CATCHWORDS

BANKRUPTCY - Bankruptcy Act 1966 (Cth), s 109(10) - whether indemnifying creditor entitled to priority.

Bankruptcy Act, 1966 (Cth)

Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294

Re Ken Godfrey Pty Ltd (1994) 12 ACLC 1071

Re Kyra Nominees Pty Ltd (in liq.) (1987) 5 ACLC 811

RE JANE VIDA CORKE ex parte OFFICIAL TRUSTEE IN BANKRUPTCY

NB 1855 of 1987

Sackville J.

Sydney

15 March 1996

IN THE FEDERAL COURT OF AUSTRALIA    )

GENERAL DIVISION                           )    No. NB 1855 of 1987

BANKRUPTCY DISTRICT OF THE STATE           )

OF NEW SOUTH WALES                   )

                                     RE:       

                                     JANE VIDA CORKE

                                     EX PARTE:

                                     OFFICIAL TRUSTEE IN BANKRUPTCY

Coram:     Sackville J.

Place:     Sydney

Date:      15 March, 1996

                         MINUTES OF ORDER

THE COURT ORDERS THAT:

1.   The balance of the sum held by the Official Receiver in respect of the bankrupt estate of Jane Vida Corke, after payment of

     (a)  the taxed costs of the Official Trustee in Bankruptcy in connection with Federal Court Proceedings No NB 1855 of 1987, Family Court Proceedings No PA 4093 of 1987, Family Court Appeal No EA 76 of 1992 and Federal Court Appeal No G 210 of 1993;

     (b)  the remuneration to which the Official Trustee is entitled pursuant to Bankruptcy Rules, r 182(1);

     (c)  the fees payable in accordance with Bankruptcy Rules, r 179(1); and

     (d)  the costs of this application

     be applied, first, in the payment of a dividend of 100 cents in the dollar in respect of the proved debt of Sharp Corporation Australia Pty Ltd in the sum of $18,533.50 (or such dividend as the balance of the sum held by the Official Receiver permits).

2.   The remainder (if any) of the sum held by the Official Receiver, after payment of the sums referred to in paragraph 1, shall be distributed pro-rata amongst the other creditors of the bankrupt.

NOTE:      Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA    )

GENERAL DIVISION                           )    No. NB 1855 of 1987

BANKRUPTCY DISTRICT OF THE STATE           )

OF NEW SOUTH WALES                   )

                                     RE:       

                                     JANE VIDA CORKE

                                     EX PARTE:

                                     OFFICIAL TRUSTEE IN BANKRUPTCY

Coram:     Sackville J.

Place:     Sydney

Date:      15 March, 1996

                       REASONS FOR JUDGEMENT

Introduction

This is an application on behalf of the Official Trustee in Bankruptcy for orders under s.109(10) of the Bankruptcy Act 1966 (Cth) ("the Act").  The orders sought relate to the distribution of the proceeds of sale of an interest in land held by the bankrupt prior to the making of a sequestration order against her. 

Mr Skinner, who appeared on behalf of the Official Trustee, sought orders that, subject to payment of certain costs, remuneration and fees, the amount available for distribution be applied in the payment of a dividend of 100 cents in the dollar in respect of the proved debt of one creditor, Sharp Corporation Pty Ltd ("Sharp").  The basis of the application was that Sharp had provided indemnities to the Official Trustee to cover legal
costs in proceedings that ultimately resulted in funds being made available for distribution to the creditors of the bankrupt.  The application was not opposed, although all creditors other than Sharp have been informed that the application was to be made.

The Legislation

Section 109 of the Act is headed "Priority Payments".  Section 109(10) provides as follows:

     "109(10) [Indemnity] Where in any bankruptcy:

     (a)  property has been recovered, realised 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."

Section 109(10) is substantially equivalent, in its terms, to s.564 of the Corporations Law, which applies in the winding up of a corporation.

The Facts

The respondent to the application was made bankrupt on 8 December 1987.  At that time she was the registered proprietor, together with her husband, of certain residential premises ("the land").

On 4 November 1987 the bankrupt and her husband had entered into a maintenance agreement under s.86 of the Family Law Act 1975 (Cth). That agreement was duly registered in the Family Court of Australia, at Parramatta, on 5 November 1987.

Sharp lodged a proof of debt claiming that it was owed $18,553.50. Five other unsecured creditors lodged proofs totalling $36,329.  A secured creditor also claimed an interest in the land.   On 5 March 1991 the Official Trustee became registered as proprietor of the land, in common with the bankrupt's husband.

