determination of what is a proper proportion to be awarded to the indemnifying creditors is very much a matter of impression.

11    In Official Trustee in Bankruptcy as Trustee of the Bankrupt Estate of Rodolfo Severio Pastro v Pastro [2004] FCA 713 Mansfield J at [20] and [21] said:

20 In my view, in the circumstances the Court has power to order that the whole amount recovered by the litigation be distributed amongst the creditors who had indemnified the trustee against the costs of the litigation. The discretion under s 109(10) is unqualified. In Re the Estate of Lawrence Robert Connell (Deceased) [2001] FCA 51, Carr J at [24] described the policy behind s 109(10) as being at least twofold: to encourage creditors to indemnify trustees in bankruptcy who wish to pursue claims in the administration of bankrupt estates, and to reward creditors who bear the burden and take the risks of litigation. See e.g. Re Glenisia Investments Pty Ltd (In Liquidation) (1996) 14 ACLC 237. It is in the public interest that the property of a bankrupt should be available to the creditors of the bankrupt, including where the property of the bankrupt may be secured only through litigation. There is no presumption that the indemnity creditors should not receive the full benefit of the net proceeds of the property or expenses recovered under an indemnity for costs of litigation: see the remarks of Barrett J in Re Home Corp Projects [2002] NSWSC 879…at [12]. That case concerned the provisions analogous to s 109(10) of the Act in s 564 of the Corporations Act 2001 (Cth).

21 The way in which the discretion should be exercised is of course dependent upon the facts of the particular case, and is often ultimately a matter of impression: see per Paine J in Re Bavistock (1946) 14 ABC 30 at 32.

12    In Woodgate, in the Matter of Eaton (a Bankrupt) [2010] FCA 550 (Woodgate) Nicholas J at [5] identified that:

There are a number of matters that are of significance in an application of this kind which are weighed up when deciding whether to make an order under s 109(10). These include:

·    the risk run, and costs incurred, by the indemnifying creditor;

·    the complexity of the proceedings in respect of which the indemnity is given;

·    the sum recovered (or the value of the property recovered);

·    the opportunity afforded to other creditors to provide indemnity;

·    the failure of other creditors to provide indemnity;

·    the proportions between the debts of the indemnifying creditor and the other debts;

·    the opposition or support of other creditors to the application for priority; and

·    the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered.

13    Nicholas J also said at [12]:

The authorities indicate that there is no presumption that the indemnifying creditor should not receive the full benefit of the net proceeds of the property or expenses recovered under an indemnity for costs of litigation: Official Trustee in Bankruptcy as Trustee of The Estate of Rodolfo Servio Pastro v Pastro [2004] FCA 713 (Pastro) at [20]. They also indicate that the question is very much a matter of impression: see Re the Estate of Lawrence Connell (Deceased) [2001] FCA 51 at [25]; Pastro at [21].

14    In Jarbin Pty Ltd v Clutha Ltd (In liq) (2004) 180 FLR 393; [2004] NSWSC 28 Campbell J dealt with an application by a creditor under s 564 of the Corporations Law 1995 (NSW) and said at [69]:

I respectfully doubt that there is any proper basis for concluding that there has been a tendency in recent times to adopt a more liberal approach in favour of indemnifying creditors. There are many cases, dating from the earliest days of the section, where the power conferred by the section has been exercised so as to give the indemnifying creditors the whole of the net proceeds of recovery.

15    On the other hand, as Campbell J also said at [70]:

As well though, even in situations where an indemnifying creditor did not receive the full amount of its debt, there have been over the years many cases which resulted in an indemnifying creditor receiving less (and sometimes substantially less) than the full amount recovered.

16    And at [71] Campbell J noted that:

There are various judicial statements to the effect that allowing an indemnifying creditor 100 percent of the amount recovered will (or should) be rare.

17    His Honour reconciled the apparent inconsistencies at [71] by making this point:

Given that a trial judge's role in an application under s 564 is to apply the appropriate test to the facts of the case before him or her, these statements should not be taken (as an over-literal reading of them might suggest) as being a statement of the statistical frequency with which awards of 100 percent of the amount recovered will be made. Rather, they should be taken as a recognition of the very significant evidentiary and persuasive onus which needs to be discharged before an award of 100 percent of the amount recovered will be appropriate.

