FEDERAL COURT OF AUSTRALIA

McNamara v San (No. 3) [2010] FCA 227

THE COURT ORDERS THAT:

1.                  The amended Further Amended Application filed 12 February 2010 be dismissed.

2.                  The applicant pay the costs of the third respondent, the fourth respondent and the fifth respondent.

3.                  The costs of the fourth respondent and of the fifth respondent be taxed on an indemnity basis as from 25 September 2009.

4.                  The Orders as to costs in paragraphs 2 and 3 may not be entered before 29 March 2010 or such later date, if any, as the Court may on or before 29 March 2010 order.

AND in the event that any party wishes to apply for a different order or orders as to costs

5.                  THE COURT GRANTS LEAVE to any party to file and serve a Notice of Motion returnable for 9:30am on 29 March 2010 or such earlier date as the parties may agree

AND

6.                  THE COURT DIRECTS that any such Notice of Motion, together with Written Submissions in support of the orders proposed therein, be served on the other parties not less than two clear business days before the return date shown in the Notice of Motion.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                                             The matter presently before the Court is a Notice of Motion filed 25 November 2009 in which the third, fourth and fifth respondents seek summary dismissal of the proceedings pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) (‘the Federal Court Act’) and in the alternative orders striking out the Amended Statement of Claim filed 18 August 2009.

2                                             The central issue is whether the applicant has the necessary standing to secure relief under s 120 and/or s 121 of the Bankruptcy Act 1966 (Cth) (‘the Act’) or, alternatively, to secure declaratory relief as to the right of the fourth and fifth respondents to obtain relief under one or other of those sections.  A subsidiary issue arises as to whether or not leave should be granted to the applicant to take fresh steps in proceedings instituted by the applicant as plaintiff against Ivan San, the third respondent, as a defendant in the Supreme Court of New South Wales on or about 8 October 2007 (Supreme Court Equity proceedings no. 4784 of 2007).

3                                             The property in question in these proceedings and in the Supreme Court proceedings is known as 3 Balson Close, Abbotsbury (‘the property’). 

4                                             The applicant was a builder who carried out building works at the property for the first and second respondents.  According to an affidavit sworn by the applicant, findings were made in his favour by the Consumer, Trader and Tenancy Tribunal on 24 October 2006, with a grant of relief in his favour ‘in the order of $336,305.07’.  On 20 September 2007 Delaney DCJ delivered a judgment in the District Court of New South Wales proceedings 69/07 at Parramatta in which his Honour made reference to the registration in the District Court of an order from the Consumer, Trader and Tenancy Tribunal that the first and second respondents pay the applicant the sum of $329,848.83.

5                                             On 27 September 2007 the fourth respondent, Official Trustee in Bankruptcy, was appointed as trustee of the estate of the second respondent, Julie San (see ss 58(1) and 160 of the Act) and on 18 July 2008 the fifth respondent, Schon Gregory Condon, was appointed as trustee of the estate of the first respondent, Bao San (see ss 58(1) and 156A of the Act), who became bankrupt on his own petition.

6                                             There may be an issue as to whether the commencement of the Supreme Court proceedings was competent (see s 58(3)(b) of the Act).  The answer to this question would no doubt depend upon a determination of the precise date upon which the initiating process was filed in the Supreme Court.  For reasons which will shortly appear, this issue need not be addressed at this stage.

7                                             A Further Amended Statement of Claim was filed by the applicant, then referred to as Paul Alan (sic) McNamara, in the Supreme Court proceedings, on 1 May 2008.  The Further Amended Statement of Claim sought relief under s 37A of the Conveyancing Act 1919 (NSW) (‘the Conveyancing Act’) asserting that a contract for sale of the property from Bao San and Julie San, the parents of Ivan San, to Ivan San, which was made on 23 December 2006, and the transfer of the property pursuant to that contract, by a Memorandum of Transfer No. AC899171B dated 19 January 2007, was voidable at the instance of the applicant.

8                                             The Further Amended Statement of Claim included a section headed ‘Sham Marketing and Agency’.  It alleged that the relevant agency agreement between L J Hooker Cabramatta and Bao San and Julie San provided for an inadequate remuneration for L J Hooker Cabramatta, being a commission of one per cent of the sale price.

It further alleged that L J Hooker Cabramatta did not market or promote the sale of the property the subject of the relevant contract and transfer in a manner that a real estate agent engaged for the purpose of achieving the best price reasonably obtainable, would reasonably undertake. 

9                                             The applicant directs attention to issues such as those canvassed in relation to mortgagees exercising powers of sale at [87] in Upton v Tasmanian Perpetual Trustees Ltd (2007) 158 FCR 118.

The Further Amended Statement of Claim in the Supreme Court proceedings included allegations criticising the advertising of the forthcoming auction sale of the property, the unreasonable shortness of the marketing period, the fact that open house inspections were not advertised or held, the fact that no signage for the sale of the property was erected on the property, the fact that professional photographs designed to present the property in its best light were not taken or incorporated into marketing material used in the marketing of the property, that the property was not presented in a manner likely to promote its sale and that it was not presented in a manner conducive to encouraging potential purchasers to attend and bid at the auction sale of the property.

10                                          The evidence presently before the Court establishes that the forthcoming auction of the property on Saturday 23 December 2006 was advertised in the ‘Fairfield City Champion’ newspaper on four occasions (29 November 2006, 6 December 2006, 13 December 2006 and 20 December 2006), contrary to the allegation in the Further Amended Statement of Claim in the Supreme Court proceedings that it was only so advertised on two occasions.  The evidence also establishes that material in the form of a flyer was used in the marketing of the property which incorporated seemingly professional photographs designed to present the property in its best light, contrary to the allegation to the contrary in the Further Amended Statement of Claim.  To be fair to the applicant, one might have thought that the photograph of the main facade would have been taken after the surrounding grass, in the foreground, had been mown.

11                                          The agent’s flyer advertising the forthcoming auction on site at 11:00am on Saturday 23 December 2006 contained three coloured photographs which depicted a substantial three storey home with a satellite dish attached to the upper level, a wide hallway with a vaulted ceiling and chandelier, columns in the entrance vestibule, a curved staircase with an intricate metalwork handrail and banister and a view over adjacent properties that had the appearance of having less substantial improvements upon them than those on the property itself.

12                                          The flyer described the property as being ‘On Top Of The Hill’.  It noted that it featured:

‘*7 bedrooms plus study

* Grand entry & foyer

* Indoor/in ground pool with sauna & private gym area

* Un-interrupted city view

* House size: 1200m2 in total

* Land size: 3684 m2

* To be viewed to appreciate’

The flyer indicated that inspection was ‘By Appointment Only’, perhaps suggesting some exclusivity.  It did not suggest to me a desire to deter inspections by potential purchasers.

13                                          One catalyst for the present proceedings in this Court has been a difference of opinion between the applicant on the one hand and the fourth and fifth respondents on the other as to whether or not the transfer of the property to the third respondent was at an undervalue and/or made by the first and second respondents for the main purpose of defeating the creditors of the first and second respondents.

14                                          Another catalyst has been a failure or unwillingness on the part of the applicant to fund the fourth and fifth respondents in the bringing by them of proceedings under s 120 and/or s 121 of the Act.

15                                          A certificate of title for the property issued on 24 November 2004 (Folio Identifier 641/748199) showed the first and second respondents as the registered proprietors of the property as joint tenants.

It would appear that on 15 November 2004 the first and second respondents had mortgaged the property to Bank of Western Australia Limited.

16                                          The contract for sale of the property from the first and second respondents to the third respondent bears date 23 December 2006 i.e. the date of the advertised auction.  The purchase price payable under the contract was $1,150,000.  The Memorandum of Transfer of the property from the first and second respondents to the third respondent was dated 19 January 2007. 

17                                          It would appear that both the contract and the transfer were stamped concurrently on 22 January 2007.  The stamp duty paid on the contract for sale was $48,740.00 and the stamp duty paid on the transfer pursuant to that contract was the nominal amount of $2.00.  Somewhat curiously, the Memorandum of Transfer AC899171B had annexed to it a form of transfer from the first and second respondent to the third respondent recording that the transfer was ‘by Family Court Consent Order’.  However, the amount of the stamp duty paid would appear to suggest that an ad valorem assessment had been made based upon an arm’s length transaction for a substantial consideration.  The evidence does not reveal whether a normal sale on 23 December 2006 for $1,150,000 would attract stamp duty of $48,740.00 or some other amount.

