FEDERAL COURT OF AUSTRALIA

Willoughby v Official Trustee in Bankruptcy (WA) [2000] FCA 757

BANKRUPTCY – transfer of property rights by Trustee – application to review “act or decision” of Trustee under s 178 Bankruptcy Act 1966 (Cth) – whether such application competent if transfer of property has been “completed”.

Bankruptcy Act 1966 (Cth) ss 30, 30(2), 58(1)(b), 58(6), 116(1)(a), 134, 134(1)(a), 149, 153A(1), 153A(2), 153B, 154(1)(a), 178

Bankruptcy Act 1914 (Cth) s 80

Trade Practices Act 1974 (Cth)

Daemar v Industrial Commission of NSW (1990) 99 ALR 789 considered

Citicorp Australia Limited v Official Trustee in Bankruptcy (1996) 141 ALR 667 considered

Re Chirnside, Digby v Union Trustee Co of Australia Ltd [1929] VLR 217 disapproved

Re Carson: Ex parte Carson; Sadleir (1960) 19 ABC 108 approved

Re Tyndall (1977) 30 FLR 6 considered

BERYL FRANCES WILLOUGHBY & ORS v OFFICIAL TRUSTEE IN BANKRUPTCY (WA) & ANOR

W 4 OF 2000

BURCHETT, LEE & HELY JJ

8 JUNE 2000

PERTH

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.                  The appeal be allowed insofar as it relates to the application under s 178 of the Act to review the decision of the Official Trustee to transfer to, and vest in, Lawcover Pty Ltd a chose in action, but otherwise the appeal be dismissed. The application be remitted to the primary judge for further consideration.

2.                  The cross appeal be dismissed.

3.                  There be no order as to the costs of the appeal or cross appeal.

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

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

THE COURT:

1                     The appellants were first declared bankrupt on 10 October 1990.  On 16 January 1994 the appellants were discharged from bankruptcy by effluxion of time under s 149 of the Bankruptcy Act 1966 (Cth) (“the Act”).  In August 1997 the first appellant was again made bankrupt.  In November 1997 the second appellant was again made bankrupt.

2                     By deed dated 9 February 1991 between the Trustee and the appellants the Trustee assigned back to the appellants their interest in a chose in action which the appellants and others had against Esanda at the time of their first bankruptcy, for alleged misrepresentation (“the Esanda claim”).  The assignment was on the basis that the appellants would pay to the Trustee 80 per cent of any net proceeds they recovered from the action against Esanda.

3                     In November 1993 the Esanda claim was settled for the sum of $1.9 million.  Of that sum $400,000 was applied in payment of legal costs.  $1.5 million was paid into a trust account of a firm of accountants on behalf of the claimants, and was said to include payments of $15,000 on behalf of the appellants.  Shortly thereafter the Trustee received 80 per cent of that sum, viz $12,000.

4                     The Trustee was dissatisfied with this outcome, and correspondence issued in relation to it.  Ultimately, the Australian Government Solicitor (“AGS”), in a letter dated 25 May 1994 set out the terms of an agreement reached with the appellants’ solicitor.  That agreement provided for payment of the claims of various creditors of the first bankruptcy out of the proceeds of the Esanda claim, after which the balance of the monies were to be released to Willoughby Investments Pty Ltd.

5                     The letter concluded:

“Once all matters are finalised, a deed will be drawn between the Official Trustee and the bankrupts and their companies to finalise all matters including a release of the Official Trustee’s claim to shares in Willoughby Investments Pty Ltd and Contractor Services Pty Ltd.”

No such deed was ever prepared.

6                     It is common ground that:

-                     the creditors referred to in the letter of 25 May 1994 were paid out of the proceeds of settlement of the Esanda claim;

-                     there is no specific reference in the letter to a claim by a Mr Schneider.  The significance of Mr Schneider will shortly appear;

-                     at some stage in 1994 the balance of the proceeds of the Esanda claim were released to Willoughby Investments Pty Ltd, apparently with the acquiescence of the Trustee.

7                     On 12 September 1994 the appellants’ solicitors, Verma Associates, wrote to the Australian Government Solicitor confirming:

-           that Mr Schneider had been given until 18 September 1994 to substantiate his alleged claim against the appellants;

-                     that AGS “would appreciate” a statutory declaration that the appellants have no other creditors;

and there was some discussion on the topic of annulment of the first bankruptcy.  The letter also stated that the balance of the settlement of the Esanda claim should be released if the Schneider claim was not substantiated within the time allowed.

