FEDERAL COURT OF AUSTRALIA

Woodgate, in the Matter of Eaton (a Bankrupt) [2010] FCA 550  

THE COURT ORDERS THAT:

1.                  Pursuant to s 109(10) of the Bankruptcy Act 1966 (Cth) (the Act), the property recovered by the applicant for the benefit of the estate of Stuart Alexander Eaton shall be applied in its entirety in payment of the admitted debt of Ilia Iliagouev in priority over the admitted debts of all other unsecured creditors.

2.                  The applicant’s costs of this application be paid from the estate of the bankrupt in the priority fixed by section 109(1)(a) of the Act.

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

(Revised from Transcript)

1                                             Before me is an application made by the trustee in bankruptcy of the bankrupt estate of Stuart Alexander Eaton.  It is made under s 109(10) of the Bankruptcy Act 1966 (Cth) (the Act).  The trustee seeks an order that an indemnifying creditor be paid in priority over other unsecured creditors of the bankrupt.  The application is not opposed by any creditor. 

2                                             The evidence relied upon in support the application consists of an affidavit of the trustee, Mr Woodgate, and an affidavit establishing service of a copy of the application and Mr Woodgate’s affidavit on the other creditors.  The trustee also seeks an order that the costs of this application be paid from the bankrupt’s estate in the priority fixed by s 109(1)(a) of the Act.

3                                             Section 109(10) of the Act provides:

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.

4                                             I was referred by the trustee to various authorities concerned with the application of that section or comparable sections in the relevant corporations legislation.  These included Household Financial Services Pty Ltd v Medical Centre Pty Ltd (1995) 18 ACSR 294; Re Ken Godfrey Pty Ltd (1994) 14 ACSR 610; Re Glensia Investments Pty Ltd (In Liquidation) (1995) 19 ACSR 84.   

5                                             There are a number of matters that are of significance in an application of this kind which are weighed up when deciding whether to make an order under s 109(10).  These include:

·        the risk run, and costs incurred, by the indemnifying creditor;

·        the complexity of the proceedings in respect of which the indemnity is given;

·        the sum recovered (or the value of the property recovered);

·        the opportunity afforded to other creditors to provide indemnity;

·        the failure of other creditors to provide indemnity;

·        the proportions between the debts of the indemnifying creditor and the other debts;

·        the opposition or support of other creditors to the application for priority; and

·        the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered.

6                                             In this case the indemnifying party was CGU Workers Compensation (NSW) Limited (CGU), which is an insurer subrogated to the rights of the unsecured creditor, Mr Ilia Iliagouev.  At the time the trustee was appointed there were no funds in the bankrupt estate available to the trustee or creditors.  The trustee identified only one potential asset of the estate, which was a claim which he believed to be available under s 120 of the Act against a company called Netoa Pty Limited (Netoa).  Netoa is a company associated with the bankrupt’s wife and son.  Netoa had purchased a property using funds provided by the sale of a house previously owned by the bankrupt and his former wife.  I am satisfied that at all relevant times the trustee had no funds available to commence or maintain the proceedings against Netoa. 

7                                             Mr Iliagouev’s admitted proof of debt is for $236,558.39 which represents approximately 27.65% of the total value of the admitted proofs of debt of all unsecured creditors.  He is owed more than any other unsecured creditor save for another individual who is owed $347,268.71.  The next largest is the Commissioner of Taxation who is owed $96,516.75.

8                                             CGU agreed to indemnify the trustee in relation to the costs of proceedings against Netoa on two separate occasions for amounts which ultimately totalled $40,000.  All other creditors were invited to provide an indemnity but none was prepared to do so.  Backed by the CGU indemnity, the trustee pursued two sets of proceedings in respect of the transaction involving Netoa, including a proceeding in this Court under s 120 of the Act.  This proceeding was ultimately settled with the trustee receiving a payment in the sum of $323,278.30.

9                                             The effect of the order sought by the trustee would be to allow the indemnifying creditor an amount in the vicinity of 75 cents in the dollar in relation to his admitted proof of debt while the other unsecured creditors would receive zero cents in the dollar. This is because there are no moneys available for distribution to creditors apart from the proceeds of the Netoa settlement. Of course, the trustee’s remuneration and expenses must also be paid from those moneys.

10                                          I am satisfied that it is appropriate to make an order under section 109(10) of the Act.  The circumstances which I have recounted plainly justify the making of such an order.  The real question seems to be how great an advantage over other unsecured creditors Mr Iliagouev (and through him CGU) should receive.   

11                                          The difference between making the order sought or another that provides for something less than full priority to the indemnifying creditor in relation to the proceeds of the Netoa settlement comes down to whether the other creditors should receive, at one extreme, zero cents in the dollar, as opposed to what would seem to be, at the other extreme, something like 20 cents in the dollar in the event that there was no priority given to the indemnifying creditor.

12                                          The authorities indicate that there is no presumption that the indemnifying creditor should not receive the full benefit of the net proceeds of the property or expenses recovered under an indemnity for costs of litigation: Official Trustee in Bankruptcy as Trustee of The Estate of Rodolfo Servio Pastro v Pastro [2004] FCA 713 (Pastro) at [20].  They also indicate that the question is very much a matter of impression: see Re the Estate of Lawrence Connell (Deceased) [2001] FCA 51 at [25]; Pastro at [21].

13                                          I have regard to the fact that there is no opposition to the application by any of the other unsecured creditors.  I also have regard to the fact that, despite being given the opportunity to do so, all other creditors declined to provide any measure of indemnity to the trustee.  I am also satisfied that without the indemnity provided by CGU the trustee would not have been able to commence the proceedings he brought against Netoa which resulted in the settlement. 

14                                          So far as the complexity of the proceedings against Netoa is concerned, there is nothing before me to indicate that they were particularly complex or risky in terms of their prospects of success.  But the trustee’s need for the indemnity shows that, as with most litigation, there were risks involved which he was not prepared to assume without the benefit of the indemnity. 

15                                          On balance, I am satisfied that it is appropriate to make the order sought by the trustee.  I am also satisfied that it is appropriate to make the order for costs sought by him.

16                                          I will order pursuant to section 109(10) of the Act that the property recovered by the trustee for the benefit of the estate of Stuart Alexander Eaton shall be applied in its entirety in payment of the admitted debt of Ilia Iliagouev in priority over the admitted debts of all other unsecured creditors. I will also order that the costs of this application be paid from the estate of the bankrupt in priority fixed by section 109(1)(a) of the Act.

Associate:

Dated:         31 May 2010