18                                          In an affidavit sworn by the third respondent in the Supreme Court proceedings on 7 February 2008 he deposed to the fact that there had not been many bids for the property.  He said:

‘37.      To the best of my recollection there would have been about 4-5 bids, but no more than about 10 bids for the Property in total. 

38.       I recall that the second highest bid for the Property was $1.05 million.  I then made the highest bid of $1.1 million but the Property was passed in because it had not reached its reserve price.

…’

19                                          A chronology of documents bearing upon the value of the property which were placed before the Court on the hearing of the current application is as follows:

20                                          It will be apparent that the evidence does not contain any valuation of the property as at 23 December 2006 determined according to the test suggested as appropriate by Griffith CJ in Spencer v The Commonwealth of Australia (1907) 5 CLR 418 at 432; see also Tyler v Thomas (2006) 150 FCR 357 at [45].

21                                          The most proximate and relevant valuation would appear to be that produced by Hodder Rook & Associates for Macquarie Bank Limited and associated companies, said to be as at 21 September 2006.  The relevant expression of opinion as to value was recorded as follows:

‘I certify that I have inspected the above property on the date below [21-Sep-06] and subject to the terms of the API Supporting Memorandum, I assess the Market Value of the Property as above [$1,200,000] and recommend it for an appropriate mortgage advance.  The valuation is for the use only of the party to which it is addressed and its mortgage insurers for mortgage purposes and is not to be used for any other purpose. …’

22                                          L J Hooker Cabramatta prepared a list of enquiries made in respect of the property during the four week auction programme.  That list recorded eight names. 

The bidders record referable to the auction of the property on 23 December 2006 showed four bidders listed, including the third respondent.  The highest bid of $1,100,000 was noted, at which the property was not sold. 

The contract for the sale of the property by the first and second respondents to the third respondent was entered into after the auction.  It was for $50,000 more than the highest bid at the auction and $50,000 less than Hodder Rook & Associates’ valuation of 17 September 2006.  It was $100,000 more than Clisdell’s Valuations’ valuation of $1,050,000 ‘for Family Law Purposes’ and also $100,000 more than Malcolm Garder’s valuation for ‘Family Law Purposes’. 

23                                          It may be noted that Mr McMurray’s ‘driveby estimate’ of value, almost a year after the relevant date, expressly indicated that it was ‘not to be construed as a formal valuation, which would be dependant on a full internal inspection’.  Mr McMurray also observed:

‘Based on our investigations we consider there has been a significant over capitalisation having regard to the general area …’

24                                          It would appear that the third respondent relied upon mortgage finance of $750,000 from Macquarie Mortgages Pty Limited to enable his purchase of the property to be completed.  It would further appear that the property was sold by the third respondent’s mortgagee exercising its power of sale for $1,195,000 on 16 August 2008, almost two years after the relevant date.

25                                          On 15 September 2008 the fifth respondent wrote to the solicitors for the applicant in relation to the applicant’s Supreme Court proceedings.  In that letter Condon Associates said:

‘We understand that Mr McNamara is undertaking this action as he believes the sale of the property was a transaction entered into to defeat Creditors.  In order to determine if the transaction was to defeat Creditors it is necessary to establish that the property was not sold for a fair value and that the full consideration was not paid to the vendor. …

Fair Value of Property

On 31 May 2005 a valuation report was prepared by Malcolm Garder where the Property was valued at $1,050,000.

As you are aware, there was an auction for the property on 23 December 2006, for which Ivan San held the highest bid of $1,100,000.  The auction was passed in (sic).

…

On 23 December 2006 contracts were exchanged for $1,150,000.  The consideration for the sale was $100,000 more than the valuation conducted in May 2005, and was $50,000 higher than the highest bid at auction.

On 16 August 2008 the property (which was then owned by Mr Ivan San) was under the powers of the mortgagee at auction for $1,195,000 (sic).

The sale price achieved has resulted in an increase in value of the property between May 2005 ($1,050,000) and August 2006 (sic) ($1,195,000) of $145,000.  This equates to an increase in the value of the property in this period (3.25 years) of 13.8%.

If one were to divided (sic) the 13.8% by 3.25 years, it can be determined that the value of the property increased at an average of 4.2% per annum.

After applying the average movement in the property price of 4.2% to the number of years between the valuation of Mr Garder to the purchase of the property by Mr Ivan San the estimated value of the property is determined to be $1,119,678. (This has been determined by multiplying 4.2% to the 1.58 years between the two events to get an adjusted figure of 6.6%.  The 6.6% is then applied to the base price of $1,050,000 to arrive at the value provided above.

As Mr Ivan San entered into a contract for the purchase of the property for $1,150,000, we can see no reason to support the argument that the consideration to be paid on the contract was not fair and reasonable.

…

As we have formed the view that the property was sold for a fair value, and that the purchase price has been settled by Ivan San, we cannot support the view that the transaction has been entered into to defeat the claims of Creditors.

…’

26                                          On 17 September 2008 the Supreme Court of New South Wales ordered that all monies payable by the purchaser of the property from the third respondent’s mortgagee exercising power of sale (Perpetual Limited) other than the monies required to be paid on settlement to that mortgagee in discharge of mortgagee registered AC899172, be paid into Court.

27                                          As it transpires the surplus moneys from the mortgagee sale are apparently held in a controlled moneys account in the name of J A Buda & Associates, the former solicitors for the third respondent.

28                                          In the course of his evidence in chief on the current motion the applicant said that at some stage after the sale of the property to the third respondent he had a conversation with the third respondent to the following effect:

McNamara:      ‘I don’t believe you’re paying for this property.’

Ivan San:          ‘I’m not.  I have a benefactor.’

McNamara:      ‘I believe your father is paying for the property.’

Ivan San:          ‘No. I shouldn’t say any more. We’ll have to end this conversation now.’

29                                          Evidence was also given by the applicant that when the second respondent was examined before a Registrar at Parramatta on an Examination Summons, presumably somewhere in the middle of 2007, he directed questions to her.  When he asked her if she received any money for the property, she replied ‘No, I gave it away.’

30                                          On 16 April 2009 the applicant’s solicitors wrote to both Insolvency & Trustee Service Australia and Condon Associates complaining about the trustees’ failure to institute proceedings under ss 120 and 121 of the Bankruptcy Act, referable to the transfer of the property from the first and second respondents to the third respondent, to have the relevant transfer declared void. 

On 20 April 2009 Insolvency & Trustee Service Australia responded to the applicant’s solicitors’ letter advising that ‘it would appear the transfer may have been at market value’ and indicating that the Official Trustee in Bankruptcy did not propose to commence legal proceedings under ss 120 and 121 of the Act.

31                                          In the foregoing circumstances the proceedings, presently before the Court, were instituted by the filing of an Application on 25 June 2009.  An Amended Application was filed on 18 August 2009 and a Further Amended Application was filed on 3 November 2009.

32                                          On 8 February 2010 leave was granted to the applicant to further amend the Further Amended Application filed 3 November 2009 by deleting paragraph A3 and substituting as A3:

‘A declaration that the transfer of the family home of the first and second respondents to the third respondent is void against the fourth and fifth respondents.’

In addition, leave was granted to the applicant to amend paragraph 2 of the preamble to the Further Amended Application filed 3 November 2009 by deleting that paragraph and substituting

‘2.        A declaration that the transfer of the family home property is void under section 120 and/or section 121 of the Bankruptcy Act 1966 (Cth).’

33                                          On 12 February 2010 a Further Amended Application was filed incorporating these amendments.  That Further Amended Application was itself further amended on 12 February 2010 by the deletion of the word ‘to’ from the second line of paragraph A4.

34                                          The applicant’s substantive claims as contained in the Further Amended Application filed in Court on 12 February 2010, and further amended on that day were as follows:

‘3.        A declaration that the transfer of the family home of the First and Second Respondents to the Third Respondent is void against the Fourth and Fifth Respondents.

4.         … a declaration that the proceeds of settlement of the mortgagee’s sale of the property now held by JA Buda & Associates are vested in the Fourth and Fifth Respondents.

5.         … an order that the proceeds of settlement of the mortgagee sale of the property now held by JA Buda & Associates be paid out in accordance with the following order and in the alternative, that they be paid to the Fourth and Fifth Respondents.

