FEDERAL COURT OF AUSTRALIA

Stoker (Trustee), in the matter of Starr (Bankrupt) v Starr [2011] FCA 746

THE COURT ORDERS THAT:

1.    To the extent such leave is required, pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth), leave be granted to the Applicants to take fresh steps in and continue with Supreme Court of New South Wales Equity Division proceedings No. 2009/00288264 (previously known as 2222 of 2009) against the Respondents and Sally Ann Starr to the extent necessary:

          1.1    To enable the Supreme Court to determine the Applicants’ entitlement to the relief specified in prayer for relief 1 to 13 of the proposed Further Amended Statement of Claim at pages 111 to 132 of exhibit CKCS-1 on the application, including:

                   1.1.1    Seeking leave to file the proposed Further Amended Statement of Claim or a pleading in substantially the same form;

                   1.1.2    Seeking leave to join the Second Respondent to the Supreme Court proceedings as a defendant.

         1.2    If leave of the Supreme Court to file the proposed Further Amended Statement of Claim is not obtained, to enable the Supreme Court to determine the Applicants’ entitlement to the relief specified in prayers for relief 1 to 13 at the Amended Statement of Claim filed 17 August 2009.

2.    For the purpose of Order 1, leave to continue with the Supreme Court proceedings is deemed to have been granted on 26 October 2009.

3.    It is a condition of leave being granted that the Applicants not take any step to enforce any judgment given or order made by the Supreme Court without the further leave of this Court other than:

         3.1    To enforce any charge over or equitable interest in the property at 23 Creswich Street, Brighton East, Victoria that the Supreme Court holds to exist;

         3.2    To enforce any order made reflecting prayer for relief 11 of the proposed Further Amended Statement of Claim or prayer for relief 11 of the Amended Statement of Claim.

4.    The parties have liberty to apply to the Court for orders on three days’ notice.

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    This is an application for leave under s 58(3) of the Bankruptcy Act 1966 (Cth) (“the Act”), to the extent that such leave is required, to take fresh steps in and continue with proceedings in the Supreme Court of New South Wales (matter number 2009/00288264) against the Respondents to the application, namely Mr Clinton Henry Starr and Mr Warren Brian White, as well as against Mrs Sally Ann Starr. The Applicants are the trustees of the deceased estate of the late Mildred Starr. They are the first and second plaintiffs in the proceedings in the Supreme Court.

2    The first respondent, Mr Clinton Henry Starr, is a bankrupt (“the Bankrupt”). He was made bankrupt by a sequestration order on 26 October 2009. The Bankrupt is the cousin of the Applicants and was a trustee of the deceased estate until he was removed by orders of the Supreme Court of New South Wales made on 20 April 2009.

3    The proceedings in the Supreme Court were commenced on 6 April 2009. The present defendants in the proceedings are the Bankrupt and his wife, Mrs Sally Ann Starr. The Applicants propose to join the trustee of the bankrupt estate of Mr Starr as a defendant in the proceedings. Neither the Bankrupt nor Sally Starr has ever appeared in the Supreme Court proceedings, but Mrs Sally Starr has filed and served a defence to the statement of claim.

4    The current statement of claim in the Supreme Court was filed on 13 August 2009. It is an amended statement of claim that was filed pursuant to leave earlier granted by the Supreme Court. The orders and declarations which are sought in the existing statement of claim seek orders and declarations in relation to breaches of trust in respect of the deceased estate said to have been committed by the Bankrupt by misappropriating approximately $450,000 from the estate. The proceeding also seeks orders for the return of that trust property and in the alternative, equitable compensation.

5    The Applicants propose to file a further amended statement of claim which is in evidence in draft form for me this morning. The substance of the amendments is that the Spplicants propose to amend the statement of claim to seek a declaration as to the existence of an equitable charge over a property registered in the name of the bankrupt and Mrs Sally Starr in order to secure the repayment of the trust funds which are said to have been misappropriated by the Bankrupt. In order to support this claim the applicants will allege in the further amended statement of claim that trust funds can be traced directly or indirectly into loan and overdraft accounts secured by a mortgage over a property. No hearing date has been allocated to the Supreme Court proceeding, but freezing orders are in place restraining the bankrupt from dealing with trust property.

