FEDERAL COURT OF AUSTRALIA

Official Trustee in Bankruptcy as Trustee of the Bankrupt Estate of Rodolfo Severio Pastro v Pastro [2004] FCA 713

BANKRUPTCY – distribution of bankrupt assets – whether certain creditors be given an advantage over other creditors under s 109(10) Bankruptcy Act 1966 (Cth) (the Act) due to indemnities given to Official Trustee in Bankruptcy (trustee) against cost of litigation – consideration of limitations upon indemnities – nature and application of Court’s discretion under s 109(10) of the Act

BANKRUPTCY – application under s 104 of Act to review, reverse or vary trustee’s decision to partially reject proof of debt lodged by creditor

Bankruptcy Act 1966 (Cth) ss 33(1)(c), 104, 108, 109(10), 120, 121, 305

Official Trustee v Pastro [1999] FCA 1631 cited

Pastro v Official Trustee in Bankruptcy [2000] FCA 508 cited

Pastro v Official Trustee in Bankruptcy [2000] FCA 744 cited

Re Butler; Ex parte Taylor (1995) 57 FCR 499 applied

Official Trustee in Bankruptcy, in the matter of Matson v Deputy Commissioner of Taxation [1999] FCA 914 applied

Re the Estate of Lawrence Robert Connell (Deceased) [2001] FCA 51 applied

Re Glenisia Investments Pty Ltd (In Liquidation) (1996) 14 ACLC 237 cited

Re Home Corp Projects [2002] NSWSC 879 cited

Re Bavistock (1946) 14 ABC 30 applied

Rocom International Pty Ltd v Prentice [2002] FCA 604 applied

IN THE MATTER OF RODOLFO SEVERIO PASTRO, OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATE OF RODOLFO SEVERIO PASTRO v EMILIO PASTRO

S.4 of 2004

MANSFIELD J

9 JUNE 2004

ADELAIDE

THE COURT ORDERS THAT:

Application under s 109(10) of the Bankruptcy Act 1966 (Cth):

1.                    Pursuant to s 109(10) of the Bankruptcy Act 1966 (Cth) (the Act), the trustee distribute 60 per cent of the net amount recovered by proceedings against Emilio Pastro and Maria Pastro to have declared void as against the applicant two mortgages granted to Emilio Pastro and to Maria Pastro each dated 9 September 1994 pursuant to sections 120 and 121 of the Act (the indemnity fund) in payment to James A Huppatz (as trustee of the Bankrupt Estate of Mara Pastro), Sun Alliance and Royal Insurance Ltd (now known as Vero Insurance Ltd) and BRL Hardy Ltd rateably between them in proportion to their debts as proved in the estate of the bankrupt Rodolfo Severio Pastro.

2.                    Pursuant to s 108 of the Bankruptcy Act 1966 (Cth), the trustee distribute the balance of the amount in the indemnity fund, and the other amount held in the estate of the bankrupt, after payment of the costs ordered in accordance with Order 3 hereof proportionately between the creditors in proportion to the debts as proved in the estate of the bankrupt except, in the case of the creditors James A Huppatz (as trustee of the Bankrupt Estate of Mara Pastro), Sun Alliance and Royal Insurance Ltd (now known as Vero Insurance Ltd) and BRL Hardy Ltd, in respect of their proved debts outstanding after the payments made in accordance with Order 1 hereof.

3.                    The costs of this application (including the costs relating to the applications under sections 33(1)(c) and 104 of the Bankruptcy Act 1966 (Cth)) be costs in the administration of the estate of the bankrupt and be paid out of the estate after payment of the monies ordered to be paid by Order 1 hereof.

The Extension Of Time Application under s 33(1)(c) of the Bankruptcy Act 1966 (Cth) and application under s 104 of the Bankruptcy Act 1966 (Cth):

4.                    Emilio Pastro is joined as a respondent to the application.

5.                    Extend the time to the date of this judgment within which Emilio Pastro may seek an order under s 104 of the Bankruptcy Act 1966 (Cth) to review the decision of the trustee of the bankrupt estate of Rodolfo Severio Pastro of 18 July 2003 to reject his proof of debt.

6.                    The application by Emilio Pastro for an order under s 104 of the Bankruptcy Act 1966 (Cth) is dismissed.