6.         Upon the Applicant’s undertakings that;

a.         insofar as these proceedings seek orders and relief pursuant to ss.120 and 121 of the Bankruptcy Act (Cth) 1966, he will undertake the conduct of the proceedings for the benefit of the Fourth and Fifth Respondents at his cost; and

b.         he will indemnify the Fourth and Fifth Respondents against any costs which might otherwise be ordered against them in respect of orders and relief sought pursuant to ss.120 and 121 of the Bankruptcy Act (Cth) 1966,

… orders pursuant to s.109(10) of the Bankruptcy Act (Cth) 1966, that the moneys to be vested in the Fourth and Fifth Respondents or to be paid to them by reason of or as ordered in these proceedings, be paid out by the Fourth and Fifth Respondents as follows:

c.                     in payment to the Applicant to reimburse in full his costs in these proceedings relating to orders and relief sought pursuant to ss.120 and 121 of the Bankruptcy Act (Cth) 1966;

d.                     in payment to the Applicant to reimburse in full his costs in these proceedings relating to orders and relief sought pursuant to ss.109(10) of the Bankruptcy Act (Cth) 1966;

e.                     in payment to the Applicant to reimburse 50% of his costs in the Equity proceedings incurred before the appointment of the Fourth Defendant (sic) as Trustee in Bankruptcy of the Second Respondent;

f.                      in payment to the Applicant in the amount of 80% of the balance of any moneys to be so vested or paid; and

g.                     in payment of the balance to the Fourth and Fifth Defendants (sic)  equally on the basis that the Applicant is not to further share in the same.

…’

35                                          The Further Amended Application also incorporated a ‘CLAIM FOR INTERLOCUTORY RELIEF’ which relevantly included:

‘1.        Leave to continue Supreme Court proceedings number 4784 of 2007.’

36                                          In relation to the Supreme Court proceedings instituted by the applicant, the solicitors for the applicant wrote to Insolvency & Trustee Service Australia on 27 February 2009 as follows:

‘Our client is prepared to maintain these proceedings [Supreme Court proceedings under s 37A of the Conveyancing Act 1919 (NSW)], without cost to the trustees in bankruptcy of both Bao San and Julie San, if he is able to retain a fair proportion of any proceeds he is able to recover as a result of the proceedings.

…

… We write to seek your consent to orders pursuant to s 109(10) of the Bankruptcy Act 1966 (Cth) for the payment out to our client in priority in a manner which will offer a fair recovery having regard to the additional money, risk and time which our client must inevitably expend or incur, in the furtherance of the proceedings.

The orders which we propose are to provide that moneys recovered in the proceedings be applied as follows:

1.         Payment to our client to reimburse in full his costs of the Supreme Court proceedings incurred after the sequestration order made against Julie San.

2.         Payment to our client to reimburse in full his costs of and incidental to his application under s.109(10) of the Act.

3.         Payment to our client to reimburse 50% his costs of the Supreme Court proceedings incurred before the sequestration order against Julie San; and

4.         Payment to our client of 80% of the balance of any amounts recovered.

5.         Payment of the balance to the trustees equally.

…’

37                                          A letter mirroring that sent by the solicitors for the applicant to Insolvency & Trustee Service Australia was sent by the applicant’s solicitors to Condon Associates on the same day.

38                                          On 6 March 2009 Insolvency & Trustee Service Australia responded to the letter of the solicitors for the applicant of 27 February 2009 inter alia as follows:

‘…

The Official Trustee can not consent to orders as proposed, on the basis that this section [s 109 of the Bankruptcy Act] applies to actions that have commenced under the Act.  However, the Official Trustee would abide by the orders made by the Supreme Court.

…’

39                                          In a letter dated 25 August 2009 the solicitors for the fourth respondent advised the solicitors for the applicant as follows:

‘We have been instructed by our client to advise as follows:-

…

2.         Consideration will be given by our client to seeking declarations under section 120 and 121 in respect of a sale of the bankrupt’s home subject to:-

(a)       provision by your client of evidence supported by documentation in relation to his allegation the property was sold at under value and acquired by the third respondent with funds provided by the bankrupts or from businesses conducted by them.

(b)       the provision by your client of adequate security in respect of costs to be incurred by our client in further investigating your clients allegations, conducting examinations under section 81 and prosecuting proceedings if appropriate.  Please note security for costs would need to extend to protect our client in respect of any order for costs which might be made against it if proceedings brought by it prove to be unsuccessful.

…’

40                                          On 17 September 2009 the solicitors for the fifth respondent wrote to the applicant’s solicitors as follows:

‘…

1.         Our client will not consent to the relief sought by your client in the proceedings.  We have previously outlined to you in correspondence and in communications with your Counsel that the Application made by your client has no legal basis and little or no prospects of success.  In the same circumstances we offered to consent to an Order that the proceedings be discontinued with no Order as to costs.  Your client ignored such offer.

2.         We note that your client is attempting to usurp the powers of the Trustee in circumstances where your client expects to be able to conduct proceedings in the name of the Trustee and without giving any indemnity for costs.  Your client does not appear to have assets to give such indemnity or satisfy any Costs Order.

3.         We give you notice that in circumstances where the claims have little or no prospects of success and do not appear to have any reasonable legal grounds of being pursued that our client will consider pursuing an Application that the partners of your firm pay our client’s legal costs in the event a Court takes a similar view as to merits of the Application and in the event your client does not have the financial resources to satisfy any Costs Order.  A copy of this letter and previous correspondence will be tendered to the Court in support of an Application that your client pay our client’s costs on an indemnity basis and also possibly your firm.

…’

41                                          On 25 September 2009 the solicitors for the applicant wrote to the solicitors for the fifth respondent as follows:

‘We are of the view our client has an arguable case in terms of the requirements of subsections 121(1). …

… we ask, for the sake of clarity, that you confirm the Trustee does not intend to commence proceedings under section 121 of the Bankruptcy Act 1966. …’

42                                          On 29 September 2009 the solicitors for the fifth respondent wrote to the solicitors for the applicant as follows:

‘…

We are concerned that we are continually emphasising to you and your Counsel the deficiencies in your client’s position in circumstances where you continue to seek clarification when we have provided the same information to you on numerous occasions.

Please note that the first reason that our client is not in a position to conduct proceedings against Ivan San is because your client has not proffered any adequate financial funding to enable such proceedings to be conducted or investigated.  Additionally there are many evidentiary deficiencies in the proposed claim at present such as inadequate evidence as to value of the property at the date of transfer and inadequate evidence that the Bankrupt has in any manner funded Ivan San to purchase the property.

Until your client agrees to provide funding no useful purpose can be served by continuing to incur substantial costs in this matter when our client’s position has been made patently clear in communications to date.

We again confirm that at present our client Trustee does not intend to commence proceedings under s 121 of the Bankruptcy Act.  However if your client is prepared to provide adequate funding to further investigate the claim AND can obtain evidence from a Valuer that the property was valued at substantially more than the sale price at the time of transfer and additionally that bank statements or other evidence demonstrates that Ivan San received funding from the Bankrupt to enable the purchase, then in those circumstances our client could reconsider the position.  However that said, our client would not consent to your client conducting the proceedings in our client’s name and having control of the proceedings, which is how the present application is formulated.

…

… The manner in which these proceedings have been conducted by your client has led to substantial and unnecessary costs. 

…’

43                                          To like effect the solicitors for the fourth respondent wrote to the solicitors for the applicant on 30 September 2009 as follows:

‘•         We have invited your firm and your counsel to provide the evidence Mr McNamara claims he has to support such applications [applications under s 120 or 121 of the Bankruptcy Act in respect of the sale of the bankrupts’ home].  This has not been forthcoming;

•          Notwithstanding several suggestions by both our firm and Gillis Delaney that Mr McNamara supply appropriate indemnity to enable further investigation this has not been forthcoming;

•          There are no funds in the estate of Julie San to warrant further investigation;

…’

44                                          On 29 October 2009 the solicitors for the applicant wrote to the solicitors for the fifth respondent as follows:

‘… You will appreciate that our client has commenced the proceedings as he has done before discussions between the parties led him to his present understanding that the Trustees may be prepared to pursue such claims if our client were to put the Trustees in funds and provide a substantial security for adverse costs orders.

