FEDERAL COURT OF AUSTRALIA

Whitton (Trustee), in the matter of Perovich (Bankrupt) v Neolido Holdings Pty Ltd (Receivers and Managers Appointed) [2014] FCA 832

IN THE MATTER OF PEROVICH (BANKRUPT)

THE COURT ORDERS THAT:

1.    Within 14 days, the parties confer and file and serve proposed minutes of orders reflecting these reasons, and in the event of disagreement, short written submissions in support of any separately proposed minutes of orders.

2.    The parties approach the Associate to Wigney J at the earliest opportunity to arrange for the matter to be listed for further directions.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF PEROVICH (BANKRUPT)

REASONS FOR JUDGMENT

1    The applicant in this matter is the trustee of the bankrupt estates of Silvana Perovich and Richard William Spencer (the Trustee). By interlocutory application filed on 30 April 2014 the Trustee seeks leave to file a further amended originating application and an amended statement of claim, together with an order that Grenfell Securities Limited (Receivers and Managers Appointed) (Grenfell) be joined as a respondent to the proceedings. The proposed amended pleading names Grenfell as the fourth respondent.

2    None of the existing respondents appeared at the hearing of the interlocutory application. There is no indication whether they consent to, or oppose, the orders sought.

3    That is consistent with the way the matter has progressed thus far. The only respondent who has appeared at previous directions hearings or taken any active role in the proceedings thus far is the third respondent, Mio Art Pty Ltd.

4    Grenfell, who appeared by its counsel at the hearing of the interlocutory application, does not oppose an order that it be joined as a respondent to the proceedings so as long as the joinder is subject to a condition. That condition is that the Trustee pay $30,000 into court, effectively as security in relation to a previous costs order made in its favour against the Trustee. That costs order related to the dismissal of an earlier interlocutory application in which the Trustee sought to join Grenfell. Grenfell also opposes the granting of leave to the Trustee to file the proposed further amended originating application and amended statement of claim. As will be seen, the basis of that opposition is that the proposed amended pleading is defective because no reasonable cause of action is disclosed and the pleading does not fairly inform Grenfell of the case it must meet at trial.

5    Given that no existing respondent appeared in opposition to the application to amend the pleading, it is convenient to deal with the joinder application first. If Grenfell is not to be joined as a respondent, it is at least questionable that Grenfell’s opposition to the amendment of the application and pleading should be entertained.

Joinder

6    The circumstances in which a person may be joined as a party to proceedings by court order are set out in r 9.05 of the Federal Court Rules 2011(Rules). Rule 9.05(1) provides as follows:

(1)    A party may apply to the Court for an order that a person be joined as a party to the proceeding if the person:

(a)     ought to have been joined as a party to the proceeding; or

(b)    is a person:

(i)    whose cooperation might be required to enforce a judgment; or

(ii)    whose joinder is necessary to ensure that each issue in dispute in the proceeding is able to be heard and finally determined; or

(iii)    who should be joined as a party in order to enable determination of a related dispute and, as a result, avoid multiplicity of proceedings.

7    As earlier indicated, there is now no issue that Grenfell is properly joined as a respondent. The only question is whether the joinder of Grenfell should be conditional on payment of funds into court as security in respect of an earlier costs order. I am, in any event, satisfied that Grenfell is properly joined as a respondent. To appreciate why, it is necessary to briefly outline the nature of the Trustee’s case against the other respondents and Grenfell’s alleged involvement.

8    The dispute between the Trustee and the existing respondents is factually and legally complex, as is Grenfell’s alleged involvement with it.

9    The essence of the Trustee’s case is that he is entitled to relief pursuant to s 120 of the Bankruptcy Act 1966 (Cth) (the Act) in respect of an alleged transfer of property by Ms Perovich and Mr Spencer shortly before they were made bankrupt. Section 120 of the Act, so far as it is relevant to the Trustee’s case, provides as follows:

Transfers that are void against trustee

(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.

Meaning of transfer of property and market value

(7)    For the purposes of this section:

    (a)    transfer of property includes a payment of money; and

(b)    a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and

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

10    Put in simple terms, the Trustee alleges that Ms Perovich and Mr Spencer transferred property to the first respondent, Neolido Holdings Pty Ltd (Neolido) within 5 years of their bankruptcy. Neolido, on the Trustee’s case, gave either no consideration, or in the alternative, insufficient consideration for the transfer of property.

11    The Trustee’s case is that the relevant property said to have been transferred comprised rights that Ms Perovich and Mr Spencer had to the payment of money arising under various agreements. Those agreements include a Share Sale Agreement between Ms Perovich and Mr Spencer (as Trustee of the Spencer Family Trust) and Mango Boulevard Pty Ltd (Mango) (as Trustee for the Mango Boulevard Unit Trust) (Share Sale Agreement) and a Consultancy Services Agreement between the second respondent, Kinsella Heights Developments Pty Ltd (Kinsella), Mango and Neolido (Consultancy Services Agreement).

12    In the proposed amended pleadings, the Trustee seeks to characterise the relevant property allegedly transferred to Neolido in three alternative ways. For the purposes of the joinder application it is unnecessary to descend into any detail, though it will be necessary to do so when considering the amendment application. For present purposes it is sufficient to note that the Trustee’s case is that some of the money that should have been paid to Mr Spencer and Ms Perovich, but was instead paid to Neolido as a result of the alleged transfer, was paid by Kinsella. The Trustee claims that, if the transfer is void under s 120 of the Act, that money vests in him.

