FEDERAL COURT OF AUSTRALIA

Willoughby v Official Trustee in Bankruptcy [2001] FCA 1345

BANKRUPTCY – directions – whether trustee should be directed to assign causes of action to a particular party – whether direction appropriate – whether it would involve Court in advocacy opinion – whether direction precluded by protective effect on Trustee’s liability

Bankruptcy Act 1966 (Cth) s 134(4)

Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 141 ALR 667 cited

Sutherland (in the matter of Scutts) [1999] FCA 147, (Sackville J, 25 February 1999, unreported) referred to

Re Driller (1972) 21 FLR 159 cited

Willoughby v Official Trustee in Bankruptcy (2000) 102 FCR 261 cited

BERYL FRANCES WILLOUGHBY, JOHN FRANCIS WILLOUGHBY and MICHAEL STEPHEN WILLOUGHBY v THE OFFICIAL TRUSTEE IN BANKRUPTCY and LAWCOVER PTY LTD

RD NICHOLSON J

20 SEPTEMBER 2001

PERTH

THE COURT ORDERS THAT:

1.                  The first respondent transfer and vest the claims and causes of action which are the subject matter of Action no WAG 183 of 1998 (excluding any causes of action under the Trade Practices Act 1974 (Cth)) in the applicants for the consideration offered by the applicants on 19 March 1999, viz the sum of $100 each plus payment of all creditors in the Estate of the bankrupts created on 10 December 1990 to a maximum amount of 50 per cent of all funds received by the applicants as a result of the prosecution of the said claims and causes of action.

2.                  The costs of the parties be paid out of the Estate of the bankrupts created on 10 December 1990.

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

REASONS FOR JUDGMENT

1                     The first respondent (“the Trustee”) brings a motion seeking directions pursuant to s 134(4) of the Bankruptcy Act 1966 (Cth) (“the Act”). 

2                     The need for directions is said to arise as a consequence of the orders of the Court made on 27 June 2001 and in particular the following two orders:

“1.       The decision of the first respondent to transfer and vest the claims and causes of action which are the subject matter of Action no. WAG 183 of 1998 excluding any causes of action under the Trade Practices Act (“the Causes of Action”) in the second respondent be and hereby is set aside.

2.                The Court declares that the causes of action are vested in the first respondent.”

Reasons for judgment in respect of the orders made on 27 June 2001 were delivered on 20 June 2001 and should be read together with these reasons. 

3                     The orders and the reasons concerned an application brought by the applicants pursuant to s 178 of the Act.  The ratio of the decision was that the decision made by the Trustee to transfer and vest the Causes of Action in the second respondent in preference to an offer from the applicants whereby they each offered to pay the sum of $100.00 and make full payment of all creditors to a maximum amount of 50% of all funds received as a result of the prosecution of the Action, did not give adequate weight to the prospect of return to creditors (and the bankrupts).  Accordingly it was said there was nothing to take the matter outside the general approach approved by the Full Court in Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 141 ALR 667.  Further it was just and equitable for the Court to intervene. 

4                     The matters on which the directions are sought are the following:

“(a)     whether the First Respondent is bound to accept the Applicants’ offer for the rights of action set out at point 6 of the Applicants’ letter of 19 March 1999 to the First Respondent (being exhibit JFW 6 to the affidavit of J.F. Willoughby sworn 18 June 1999);

(b)            whether the First Respondent is entitled to invite new offers for the rights of action from the Applicants and/or Second Respondent;

(c)             whether the First Respondent is prevented from transferring the rights of action to the Second Respondent in any circumstances, regardless of the amount which the Second Respondent may offer for the rights of action;

(d)            the minimum figure which the Second Respondent must offer for the rights of action before the First Respondent is entitled to accept an offer from the Second Respondent;

(e)             whether the First Respondent can be liable for the costs of Clayton Utz in the event that the First Respondent assigns the rights of action to the Applicants for a consideration which includes a percentage of any net proceeds from the rights of action and judgment is given in favour of Clayton Utz as against the Applicants;

(f)              whether the First Respondent is bound to assign the rights of action to the Applicants or at all.”

First respondent’s submissions

5                     It is submitted that in the present case the Trustee’s options for dealing with the Causes of Action included:

“(a)     disclaiming the [Causes] of Action under section 133 of the Bankruptcy Act;

(b)             assigning to the Applicants for a fixed sum of $5100 or a lesser or greater fixed sum;

(c)             assigning to the Second Respondent for a fixed sum of $5100 or a lesser or greater fixed sum;

(d)             assigning to the Applicants as per their offer of $100 plus 50% of the net proceeds or for some other consideration including a percentage of any proceeds if the litigation were successful.”

It is accepted on behalf of the first respondent that the orders made on 27 June 2001 preclude option (c) in respect of a fixed sum of $5100.00 or a lesser fixed sum. 