… we enclose on a without prejudice basis a copy of a valuation estimate prepared by Mr McMurray dated 5 October 2007.  This document is made available only for the purpose of assisting our respective clients to resolve their differences.  You will observe that the estimate assesses the value of the property at that time [presumably a reference to 5 October 2007] at $1.75-$2.0m, considerably in excess of the sale price to Ivan San.  Since the provision of his valuation, Mr McMurray has confirmed that in his view, the valuation of the property would have been the same as at the time of sale to Ivan San. …

Our client is concerned to ensure that the costs incurred are minimised.  He is concerned that he will not be able to satisfy the Trustee’s requirements both as to funding and as to security. …

….

5.         The legal basis on which our client is entitled to proceed as he has is as follows:  He has in (sic) interest in the subject matter of the proceedings, namely the bankrupts’ estates.  He has an interest in the exercise of rights against the bankrupts permitted under the Bankruptcy Act and the avoidance of the impugned transaction against the Trustees.  The Act does not provide that only the Trustees may commence proceedings under ss.120 and 121.  Our client seeks orders in favour of the Trustee.’

45                                          On 30 October 2009 the solicitors for the fifth respondent responded to the applicant’s solicitors letter of 29 October 2009 as follows:

‘…

2.         Under no circumstances would our client be prepared to instruct your firm to act on his behalf in any proceedings, particularly as your firm has shown a lack of understanding of the relevant provisions and the impact proceedings would have upon our client’s position.

3.         Your client’s indemnity has no value.

4.         The Valuation is not a proper valuation at the relevant time.

5.         Our client cannot consent to Orders which have no legal basis and as an Officer of the Court has an obligation to advise the Court of such.

6.         With respect your client’s application is misconceived. … With respect your client is seeking to have rights which under Statute can only be pursued by a Trustee to in effect be assigned to your client where there is no legal basis to do so.’

The Notice of Motion filed 25 November 2009

46                                          The joint Notice of Motion of the third, fourth and fifth respondents for relief under s 31A(2) of the Federal Court Act or alternatively Order 11 rule 16 of the Federal Court Rules is irregular insofar as it contemplates separate representation for different moving parties in the one Notice of Motion.  However, the parties are agreed that the Notice of Motion as filed on 25 November 2009 should be treated as three separate Notices of Motion seeking relief on behalf of the third, fourth and fifth respondents severally, rather than collectively.  But for this agreement I would not have been disposed to permit separate submissions to be made in support of the Notice of Motion by each of the parties’ legal representatives.

Summary dismissal under s 31A

47                                          A Full Court recently addressed the approach to be taken to applications under s 31A of the Federal Court Act in Kowalski v MMAL Staff Superannuation Fund Pty Ltd (2009) 178 FCR 401 (‘Kowalski’) at [23]-[31] as follows:

‘23       Section 31A was inserted in the Federal Court Act by the Migration Litigation Reform Act 2005 (Cth). Section 31A made provision for the Court to give summary judgment for an applicant in relation to the whole or any part of a proceeding upon it being satisfied that the respondent had no reasonable prospect of successfully defending the proceeding or that part of the proceeding. More importantly for the purposes of the present case, it also provided for a judgment in the nature of summary dismissal of the whole or any part of a proceeding on the application of a respondent, in the event that it was satisfied that the applicant had no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.

24        Section 31A relevantly provided:

31A          ...

(2)     The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)        the first party is defending the proceeding or that part of the proceeding; and

(b)        the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.

(3)        For the purposes of this section, ... a proceeding or part of a proceeding need not be:

(a)        hopeless; or

(b)        bound to fail;

for it to have no reasonable prospect of success.

(4)        This section does not limit any powers that the Court has apart from this section.

25        The effect of s 31A was to soften the test for a successful application for summary judgment as stated by the High Court in Theseus Exploration NL v Foyster (1972) 126 CLR 507 (Theseus Exploration) and also the test for a successful application for summary dismissal as stated by Dixon J, as his Honour then was, in Dey v Victorian Railways Commissioners (1949) 78 CLR 62 and by Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 (General Steel Industries). See also Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd (2008) 167 FCR 372  (Jefferson Ford) at [45], [57], [63], [124].

26        The Explanatory Memorandum circulated by authority of the Attorney-General in relation to the Migration Litigation Reform Bill 2005 (Cth) revealed the purpose of the new s 31A of the Federal Court Act. It relevantly provided:

21.       … Section 31A provides that the Court may give summary judgment in a matter where it is satisfied that a proceeding or part of a proceeding, or a defence to a proceeding or part of a proceeding, has no reasonable prospect of success.

22.       Subsection 31A(3) provides that for the purposes of giving summary judgment, a proceeding or part of a proceeding, or a defence to a proceeding or part of a proceeding, need not be hopeless or bound to fail for it to have no reasonable prospect of success. This moves away from the approach taken by the courts in construing the conditions for summary judgment by reference to the “no reasonable cause of action” test, in Dey v Victorian Railways Commissioners ... and General Steel Industries Inc v Commissioner for Railways (NSW) ... [both of which were summary dismissal cases]. These cases demonstrate the great caution which the courts have exercised in regard to summary disposal, limiting this to cases which are manifestly groundless or clearly untenable.

23.       Section 31A will allow the Court greater flexibility in giving summary judgment and will therefore be a useful addition to the Court's powers in dealing with unmeritorious proceedings.

27        In his Second Reading Speech in the House of Representatives (Hansard 10 March 2005 at p 3) the Attorney-General said, amongst other things:

The bill also strengthens the power of the courts to deal with unmeritorious matters, by broadening the grounds on which federal courts can summarily dispose of unsustainable cases. ...

A like observation was made by the Minister delivering the Second Reading Speech in the Senate (Hansard 11 May 2005 at p 139).

28        It may be observed that the word “may” in the expression “may give judgment” in s 31A(1) and (2) is, in the context in which it is used, permissive, not mandatory. Furthermore the use of the word “unmeritorious” in the Explanatory Memorandum and both of the Second Reading Speeches, along with the use of the word “unsustainable” in both of the Second Reading Speeches, indicates that a generally cautious approach should still be adopted to the exercise of the Court's powers under s 31A.

In relation to the use of the word “may” it is instructive to note the recent observations of Gordon J in Jefferson Ford 167 FCR 372 at [128]. However, in our respectful opinion, the preconditions for the exercise of the relevant power, which require value judgments to be made in the absence of a full and complete factual matrix and full argument thereon, lead us to the view that a discretion is reposed in the judge hearing the relevant application to grant summary judgment.

29        The concept of “no reasonable prospect of successfully prosecuting” a proceeding, which is a relevant issue where summary dismissal is sought under s 31A(2) of the Federal Court Act, was addressed by Rares J in Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720. At [43] his Honour said:

... The concept of a party having “no reasonable prospect of successfully prosecuting a proceeding” has some similarity to the test at common law for determining whether a jury properly instructed could reach a verdict for the plaintiff. ...

(Emphasis added.)

At [44] Rares J said:

[44]     In a case to which s 31A applies, where there is a real issue of fact to be decided in the sense identified in the above principle [a reference to [43] and to Hocking v Bell (1945) 71 CLR 430 at 441-442], and, possibly, where there is a real issue of law of a similar kind, it is obviously appropriate that the matter goes to trial. ...

30        In White Industries Australia Ltd v Federal Commissioner of Taxation (2007) 160 FCR 298 (White Industries) Lindgren J said at [50] that s 31A “is concerned with the bringing and defending of proceedings, not just with pleadings; with substance, not just with form”.

31        It remains a matter for a judge hearing a summary dismissal application to exercise some discretion as to whether questions of law that have been raised are so difficult that they ought not to be decided summarily.’

48                                          The question of the applicant’s standing to seek the final relief claimed in the amended Further Amended Application filed on 12 February 2010 in this case, is plainly one of law.  Its determination, if adverse to the applicant, would require a finding that the applicant has no reasonable prospect of successfully prosecuting that part of the proceeding.

49                                          As I see it, there is nothing in s 31A of the Federal Court Act which limits its application to cases where the Court is satisfied that an applicant has no reasonable prospect of successfully prosecuting the relevant proceeding on the facts. 

50                                          In my opinion, the resolution of the threshold question as to the applicant’s standing to obtain the final relief that he seeks is clear.  It is equally clear that the legislature contemplated that s 31A might be invoked whenever a determination on a question of law rendered an applicant’s case unmeritorious or unsustainable.

51                                          Counsel for the applicant rightly draws attention to the fact that the present applications for summary dismissal proceed upon an incomplete factual matrix such that a generally cautious approach should still be adopted to the exercise by the Court of its summary dismissal power under s 31A, as indicated by the Full Court in Kowalski at [28].  However, the question of the applicant’s standing in this case would not be resolved differently were the matter to proceed to trial thereby affording the applicant an opportunity to call further evidence touching upon his right to seek the relief claimed by him.

