FEDERAL COURT OF AUSTRALIA

Commonwealth Bank of Australia v Prentice (Trustee), in the matter of Shannon (Bankrupt) [2016] FCA 53

ORDERS

IN THE MATTER OF THE BANKRUPT ESTATE OF GEOFFREY ANTHONY SHANNON

THE COURT ORDERS THAT:

1.    Leave is granted, to the extent that it is required by s 58(3)(b) of the Bankruptcy Act 1966 (Cth), to the applicant take fresh steps in and continue with Supreme Court of New South Wales proceeding no 2013/217325 (“Supreme Court proceeding”).

2.    On the granting of the leave sought in paragraph 1 above, the applicant in the Supreme Court proceeding:

(a)    must maintain its claim for the orders recorded under the heading “relief claimed” in the amended statement of claim filed on 17 February 2014 in the proceeding (other than the claim for costs against Geoffrey Shannon);

(b)    must join the respondent to the proceeding; and

(c)    must not otherwise seek leave in the proceeding to amend the claim to seek relief for any monetary judgment.

3.    The leave in paragraph 1 above be granted nunc pro tunc, with such leave to have been deemed to have commenced on 16 December 2013.

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

REASONS FOR JUDGMENT

GLEESON J:

1    The applicant (“Bank”) seeks leave pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) to take fresh steps in and continue with Supreme Court of New South Wales proceeding no. 2013/217325 (“Bank’s Supreme Court proceeding”).

2    Section 58(3)(b) provides:

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

…

(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.

3    Geoffrey Anthony Shannon (“Mr Shannon”) became a bankrupt, pursuant to orders of this Court made on 16 December 2013.

4    The application was not opposed by the respondent. Mr Shannon was granted leave to be heard in opposition to the application.

5    For the following reasons, I will grant the leave sought by the Bank.

Background to the application

Events prior to Mr Shannon’s bankruptcy

6    On 22 August 2013, the Bank commenced proceedings in this Court seeking to set aside a personal insolvency agreement (“PIA”) dated 5 July 2013 between Mr Shannon and William Roland Robson (“Mr Robson”).

7    On 16 December 2013, Rares J made orders including that the PIA between Mr Shannon and Mr Robson be set aside, and that a sequestration order be made against Mr Shannon’s estate: Commonwealth of Australia v Robson [2013] FCA 1430. The Court noted that the date of Mr Shannon’s bankruptcy was 21 May 2013, being the date of Mr Shannon’s statement of affairs prepared for the purposes of s 188(2C) of the Bankruptcy Act.

8    An appeal from the decision of Rares J was dismissed: Shannon v Commonwealth Bank of Australia [2014] FCAFC 108; (2014) 318 ALR 420.

9    Rares J recorded the following relevant history:

8.    There is a large amount of background to the proceedings, but, it suffices for present purposes, to summarise that as follows. In February 2013, the Bank’s proceeding for a sequestration order against the debtor’s estate was part heard in the then Federal Magistrates Court. The Bank’s proceedings on a creditor’s petition were based on judgment debts totalling $1,571,958.88. The proceeding resumed part heard on 5 February 2013 and on that day the debtor swore an affidavit as to his assets and liabilities. He asserted in that affidavit that he had net assets of $2,909,000 and gross assets of about $6.2 million, with liabilities of $3,287,000. That account excluded any reference to his indebtedness, if any, to the Bank. He claimed that he owed his parents $2.7 million, as a non-current liability, and a further $500,000 was owed to his daughter, Kerri Shannon. The affidavit listed other creditors as being owed $11,000.