8                     The appellants’ solicitor has asserted, and the Trustee has denied, that an assurance was given by the Trustee that provided all creditors of the first bankruptcy were paid, “annulment would follow as a matter of practice” under the Act.

9                     The sum of $4,000 was credited to the account of each of the bankrupt estates on 20 December 1993, reflecting the $12,000 received from the Esanda claim.  On 26 February 1996 debits of $1,269.10, $1,270.09 and $1,269.09 representing Trustee’s fees were posted to the respective accounts for the individual bankrupt estates resulting, in each case, in a nil balance.

10                  It is apparent from the AGS’ letter of 23 October 1996 that earlier in that month there was some discussion with the appellants on the topic of annulment of the first bankruptcy.  By that letter, AGS confirmed that the first bankruptcies could not be annulled until:

-                     the issue of Mr Schneider’s claim has been resolved;

-                     Trustee’s fees of about $1,845 for each of the three estates, totalling about $5,500 had been paid.

11                  On 22 December 1998 the appellants together with Mark Robert Willoughby commenced proceedings in this Court against Clayton Utz in Action No WAG 183 of 1998 (“the Action”).  The action was based upon acts or omissions of Clayton Utz said to have occurred in late 1993, prior to the discharge of the appellants from their first bankruptcy.  The appellants and the first respondent (“the Trustee”) proceeded upon the basis that the chose in action against Clayton Utz was after acquired-property in the 1990 bankruptcies (s 58(1)(b); 58(6)) and divisible property within s 116(1)(a).  As such, the interests of the appellants in the chose in action vested in the Trustee, and remained vested in the Trustee notwithstanding the discharge of the appellants from bankruptcy: Daemar v Industrial Commission of NSW (1990) 99 ALR 789 at 793, 795.  There was no challenge to any of these propositions in the present proceedings.

12                  The Trustee has power to sell or assign any part of the property of the bankrupt: s 134(1)(a).  That power includes a power to sell or assign the chose in action against Clayton Utz either to the bankrupt or to a third party: Citicorp Australia Limited v Official Trustee in Bankruptcy (1996) 141 ALR 667.

13                  In March 1999 the appellants requested the Trustee to assign the right of action against Clayton Utz to the appellants.  The precise circumstances in which this occurred were not the subject of evidence.  The Trustee’s administration of the first bankruptcy had long since been completed, and with the possible exception of Mr Schneider, the debts of the first bankruptcy had been discharged out of the proceeds of the Esanda claim.  The only other matter which might stand in the way of an annulment of the first bankruptcy was the fees due to the Trustee as notified in AGS’ letter of 23 October 1996.

14                  On 8 March 1999 the Trustee’s solicitor wrote to Mr John Willoughby, and to the solicitors acting for the second respondent (“Lawcover”).  The letter stated that the appellants have requested an assignment of the rights of action against Clayton Utz for a sum of $100 each plus a percentage of the proceeds of the action if successful.  The letter advised that the Trustee does not wish to assign the rights of action for a percentage of the proceeds of the action, as this might conceivably lead to an argument that the Trustee should be liable for the cost of the action in the event that it is unsuccessful.  For that reason, the Trustee advised that he was only prepared to assign the rights of action for a fixed sum payable within twenty eight days.  The Trustee invited the appellants and Clayton Utz to submit any offers they might wish to make for the purchase of the causes of action which the appellants might have against Clayton Utz arising from the action against Esanda.  Any such offer should be by way of a fixed lump sum payable within twenty eight days with the assignment only to take effect upon payment being made.  The Trustee stated that he was likely to accept what he considered to be the best offer and did not propose to give either party a subsequent opportunity to increase its offer. Excluded from the chose in action proposed to be assigned were claims under the Trade Practices Act 1974 (Cth) which had apparently been brought outside the limitation period and which, in the assessment of the Trustee, had “demonstrably no prospects of success”.

15                  By letter dated 19 March 1999 the appellants responded to the Trustee’s invitation.  B F and J F Willoughby each offered to pay her and his second bankrupt estate the sum of $100 and full payment of all creditors to a maximum amount of 50 per cent of all funds received as a result of the prosecution of the claim against Clayton Utz.

16                  On 24 March 1999 the Trustee informed Mr J F Willoughby that his offer of 19 March 1999 had not been accepted.  An offer of $5,100 from Phillips Fox (the solicitors for Lawcover) had been accepted.  The letter continued:

“Pursuant to s 178 of the Bankruptcy Act 1966 you may appeal to the Court against the Trustee’s decision.”