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

REASONS FOR JUDGMENT

1                     There are two issues for determination on this application.

2                     The first is an application by the Official Trustee in Bankruptcy (the trustee) as trustee of the Estate of Rodolfo Severio Pastro (the bankrupt) under s 109(10) of the Bankruptcy Act 1966 (Cth) (the Act) for an order that certain creditors in the bankrupt’s estate be given an advantage over the other creditors in the estate in the distribution of the property by the bankrupt.

3                     The second is an application by Emilio Pastro for an extension of time under s 33(1)(c) of the Act to apply for an order under s 104 of the Act to review the decision of the trustee rejecting his proof of debt in the bankrupt’s estate to the extent of $126,810 and for an order that his proof of debt be admitted for the full amount claimed of $178,925.

the application under s 109(10)

4                     The bankruptcy order was made in respect of the bankrupt on 12 February 1996 on the petition of a creditor Sun Alliance and Royal Insurance Ltd now known as Vero Insurance Limited (Sun Alliance). 

5                     Section 108 of the Act provides that, except as otherwise provided, all debts proved in bankruptcy rank equally and, if the proceeds of the property of the bankrupt are insufficient to meet them in full, that they be paid proportionately.  Section 109 provides circumstances in which the Trustee is to apply the proceeds of the property of the bankrupt in priority to other payments.  Relevantly, s 109(10) provides:

‘Where in any bankruptcy:

7.      property has been recovered, realised or preserved under an indemnity for costs of litigation given by a creditor or creditors; or

8.      expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;

the court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.’

6                     In the bankruptcy of the bankrupt, creditors whose proofs of debt were accepted by the trustee, and the amounts of those proofs of debt as admitted were as follows:

7                     Huppatz is a private registered trustee.  He was the trustee of the bankrupt estate of Mara Pastro who became bankrupt on 4 December 1989.  Mara Pastro had been in business in partnership with the bankrupt and Luciano Pastro.  In June 1989, the partners in that business had commenced proceedings against Sun Alliance because that company had declined to meet a claim on an insurance policy following the destruction of the business premises by fire.  Upon the bankruptcy of Mara Pastro, the issue arose as to whether her trustee Huppatz should adopt those proceedings.  He did so, upon the basis of an indemnity given by the bankrupt and by Luciano Pastro, and provided he obtained funding from the Commonwealth pursuant to s 305 of the Act to proceed with the action.  The action then duly proceeded.  On 19 August 1993, judgment was given.  The action was dismissed.  Each of the plaintiff parties was ordered to pay the costs of Sun Alliance.  Pursuant to that order, the Commonwealth paid a total of $164,189 in respect of legal costs.  It is that amount in respect of which Huppatz proved in the bankruptcy of the bankrupt, pursuant to the indemnity given to him by the bankrupt.  He has instructed the trustee to pay to the Commonwealth any dividend he might receive as a result of proving that debt in the bankrupt’s estate.

8                     The bankrupt estate has been realised, and has resulted in two separate accounts.  One called the ‘general account’ has a net balance available of $1,287.72.  The other called the ‘indemnity account’ has a balance available for distribution of $222,471.61.  There is therefore insufficient for all creditors in the estate of the bankrupt to be fully paid from realisation of the bankrupt’s property.

9                     The present application relates to the funds available in the indemnity account.  If an order is made, as sought, that each of Sun Alliance, Hardy and Huppatz be given an advantage over the other unsecured creditors of the bankrupt’s estate in respect of the sum held in the indemnity account, to the extent of their respective indebtedness, they will in substance recover their debts in full.  Their debts total $193,491.  There will then be a surplus in the indemnity account plus the amount in the general account available to the creditors Maria Pastro and Emilio Pastro.  On that basis their dividend or payment would represent a payment of 35.97 cents in each dollar.  If no order is made under s 109 on this application, all creditors will receive a payment of 80.59 cents in the dollar in accordance with s 208.  Those figures are estimates only, as the precise costs of the present application have not been determined.  In those estimates, I have assumed Emilio Pastro’s debt will not be accepted for a higher sum than that to which it was admitted to proof.

10                  The indemnity account was separately established to isolate those funds which represented property in the bankrupt’s estate recovered or realised under an indemnity for costs of litigation given by each of Sun Alliance, Hardy and Huppatz.