9.    So, it must have come as quite a shock to the Bank to receive, about three and a half months later, the debtors’ statement of affairs dated 21 May 2013 made under s 188(2C) of the Act in support of his proposed personal insolvency agreement in which he listed his assets as virtually nil and his creditors at $26,739,922, again, excluding any liabilities to the Bank. The statement of affairs was materially inaccurate in that it failed to disclose that in the previous five years the debtor had disposed of three assets, namely:

•    his half share in a property at 8 Fleeting Court, Tuncurry in July of 2009, that had realised for his wife, who is a bankrupt, and himself $950,000;

•    100 shares in a company called Unhappy Customers Litigation Pty Limited that he transferred to his daughter, Paige, on 4 February 2013; and

•    a cause of action that he and one of his companies, now in liquidation, 33 Electra Pty Limited had sold to one of his solicitors, Douglas McClelland of Platinum Lawyers, on 27 March 2012 for an expressed consideration of $1.5 million. Mr McClelland, who was a principal of his firm, was admitted to proof at the creditors’ meeting for a claim of $1,947,017.

10.    On 15 May 2013, Judge Driver’s associate notified the parties that his Honour proposed to deliver a reserved judgment in the bankruptcy petition on 7 June 2013.

11.    A lot happened on 21 May 2013. First, the hearing of the Bank’s proceedings against the debtor, 33 Electra, and the second of his companies, C2C Investments Pty Limited, began before Sackar J. Secondly, Davies J in the Supreme Court gave judgment in favour of the plaintiffs in two proceedings that had been commenced the previous month: Shannon v Shannon [2013] NSWSC 608. The debtor’s father was the plaintiff in one of those proceedings in which he claimed $12,885,383 and interest. In the second, a company of his father and mother, D & W Shannon Pty Limited (DWS), claimed $8,916,052.74 plus interest. The father’s proceedings had been commenced on 16 April 2013, and DWS’s on 22 April 2013 and both were, to say the least, unusual. The debtor was most diligent in filing his defences. The defences were verified not by the debtor but by Mr McClelland on 29 April 2013, contrary to the Uniform Civil Procedure Rules in force in New South Wales Courts. Those defences admitted the loans claimed, the debtor’s failures to repay but pleaded that they were not repayable because, in the father’s case, they were gifts, and, in DWS’s case, because the interest rate of 20% was allegedly a penalty. In addition, Mr McClelland, as the debtor’s solicitor, signed certificates for those defences under s 347 of the Legal Profession Act 2004 (NSW) that Davies J described in his reasons, were in a form (at [7]):

“... so extraordinary it first prompted a telephone call from the solicitor for the Plaintiff to the solicitor for the Defendant, Mr McClelland, where the solicitor for the Plaintiff asked Mr McClelland, ‘Did you mean to sign the certificate as it reads or is there a typographical error...?’”

12.    The certificates read that Mr McClelland certified under s 347 that there were “reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law, that the defence to the claim for damages in these proceedings has no reasonable prospects of success” (his Honour’s emphasis). That is, Mr McClelland, on his client’s behalf, had verified a defence which Mr McClelland viewed had no prospects of success.

13.    Davies J recorded that, in those circumstances, and because the debtor’s father was elderly and in ill health, motions had been brought seeking urgent summary judgment for the claims in each statement of claim. He said that the debtor had appeared by his solicitor who offered no opposition to the matters. His Honour entered judgments for the full amounts claimed on the same day having given ex tempore reasons. In consequence, the debtor’s indebtedness to his parents increased by about $19 million above what he had sworn was his indebtedness to them on 5 February 2013. There was no explanation before me of any reason for that change.

14.    The third thing that happened on 21 May 2013, was the debtor executed the draft personal insolvency agreement as a deed and completed his statement of affairs. The latter included the very recent judgment debts owed to his father and DWS entered by Davies J.

15.    On 3 June 2013, after the Bank learnt of the judgments in favour of the debtor’s father and DWS in late May 2013, it applied, in the Supreme Court proceedings to set those judgments aside as not having been obtained in good faith. Subsequently, Rothman J in the Supreme Court ordered that the Bank bring separate proceedings to make that challenge, and it promptly did so, filing a statement of claim on 17 July 2013 that explained the bases on which that claim was made.