6    The requirements of s 58(3)(b) are that, except with leave of the court and on such terms as the court thinks fit, it is not competent for a creditor to commence any legal proceedings “in respect of a provable debt” or to “take any fresh step in such a proceeding”.

7    The principles which apply to the exercise of the discretion to grant leave under s 58(3)(b) of the Act were recently discussed and applied by Flick J in 7Steel Building Solutions Proprietary Limited v Wright [2011] FCA 328 (“7Steel”). The application in that matter was similar to the application before me this morning because it sought leave for a creditor to take a “fresh step” in a legal proceeding.

8    As Flick J observed at [9], the phrase employed in s 58(3)(b), “in respect of”, will ordinarily be given a wide meaning: Re Mcmaster; Ex parte Mcmaster (1991) 33 FCR 70 at 72.

9    The policy behind s 58(3) has been expressed by Hill J in Re Rose; ex parte Devaban Pty Ltd (Unreported, Federal Court of Australia, Hill J, 7 October 1994). Justice Hill stated at [6] that:

[t]he 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.

10    His Honour went on to say that:

…the Act does contemplate that the court will, in an appropriate case, grant leave. In that respect a case would be an appropriate one where the proceedings proposed against the bankrupt are proceedings to which other parties are involved.

11    Flick J observed at [10] in 7Steel that:

Section 58(3) protects a bankrupt and the property of the bankrupt against the enforcement of remedies and enables the court to control proceedings in respect of a provable debt in the light of the objectives of the Act.

12    His Honour also pointed out by reference to a leading authority of a Full Court of this court in Allanson v Midland Credit Ltd (1977) 16 ALR 43 at 48 (“Allanson”). In that case, Bowen CJ, Riley and Deane JJ observed that it is relevant to the exercise of the discretion conferred by s 58(3) that the facts are complex and whether it may be preferable for those facts to be resolved at hearing rather than by way of a proof of debt.

13    Their Honours went on to observe that leave may be granted without determining whether s 58(3) is enlivened. This is because the question of whether leave is required may involve difficult and complex questions of law and fact. It is, as their Honours said, therefore, permissible in an appropriate case to proceed on the basis that leave is necessary rather than to involve the parties in the futile exercise of determining, possibly after a series of appeals whether the need for such leave has arisen: Allanson at 49.

14    The importance of that in the present case is that there may be a question arising as to whether the proceeding is in respect of a “provable debt” for the reasons referred to by their Honours in Allanson it is unnecessary for me to determine that question and I will proceed to deal with the question of whether to exercise my discretion to grant leave under s 58(3).

15    In approaching that matter it is, as Flick J observed in [7] of 7Steel, of continuing utility to recall the purposes sought to be achieved by the Act. Those purposes were stated at a general level by Hill J in re McMaster ex parte McMaster (1991) 33 FCR 70 at 72–73. The same approach was taken by Nicholas J in Pedersen v Delaveris [2010] FCA 536.

16    In my opinion it is appropriate in the present case to exercise my power to grant leave. The reasons were succinctly summarised in the written submissions handed up to me this morning by Mr D Mitchell of counsel. I will record them for completeness.

17    First, the claim which the applicants wish to include in the Supreme Court proceeding is effectively a proprietary claim. It is arguable that s 58(3) would not prevent the pursuit of that claim. If it is successful the applicants will be confirmed as secured creditors with the benefit of s 58(5) of the Act.