6                     It is also accepted that the Court is not obliged to give directions when a trustee seeks them and that it is open to the Court to decide whether or not directions should be given:  Re Driller (1972) 21 FLR 159.  However, it is said that a clear need for directions arises in the present circumstances and that it would be in the interests of all parties for directions to be given.  That is because it would be open to the Trustee to make a fresh decision as to how to deal with the Causes of Action and any fresh decision could then be the subject of an application pursuant to s 178 of the Act.  That has the prospect that the process could potentially continue to repeat itself until the various options were eliminated.  It is submitted that the impacts of the substantial costs and delay of that course of action make it inappropriate and therefore make directions necessary.

7                     The difficulty which the Trustee perceives in relation to the option of assigning to the applicants in accordance with their existing offer is that it could give rise to the possibility that the Trustee may be held personally liable for an adverse costs order in the event the applicants are unsuccessful in litigation against Clayton Utz.  In the reasons for judgment given on 20 June 2001 it was said that while that consideration may have been a legitimate one for the Trustee to have in mind, it could not have outweighed the important possibility that the claim in the Action contained in it some prospect of a cost free gain for the creditors. 

8                     In further support it is said that a trustee in bankruptcy is not required to spend the trustee’s own personal funds in pursuing a claim on behalf of creditors.  If there are no funds in the estate and creditors are not prepared to provide funding or to indemnify, then it is common and proper for a trustee not to pursue a claim.  In this respect attention is directed to s 109(10) of the Act which provides for a court to give priority to creditors who indemnify a trustee for litigation which succeeds.  It is said that this is a statutory recognition of the fact that the Trustee may not be able to pursue claims without indemnities and that also those who take the risk of litigation, which succeeds, should be rewarded. 

9                     Similarly, it is said that a trustee in bankruptcy cannot be expected to voluntarily accept exposure to personal liability in circumstances such as the present.  It is said that if the litigation is successful it is the creditors and bankrupts who will primarily benefit.  Accordingly, the creditors should indemnify the Trustee for any adverse costs order.  Alternatively, the bankrupts should provide sufficient funding or security to the Trustee to protect against any such order. 

10                  In the present case the creditors are twofold.  There is the Australian Taxation Office, being the only creditor in the 1997 bankruptcy of the first-named applicant for $175,901.00.  The creditors in the 1997 bankruptcy of the second-named applicant are the same office for $177,304.00 and one minor creditor for $507.00.  It is submitted that affidavit evidence, which is not contested, establishes that the Australian Taxation Office is not prepared to indemnify the Trustee.  I accept that is correct.  Further, it is submitted it is not realistic for the Court to expect the minor creditor to offer any indemnification.  I also accept that submission.

11                  Accordingly, the Trustee states that it would only assign to the applicants in accordance with their existing offer if directed by the Court to do so. 

12                  The other option open to the Trustee is to reopen the bidding process.  For the Trustee it is submitted that this option would require the setting of certain parameters by way of directions.  If the Court was simply to direct that course to be undertaken that could, it is submitted, result in another application pursuant to s 178 of the Act.

Second respondent’s submissions

13                  In the submission of the second respondent, the courses open to the Trustee are as follows:

“1.       Attempt to realise the Causes of Action by proceedings to seek the remedies which allegedly are available under the Causes of Action;

2.                Attempt to realise the Causes of Action by assignment; and

3                  Take no action in relation to the Causes of Action”

14                  In relation to the second option, that of assignment of the Causes of Action, it is submitted the only parties with any interest in acquiring the causes are the applicants and the second respondent.  As far as the second respondent is concerned it views the Action as without any merit.  Accordingly, any offer by it to acquire the Action would not include, as a whole or part of the consideration to the assignment, an offer to pay a percentage of the proceeds.  The result is that the second respondent is not prepared to offer more than an amount which would reflect its irrecoverable solicitor and client costs of defending any proceedings in which the applicants seek remedies in respect of the causes of action. 

15                  It is also the submission of the second respondent that if Clayton Utz succeeded in the litigation it is likely it would seek to recover costs from the Trustee (given the likely amount of those costs and the probable inability to recover costs from the applicants).  In those circumstances, the second respondent submits that a decision as to the course to be taken by the Trustee involves commercial questions in matters of risk assessment which are not the subject of evidence and which are more appropriately determined by the second respondent in the exercise of discretion than by the Court in the giving of directions. 

16                  In oral submissions counsel for the second respondent submitted that the present circumstances were not ones which made it proper for directions to be given pursuant to s 134(4) of the Act.  He said this was because the directions sought involved the determination of a hypothetical issue and were in the nature of an advisory opinion.  The directions sought should be seen as an attempt to fetter the Trustee’s discretion by having the Court bear the responsibility for the course of action to be pursued and thus to provide a shield and protection to the Trustee.  Reliance was placed upon Sutherland (in the matter of Scutts) [1999] FCA 147, Sackville J, 25 February 1999, unreported at pars 9, 17 and 70.

Applicants’ submissions

17                  On behalf of the applicants it was contended that the Trustee should assign the Causes of Action to the applicants on the basis of their offer which was previously not accepted.  They would prefer the Trustee was not given the protection of a court order but accept a direction may be necessary as otherwise the Trustee will not take that step. 