18    Campbell J made another point at [75] which is worth noting, although not engaged on the facts of the present case given that the debt owed to Grandsky exceeds the amount available for distribution:

Given that the power under s 564 is one to alter the prima facie equality of unsecured creditors within their various classes, and that the structure within which s 564 operates is one of a regime for distribution of the assets of a company in liquidation among those entitled, it is hard to see how a proper exercise of the power under s 564 could ever result in a creditor receiving more than 100% of the debt owed to him, together with such interest as the Corporations Law allows.

19    At [95], when dealing with the issue of risk, his Honour noted that:

The time at which the extent of the risk undertaken should be assessed is “at the time a commitment is first made to fund that litigation and thereafter throughout the funding period”: Re Russell (in his capacity as official liquidator of Parkston Ltd (in liq)) (2000) 35 ACSR 114 at 123 [2000] NSWSC 764 at [30], per Santow J.

20    Campbell J assessed the risk by reference to the return on an equivalently risky investment the funding creditor could have made at the time and various deals entered into by litigation funders on litigation of different risk profiles (the funder’s recovery ranging from 12% to 75%).

3.    FACTS

21    Grandsky is a company having two directors and shareholders, Mr and Mrs McLachlan. Having been introduced to Mr Van Oost and various companies in which he was involved through a common acquaintance, including Pan Australia Shipping Pty Ltd, Grandsky entered into a series of transactions and dealings. Grandsky lent Mr Van Oost $380,000 on the same day that Mr Van Oost and his then partner, Ms McCooke, purchased a house for $3.8 million near the Port of Melbourne (the property). The following month Grandsky paid $6.12 million for shares in various companies including Pan Australia Shipping Pty Ltd, a shareholder deed subsequently being entered into between Grandsky and Pan Australia Shipping Pty Ltd.

22    The investigations of Mr Horne disclosed that through various means Mr Van Oost arranged for the money that had been paid for the shares by Grandsky to be used to pay for the property Mr Van Oost purchased with Ms McCooke. Mr Van Oost also transferred $1.025 million into his joint bank account with Ms McCooke. On 2 October 2006 Pan Australia Shipping Pty Ltd was placed into liquidation. On 10 October 2006 Mr Van Oost transferred his share of the property to Ms McCooke, the consideration for which was said to be “natural love and affection”.

23    On 30 May 2007 Grandsky commenced proceedings against Mr Van Oost and Ms McCooke in the Supreme Court of Victoria regarding monies owed by Mr Van Oost and claim that the transfer of Mr Van Oost’s share in the property to Ms McCooke was an attempt to defraud creditors (the 2007 proceedings). Freezing orders were made and a defence was filed but Mr Van Oost was shortly thereafter declared bankrupt on 17 September 2009 with Mr Horne appointed as his trustee.

24    The sequence of events thereafter is the subject of some controversy. None of the people directly involved apart from Mr Horne gave evidence. Mr Horne was not required for cross-examination on any of his three affidavits. What is clear from the contemporaneous records is that a number of things occurred.

25    On 24 November 2009 Mr Horne sent a report to creditors. The report to creditors dealt with the issue of real estate in these terms:

A search of the Landata database for the state of Victoria failed to reveal any property currently registered in the name of the bankrupt.

A historical title search carried out in the name of the bankrupt disclosed him being a former proprietor of 8 First Point, Port Melbourne, Victoria (“the property”). The property was registered in the joint names of the bankrupt and his partner, Ms. A.N. McCooke, when it was purchased on 29th May 2006. On 10th October 2006, the bankrupt’s share in the property was transferred to Ms. McCooke for “natural love and affection”.

My initial enquiries in relation to this property reveal that it has a value in excess of $4,000,000. However, please note no formal assessment of the value of the property has been undertaken at this stage of my investigation.

Section 120 of the Act deals with undervalued transactions and states a transfer of property by a person who later becomes a bankrupt to another person is void against the Trustee if:

(a)    The transfer took place in the period beginning four years (in the case of a transfer to a related entity) before the commencement of the bankruptcy and ending on the date of the bankruptcy; and

(b)    The transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.

In accordance with Section 120(5) of the Act, a transfer for love or affection is not deemed to be consideration.

Clearly the transfer of the bankrupt’s share in the property falls within the ambit of an undervalued transaction and is void against the Trustee.

A caveat was lodged on 30th September 2009 to secure the bankrupt estate’s interest in the property.

Please refer to the section of my report titled “Potential Legal Action and Trustee’s Indemnity for Costs” for further information in respect of this matter.

