FEDERAL COURT OF AUSTRALIA

Healey v Prentice (No. 2) [2000] FCA 1598

BANKRUPTCY – review of the decision of the trustees of a bankrupt estate not to pursue litigation in which the bankrupt was involved – nature of review.

Bankruptcy Act 1966 (Cth), ss 60, 178

Bethune v Newman (1996) 19 ACSR 99, followed

Re Wheeler; ex parte Wheeler v Halse (1994) 54 FCR 166, followed

Cummings v Claremont Petroleum NL & Anor (1996) 185 CLR 124, cited

GREGORY HARRISON HEALEY v MAXWELL WILLIAM PRENTICE & ORS

N 7835 of 1999

MADGWICK J

2 NOVEMBER 2000

SYDNEY

THE COURT ORDERS THAT:

1.                  The application be dismissed. 

2.         The applicant pay the respondent's costs of the motion and those costs be regarded as costs of the administration for the purposes of s 109 of the Bankruptcy Act 1966 (Cth).

REASONS FOR JUDGMENT

(revised from transcript)

HIS HONOUR:

1                     The applicant in this application is a bankrupt solicitor and the first respondents are the Trustees of his estate.  The second respondent was the petitioning creditor, and by far the applicant's largest creditor, and at its behest, the applicant was made bankrupt.  The interests of the second respondent were inextricably involved with the outcome of this application and as the hearing proceeded, the fictional quality of the Bank not being party to the application became apparent.  By consent the Bank was joined as a party.

2                     By his application, the applicant claims as follows:

“1.       An Order, pursuant to s178 of the Act that the decision of the Trustee dated 16 July 1999 to not pursue litigation in which the bankrupt was involved prior to the date of bankruptcy be set aside.

2.                  An Order that the bankrupt be permitted to continue with the litigation in respect of the Commonwealth Bank of Australia namely:

(i)                  Proceedings No 50005 of 1999 in the Commercial List of the Equity Division of the Supreme Court of New South Wales.

(ii)                Proceedings No 11769 of 1998 in the Common Law Division of the Supreme Court of New South Wales.

(iii)              Proceedings No S194 of 1996 in the High Court of Australia.

3.                  In the alternative to Order 2 herein, an Order that the matter be remitted to the Trustee for further consideration.”

3                     Section 178 of the Bankruptcy Act 1966 (Cth) (“the Act”) provides:

“If the bankrupt, a creditor or any other person is effected by any 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.”

Background

4                     The litigation referred to above arises out of three cases in the New South Wales Supreme Court.  The first of these was matter No. 50226 of 1996 brought in the Commercial Division of the Court and ultimately heard by Rolfe J.  In that proceeding, the Bank sued the applicant for debt, claiming some millions of dollars in unpaid and overdue loans and interest.  It will be convenient to refer to that action as the debt proceedings or the action for debt, or similar phrases.

5                     Secondly, there was proceeding No. 11769 of 1998 brought in the Common Law Division of the Court, whereby the Bank sought possession of certain parcels of real property owned by the applicant.  Thirdly, in proceeding No. 50005 of 1999 brought in the Equity Division, the Bank sought possession of some other properties, as I understand it, by the assertion of equitable claims.  In respect of these properties, the applicant's mother was either the lawful titleholder or one of the lawful titleholders; the applicant was also a party to the proceedings.

6                     In the debt proceedings, the principal matter of present relevance which was litigated, was the applicant's defences that the loan moneys and interest claimed were not presently due and payable.  Firstly, it was said that an agreement had been reached between the Bank and the applicant on arrangements for the applicant to "work out" his indebtedness by staged sales of certain properties and then a review of what would still be a substantial excess of debt over the anticipated proceeds of those sales.  This alleged agreement, apparently in the nature of an alleged novation or compromise agreement as to earlier loan agreements, was referred to as the alleged "work out" agreement.

7                     Alternatively, it was said that there had been reached an agreement, to which legal effect should be given, between the parties that, in substance, before any irrevocable steps were taken to enforce the Bank's rights against the applicant, the parties would negotiate in good faith to find a mutually acceptable scheme of repayment and/or of rescheduling and/or of partial waiver of the debts.  The case was that this agreement was not express but should be implied as a matter of law from a long course of negotiations between the Bank and its solicitor/customer over sizeable commercial loans.

8                     Rolfe J rejected these claims, finding as a fact, that no such agreements had been reached.  Apparently accepting that the applicant may have acted on the assumption that one or other of these agreements had been reached, his Honour held that there was no evidence that the Bank had ever acted in a way which showed an acceptance of any such obligations by it.  Further, as I understand it, Rolfe J held, in substance, that the circumstances were not such as to give rise to the allegedly implied agreement to negotiate in good faith.  The decision of Rolfe J at first instance was given after a long and detailed hearing and examination of relevant documents.  The applicant was a specialist in common law litigation, fighting for his commercial life.  He may be taken to have known all the rules of litigation and how to assert them.  He was represented by experienced counsel. 