11                  The bankrupt’s estate included two properties, one at Magill and one at Campbelltown.  Each of the Magill property and the Campbelltown property was subject to a mortgage granted by the bankrupt to Emilio Pastro dated 9 September 1994, and to a mortgage granted by the bankrupt to Maria Pastro also dated 9 September 1994 (the mortgages).  The trustee in the bankrupt’s estate determined to challenge the validity of each of those mortgages as against the trustee pursuant to ss 120 and 121 of the Act.  The indemnities sought from the three creditors arose because the trustee had reservations about the validity of each of those mortgages.  Examinations were conducted under the Act of the bankrupt and of Maria Pastro and Emilio Pastro.  Following the procuring of legal advice, the applicant proposed the institution of legal proceedings for orders under ss 120 and 121 of the Act that each of the mortgages was void as against the trustee.  The three creditors who were not potential respondents to those proceedings, namely Sun Alliance, Hardy and Huppatz were invited to give indemnities in respect of the costs of the proposed proceedings.  They did so.

12                  It is necessary to refer to the terms of the indemnities.  They each related to the proposed action against Emilio Pastro and Maria Pastro to set aside, as against the trustee, the mortgages over the Magill property and the Campbelltown property.  The indemnity given by Sun Alliance and by Hardy is effectively in the same terms.  Each is apparently a full indemnity for the costs of the proposed litigation.  However, each indemnity was limited in the following terms:

‘…liability hereunder shall not exceed such a sum as bears to the total of the said costs, charges, expenses and sums the same proportion as my/our proved debt bears to the total of the proved debt of the creditors who pay such costs, charges, expenses and sums or part thereof.’

The Hardy indemnity was also endorsed with a condition that it be for a maximum of $250.

13                  On 7 January 1998, the trustee sought approval under s 305 of the Act to undertake legal action against Emilio Pastro and Maria Pastro to have set aside the mortgages over the bankrupt’s two properties.  On 13 January 1998 approval for such a costs indemnity under s 305 of the Act was given to the trustee to undertake the proposed legal action.  The approval was subject to the condition that the amount payable under the indemnity be ‘limited to $10,000 plus any costs awarded against’ the trustee if the action failed.  In addition, the approval under s 305 included the following condition:

‘If you realise assets in the estate, those realisations must be applied to reimburse the Commonwealth in respect of amounts paid by it under this direction, either in full, or to the extent that available funds permit.  This condition applies pursuant to subs 305(2), notwithstanding any other provision of the Act or regulations or rules.’

Section 305 provides for the Minister, upon the application of the trustee of the estate of a bankrupt person, and upon being satisfied of certain events, to direct that the cost of a proceeding, including any costs that may be awarded against the trustee, be paid by the Commonwealth.  Section 305(2) provides:

‘A direction made by the Minister under subsection (1) may be subject to such conditions (including conditions as to the taxation of all or any costs in the reimbursement of the Commonwealth, in whole or in part, by the estate of the bankrupt, the debtor or the deceased person, as the case may be) as the Minister thinks fit.’

Counsel for the applicant acknowledged that the direction was not intended to interfere with the proper operation for the order of payment of debts of the bankrupt in Div 2 of Pt VI of the Act, and that if it otherwise sought to achieve that end it would be invalid.

14                  The effect of the costs indemnity given under s 305 was therefore that the Commonwealth would protect the trustee to the extent of $10,000 only of the trustee’s costs incurred in prosecuting the proposed action and to the full extent of any liability of the trustee for the costs if the proposed action were unsuccessful.

15                  The proposed action was duly instituted.  It was successful.  Judgment was given by Finn J in Official Trustee v Pastro [1999] FCA 1631 on 26 November 1999.  His Honour declared that each of the mortgages given by the bankrupt in favour of Emilio Pastro and in favour of Maria Pastro dated 9 September 1994 over both the Magill property and the Campbelltown property was void as against the trustee pursuant to ss 120 and 121 of the Act. 

16                  On 31 March 2000 Emilio Pastro sought an extension of time within which to file and serve a notice of appeal from that judgment.  The application was refused:  Pastro v Official Trustee in Bankruptcy [2000] FCA 508.  Maria Pastro appealed from the decision of Finn J within time.  Her appeal was unsuccessful in the Full Court:  Pastro v Official Trustee in Bankruptcy [2000] FCA 744.