26    This section contained the following:

Following my appointment I was contacted by Grandsky’s solicitor in respect to legal proceedings issued against the bankrupt and his partner (Ms. McCooke). The solicitor advised Grandsky was interested in providing an indemnity to fund the fees and legal expenses of the Trustee to commence proceedings pursuant to Section 120 of the Act, which relates to the bankrupt’s transfer of his interest in the property. I am yet to be provided with full details in relation to the proposed indemnity from Grandsky.

In accordance with Section 109(10) of the Act, where property has been recovered under an indemnity for costs of litigation the court may make such orders in respect to the distribution of that property with the view of giving those creditors an advantage over others in consideration of the risk assumed by them.

Due to the above, it is important creditors that have an interest in providing funding towards an indemnity notify my office in writing by 4th December 2009.

27    Although it is claimed on behalf of Mr Coleman that he did not receive this report to creditors, there is no evidence to support this claim and the report ought to have been received in the ordinary course. In any event, it is clear that the ATO received the report to creditors because on 1 December 2009 an officer of the ATO, Fiona Biltris, sent an email to the office of Mr Horne stating that the Commissioner was interested in considering an indemnity and attaching the information the ATO would require in order to consider an indemnity request. On 11 January 2010 Mr Horne responded by providing the information available at that time and requesting a meeting to finalise the Commissioner’s position as an indemnifying creditor. The information included the fact that Grandsky had provided a draft indemnity agreement to Mr Horne. Further communications occurred between Mr Horne’s office and the ATO on 15 January, 5 February, 10 February and 5 March 2010. On 10 March 2010 Mr Horne wrote to the ATO to the following effect:

I refer to my letter dated 11th January 2010… and subsequent correspondence in relation to my application for indemnity.

I note that considerable amount of time has been spent providing the Deputy Commissioner of Taxation (“the DCT”) with details in relation to the proposed legal action.

As you are aware, I have received a funding agreement from Grandsky Pty. Ltd. (“Grandsky”) (the other major creditor in the bankrupt’s estate). It is my intention to enter into an agreement with Grandsky and without further delay commence legal proceedings against Ms. McCooke for the recovery of the bankrupt’s interest in the property.

Should the DCT wish to contribute funding as indemnifying creditor, I require full details of this commitment by 19th March 2010.

28    The ATO responded as follows on 16 March 2010:

The DCT is unable to provide full details of her commitment to contribute funding as indemnifying creditor by 19 March 2010 as you requested. We understand from the conversation between Ian Celantano from our office and Rebecca Brown that you are concerned that our delay in providing a commitment for an indemnity may cause the funding agreement from Grandsky Pty Ltd to be withdrawn.

The expenditure of Commonwealth resources is largely governed by the Financial Management and Accountability Act 1997, the Financial Management and Accountability Regulations 1997 and the Department of Finance and Deregulation, as well as other internal procedures. Misapplication or improper use of public money can result in a maximum penalty of 7 years imprisonment for an official of a Commonwealth agency so our indemnity decision process has to be thorough. Due to the recent release of a new Income Tax system and internal resource changes it is impossible to meet your 19 March 2010 deadline.

If you are able to extend the date then we can continue to process your request. We understand if you are unable to accommodate our request.

29    Mr Horne answered in these terms on 18 March 2010:

I note your advice the ATO will be unable to meet the deadline set of the 19th March 2010.

Taking into consideration the risks of having the funding agreement of Grandsky withdrawn, it is my intention to enter into the agreement with Grandsky forthwith.

30    The ATO wrote again on 29 March 2010 as follows:

We refer to your indemnity request to the Deputy Commissioner of Taxation (DCT) and subsequent correspondence.

Each indemnity request is considered on its merits and with regard to applicable Commonwealth Laws and Policies governing the expenditure of Commonwealth monies. In making a decision in this matter, the DCT’s considerations included:

•    Whether the proposed action has merit and if so, the prospects of success and recovery;

•    Whether the expected benefits objectively outweigh the level and costs of the risks; and

•    The likelihood of recovering the indemnity in full, together with the prospects of payment in full of, or a reasonable portion of the DCT’s proof of debt.

