FEDERAL COURT OF AUSTRALIA

Donnelly (Trustee), in the matter of Hancock (Bankrupt) v Porteous [2002] FCA 607

MAX CHRISTOPHER DONNELLY (TRUSTEE OF THE PROPERTY OF THE LATE LANGLEY GEORGE HANCOCK, A BANKRUPT) v ROSEMARIE PORTEOUS & ORS

N 8132 of 1999

STONE J

13 MAY 2002

SYDNEY

THE COURT ORDERS THAT:

1.         The parties bring in short minutes of order in accordance with these reasons.

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

REASONS FOR JUDGMENT

1                     By separate notices of motion the applicant (“Trustee”) and the respondents are seeking to vacate orders 2 and 5 of the Mareva-type orders that I made in this proceeding on 2 April 2001 and to replace them by other orders. The orders made on 2 April 2001 were:

“1.       Pending the determination of these proceedings, the First Respondent be restrained by herself, her servants or agents from selling, charging, mortgaging, encumbering or otherwise disposing of or dealing with the property known as “Prix d’Amour” (being Lots 100 and 104, Wellington Street, Mosman Park in the State of Western Australia) without first giving twenty-one (21) days’ written notice to the Applicant.

………

5.         In the event of sale of Prix d’Amour, there shall be retained out of the proceeds of such sale and placed in a joint bank account in the names of the Applicant and the solicitor for the Respondents, an amount of $3,242,581.80 together with interest on that amount calculated in accordance with the rates of interest prescribed under Schedule J of the Supreme Court Rules 1970 (NSW) from 8 April 1999to the date of settlement of such sale.”

2                     These orders were designed to protect any interest that the Trustee may have pending the outcome of this proceeding. In substance the parties seek to alter the way in which this interest is secured. In fact, the first respondent, Mrs Porteous claims that it is her need to finance the various proceedings between her and the Trustee by borrowing on the security of Prix d’Amour and another property that is behind the proposed arrangement.

Proposed arrangement

3                     It is proposed that the Howard Mortgage Trust will make two separate facilities available to Mrs Porteous:

(a)                $2.9 million secured by a first mortgage over 24 Bay Street, Double Bay; and

(b)               $11,298,800 secured over 4-10 Bay Street, Double Bay and Prix d’Amour.

4                     Pending the determination of this proceeding Mrs Porteous will deposit the amount of $4,485,327.55 (being the amount referred to in order 5 above plus interest calculated at “Court rates” from 8 April 1999 to 31 January 2003) in a joint account in the names of the Trustee and her solicitors. The Trustee will withdraw its caveats and all claims on Prix d’Amour and those claims will become claims against the fund in the joint account. Interest accruing on the amount in the joint account shall be payable to and be released to Mrs Porteous.

5                     The parties have also agreed to an arrangement the terms of which are set out in draft consent orders put before me at the hearing. Those terms are:

“7.       The Applicant consents to the granting by the First Respondent of a mortgage to Howard Mortgage Trust (“Howard”) over the property 4/10 Bay Street Double Bay (“the Double Bay Property”) and to the registration of that mortgage upon the title to the Double Bay Property, subject to and conditional upon Howard forthwith entering into an agreement with the Applicant in which it agrees to limit its priority under that mortgage as against the Applicant to the principal amount of $11,298,800.00 together with costs and default interest.

8.         In consideration of the Applicant consenting to the granting and registration of the aforesaid mortgage to Howard and further to protect the Applicant’s position in relation to his claims made against the Double Bay Property made in proceedings No N7891/2000 in this Honourable Court, in the event that:

(a)               the Applicant is successful in the proceedings No. N7891/2000; and

(b)               the Double Bay Property is insufficient, after discharge of all indebtedness of the First Respondent to Howard, to satisfy in full the Applicant’s claim therein for a constructive trust over or tracing remedy against the Double Bay Property to the extent of $3,250,000.00 (“the Domestic Fund Tracing Claims”),

the Property be and hereby is charged in favour of the Applicant by the First Respondent with payment of the Domestic Fund Tracing Claims to the extent that the Double Bay Property is insufficient to satisfy the same in full.

9.         The First Respondent consents to the Applicant lodging a fresh Caveat over the Property in respect of the charge referred to and conferred in paragraph 8 above.

6                     In addition to orders as described above, the Trustee seeks orders that he is justified:

(a)                  in consenting to the variation of orders 1 and 5 made on 2 April 2001 in terms of the orders sought by Mrs Porteous; and

(b)                 in entering into a Deed with Mrs Porteous containing the terms of the agreement set out above.

7                     In an affidavit sworn on 26 April 2002, the applicant states that he has formed the view that the proposed arrangement is reasonable and that the interests of the creditors of the deceased estate are reasonably protected by it. In particular the Trustee points to the fact that, if he is successful in the proceeding, he will have immediate and certain access to the fund created under the proposed arrangement without the delay and uncertainty of attending the sale of Prix d’Amour and the realisation of its proceeds. However, the applicant notes that his consent to the orders sought is subject to and conditional upon the Court approving the respondents’ application and directing him that he is justified in so consenting and agreeing.