17                  Emilio Pastro declined to give effect to the declaratory order so made.  Proceedings were taken in the Supreme Court of South Australia which led to the Registrar-General being given authority to execute the discharge of the mortgages on his behalf.  The result was that the net proceeds of sale of the Magill property and of the Campbelltown property became available to the creditors in the estate of the bankrupt generally.  The net proceeds of sale are in the indemnity account and are estimated at $222,471.61.

18                  The proceeds of sale of the Magill property were considerably more than were anticipated at the time the creditors were asked to provide the indemnities.  The indemnities were given in early 1998.  The gross selling price was $179,419, but the valuation available to the creditors made on 12 August 1996 was for $85,000 only.  Similarly, the gross selling price of the Campbelltown property was $139,964 whereas the valuation available to creditors was made on 12 August 1996 and was for $110,000.  At the time, the mortgages purported to secure $178,924 on behalf of Emilio Pastro and $53,028 on behalf of Maria Pastro.  Moreover, the proceedings were successful in recovering costs from Emilio and Maria Pastro.  The costs recovered by the trustee were $49,526.  The legal expenses incurred by the trustee were $50,213.  There was only a shortfall of about $700, as events turned out.

19                  Counsel for the respondent did not contend that the undertaking proffered by the Commonwealth on 13 January 1998 pursuant to s 305 of the Act did not amount to an indemnity for costs as that expression is used in s 109(10) of the Act.  I am satisfied that each of Sun Alliance, Huppatz and Hardy gave an indemnity for the costs of the litigation which led to the orders that the two mortgages were invalid as against the trustee.  It is not necessary that the costs incurred by the trustee be actually paid by the indemnifying creditors in advance, or as those costs are incurred, provided there is an enforceable agreement to indemnify the trustee:  see Re Butler; Ex parte Taylor (1995) 57 FCR 499 at 507; Official Trustee in Bankruptcy, in the matter of Matson v Deputy Commissioner of Taxation [1999] FCA 914 (re Matson).

20                  In my view, in the circumstances the Court has power to order that the whole amount recovered by the litigation be distributed amongst the creditors who had indemnified the trustee against the costs of the litigation.  The discretion under s 109(10) is unqualified.  In Re the Estate of Lawrence Robert Connell (Deceased) [2001] FCA 51, Carr J at [24] described the policy behind s 109(10) as being at least twofold:  to encourage creditors to indemnify trustees in bankruptcy who wish to pursue claims in the administration of bankrupt estates, and to reward creditors who bear the burden and take the risks of litigation.  See e.g. Re Glenisia Investments Pty Ltd (In Liquidation) (1996) 14 ACLC 237.  It is in the public interest that the property of a bankrupt should be available to the creditors of the bankrupt, including where the property of the bankrupt may be secured only through litigation.  There is no presumption that the indemnity creditors should not receive the full benefit of the net proceeds of the property or expenses recovered under an indemnity for costs of litigation:  see the remarks of Barrett J in Re Home Corp Projects [2002] NSWSC 879 (Re Home Corp Projects) at [12].  That case concerned the provisions analogous to s 109(10) of the Act in s 564 of the Corporations Act 2001 (Cth).

21                  The way in which the discretion should be exercised is of course dependent upon the facts of the particular case, and is often ultimately a matter of impression:  see per Paine J in Re Bavistock (1946) 14 ABC 30 at 32.

22                  In this matter, I have taken into account the proportion between the debts of the three indemnifying creditors and those of Emilio Pastro and Maria Pastro.  I have taken into account the extent of the risks run by the indemnifying creditors in several respects.  Firstly, I infer from the sum in the general account that the trustee did not have the resources from other property of the bankrupt to pursue the proposed litigation.  Secondly, the potential exposure of the trustee to costs in the proposed litigation was substantial.  As it turned out, the trustee’s own costs were of the order of $50,000.  If the proposed litigation were unsuccessful, the costs of Emilio Pastro and Maria Pastro recoverable from the trustee are likely to have been at least of similar order.  As addressed below, I have also considered the terms and extent of the three indemnities and the risks of the proposed litigation being successful.  Finally, I have considered the possible extent of the property of the bankrupt if the litigation had not been undertaken.

23                  At the time the indemnities were given, the available valuations of the Magill property and the Campbelltown property indicated that there would not have been any residual equity after discharge of the mortgages to Emilio Pastro and Maria Pastro if the proceedings had not been pursued.