13    Grenfell’s involvement in the matter allegedly comes about as follows. Grenfell loaned a large sum of money to Neo Lido Pty Limited, no doubt a company related in some way to Neolido. That loan was guaranteed by Neolido and secured by a charge given by Neolido over its assets and undertaking. It is alleged that the charge attaches to money paid or payable to Neolido under the terms of the Consultancy Service Agreement. That includes money paid or payable by Kinsella.

14    Kinsella has paid into the Supreme Court of Queensland significant amounts of money that would otherwise have been paid to Neolido under the terms of the Consultancy Services Agreement. That appears to have been because Kinsella is aware of the competing claims to this money. The money was paid into the Queensland Supreme Court pursuant 102(1) of the Trusts Act 1973 (Qld), which provides that money paid into court is to be dealt with in accordance with the orders of the Court.

15    Proceedings have been commenced in the Queensland Supreme Court in which various persons or entities have claimed an entitlement to these funds. Grenfell is a party in those proceedings, as is the Trustee. Grenfell claims that it is entitled to these funds as a secured creditor of Neolido pursuant to the charge. The Trustee also claims that he is entitled to the funds. That entitlement can, however, only be made out if the alleged transfer to Neolido is declared void under s 120 of the Act. The question whether the alleged transfer is void under s 120 of the Act can only be determined in this Court.

16    It should be noted in this context that in the Queensland Supreme Court proceedings Grenfell has submitted that it is not bound by any order made by this Court in these proceedings unless it is a party to the proceedings. It was essentially that submission that prompted the Trustee to again seek to join Grenfell.

17    Having regard to the above circumstances, it is readily apparent that the joinder of Grenfell under r 9.05 is appropriate. To use the language of r 9.05(1)(b)(ii), joinder is necessary to ensure that each issue in dispute in relation to entitlement to the funds paid into the Queensland Supreme Court is able to be heard and finally determined. The Trustee’s claim to the funds relies on the grant of relief under s 120 of the Act. That relief can only be granted in this Court. Grenfell claims, on the other hand, that its entitlement to the funds cannot be affected by any relief granted by this Court unless it is made a party to the proceedings. Alternatively, to use the words of r 9.05(1)(b)(iii), Grenfell is a person who should be joined as a party to enable determination of a related dispute, that is the dispute concerning entitlement to the funds paid into the Queensland Supreme Court. In this sense, joinder is necessary to avoid multiplicity of proceedings.

18    The only real question is whether the joinder should be made conditional on the Trustee paying funds into court in relation to the earlier costs order.

19    In my opinion it is not appropriate to impose such a condition.

20    The relevant costs order was made on 3 February 2014. It followed the dismissal, by consent, of the earlier application by the Trustee to join Grenfell.

21    It should be noted that r 40.13 of the Rules provides that when an order is made on an interlocutory application, the party in whose favour the order was made must not tax those costs until the completion of the proceeding in which the order is made. It is, however, questionable whether that rule applied or applies in the context of the costs order made in Grenfell’s favour on 3 February 2014. That is because Grenfell was not a party to the action either before the interlocutory application or after its dismissal. Had the Trustee not filed this further interlocutory application, Grenfell would undoubtedly have been able to immediately move to have its costs relating to the dismissal of the earlier interlocutory application taxed.

22    Even if r 40.13 can or does apply to the costs order made on 3 February 2014, I consider it appropriate to dispense with that rule and order that Grenfell may move to have its costs in respect of the earlier dismissal of the interlocutory application taxed immediately.

23    Grenfell submits that an order requiring the Trustee to pay $30,000 into court pending the taxation of its costs is justified because of the unsatisfactory and dilatory conduct of the Trustee in prosecuting these proceedings. In particular Grenfell points to the Trustee’s conduct in relation to his earlier attempt to join Grenfell.

24    I do not propose to rehearse the chronology of these proceedings. Suffice it to say that it is a sorry tale of delay, failure to comply with directions and other unsatisfactory conduct on the part of the Trustee in the conduct of these proceedings. Whilst some explanation has been given for why the Trustee consented to the dismissal of the earlier application to join Grenfell, that explanation does not on any view adequately justify the delay and dilatory conduct on the part of the Trustee. Grenfell’s submission that the Trustee’s conduct of this matter and its previous attempt to join Grenfell has been dilatory and unsatisfactory should be accepted.

25    That finding alone, however, does not warrant or justify an order requiring the Trustee to, in effect, provide security for the costs likely to be payable to Grenfell under the earlier costs order. To a large extent Grenfell has already received a remedy in respect of the Trustee’s past conduct of the proceedings. It has received a cost order and, failing an agreement as to the quantum of its costs, it will, as a result of the order dispensing with r 40.13 that I have foreshadowed, be able to have those costs taxed and in due course paid without further delay. There is no suggestion, let alone evidence, that Grenfell will not be able to recover its costs from the Trustee if and when they are ultimately taxed. Any delay occasioned by the need to have the costs taxed would not alone justify requiring the Trustee to pay funds into court as security.

26    Whilst it may be accepted that conditions can be imposed in relation to the joinder of a party, and that a condition similar to the one sought by Grenfell has been imposed in other cases (see for example Rangott v Pilor Pty Limited [2006] FCA 800) the imposition of the condition in this case in my opinion is not warranted. The better course is to unconditionally join Grenfell and to ensure that the proceedings from this point on are prosecuted by the Trustee in a satisfactory way in accordance with the Court’s directions and orders.