9                     Judgment was given by Rolfe J on 19 March 1998, whereupon the applicant appealed to the New South Wales Court of Appeal.  On 17 June 1998, Mason P refused a stay of proceedings on the Bank’s judgment in its favour and on 30 November 1998, the Court of Appeal unanimously dismissed the applicant's appeal.

10                  The applicant then on 16 December 1998 lodged an application for special leave to appeal to the High Court. 

11                  After the judgment was given by Rolfe J, on 13 May 1998, the Bank had served a bankruptcy notice upon the applicant, following the refusal of the stay proceedings on the judgment by Mason P.  On 26 August 1998, the Bank filed a bankruptcy petition against the applicant in this Court.  On 14 December 1998, the applicant sought to have proceedings on the petition stayed.  On 10 March 1999, Emmett J heard that application.  The stay was not granted but, by consent, Mr Prentice, one of the first respondents and of course one of the eventual trustees in the bankruptcy, was appointed controller of the applicant's estate under s 50 of the Act.  The purpose of this was to allow the applicant to present his application for special leave in the High Court. 

12                  Meanwhile the other two proceedings in the Supreme Court were actively continuing.  On 4 June 1999, Rolfe J ordered that they be heard together.  An important issue in each case was the applicant's assertion, as in the debt proceedings, that there was either a completed work out agreement or an agreement to negotiate in good faith before the bank would exercise its rights.  The Bank had on foot in these other proceedings, applications to strike out such of the applicant's proceedings as grounded these assertions, on the basis that the assertions were hopeless in the light of the earlier decisions of Rolfe J and the Court of Appeal.  For his part, the applicant had on foot applications complaining of the insufficiency of discovery in the two sets of possession proceedings.  On 4 June 1999, Rolfe J also listed these various motions, as I understand it, for hearing on 14 July 1999.

13                  On 11 June 1999, application was made before Emmett J to reactivate the bankruptcy petition and, after a hearing on 16 June 1999, Emmett J made a sequestration order against the applicant.  It appears that the final matter that weighed with his Honour was that there was an admitted portion of a debt claimed by a creditor other than the bank, in a substantial and absolute amount, though relatively much less than the amounts claimed by the Bank, and that there was no suggestion of any realistic capacity in the applicant to pay that undisputed part of that debt. 

14                  Consideration was then given by the parties, after the making of the sequestration order, to s 60 of the Act which governs the fate of litigation to which a bankrupt has been a party upon bankruptcy. 

15                  The effect of s 60 for relevant purposes is that at any time after the presentation of a petition, the Court may stay any legal process against the personal property of the debtor in respect of the non-payment of a provable debt and, upon the debtor becoming a bankrupt, an action commenced by the debtor is stayed until the trustee makes an election in writing to prosecute or discontinue the action.  If the trustee does not make such an election within 28 days after notice of the action is served upon him or her, the trustee is deemed to have abandoned the action.  None of this, however, applies to certain actions of a bankrupt in respect of various personal injuries or wrongs of a non-contractual kind.  In so far as any other legal proceedings which may not fall within the purview of s 60, but amount to property of the bankrupt, they of course fall under the control of the trustee once a sequestration order has been made. 

16                  Finally, on 16 July 1999, the two outstanding sets of Supreme Court proceedings came to an end in favour of the Bank.  This was a consequence of the trustees declining to prosecute the applicant's resistance, including cross claims by him, in those proceedings any further. 

17                  At about the same time, the trustees filed a notice of discontinuance of the special leave application in the High Court in consequence of their having declined to prosecute those proceedings further.

The applicant’s case in these proceedings

18                  The substantive case before me depended on two views. The first was that Rolfe J and the Court of Appeal had made legal errors in failing to hold that an agreement to negotiate in good faith should be implied, so there were real prospects of the High Court granting special leave and, secondly, that the effect of the trustees’ decision not to further contest the remaining Supreme Court actions, at least to the point of allowing the ventilation of the applicant's motions to test the adequacy of discovery, was to deny the applicant a chance to find documents which could be anticipated to exist.  Further, there was a chance that as yet undiscovered documents would provide something akin to evidence (the familiar allusion to "smoking guns" was employed in these proceedings) of bank officers’ acceptance of the reality of the existence of one or other of the express or implied exculpatory agreements asserted by the applicant.  It was sought before me, in effect, to prove that the trustees’ decision was flawed by attempting to show that an examination of the relevant documents would indicate that at least there had not been full compliance by the Bank with its discovery obligations, including in the suit heard to finality by Rolfe J.