The Court’s power to strike out a pleading under Order 11 rule 16

52                                          Order 11 rule 16 relevantly provides:

‘16       Where a pleading –

(a)        discloses no reasonable cause of action … or other case appropriate to the nature of the pleading;

(b)        has a tendency to cause prejudice, embarrassment or delay in the proceeding; or

(c)        is otherwise an abuse of the process of the Court,

the Court may at any stage of the proceeding order that the whole or any part of the pleading be struck out.’

53                                          In light of the conclusions which I have reached in relation to the summary dismissal applications contained in the Notice of Motion filed 25 November 2009, it is unnecessary to address the alternative strike out applications.

Relevant provisions in the Bankruptcy Act

54                                          Sections 120 of the Act relevantly provided:

‘120(1)            A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a)        the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and

(b)        the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.

…

     (3)               Despite subsection (1), a transfer is not void against the trustee if:

…

     (4)               The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.

…

     (7)               For the purposes of this section:

…

(c)        The market valueof property transferred is its market value at the time of the transfer.’

55                                          Section 127 of the Act addressed time limits for the commencement of proceedings by the trustee of the estate of a bankrupt.  Relevantly in relation to proceedings under s 120, s 127(3) provided:

‘127(3)            An action under section 120 with respect to a transfer shall not be commenced by the trustee of the estate of a bankrupt after the expiration of 6 years from the date on which the bankrupt became a bankrupt.’

56                                          Relevantly, for present purposes, s 121 of the Act provided in respect of transfers to defeat creditors:

‘121(1)            A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a)        the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(b)        the transferor’s main purpose in making the transfer was:

(i)         to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii)        to hinder or delay the process of making property available for division among the transferor’s creditors.

…

     (4)              Despite subsection (1), a transfer of property is not void against the trustee if:

…

     (5)              The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.

…’

57                                          In relation to the commencement of proceedings under s 121 of the Act, s 127(4) provided:

‘127(4)            An action under section 121 with respect to a transfer of property may be commenced by the trustee of the estate of a bankrupt at any time.’

58                                          Other provisions of the Act which are important for present purposes include the following:

‘58(3)              Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a)        to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

(b)        except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

…

109(10)            Where in any bankruptcy:

(a)        property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or

(b)        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.

…

134(1)              Subject to this Act, the trustee may do all or any of the following things:

…

(j)        bring, institute or defend any action or other legal proceeding relating to the administration of the estate;

…

…

177(1)              Subject to this Act, in the administration of the estate of a bankrupt, the trustee shall have regard to any lawful directions given by resolution of the creditors at a meeting of the creditors or by the committee of inspection.

178(1)              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.

     (2)               The application must be made not later than 60 days after the day on which the person became aware of the trustee’s act, omission or decision.

179(1)              The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:

(a)        remove the trustee from office; and

(b)        make such order as it thinks proper.

     (2)               The Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs.’

59                                          Section 58dealt with the vesting of property upon bankruptcy and stated the general rule, s 109 dealt with priority payments in that Division of Part VI of the Act which dealt with ‘Order of payment of debts’, s 134 dealt with powers exercisable at the discretion of the trustee and ss 177-179 fell within that Division of Part VIII of the Act which dealt with ‘Control over trustees’.

60                                          On 21 September 2009 the applicant indicated that his claims for relief in his Amended Application filed 18 August 2009 under s 178 of the Act would not be pressed.  His abandonment of these claims was formally recorded in the first Further Amended Application filed 3 November 2009.

61                                          However, in argument on 23 February 2010 the applicant propounded an entitlement to relief under s 179 of the Act by virtue of the fourth and fifth respondents refusing to allow the applicant to bring claims under ss 120 and 121 in respect of the transfer of the property on their behalf.  It was submitted that this refusal did not occur until after September 2009.

General principles

62                                          The policy of the Act is ‘to assist in ensuring that the assets of the insolvent debtor are distributed in the interests of creditors generally, to prevent one creditor obtaining an undue advantage over the others, and to prevent the scheme of the Bankruptcy Act from being defeated’ (per Gibbs CJ in Storey v Lane (1981) 147 CLR 549 (‘Storey v Lane’) at 557). 

63                                          To like effect Hill J has spoken of the modern bankruptcy law serving three purposes.  The first is to ensure that the assets of the bankrupt are distributed rateably among creditors.  The second, which is interrelated with the first, is to ensure that one creditor does not obtain an undue advantage over other creditors.  The third is to bring about the discharge of the debtor from future liability of his existing debts, so that the debtor may start afresh (see Re McMaster; ex parte McMaster (1991) 33 FCR 70 at 72-3).

64                                          An essential feature of any modern system of bankruptcy law is that provision is made for the appropriation of the assets of the debtor and their equitable distribution amongst his creditors, and for the discharge of the debtor from future liability for his existing debts (per Gibbs CJ in Storey v Lane at 556).

65                                          The equitable distribution of the assets of an insolvent debtor is a fundamental purpose of the bankruptcy law.  Any system of bankruptcy law may frequently require various ancillary provisions for the purpose of preventing the scheme of the Act from being defeated.  For example, it may be necessary to frame provisions to stop individual action by creditors for the purpose of obtaining payment of the debts due to them when the aim of the law is to secure administration of the debtor’s assets in the interests of the creditors generally (per Gibbs CJ in Storey v Lane at 557).

In this case, the last sentence is not without significance.

66                                          When a debtor becomes bankrupt, amounts which were owed by him or her at the date of the bankruptcy may, notwithstanding the bankruptcy, still be described as ‘debts’.  The bankrupt is not released from such ‘debts’ until he or she is discharged from bankruptcy (see s 153 of the Act).  However, a creditor’s right to be paid by the debtor is converted into a right of proof.  The debt does not remain ‘owing’ within the meaning of the Act.  The debtor is no longer obliged to pay his creditors; indeed he is disabled from doing so.  Once a debtor has become bankrupt the creditor’s right is a right of proof against the estate (per Gibbs CJ, Murphy, Brennan and Dawson JJ in Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 594-595; see also per Lockhart J in Taylor v Secretary to the Department of Social Security (1988) 18 FCR 322 at 330-331).

67                                          The obvious policy behind s 58(3) of the Act was that any proceedings in force at the time of bankruptcy should be stayed and no further proceedings should be commenced so far as they relate to the period prior to bankruptcy unless the Court gives leave.  In this way the bankrupt is freed from any claims that might be made in respect to the period prior to bankruptcy and the trustee in bankruptcy can, if the trustee accepts the proof of debt, treat a claim against the estate like the claim of all other creditors, so that the assets of the estate are, in due course, divided pro rata amongst the creditors. 

Another reason for staying proceedings or preventing new proceedings from being commenced is to ensure that the Trustee of a bankrupt estate is not put to expense in defending proceedings which the Trustee has no money to defend.  On the other hand, the Act does contemplate that the Court will, in an appropriate case, grant leave.  In that respect a case would be an appropriate case where the proceedings proposed against the bankrupt are proceedings to which other parties are involved and for the proper conduct of which it may be necessary for the bankrupt to become a party.

One must be careful in stating the matter that way, not to come to the point where all proceedings in which a bankrupt is a respondent are automatically allowed because such proceedings could never continue without the bankrupt being a party in one sense (per Hill J in Re Rose; ex parte Devaban Pty Ltd [1994] FCA 1082 (7 October 1994)).

Transfers that are void against the trustee in the transferor’s bankruptcy

68                                          A provision which makes a transfer void against the trustee in the transferor’s bankruptcy means voidable at the instance of the trustee as from the time at which his title accrues.  It invalidates the transfer only ‘against the trustee’ which means for the purpose of letting in his claim; in order that his demand may be given effect to.  In all other respects and after the demands of the trustee have been satisfied, the transfer stands (see per Dixon J as his Honour then was, Rich, Evatt and McTiernan JJ concurring, when dealing with settlements that were void against the trustee in bankruptcy under s 94 of the Bankruptcy Act 1924 (Cth) in Williams v Lloyd; in re Henry Morgan Williams (1934) 50 CLR 341 (‘Williams v Lloyd’) at 374; see also In Re Carter and Kenderdine’s Contract [1897] 1 Ch 776 at 780-781, 782-3 and 783-5 and Anscor Pty Limited v Clout (2004) 135 FCR 469 at [43]).

