FEDERAL COURT OF AUSTRALIA

Low v Barnet (Trustee); In the Matter of Mathai [2015] FCA 1386

IN THE MATTER OF THE BANKRUPT ESTATE OF MATHEW KERALAVAKAYIL MATHAI

THE COURT ORDERS THAT:

1.    By 14 December 2015, the parties and their legal representatives confer and endeavour to agree on the form of orders which should be made in order to give effect to Reasons for Judgment published by Foster J this day (Low v Barnet (Trustee); In the Matter of Mathai [2015] FCA 1386).

2.    In the event that agreement is reached as to the form of such orders, the agreed form of orders be lodged with the Associate to Foster J by 15 December 2015 for consideration by the Court.

3.    In the event that agreement is not reached as to the appropriate form of orders, by 18 December 2015, each party lodge with the Associate to Foster J that party’s draft of the orders which that party considers ought to be made and thereafter the form of the final orders will be decided on the papers.

4.    By 18 December 2015, the applicant and the respondent lodge a Written Submission of no more than three (3) pages in length addressing the question of costs in light of the said Reasons for Judgment published this day and thereafter the said question of costs will be decided on the papers.

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

IN THE MATTER OF THE BANKRUPT ESTATE OF MATHEW KERALAVAKAYIL MATHAI

THE COURT ORDERS THAT:

1.    By 14 December 2015, the parties and their legal representatives confer and endeavour to agree on the form of orders which should be made in order to give effect to Reasons for Judgment published by Foster J this day (Low v Barnet (Trustee); In the Matter of Mathai [2015] FCA 1386).

2.    In the event that agreement is reached as to the form of such orders, the agreed form of orders be lodged with the Associate to Foster J by 15 December 2015 for consideration by the Court.

3.    In the event that agreement is not reached as to the appropriate form of orders, by 18 December 2015, each party lodge with the Associate to Foster J that party’s draft of the orders which that party considers ought to be made and thereafter the form of the final orders will be decided on the papers.

4.    By 18 December 2015, the applicant and the respondent lodge a Written Submission of no more than three (3) pages in length addressing the question of costs in light of the said Reasons for Judgment published this day and thereafter the said question of costs will be decided on the papers.

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

IN THE MATTER OF THE BANKRUPT ESTATE OF MATHEW KERALAVAKAYIL MATHAI

REASONS FOR JUDGMENT

1    Low Mooi Kwee (also known as Monica Low or Monica Leong) is the only creditor of the bankrupt estate (the estate) of Mathew Keralavakayil Mathai (the bankrupt).

2    On 18 May 2004, upon the application of Ms Low, a sequestration order was made against the estate. The bankrupt was discharged from bankruptcy on 21 April 2008.

3    Over the years, several persons have been appointed from time to time to act as the trustee of the estate. Katherine Elizabeth Barnet, of Bentleys Chartered Accountants, is the current trustee. In these Reasons for Judgment, I shall refer to the person occupying the position of trustee of the estate from time to time as “the Trustee”.

4    In 1998, Ms Low obtained a judgment against the bankrupt in the High Court of Justice of England and Wales (English High Court) after a contested trial in that Court.

5    Since 1998, in the face of very significant and persistent resistance on the part of the bankrupt, Ms Low has diligently and tirelessly endeavoured to obtain the fruits of that judgment at very significant expense to her and at very significant personal financial risk.

6    By early 2014, the amount expended by Ms Low in pursuing the bankrupt (including interest thereon up to 31 December 2013) came to approximately $720,633. Those funds were outlaid by Ms Low on account of assistance provided to the Trustee and, on occasion, pursuant to indemnities given to the Trustee.

7    As submitted on behalf of Ms Low, the long and difficult history of Ms Low’s attempts to recover the English judgment debt was characterised, at every step along the way, by the bankrupt’s attempts to stymie recovery.

8    By the two sets of proceedings with which these Reasons deal, Ms Low seeks to recover from the property recovered by the Trustee the judgment debt and all of her outlays together with a just and equitable amount as a reward for the assistance (both personal and financial) which she has provided to the Trustee from time to time. This latter reward amount may be appropriately regarded as a premium for the risks (risk premium) which Ms Low took in pursuing the bankrupt.

9    As at 17 December 2014, the Trustee had paid to Ms Low a total of $647,659.55 on account of the claims which Ms Low had submitted to the Trustee under s 82 and s 109(1)(a) of the Bankruptcy Act 1966 (Cth) (the Act). The balance of the total of those claims (viz $731,480.84) remains outstanding. That amount includes interest up to the end of 2013 or possibly up to the end of January 2014. Some additional interest for the period from and including 1 February 2014 may be payable.

10    As matters presently stand, and subject to the orders of the Court in these proceedings and the costs of them, it is highly likely that there will be a surplus of funds in the estate. It was primarily for this reason that I permitted the bankrupt to take part in a limited way in the two sets of proceedings with which these Reasons deal (as to which, see Low v Barnet (Trustee); In the Matter of Mathai [2014] FCA 728; (2014) 12 ABC(NS) 107; and Low v Barnet (Trustee); In the Matter of Mathai [2014] FCA 1187).

Ms Low’s Claims

The Claim Under s 109(10) of the Act

11    This claim is made in proceeding NSD 310 of 2014 which was commenced on 24 March 2014. In this proceeding, Ms Low is the applicant and Ms Barnet is the respondent. By her initiating Application filed in this proceeding, Ms Low seeks the following relief:

A.    FINAL ORDERS SOUGHT BY THE APPLICANT

On the grounds stated in the supporting affidavit, the applicant seeks the following orders:

1.    An order pursuant to section 109(10) of the Bankruptcy Act 1966 (Cth) (the Act) that after payment of the amounts payable under section 109(1)(a) and section 82 of the Act, the Respondent distribute to the Applicant the whole amount of all property and expenses recovered or realised by the Respondent in the administration of the Bankrupt Estate of Mathew Keralavakayil Mathai.

2.    In the alternative to order 1 above, that, pursuant to section 109(10) of the Act, the Respondent distribute to the Applicant such proportion of the property and expenses recovered or realised by the Respondent in the administration of the Bankrupt Estate of Mathew Keralavakayil Mathai that the Court considers just and equitable.

3.    The applicant’s costs of and incidental to this application be paid from the Bankrupt’s Estate in the priority fixed by section 109(1)(a) of the Act.

4.    Such further or other orders as the Court sees fit.

12    Thus, by her primary s 109(10) claim, Ms Low seeks payment of the whole of the surplus funds and a transfer of the property that will be in the hands of the Trustee after payment of all amounts required to be paid under s 82 and s 109(1)(a) of the Act. The relevant property is the property known as 69 Wellington Street, Kew Vic (69 Wellington Street). In the alternative, Ms Low claims the amount of all of her outlays plus interest plus a fair amount by way of risk premium less the total of all amounts already paid.

13    The Trustee opposes these claims. She argues that the Court does not have jurisdiction or the power to make any payment to Ms Low by way of risk premium. The Trustee also contends that, even if the Court could authorise or require the making of such a payment, it ought not do so in the circumstances of the present case in the exercise of its discretion.

14    The Trustee contends that Ms Low is only entitled to payment of the whole of her provable debt and the total of those amounts paid or incurred by her under the indemnities for the costs of litigation provided by her to previous trustees of the estate. She is also entitled to interest on those amounts. The Trustee argues that Ms Low is not entitled to receive any funds in addition to those amounts.

The Claims Under s 178 of the Act

15    This claim is made in proceeding NSD 769 of 2014 which was commenced on 25 July 2014. In this second proceeding, Ms Low is the applicant and Ms Barnet is the respondent. By her initiating Application filed in this proceeding, Ms Low appeals from Ms Barnet’s decision to reject nine specific claims made by Ms Low against the estate pursuant to s 82 and s 109(1)(a) of the Act and reg 6.01 of the Bankruptcy Regulations 1996 (the Regulations). She relies upon s 178 of the Act and “… such other power as may be available to the Court”.