Having considered your indemnity request, the DCT has concluded that on balance, an indemnity will not be approved on this occasion. We refer to your correspondence dated 18 March 2010 stating your intention to enter into an agreement with Grandsky forthwith, thereby precluding the DCT from completing her investigations into your request. If the Grandsky agreement is withdrawn, the DCT would be willing to consider another request for indemnity. In reaching this decision, we are led by our view that the merits and prospects of success of the proposed action have not been established to the satisfaction of the DCT.

31    On 19 August 2010 Mr Horne entered into a funding agreement with Grandsky and Mr and Mrs McLachlan as guarantors. The funding agreement included provisions as follows:

2.1 Grandsky hereby agrees to provide Funding to the Trustee to pay the following sums in respect of the Proceedings:

2.1.1    The Trustee’s Costs to a capped amount of $83,549.95 as per the costing attached to Schedule 1 (inclusive of GST); and

2.1.2    Subject to clause 2.8, the Legal Costs (inclusive of Disbursements and GST other than counsels’ fees and Reasonable Photocopy Costs) to a capped amount of $149,831.00 as per the costing attached to Schedule 2 (inclusive of GST); and

2.1.3     The Enforcement Costs; and

2.1.4    counsel’s fees as invoiced by counsel from time to time; and

2.1.5    Reasonable Photocopy Costs; and

2.1.6    Any other costs incurred by the Trustee which is agreed with the prior written consent of Grandsky from time to time.

…

3.1 To the extent that the Final Amount is sufficient to do so, the Trustee must repay to Grandsky the Funding paid by Grandsky on the Repayment Date from the Final Amount received by the Trustee.

…

3.3 Provided no other creditor contributes to the funding of the Proceedings then whether the Application is made by the Trustee or by Grandsky will be at the election of Grandsky provided that Grandsky must give the Trustee 14 days’ notice of the Application so that the Trustee may file any material he deems appropriate with respect to the Application. If Grandsky makes the Application then Grandsky shall determine in its sole discretion the amount to be requested by Grandsky in the application by way of the Additional sum, however the Trustee reserves all his rights with respect to his recommendation to the Court regarding Grandsky’s request. In the event the Trustee makes application to the Court at the request of Grandsky, the Trustee will put before the Court the requests by Grandsky, however it shall be up to the Trustee to determine in his sole discretion the amount he recommends be distributed to Grandsky.

…

5.1.1 Grandsky hereby indemnifies the Trustee and the Estate from and against any Order for Costs against the Trustee and/or the Estate made in the Proceedings in respect of the period from the date of this Agreement up to the date of termination of conclusion of this Agreement and with respect to any Order for Costs made against the Trustee pursuant to clauses 7.5 and 7.6 notwithstanding such Order for Costs may be made after the termination of this Agreement.

32    On 27 August 2010 the ATO wrote to Mr Horne saying:

We refer to your indemnity request of January 2010 and your letter of 18th March 2010 confirming that your intentions to enter into the agreement with Grandsky as the indemnifying creditor.

The Deputy Commissioner (DCT) as a creditor conducted its own investigations into the bankruptcy estate and released vital information to your office.

This information allowed your office to further your investigations and examinations.

The DCT was seeking legal advice on our recommendation to approve the indemnity; however, your timeframe did not allow us to proceed with the indemnity request.

The DCT intends to contest any application made to the Court pursuant to Subsection 109(1) of the Bankruptcy Act 1936 to allow Grandsky to become a preferential creditor should any potential assets be realised.

33    On 14 September 2010 Mr Horne provided a detailed reply of the sequence of events which included all of the earlier correspondence and communications to and with the ATO. This letter concluded as follows:

It is my view that ample time was provided to the ATO to commit to this process.

Please note at no stage did the ATO communicate with our office to advise it was seeking legal advice. There had not been a request for an extension of the deadline to enable the legal advice to be received.

I also reject your claim that the information provided by the ATO was vital to our investigations. My investigations were conducted in accordance with my powers as Trustee. I refer you to Section 77A and 77C of the Bankruptcy Act, 1966 (“the Act”) and note I obtained sufficient information independently of the ATO to commence proceedings.

The above matters would be raised in my application pursuant to Section 109(1) should the ATO intend to contest the future application in accordance with Section 109(1) of the Act. I would also add the delays experienced could have had a detrimental effect on my ability to fund proceedings and recover assets for the benefit of creditors including the ATO.

