FEDERAL COURT OF AUSTRALIA

Freeman v National Australia Bank Limited [2003] FCA 1233

BANKRUPTCY – whether decision by the trustee to abandon litigation was unjust or inequitable – duties of a trustee in bankruptcy – whether trustee has a duty to prosecute litigation on material which came into existence subsequent to judgment which founds a bankruptcy

Bankruptcy Act 1996 (Cth) s 178

Cummings v Claremont Petroleum NL (1995-1996) 185 CLR 124 followed

Evans v Hi Fert Pty Ltd [2003] SCSA 186 mentioned

Adsett v Berlouis (1992) 37 FCR 201 followed

Citicorp Australia Limited v Official Trustee in Bankruptcy (1966) 71 FCR 550 followed

Haskins v Official Trustee in Bankruptcy [1996] FCA 242 referred

LYNTON NOEL CHARLES FREEMAN v NATIONAL AUSTRALIA BANK LIMITED and ORS

No Q 7001 OF 2001

SPENDER J

BRISBANE

31 OCTOBER 2003

THE COURT ORDERS THAT:

1.                  The two notices of motion filed by the applicant on 7 October 2003 are dismissed.

2.                  The applicant pay the respondents’ costs, to be taxed if not agreed.

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

REASONS FOR JUDGMENT

1                     On 7 October 2003, Mr Noel Freeman filed two notices of motion: the first sought the following order from the court:

‘That subject to the provisions of s.178 of the Bankruptcy Act 1966 (Cth) the trustee in Bankruptcy Jefferson Stevenson & Co, Level 4, 370 Queen Street, Brisbane, be compelled to prosecute S 2339/02 Lynton Noel Charles Freeman v National Australia Bank Limited (ACN004 034 937) in order to prevent an injustice being suffered by Lynton Noel Charles Freeman and his creditors.’

referring to proceedings S 2339/02 in the Supreme Court of Queensland.  The second notice of motion sought orders:

‘1.   That subject to the provisions of s.178 of the Bankruptcy Act 1966 (Cth) the trustee in Bankruptcy Jefferson Stevenson & Co, Level 4, 370 Queen Street, Brisbane, be compelled to prosecute S 4013/98 Application underUCPR r 668 (1) and (2) to put aside the Judgement between National Australia Bank Limited ACN034 044 937 and Lynton Noel Charles Freeman in order to prevent and injustice being suffered by Lynton Noel Charles Freeman and his creditors.

2.    That subject to the provisions of S, 178 of the Bankruptcy Act 1966 (Cth) that the trustee in Bankruptcy Jefferson Stevenson & Co, Level 4, 370 Queen Street, Brisbane be compelled to prosecute an Application to put aside the judgment of the Supreme Court of Queensland Court of Appeal in CA 9718/2000 between Lynton Noel Charles Freeman  (Defendant, Applicant) and National Australia Bank Limited (Plaintiff, Respondent), under UCPR r. 668(1) and (2) in order to stop an injustice to Lynton Noel Charles Freeman.’

That notice of motion referred to proceedings S 4013 of 1998 in the Supreme Court of Queensland, which include a judgment by Ambrose J adverse to Mr Freeman, and the judgment of the Court of Appeal in Court of Appeal 9718 of 2000 dismissing Mr Freeman’s appeal from the orders of Ambrose J.

2                     What Mr Freeman is seeking to achieve are orders by the Court compelling or directing the trustees in his bankruptcy to commence proceedings relying on Uniform Civil Procedure Rule 668 (‘UCPR 668’). These proceedings seek to challenge the primary judgment and the unsuccessful challenge to it which founded the sequestration order made in the Federal Court on 12 March of 2002. Mr Freeman also seeks orders compelling or directing the trustee to commence proceedings against the National Australia Bank in respect of a claim for damages, which Mr Freeman says he suffered as a result of the sale of property of which the bank was a secured creditor. He alleges that that sale, which was conducted by receivers of managers appointed by the bank, was at an undervalue.

3                     The present applications are merely part of a very extensive saga of litigation.  As has already been mentioned, the original judgment of Ambrose J was the subject of an unsuccessful appeal to the Court of Appeal, and was then the subject of an unsuccessful application for special leave to appeal.  Questions concerning the capacity of Mr Freeman to consent to decisions arising out of a mediation were live questions before Ambrose J, and before the Court of Appeal, and the question of some sales records of cattle was part of the evidence that was before Ambrose J, as exhibit 36. Further, while it was not reproduced in the Appeal Books, reference was made to it in the proceedings in the Court of Appeal.  I also note that in respect of the unsuccessful application for special leave to appeal, there is a reference to cattle sale records as part of that application, in Part III, being the statement of the appellant’s argument to the High Court.