18                  In relation to the need of the Trustee for protection against a costs order from Clayton Utz, the applicants contend it should be viewed as a vexatious threat designed to prevent a transfer of the Causes of Action to the applicants as the bankrupts.  Furthermore it is contended that no such consideration inhibited the Trustee from transferring the Esanda claim to the applicants in 1991 and nothing has occurred since to inhibit the same course being followed in relation to the Causes of Action.

Requirements of law

19                  It was accepted by the Full Court in its reasons in this proceeding, Willoughby v Official Trustee in Bankruptcy (2000) 102 FCR 261, that the Trustee has power to sell or assign any part of the property of the bankrupts:  s 134(1)(a).  Such power includes a power to sell or assign the Causes of Action either to the bankrupts or to a third party:  Citicorp.

20                  However, as Re Driller makes apparent, the Court is not bound to give directions.  In Re Driller Sweeney J at 175 said:

“In the present case the official receiver in his original application sought to stand in the shoes of the bankrupts and by his later application he seeks directions as to whether or not he should proceed with the original application.  In my opinion, the question of whether he should proceed or not is one to be answered by him, in the exercise of his discretion in the administration of the estates.  The court should refrain from expressing any opinion on the question.  Any direction to the official receiver to proceed with his application would produce the practical result that the trustees of the scheme and the principal creditors of the bankrupts would be faced with protracted and expensive litigation, initiated by the official receiver, as trustee of the estates of the bankrupts, against the wishes of the creditors, upon terms which would protect him from the ordinary consequences of unsuccessful litigation.”

It is to be noted that the present is not a case where the Trustee seeks to proceed with the application or to act in a way which would face the creditors with litigation against their wishes.  Nevertheless the principle that the Court is not required to give directions is one which requires careful consideration in the present circumstances.  It was accepted by Sackville J in Sutherland.  There the Court was asked to determine authoritatively the priorities among various categories of creditors and to make rulings binding on all creditors.  That is not this case.

Consideration of present circumstances

21                  It is of assistance to return to the relevant present circumstances as they appear in the facts set out by the Full Court in Willoughby at 264 and quoted in the previous reasons for judgment.  The most relevant passage is the following:

“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 [applicants] 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 [applicants] and Clayton Utz to submit any offers they might wish to make for the purchase of the causes of action which the [applicants] 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 (sic) 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.

…

By letter dated 19 March 1999 the [applicants] 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.”

Two facts in particular have a present relevance.  They are firstly, that the Trustee had then (as she continues to have now) concerns about her liability in the event the Causes of Action are unsuccessful.  It is apparent, as submitted for the applicants, that the Trustee will not assign the Causes of Action to the applicants unless protected by a direction of the Court to do so.  It is therefore relevant to ascertain what other options are open to the Trustee if intervention of the Court is desirably to be avoided. 

22                  The second fact of particular relevance is that the Trustee determined when inviting  the offers that neither party would be given a subsequent opportunity to increase its offer.  This has the consequence that the offer then made by the applicants and by the second respondent was in each case their best offer.  Nothing would therefore be served by reopening the bidding and that option has, in practical terms, been foreclosed by the conditions on which the Trustee invited the offers.  That view is reinforced by the submission for the second respondent that it continues to view the Action as without merit so that its offer is limited to reflect irrecoverable solicitor and client costs.

23                  Turning to the options before the Trustee as earlier set out, option (a), disclaimer, was not one supported by any submissions for the Trustee.  It was not the course of action chosen on the occasion of the previous assignment.

24                  Option (b) – assignment to the applicants on terms different to option (d) – has no practical content given that the applicants maintain their offer in terms of option (d).

25                  The remaining portion of option (c) – assignment to the second respondent for a sum greater than $5100 – likewise has no practical content in the light of the submissions for the second respondent and the circumstances in which the offers were previously obtained by the Trustee, namely, that no subsequent opportunity would be given to offer.

26                  That leaves option (d) as the practical option in all the circumstances. 

27                  The matter can be put further in context by returning to the list of directions sought.  Proposed direction (b) is precluded by the condition the Trustee set for calling offers on the offers.  Proposed direction (c) is precluded by the second respondent’s own position precluding any changed offer.  Proposed directions (d), (e) and (f) would (as the second respondent submitted) involve the Court in giving an advisory opinion and being involved in factors which are within the realm of the Trustee’s discretion.  Only proposed direction (a) is viable. 

28                  There remains the question whether the Court should make any direction.  Proposed direction (a) and option (d) would not involve the Court in either giving an advisory opinion or becoming involved in the commercialities or issues of the proposed litigation.  If the Court does not make a direction in those terms, the Trustee will not assign the Causes of Action.  Inaction by it would only occasion another application such as the present. 

29                  I do not consider that the fact that a direction may protect the Trustee from a claim for costs by the second respondent can outweigh these other considerations.  Furthermore, the second respondent does not put the making of such a claim as a certainty but only as a likelihood.

Conclusion

30                  For these reasons I consider it is appropriate for there to be a direction that the Trustee assign the Causes of Action to the applicants on the terms and conditions of their offer made in March 1999.

Associate:

Dated:              20 September 2001