16    The total amount claimed in the s 178 proceeding is $443,024.21. That amount is part of the total outlays claimed in proceeding NSD 310 of 2014.

17    The precise orders sought in proceeding NSD 769 of 2014 are:

1.    An order that the Respondent’s decision to reject the claims of the Applicant referred to in this Application be set aside;

2.    An order that the Respondent pay to the Applicant the sum of $443,024.21, or such other amount as to the Court may seem fit;

3.    In the alternative to order 2 above, an order pursuant to s 32 of the Act, that the costs claimed at items 2 to 11 in the table above be paid by the Respondent to the Applicant in priority to other payments from the Estate, or alternatively in such priority as to the Court may seem fit;

4.    The Respondent to pay the Applicant’s costs of this application;

5.    Such further or other orders as the Court sees fit.

18    The claims made by Ms Low in her Proof of Debt lodged with the Trustee on 4 January 2014 which were rejected were claims numbered 2, 3, 4, 5, 6, 7, 9, 10 and 11. The Trustee allowed claim 1 ($288,086.46 being the amount of the judgment debt) but not interest after 18 May 2004, the date of the sequestration order. She also allowed claim 8 (outlays the total of which was $283,312) but noted that that amount had already been paid on 9 December 2013. At the trial, the Trustee conceded some of the remaining claims pressed by Ms Low. Otherwise, the Trustee opposed all other claims made by Ms Low.

19    In those circumstances, if Ms Low fails in her s 109(10) proceeding to secure any risk premium, it will be necessary for the Court to determine which of Ms Low’s specific claims which remain in contest should be met by the Trustee.

The Evidence

20    Ms Low read and relied upon the following affidavits:

(a)    The affidavit of Phillip Leong sworn on 26 February 2014 and filed in proceeding NSD 310 of 2014 and the bundle of documents exhibited to that affidavit as Exhibit “PL-1”;

(b)    The affidavit of Mr Leong sworn on 3 October 2014 and filed in proceeding NSD 310 of 2014 and the bundle of documents exhibited to that affidavit as Exhibit “PL-1”;

(c)    The affidavit of Stephen Keith Mullette sworn on 25 July 2014 and filed in proceeding NSD 769 of 2014;

(d)    The affidavit of Ms Low sworn on 22 August 2014 and filed in proceeding NSD 310 of 2014 and the bundle of documents exhibited to that affidavit as Exhibit “LMK-1”; and

(e)    The affidavit of Desmond Anthony Ryan sworn on 24 August 2014 and filed in proceeding NSD 310 of 2014 (Mr Ryan’s affidavit) and the bundle of documents exhibited to that affidavit as Exhibit “DAR-1”.

21    Mr Leong is also known as “Philip Kong”. He is Ms Low’s husband. Ms Low and Mr Leong live in Vancouver, Canada. Because of Ms Low’s poor health, Mr Leong has acted as her representative in dealing with the Trustee and in pursuing the judgment debt. He holds a formal power of attorney from Ms Low.

22    The Trustee relied upon her affidavit sworn on 23 September 2014.

23    No witness was cross-examined.

24    Some objections were taken by Counsel for the Trustee to parts of the affidavits read on behalf of Ms Low. My rulings in respect of those objections are set out in a document which I marked as MFI-3. I made those rulings in advance of the hearing. At par 169 of her Written Submissions, Ms Low applied to re-tender certain paragraphs of Mr Leong’s first affidavit. I decline to accede to that request. My rulings will stand.

25    The hearing of both proceedings took place at the same time. Evidence in each proceeding was evidence in the other proceeding.

The Relevant Facts

26    In this section of these Reasons, I shall set out a brief summary of the relevant facts. That summary will not include much detail of the steps taken by Ms Low and her husband over many years to recover the amount of the judgment debt which she obtained against the bankrupt. I will provide more detail of those steps when I come to address those specific claims for reimbursement made by Ms Low which the Trustee continues to reject.

27    In 1993, Ms Low commenced proceedings against the bankrupt in the English High Court, Chancery Division (Ch 1997 K 3097) in which she claimed from the bankrupt three holdings of United Kingdom Treasury stocks which she contended belonged to her. In those proceedings, Ms Low claimed that the bankrupt had fraudulently obtained control of those stocks by forging a document which purported to transfer the stocks to him.

28    On 12 October 1998, the English High Court gave judgment in favour of Ms Low against the bankrupt. The trial judge found that the bankrupt had forged the signatures of Ms Low and another person on the document by which the stocks were purportedly transferred. The Court made an appropriate declaration and ordered the bankrupt to pay to Ms Low GBP179,575.24 plus interest and costs.

29    On 12 February 2003, the Supreme Court of Victoria registered the judgment of the English High Court and the Default Costs Order made by that Court under s 6 of the Foreign Judgments Act 1991 (Cth). The net amount in respect of which judgment was entered was GBP118,317.11. The Supreme Court also ordered that the bankrupt pay Ms Low’s costs of the registration of the English judgment.

30    On 14 June 2003, the bankrupt was validly served with notice of the foreign judgment registration and a demand for payment at his home. At the time, he was living at 69 Wellington Street.

31    On 3 July 2003, on the application of Ms Low, the Official Receiver issued a Bankruptcy Notice against the bankrupt. The amount specified in that Bankruptcy Notice as the debt owed to Ms Low was $288,086.46. That amount was the Australian dollar equivalent of GBP118,317.11 as at 3 July 2003.

32    The bankrupt spent most of the second half of 2003 overseas.

33    On 6 December 2003, the Bankruptcy Notice was validly served on the bankrupt in Australia.

34    The bankrupt did not comply with the Bankruptcy Notice.

35    On 2 January 2004, Ms Low filed a Creditor’s Petition in this Court seeking a sequestration order against the estate of the bankrupt.

36    On 18 May 2004, a Registrar made a sequestration order against the estate of the bankrupt. The Registrar also ordered that the bankrupt pay Ms Low’s taxed costs of and incidental to the Creditor’s Petition filed by her.

37    On 19 April 2005, the bankrupt applied for an annulment of his bankruptcy pursuant to s 153B of the Act.

38    The bankrupt subsequently also sought review of the Registrar’s decision to make a sequestration order.

39    On 19 July 2005, Graham J dismissed the bankrupt’s annulment application and his application for review (Mathai v Kwee [2005] FCA 932).

40    In the second half of 2005, the Trustee conducted examinations of the bankrupt, his wife, his brother-in-law and his adult sons, Gerald Mathai, Christopher Mathai and Michael Mathai. Ms Low funded these examinations to an amount of $30,000.

41    On 17 October 2006, Mr Desmond Anthony Ryan was appointed trustee of the estate.

42    On 21 June 2007, the Trustee then in office (Mr Ryan) applied in the Federal Magistrates Court of Australia (as it was then known) for relief under s 121 of the Act against the bankrupt and against the registered proprietors of 68A Wellington Street, Kew, VIC (68A Wellington Street) which was then in the name of the bankrupt’s wife, Mrs Margaret Mathai, his brother-in-law Mr Wee Eng Poh and Mr Brian Selby Gill, and 69 Wellington Street, which was in the name of his son, Mr Michael Mathai. The Trustee claimed that the bankrupt had transferred both of these properties at times when he was, or was about to become, insolvent, in order either to prevent the properties from being recovered by his creditors, or to obstruct, or to delay his creditors.