On 12 November 1991 the husband commenced proceedings in the Family Court against the bankrupt, asserting that he was entitled to an equitable interest in her share of the land, pursuant to the maintenance agreement.  At about the same time, the husband instituted proceedings in this Court against the bankrupt and the Official Trustee, seeking orders that the maintenance agreement was valid against the Official Trustee.

On 31 December 1991, all known creditors of the bankrupt's estate were given notice that the Official Receiver was seeking indemnities from creditors to finance the defence of the proceedings brought by the husband and to take the steps necessary to preserve the asset in the estate.  The notice stated that, in due course, an application would be made to the Court for orders giving priority to creditors who provided an indemnity.

In response to the Official Receiver's notice, Sharp offered an indemnity of $10,000 to the Official Trustee for the purposes of financing the costs of the legal proceedings.  No other creditors responded to the invitation from the Official Receiver.

It is not necessary to trace the history of the proceedings in the Family Court and in this Court.  It suffices to say that, ultimately, the Official Trustee succeeded against the husband.  Subsequently, the Official Trustee transferred his right, title and interest in the land to the husband for the sum of $63,000.  I was informed that the husband paid that sum not only to acquire the Official Trustee's interest in the land, but in satisfaction of all costs orders that had been made in favour of the Official Trustee against the husband.

In the course of these somewhat protracted proceedings, a further indemnity in relation to costs was sought by the Official Trustee.  On 25 June 1993, Sharp provided a further indemnity.  Although this does not appear from the evidence, I was told that the indemnity was limited to $4,000.  I was also told that Sharp actually paid $7,500 towards the costs of the proceedings, but that this amount was refunded to it, in a manner not made clear by the evidence or from the Bar table.

A secured creditor was paid out of the sum of $63,000 in the hands of the Official Receiver, leaving a total of $51,389.73 available for distribution.  After deducting costs, remuneration and fees computed in accordance with the Bankruptcy Rules, the
sum of $21,396.05 remained for distribution by way of dividends to creditors.

The following table shows the dividend rates applicable in relation to the indemnifying creditor and the ordinary creditors, depending on the extent of the priority (if any) afforded to Sharp.

                                                                Priority given       Dividend rate   Dividend rate        Total

      to                   to           to all         dividend to

Indemnifying         Indemnifying      Ordinary     Indemnifying

   Creditor            Creditor      Creditors        Creditor 

100% priority        100 cents in     7.5 cents in     18,554.00

                     the dollar      the dollar

 75% priority        75 cents in    18.25 cents in    14,763.00

                     the dollar      the dollar

 50% priority        50 cents in    26.5 cents in     11,742.00

                     the dollar      the dollar

 25% priority        25 cents in    33.55 cents in     9,280.00

                     the dollar      the dollar

 Nil priority           Nil          38.99 cents in     7,232.00

                                     the dollar

The Principles

Section 109(10) applies where property has been recovered, realised or preserved under an indemnity for costs of litigation given by a creditor.  On the evidence in the present case, I think that property, in the form of the bankrupt's interest in the land, of which the Official Trustee became the registered proprietor, was "realised or preserved" under the indemnities given by Sharp.

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."

In that case his Honour gave the indemnifying creditor, who was owed about $290,000, priority in relation to the whole of the available fund ($218,000).  This left other unsecured external creditors, whose debts totalled $770,000, with no entitlement to a dividend.

The Present Case

Each case must rest on its own facts.  Here Sharp was the only indemnifying creditor despite invitations extended to other creditors; it was exposed to a substantial risk by reason of the indemnity (under which its liability was not very much less than the amount due to it); I infer that the provision of the indemnity played a major part in preserving the asset ultimately realised; and the litigation supported by Sharp was prolonged and, in some respects, difficult.  Having regard to the policy underlying s.109(10) of the Act, I think that the appropriate course is to give Sharp priority for 100 cents in the dollar in respect of its debt.

Conclusion

I propose to make orders that provide, subject to payment of costs, remuneration and fees, that the sum held by the Official Receiver be applied first in payment of a dividend of 100 cents in the dollar, in respect of the proved debt of Sharp in the sum of $18,533.50.

                     I certify that this and the preceding 6 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville.

                     Associate:

                     Dated: 15 March, 1996

Heard:               12 March, 1996

Place:               Sydney

Decision:            15 March, 1996

Appearances:         Mr B.J. Skinner, instructed by Lobban McNally & Harney, Solicitors, appeared for the Official Trustee.