34    On 1 December 2010 Mr Horne commenced proceedings against Mr Van Oost and Ms McCooke in this Court. As foreshadowed in the report to creditors the proceedings sought to recover various payments to Mr Van Oost and to void certain transactions by Mr van Oost including the transfer by Mr Van Oost to Ms McCooke of his interest in the property. On 16 December 2010 Mr Horne sought orders preventing Ms McCooke from dealing with the property and orders to that effect were made on 20 December 2010. The proceedings were listed for hearing on 21-23 February 2012. However, the proceedings settled on 29 February 2012. The deed of settlement provided a period of 12 weeks for Ms McCooke to sell the property and for an order of priority for application of proceeds of sale. The terms of the deed were not complied with. Accordingly further orders had to be sought by Mr Horne. Gray J made these orders on 27 July 2012. Amongst other things the orders required that vacant possession of the property be provided and that Mr Horne be authorised to sell the property and apply the proceeds of sale and in accordance with the deed of settlement. Vacant possession was not provided as required and on 16 August 2012 Gray J made further orders enabling the use of reasonable force to effect entry into the property and to remove any chattels remaining within the property so that the property could be sold. Mr Horne took possession of the property on 24 August 2012 pursuant to these orders. On 27 October 2012 the property was passed in an auction but it subsequently sold for $4.1 million. On 5 March 2013 Mr Horne called for proofs of debt. Grandsky’s proof has been admitted by Mr Horne in the sum of $6.894 million. The ATO’s proof has been admitted in the sum of $7,722,301.02. Coleman Lawyers’s proof has been admitted in the sum of $271,085.73. Other debts, due to Maritime Containers Services Pty Ltd and McLennan Partners, have been admitted in the sum of $55,048.68 and $26,520 respectively.

4.    DISCUSSION

35    The grounds of opposition of the ATO and Mr Coleman involved substantial overlap. They both contended that the order was inappropriate as it would solely benefit Grandsky leaving no funds for distribution to any other creditor. They also both contended that: - (i) they were not afforded a proper opportunity to give the trustee an indemnity (Mr Coleman alleging he was not allowed to see the funding agreement until 18 November 2013), (ii) the debt due to Grandsky had been disputed by Mr Van Oost and that dispute had not been resolved, (iii) the risk taken by Grandsky in providing funding was low as the proceedings were not complex and Grandsky was in an advantageous position relative to other creditors in respect of Mr Van Oost’s dealings with the property, and (iv) Grandsky had already been repaid the full funding amount of $376,000 and was now seeking a return (in the form of the full amount held in trust for distribution) far in excess of that amount (about a 700% return on the investment of the funds for the litigation).

36    The ATO also contended that the order should not be made because the ATO is the largest creditor and had notified Mr Horne the order for priority would be opposed at the time of entry into the funding agreement. Mr Coleman contended further that Mr Horne had failed to make any proper recommendation as to the amount of any additional sum that should be paid to Grandsky and, in particular, had failed to have regard to the interests of other creditors. In addition, it was contended for Mr Coleman that Mr Horne did not keep creditors properly informed about the litigation and the funding or the costs of the litigation (which were not properly managed or taxed), with Mr Horne appearing to be subject to the exercise of direct control by Grandsky “thereby reducing the risk of adverse outcome to” Grandsky. Also, according to the submissions for Mr Coleman the property was sold at an undervalue in consultation with Grandsky but not the other creditors, so that the circumstances surrounding the sale call for investigation.

37    One problem that was not confronted by any of the submissions for the parties objecting to the proposed order was that Mr Horne provided affidavits explaining the details of all of his actions. He was not cross-examined about any matter. His unchallenged evidence included the following:

(1)    He had investigated Mr Van Oost’s dispute about the debt owed to Grandsky and concluded the dispute had no merit. Mr Horne’s letter to Mr Van Oost of 13 November 2013 said that:

I have investigated this claim and sought legal (including Counsel’s) advice on the merits of it. On the information available to me regarding the merits of the claim (with which I have instructed my legal advisers), I have been advised that the claim has no merit.

I have expended a significant amount of time and costs in investigating this matter, both with engaging my staff to locate and access documents and in engaging external legal advisers. In view of the advice now received, I do not intend to pursue investigation of the claim further.

(2)    A report to creditors of 28 March 2013 which said:

Extensive correspondence took place between my office and the ATO in relation to the proposed funding. Being a government body it took a significant amount of time before the matter could be assessed through the relevant channel.

After an extended period of time I wrote to the ATO advising I required a commitment by no later than 19th March 2010. I was subsequently advised by the ATO that they were unable to meet the deadline and then advised that at this point in time the ATO was not in a position to provide the indemnity.