8                     The question of whether the proposed orders and the new arrangement would satisfactorily protect the creditors is a matter for the discretion of the Trustee. I see no reason to interfere with the exercise of the Trustee’s discretion in this case. In particular the proposed arrangement does protect the Trustee from the inevitable uncertainties and delay attendant on the sale of a major property such as Prix d’Amour.

Hancock Prospecting Pty Ltd - leave to be heard

9                     Although the Trustee and the respondents have agreed to consent to these orders, the orders are opposed by Hancock Prospecting Pty Ltd (“HPPL”), a creditor of the bankrupt estate. At the hearing of the parties’ notices of motion, HPPL sought leave to be heard, or alternatively to intervene, in relation to these notices on the ground that the proposed financing arrangement will conflict with certain contractual obligations arising out of an agreement between Mrs Porteous and HPPL made on 27 October 2000. While not conceding that HPPL ought to be heard, neither the Trustee nor the respondents opposed this. Given the nature of the above claims I decided that it was appropriate that HPPL be heard and therefore gave the leave sought.

Agreement of 27 October 2000

10                  The agreement of 27 October 2000 concerns two properties (4-10 and 24 Bay Street in Double Bay Sydney) owned, directly or indirectly, by the first respondent, Mrs Porteous. The relevant clauses of that agreement are clauses 5, 6 and 7 which provide as follows:

5.                           HPPL agreed not to extend its then existing caveat over 4-10 Bay Street property.

6.                           Mrs Porteous agreed that on sale of 4-10 Bay Street the proceeds would be applied to reduce the indebtedness secured over 24 Bay Street to a maximum of $800,000.

7.                           Mrs Porteous warranted that there was no more than $3  million secured over 24 Bay Street and agreed not to increase the existing borrowings secured over that property above that amount, or when reduced to $800,00, above that sum.

The Agreement did not impose any express time limit in relation to the sale of 4-10 Double Bay or contain any express obligation to sell the property.

HPPL’s objections

11                  HPPL’s objection to the proposed arrangement is this. In order to meet her obligations under the 27 October agreement, Mrs Porteous would need to apply $2.1 million from a sale of 4-10 Bay Street, in reduction of the indebtedness secured by 24 Bay Street. Under the proposed arrangement, however, 4-10 Bay Street would be encumbered (with Prix d’Amour) by a mortgage for $11.8 million. Those assets have been assessed as having a combined value of $22.7 million, 4-10 Bay Street being valued at $6.4 million. The liabilities secured against those assets total $21.14 million. The evidence before me shows, it is submitted, that the proceeds of a sale of 4-10 would not be sufficient for Mrs Porteous to meet her obligations. Consequently the effect of the Court making orders that permit the transaction to proceed would be to permit Mrs Porteous to enter into an arrangement that is inconsistent with her obligations under the 27 October agreement.

12                  According to HPPL the alleged inconsistency should be a relevant issue in the Court’s discretion in determining if the applicant is justified in consenting to the proposed orders. HPPL submits that the Court should determine that the Trustee would not be justified in entering the proposed agreement with Howard, either at all or except on terms that protect HPPL’s substantive rights. For example it is suggested that HPPL should be granted a 1^st ranking mortgage for an amount sufficient to ensure that sufficient of the proceeds of the sale of 4-10 Bay Street to reduce debt secured by 24 Bay Street to $800,000 can be directed to that end.

13                  In support of this position, Mr Martindale, counsel for HPPL, valiantly argued that there is a necessary implication from the 27 October agreement to the effect that Mrs Porteous is obliged not to put herself in a position that would leave her unable to meet her obligations. He argued that, whether or not such a contract would be void, it is certainly a contract that the Court should not assist the relevant party to make. In support of his submissions Mr Martindale referred me to the decision of du Parcq J in British Homophone Co Ltd v Kunz and Crystallate Gramophone Record Manufacturing Co Ltd (1935) 152 L T 589 and an article by Professor Lauterpacht, “Contracts to Break a Contract” in (1936) LQR 494. It is not necessary for me to consider either Mr Martindale’s submissions on this point or the authorities to which he referred because I do not accept his argument that the proposed arrangement would be inconsistent with the obligations imposed on Mrs Porteous by the 27 October agreement.