69                                          Section 120 of the Bankruptcy Act 1966 (Cth), as it stood in 1989, rendered certain voluntary and marriage settlements void against the trustee in bankruptcy.  It did not render illegal the transactions it affected.  Nor did it automatically avoid them or vest the relevant property in the trustee.  Its effect was to render the relevant transaction voidable at the option of the trustee (per French J, as his Honour then was, in Re Francesco Candeloro La Rosa and Linda Robyn La Rosa (Bankrupts); Ex parte Norgard [1989] FCA 231 (26 June 1989) at [26]).

70                                          If property be disposed of by sale and the sale price received by the disponor is equal to the true value of the property at the time of the disposition, the creditors have an undepleted fund against which to prove their debts.  But if property is sold for an under value or is given away, that fact is relevant to the intent to be attributed to the disponor in disposing of the property.  The value of property at the time of disposition may reflect, of course, the prospect of its future increase or decrease in value.  But disposition of property at under value is only a fact from which, dependent on the surrounding circumstances, an inference of fraudulent intent may be drawn (per Brennan CJ and McHugh J in D M Cannane v J Cannane Pty Limited (in liquidation) (1998) 192 CLR 557 at [13]).

The relationship between creditors and trustees in a bankruptcy

71                                          In dealing with the institution of proceedings in respect of an insolvent Cottenham LC said in Heath v Chadwick (1848) 2 Phillips 649 [41 ER 1094] at 651:

‘By the effect of the Insolvent Acts all property and rights of the insolvent are vested in the assignee.  He is the person to realize the property, and to institute all proceedings proper for that purpose; but he is prohibited from instituting suits in equity without the authority of the creditors.  It would be strange that any creditor should be competent to institute such suits which had not only not been authorized by, but had been actually prohibited by, the creditors.’

72                                          In a suit of Davis v Chanter, John Snell was made liable to pay certain costs to Davis and others.  Snell took the benefit of the Insolvent Debtors Act whereupon a Mr Daw was appointed as the official assignee.  Davis alleged that Snell had executed a fraudulent deed some 11 years before he took the benefit of the Insolvent Debtors Act whereby he assigned all his property and effects to trustees allegedly to defraud his creditors under the decree made in Davis v Chanter.  The bill, in Davis v Snell (1860) 28 Beavan 321 [54 E.R. 389], alleged that the plaintiff (Davis), as well as all his relatives, had been reduced, in consequence of the protracted and expensive litigation [in Davis v Chanter] to the greatest poverty and distress (perhaps a little like the applicant in the present case) and that he was utterly unable, either himself to indemnify, or to procure any of his friends or any other person to indemnify the defendant, Daw against the costs that might be incurred by Daw in taking proceedings to have the relevant assignment set aside.  The bill asserted that ‘under the circumstances aforesaid he [Davis] ought to be permitted to file this bill in his own name as Plaintiff, and make the said John Daw a party defendant thereto.’

73                                          During the course of argument on a demurrer by two of the defendants, The Master of the Rolls, Sir John Romilly, remarked:

‘If the assignee misconducts himself, you must apply to the Insolvent Debtors Court to remove him.’

74                                          The reasons for judgment of The Master of the Rolls were expressed as follows:

‘It is impossible to allow the plaintiff to continue to prosecute this suit.  Both in insolvency and bankruptcy the assignees are the only persons who can take proceedings in respect of the insolvent’s or bankrupt’s estate.  It would be extremely injurious to the general body of creditors, if any one of them were to be at liberty to take on himself the functions of the assignees.  I am of the opinion that this demurrer must be allowed.’

(see Davis v Snell at 324)

75                                          An appeal from the decision of The Master of the Rolls came before the Lord Chancellor, Lord Campbell (see Davis v Snell (1860) 2 de G.F. & J. 463; 45 E.R. 700).  The Lord Chancellor considered that the case was governed by Heath v Chadwick ((1848) 2 Phillips 649 [41 ER 1094]).  He dismissed the appeal.  The headnote succinctly summarised the case as follows:

‘Bill by one of the creditors of an insolvent to recover property alleged to belong to the insolvent’s estate, on the mere allegation that the assignee in insolvency refused to sue without an indemnity against the costs of the suit, and that the Plaintiff, through poverty, was unable to give such indemnity: Held demurrable.’

76                                          In Douglas v M’Intyre (1884) X VLR (Equity) 249 it became apparent that Mr Alex M’Intyre was in ‘embarrassed circumstances’ and unable to pay his debts. In such circumstances he purchased land with his own money and had it conveyed to his wife.  Portions of that land were mortgaged and the equity of redemption assigned by Mr Alex M’Intyre’s wife to his brother Peter M’Intyre who was the defendant in the proceedings before Molesworth J in the Victorian Supreme Court.  The estate of Alex M’Intyre was placed under sequestration in the hands of Mr Samuel Cohen as official assignee.  He was requested by the plaintiff Mr Douglas and other creditors to take proceedings to have the purchase and transfers declared fraudulent and void as against the official assignee and creditors, but he refused to do so.  In the circumstances Mr Douglas on behalf of himself and all other creditors of Mr Alex M’Intyre instituted proceedings against Mr Peter M’Intyre and his official assignee Mr Cohen to have a conveyance and two transfers of land declared void.  Mr Peter M’Intyre objected that the plaintiff as a creditor could not sustain such a suit and that the official assignee alone could sue. 

Molesworth J found the objection to Mr Douglas’s standing to be ‘especially strong’ where the impeachment of the conveyance was under the Insolvent Act 1871.  Molesworth J said at p254:

‘… it would be very unreasonable that persons against whom assignees may take proceedings should be subject to suits by each particular creditor, the result of which, if favourable to defendants, would not bind other creditors. It is similar to the case of rights of suit by creditors or legatees to enforce claims which the personal representative refuses to enforce.’

77                                          In Re Fresjac Pty Ltd (In liquidation); Campbell v Michael Mount PPB (1995) 65 SASR 334 the Full Court of the Supreme Court of South Australia was required to consider the proper disposition of money recovered from a creditor where a payment to the creditor was made void by operation of s 468 of the Corporations Law.  Relevantly s 468(1) of the Corporations Law provided for certain dispositions of property made after the commencement of a winding up by the Court to be ‘void’.  By way of contrast s 565(1) of the Corporations Law at that time provided for certain transfers of property and payments made, which if effected or made by a natural person would in the event of that natural person becoming bankrupt be ‘void as against the trustee in bankruptcy’, to be ‘void as against the liquidator’ in the event that the transfer of property or payment was made by a company.

Speaking of s 468 of the Corporations Law Doyle CJ (Matheson J agreeing) said at 345:

‘I can see no reason for taking a different approach to the location of the right to claim recovery of the property disposed of by the void transaction [a right in the liquidator appointed for the benefit of the general creditors rather than anyone else] despite the absence of the phrase “as against the liquidator”. Commonsense suggests that the liquidator must decide whether to exercise that right, and that other persons cannot do so.  This is so, even though the company is the appropriate plaintiff.  It is the liquidator who causes the company to take action.’

Doyle CJ proceeded to indicate, at 345, that other persons could rely in other ways upon an avoidance effected by s 468, the relevant disposition being void for all purposes.  However, as his Honour said ‘[t]he mere right to assert or rely upon voidness cannot, as a matter of logic, give rise to a right to recover the property disposed of by the void transaction.’

Control over trustees

78                                          The wording of s 178 of the Act is such as to confer upon the court the widest possible discretion as to the appropriate order which should be made in the particular case and is quite inconsistent with the approach that, upon an application made pursuant to the section by a bankrupt, creditor or other person affected by an act, omission or decision of the trustee, the court is only empowered to interfere with the trustee's act, omission or decision if it is of the view that the trustee has acted absurdly or unreasonably or in bad faith. Once the matter is properly before the court, the court is, by the express words of s 178, empowered (indeed, obliged) to make such order in the matter as it thinks just and equitable.

