FEDERAL COURT OF AUSTRALIA

In the matter of Rose, a bankrupt; Godfrey v Whitton [2006] FCA 823

COSTS – s 129 Demand and s 139ZQ Notice under the Bankruptcy Act set aside, by consent – whether costs should be ordered against the Official Receiver – whether costs should be ordered against the Trustee and/or the Official Receiver on an indemnity basis

Held: in the circumstances of the case, it was appropriate to order that two-thirds of the Applicant’s costs be paid by the Trustee who issued the Demand and who requested the issue of the Notice and that one-third be paid by the Official Receiver, all such costs being taxed on a party and party basis

Bankruptcy Act 1966 (Cth) ss 55, 77C, 120, 121, 122, 129, 139ZQ, 139ZS

Terry v The Official Receiver [1998] FCA 1341

Citibank Limited, In the Matter of Stivacatas v Parker [2000] FCA 1914

Terry v Terry; Prentice v Official Receiver [1994] FCA 1031

Gersten v The Minister for Immigration and Multicultural Affairs [2001] FCA 260

IN THE MATTER OF JOHN EMMANUEL ROSE, A BANKRUPT; MURRAY GODFREY AS ADMINISTRATOR OF REGIS TOWERS REAL ESTATE PTY LIMITED (IN ADMINISTRATION) ACN 087 088 202 & ANOR v ROBERT WILLIAM WHITTON AS TRUSTEE OF THE ESTATE OF JOHN EMMANUEL ROSE, A BANKRUPT & ANOR

NSD 641 OF 2006

GRAHAM J

22 JUNE 2006

SYDNEY

IN THE MATTER OF JOHN EMMANUEL ROSE, A BANKRUPT

THE COURT ORDERS THAT:

1.         The applicants' costs thrown away by the vacation of the hearing dates fixed for 23 June 2006 and 26 June 2006 be paid by the first respondent.

2.         The costs of the applicants of the amended application be paid as to two thirds (²/₃) by the first respondent and as to one third (¹/₃) by the second respondent.

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

IN THE MATTER OF JOHN EMMANUEL ROSE, A BANKRUPT

REASONS FOR JUDGMENT

1                     These proceedings were commenced by an Application filed 29 March 2006.  An Amended Application adding the second applicant (‘the Company’) as a party and modifying the relief sought was filed 24 April 2006.  On 10 May 2006 a Further Amended Application was filed further modifying the relief sought.

2                     By force of the presentation by John Emmanuel Rose of a debtor’s petition in accordance with s 55 of the Bankruptcy Act 1966 (Cth) (‘the Act’) and the acceptance thereof by the Official Receiver in accordance with s 55(4A) of the Act on 21 June 2005, John Emmanuel Rose became a bankrupt.

3                     From about 19 April 1999 the bankrupt had been a director of the Company.

4                     On 17 September 2004 the first applicant was appointed as administrator (‘the Administrator’) of the Company.

5                     These proceedings concern a Notice dated 22 February 2006 ostensibly given by the second respondent, the acting Official Receiver for the Bankruptcy District of the State of New South Wales (‘the Official Receiver’), to ‘The Administrator, Regis Towers Real Estate Pty Limited ACN 087 088 202 Administrator Appointed’ in accordance with s 139ZQ of the Act and a Notice of Demand dated 1 March 2006 ostensibly given by the first respondent (‘the Trustee’) to the Administrator pursuant to s 129(4B) of the Act. 

6                     On 12 April 2006 the Official Receiver appeared, submitting to any order save as to costs.

7                     On 15 May 2006 the Trustee filed a cross-application against the applicants as cross-respondents in which leave to proceed against the second cross-respondent, being the Company, was sought and also relief under s 121 of the Act in respect of certain payments said to have been made by the bankrupt in late April 1999, 6 August 1999 and 2 December 1999.  Those amounts bear no relationship to the amounts sought to be recovered under the s 139ZQ notice or the s 129 demand. 

8                     The application and the cross-application were fixed for hearing before me as contested matters likely to occupy three hearing days commencing today.  On 16 June 2006 it became clear that the Trustee was not in a position to proceed with his cross-application and would not be in a position to so proceed at the hearing fixed for today.  It also became clear that in terms of substantive relief on the applicant’s claims as set forth in the Further Amended Application, the parties were in substantial agreement.

9                     At a directions hearing which took place before me on 19 June 2006, I vacated the three hearing days but stood the matter over to today to deal with the costs of the applicants’ Further Amended Application and the costs thrown away by the vacation of the hearing dates.