Consequently I entered into a funding arrangement with Grandsky under which Grandsky made an amounts totalling $376,219.66 available to me to fund the investigations in relation to the transfer of the bankrupt’s interest in the property and to pursue a claim under the antecedent provisions of the Act.

…

Upon obtaining vacant possession of the property on 24th August 2012 I engaged real estate agents, Hocking Stuart Albert Park to facilitate the sale of the property. I also engaged the services of Herron Todd White to provide a sworn valuation on the property. The valuation provided ascribed a value of $4 million to the property.

On inspection of the property it was apparent it was not currently in an acceptable condition to enable the maximum return to be obtained from the sale. I arranged for the property to be cleaned and recarpeted. Furniture was hired for the purposes of enhancing the appeal of the property for the period of the sale campaign.

The property was offered for sale by public auction held on 27th October 2012. The property as passed in at the auction. However, later the same day as a result of further negotiations with two interested parties who attended the auction, I received and subsequently accepted an offer to sell the property for the amount of $4.1 million with 30 day settlement terms. The sale of the property settled on 26th November 2012.

38    In contrast, there was no evidence from Mr Coleman and no evidence from any officer of the ATO directly involved in the ATO’s decision-making processes about the indemnity. Accordingly, insofar as there is any conflict between the direct evidence of Mr Horne and the submissions of any form of failing on his part, I prefer the evidence of Mr Horne. In particular, there is no evidence supporting Mr Coleman’s allegations that he did not receive the initial report to creditors of 24 November 2009, was not kept informed about the litigation, or that Grandsky exercised control over Mr Horne in the conduct of the litigation. Insofar as the ATO is concerned the contemporaneous communications indicate that the ATO was given a lengthy period of time to consider its position, did not request any extension of time for the purpose of obtaining legal advice, and led Mr Horne to believe that it had decided not to grant indemnity because it was not persuaded of the merits of the claim. Nor does the evidence support an inference of any significant assistance by the ATO to Mr Horne in respect of the litigation. The fact that Mr Van Oost disputes Grandsky’s debt is of little weight. Mr Horne assessed Mr Van Oost’s alleged cross-claim against Grandsky and determined, with the benefit of legal advice, that it lacked merit. That the 2007 proceedings which Grandsky commenced remain undetermined is due to Mr Van Oost’s bankruptcy and does not give the allegation any more merit than it would otherwise have. There is also an inconsistency in the position of the opponent creditors who, on the one hand contend that the proceedings were not particularly complex and that Grandsky was in an advantageous position compared to them because of its knowledge of the property and the 2007 proceedings and, on the other hand, that they were given insufficient time to decide whether they wished to be involved in providing an indemnity for the funding of the litigation. If, as the opponent creditors maintain, the proceedings were straightforward and low risk then it is difficult to understand why no-one but Grandsky offered indemnity in the period between 24 November 2009 and 19 March 2010. It cannot be the alleged special or advantageous position of Grandsky. The report to creditors of 24 November 2009 clearly exposed the potential problems with the transactions into which Mr Van Oost had entered in respect of the property.

39    Nor does it appear particularly relevant to me that the ATO is the largest creditor, at least in the sense that both Grandsky and the ATO are by far the largest creditors, with the ATO being owed 51.59% of the total debt and Grandsky 46.06%. As between the ATO and Grandsky there is an insufficient proportional difference to be material. The same cannot be said about Mr Coleman. Whilst not insignificant in and of itself, the amount owed to Mr Coleman is a fraction of the debts owed to the ATO and Grandsky (1.81% of the total). Further, it was common ground that Mr Coleman was Mr Van Oost’s former solicitor. There was no evidence to support the notion that Mr Coleman would have funded any part of the litigation against his former client had he been given some further or different opportunity to do so. I do not accept the submissions made on Mr Coleman’s behalf to that effect. For the same reasons, lack of evidence and evidence to the contrary, I do not accept the submission for Mr Coleman that the property was sold at an undervalue or in order to benefit Grandsky. Nor do I accept that Grandsky exercised inappropriate control over the litigation or that Mr Horne failed to exercise proper control over the costs of the litigation. These are mere assertions lacking any evidentiary foundation.