This is not, of course, to say that the court should either disregard the relevant decision of the trustee or ignore the well-established policy under bankruptcy legislation that the court should not unduly interfere with the day-to-day administration of a bankrupt's estate by a trustee. The trustee is made responsible for the administration of the bankrupt estate under the general provisions of the Act. He must, in the course of that administration, make a variety of decisions aimed at enabling the administration to be carried out with promptness and efficiency. Some of these decisions will be business or commercial decisions in which the business or commercial experience of the trustee would itself provide a basis for arguing that, unless it were shown that the trustee’s decision was perverse or clearly wrong, it would be inappropriate and unjust for the court to interfere. Again, under the present legislation [that was in force in 1977], the trustee will ordinarily be the official receiver and the court must be conscious of the fact that the official receiver will be made responsible for the administration of an extraordinarily large number of estates. In such circumstances, the administration of the Bankruptcy Act demands that the court take into account, in exercising its functions under the provisions of s 178 of the Act, the opinion of the official receiver, as trustee, as to what is expedient in the interests of the prompt and efficient administration of a particular bankrupt estate. That is, however, a completely different thing to saying that the court can only interfere with an act, omission or decision of the official receiver, as such trustee, when it is of the view that the official receiver has acted unreasonably, absurdly or in bad faith in so acting or failing to act or in reaching that decision (per Deane J in Re Tyndall (1977) 30 FLR 6 at p9-10).

79                                          Section 178 of the Act allows the bankrupt, a creditor or any other person affected by conduct of the trustee in the course of the administration of a bankrupt estate, to challenge that conduct by seeking review by the Court of the relevant act, omission or decision of the trustee (per Branson J in Wilson v Commonwealth of Australia [1999] FCA 219 (‘Wilson v Commonwealth of Australia’) at [43]).

80                                          The fundamental purpose of s 178 of the Act is to give the court the power in a supervisory role, to review acts, omissions or decisions of a trustee in bankruptcy made in the course of the administration of a bankrupt’s estate on the application of any person with appropriate standing. Its operation is to be understood in its historical context and in the context of the broader relationship between the court and the trustee in bankruptcy as an officer of the court.  For present purposes it is sufficient to note the following points about the scope of the section:

(a)        Under the section, the court is fulfilling a supervisory role judicially, rather than an administrative role standing in the shoes of the trustee. As such, grounds for judicial review must be established by an applicant, and the exercise of the court’s power is wholly in its discretion. The court has the ‘widest possible discretion as to the appropriate order which should be made in the particular case’.

(b)        The impugned act, omission or decision of the trustee in bankruptcy need not be absurd, unreasonable, or taken in bad faith before it is subject to review or a resultant order of the court under the section.  Indeed, the act, omission or decision of the trustee may be subject to review even though it was commercially sound at the time it was made. At the same time the trustee’s opinion will be a relevant factor in the exercise of the court’s discretion, and there is no presumption that the court will intervene in a given case.  The fact that the court might have taken a different course to the trustee in bankruptcy at the relevant time is not, without more, a basis to disturb the trustee’s decision.

(c)        The court is able to take into account information which was not available to the trustee at the time of an impugned act, omission or decision.

(d)        The exercise of the discretion is subject to the principle that the court will not unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee in bankruptcy.

(e)        The section does not provide an avenue for a bankrupt to pursue his or her personal interests at the expense of creditors nor does it ‘create a cause of action which sounds in damages’, either in tort or under the general law. Both of these propositions reflect the purpose of the section which is to give the court a supervisory role with respect to a trustee in bankruptcy in the administration of the bankrupt’s estate. 

(f)         Ultimately the question is what result would be ‘just and equitable’ in the circumstances of the case. 

(per Besanako J in Moore v Macks [2007] FCA 10 (‘Moore v Macks’) at [28]).

81                                          Section 179 of the Act serves a different purpose.  It reflects the position that trustees are subject to the general control of the Court.  It authorises the Court on the application of the Registrar, the Inspector-General, a creditor or the bankrupt, to enquire into the conduct of a trustee.  Although it is not a rule of universal application, the Court will not ordinarily initiate an enquiry under s 179 unless it is satisfied that a proper case for an enquiry has been demonstrated.  There will ordinarily be a proper case for enquiry where there is reasonable cause to believe that a trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the general law (per Branson J in Wilson v Commonwealth of Australia at [44]).

82                                          Section 179 of the Act is governed by similar, but not identical, considerations to those which are relevant to s 178. Unlike s 178, which relates to the review of specific acts, omissions or decisions of a trustee in bankruptcy in the administration of a bankrupt’s estate, s 179 reflects the more general aspect of the court’s supervisory role and allows it to carry out an inquiry into the ‘conduct’ of a trustee in relation to a bankrupt’s estate or affairs (s 179(1)). As with s 178 the section is to be understood in the context of the role of the trustee in bankruptcy as an officer of the court. The section is typically employed where an allegation of misconduct or error by a trustee in bankruptcy arises.

Section 179 requires the court to engage in a process which may involve two stages.  First, the court must consider whether there is a basis to inquire into the conduct of a trustee in bankruptcy. Secondly, if an inquiry is undertaken, the court must consider what, if any, order should be made as a result of the inquiry. The following salient points with respect to the operation of the section in the case of the first stage need to be noted:

(a)        The question of whether to order an inquiry is in the broad discretion of the court, and the court should be reluctant to do so unless there are ‘substantial grounds for believing that the trustee erred in his administration’.  This requirement has also been put in terms of ‘sufficient grounds’ and ‘a proper cause to believe that a trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the general law’. The onus is on the applicant to establish the grounds or case for an inquiry.

(b)        As with s 178, the exercise of the court’s discretion to order an inquiry is subject to the principle that the court will not unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee in bankruptcy.

(c)        As with s 178, s 179 is not a vehicle for a bankrupt or other person to seek damages which go beyond the making good of any loss to the bankrupt’s estate caused by improper administration by the trustee in bankruptcy.

(per Besanko J in Moore v Macks  at [29]-[30])

Section 37A of the Conveyancing Act 1919 (NSW)

83                                          Section 37A of the Conveyancing Act 1919 was inserted into the Act by the Conveyancing (Amendment) Act 1930 which commenced on 1 January 1931.  It relevantly provides:

‘37A(1)         Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.

    (2)            This section does not affect the law of bankruptcy for the time being in force.

    (3)            The section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.’

84                                          In Williams v Lloyd Starke J opined at 362-3 that there was nothing in the Bankruptcy Act 1924 (Cth) which superseded or was inconsistent with the provisions of s 37A of the Conveyancing Act.  However, in Kattirtzis v Zaravinos [2001] FCA 1158 (‘Kattirtzis’) it was noted that an argument was available to the effect that s 37A of the Conveyancing Act could not continue to have any operation once a bankruptcy administration came into play. 

85                                          Whether such an outcome arises by virtue of s 37A(2) of the Conveyancing Act or s 109 of the Constitution is not a matter in relation to which it is necessary to express any opinion.  No matter arising under the Constitution or involving its interpretation is presently involved such that the Court is constrained by s 78B of the Judiciary Act 1903 (Cth) to adjourn the present application until the Court is satisfied that notice of the cause specifying the nature of the constitutional matter has been given to the Attorneys-General.

86                                          In Kattirtzis there was only one relevant creditor being the plaintiffs in Supreme Court proceedings under s 37A.  Gyles J granted leave under s 58(3) of the Act upon strict conditions that the leave be restricted to the recovery of property and that there be no claims for damages or other monetary relief (including costs) against the bankrupt George Zaravinos.  The leave was granted without prejudice to the determination of the issues of substance which arose in the proceeding.  The applicants were required to pay the costs of the Official Trustee of the application.  Leave was granted in respect of proceedings which were due to commence on the following day in the Supreme Court with five days put aside for the hearing.  The applicants agreed that they would not oppose any application by the Official Trustee to be joined in the proceeding.  They were required to give an undertaking to the Court that they would ensure that the benefit of an order obtained in relation to recovery of property would be received by the Official Trustee to be held on behalf of the bankrupt estate.

87                                          In Green v Official Trustee in Bankruptcy, in the matter of Schneller (A bankrupt) [2001] FCA 1644 (‘Green’) Hill J granted leave to continue proceedings brought by a creditor of a bankrupt under s 37A subject to the giving of an undertaking by the creditor to the Court to hold the benefit of any order made in the s 37A proceedings for the Official Trustee on behalf of the bankrupt estate of Mrs Schneller.

Consideration

88                                          This is not a case where the applicant is seeking to enforce public law such that consideration needs to be given to whether he has a sufficient material interest in the subject matter, beyond the satisfaction of righting a wrong, upholding a principle or winning a contest (cf Australian Conservation Foundation Inc v Commonwealth (1980) 146 CLR 493 and Bateman’s Bay Local Aboriginal Land Council v Aboriginal Community Benefit Fund Pty Ltd (1998) 194 CLR 247). 