4                     The application for special leave was refused by the High Court, the National Australia Bank not being called on.

5                     The Federal Court made a sequestration order against the estate of Mr Freeman on 12 March 2002, which was stayed, pending appeal.  The Full Court of the Federal Court dismissed the appeal on 26 August 2003.  On 27 August 2003, Mr Freeman filed an application in the State Supreme Court, being S4013 of 1998.  The application was described by De Jersey CJ as:

‘An application broadly speaking to reopen a judgment under rule 668 of the Uniform Civil Procedure Rules.’

6                     His Honour noted that Mr Freeman was, at the time he made the application, an undischarged bankrupt, and pointed out that the decision of the High Court in Cummings v Claremont Petroleum NL (‘Cummings’) (1995-1996) 185 CLR 124, was that a person in Mr Freeman’s position had no relevant interest in proceedings such as those before the Chief Justice.

7                     His Honour concluded that, based on the judgment of the High Court in Cummings, as well as an unreported judgment, Evans v Hi Fert Pty Ltd [2003] SCSA 186, Mr Freeman did not have standing to pursue this application at that time, and the application filed on 27 August 2003 was accordingly dismissed, with Mr Freeman being ordered to pay the respondent bank’s costs to be assessed.

8                     While this court has, on the present motions, been subjected to a considerable volume of material, most of it is directed at issues which are not central to the applications which Mr Freeman wishes the court to consider today or the orders he wishes the court to make.  Much of the material seeks to re-canvass the question of whether the judgment of Ambrose J was correct, and whether the consequential proceedings in the Court of Appeal, in the High Court, the making of a sequestration order, and the unsuccessful appeal from the making of that order are consequently tainted.

9                     It is the contention of Mr Freeman that there is material which came into existence, subsequent to the making of the original orders, which entitle him to relief under UCPR 668.  Issue was taken by the trustees and by the National Australia Bank as to the availability of this material and to its relevance, but the central question in this case is not, as Mr Freeman contends, whether in fact the original judgment was correct, or whether the sequestration order was founded on a proper judgment.  It is whether the decisions made by the trustee effectively to abandon the two pieces of litigation are unjust or inequitable, such as to require the Court in the proper exercise of its supervisory jurisdiction under s 178 of the Bankruptcy Act 1996 (Cth) (‘the Act’) to make orders of the kind for which Mr Freeman contends. 

10                  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 or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.’

11                  The position of a trustee in bankruptcy is one of considerable responsibility.  The general duties of a trustee in bankruptcy were summarised by a Full Court of the Federal Court in Adsett v Berlouis (1992) 37 FCR 201 at 208 as follows:

‘The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act: see Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 at 329.  The conduct of the trustee in subject to the supervision of the court (eg Div 4 of Pt VIII of the Act) and a trustee in bankruptcy has historically been regarded as an officer of the relevant court: see Ex parte James, Re Condon (1874) 9 Ch App 609 at 614; Scranton’s Trustee v Pearse [1922] 2 Ch 87; Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In liq)  (1948) 76 CLR 463 at 482; Re Henderson; Ex Parte Tonkin (1934) 7 ABC 273 at 277-278.  A trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee: see Re Silver Valley Mines (1882) 21 Ch D 381 CA at 386, 392.  The trustee is required to bring reasonable skill to the performance of his or her duties: see Silver Valley Mines (supra) at 392; Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 at 284.’

12                  As the court noted in Citicorp Australia Limited v Official Trustee in Bankruptcy (1966) 71 FCR 550 at 560 and 561:

‘... a trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money, and that a trustee in bankruptcy is required to discharge the public duty imposed by the Act conformably with the trustee’s obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors’ claims and any possible surplus for the bankrupt.’

13                  It is against those principles of the duty of a trustee in bankruptcy that the decisions made by the trustees in the present case fall to be assessed.  It is for Mr Freeman to show that the trustee’s decisions to decline to make an election to prosecute either of the proceedings in the Supreme Court was wrong, and that on the material before this court, justice and equity requires it to compel the trustees to prosecute those actions, or to commence similar actions. 

14                  As the history of the litigation so far described might suggest, there are very real grounds for thinking that the prospects of success, particularly in the UCPR 668 proceedings, are far from rosy. 

15                  One of the trustees, Mr Joiner, has deposed to the basis of the decisions to abandon those pieces of litigation. In relation to the proceedings in S4013 of 1998, Mr Joiner says that the trustees abandoned those proceedings for the following reasons:

‘(a)   The Trustee did not consider it to be in the interests of the creditors to prosecute the proceedings or assign the proceedings to the applicant;

(b)     No funding was available from either creditors or the Commonwealth Government to conduct a detailed assessment of the proceedings;

(c)     The Trustee had strong reservations about the prospects of the proceedings being successful;

(d)     The Trustees were aware of the various risks associated with electing to prosecute or assign the proceedings, including exposing the Trustee to an adverse costs order, for which there were no funds in the estate to indemnify the Trustee with. I considered that, should the Trustee have elected to prosecute the proceedings, the Trustees would have become substituted as plaintiffs in the proceedings and thereby possibly become exposed to costs if unsuccessful.’