24                  The other unsecured creditors in the estate, that is Emilio Pastro and Maria Pastro, resisted the claim to have the mortgages declared void as against the trustee.  Counsel for the trustee put that, in the circumstances, it is significant that the failure to allow to the other creditors the advantage which is sought will result in Emilio Pastro and Maria Pastro benefiting by distribution of assets recovered by proceedings brought against them.  I do not think that is a relevant consideration.  Section 108 provides for equal distribution of the property of the bankrupt between unsecured creditors.  Section 109(10) allows for variation from that starting point, where it applies, but its application should not be affected by any notion of the merits of certain of the unsecured creditors resisting an action brought by the trustee against them.

25                  However, I consider that it is significant that the indemnities were limited in the terms expressed above.  In the event that the proceedings were unsuccessful, the Huppatz indemnity could have protected the trustee for the costs he was liable to pay to Emilio Pastro and to Maria Pastro but it would only have protected the trustee for his own costs (which were about $50,000) to the extent of $10,000.  In that event, because the Sun Alliance indemnity and the Hardy indemnity were limited in a different way, by reference to the pro rata proportion of their proved debts to those of the indemnifying creditors.  Those proportions are 14.55 per cent and 0.59 per cent respectively.  Hence, if the proposed action were unsuccessful, and if it is assumed that the costs of Emilio Pastro and Maria Pastro recoverable against the trustee were also about $50,000 (so the total costs of the trustee were of the order of $100,000), their indemnities were for $14,550 and $590 respectively.  In addition, the Hardy indemnity was limited to $250.  The indemnity under s 305 in such circumstances would have been for $60,000.  On my calculations, in that eventuality therefore, the trustee would have been entitled to recover under the indemnities $74,800 and would have been personally exposed for the balance of the costs.

26                  In those circumstances, I do not consider that it is appropriate to make an order under s 109(10) that the three creditors have a full indemnity in respect of their proven debts from the indemnity account.   I do not consider it is just and equitable that they should have such a benefit when their respective indemnities were limited in the way I have described.  The order under s 109(10) should reflect in some way those limitations.

27                  I do not consider that the other factors to which counsel for the respondent referred weigh much in the scales as to whether an order for indemnity should be made, and if so to what extent.  Counsel referred to the actual shortfall in costs recovered being only $700.  That is correct, but it was not an event which was necessarily the outcome at the time the indemnity was given.  The nature of the application under ss 120 and 121 depended upon the relationship between the bankrupt and Emilio Pastro and Maria Pastro at the time of the mortgages.  That is a matter upon which they had particular knowledge, albeit that the applicant was informed to some extent by reason of the examination.

28                  Nor do I think that the fact that the realised value of the properties was in excess of the mortgage values is of any substantial moment.  The significant thing is that, when the indemnities were being given, the then current valuations of the two properties showed a shortfall.  It was not a circumstance where the creditors could be confident that realisation of the properties in any event would leave a sufficient equity to pay the costs of the proceedings, even if the proceedings were unsuccessful.

29                  It was next put that Maria Pastro ‘conceded’ in the proceedings.  She did not.  She complied with the order of the Court to execute discharges of the mortgages to give effect to its declarations, but she maintained the claims about the validity of the mortgages both at first instance and on appeal.

30                  It was also contended that the Court should not make an order because the risk to which the creditors were exposed was negligible.  I do not accept that.  It is of course plain that the trustee would not seek to bring proceedings unless there was some reasonable prospect of success.  The legal advice given to the Trustee is not in evidence.  There is nothing to indicate that it was conveyed to the creditors.  There is no evidence to indicate that they were assured of success in the proposed action.  In my judgment the case is not shown to be one other than the routine one where the trustee was of the view that there is some reasonable prospect of success in the proceedings, sufficient to pursue them, provided that the creditors were prepared to indemnify the trustee in respect of the costs.  That is the sort of circumstance to which s 109(10) is directed.  That assessment of the nature of the case is confirmed by the facts that both Emilio Pastro and Maria Pastro defended the litigation, and in one instance appealed, and in the other instance sought leave to appeal, from the judgment at first instance.