89                                          With respect, it seems to me that the applicant’s proceedings are misconceived.  Firstly, the applicant’s approach to s 109(10) of the Act fails to take account of the fact that the sub-section only operates where property has been, not might be, recovered and that has not occurred in this case as yet. 

Secondly, it is only a trustee who may seek to avoid a transfer in reliance upon s 120 and/or s 121 of the Act and the cases cited above.  The quoted parts of the relevant section as recorded above, when taken in conjunction with s 127 of the Act and the cases cited above make this demonstrably clear.  How absurd it would be to contemplate creditors having a right to seek orders that transfers of property by a bankrupt be declared void with the consequence that, if such orders were to be made, obligations would thereby be cast upon the relevant trustees to make payments of money to the relevant transferees.

Thirdly, the policy and scheme of the Act would be totally frustrated if an individual creditor was able to usurp the role of the trustee whose duty it is to act in the interests of all creditors of the relevant bankrupt estate. 

Fourthly, provision is made in ss 177-179 of the Act, along with other sections such as s 104 in relation to applications to the Court for the review of decisions of a trustee in relation to the admission or rejection of proofs of debt etc, to ensure that appropriate control over trustees is exercised in the discharge of their responsibilities.

90                                          Even if the evidence had established, which it has not, that the applicant had put the fourth and fifth respondents in funds sufficient to enable them to address and seek orders under s 120 and/or s 121 of the Act in respect of the transfer of the property by the first and second respondents to the third respondent, and that the applicant had provided a secure and appropriate indemnity for any liability which the fourth and fifth respondents may incur by virtue of their commencement of proceedings as proposed by the applicant, there remains a discretion in the trustee to decline to bring proceedings, where they have not been reasonably persuaded that the transfer in question was at an undervalue or made to defeat the creditors of the relevant bankrupt.

91                                          Whilst there is some evidence before the Court on the present Motion touching upon the circumstances of the sale of the property and the price realised, it seems to me that the proceedings have no reasonable prospects of success.  Nothing has been said by the applicant, in response to the reasoned position of the trustees to the contrary, to suggest otherwise. 

92                                          Plainly, this is a case of ‘first things first’.  Unless and until a proper valuation as at 23 December 2006 has been obtained which reveals that the sale for $1,150,000 on that day was at an appreciable undervalue or such as to bring the transfer within the reach of s 121 of the Act with evidence of (say) a sham payment of consideration by the third respondent to the first and second respondents, I am unable to see that any challenge to the conduct of the trustees could be justified by virtue of their refusal to institute, what the applicant might consider to be, appropriate proceedings.

93                                          There is no evidence at all to engage s 179 of the Act.  The applicant’s case is predicated upon speculation, not reasoning.  Guesstimates as to value are of no assistance.  The trustees have presented reasoned cases for their inaction, at the same time embracing the possibility that if they had proper and reasoned valuation evidence which established that the sale of the property on 23 December 2006 had been at an appreciable undervalue or other evidence establishing an intention to defeat the first and/or second respondents’ creditors, the position could be revisited.

94                                          Nothing has been put by the applicant to demonstrate that he might have any reasonable prospect of successfully prosecuting the current proceeding.  The applicant has no standing and, even if he did, there is nothing about this case to take it outside the reach of s 31A(2) and (3) of the Federal Court Act and the relevant principles as summarised in Kowalski. 

95                                          A fall back position has been advanced by the applicant to the effect that even though he may not be entitled to bring proceedings to secure relief under s 120 and/or s 121 of the Act, nevertheless he is entitled to bring proceedings seeking declaratory relief as to the entitlement of the fourth and fifth respondents to obtain relief were they to bring proceedings under one or other of those sections.  In this regard reference has been made to the decision of French J, as his Honour then was, in Australian Gaslight Company (ACN 052 167 405) v Australian Competition & Consumer Commission (No 2) (2003) ATPR 41-962 (‘Australian Gaslight Company v ACCC’) in relation to a person’s right to institute proceedings for declaratory relief in this Court where such person has a real interest in a real controversy the subject of the proposed proceedings. 

96                                          In my opinion, notwithstanding the interest of the applicant in the due administration of the bankrupt estates of the first and second respondents by the fifth and fourth respondents respectively, he does not have a real interest which would entitle him to seek the declaratory relief which the applicant proposes.  This is not a case such as Australian Gaslight Company v ACCC where there was a real controversy about the right or freedom of AGL to proceed with the proposed acquisition of shares in entities operating the Loy Yang Power Station and Coal Mine in the Latrobe Valley in Victoria. 

97                                          When the first and second respondents became bankrupt, the rights of the applicant became rights to prove in the estates of the bankrupts, leaving the due administration of the estates of the bankrupts to the respective trustees.  The applicant ceased to have any rights in relation to the property and former property of the bankrupts so long as they remained bankrupt.

98                                          In my opinion, not only does the applicant lack standing to seek relief directly under ss 120 and/or 121 of the Act, he also lacks standing to seek declaratory relief as to the rights of the fourth and fifth respondents to secure relief under one or other of those sections.

99                                          This leaves for consideration the interlocutory application of the applicant for leave to continue his Supreme Court proceedings.  In my opinion, in circumstances where the transferors have become bankrupt and the relevant transfer occurred well within the time permitted for the commencement of proceedings under s 120 and/or s 121 of the Act by the fourth and fifth respondents, it would be inexpedient to grant to one creditor, the leave which the applicant seeks.  It is clear that the applicant is seeking to secure a peculiar advantage for himself by the continuation of the s 37A proceedings.  He has not taken any of the steps which might otherwise have justified a grant of leave, if indeed, a grant of leave was permissible at this stage, such as were taken in Kattirtzis and Green where the grant of leave was conditioned upon the giving of an undertaking to the Court to hold the benefit of any order that may be made for the relevant trustee rather than himself.

100                                       In my opinion the applicant has no reasonable prospect of successfully prosecuting the proceeding.  Judgment should be given for each of the third, fourth and fifth respondents in relation to the whole thereof.  Furthermore, proceeding on the assumption that the Court has power to grant leave to the applicant to continue the s 37A proceedings in the Supreme Court, I do not consider that it would be appropriate for a grant of leave to be made in the circumstances of this case as detailed above.  Such application should be dismissed.

101                                       It is clear that the fourth and fifth respondents are without the ammunition to fire the necessary bullets.  Were the applicant able to provide evidence to support appropriate claims by the trustees under s 120 and/or s 121 of the Act or to put them in funds so that they might seek such evidence, then, subject to appropriate funding and indemnities being provided to cover the contemplated proceedings by the trustees, a different course of action might result.  That of course is no more than speculation at this stage. 

102                                       In relation to the first and second respondents it should be noted that they have not appeared and leave has not been granted in accordance with s 58(3)(b) of the Act to permit the applicant to bring the current proceedings against them.

103                                       In all the circumstances, it seems to me that the appropriate orders would be for the proceedings to be dismissed with appropriate orders for costs. 

104                                       Whilst there has been some suggestion that an order for costs might be sought against the solicitors for the applicant, it seems to me that the appropriate order as to costs would be one requiring the applicant to pay the costs of the third, fourth and fifth respondents.  In addition, in the case of the fourth and fifth respondents it would seem to me that special circumstances exist warranting an order that their respective costs be paid on an indemnity basis as from 25 September 2009, the date upon which the solicitors for the applicant declared that they were of the view that their client had an arguable case in terms of the requirements of subsection 121(1) of the Act, notwithstanding clear advice from the trustees’ side of the record to the contrary (see generally Gersten v Minister for Immigration & Multicultural Affairs [2001] FCA 260 at [19]).  I have considered only allowing one set of costs to the third, fourth and fifth respondents, but have reached the conclusion that the unwillingness of the applicant to yield to a commonsense outcome militates against the adoption of such an approach.  Each respondent was required to address his own respective case.

105                                       What I propose to do is to make an order for costs in the terms indicated, on the basis that the relevant order may not be entered for a period of 14 days or further order of the Court, so that, if any party wishes to make a submission to the effect that a different costs order should be made they will be afforded an appropriate opportunity to do so.  I will direct that any application for a different order as to costs be supported by the filing of a written submission advancing reasons as to why such order should be made.  By proceeding in this way it may be possible to spare the parties further costs in bringing this matter to finality.

Associate:

Dated:         15 March 2010