16                  In an affidavit filed on 27 October 2003, Mr Joiner swears that the trustees abandoned the proceedings in S2339 of 2002 for similar reasons, being the reasons set out in paragraph 12 of that affidavit, namely:

‘(a)   The Trustee did not consider it to be in the interests of creditors to prosecute the proceedings or assign them to the Applicant Mr Freeman was willing to provide consideration to the bankrupt estate for an assignment of the proceedings  to him of $1.00;

(b)     No funding was available from the Commonwealth Government to conduct a detailed assessment of the proceedings ;

(c)     The Trustees had strong reservations about the prospects of the proceedings being successful;

(d)     The Trustees were aware of the various risks associated with electing to prosecute or assign the proceedings, including exposing the Trustee to an adverse costs order, for which there were no funds in the estate to indemnify ourselves with. I considered that should the Trustee have elected to prosecute the proceedings, the Trustees would have become substituted as plaintiffs in the proceedings and thereby possibly become exposed to costs, if unsuccessful.’

17                  That affidavit canvasses at some length the litigious history of the matter, and all that can sensibly be said by way of summary is that it has not been shown to my satisfaction that the trustee has reached a perverse or necessarily wrong conclusion about the prospects of success of the proposed litigations being successful.

18                  The fact is that no funding is available from either creditors or the Commonwealth government to conduct a detailed assessment of the proceedings, notwithstanding a request by the trustees for the expression of interest in that respect from the creditors and the Commonwealth government.  The estate is without funds. The concern by the trustees about the risks associated with electing to prosecute, or to assign the proceedings, including exposing the trustees to an adverse order for costs, when there were no funds in the estate from which to indemnify the trustees for those costs is a very real consideration.

19                  One can understand Mr Freeman’s desire not to be subject to bankruptcy, and to pursue what he says are valid claims.  Those claims or assertions have to be assessed, nonetheless, against the litigation history that has occurred and I need go no further than say, as I have earlier said, that there is a sensible basis for the reservations by the trustees about the prospects of the proceedings being successful. 

20                  In Haskins v Official Trustee in Bankruptcy [1996] FCA 242, a judgment of Sundberg J of 10 April 1996, his Honour was concerned with reviewing decisions by the Official Trustee not to continue various pieces of litigation.   The material before his Honour included advice from the Australian Government Solicitor (‘AGS’) concerning prospects of success.  That and other factors, were considerations applicable in the present case, but some factors to which his Honour referred are of direct relevance to the decision of the trustees in the present case.  His Honour said, in respect of the decision of the trustee concerning his decision not to proceed with leave to appeal:

‘In coming to his decision, the Trustee, in addition to AGS’s advice, took into account: that there are no funds in the estates with which to pay for an application for leave to appeal; that the applicants have no assets with which to finance further proceedings; that other creditors are most unlikely to provide the Trustee with an indemnity in relation to the costs of further proceedings which the Trustee has been advised not to pursue, and the risk that the court might order the Trustee personally to pay the costs of an unsuccessful application.  All these matters amply justified the Trustee’s decision not to seek leave to appeal.’

21                  In my opinion, on the entirety of the material before me, the decisions by the trustee not to prosecute proceedings relying on UCPR 668, nor to prosecute the proceedings in respect of the claim for damages against the bank in respect of the sale at an alleged undervalue by bank appointed receivers, has not been shown to be either unjust or inequitable.  The material justifies the trustee’s decisions in the circumstances as they were made known to the trustee.  In those circumstances, I decline to make any order of the kind which Mr Freeman seeks. 

22                  The duty of the trustee in bankruptcy is to exercise judgment so as to save the estate unnecessary expenditure of money. Further it is to discharge the public duty imposed by the Act conformably with his obligation to administer the estate in such a manner as to maximise the return from estate assets, thereby maximising satisfaction of the creditors’ claims, and any possible surplus for the bankrupt.  The decisions which the trustee made in the present case conform to those duties.  I decline to make any order on the motions sought by Mr Freeman. 

23                  On the question of costs, having heard from the parties, and notwithstanding the consideration which Mr Freeman has raised, namely that ultimately he might be able to succeed on the foreshadowed litigation, I think the ordinary order as to costs is appropriate in the present case. Each motion is dismissed with costs, those costs to be taxed if not agreed.

Associate:

Dated:              7 November 2003