14                  The obligation to apply part of the proceeds of the sale of 4-10 Bay Street to reduce the indebtedness secured over 24 Bay Street is not due for performance until the property has been sold. The agreement does not, however, specify a time by which 4-10 Bay Street must be sold or even impose an obligation to sell it. It is therefore not possible to predict whether the obligation in relation to 24 Bay Street would be able to be met following a future sale. It may be, for example, that the mortgage to the Howard Mortgage Trust will have been discharged by then. What is clear is that there can be no actual breach of obligation that is not yet due to be performed and there is no evidence of any anticipatory breach. HPPL has not pointed to any evidence that Mrs Porteous rejects her obligations under the 27 October agreement. On the contrary, in a facsimile letter to HPPL’s solicitors dated 30 May 2001, the solicitors for Mrs Porteous state unequivocally that Mrs Porteous intends to comply with her obligations under that agreement. Mr Martindale’s argument was, in essence, an argument for an implied term that Mrs Porteous would limit security interests in 4-10 Bay Street to an amount that would always leave her with unencumbered equity in the property to the value $1.2 million. While such a term may not contradict any of the express terms of the agreement, it does not meet any of the other criteria for implication of a term and cannot be supported; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.

15                  In rejecting HPPL’s objections to the proposed arrangement senior counsel for the respondents, Mr Burnside QC, urged that the long and acrimonious history of litigation between the interests of Mrs Porteous and the interests of Mrs Gina Rinehart (which include HPPL) is relevant to the exercise of my discretion to make or refuse the orders sought. Mr Burnside submitted that HPPL’s objections to the arrangements that Mrs Porteous seeks to put in place have nothing to do with its legitimate financial interests but are driven by the “extraordinary hatred” of Mrs Rinehart for Mrs Porteous and the intention to deprive Mrs Porteous of the means of defending the various proceedings brought against her. As I have concluded that the 27 October agreement is not inconsistent with the proposed arrangement and should not prevent me making the orders sought there is no need for me to consider these submissions and I make no finding in respect of them.

The Court’s power to grant the relief sought

16                  The Court has power to vary the orders made on 2 April 2001; ss 30,37 and 178 of the Bankruptcy Act 1966 (Cth) (“Act). See also the Federal Court Rules Order 35 r 1 and r 7. The more problematic issue here is the Court’s power to approve the agreement in terms requested by the Trustee. The terms of that agreement, set out in [5] above, contain the conditions on which the Trustee has agreed to the orders sought by the respondents. They provide the commercial justification for the Trustee’s consent. 

17                  Section 134(4) of the Act provides that a trustee may at any time apply to the Court for directions “in respect of a matter arising in connexion with the administration of the estate”. The Court is not under an obligation to give such directions; it is a matter for it to decide in the exercise of its discretion; Re Driller (1972) 21 FLR 159. It is however settled that the Court will not give an advisory opinion in the form of a direction; Willoughby v Official Trustee in Bankruptcy [2001] FCA 1345.  It is also said that the duty of the judge on a petition for advice is to advise the trustee on questions of law, but not to tell him how to exercise discretionary powers vested in him; In the Will of Osborne (1863) 2 SCR (NSW) Eq 89.

18                  Mr Newlinds conceded that a rule that the Court does not get involved in assessing commercial judgments made by the Trustee would apply to the directions sought by the Trustee. In relation to this issue, however, he made two points:

(a)        that the authorities on this point (which Mr Newlinds did not name) go to the Court’s exercise of discretion and do not support the proposition that the Court is prohibited from approving commercial terms; and

(b)       that this is an unusual estate where the Trustee is faced with very strong feelings on both sides and, by implication, is entitled to the protection of the Courts in these circumstances.

19                  In the short time available I have not found any authority to support the proposition that the Court may not approve commercial terms agreed to by the Trustee. In Sutherland (In the matter or Scutts) [1999] FCA 147, Sackville J noted that the language of s 479(3) of the Corporations Law (now the Corporations Act 2001) was in substance identical to that of s 134(4) of the Act and reviewed the authorities relevant to that section. Having done so his Honour declined to answer the questions presented for determination saying, at [70],

“…they seem to assume that the role of the Court on an application for directions under s 134(4) of the Bankruptcy Act is to determine authoritatively the priorities among the various categories of creditors.”

However his Honour was prepared to give a direction to the trustee that he would be justified in distributing the property divisible among the Bankrupt’s creditors in a specified manner. In doing so his Honour attached some importance to the Trustee and creditors not being denied the benefit of directions that as a practical matter may enable the administration of the estate to proceed to completion. I have similar concerns in this case. It is clear that unless the Court approves the agreement there will be more litigation in which issues that have already been ventilated will be raised again. In my opinion it is not in the interests of the Trustee or the creditors that this be so.

20                  I am prepared to make orders and give directions more or less having the effect that the parties seek. I have however some concerns that the orders sought would not give the Trustee the security that I understand is intended by the parties. In particular, the orders as presently drafted would allow a gap between vacating the orders of 2 April 2001 and settlement of the refinancing arrangement with the Howard Mortgage Trust. It would seem, at least, to be appropriate that the withdrawals of the caveats over Prix d’Amour be handed over on settlement of the refinancing at the same time as the cheques to establish the fund referred to in [4] above are made available. I will therefore give the parties an opportunity to prepare amended orders in accordance with these reasons.

Associate:

Dated:              13 May 2002