27    In the meantime, as I have said, Grenfell can have its costs taxed. Grenfell’s bill of costs was tendered on the application. The Trustee made submissions in relation to the reasonableness of items in the bill of costs. He submitted that some items were unnecessary or unwarranted and that the overall quantum was excessive. I do not propose to give any consideration to the question whether the bill of costs that has been served is reasonable or otherwise. That is entirely a matter for the parties or, if no agreement can be reached, the taxation officer.

Should the Trustee be permitted to file the proposed amendED pleadings?

28    The issues concerning the Trustee’s application for leave to file the proposed further amended originating application and amended statement of claim are more difficult. A good deal of evidence was tendered on the application, though as it turns out most of it was not relevant or material to the key issues that need to be determined in considering the pleading. Detailed written and oral submissions were made on behalf of both the Trustee and Grenfell. Difficult and complex questions of fact and law are involved.

29    The Trustee has provided a draft of the further amended originating application and pleading that, if granted leave, he will file. Grenfell challenges virtually all of the new or amended paragraphs of both the application and pleading. The new or amended paragraphs of the application and pleading mostly do not directly relate to Grenfell. Rather, they purport to plead new and alternative characterisations of the relevant agreements or transactions involving Mr Spencer, Ms Perovich and the other respondents in terms that would, on the Trustee’s case, attract the operation of s 120 of the Act.

30    Grenfell’s opposition to these amendments is based on two propositions. First, Grenfell contends that these paragraphs fail to disclose any reasonable cause of action. Second, Grenfell contends that the paragraphs do not fairly apprise Grenfell of the case it must meet at trial.

31    To adequately address these contentions, it is, unfortunately, necessary to descend into some detail in relation to the facts and the Trustee’s case as identified in the proposed pleading and the submissions of the parties.

Background facts and the Trustee’s case

32    Prior to being bankrupted (on 20 August 2007 and 24 August 2007 respectively) Ms Perovich and Mr Spencer were directors of, and shareholders in, both Kinsella and Neolido. Importantly, it would appear that Mr Spencer held the shares in Neolido as Trustee of the Spencer Family Trust.

33    In May 2002, Kinsella purchased a property in Queensland (the Property) apparently for the purposes of development. On or about July 2003, a number of agreements were entered into by, relevantly, Mr Spencer, Ms Perovich, Kinsella, Neolido and Mango. The proposed amended pleading refers (in paragraph 14) to six agreements, though it would appear, at least from the balance of the pleading, that only two are relevant to the Trustee’s case.

34    First, Ms Perovich, Mr Spencer (as Trustee of the Spencer Family Trust) and Mango (as Trustee for the Mango Boulevard Unit Trust) entered into the Share Sale Agreement. Relevantly, that agreement provided that Mr Spencer (in his capacity as Trustee of the Spencer Family Trust) and Ms Perovich would each sell 25 of the 50 shares they each held in Kinsella. This comprised 50 percent of the issued shares in Kinsella. The Share Sale Agreement specified that the consideration for the sale of the shares was an amount worked out by calculating a sum, defined as the “Improved Property Price”, and deducting from it certain fees, defined as the “Monthly Development Management Fee”, payable by Mango to Neolido. The Improved Property Price was defined in the agreement as being the greater of $5 million and the difference between the purchase price of the Property and the improved market value of the Property less $2 million.

35    The second relevant agreement was the Consultancy Services Agreement. The parties to the Consulting Services Agreement were Kinsella, Mango and Neolido. Neither Mr Spencer nor Ms Perovich were parties to the Consultancy Services Agreement, though they executed it in their capacity as directors or officers of Neolido and Kinsella. In broad terms, the agreement provided that Neolido was to provide various consulting or other services in relation to the acquisition and proposed development of the Property. In consideration for the services and its role in the acquisition and development, Neolido was to be paid fees by Mango and Kinsella. The fees included the Monthly Development Management Fee, referred to earlier in the context of the Share Sale Agreement, which was to be paid by Mango. They also included a fee, defined as the Development Facilitation Fee, which was payable by Kinsella, and a fee of $2 million, called the Lump Sum Development Management Fee, which was payable by Mango. The agreement also provided that Mango was to reimburse Neolido in respect of certain expenses incurred by Neolido in relation to the development.

36    The Trustee’s case under s 120 of the Act turns on the characterisation of the amounts payable as consideration for the sale to Mango by Mr Spencer (as trustee) and Ms Perovich of the shares they held in Kinsella and the characterisation of the fees and amounts payable by Mango and Kinsella to Neolido pursuant to the Consultancy Services Agreement. The Trustee contends, in effect, that these amounts were properly payable by Mango and Kinsella to Mr Spencer and Ms Perovich, but were instead paid to Neolido. He alleges, in effect, that Mr Spencer and Ms Perovich transferred their right to receive these payments to Neolido.

37    The proposed amended pleading seeks to characterise the alleged transfers in three alternative ways. The manner in which the Trustee seeks to characterise the alleged transfers in the proposed amended pleading is at the heart of Grenfell’s complaint and opposition to the amendments.

38    The first way the amended pleading seeks to characterise the alleged transfer (referred to in the pleading as “Transfer 1”) is as the transfer to Neolido of the amounts otherwise payable by Mango to Mr Spencer and Ms Perovich for the sale of their Kinsella shares. This characterisation hinges on two key allegations. First, it is alleged (in paragraph 19 of the proposed amended pleading) that the consideration “required” by Mr Spencer and Ms Perovich for the sale of their Kinsella shares “in substance” comprised the Improved Property Price, the Monthly Development Management Fee, the Lump Sum Development Management Fee, the Development Facilitation Fee, and the reimbursement of expenses that Neolido was entitled to be paid by Mango under the Consultancy Services Agreement. As will be seen, the alleged “requirement” by Mr Spencer and Ms Perovich appears to have been no more than a wish or desire.