40    I also do not accept the generalised and sweeping propositions of the opposing creditors that the proceedings were simple, straightforward and low risk. All litigation, even on a strong case, is risky. While the claims appeared to have been well-founded the proceedings were relatively complex and interlocutory applications were required to protect the assets. The proceedings were fixed for hearing but settled before the hearing dates. However, further action had to be taken to enforce the settlement on two occasions. All of these steps involve further risk and further costs which Grandsky had to pay pursuant to the funding agreement. It is true that Grandsky has been paid the amount it funded but it was Grandsky alone that took the risk to fund the litigation, the fruits of which have provided funds in the estate for distribution. But for Grandsky there would have been nothing to distribute.

41    In terms of the factors Nicholas J identified in Woodgate Grandsky’s actions were in the public interest because they prevented a fraud on creditors being effected. The sum recovered (some $2.7 million) is substantial but dwarfed by the debts owed to the ATO and Grandsky who, between them, are owed the vast majority of the total debt (nearly 98%). The costs Grandsky incurred ($376,000) reflect the complexity of the proceeding and the difficulty of dealing with a potentially recalcitrant opponent, facts which would have been known to Grandsky when it decided to provide the funding but did not dissuade it from taking on the risks. Grandsky may have been in a slightly better position than the other creditors to assess the strength of its case at the time the first report to creditors was issued in November 2009, but by March 2010, it is difficult to conclude that this remained the case. Accordingly, by that time, all creditors had had an opportunity to obtain relevant information about the proposed litigation and were able to make an informed decision as to whether they wished to provide funding. In common with Grandsky, they would have been able to judge that the case was soundly based, that there were good prospects of ultimate success, but that as with all litigation the result was by no means certain. They could have expected that the opponents may prove difficult to deal with, making interlocutory and enforcement applications necessary, thereby increasing the potential cost. That said, they also would have been in a position to judge that the litigation was relatively confined in scope, would not expose them to unlimited costs, and should have been capable of resolution within a relatively limited period of time subject to court availability. The funding agreement ensured repayment of the costs incurred in the event that the litigation was successful and Grandsky has since been repaid the full funding amount. An important factor is also the opposition of the other creditors. Although they elected not to provide funding they remain creditors whose debts have been admitted including in the case of the ATO a very substantial debt. Another relevant factor is that there is a very large disparity between the amount Grandsky funded and its ultimate reward should 100% of the available funds be distributed to it. Weighing up all of the circumstances including the nature and magnitude of the risks Grandsky ran, the benefit to Grandsky should it receive 100% of the funds available for distribution appears disproportionate, even when substantial weight is given to the public interest in ensuring that creditors provide indemnities so as to enable assets to be recovered.

42    The evidence does not permit any analysis above and beyond an impression formed by all of the relevant factors but giving particular weight, as I am satisfied should be given in the circumstances of this case, to the debts owed, the risks Grandsky ran, the total amount recovered and the public interest. While there is no presumption that a creditor should not receive 100% of the amount recovered I am not satisfied that Grandsky has established that it is just and equitable for such an order to be made in this case. The advantage over others Grandsky would thereby obtain in consideration of the risk assumed by it would be excessive. That said, I also do not accept that the ATO’s suggestion that any priority should be limited to 20% of the funds properly reflects the advantage over others Grandsky should obtain in consideration of the risk assumed by it. As noted, it was Grandsky’s willingness to assume that risk that ensured funds are available for distribution. The risk was real given the nature of the case and enforcement difficulties were likely thereby increasing the potential costs and the risks of ultimate recovery. A priority as to 20% does not reflect what is just and equitable in all of the circumstances and would not fulfil the important public interest that is reflected in s 109(10).

43    Being satisfied that property has been recovered under an indemnity for costs of litigation given by Grandsky I consider that it is just and equitable with respect to the distribution of that property that Grandsky be given an advantage over others in consideration of the risk assumed by it as to 50% of the funds available for distribution after the payment of costs, remuneration and other expenses. The balance of the fund should be distributed proportionately to all creditors. Those proportions must take into account that Grandsky’s proportion of the total debt and the total debt must be adjusted to reflect the priority payment to Grandsky. In other words, Grandsky’s proportion will necessarily be reduced to reflect the fact that of its original debt of $6,894,343.56 (or $46.06% of the total debt) will be reduced by the amount which is 50% of the funds available for distribution after the payment of costs, remuneration and other expenses.

44    The parties should be given an opportunity to prepare orders which reflect these reasons for judgment.

Associate:

Dated:    21 February 2014