17                  On 14 April 1999 the Trustee and Lawcover executed a deed (“the deed”). The deed recited that the chose in action against Clayton Utz was an after-acquired asset in the first bankruptcies. The deed provided that upon full payment being received of the sum of $5,100 payable under the deed, the Trustee would thereby transfer and vest the action pending in the Federal Court against Clayton Utz under action number WAG 183 of 1998, and underlying causes of action (apart from causes of action under the Trade Practices Act), “to” Lawcover as purchaser. The Trustee undertook not to transfer or vest the Trade Practices Act claims “to” any person and consented to those claims being dismissed.

18                  Clause 6 of the deed provided that if the “transfer and vesting” to Lawcover under the deed is set aside or declared invalid by a court for any reason, then the Trustee is to refund to Lawcover monies paid under the deed.

19                  The effect of the deed (assuming that it operates according to its terms), was to put an end to the appellants’ claims against Clayton Utz both under the Trade Practices Act and under the general law in return for a payment of $5,100 from Clayton Utz’s professional indemnity insurer.

20                  The $5,100 realised was applied to the estate of the appellants administered by the Trustee in respect of their joint debts and was appropriated in payment of the petitioning creditor’s costs, fees due to the Trustee and other expenses.

21                  On 18 June 1999 the appellants applied to the Court under s 178 of the Act for a review of the Trustee’s decision to transfer and vest the action WAG 183 of 1998 and underlying causes of action to Lawcover, and sought a determination that the decision was invalid.  The application also sought an order that the bankruptcies of the appellants be declared annulled.

The application under s 178

22                  A “preliminary point of competence” was taken in relation to the application to review the Trustee’s decision to enter the deed.  Whilst it is the decision of the Trustee which the application attacks as invalid, the substance of the complaint made by the application is as to the entry into and completion of the deed so as to transfer the appellants’ claim against Clayton Utz to Lawcover.

23                  The preliminary point is that s 178 does not apply to a sale of property under s 134 which has been completed.  The primary judge upheld the preliminary point and dismissed the application insofar as it related to s 178 of the Act upon the ground that the application was incompetent.  His Honour did so without prejudice to any entitlement which the appellants might have to bring an action in another court on a properly pleaded case to establish collusion or fraud.

24                  The result of the matter being dealt with in this way was that any “merits” which the appellants’ claim might have were not the subject of full consideration.  There was no cross examination on the affidavits which had been filed.  The primary judge did indicate a view on the issue of possible collusion between the Trustee and the purchaser based on such evidence as was before him, but his Honour made it clear that he was not deciding any factual issue in a determinative sense.  On the hearing of this appeal, the parties were agreed that if this Full Court were to conclude that the application to set aside the deed under s 178 was competent, then the matter would need to be remitted to the primary judge for further consideration of the facts.

25                  Section 178 of the Act provides:

“If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the Trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.”

26                  Section 178 falls to be considered against the background provided by s 30 of the Act, which gives the Court full power to decide all questions of fact or law in any case of bankruptcy coming within the cognisance of the Court.  The Court may make such orders as are necessary for the purposes of carrying out or giving effect to the Act: s 30(2).

27                  A sale by a trustee of the property of a bankrupt is an act of the trustee which, if improperly undertaken, could adversely affect the bankrupt.  As a matter of ordinary English, such an act is within the purview of s 178.  The fact that a third party is also involved does not deny the proposition that the bankrupt is affected by an act of the trustee although, clearly enough, the involvement of a third party, and any rights acquired by that third party through dealing with the trustee, would be relevant in deciding whether it is just and equitable to make any order on the application which would adversely impact upon the position of the third party.

28                  It is too narrow a reading of s 178 to treat it as being incapable of applying to a sale which has been carried into effect so that title to property of the bankrupt has passed to a purchaser.  The fact that property has passed, simply reinforces the conclusion that the bankrupt is affected by the act of the trustee which produces that result.  Nor is there any justification for holding that s 178 is capable of application to an executory contract for the disposition of the property of a bankrupt, but that in some way its potential for operation is spent upon the completion of the contract.  It is true that s 178 contains no provision for the giving of notice of the application to an affected third party.  For that matter, it contains no provision for giving notice of the application to the Trustee.  But these omissions do not give guidance as to the scope of the section, as matters of notification and joinder are often left to be supplied by the judicial method.