18    Second, in the Supreme Court proceedings, the Applicants make claims against persons other than the Bankrupt. That is a matter which is relevant to take into account: see, for example, the authorities cited in 7Steel at [11]. In particular, in the present case, it is important to note that the Applicants will seek declarations in the Supreme Court against Mrs Sally Starr concerning the joint receipt of trust property with the Bankrupt and as I have already said, they intend to seek declarations as to the existence of a charge over property jointly held by the Bankrupt and Mrs Sally Starr.

19    Third, the facts and legal issues concerning the proprietary claim are complex, and, in my view, are more appropriately dealt with by the Supreme Court than by the trustee in bankruptcy pursuant to the proceeding under a proof of debt: see, for example, the authorities cited in 7Steel at [12].

20    Fourth, if the applicants were to lodge a proof of debt it may be argued that they have surrendered their equitable charge under s 90 of the Act. It would, therefore, not be a course which they wish to take, nor in the circumstances should they be forced to do so.

21    Fifth, the trustee in bankruptcy has advised that he does not intend to pay a dividend in the bankruptcy because his investigations have not identified any realisable assets. The trustee does not oppose the present application, and that is, of course, a matter to be taken into account in the exercise of the discretion.

22    Sixth, the proceedings in the Supreme Court were commenced before the presentation of the creditors petition on 9 July 2009. There is no question of the Applicants seeking to obtain an advantage over other creditors by reason of the Supreme Court proceedings, save to the extent that they may obtain a declaration to the effect that they are secured creditors of the bankrupt estate.

23    Mr Mitchell took me this morning to further matters which are to be taken into account in the exercise of my power under s 58(3).

24    The first is the delay in making the application in the Supreme Court for leave to further amend the statement of claim. The reasons for delay were explained in paragraphs 17 and 18 of the affidavit of Mr Christopher Kimberley Charles Serow affirmed 13 May 2011. In particular, the deceased estate is without funds, and the Applicants have been funding the Supreme Court proceedings from their own funds. Their financial resources are limited as explained by Mr Serow in his affidavit.

25    Another dfficulty which arose, and which contributed to the delay was that the Bankrupt has not disclosed to the Applicants what he did with the trust funds. Accordingly, the Applicants had to try to locate the trust funds by way of access to bank statements and records held by the bankrupt and his wife, and companies controlled by them. That process involved the issue of subpoenas on a progressive basis, and resulted in delay in the receipt of documents which are thought to be relevant to the claim now sought to be made.

26    The second matter to be taken into account is really a second aspect of the matter of delay to which I have already referred. This issue is the issue of the utility of the proceedings. That arises because the National Australia Bank Limited is a secured creditor of the bankrupt, and has security of a mortgage over a property at Creswick Street, Victoria, which security may exceed the value of the property.

27    However, it appears that no steps have been taken by the National Australia Bank to enforce the security, and it is now thought that there may be some utility in the pursuit of the Supreme Court proceeding, in particular, insofar as orders and declarations are sought in relation to the existence of an equitable charge over the property. What is of particular importance, it seems to me, is that the costs which the Applicants will incur in bringing the present proceedings, and pursuing the Supreme Court proceedings to date, appear to justify the expense of further funds involved in seeking to amend the statement of claim. For all these reasons it is my opinion that leave ought to be granted.

28    I propose to make orders in terms of paragraphs 1 to 3 inclusive of the draft orders provided to me by Mr Mitchell. I should mention that the orders provide for a condition of leave being granted, that the Applicants not take any steps to enforce any judgment given or orders made by the Supreme Court, without the further leave of this Court, other than an order to enforce any charge or equitable interest over the property at Creswick Street, or to enforce any order made reflecting the prayer for relief contained in paragraph 11 of the proposed further amended statement of claim. That paragraph sets out a prayer for relief, being a declaration of the costs of the plaintiff on a solicitor and client basis, together with interest payable out of the trust assets. I will also reserve liberty to apply in case any further leave of the court is required. That liberty may be exercised upon three days notice.

29    Accordingly, as I have said, for the reasons referred to above, I will make orders in terms of the draft short minutes which I am about to sign and date.

Associate:

Dated:    22 June 2011