39    Second, it is pleaded (in paragraph 19A of the proposed amended pleading) that despite the alleged requirement, Mr Spencer and Ms Perovich “negotiated and signed” the Share Sale Agreement and Consultancy Services Agreement, which provided that the relevant fees and the reimbursement of expenses were to be paid to Neolido, and that the consideration payable to them for their Kinsella shares was to be correspondingly reduced “inter alia” by the amount of the fees.

40    Thus, so far as it is able to be comprehended, the Trustee’s allegation appears to be that the share sale was structured, by the terms of the Share Sale Agreement and Consultancy Services Agreement, in such a way that the amounts that Mr Spencer and Ms Perovich “required” to be paid to them for their Kinsella shares were in fact, under the terms of the agreements, payable to Neolido. This is alleged to constitute a transfer for the purposes of s 120 of the Act.

41    As will be seen, Grenfell submits that this characterisation of the alleged transfer is nonsensical unless the Trustee alleges that the Share Sale Agreement and Consultancy Services Agreement were a sham. Yet no sham is pleaded in the proposed pleading.

42    The second way the proposed amended pleading seeks to characterise the transactions under the Share Sale Agreement and Consultancy Services Agreement (referred to in the proposed pleading as “Transfer 2”) is as the creation, by Mr Spencer and Ms Perovich, of rights that did not previously exist. The creation and conferral of those rights on Neolido is alleged to constitute a transfer of property by reason of s 120(7)(b) of the Act.

43    This characterisation apparently hinges on a number of contentions. First, the relevant property (for the purposes of s 120) is said to be the right, under the terms of the Share Sale Agreement and Consultancy Services Agreement, to receive the Monthly Development Management Fee, the Lump Sum Development Management Fee, the Development Facilitation Fee, and the reimbursement of expenses. Second, this property is alleged not to have existed prior to the time that the two agreements were entered into. Third, it is alleged that under the terms of the agreements, Neolido became the owner of the property. Fourth, this is said to have come about as a result of Mr Spencer and Ms Perovich negotiating and signing the agreements. The negotiation and signing of the agreements by Mr Spencer and Ms Perovich is alleged to amount to the doing of “something” that resulted in Neolido becoming the owner of property that did not previously exist within the meaning of s 120(7)(b) of the Act.

44    The third way that the relevant transactions are characterised in the proposed amended pleading (referred to in the proposed pleading as “Transfer 3”) is as the transfer of the right to payment for the provision of personal services. The steps in this characterisation, as pleaded, appear to be as follows. First, it is alleged that prior to entering into the Consultancy Services Agreement, Mr Spencer and Ms Perovich were “entitled to payment for personal services” provided by them (paragraph 22 of the proposed pleading). Whilst it is unclear, it would seem (from paragraph 23 of the proposed pleading) that the alleged personal services were services provided in relation to the development application made to the Pine Rivers Shire Council (presumably the development application relating to the proposed development of the Property by Kinsella) and services in relation to the “Sale Contract” (presumably the Share Sale Agreement). It is unclear from the proposed pleading exactly who it is alleged Mr Spencer and Ms Perovich were entitled to receive the payments from, or what the basis of the entitlement was. As will be seen, this is one of the complaints made by Grenfell in relation to the proposed amended pleading.

45    Second, it is said that the relevant “right to payment” (the “entitlement” to be paid for personal services) was property within the meaning of s 120 of the Act. Third, and critically, it is alleged that the Consultancy Services Agreement “had the effect” of transferring the right to Neolido. So far as it is able to be gleaned from the proposed amended pleading, this is said to flow from the fact that the Monthly Development Management Fee, Lump Sum Development Management Fee and the right to reimbursement, being amounts payable to Neolido, were in fact payments for the personal services that had been, or were being, provided by Mr Spencer and Ms Perovich.

46    The Trustee alleges that Neolido either provided no consideration, or inadequate consideration for the alleged transfers.

Grenfell’s objections to the proposed amended pleadings

47    As earlier indicated, the Trustee’s objection to the proposed amended pleading is that it fails, in a number of respects, to disclose any reasonable cause of action and fails to fairly apprise Grenfell of the case it has to meet. These objections are raised in respect of each of the three alternative characterisations of the alleged transfers.

48    In relation to the first alleged characterisation, the transfer of sale price characterisations (Transfer 1), Grenfell attacks the proposed amended pleading in two substantive ways. First, Grenfell points out that (as is clear from the pleading itself) that Mr Spencer entered into the Share Sale Agreement as Trustee for the Spencer Family Trust. Grenfell submits that two things flow from this. First, it is said that the consideration paid or payable for the sale of the shares cannot be property for the purposes of s 120 of the Act. That is because it was trust property, not the property of the bankrupt (Mr Spencer). In this respect, Grenfell relies on the judgment of the Full Court in Parsons v McBain (2001) 109 FCR 120 at [17].

49    Second, Grenfell submits that even if the alleged transfer of the right to receive the consideration for the share sale is voided under s 120 of the Act, the impugned payments (made to Neolido as a result of the transfer) would not vest in the trustee. That is because, as trust property, it could not be property divisible among the creditors of Mr Spencer under s 116(1) of the Act. That is because 116(2)(a) of the Act provides that s 116(1) does not extend to property held by the bankrupt in trust for another person. Grenfell also relies on the judgment of the Full Court in Anscor Pty Ltd v Clout (2004) 135 FCR 469 at [42].