43    Ms Low indemnified the Trustee in respect of the s 121 proceedings.

44    Ms Low led evidence from Mr Ryan. At par 28 of Mr Ryan’s affidavit, Mr Ryan gave evidence of a conversation he had with Mr Leong during a meeting with Mr Leong which took place in about mid August 2007. Mr Ryan said that, at that meeting, Mr Leong handed to him a copy of Ms Low’s letter dated 12 August 2007. Mr Ryan testified that Mr Leong agreed, on behalf of Ms Low, that Ms Low would fund the s 121 proceedings which were then under way and would indemnify Mr Ryan against any adverse costs order which the Court might make in those proceedings. Mr Ryan said that he told Mr Leong at this meeting that the costs of running the recovery proceedings could be as much as $100,000. Mr Leong wanted Mr Ryan to agree to pay a risk premium of 80%–85% to Ms Low. Mr Ryan said that he could not agree to pay such a premium as, under s 109(10) of the Act, the payment of such a premium was a matter for the Court. He suggested that 75% might be “… more acceptable”.

45    Evidence to substantially the same effect was given by Mr Leong.

46    The terms of the indemnity provided by Ms Low to Mr Ryan in respect of adverse costs are set out in the letter from Ms Low to Mr Ryan dated 12 August 2007 as follows:

In this litigation against the respondents for assets recovery for the bankrupt’s estate we agree to: -

(a)    indemnify you for any adverse costs awarded against you by the court;

(b)    provide as part of that indemnity a cash cover equal to A$8,000 per property pursued after – payable 50% (A$4,000) on commencement of litigation action on that property and 50% (A$4,000) 4 weeks before the trial date; it being further agreed that you will place such funds in a distinctly separate account and on time deposit to earn interest thereon as it is not known when the trial would take place. It is agreed, of course, that if no trial takes place or the litigation matter has been amicably settled, such funds placed on deposit should be returned to us together with the interest earned.

To put into effect the above we attach herewith:

(a)    cheque #100047 for A$8,000 dated today (12th August) for initial cash cover for 68A and 69 Welling [sic] Street, Kew as referred to above and

(b)    cheque #100048 for A$20,000 to fund the sec. 81 examination should it be deemed warranted; cheque is dated 29th August, 2007 to allow us sometime to assess the respondents’ replies due on 20th August.

Kindly sign the attached copy of this letter and return it to Philip as acknowledgment of the above and the attached cheques.

47    Mr Ryan acknowledged receipt of two cheques totalling $28,000 and accepted the indemnity offered by Ms Low in her letter dated 12 August 2007 by signing and returning to Ms Low a copy of that letter.

48    On 21 April 2008, the bankrupt was discharged from bankruptcy.

49    On 30 August 2010, Mr Ryan was replaced as Trustee by Mr Simon Patrick Nelson.

50    On 2 September 2011, the Federal Magistrate who heard the s 121 proceedings declared that the Trustee was entitled to the beneficial ownership of both of the Wellington Street properties, declared that the holders of the title to those properties held that title on trust for the Trustee and ordered those holders to transfer the legal title to the Trustee. The Federal Magistrate subsequently made an order for costs in favour of the Trustee against the respondent parties to the s 121 proceedings.

51    On 23 September 2011, the respondents to the s 121 proceedings filed a Notice of Appeal from the judgment of the Federal Magistrate.

52    On 1 March 2012, Ms Low sent a letter to Mr Nelson. That letter was in the following terms (omitting formal parts):

Indemnity Agreement for Adverse Costs Order

In accordance with your recent request I hereby confirm that I will indemnify you for any adverse costs order that may be awarded against you by the Court in the present litigation undertaken by you as Trustee for the Estate of Mathew K. Mathai in the recovery of assets for the Estate under sec. 121 of the Bankruptcy Act 1966. I note that in past correspondence you had expressed your intention to have an Indemnity Agreement drawn up for this purpose. In your letter of 18th October 2011 to Philip Leong (my representative under my P.A.) at page 2 item D (INDEMNITY FOR ADVERSE COSTS ORDER), you state that “I advise that I have instructed Mark Koroneos to prepare a Deed of Indemnity to record this indemnity. This will be made available to you and Mr. Lhuede shortly”, and on the same letter at page 1 under item A (SEC. 109 PROCEEDINGS) you also state, inter alia, that “... as the indemnifying creditor (referring to myself) you would be entitled to a premium on the funds advanced in consideration of the risks assumed”. Attached is a copy of your letter of 18th October 2011 for easy reference.

Apparently this formal Indemnity Agreement to include the above is still being worked out by your solicitor Mr. Mark Koroneos and my solicitor Mr. Michael Lhuede since October last year with mounting expense/costs without it being amicably finalised by now. Of course it was the understanding that such a formal Indemnity Agreement would be drawn up and signed by you and I to form the proper basis of things. I also understand that under sec. 109(10) of the Bankruptcy Act I can as the funding and indemnifying creditor make application to the court for approval of my claims including whatever the court would deem fit to grant me as an incentive/reward for the risks undertaken in that significant role in the lengthy litigation for asset recovery. You had expressed your view that the percentage of 70-75% reached by Des Ryan with Philip based on net proceeds of assets recovered less legal costs, past and present remumerations [sic] of trustees and expenses as incentive-reward to be high. Des had taken into account the common knowledge that those contingency-fee lawyers (so-called ambulance chasers) are getting 40-55% of the damages awarded to their clients for fees and reward for their efforts and risks) and that too without any cash upfront from their clients as funding nor indemnities given whereas in this case I had over the past 10 years expended over $500,000 and endured every imaginable obstacle put up by the bankrupt and at great risks too for this litigation for asset recovery for the Estate of the Bankrupt that would benefit all creditors including past trustees who would have the their remunerations paid too – all of which would not have been possible had I not persevered and funded the litigation. I understand from Mr. Lhuede that he is awaiting your answer to a percentage figure that you deem to be the deserving incentive-reward for the risks undertaken for the cash funding and indemnity that I have given against any adverse costs order in this lengthy litigation for asset recovery.

I look forward to receiving the Indemnity Agreement and trust that its terms are reasonable and acceptable to you and I.

53    On 21 December 2012, Tracey J dismissed the appeal from the Federal Magistrate’s decision (Mathai v Nelson (2012) 208 FCR 165).

54    On 17 January 2013, the respondent parties filed an Application for Special Leave to Appeal to the High Court of Australia from the orders made by Tracey J. On 26 June 2013, the High Court dismissed that Application and awarded costs to the Trustee.

55    On 3 September 2013, Ms Barnet was appointed as Trustee.

56    The bankrupt has not paid any of the judgments ordered against him. Nor has he paid any of the costs ordered against him.

57    On or about 14 September 2013, 68A Wellington Street was sold at auction for $1,708,000. As at the date of the trial before me, 69 Wellington Street had not been sold. Michael Mathai, who holds the title of 69 Wellington Street in his name, has executed and provided a transfer of that property to the Trustee. That property remains in the control of the Trustee.

58    Ms Low’s claim for reimbursement of her outlays is currently quantified by her solicitor at $731,480.84 plus interest. Ms Low has been paid $647,659.55 towards the total amount of her claims.

59    As I understand the present position, her present claim of $731,480.84 plus interest is the quantum of her claim for reimbursement of outlays as at the date of the trial before me. That figure has been arrived at by adding the following amounts:

(a)    The amount of the Victorian judgment;

(b)    The total of all of the amounts actually outlaid by Ms Low in pursuing the bankrupt; and

(c)    Interest thereon up to 1 February 2014

and subtracting from that overall total the total of all of the amounts paid by the Trustee to Ms Low up to the date of the hearing before me (viz $647,659.55).

60    As at the date of these Reasons for Judgment, there appear to be fees and expenses due to the Trustee. There are also amounts due to previous Trustees. The total of all of these amounts as at late May 2014 was of the order of $457,124.

61    As at 14 September 2014, the Trustee had received in the estate amounts totalling $1,764,605. As at the same date, she had paid out $1,102,695 (including $647,656 to Ms Low comprising a distribution of $364,344 to Ms Low as the only unsecured creditor in the estate and $283,312 as repayment of funds provided to the Trustee from time to time under the indemnities given to the Trustee by Ms Low).

62    Therefore, as at 14 September 2014, the Trustee held the amount of $661,910 as the remaining cash funds in the estate.