19                  I took the preliminary view that s 178 was and might be wide in its scope and allowed considerable latitude to the applicant, by the use of subpoenas and by permitting his counsel to put leading questions to witnesses in the bank's camp, to test his theories.

Section 178 of the Act

20                  The Court is given a very broad supervisory role.  The only constraint is that it must be made to appear to the Court that it is just and equitable to make some proposed order.  While, for historical reasons, its is well settled that such a broad review jurisdiction in insolvency matters falls within the judicial power of the Commonwealth, in truth, the Court's role has aspects not unlike those more commonly found in administrative reviews.  The Court is, after all, reviewing administrative actions of a trustee.

21                  It would be enough to excite the court to intervene if it be shown that the impugned conduct of the trustee was incorrect or that other conduct was, or on the material before the Court would be, preferable and that justice and equity require the Court's intervention.  An applicant no doubt carries the onus of establishing this.  It is plain that the Court should not be too ready to intervene for fear of making the role and work of a trustee unmanageable.  That the judge who hears a review application might have acted differently from the way a trustee did is not to the point.  The question is whether it is just and equitable that the Court should afterwards intervene in some fashion. 

22                  This view I think is in accord with what RD Nicholson J said in Bethune v Newman (1996) 19 ACSR 99 and of the approach of Lee J in Re Wheeler; ex parte Wheeler v Halse (1994) 54 FCR 166 at 170.

The subject matter

23                  A very large debt, and the application of the value of a considerable number of properties, themselves of value, to the reduction of that debt, were in issue in the litigation, even though the total value, if all the litigation had been concluded in the applicant's favour, would likely not have been sufficient to undermine the actual sequestration order (insolvency apart from the imputed Bank debts having been shown).  The size of the sums in issue no doubt indicated a need for considerable care on the part of the trustees.

The submissions of the applicant

24                  The applicant contended firstly that it could be inferred from the voluminous nature of the litigation and associated documents that the trustees did not have sufficient time properly to review the necessary materials in order to come to a sound decision.  Secondly, in particular, the trustees failed to exercise what would have been an option well open to them of seeking additional time from the Court to reply to the s 60 notices served on the trustees.  Thirdly, it could be inferred from the circumstances that the trustees did not in fact properly review the material and consider the information provided, both in the light of the material available to them and in the light of the further material available as a result of the proceedings before me.  Finally, it was submitted that the trustees did not have the power to discontinue the High Court proceedings.

The time available to the trustees

25                  It is true that the trustees acted within a fairly short period to come to their decision, given that the subject litigation was large and complex and that a few extra days, even without an application for extension of time, would have been available.  However, one of the trustees, Mr Prentice, had had knowledge of the applicant's affairs generally since 11 March 1999 and it is inconceivable that he would not have understood, as it were, the theory of the respective cases advanced by the Bank and by the applicant, even if he had not had the opportunity to master all relevant details.  There were, by the time the trustees came to consider the matter, two judgments to assist them.  The judgment of Rolfe J is long but not so long that the trustees, their agents or legal advisers could not, with assiduity, reasonably soon absorb it.  The Court of Appeal’s judgment is quite short.  These judgments dealt with the applicant's claims and made an understanding of his position and that of the Bank reasonably easy to comprehend.  In addition, the Bank, as was its right, was astute to provide helpful information to the trustees which it did, and the trustees had this information.

26                  Secondly, Emmett J had expressed views that considerable difficulties would attend the special leave application in the High Court. 

27                  It would have very soon become apparent to the legal advisers of the trustees, if not to the trustees themselves, that the discovery issues in the remaining Supreme Court litigation were substantially the same as those in the proceedings litigated before Rolfe J.  The trustees could safely have assumed that the debt litigation before Rolfe J had been thoroughly fought, including as to interlocutory aspects. 

28                  Finally, there was no evidence put before the trustees to indicate deficiencies in discovery, of a kind having a material chance of affecting the outcome of any of the Supreme Court litigation, including leading to a new trial of the case which Rolfe J had decided.

29                  The trustees were not required, of course, to read every document among thousands.  They were required to understand and assess the matter sufficiently to enable a practical commercial decision to be taken.  In my opinion, when one looks at all the circumstances, one does not conclude that there was scant time for all of that.  On the contrary, I conclude that there likely was enough time for that.  Mr Prentice gave evidence that in fact he did have enough time and he was not sought to be cross-examined in relation to that. 

30                  In my opinion, the attack based on the amount of time available to the trustees fails. 

31                  It follows that, if they had enough time, there can be no substance in the criticism that the trustees should have sought further time. 