50    Second, Grenfell submits that the characterisation of the Share Sale Agreement and the Consultancy Services Agreement as effecting a transfer, by Mr Spencer and Ms Perovich to Neolido, of the consideration payable for the sale of their Kinsella shares, is nonsensical and cannot be made out in the absence of an allegation that the agreements are shams. Grenfell submits that the terms of the Share Sale Agreement make it clear that the consideration payable to Mr Spencer and Ms Perovich did not include the relevant fees, and that the terms of the Consultancy Services Agreement make it clear that the fees payable to Neolido by Mango and Kinsella were for services that had been or were to be provided by Neolido in respect of the development. Grenfell’s submission is that the Trustee’s case must be that the terms of those agreements must be ignored or disregarded, though there is nothing in the pleading to indicate why.

51    In relation to the second alleged characterisation (Transfer 2), the characterisation of the transactions as amounting to a transfer by the creation of property within the meaning of s 120(7)(b) of the Act, Grenfell submits that the pleaded case is doomed to fail for two reasons. First, it submits that the execution of the Consultancy Services Agreement by Mr Spencer and Ms Perovich on behalf of Neolido and Kinsella was not something done by them personally. Rather, it was something done by them on behalf of the companies. It was therefore something done by the companies, not Mr Spencer and Ms Perovich. Grenfell also submits that the act of negotiating the agreements is not something that is capable of creating property within the meaning of s 120(7)(b) of the Act as alleged in the pleading.

52    Second, Grenfell submits that, in any event, the alleged creation of rights to payment that arose upon the execution of the Consultancy Services Agreement could not amount to a transfer for the purposes of s 120 of the Act. That is because s 120(7)(b) can only sensibly apply where the property that did not previously exist is “carved out” of property that was held by the person who later became bankrupt, for example where the person executes a mortgage over property in his or her name: see Peldan v Anderson (2006) 227 CLR 471 (Peldan) at [26].

53    In relation to the third alleged characterisation (Transfer 3), namely that the transactions can be characterised as the transfer of the right to payment for personal services, Grenfell advances two substantive complaints. First, Grenfell submits that the right to receive payment for personal services cannot be property for the purposes of s 120 of the Act. That is because it is income, which is dealt with separately in Part VI Div 4B of the Act. In this respect, the Trustee relies on Barwick v Goodridge (2011) 255 FLR 245 as authority for the proposition that money received by a bankrupt after bankruptcy which has the character of income does not vest in the trustee under s 58 of the Act.

54    Second, Grenfell submits that, in any event, the proposed amended pleading does not plead any, or all, material facts capable of supporting the alleged transfer. It is devoid of meaningful particulars. In particular, Grenfell points to the fact that the pleading does not provide any particulars of the alleged “entitlement” of Mr Spencer and Ms Perovich to be paid for personal services. Was this pursuant to contract? What were the services? Who were they provided to and who was to pay for them? Perhaps more importantly, the pleading does not reveal how the creation of a contractual right for Neolido to be paid fees for the provision of specified services (the fees and services specified in the Consultancy Services Agreement) can effect a transfer of the unparticularised right or entitlement that Mr Spencer and Ms Perovich allegedly had to be paid for the provision of unspecified services to an unspecified recipient or recipients.

The Trustee’s submissions

55    In relation to the fact that Mr Spencer held and sold the Kinsella shares as trustee for the Spencer Family Trust, the Trustee submits that this fact alone does not preclude him from seeking to have the alleged transfer declared void under s 120 of the Act. In this respect the Trustee relies on the decision of the High Court in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, which he submits establishes that s 122 of the Act may operate even where trust property is involved. Section 122 is relevantly analogous to s 120 of the Act because it permits a trustee in bankruptcy to apply to have preference payments declared void. In simple terms, the Trustee submits that s 120 can still operate in respect of transfers of property that were held in trust by the bankrupt because a trustee has a right of indemnity over trust property in respect of liabilities incurred in the administration of the trust. Creditors may accordingly have resort to the trust assets to the extent of the liabilities incurred by the trustee. Here, the Trustee may have recourse to the assets of the Spencer Family Trust to meet any liabilities incurred by Mr Spencer in his administration of the trust.

56    The Trustee appears to accept that, if the alleged transfer is declared void by reason of the operation of s 120 of the Act, the fact that Mr Spencer held the shares as trustee might raise an issue about whether the property the subject of the impugned transfer (relevantly the money paid into the Queensland Supreme Court) thereby vests in the Trustee. The Trustee submits, however, that if Grenfell wishes, in that regard, to rely on s 116(2)(a) to argue that the money is trust property and not divisible amongst the creditors, that is something that Grenfell needs to raise in its defence. It is not a proper basis for refusing the Trustee’s application to amend. The Trustee’s submission in this respect appears, at least in part, to be a response to Grenfell’s apparently valid complaint that the proposed amended pleading makes no mention of any right of indemnity that Mr Spencer may have had over trust property (relevantly the consideration for the sale of the Kinsella shares) in respect of liabilities incurred by him in the administration of the Spencer Family Trust. The Trustee contends, in effect, that he need only plead these matters if the issue is first raised in Grenfell’s defence.