63    The evidence before me did not make clear whether Ms Barnet is now registered as the proprietor of 69 Wellington Street. It is clear, however, that a transfer in registrable form was delivered to her some time ago. It is also clear that Ms Barnet controls the disposition of 69 Wellington Street.

64    She informed me that she would only need to sell 69 Wellington Street if Ms Low were successful in the present proceedings.

Ms Low’s Claim for a Risk Premium

The Relevant Statutory Provisions

65    This claim is based upon s 109(10) of the Act.

66    Section 109 is headed “Priority payments” and is found in Pt VI, Div 2, Subdiv A of the Act. Part VI of the Act is headed “Administration of property”. Part VI, Div 1 is headed “Proof of debts”. Part VI, Div 2 is headed “Order of payment of debts”. Part VI, Div 2, Subdiv A is headed “General”.

67    Section 82 describes those debts which are provable in bankruptcy. Subsection 82(1) contains the general rule. That subsection is in the following terms:

(1)    Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

68    Other subsections of s 82 explain and qualify that general rule. Here, the judgment debt obtained by Ms Low against the bankrupt and the related costs orders when quantified were provable debts in the estate. The subsequent advances made by Ms Low to Mr Ryan and Mr Nelson (if any) in order to fund the s 121 proceedings and associated litigation were not provable debts in the estate. They constitute expenses incurred by the Trustee as part of the general administration of the estate.

69    Section 107 of the Act provides:

107    Creditor not to receive more than the amount of his or her debt and interest

Subject to the operation of the provisions of section 91, a creditor is not entitled to receive, in respect of a provable debt, more than the amount of the debt and any interest payable to him or her under this Act.

70    Section 91 deals with the redemption of security by the trustee. That section is not presently relevant.

71    Section 108 is the first section in Pt VI, Div 2, Subdiv A of the Act. That section is in the following terms:

108    Debts proved to rank equally except as otherwise provided

Except as otherwise provided by this Act, all debts proved in a bankruptcy rank equally and, if the proceeds of the property of the bankrupt are insufficient to meet them in full, they shall be paid proportionately.

Note:    The rules under this Subdivision for payments of debts can be affected by proceeds of crime orders and applications for proceeds of crime orders: see Subdivision B.

72    Subsections (1)(a), (10), (11) and (12) of s 109 are in the following terms:

109    Priority payments

(1)    Subject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following order:

(a)    first, in the order prescribed by the regulations, in payment of the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee and the costs of any audit carried out under section 175;

…

(10)    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.

(11)    Except as provided in paragraph (1)(a), 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.

(12)    In subsection (11), debts includes liabilities, remuneration, commitments and expenses specified in subsection (1).

73    Subparagraphs (b) to (j) of s 109(1) describe the order in which the categories of payment referred to in those subparagraphs are to be paid. It is not necessary for present purposes to set out those subparagraphs. They are not presently relevant.

74    Subsection (10) of s 109 was inserted into the Act by s 51 in Act No 12 of 1980. In its original form, subs (10) provided:

(10)     Where property has been recovered, realised or preserved by means of an indemnity for costs of litigation given by any creditor or creditors, the Court may, upon the application of the trustee or a creditor, make such order as it thinks just and equitable with respect to the distribution of the proceeds of that property with a view to giving the indemnifying creditor or creditors an advantage over other creditors in consideration of the risk run by him or them in giving the indemnity.

75    In its original form, the text of s 109(10) followed closely the language of s 84(2) of the Bankruptcy Act 1924 (Cth). It repeated precisely the text of s 109(6) of the Act as originally enacted in 1966.

76    The present subsection was substituted by s 23 of Act No 21 of 1985.

77    Section 564 of the Corporations Act 2001 (Cth) (Corporations Act) derives from the original form of s 109(10). It is in the following terms:

564    Power of Court to make orders in favour of certain creditors

Where in any winding up:

(a)    property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or

(b)    expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.

78    It can readily be seen that the effect of s 564 is substantially the same as s 109(10) of the Act.

Ms Low’s Arguments

79    Senior Counsel who appeared for Ms Low at the hearing before me correctly submitted that, in circumstances where property has been realised after recovery under an indemnity for costs of litigation given by a creditor or creditors, the proceeds of the property recovered in respect of which an order may be made under s 109(10) are the net proceeds after deduction of relevant remuneration, legal costs and expenses (Re Ehrat and Danglmaier (1976) 12 ALR 566 at 567–568 per White J). These deductions will not include the cost of work done prior to the receipt of the relevant indemnity (Re Ehrat and Danglmaier at 568).

80    It was also submitted on behalf of Ms Low that the principles relating to the application of s 109(10) were considered in Grandsky Pty Ltd v Horne [2014] FCA 119 (Grandsky) at [6]–[20] per Jagot J. In those paragraphs of her Honour’s judgment, her Honour extracted various observations of general application from a number of cases. Counsel also referred to Official Trustee in Bankruptcy v Pastro [2004] FCA 713 (Pastro) at [20]–[21]; (2004) 2 ABC(NS) 257 at 262–263 where Mansfield J 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 (Re Home Corp Projects) at [12]. That case concerned the provisions analogous to s 109(10) of the Act in s 564 of the Corporations Act 2001 (Cth).

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.

81    It was also submitted on behalf of Ms Low that, when due regard is paid to the legislative history of s 109(10) and s 564 of the Corporations Act discussed by Campbell J in Jarbin Pty Ltd v Clutha Ltd (In Liq) (2004) 180 FLR 393 (Jarbin) at 408–414 [47]–[76] the pattern of changes over time has been to widen the circumstances in which the Court’s power to make an order can be exercised but to leave unchanged what it may do in exercise of its power and the “consideration” relevant to the exercise of that power (at 408–409 [49]).

82    Counsel for Ms Low then submitted that, when interpreting s 109(10), the Court must prefer that interpretation which would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) over each other interpretation. It was submitted that the Court must approach the interpretation of s 109(10) in this way even if the meaning of the words, interpreted in the context of the rest of the Act, is clear. In particular, Counsel submitted that it was inappropriate to read provisions conferring jurisdiction upon a court or granting powers to a court by making implications or imposing limitations which are not found in the express words of the provisions. It was said that it is permissible for the Court to have regard to prior statutory provisions dealing with the same subject matter in order to enable the Court to interpret a current statute. In this way, the Court may ascertain what the legislation was intended to achieve. Finally, courts may take account of the consequences of giving a particular meaning to an Act or provision. If one construction will do manifest injustice and the other avoid it, it is proper to adopt that meaning which will avoid consequences that appear irrational and unjust (Public Transport Commission of NSW v J Murray-More (NSW) Pty Ltd (1975) 132 CLR 336 at 349–350 per Gibbs J).

83    Senior Counsel for Ms Low argued that the change to the wording of s 109(10) effected by the amendment to that subsection made in 1985 whereby the class of persons over which an advantage is to be afforded by s 109(10) was expressed to be “others” in lieu of “other creditors” was a deliberate change of language designed to bring about a substantive change in the operation of the subsection. Senior Counsel for Ms Low submitted that the Court ought not to ignore this legislative change and should impute to the legislature an intention to change the meaning of the section. It was then submitted that the expression “others”, when used in the subsection to describe the class of persons over which an advantage might be given, includes, as a matter of ordinary English, persons who are not creditors of the bankrupt and thus includes the bankrupt himself.

84    At par 87 of her Written Submissions in Chief, Ms Low submitted:

Adopting a narrow interpretation of s 109(10) and precluding creditors from availing of the provision over “others” (including a bankrupt who might have a contingent claim to a surplus) would be contrary to the purpose of the provision. It would not serve the purpose of encouraging creditors to indemnify trustees. Nor would it promote the public policy of facilitating the recovery of assets which a bankrupt has attempted to conceal from his creditors. Such an outcome would permit the bankrupt to reap a benefit from his own wrongdoing, since but for the creditor’s decision to indemnify the trustee in the recovery proceedings, the property would not have been recovered, and that bankrupt would have had no contingent interest in the property recovered at all.