31                  In my view, in the circumstances, it is appropriate to order that the indemnifying creditors have an advantage over the other creditors in the estate of the bankrupt to the effect that 60 per cent of the monies in the indemnity account be distributed to them, and the balance be available to them to be distributed to all creditors in the estate (including the indemnifying creditors to the extent of their remaining debts) together with the monies in the general account in accordance with s 108 of the Act.  In fixing that amount, I have had regard to the extent of the total indemnity given by the creditors, the risk they collectively undertook, and the other matters I have referred to.

32                  I have also considered whether it is appropriate to distinguish between the way in which the three indemnifying creditors should participate in that advantageous payment.  Such an order was made by consent in Re Home Corp Projects (see at [14]), and as a discretionary exercise of the power in s 109(10) in Re Matson.  In the latter case, Heerey J had regard to the extent and timing of the indemnities given by the creditors concerned, as well as the extent of their respective indebtedness.  In this matter, the Huppatz indemnity extended to about one third of his debt, and was limited as to the trustees own costs on the litigation although it covered whatever the costs the trustee became liable for in the event that the proceedings were unsuccessful.  The Sun Alliance indemnity, as events transpired, represented as a percentage of its total exposure under the indemnity almost the same percentage as its debt bore to the total debts of the three indemnifying creditors.  Had the trustee’s costs been greater, its exposure would not have further increased.  As there is nothing to indicate what costs estimates were provided to the three indemnifying creditors, I do not think I should assume that any assessment of the potential costs exposure was significantly different from that which can be assessed by knowing the trustee’s actual costs.  In the circumstances, there is insufficient to differentiate between those two creditors.  I also propose to treat Hardy equally.  Its debt is slight.  Its indemnity limited its exposure to only about one half of what it was on a strictly pro rata basis in relation to the other indemnifying creditors, with a greater disproportion of its exposure to that of the trustee’s potential costs liability.  However, the resulting difference in outcome is too small to be significant overall.

33                  On the basis that the trustee has otherwise already made any payments in accordance with s 109(1) of the Act.  I therefore order that:

(1)        pursuant to s 109(10) of the Act, the trustee distribute 60 per cent of the amount in the indemnity fund after payment of the costs of this application in payment to Huppatz, Sun Alliance and Hardy rateably between them in proportion to the debts as proved in the estate of the bankrupt, and

(2)        pursuant to s 108 of the Act, the trustee distribute the balance of the amount in the indemnity fund, and the amount in the general fund proportionately between the creditors in proportion to the debts as proved in the estate of the bankrupt except, in the case of Huppatz, Sun Alliance and Hardy, in respect of their proved debts outstanding after the payments made in accordance with (1) hereof,

(3)        the costs of this application be costs in the administration of the estate of the bankrupt and be paid out of the estate.

the extension of time application AND THE APPLICATION UNDER S 104

34                  In response to the application, on 22 March 2004 Emilio Pastro gave notice that he intended to oppose the application inter alia on the ground that he wanted an extension of time to review the decision by the Official Trustee of the estate of the bankrupt pursuant to s 33(1)(c) of the Act to reject the proof of debt made by him as a creditor of the estate, and for an order under s 104 of the Act to ‘review, reverse and in the alternative vary, the decision and to admit the full amount of moneys claimed as owed by Emilio Pastro’.  The trustee took the view that it was more efficient in the circumstances to have that application dealt with at the same time rather than by separate proceedings.  No objection was taken to the form of the proceedings.  In those circumstances, I think it is appropriate to deal with the application at this point.  The affidavit material is relatively brief.

35                  I formally join Emilio Pastro as a respondent for the purpose of having him formally before the Court.

36                  On 23 June 1996 Emilio Pastro lodged a proof of debt in the estate in the sum of $178,928 (an amount also allegedly secured under his mortgage).  On 18 July 2003, that is after the various proceedings were dealt with to set aside the mortgages, the trustee accepted his claim as to $52,115 and rejected it as to $126,810.

37                  The proof of debt attached was an agreement dated 30 August 1994 between the bankrupt and Emilio Pastro in which the recitals included the following:

‘A.       The Lender provided certain financial accommodation to the Borrower on or about the 5^th day of March 1990 (“the Accommodation”).

B.         The Lender’s contingent liability on the Accommodation is $70,753.

C.        The Lender advanced the sum of $20,000 (“the Advance”) to the Borrower on 25^th day of July 1992.

D.        The Lender advanced a further sum of $32,115.31 (“the Second Advance”) to the Borrower on the 1^st day of August 1994.’