57    As for Grenfell’s submission that the Trustee must plead sham to make good the allegation that the transactions amount to a transfer of the consideration for the sale of the shares, the Trustee maintains that it does not, and does not need to, plead sham. He submits that the allegation that the various fees were “in substance” part of the consideration for the sale of shares, is supported by the following evidence contained in an affidavit sworn by Ms Perovich:

“At the time of entry into the agreements referred to above, the payments that I wanted (and to the best of my knowledge, Mr Spencer wanted) for the sale of a half interest in [Kinsella], and considered at the time to be representative of the value of our shares in [Kinsella] were the following:

(a)    An amount representing the increase in the value of the property following the preliminary approved by Pine Rivers Shire Council authorising a material change of use of the Property (which occurred on 19 December 2006) (with the minimum amount being $5 million) [i.e. the stated sale price in clause 4.1 of the Share Sale Agreement payable to Ms Perovich and Mr Spencer];

(b)    A lump sum payment of $2 million [i.e. the Lump Sum Development Management Fee payable to Neolido];

(c)    The amount of $25,000 a month plus GST for the period from entry into the agreements up to the latest of the date of settlement of the Contract for Sale and the date on which the said preliminary approval was granted ([i.e. the Development Management Fee payable to Neolido]);

(d)    A trailing commission of 2.5% plus GST per lot sold [i.e. Development Facilitation Fee payable to Neolido];

(f)    Reimbursement of expenses incurred by us and our related entities [i.e. the right to reimbursement granted to Neolido].”

58    In relation to Grenfell’s attack on the Trustee’s proposed pleaded case in relation to “Transfer 2”, namely the characterisation of the transactions as amounting to a transfer within the meaning of s 120(7)(b) of the Act, the Trustee submits that its allegations as pleaded are capable of falling within the broad terms of that section. His case is at the very least arguable. He submits that Grenfell’s arguments concerning the construction and scope of s 120(7)(b) are more appropriately dealt with at trial.

59    Likewise, the Trustee submits that Grenfell’s attack on the pleaded case in respect of “Transfer 3”, that the transactions amounted to a transfer of Mr Spencer’s and Ms Perovich’s entitlement to payment for personal services, are matters that are best left for trial. For example, Grenfell’s contention that Mr Spencer’s and Ms Perovich’s alleged right or entitlement to payment constituted income and therefore could not be property for the purposes of s 120 of the Act, is a matter that can, in the Trustee’s submission, only be dealt with at trial when the evidence is complete and the facts are clear.

60    In relation to Grenfell’s complaints concerning inadequate particulars, the Trustee submits that Grenfell well knows the case it has to meet. That is clear from the submissions that Grenfell has made attacking this aspect of the Trustee’s case. The complaint that Grenfell does not know what services were provided has no merit because the pleading makes it clear, so the Trustee submits, that the services were “those required by the Consultancy Services Agreement.”

Consideration and disposition

61    In my opinion, there is considerable force in many of Grenfell’s submissions concerning the proposed amended pleading. The proposed amended pleading is not only ineloquent and awkward, it is in many respects positively opaque. It is, with respect, difficult to comprehend some aspects of the Trustee’s case, even with the benefit of detailed written and oral submissions. Some aspects of the Trustee’s case as pleaded appear to be, at best, tenuous, if not dubious.

62    Nevertheless, for reasons that I will expand on later, in the interests of enabling this matter to be determined “as quickly, inexpensively and efficiently as possible” (s 37M(1)(b) of the Federal Court of Australia Act 1976) in my opinion the Trustee should be granted leave to amend the originating process and pleading. That leave must, however, come at a price. The price is that the Trustee will be required to furnish such particulars as are reasonably requested by Grenfell.

63    Before turning to the reasons for granting leave, given the careful and comprehensive submissions that have been made by the parties it is appropriate that I deal with the main arguments raised by Grenfell in relation to the merits of the Trustee’s pleaded case.

64    I should make it clear that much of what follows comprises no more than my preliminary views based on the pleadings, submissions and a limited understanding of the facts. A final determination of the issues must be made at trial when all the evidence is complete and the facts are clearer.

65    I have some considerable difficulty seeing how the Trustee’s case in relation to “Transfer 1” can succeed as currently pleaded (or proposed to be pleaded). As already indicated, the Trustee’s case is apparently based on the contention that the Share Sale Agreement and Consultancy Services Agreement operated to effect a transfer to Neolido of the consideration otherwise payable to Mr Spencer and Ms Perovich for the sale of their Kinsella shares. However, unless there is some reason why, as a matter of law, the terms of the Share Sale Agreement and Consultancy Services Agreement can be disregarded, the consideration payable for the shares was the consideration that is specified in clear terms in the Share Sale Agreement. It was not some other amount that Mr Spencer and Ms Perovich “required” or wanted to be paid to them. The pleadings do not appear to disclose any basis for disregarding the terms of the Share Sale Agreement. Likewise, it is difficult to see why the amounts payable under the Consultancy Services Agreement should be found to be anything other than fees payable to Neolido by Mango and Kinsella in consideration for services provided in relation to the acquisition and development. It is not clear why the fees and other amounts specified in the Consultancy Services Agreement should be construed as being amounts that should or would otherwise have been paid to Mr Spencer and Ms Perovich as consideration for the sale of their Kinsella shares. The pleadings do not disclose any basis for concluding that the terms of the Consultancy Services Agreement should be disregarded.