85    Ms Low went on to submit that the possibility of a surplus in the estate does not preclude the Court from making the order which she now seeks. She submitted that, as a discharged bankrupt, the bankrupt has no present claim to any surplus. It was submitted on behalf of Ms Low that, as a consequence of the operation of s 58(1) and s 116(2) of the Act, any interest which may remain extant in a bankrupt estate is not the bankrupt’s but rather is that of the Official Trustee in Bankruptcy.

86    By force of s 153A(1) of the Act, when the Trustee is satisfied that all of the bankrupt’s debts have been paid in full, the bankruptcy is automatically annulled on the date the last such payment was made. Section 154(1)(c) provides that only after all debts have been paid in full does the remainder (if any) of the former bankrupt’s property still vested in the Trustee revert to the bankrupt. It was then submitted that, as the Trustee is still administering the estate, the requirements of s 153A(1) have not yet been satisfied and the bankrupt has no current claim on any surplus.

87    These latter submissions were advanced in support of the proposition that the Court should not approach Ms Low’s claim upon the basis that the bankrupt is entitled to any surplus. Ms Low then submitted that the position of the bankrupt should only be considered after all other claims on the estate have been dealt with, including Ms Low’s claim under s 109(10).

88    Ms Low went on to submit that the Court can exercise its discretion under s 109(10) regardless of whether or not the Trustee has already applied the proceeds of the bankrupt’s property in accordance with s 109(1) and irrespective of any other rights the Trustee or bankrupt may have. It was submitted that this is so because, unlike s 109(1), s 109(10) is not expressed to be “subject to this Act”. The subsection operates directly upon recovery of property or expenses under an indemnity for costs. The creditors’ right under the subsection derives from the existence of that property (or those expenses), which then may be distributed to the indemnifying creditor as the Court orders.

89    Senior Counsel for Ms Low relied upon the decision of Green; Re Oz-US Film Productions Pty Ltd [2005] NSWSC 249 at [17] where, in a case involving s 564 of the Corporations Act, Barrett J awarded the indemnifying creditor an “advantage” of $400,000, or if the surplus (which was estimated at $300,000) was less than $400,000, the entire surplus.

90    Ms Low relied upon the exposition of the relevant principles given by Nicholas J in Re Woodgate, in the Matter of Eaton (a bankrupt) [2010] FCA 550 (Eaton) at [5]; (2010) 8 ABC(NS) 65 at 66.

91    She argued that it was within a legitimate exercise of the Court’s discretion to award 100% of the amount recovered. In addition, so it was submitted, the Court has power to award a payment of more than the amount of funding contributed by the indemnifying creditor. Ms Low relied upon Re Babcock and Brown Ltd (in Liq) [2012] FCA 107 and Re Oz-US Film Productions Pty Ltd.

92    It was then submitted on behalf of Ms Low both in writing and orally that the facts of the present case justify the award of 100% of the proceeds recovered. In support of that proposition, Senior Counsel for Ms Low made detailed submissions in which he traversed the history of Ms Low’s involvement in recovering 68A Wellington Street and 69 Wellington Street.

The Trustee’s Arguments

93    Counsel for the Trustee submitted that, in the estate, any order made under s 109(10) can only be directed to the distribution of property recovered as a result of the operation of s 121 and s 58 of the Act. There are no other assets in the estate. In support of these propositions, Counsel referred me to Anscor Pty Ltd v Clout (Trustee) (2004) 135 FCR 469 at 480–483 [43].

94    It was then submitted on behalf of the Trustee that the effect of s 120 and s 121 of the Act is that certain transfers of property are declared to be “void as against the trustee”. It was said that such provisions have long been held not to avoid those transfers absolutely but only to do so to the extent necessary to satisfy the debts of the bankrupt and the costs of the bankruptcy. These propositions were said to be supported by Re Parry; Ex Parte Salaman [1904] 1 KB 129; Re MacDonald; Ex Parte McCullum [1920] 1 KB 205; Re Last; Ex Parte Butterell (1994) 124 ALR 219.

95    Counsel argued that the right to any surplus left once all debts and administration costs have been paid from the property recovered into the estate by the operation of either s 120 or s 121 of the Act belongs to those who took under the impugned transactions. That proposition was said to be “uncontroversial” by a Full Court of this Court (Ebner v Official Trustee in Bankruptcy (1999) 91 FCR 353 at 371–372 [65] per Sackville, Finn and Kenny JJ).

96    Counsel for the Trustee then submitted that s 109(10) ought not to be construed in a way which exposes the transferred property (or its proceeds) to a wider range of claims, including a claim for recovery of a risk premium to be paid to the funding creditor, than those which orders under s 120 or s 121 are intended to satisfy. This is not a case where the relevant Trustees entered into a contract with Ms Low of a kind comparable to the type of contract which a commercial litigation funder may have secured.

97    The Trustee submitted that the reference to “others” in s 109(10) is a reference to “other creditors” and not, as Ms Low submitted, the bankrupt, or indeed the donee under the avoided transfers. Counsel contended that there is nothing in the Explanatory Memorandum which accompanied the amendments to the Act by which the section took its present form which suggests that the present language was intended to make a substantive alteration to the effect of the section (reference was made to par 92 of the Explanatory Memorandum to the Bankruptcy Amendment Bill 1985).

98    It was then submitted on behalf of the Trustee that, in a case where there are no other creditors vying for any part of the net proceeds of the indemnified litigation, the order sought by Ms Low cannot be described as one which will have been made “with a view to giving the indemnified creditor or creditors, as the case may be, an advantage over others” and is thus not authorised, as a matter of jurisdiction, by s 109(10). Where there are no other creditors, there is no need to make provision for any “advantage” in favour of an indemnifying creditor. At 414 [75] in Jarbin, Campbell J said that “… 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”. To similar effect were the remarks of Hodgson J in State Bank of NSW v Brown (2001) 38 ACSR 715 at [91] where his Honour said that the object of the section was not to provide “for the private benefit of creditors who provide the indemnity”.

99    Counsel for the Trustee then submitted that, in the circumstances of the present case, the Court has no power to make the orders sought.

100    As far as discretion is concerned, Counsel for the Trustee broadly accepted the statement of the relevant principles given to the Court by Senior Counsel for Ms Low. He then submitted that, were this an ordinary case of a claim by a funding creditor to achieve some advantage over other creditors in circumstances where none would receive payment of 100% of their debt regardless of the form of any order which was made, then the matters of detail relied upon by Ms Low would make a powerful argument in favour of preference being given to her. He said, however, that the present case is not such a case.

101    Counsel for the Trustee went on to submit that the policy behind s 109(10) would not be fulfilled in a single creditor estate by granting the relief sought by Ms Low in the present case.

The Bankrupt’s Submissions

102    Counsel for the bankrupt adopted and agreed with the submissions made by the Trustee concerning Ms Low’s claim under s 109(10) of the Act. He also made submissions on his own account.