10                  I have now given directions in relation to the further conduct of the cross-application.

11                  The applicants seek an order that the costs of the application in these proceedings (including reserved costs) be paid by the respondents on an indemnity basis.

12                  The Trustee does not oppose an order for costs being made against him but opposes the making of such an order on an indemnity basis.  The Official Receiver opposes the making of any order for costs against her.

13                  Sections 120, 121 and 122 of the Act each provide for certain transfers of property to be void against the trustee in the transferor’s or debtor’s bankruptcy.  In each of the sections a ‘transfer of property’ includes a payment of money.

14                  Under s 139ZQ of the Act the Official Receiver may, by written notice given to a person who has received any money or property as a result of a transaction that is void under one or other of the sections, require the recipient to pay to the trustee of the bankrupt’s estate ‘an amount equal to the money or the value of the property received’.

15                  Such a notice may be complied with by the transfer to the trustee of the property in question as an alternative to payment of the amount demanded.

16                  By virtue of s 139ZQ(8) an amount payable pursuant to a s 139ZQ notice may be recovered by the trustee as a debt by an action against the recipient of the money or property who has been served with the s 139ZQ notice.

17                  Under s 129(4A) of the Act the trustee of a bankrupt estate may demand the payment of monies which are covered by paragraphs (a), (b) and (c) of that subsection.  Amongst other things such monies must constitute property divisible amongst the creditors of the bankrupt.  The monies demanded by the Trustee of the Administrator in this case were clearly not monies which would constitute property divisible amongst the creditors of the bankrupt estate of John Emmanuel Rose.

18                  The applicants have enjoyed success in the proceedings in respect of the s 139ZQ Notice and also the s 129 Notice of Demand.  Earlier today I made the following declarations and orders, as set out in Short Minutes of Order, by consent:

‘1.        A declaration that the Notice issued pursuant to s139ZQ of the Bankruptcy Act, 1966, dated 22 February 2006 given to the First Applicant by the Second Respondent on the application of the First Respondent is invalid and of no effect.

2.         Pursuant to s139ZS of the Bankruptcy Act, 1966, the Notice issued pursuant to s139ZQ of the Bankruptcy Act, 1966, dated 22 February 2006 given to the First Applicant by the Second Respondent on the application of the First Respondent, be set aside.

3.         A declaration that the property referred to in the document lodged by the First Respondent on 30 March 2006 with ASIC and entitled “Notification of Details of a charge” a copy of which is attached to these orders (“the Property”) is not the subject of a charge in favour of the First Respondent.

4.         Within 7 days, the First Respondent is to furnish the Applicants with a Memorandum acknowledging that the Property is not and never was the subject of a charge in favour of the First Respondent.

5.         A declaration that the s129 Demand dated 1 March 2006 made by the First Respondent to the First Applicant is invalid and of no effect.’

19                  In relation to the question of whether or not it is appropriate to impose any cost burden upon the Official Receiver I have been referred to two authorities directly and one indirectly.  In Terry v The Official Receiver (‘Terry’) [1998] FCA 1341 (Cooper J, 18 September, unreported),Cooper J ordered the Official Receiver to pay the costs of a notice which had been set aside.  That was a case where complaints had been made about formal defects in the notice that had been issued and in which the basis on which it was asserted that the trustee was entitled to have the transaction set aside had been challenged. 

20                  In a later case of Citibank Limited, In the Matter of Stivacatas v Parker (‘Citibank’) (2000) 181 ALR 115, Tamberlin J distinguished Cooper J's decision in Terry on the basis that in the case before his Honour there was, unlike Terry, no suggestion of any formal defect in the notice or any fault or oversight on the part of the Official Receiver.  In Citibank Tamberlin J said at [12]:

‘...Citibank should be awarded costs.  The question is against whom?  The real party with an interest in the issue of the Notice was clearly the Trustee.  The Notice was issued on behalf of the Trustee by the Official Receiver and required payment to the Trustee of the moneys claimed under the allegedly void transaction. The Official Receiver made it clear that the Notice was issued at the request of the Trustee.  As was appropriate in the circumstances the Official Receiver made it clear that she did not intend to take any active part in the proceedings.  The authorities to which I have referred above proceeded on the basis that the Trustee is the real party with an interest in the proceedings and in my view the present case is not a case where the Official Receiver should be ordered to pay costs.  Although the Act provides that the issue of a Notice under section 139ZQ is discretionary (by using the word "may") it does not follow that the Official Receiver ought to suffer the burden of costs where the Notice is issued and the Trustee is unable to make out the position for which he contends.  The position may be otherwise in circumstances where it could be shown that there was some default on the part of the Official Receiver, such as issuing a notice in an incorrect form, which led to its being set aside or where it was manifest on the facts set out as part of the Notice that there was no basis for the claim to be made out.  However, it is not necessary, in my view, for the Official Receiver to embark on a detailed investigation as to the factual or legal merits of the claim which forms the basis of the request for the Notice.’  (emphasis in original)

21                  In the circumstances his Honour ordered that Citibank's costs be paid by the trustee who had requested the issue of the notice by the Official Receiver, but not the Official Receiver herself.