66    The Trustee’s case appears to be based almost entirely on the evidence of Ms Perovich that she (and to her knowledge Mr Spencer) “wanted” to be paid certain amounts, which correspond to the Improved Property Price and the various fees in the Consultancy Services Agreement, for the sale of their Kinsella shares. However, the fact that Mr Spencer and Ms Perovich may have “wanted” (or even “required” as alleged in the pleading) these payments for their Kinsella shares is no basis for concluding that they were ever in fact payable to them as consideration for the shares. It is not clear how it is alleged that Mr Spencer and Ms Perovich ever had any right to be paid these amounts. If Mr Spencer and Ms Perovich never had any right to receive these payments, the payments (or the rights thereto) were not theirs to transfer.

67    It is difficult to see how the fact that Mr Spencer and Ms Perovich negotiated and signed the Share Sale Agreement can provide support for the Trustee’s case. The fact that, despite their apparent wishes, Mr Spencer and Ms Perovich chose to execute a contract which provided that the consideration that they were entitled to receive for their shares did not include all the amounts they “wanted” to receive, demonstrates nothing more than that they ultimately agreed to sell their shares for less than they wanted. That is hardly remarkable.

68    Nor does the entry into the Consultancy Services Agreement appear to assist the Trustee’s case. That is particularly the case because Mr Spencer and Ms Perovich were not parties to the Consultancy Services Agreement. That agreement provided for certain payments to be made to Neolido in respect of its role in respect of the development of the Property. It is difficult to see how the fact that these amounts appear to correspond to amounts that Mr Spencer and Ms Perovich wanted to be paid to them for their Kinsella shares can mean that some form of transfer has been effected. It is particularly difficult to see how payments made by parties other than Mango, which was the purchaser of the Kinsella shares, could or should be considered to be part of the consideration for the sale of the shares.

69    Nevertheless, in my view, the complex issues of fact and law which surround these transactions cannot properly be considered or resolved unless and until there is a proper appreciation of all of the evidence and facts. That can only be done at trial. I am not prepared at this stage to conclude that the Trustee’s case is hopeless or doomed to fail.

70    I have some considerable sympathy for Grenfell’s claim that it does not understand the case it has to meet in respect of this aspect of the claim. As I have just sought to explain, it is difficult to understand exactly how the Trustee can succeed on the case as pleaded. Nevertheless, I consider that the more efficient way to meet this complaint is to direct the Trustee to provide such further particulars of the nature and basis of this aspect of his case as are reasonably requested by Grenfell.

71    As for the fact that Mr Spencer sold the Kinsella shares in his capacity as Trustee for the Spencer Family Trust, I am not prepared to conclude, at this interlocutory stage, that the relevant property (consideration for the sale of the Kinsella shares) cannot be property for the purposes of s 120 of the Act simply because it may have been held by Mr Spencer in trust for the Spencer Family Trust. The definition of “property” in s 5 of the Act is very broad. It does not, in terms, exclude trust property. In my opinion there is some merit in the Trustee’s submission that the fact that the property that was allegedly transferred may have been trust property does not alone preclude recourse by the Trustee to s 120 of the Act.

72    That said, there appears to be real issues of some complexity in relation to the question whether, if the transfer is voided under s 120, the result is that the property would vest in the Trustee. In the proposed amended originating application, the Trustee seeks relief which includes declarations that the rights to the money that were transferred, including money that is said to have been payable to Mr Spencer in his capacity as trustee, vested in the Trustee or are owned by him. It is tolerably clear, however, that even if the alleged transfers are voided under s 120, the only basis upon which these monies could vest in the Trustee, or be owned by him, is by reason of the existence of the right of indemnity over trust property in respect of liabilities incurred by Mr Spencer, as trustee of the Spencer Family Trust, in the administration of that trust. Even then, as Grenfell has pointed out, there is a real issue about what, if anything, in fact vests in the Trustee. There is at least a strong argument that the only thing that vests in the Trustee is the trustee’s right of indemnity, not legal title to the property.

73    These are complex issues that are best left to trial when the evidence is complete and the facts are clear. It is not appropriate that they be decided at an interlocutory stage, in the context of an argument about the amendment to a pleading, and on the basis of incomplete facts.

74    It is, however, plainly unsatisfactory that the proposed pleading does not deal with this issue. It is unclear whether there ever were any relevant liabilities incurred by Mr Spencer in the administration of the Spencer Family Trust. If there were no such liabilities, the Trustee could have no interest in any money representing consideration for the sale of the Kinsella shares that were held by Mr Spencer as trustee. That is so even if the alleged transfer of the rights to this money is declared void by operation of s 120 of the Act. These proceedings should not be treated as some academic exercise. Whether the Trustee has any interest in these funds should not be left to speculation. Nor, contrary to the Trustee’s submissions, is this a matter that should first necessarily be raised in Grenfell’s defence and only then dealt with in the Trustee’s reply. Grenfell should be fairly apprised of exactly what the Trustee’s case is in respect of the vesting of any property that may have been held by Mr Spencer as trustee for the Spencer Family Trust. For these reasons, I propose to direct the Trustee to provide particulars of any or all amounts that might give rise to a relevant right of indemnity so this issue can be dealt with at trial on a proper footing.

75    In relation to that part of the Trustee’s case that relies on s 120(7)(b) of the Act, I am not at this stage prepared to conclude that the Trustee’s case is hopeless or doomed to fail. Section 120(7)(b) of the Act was described as “obscure” by the High Court in Peldan (at [24]). I respectfully agree. Difficult issues of construction are involved. These issues again should not be addressed at an interlocutory stage on the basis of incomplete facts. It must be said, however, that whilst the Trustee’s case as pleaded may be arguable, it would be surprising (if not absurd, as Grenfell submits) if the act of negotiating and signing the Share Sale Agreement and Consultancy Services Agreement could sensibly be considered to be a transfer for the purposes of s 120 of the Act. Were that so, it would expose virtually any contract signed by a person who subsequently becomes bankrupt to be voided under s 120 if the contract created rights for payment – even if the person signed the contract in his or her capacity as a director.