103    Counsel for the bankrupt made the following submissions:

(a)    The costs, charges and expenses of the administration of the bankruptcy are costs incurred by the trustee in bankruptcy and not by the petitioning creditor or anyone else. For this reason, s 109(1)(a) does not give priority to Ms Low for any amount apart from her costs as petitioning creditor;

(b)    The only provision in s 109 which can give a creditor a right to amounts other than costs expended as a petitioning creditor or the payment of debts owing to the creditor is s 109(10);

(c)    The phrase “an advantage over others in consideration of the risk assumed” means an “advantage” over “other creditors” in the distribution of the bankrupt estate and is a right to a preference over other creditors in the distribution of the property recovered by means of the indemnity (see Official Trustee in Bankruptcy; in the Matter of Matson v Deputy Commissioner of Taxation [1999] FCA 914 at [8]–[10]);

(d)    Section 109(10) of the Act does not entitle the indemnifying creditor to recover amounts which the indemnifying creditor is not owed and is not entitled to recover in relation to the bankrupt estate;

(e)    Since Ms Low is the only creditor in the estate, and is also the relevant indemnifying creditor, there are no “others” over whom advantage can be given with the consequence that, in the present case, there is no work for an order made by the Court under s 109(10) to do;

(f)    Section 109(10) is directed to circumstances where there are insufficient assets in the bankrupt estate to pay all of the creditors and liabilities in full with the consequence that some creditors will inevitably miss out. The subsection permits the Court to interfere with what would otherwise be the operation of the pari passu principle between unsecured creditors (Grandsky at [9]–[20]; Jarbin at 414 [75]);

(g)    In making an order under s 109(10), it is not the Court’s function to distribute property independently of any legitimate claims on or in the bankrupt estate. The appropriate function of the Court in exercising the power afforded to it under s 109(10) is to effect an alteration in the pari passu principle so that indemnifying creditors can receive an advantage over non-indemnifying creditors (Jarbin at 414 [75]);

(h)    Section 109(10) is directed to circumstances where there are insufficient assets in the estate to pay all creditors in full; and

(i)    In the present case, there is no need for the indemnifying creditor to be given 100% of the assets recovered since more assets were recovered than are required to pay the legitimate debts, costs and expenses of the estate and there will be a substantial surplus available to be returned to the bankrupt once the bankruptcy is annulled pursuant to s 153A and s 154 of the Act.

104    As far as the exercise of any available discretion is concerned, Counsel for the bankrupt submitted that most of the factors relied upon by Ms Low were irrelevant because there are no other creditors. It was then submitted on behalf of the bankrupt that, in the present case, in any event, there was no factor put forward which would, as a matter of discretion, cause the Court to make orders giving Ms Low more than that which she is owed, even if there were power to do so.

105    It was also submitted on behalf of the bankrupt that s 109 is not punitive and should not be used by the Court to punish the bankrupt for his conduct over the years in resisting paying Ms Low the amounts which the English High Court and courts in this country have held she was owed. The subsection is not directed to punishing the bankrupt for alleged misconduct.

Decision

106    Part VI of the Act deals with administration of the bankrupt’s property comprising his bankrupt estate. In s 5(1) of the Act, “property” is defined in wide terms as follows:

property means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.

107    Part VI commences with Div 1 which addresses the concept of provable debts and then outlines the procedures and principles governing the lodgement and assessment of proofs of debt.

108    Division 2 of Pt VI is concerned with the order in which proven debts are to be paid. The general rule is that all debts proved in a bankruptcy are to rank equally and, if the proceeds of the property of the bankrupt are insufficient to meet those debts in full, they are to be paid proportionately (s 108).

109    The general rule embodied in s 108 is subject to the terms of s 109 which require the trustee to apply the proceeds of the property of the bankrupt in the specific order set out in subs (1) as explained and qualified by subs (1B) to subs (9). Subsection (11) invokes the general rule captured in s 108 in order to rank the debts in each of the classes specified in subs (1) as between themselves.

110    It must not be forgotten that s 109(10) appears in a section which is headed “Priority payments” and which, for the most part, addresses the question of the order of the payment of those debts which are proven in the bankruptcy.

111    At 262–263 [20]–[21] in Pastro (which I have extracted at [80] above), Mansfield J identified and explained the policy behind s 109(10). I respectfully agree with his Honour’s observations.

112    Here, Ms Low is the only creditor of the bankrupt. There are no other persons who have made any claims upon the estate. She is a judgment creditor of the bankrupt and a claimant for reimbursement of additional outlays said to be recoverable from the estate.

113    The only property of the bankrupt in the estate are the two Wellington Street properties and rent derived from one of those properties. 68A Wellington Street has been sold. The net proceeds of sale have fallen into the estate.

114    Ms Low provided funds and gave indemnities to Mr Ryan and to Mr Nelson in respect of the s 121 proceedings and the appeals which followed.

115    In the circumstances, it follows (and I find) that property (the two Wellington Street properties) were recovered under an indemnity for costs of litigation (the s 121 proceedings and the subsequent appeals) given by a creditor (Ms Low) to the trustee. Thus, s 109(10) is prima facie engaged in the present case because the threshold requirements specified in s 109(10)(a) have been satisfied.

116    Ms Low also contends that the terms of s 109(10)(b) have also been satisfied.

117    The questions which then arise are whether, having regard to the terms of the balance of s 109(10), the statutory discretion is engaged at all and, if so, whether and how it should be exercised in the present case.

118    The order which may be made by the Court pursuant to s 109(10) is an order with respect to the distribution of the property which has been recovered by reason of the indemnity (here the two Wellington Street properties) with a view to giving the indemnifying creditor an advantage over others in consideration of the risk assumed by that creditor. That is, the purpose or intent behind making an order under s 109(10) must be to provide an advantage to the indemnifying creditor as a reward for taking the risk on the recovery litigation.

119    The use of the word “advantage” in this context connotes a comparison. The indemnifying creditor is to be given something more than the “others”. The comparison invited by the subsection is a comparison between the position of the indemnifying creditor with respect to his proven debts and the position of the remaining creditors with respect to their proven debts.

120    In my opinion, s 109(10) contemplates that the indemnifying creditor is already a creditor with one or more provable debts at the time when the indemnity is given and the property is recovered. The subsection is directed to giving an “advantage” to the indemnifying creditor in respect of the payment of those provable debts. It does not operate as the basis for the creation of a new and independent liability in the estate in favour of the indemnifying creditor.

121    Section 109(10) appears in a part of the Act which addresses the order of the payment of proven debts. In particular, it is part of a section which, in terms, identifies the order in which those debts are to be paid thereby specifying a set of statutory rules for prioritising the payment of specified classes of proven debts.

122    The “advantage” to be given to an indemnifying creditor is designed to reward that creditor for taking the recovery risk. The intention is to encourage such indemnities to be given. Understood in this way, the preference or priority is over other creditors for it is they who would otherwise rank equally or proportionately (subject to s 109(1)) in the distribution of the recovered property.

123    Sections 108 and 109 are not concerned with claims by persons other than creditors.

124    In my view, the Trustee and the bankrupt were correct when they submitted that the word “others” in s 109(10) is a reference to “other creditors” and that the 1985 amendment to s 109(10) was never intended to bring about a substantive change to the definition of the class of persons over whom the advantage was to be given.

125    The “distribution” of the recovered property to which reference is made in s 109(10) is a distribution among creditors. The section simply does not speak to a circumstance where property might revert to the bankrupt upon annulment of the bankruptcy under s 153A and s 154 of the Act nor does it speak to the possibility of part of the recovered property being returned to the donee under an impugned transaction.

126    These conclusions are supported by the reasoning underlying the submissions made by the Trustee and by the bankrupt in relation the question of whether s 109(10) is engaged at all in the present case. Those submissions are correct and I accept them.

127    Ms Low relied upon a number of authorities to support her interpretation of s 109(10) of the Act and her claims based upon that subsection. The only authority which arguably provides any support for Ms Low’s claim for a risk premium payment is Re Oz-US Film Productions Pty Ltd which is a decision of Barrett J in the Supreme Court of New South Wales. In that case, his Honour was dealing with an application by a liquidator of a corporation for a direction that he would be justified in distributing an amount equal to 40% of the gross proceeds recovered by him under an indemnity for costs of litigation given by an indemnifying creditor or, in the alternative, if the surplus was less than the amount so calculated, the entire surplus. At [5] of his Reasons, his Honour noted that the recovery litigation financed by the indemnifying creditor saw proceeds of $1 million received by the liquidator. The debts admitted to proof totalled a little over $700,000. It was estimated that there would be a surplus of funds over the total quantum of proven debts of $283,942.73. At [6], his Honour noted that the indemnifying creditor had provided $234,079.50 by way of loan for which she subsequently proved and received full payment. It is clear that there were other unsecured creditors who had their claims admitted in the liquidation. At [14]–[17], Barrett J set out what he intended by the orders which he made. It seems upon a fair reading of those paragraphs, that his Honour intended that the indemnifying creditor receive her outlays which totalled $234,079.50 as well as 40% of the settlement proceedings or the entire surplus available in the liquidation, whichever was the lesser.