22                  Another case dealing with costs to which I have been referred is Terry v Terry; Ex parte Prentice [1994] FCA 1031 (Lindgren J, 9 December 1994, unreported).  In that case Lindgren J reached a different conclusion on the facts from that reached by Tamberlin J in Citibank and ordered that the trustee bear two thirds of the costs in respect of proceedings where a s 77C notice was set aside and one third of the costs to be paid by the Official Receiver.  His Honour said at [6]-[7]:

‘6.        … The Official Receiver issued the notice in a form which differed from that which had been requested.  The form of notice as issued was narrower than that which had been requested, although still not in an appropriate form.  …

7.         It is by virtue of the Official Receiver's having lent his name to the notice that the potentiality for penalties arises and for this reason the Official Receiver should, in my view, bear some responsibility for the notice.’

23                  The last-mentioned case, of course, was one under s 77C of the Act.  Nevertheless, it is not inappropriate to observe that in the case of notices issued by the Official Receiver at the request of a trustee there will be circumstances when it is appropriate for the Official Receiver to bear some responsibility for the notices.

24                  In the helpful submissions of Mr Murray, solicitor, who has appeared for the Official Receiver, I have been directed to passages from the Explanatory Memorandum circulated in respect of the Bankruptcy Amendment Bill 1991 which led to the insertion into the Act of s 139ZQ.  It is clear that the section was inserted by the legislature with a view to providing an administrative shortcut whereby the necessity for protracted proceedings under ss 120, 121 and 122 of the Act could be circumvented.  Section 139ZQ(1) provides:

‘139ZQ(1)       If a person has received any money or property as a result of a transaction that is void against the trustee of a bankrupt under Division 3, the Official Receiver:

…

(b)        if a registered trustee is the trustee - on application by the trustee;

may require the person, by written notice given to the person, to pay to the trustee an amount equal to the money or the value of the property received.’

25                  In the circumstances of this case the Trustee applied to the Official Receiver for the issue of the 139ZQ Notice.  The Official Receiver had concerns about the matter which are evident from email communications that are in evidence bearing date 14 February 2006.  On 14 February 2006 a communication was sent from an officer within the Insolvency and Trustee Service Australia which included the following:

‘… I will submit the Notice to the Official Receiver for her consideration and if she agrees, her signature.  I still have grave reservations about the basis of the trustee's claim for the full $1,750,000, especially when I note your comment at second dot point under section 139ZQ(1) that RTRE should be required to either pay $1,750,000 to the trustee, or transfer the caretaker/management agreement to the trustee "(and with it, to be fair,” [sic] the outstanding debt to Meriton)" which presumably, is the $1,225,000.00 unpaid 70% vendor finance.  It would follow would it not, that if in the unlikely event that RTRE paid $1,750,000 to the trustee, the trustee would then be required to pay $1,225,000 to Meriton, which would result in the trustee netting $525,000, being the amount which I consider should be claimed under the Notice.’

26                  On 22 February 2006 the Acting Official Receiver sent an email in which he said:

‘As previously advised, due to certain lingering doubts about the grounds on which the Notice is based, the Notice has been issued on the basis that it will be revoked if it is challenged by an application to the Court and the trustee does not provide an undertaking that he will meet the costs of the Official Receiver's legal representation in respect of the Court challenge plus any costs that the Official Receiver is ordered to pay in respect of the Court challenge.’

27                  On 22 February 2006 a letter was sent by the Official Receiver to the Trustee in which he said:

‘As I have advised Mr Piscopo, I have some doubts about the grounds on which the Notice is based.  Accordingly, it is most likely that the Administrator will challenge the notice by way of an application to the Court under s 139ZS of the Bankruptcy Act.

Consequently, I have issued the subject notice on the basis that it will be revoked pursuant to s 139ZQ(4) of the Act, if it is challenged by an application to Court and you do not provide the Official Receiver with an undertaking that you will meet the costs of the Official Receiver's legal representation in respect of a Court challenge plus meeting any costs that the Official Receiver may be ordered to pay in respect of those legal proceedings.