76    Finally, in relation to the Trustee’s claim based on the alleged transfer of rights to payment for personal services (Transfer 3), I tend to agree with Grenfell’s complaint that this part of the pleading is inadequately particularised. In particular, it is unclear who Mr Spencer and Ms Perovich where entitled to receive payment for personal services from, what the basis of that entitlement was and what those personal services were. I consider, however, that the more efficient way to deal with this inadequacy is to direct the Trustee to provide such further particulars of this aspect of the claim as are reasonably requested by Grenfell.

77    The question whether the payments or the rights thereto are capable of being property, for the purposes of s 120, is again a matter properly dealt with at trial. I do not consider that it is unarguable that such rights can constitute property, even if in different respects, or in different contexts, they can also be characterised as income.

78    There are a number of reasons why I consider that, despite the force of a number of Grenfell’s arguments in relation to the deficiencies in the proposed pleadings, the preferable course is to allow the Trustee to amend. First, given the nature of the proceedings, it is in the interests of all parties to ensure that the matter proceeds to a final hearing as soon as possible. There is a public interest generally in avoiding excessive delay in bankruptcy proceedings. Here, the resolution of these proceedings is necessary before the Queensland Supreme Court proceedings can be finally resolved.

79    In my opinion it would be unfortunate if the final resolution of these proceedings was delayed by technical and academic arguments about pleading. If I was to refuse leave, I have little doubt that the Trustee would, at some later stage, make another application to amend. Grenfell conceded at the hearing that it could not oppose an order that permitted the Trustee to have another attempt at properly pleading his case. But that would, in my view, simply lead to another contested amendment application. It is in my view, based on the arguments that have been advanced, highly unlikely that Grenfell will ever concede that the Trustee has an arguable case. Any further amendment application would inevitably be met by arguments that no reasonable cause of action has been pleaded by the Trustee.

80    Second, the Trustee’s case and the arguments raised against it by Grenfell raise a number of complex questions of fact and law. In my opinion it is preferable to resolve these questions at trial, when the evidence is complete and the facts are clear, rather than at an interlocutory stage in the context of an amended application.

81    Third, I accept the Trustee’s submission that the essential function of a pleading is to fairly apprise the parties of the case that has to be met at trial and that the time and resources of the parties, and the limited resources of the Court, should not be wasted extensively debating the application of technical pleading rules: Barclay Mowlem Construction Ltd v Dampier Port Authority (2006) 33 WAR 82 at [7]-[10]; Australian Securities and Investments Commission v Cassimatis (No 2) (2013) 96 ACSR 272 at [97]-[100]. As the Full Court said in Betfair Pty Limited v Racing New South Wales (2010) 189 FCR 356 at [52], “[p]leadings are a means to an end and not an end in themselves”. The real question here is whether Grenfell knows the case it has to meet.

82    In my opinion, whilst there are plainly a number of deficiencies with the amended pleading and application, Grenfell is sufficiently apprised of the case it has to meet. As I understand it, the Trustee’s evidence is now complete. Grenfell has now had the benefit of the Trustee’s written and oral submissions in which the Trustee has attempted to articulate the nature of his case. Grenfell clearly knows enough about the Trustee’s case to have been in a position to make detailed and forceful submissions on this application about the deficiencies and weaknesses in the Trustee’s case. Grenfell’s real complaint is that the Trustee has no case. This is a submission it will no doubt make at the final hearing.

83    Further, to the extent that the pleading contains inadequate particulars or an inadequate articulation of the Trustee’s case, I propose to direct the Trustee to provide such further particulars as are reasonably requested by Grenfell. The Trustee will not be permitted to depart from the case he has pleaded, or explained in further particulars, or in submissions made on this application, without leave.

84    It is also relevant, in this context that Grenfell is not alleged to have been a party to any of the relevant agreements or transactions. It is unlikely that Grenfell will be in a position to, or will seek to, adduce evidence in relation to the relevant transactions and dealings between the other parties. In this respect, Grenfell is in a different position to the parties to more conventional proceedings. The deficiencies in the pleadings are unlikely to prejudice the determination by Grenfell of what, if any, evidence it should lead in the proceedings.

85    For all these reasons I consider that the appropriate course is to permit the Trustee to file an amended originating application and statement of claim substantially in the form of the documents that were annexed to the Trustee’s written submission on this application. The Trustee, however, should be required to provide such further particulars concerning the nature of his case and the material facts that are reasonably requested by Grenfell.

86    As for costs, despite the fact that the Trustee has achieved some success on the interlocutory application, Grenfell’s opposition to the proposed amendment was reasonable. The Trustee’s need to amend the originating process and the statement of claim arose from manifest deficiencies in its original application and pleading. The Trustee’s position in relation to the joinder application has also been unsatisfactory. In particular, a previous application to join Grenfell was effectively abandoned by the Trustee. For these reasons, the Trustee should be required to pay Grenfell’s costs of, and occasioned by, the interlocutory application.

87    I will direct that within fourteen days the parties confer and file and serve proposed minutes of orders reflecting these reasons. In the event of any disagreement, short written submissions in support of any separately proposed minutes of orders should be filed and served. The final form of the orders can then be determined. The parties should also approach my associate at the earliest opportunity to arrange for the matter to be listed for further directions.

Associate:

Dated:    7 August 2014