128    In Re Oz-US Film Productions Pty Ltd, there were other creditors over whom the indemnifying creditor obtained an advantage as a result of the orders made by Barrett J. However, by the orders which he made, his Honour appears to have authorised the payment to the indemnifying creditor of a sum of money which was greater than the quantum of the provable debts of that creditor and thus appears to have awarded an uplift amount or risk premium out of the surplus funds available or measured by the entire amount of those surplus funds.

129    The Trustee and the bankrupt submitted that, if the decision in Re Oz-US Film Productions Pty Ltd did stand as authority for the proposition that s 564 of the Corporations Act authorised the Court to order that an indemnifying creditor be paid more than that creditor is owed in the relevant liquidation, then the case was wrongly decided.

130    Re Oz-US Film Productions Pty Ltd was decided on 31 March 2005. On 6 February 2006, less than a year later, Barrett J decided Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd (2006) 24 ACLC 327. In that case, at 332 [7]–[9], his Honour said:

7    The first question raised by the Commonwealth’s submissions is whether an order under s.564 is capable of having such an effect that the creditor benefited by the order occupies a higher position on the scale of priorities in the winding up than a creditor within one of the classes referred to in s.556(1). Put another way, the question is whether the direction in s.556(1) that the debts and claims with which it deals are to be paid “in priority to all other unsecured debts and claims” means that a s.564 order may not promote a creditor to a position superior, in point of priority, to that of a creditor in respect of a claim comprehended by s.556(1).

8    I am satisfied that, as a matter of power, the court may, under s.564, make an order that causes the creditor chosen for preferred treatment to rank ahead of any one or more of the creditors having claims within the s.556(1) categories. This is because s.556(1) is expressed to operate “Subject to this Division”, that is, Division 6 of Part 5.6. Section 564 is within Division 6. The priorities created by s.556(1) are thus susceptible to inroads made by or pursuant to other Division 6 provisions, including s.564. So much was recognised by Campbell J in Jarbin Pty Ltd v Clutha Ltd (2004) 208 ALR 242.

9    Section 564 contemplates that assisting or indemnifying creditors within its purview may be given “an advantage over others”. The section does not say “all others” or “some others” or “any others”. In referring to “others” generally, it contemplates, in my view, that the court may, by its order, give the assisting or indemnifying creditors “an advantage over” any one or more of the other creditors or all of them, with the result that the court may, as a matter of jurisdiction, cause the debts of the creditors in question to be placed on any of the rungs of the ladder of priority created by s.556(1) (and, within a particular rung, above, below or beside the creditors with claims that s.559 causes to rank equally inter se), above the topmost of those rungs or below the bottom rung (yet ahead of “all other unsecured debts and claims”). In short, s.564 is cast in terms giving the court a complete discretion regarding positioning of the whole or any part of the debts of the assisting or indemnifying creditors on the scale of priorities in the winding up and the opening words of s.556(1) cause any such positioning ordered by the court to have effect despite what would otherwise be the order of priority under s.556(1).

131    Quite clearly, in Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd, his Honour took the view that the reference to “others” in s 564 of the Corporations Act was a reference to one or more of the other creditors or all of the other creditors of the relevant corporation.

132    In this Court, in Deputy Commissioner of Taxation v Vintage Gold Investments Pty Ltd (In Liq) (2009) 27 ACLC 1393 at 1396 [9]–[12], Greenwood J referred to the judgment of Barrett J in Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd at [9] and noted that his Honour’s view of the scope of the power conferred upon the Court by s 564 of the Corporations Act and the relationship between s 564 and s 556(1) of that Act was adopted by Austin J in Australian Steel Company (Operations) Pty Ltd v EPS Group Pty Ltd (In Liq) [2006] NSWSC 1080. At 1397 [12], Greenwood J said:

… However, that claim nevertheless remains a claim within s 556(1) and is subject to a power in the Court conferred by s 564 to adjust the order of priority including the paramouncy of such a claim, as appears just in all the circumstances, as between an indemnifying creditor and others. In that sense, the reference to others must be taken to be a reference to any other person (or entity) that has a debt or claim to be paid in the winding up of a company whatever the priority of that debt or claim may be according to the proper operation of the relevant provisions of the Corporations Act.

133    In Jarbin at 413–414 [73]–[76], Campbell J raised for consideration the question of whether or not a creditor could ever receive more than 100% of the debt owed to him, together with such interest as the corporations law might allow by means of an order made under s 564 of the Corporations Act.

134    For all of the above reasons, I am of the view that Re Oz-US Film Productions Pty Ltd was probably wrongly decided and that the correct principle is found in Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd and Deputy Commissioner of Taxation v Vintage Gold Investments Pty Ltd (In Liq).

135    In light of the above conclusions, the question of discretion under s 109(10) does not arise. However, against the possibility that I am wrong in the conclusions which I have reached, I will briefly address discretion.

136    Here, most of the commonly found discretionary factors are not present (as to which, see Eaton at 66 [5]).

137    Ms Low was the only person who would benefit from the recovery action which she undertook. She did not provide the indemnities which she gave in order to benefit the estate and thus the body of unsecured creditors generally—there were no other creditors. There was no possibility that the recovered property would ever have to be shared with any other creditor. As submitted by the Trustee, the funding of the investigations undertaken by the Trustee and the recovery litigation subsequently prosecuted served the self-interest of the creditor.

138    Ms Low is entitled to receive full reimbursement for all funds paid to the Trustee in connection with the recovery action undertaken by him and payment in full of her provable debts. She is also entitled to interest on those amounts where interest is properly payable. These are Ms Low’s entitlements under s 82 and s 109(1)(a) of the Act.

139    Once Ms Low has been paid all of the amounts to which I have referred at [138] above, she will have been amply and appropriately rewarded for the risks which she took. She is not entitled to more than this. She is not entitled to any risk premium.

Ms Low’s Appeal Under s 178 of the Act

140    Proceeding NSD 769 of 2014 is an appeal brought by Ms Low pursuant to s 178 of the Act whereby she challenges the Trustee’s adjudication on her Proof of Debt communicated to her by the Trustee’s letter dated 26 May 2014. As I have already noted at [18] above, the Trustee rejected most of the claims made by Ms Low in her Proof of Debt. Given that I have rejected Ms Low’s claim pursuant to s 109(10) of the Act for a risk premium, it is necessary to consider and determine Ms Low’s application under s 178 of the Act.

141    Section 178 of the Act is in the following terms:

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.

142    Prior to the commencement of the hearing before me, the Trustee filed and served a detailed Written Submission in which she set out her specific responses to the claims made by Ms Low in the s 178 proceeding.

143    The Trustee commenced her submissions by emphasising that, in the present case, if Ms Low is to succeed in her claims, she must bring those claims within the class of expense more particularly described in s 109(1)(a) of the Act in the following terms, viz “… the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee …”. This submission is correct and I accept it.

144    The Trustee then submitted that, unless Ms Low’s claims can be brought within the classes of expense to which I have referred, her claims cannot be brought within s 109(1)(a) of the Act. The Trustee has allowed Ms Low’s legal costs incurred in respect of the Creditor’s Petition lodged by her but has rejected certain travel expenses incurred by Mr Leong and interest said to have been incurred by reason of the lodgement of the Creditor’s Petition.

145    As submitted by the Trustee, Ms Low’s outstanding claims for reimbursement can only be successfully claimed if they can properly be characterised as “costs, charges and expenses of the administration”.