The decision of the trustees not to pursue discovery - whether flawed on the merits

32                  On the face of it, to a non-banker it looks surprising that there were not more intra-Bank written communications in the period of approximately a year before the final notification by the Bank to the applicant that the Bank was intent on suing him.  However, an explanation by a seemingly credible senior bank officer was given in evidence, and the apparent dearth of documents is, on examination, neither as extensive nor as surprising as might at first appear.  Even with the benefit of an extensive investigation of the matter, it does not seem to me now to be warranted that the matter should be further investigated. 

33                  There is, in my opinion, no serious prospect that any further document would appear which could affect the result of the litigation or justify the grant of a new trial as to the debt action;  nor is there any serious prospect, in my view, that facts will otherwise be revealed by reactivating any of the litigation which would ultimately assist the applicant.  In particular, I should say that, in my view, no inference arises, from all the circumstances, of any wrongful suppression of documents by any bank officer, known or unknown.

34                  There is a further aspect to this, as pointed out by counsel for the respondents.  The prospect that there might have been express acknowledgement by anyone in the Bank that the Bank had a duty to continue to negotiate in good faith, is at odds with the very case put before Rolfe J.  This was that, there being no express agreement to negotiate in good faith, by operation of law in all the other circumstances, such an agreement ought to be implied.  This is perhaps another reason for considering that there was nothing wrong with the trustees’ decision on the merits.

The special leave application in the High Court

35                  Argument was put that the trustees did not have the power to discontinue the High Court proceedings.  As I apprehend this argument, it rests on the High Court proceedings having actually been discontinued rather than simply having been left to be "deemed to have [been] abandoned" under subs (3) of s 60 of the Act.  The argument would appear to assume that there was no power under s 60 to discontinue the action and that the only power the trustees had was that of dealing with the bankrupt's property.  However, subs (2) of s 60 provides that:

“An action commenced by a person who subsequently becomes a bankrupt is, upon him or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.” (emphasis added)

Thus s 60 itself seems to contemplate an actual discontinuance.  It appears that an application for special leave falls within section 60:  see Cummings v Clarement Petroleum NL & Anor (1996) 185 CLR 124 at 130.  It seems to me, therefore, that this argument was founded on something of a misconception.

36                  As to the merits of discontinuing the special leave application, every judicial officer who has looked at this matter so far has expressed himself as unimpressed with the central legal argument upon which the special leave application is founded.  The legal advice of the trustees was to the like effect.  The applicant does not say that he had any legal advice to the contrary.  It seems to me that the decision of the trustees in the circumstances was clearly correct.

37                  As pointed out by counsel for the trustees, the question for the trustees was to decide what was in the best interests of the administration of the bankrupt estate.   In the case of all the litigation concerned, on the evidence, the trustees considered the pleadings, the various judgments and the correspondence which both the Bank and the applicant had with the trustees and their solicitors in relation to the appropriate course of action.  The trustees took legal advice and acted in accordance with it.  They also considered what, in financial terms, success in the litigation would bring to the unsecured creditors.  As pointed out by counsel for the respondents, that return would appear to be nil.  The applicant's case in defence of the Bank's claim was not that the money was not owing, but rather that there was in place an agreement to negotiate as to the terms upon which it would be repaid.   Such an agreement would have no special likelihood of resulting in an ultimate agreement to defer for any material period the repayment.

38                  It is true that the applicant sought to lighten the trustees’ load by offering to provide solicitors to conduct the case for the trustees on discovery and in the High Court at no charge.  Yet nothing was done to indemnify the trustees against any adverse costs order if it might be made and the estate could have been exposed to significant costs orders.

Conduct of the Bank’s solicitor as to discovery

39                  In fairness to Mr Courtenay, I should say that it has not been shown to me that there was any dereliction or failure by the Bank's solicitor to appreciate the extent of his duty to the Court and to his opponent.  Mr Courtenay appears to have acted honestly and with reasonable competence for an expert litigator.  There was also no positive evidence to suggest banking practice different from  that shown to have been employed in this case.

Too late?

40                  Submissions were made by the respondents in effect that the applicant had come to this Court too late and that after the judgments in the Supreme Court and the discontinuance of the proceedings in the High Court, nothing this Court could now do, could resuscitate those proceedings.  No doubt there is a question of the direct reach of this Court, but it is not necessary to decide the validity of these submissions.  I note, however, that the Court's powers are wide and that the Bank is a party.  I would assume that, if appropriate, the Court could in fact mould orders that would at least materially assist the applicant.  However, as I have indicated, in my view it is not appropriate that the Court intervene.

Disposition

41                  It follows that the application should be dismissed.  The applicant should pay the respondent's costs over the motion and those costs should be regarded as costs of the administration for the purposes of s 109 of the Act. 

Associate:

Dated:              8 November 2000