29                  His Honour’s decision on the competency point was founded on the decision of the Full Court of the Supreme Court of Victoria in Re Chirnside, Digby v Union Trustee Co of Australia Ltd [1929] VLR 217.  That case was concerned with the effect of s 80 of the Bankruptcy Act 1914 (4 & 5 GEO.V.Cap 59) (“the 1914 Act”).  That section read:

“If the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the Trustee he may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just.”

30                  In Re Chirnside, the Full Court decided that a completed sale of property by the trustee is not an “act or decision” of the trustee within the meaning of s 80 of the 1914 Act.  That section, in their Honours’ view, was not intended to confer a general jurisdiction upon the Court of Bankruptcy to set aside such a sale, and thereby affect rights acquired by purchasers.

31                  The decision of the Victorian Full Court in Re Chirnside was considered by Clyne J, in the context of s 148 of the 1924 Act in Re Carson: Ex parte Carson; Sadleir (1960) 19 ABC 108.  Section 148 of the 1924 Act was in similar terms to s 80 of the 1914 Act.  After referring to Re Chirnside, and to Canadian authority which pointed in a different direction, Clyne J said:

“I cannot see why a sale by the Trustee cannot be an act whereby a bankrupt may be aggrieved within the meaning of this section.

…

I come to the conclusion that where a Trustee sells the bankrupt’s property at an inadequate price, and in doing so there has been fraud on his part or collusion between him and the purchaser, or where he has acted in a manner utterly unreasonable and absurd, a bankrupt is entitled to say that he is aggrieved under s 148 by the act or decision of the Trustee.”

This decision was not drawn to the attention of the primary judge.

32                  For the reasons earlier given, we prefer the decision of Clyne J to that of the Victorian Supreme Court in Re Chirnside.  The position is a fortiori in the context of s 178.  One of the matters relied upon by the Victorian Supreme Court in coming to the conclusion which it did was that s 80 of the 1914 Act provided that the “act or decision” of the trustee may be “confirmed, reversed or modified”, which was not an apt expression to encompass setting aside a sale to a third party.  Section 178 does not include that expression, but empowers the Court, in perfectly general terms, to make such order in the matter as it thinks just and equitable.  In Re Tyndall (1977) 30 FLR 6, 9 Deane J adverted to the significance of this change in expanding the scope of the section.

33                  Accordingly, we would set aside the decision of the primary judge in which he dismissed the application under s 178 as incompetent, and remit the matter for further consideration.

Annulment of bankruptcy

34                  Section 153A(1) provides that if the Trustee is satisfied that all the bankrupt’s debts have been paid in full, the bankruptcy is annulled, by force of the subsection, on the date on which the last such payment was made.  “Bankrupt’s debts” means all the proved debts plus “the costs, charges and administration of the bankruptcy”.  Section 153B provides, relevantly, that the Court may make an order annulling the bankruptcy if it is satisfied that a sequestration order ought not to have been made.

35                  Although the application sought an order from the Court that the bankruptcies of the appellants be annulled no attempt was made to invoke s 153B.  The appellants’ case was that all of the debts were paid in full, so that s 153A should have applied in their favour at the point in time when they were so paid.

36                  The primary judge held that the short answer to the annulment claim was that there is no power in the Court to annul the appellants’ bankruptcy as it is only in the case of s 153B that the Court is given any power to make an order annulling the bankruptcy.  That is true, and it is also true that the relief sought in the application was simply:

“That the bankruptcies of the abovenamed applicants referred to in this application be declared annulled.”

37                  However, a lack of satisfaction on the part of the Trustee as to the payment of the appellants’ debts of the first bankruptcy could itself be the subject of an application to the Court under s 178, which could give appropriate directions to the Trustee, if a case that the Trustee should have been so satisfied is made out, including a direction that the Trustee give the certificate under s 153A(2).  Where the Trustee is satisfied that the bankrupt’s debts have been paid in full, the annulment has retrospective operation inasmuch as it relates back to the date on which the last payment was made.

38                  Ordinarily, the practical implementation of s 153A will not be productive of difficulty or uncertainty because it is the trustee who has charge of the administration of the bankrupt estate, and it is the trustee who attends to the payment of dividends to creditors.  But here the creditors’ claims were discharged, in a sense outside the bankruptcy, by the making of payments from the proceeds of the Esanda claim.  Whilst it is known that on 7 July 1999 Mr Schneider acknowledged that “all funds in this matter have been settled in full”, it is not known when Mr Schneider’s claim was paid in full, assuming, as the acknowledgment suggests, that this in fact occurred. It will be remembered that Mr Schneider was not a creditor of the third appellant, Michael Willoughby.