146    As a result of concessions made by the Trustee, the following matters should be noted:

(a)    By Item 4 in her Proof of Debt, Ms Low claimed legal costs in the amount of $67,514.30 incurred by her in connection with the bankrupt’s annulment application filed on 19 April 2005. She also claimed $11,747.43 for out of pocket expenses incurred by her in respect of travel to and the presence within Australia of Mr Leong on three occasions as well as interest on both claims in the amount of $73,383.05. The Trustee accepted at the hearing that, at the level of principle, Ms Low ought to be entitled to recover from the estate the proper legal costs and expenses incurred by her in proceedings 596 of 2005 (the bankrupt’s annulment application and application for review of the Registrar’s sequestration order) although the Trustee submitted that the entitlement to reimbursement for those sums exists for reasons different from those propounded by Ms Low. The Trustee went on to submit that the proper quantum of those costs should be determined either by subsequent agreement between the Trustee and Ms Low or by taxation.

These submissions are correct and I accept them. I propose to give the parties an opportunity to discuss the quantum of this claim for legal costs and expenses in an endeavour to agree that quantum. In the absence of agreement, the costs will need to be taxed.

Some of the travel and accommodation expenses in respect of Mr Leong’s visits may also be claimable. The Trustee took a similar position in respect of that claim. I propose to deal with that claim in the same way as the claim for legal costs and expenses made as part of this item.

(b)    In respect of travel and accommodation expenses for trip 19 claimed as part of Items 6, 7 and 10, the Trustee accepted that Ms Low may be entitled to some recompense for expenses incurred in respect of the attendance of Mr Leong at the hearing of the s 121 application on 4 March 2010. This is an amount of $5,186.48. I propose to allow that claim.

(c)    The amount of $17,500, being fees paid to Mr P Hayes of Counsel, was also conceded as payable.

147    Apart from the concessions to which I have referred at [146] above, the Trustee maintained her opposition to Ms Low’s claims in respect of the balance of the items the subject of the s 178 proceeding.

148    The outstanding claims fall into a few broad categories, being travel and accommodation expenses incurred by Ms Low in respect of 30 trips made to Australia by Mr Leong, legal fees and disbursements and interest.

149    The Trustee referred the Court to the decision of Morling J in Re Ayoub; Ex Parte Silvia (1983) 67 FLR 144 in support of the proposition that, for an outlay to be properly characterised as a “cost, charge and expense of the administration of the bankruptcy” within the meaning of s 109(1)(a) of the Act, the payment or outlay must have been incurred by the trustee or with the trustee’s authority. That principle is correct. I propose to apply it here.

150    In Item 2 in her Proof of Debt, Ms Low claimed $9,415 by way of travel expenses for two trips to Australia made by Mr Leong in October/November 2002 and for the period May to July 2003 together with interest on those expenses. The Trustee submitted that the claims were not adequately supported by vouchers and documentary proof and that, in any event, the expenses did not fall within the reach of the costs order made by the Victorian Supreme Court when the English judgment was registered in that Court. It was submitted that, for these reasons, the travel expenses claimed in Item 2 do not form part of any debt provable under s 82 of the Act. In addition, it was also argued that the expenses cannot be claimed from the estate as they were incurred well before the commencement of the bankruptcy administration. Because the expenses are not claimable, no interest is claimable either. These submissions are correct and I accept them.

151    For all of the above reasons, I reject the claim made in Item 2 of Ms Low’s Proof of Debt.

152    Item 3 in Ms Low’s Proof of Debt comprises additional travel costs and expenses incurred in December 2003 and in the period May/June 2004. Expenses of this character incurred in December 2003 are not recoverable for the same reasons as those expenses forming part of Item 2 were not recoverable. As far as the May/June 2004 expenses are concerned, some of those may well have been incurred after the making of the relevant sequestration order. But the claimed expenses do not fall within the petitioning creditor’s costs of the Creditor’s Petition and were not otherwise incurred at the request of the Trustee.

153    For the above reasons I reject Item 3.

154    I have already addressed the actual claims made in Item 4. They will be dealt with in accordance with the approach which I have described at [146] above. The Trustee submitted that no interest is payable in circumstances where the quantum of the legal costs was never fixed by taxation or by agreement either before or after the making of the sequestration order. I agree.

155    The claim in Item 5 is a claim for legal costs paid by Ms Low to her lawyers in Australia and in Ireland. There is no evidence to suggest that any of these payments were incurred with the knowledge of or at the request of the Trustee. As submitted by the Trustee, these expenses were of a private nature and are not recoverable.

156    I reject the claims made in Item 5.

157    In Items 6, 7 and 10, Ms Low claims $82,181.63 for 22 trips made by Mr Leong to Australia commencing in October 2005 and ending in February 2014. As correctly submitted by the Trustee, no attempt was made by Ms Low to explain in any detail why it was necessary for so many trips to be made in that period nor was there any detailed evidence as to what contribution Mr Leong’s presence in Australia made to the administration of the bankruptcy.

158    None of the claimed expenses in Items 6, 7 and 10 were incurred by the Trustee and there is no evidence of any understanding or agreement which would support the proposition that those costs and expenses were incurred with the authority of the Trustee. As submitted by the Trustee, the dogged pursuit by the creditor of her self interest in overseeing the Trustee’s actions and even in assisting them where she could is not a proper basis upon which to transform private costs voluntarily undertaken into costs of the administration for which reimbursement can be claimed. Subject to the potential for reimbursement in respect of trip 19, these claims should be rejected.

159    By Item 9 in her Proof of Debt, Ms Low claims $127,739.52 for legal fees and disbursements. Part of that claim consists of Mr Hayes’ fees with which I have already dealt at [146] above.

160    The Trustee correctly submitted that, apart from Mr Hayes’ fees, all other legal costs claimed in this item are private costs incurred by Ms Low and are not properly payable by the estate. It would appear also that some of the costs claimed under this item relate to the costs of the present proceedings. The evidence adduced in support of the claims made in Item 9 simply did not support the proposition that the expenses incurred were incurred in the administration of the bankruptcy. I reject the claims made in Item 9.

161    The final claim is a claim for $7,017.57 in Item 11. The outlay claimed in this item was simply not supported by any probative evidence. It appears that the expense was incurred as part of private enquiries being made by Ms Low in pursuit of her perceived self interest rather than at the request of or on behalf of the Trustee.

162    For all of the above reasons, I have rejected most of the claims made by Ms Low under s 178 of the Act. I propose to deal with those claims which I have allowed at the level of principle by inviting the parties to confer with a view to securing agreement in respect of those claims and, in the absence of agreement, to require that they be taxed. I will direct the parties to confer and endeavour to agree on the form of an appropriate order in order to give effect to these conclusions. The claims which I have allowed should be addressed in the orders to be submitted by the parties.

Other Matters

163    In a separate Written Submission dated 9 December 2014, the Trustee drew the Court’s attention to what she submitted was an error in the orders for costs made on 4 July 2014 and on 6 November 2014 respectively in the judgments dealing with the bankrupt’s Interlocutory Applications for leave to intervene in the current proceedings. The Trustee propounded a form of order which she submitted more correctly reflected the law concerning the Trustee’s costs of those Applications. The variations sought by the Trustee were consented to by Ms Low.

164    I am prepared to vary the orders previously made in the manner sought by the parties. The varied orders should be incorporated into the draft orders which I will direct the parties to submit.

Conclusions

165    I have rejected Ms Low’s claim under s 109(10) of the Act, allowed some parts of her claims under s 178 of the Act, deferred further consideration of some parts of her claims under s  178 of the Act and rejected the balance of those claims.

166    I propose to direct the parties to submit a draft of the appropriate orders to be made in light of these Reasons for Judgment. As presently advised, those orders should include an order dismissing the whole of proceeding NSD 310 of 2014. However, I shall refrain from making that order at the moment and will only do so after giving the parties an opportunity to consider whether such an order is the appropriate order for determining the claims made in that proceeding.

167    I will hear the parties on costs.

Associate:

Dated:    4 December 2015