38                  The trustee accepted the proof of debt to the extent that it was based upon the two advances of $20,000 and $32,115.  Notice to Emilio Pastro was given on 18 July 2003 as to the grounds why the trustee considered that the bankrupt did not agree to pay interest on those of the advances made to him by Emilio Pastro, and as to the grounds why the trustee rejected the balance of the claimed debt.  It was that Emilio Pastro had failed to provide evidence in respect of the amount of $70,753, as requested in the trustee’s letter of 26 June 2003.  In fact, on 26 June 2003 the trustee had written to Emilio Pastro referring to the contingent liability of $70,753, and asking for evidence in respect of that amount, including whether it was paid as guarantor, and evidence of the amount which had been paid.  A period of 14 days was allowed within which to respond.  Emilio Pastro did not respond within that time.

39                  Documentary evidence subsequently produced to the trustee, and in evidence on this application, purports to indicate that on 5 March 1990 a loan agreement was entered into between the bankrupt and Ebbtide AG (Ebbtide) for a sum of $A110,000 at the interest rate of 19 per cent.  That was confirmed in a letter.  No reference was then made to any guarantee given by Emilio Pastro to support the borrowing by the bankrupt.  By document from Ebbtide dated 22 August 1996, a statement was provided, translated as follows:

‘As requested, we hereby state that the loan of Australian $110,000 (one hundred thousand) [sic] granted Mr Rodolfo Pastro on 5 March 1990 was secured by Mr Emilio Pastro’s guarantee.

The outstanding loan amount, after payments, at 21 June 1994 was $A70,753.32.

To this amount will be added interest on arrears as from that date.’

40                  That is the first documentary evidence of any guarantee given by Emilio Pastro in respect of the bankrupt’s borrowing on 5 March 1990.  It is after the bankruptcy order.

41                  Subsequently on 25 September 2000 Ebbtide demanded payment by Emilio Pastro ‘in his capacity of guarantor’ for an unspecified amount.  The document is headed ‘Statement’.  It asserts that the loan of 5 March 1990 to the bankrupt included the term that, if he did not repay the ‘known amount’ by October 2000, Ebbtide would institute legal proceedings.  No such term appears in the letter dated 15 March 1990 apparently recording the loan agreement. The demand said that if the loan were repaid before the end of October 2000 the amount due ‘will be reduced accordingly’.  It is again apparently signed by a person called Ghezzi, described variously as the administrator or the solicitor of Ebbtide.  There is evidence that on 7 November 2000 the respondent telegraphically transferred to a bank in Switzerland $190,844.  He deposes to that being in payment of the debt of the bankrupt payable under the guarantee.

42                  By document executed before a notary on 8 October 1999, Ghezzi has declared that:

‘… during the period from March 1990 and July 1995, Mr Emilio Pastro and him had several conversations arranging that Mr Emilio Pastro was a guarantor under the loan made by our company Ebbtide AG – Schaan to his brother Rodolfo in the amount of $A110,000.  In consequence of this, further engagements have been taken by Mr Emilio Pastro with reference to the repayment by him of Mr Rodolfo’s loan.  This declaration was delivered at the request of Mr Emilio Pastro and cannot be supported by any documentation due to the legal secrecy which cover [sic] our files.’

There is also a statement showing how the sum of $70,757 at 1 August 1994 accumulated through interest, and interest on interest, to be $190,242 at 31 October 2000. 

43                  There is no explanation offered as to why that material was not submitted to the trustee in the time specified, although I accept that it was subsequently provided to the trustee on 4 August 2003.  When I pointed out to counsel for Emilio Pastro that shortcoming, together with the fact that there was no evidence of the guarantee until the document of 22 August 1996, instructions were sought as to whether Emilio Pastro wished to give further evidence in support of his claim.  He did not.  I also pointed out that there was no evidence of Italian law, nor of the ownership or composition of Ebbtide, or its relationship (if any) to the bankrupt or to Emilio Pastro.

44                  The application to the Court, effectively instituted albeit informally on 22 March 2004 is well outside the time limit prescribed by s 104(3) of the Act.  It permits a creditor to apply to the Court for review of a decision of the trustee in respect of a proof of debt within 21 days from the date on which the decision was made.  It is accepted, however, that the Court has power under s 33(1)(c) to extend that time.  Generally, the Court should extend the time only when good cause is shown to do so:  see Rocom International Pty Ltd v Prentice [2002] FCA 604 at [3] – [4].