            ...’

28                  The Notice itself was, as I have earlier indicated, directed to the Administrator of the Company.  The formal requirements of the Notice required:

‘You to pay Robert William Whitton [the Trustee] … the sum of $525,000.00 being the value of property received by you by way of transfer of property that is void against the trustee.’  (emphasis added)

29                  Earlier it was indicated that ‘you’ was a reference to a person who had received money or property from Mr Rose as a result of a transaction that was void under s 121 of the Act.

30                  In the course of his submissions, counsel for the applicants drew my attention to the fact that in the Notice there are references to both the Company and to ‘you’ as if there was a distinction between the two which was intended, it being submitted that the Notice imposed a demand upon the Administrator personally rather than the Company in administration of which he was the Administrator.  I am not satisfied that the Notice can be construed as one which seeks to impose a personal liability on the Administrator rather than a bare liability on the Company of which he was the Administrator.

31                  If I understand it correctly, one of the points taken by the Administrator as early as 22 February 2006, in respect of the Notice, was that the s 139ZQ procedure was inappropriate and the Trustee should have proceeded simply by way of lodgement of a proof of debt with the Administrator in the Company's administration.  I do not consider that the assertion made by the Administrator was correct.  It would seem to me that there can be circumstances where, even in respect of a payment of money covered by s 121 of the Act, a s 139ZQ may properly precede the making of a claim for payment of the amount specified in the Notice even if that claim may be expressed in the form of a proof of debt in a company's administration.

32                  The question of whether or not by the Notice a personal liability should be imposed on the Administrator was raised in a letter of 1 March 2006 to the Official Receiver, and in a letter dated 3 March 2006 the Deputy Official Receiver confirmed that there was no intention to impose a personal liability on the Administrator, Mr Godfrey, in respect of the Notice.  In my opinion, this declaration of intention is consistent with a proper construction of the Notice itself.

33                  In relation to the s 129 Notice of Demand, it was acknowledged by the Trustee in the points of defence filed 15 May 2006 that the s 129 Notice of Demand was bad.

34                  The solicitors for the applicants invited the Official Receiver to withdraw the s 139ZQ Notice.  Under s 139ZQ(4) of the Act it was open to the Official Receiver to revoke or amend the original s 139ZQ Notice.  By letter dated 31 May 2006 the Official Receiver declined to do so, notwithstanding the institution of the proceedings challenging the Notice and the earlier communications emanating from the Official Receiver to which I have referred.

35                  On 30 May 2006 the solicitors for the Trustee expressed the desire that the Notice should not be revoked and said, amongst other things, that the Administrator had elected to proceed by way of a Court application to have the Notice set aside and that it was ‘inconsistent’ to now request the Official Receiver to revoke the Notice.  The suggestion was put that the matter should await the decision of the Court in relation to the Notice.  I do not follow why it would be inconsistent for the Official Receiver to revoke a Notice which it was recognised could be set aside.  As it transpires, the parties have agreed that orders be made in the terms to which I have earlier referred.  I should indicate that in respect of the first declaration it was made clear by the applicants that they would not rely upon that declaration as against the Official Receiver in relation to the argument as to costs.

36                  In my opinion, this is a proper case in which there should be an order for costs made in the applicants’ favour which burdens part of the liability upon the Trustee, and part of the liability upon the Official Receiver.  As against Official Receiver, I do not see that there is any justification for costs to be ordered on an indemnity basis. 

37                  I have been referred to a passage in the judgment of the Full Court in Gersten v The Minister for Immigration and Multicultural Affairs [2001] FCA 260 (Lee, Carr and Sackville JJ, 19 March 2001, unreported), where at [19] the Full Court said:

‘... if a party who has no defence to a claim of right, refuses to acknowledge that right and ... obstinately ... obliges the claimant to commence proceedings to enforce that right, that circumstance may attract the exercise of a discretion to award indemnity costs against that party. ...’

38                  Notwithstanding the success which the applicants have enjoyed in the proceedings, and the concerns which the Court has in relation to the failure on the part of the Trustee to file evidence in accordance with the Court's directions to enable the whole matter to be prepared for hearing in the bracket of dates set aside for that purpose, commencing today, I do not think it is appropriate to make an order that any of the costs be paid on an indemnity basis. 

39                  I appreciate that a Calderbank letter was sent by the solicitors for the applicants to the solicitors for the Trustee on 17 May 2006.  That letter does not, in my view, warrant an elevation in the basis on which the costs are to be paid from the normal party and party basis to an indemnity basis.

Associate:

Dated:              29 June 2006