39                  Section 154(1)(a) protects and preserves dispositions of property made by the trustee before the annulment.  But, if the last of the debts of the first bankruptcy was paid in full prior to 14 April 1999, s 154(1)(a) would not protect and preserve the efficacy of the disposition by the Trustee of the chose in action in favour of Lawcover in the event that the Trustee thereafter was satisfied that all the bankrupts’ debts had been paid in full.

40                  Thus the observation of the primary judge:

“It was not until 17 July 1999 that information was forwarded on behalf of the applicants to the Trustee which was arguably capable of supporting a conclusion by him that Mr Schneider’s claim was no longer maintained”

is, with respect, not to the point.

41                  However, that does not assist the appellants if costs charges and expenses of the bankruptcy, including the remuneration and expenses of the Trustee, had not been paid in full as at 14 April 1999.  Prima facie there were fees and expenses owing to the trustee as of that date as the $5,810 notified in the letter of 23 October 1996 had not been paid, and there was evidence of a further $2,885.94 for fees and costs owing on behalf of the joint estate, although no communication of this latter liability had been made to the appellants.

42                  The prima facie position would be otherwise if the events of 1994 involved a contractual release on the part of the Trustee of any outstanding fees, or an estoppel to that effect.  As to this, the primary judge held:

“There is no evidence in the terms of the agreement which would support a finding that the Trustee had held out a position in relation to its costs and fees in relation to which it could be estopped.  There was no evidence to support any finding of waiver by the Trustee of any right to recovery of such costs and fees.  Indeed the applicants’ acknowledgment that they would have paid the fees and expenses had they known of them at the time is an acknowledgment of the appropriateness of the debt.”

43                  On the hearing of this appeal (as was the case before the primary judge) the appellants were unrepresented, and there was little, if any, development of an argument by them to the effect that no fees or expenses were due to the Trustee.  In essence, the claim was that the Trustee should not have authorised the release of the surplus funds arising from the Esanda claim in 1994 if there was then any outstanding liability for fees or expenses.

44                  The letter of 25 May 1994 is silent on the question of fees.  The letter envisaged that a deed would be drawn up “to finalise all matters”.  There may be room for argument as to what that expression encompassed, but the fact of the matter is that no such deed was drawn up.

45                  The letter of 25 May 1994 does not expressly release outstanding fees.  Nor can it be said that an implication to that effect is necessarily implied into the agreement reflected in that letter.  Whilst a trustee cautious to protect its own interests may have sought to impose a stipulation for payment of its own fees out of the balance of the Esanda claim, there was no established entitlement to have recourse to that fund for payment of those fees, or, for that matter, any other of the liabilities of the appellants.  In those circumstances, a failure to assert an entitlement to fees until the letter of 23 October 1996 cannot be regarded as reflecting an agreement not to make such a claim, or as giving rise to an estoppel precluding the later making of it.  There is nothing to suggest any detrimental change in position on the part of the appellants upon the faith of and expectation created or encouraged by the Trustee that no such claim would be made.

46                  The primary judge did give consideration to the merits of the asserted entitlement on the part of the appellants to an annulment, notwithstanding the deficiencies as to form in their application in that respect.  We agree with his Honour’s conclusion that the appellants have not made out a case for relief in this respect.

Cross Appeal

47                  Lawcover contends that the primary judge made an error of principle in denying to it its costs on the issue of the competency of the application insofar as it relates to s 178 of the Act, because Lawcover took the point that the application was incompetent at an appropriate stage of the proceedings, and was not responsible for what the primary judge found to be erroneous advice given by the Trustee as to entitlement to review under s 178.  There would have been force in Lawcover’s contentions had we agreed with the decision of the primary judge in this respect.  As we do not, the matter simply does not arise.

Orders

48                  The appeal will be allowed insofar as it relates to the application under s 178 of the Act to review the decision of the Trustee to assign a chose in action to Lawcover but otherwise the appeal will be dismissed. The application will be remitted to the primary judge for further consideration. The cross appeal will be dismissed and there will be no order as to the costs of the appeal or cross appeal.

Associate:

Dated:              8 June 2000

The appellants were represented by J F Willoughby.