45                  There is no explanation given for what is now quite a long delay between the trustee’s notification of 18 July 2003 and the application now under consideration.  On the other hand, because the estate has not been distributed, there will be no real prejudice to the other creditors if the extension of time sought is granted.  I indicated that I would hear the application for the extension of time, and if granted, the application itself at the same time.

46                  In my view, the material available is sufficient to justify an arguable basis for a submission that the application could succeed.  I therefore extend the time within which the respondent may seek an order under s 104 to review the trustee’s decision of 18 July 2003 in respect of his proof of debt to the date of this judgment.  I turn to consider the merits of the application.

47                  In my view, Emilio Pastro has failed to show that the decision of the trustee is erroneous or that the bankrupt was indebted to him, either by a guarantee or in some other way, beyond the sum of $52,115.  I do not consider that the material demonstrates that the bankrupt was indebted to Emilio Pastro for the amount specified in his proof of debt at the date of the bankruptcy, or beyond the two advances totalling $52,115.  He did not take up the opportunity to explain either by affidavit, or in oral evidence, how the amount claimed in his proof of debt was arrived at.  It is not apparently tied to the Ebbtide debt.  His counsel, when asked to explain how the figure of $178,925 was reached, asserted that it arose in part from the two advances totalling $52,115, and in part from some other advances made to the bankrupt which were simply not identified in any document or indeed in the evidence.  Nor does the evidence concerning the Ebbtide indebtedness of the bankrupt persuade me either that the respondent guaranteed that indebtedness, or as to its amount.  I have already given some reasons for that.  There is no documentary basis before 22 August 1996 that Emilio Pastro guaranteed that indebtedness.  The first record from Ebbtide in writing as to the amount of the indebtedness is its letter of 22 August 1996.  That is the first suggestion of a guarantee.  The affidavit of Emilio Pastro suggests that document was produced at his request to evidence the guarantee.  It identified the indebtedness at 21 June 1994 as $70,753.  Somehow, that figure was inserted into the recitals in the mortgage dated 30 August 1994, but nothing explains how that figure was known at 30 August 1994.  Moreover, his counsel was unable to explain how that figure, either with or without interest, made up the sum in the proof of debt of $178,925.  She was unable to explain whether interest payable under the loan agreement was on a simple interest basis, or on a compounding interest basis.  The agreement does not address that.  The statement to the notary by Mr Ghezzi does not confirm that the respondent guaranteed that indebtedness at the time of the loan.  His statement suggests that Emilio Pastro had some discussions with Ebbtide personnel during the years subsequent to March 1990, and somehow later came to assure Ebbtide of the repayability of that debt.  Emilio Pastro has not explained the events in that way.  The two versions of events are inconsistent.  The terms of the alleged guarantee are not spelled out.

48                  In my view, the evidence is not sufficiently cogent to reach the conclusion that, as Emilio Pastro now claims, on 5 March 1990 he guaranteed the indebtedness of the bankrupt to Ebbtide in terms which obliged him to make the payment which he made on 31 October 2000.

49                  The trustee determined that there was no basis to allow interest on the two advances totalling $52,115.  That is because, it is asserted, there is no evidence that the interest payable on those advances up to the date of bankruptcy was not paid.  The proof of debt did not assert any outstanding interest.  Neither of the affidavits of Emilio Pastro asserts outstanding interest on those advances.  In those circumstances, it would be mere speculation to conclude that the interest payable to the date of bankrupts had not been paid on those advances.

50                  There is insufficient material to satisfy me that Emilio Pastro’s proof of debt should be accepted at a different figure than the $52,115 which the trustee accepted.

51                  The application under s 104 of the Act is therefore dismissed.

52                  The issues arising in the application under s 104 occupied a significant part of the hearing.  In my judgment, the appropriate order for costs is that the costs of the application, including the costs of the applications under ss 33(1)(c) and 104 of the Act, be costs in the administration of the estate of the bankrupt and should be paid out of the estate, but from the funds available in the estate after payment of the monies ordered to be paid in accordance with order (1) in [33] above.

Associate:

Dated:              4 June 2004