16.    The Bank asserted, in effect, that all the alleged debts were statute barred at the time at which the Supreme Court proceedings were commenced by each of the debtor’s father and DWS, the loan agreements were all shams and the debtor’s parents, on behalf of DWS, had applied on 16 December 2011 to the Australian Securities and Investments Commission for DWS to be deregistered with the father and mother declaring that, as at 16 December 2011, its assets were less than $1000. The Bank’s statement of claim also alleged that the first loan agreement on which the father claimed in his proceedings was for a principal sum of $150,000 entered into on 1 July 1995, providing for payments of $3,750 per month for interest at only 10% per annum for two years with the principal repayable by 30 September 2005. The purpose of that loan was said to be for land supplied for the family home at 8 Fleeting Court, Tuncurry. (Curiously, that Bank alleged there was no “Fleeting Court” at Tuncurry. That is one of the properties the Bank alleged that the debtor failed to disclose in his statement of affairs of 21 May 2013.) Clause 6.3 of that loan agreement referred to Goods and Services Tax and to a 1999 Commonwealth statute relating to that tax, despite the fact that that tax only commenced to be payable on 1 July 2000 and was not provided for in any legislation in 1995, being the time of the alleged agreement. Suffice to say that the claim by the Bank to challenge the default judgments is not colourable.

10    The proceeding heard by Sackar J, mentioned at [11] of Rares J’s judgment, was Supreme Court of New South Wales proceeding No. 2009/296947. The decision in that proceeding is Commonwealth Bank of Australia v Shannon [2013] NSWSC 1076; (2013) 8 BFRA 674, delivered on 12 August 2013. Following delivery of his reasons on 1 November 2013, Sackar J gave judgment in favour of the Bank against Mr Shannon in the sum of $8,508,963.55 including costs and interest.

11    The judgment given by Davies J, mentioned at [11] to [13] of Rares J’s judgment was given in Supreme Court of New South Wales proceedings Nos. 2013/117170 and 2013/123931. The judgment was for the full amounts claimed (as set out at [11] of Rares J’s judgment) plus costs.

12    The decision of Rothman J, referred to at [15] of Rares J’s judgment, is DA Shannon v G A Shannon; D&W Shannon Pty Ltd v G A Shannon [No 2] [2013] NSWSC 1222 (“Rothman J’s judgment”). In that decision, Rothman J stated that the Court could “confidently arrive at the following conclusions of fact”:

31. The judgment proceedings were between members of the one family who are closely related and are not at arms’ length and/or a company, the sole directors of which are members of that same family and/or the same persons.

32.    Between 5 February 2013 (the date of G A Shannon's affidavit in the Guarantor Proceedings) and 21 May 2013 (the date of the Statement of Affairs in the personal bankruptcy proceedings), a period of just over three months, there appears a gross disparity between the debts said to be owed by G A Shannon. That disparity affects the position of the CBA significantly and adversely in relation to the enforcement of the Guarantor Proceedings [heard by Sackar J].

33.    On the basis of the material read on the motion, and purely for the purposes of the interlocutory proceedings, it is more than arguable that the judgment proceedings [being the proceedings heard by Davies J, which led to the 21 May 2013 judgments against Mr Shannon] were taken for the purpose of affecting the standing of creditors, rather than the obtaining of moneys arising from the debt, if it were to exist.

34.    Lastly, there is, at least arguably, arising from the aforesaid disparity, a suggestion that one or other of the affidavit or Statement of Affairs is inaccurate and possibly deliberately so. Whether or not deliberately, arguably full disclosure was not made to Davies J in the judgment proceedings.

13    At [42], Rothman J said:

The issues raised by the CBA going to the setting aside of the orders are, at least, arguable. The overwhelming balance of convenience, particularly in light of bankruptcy proceedings, dictates that the CBA should not be disadvantaged (nor D & W Shannon or Dallas Shannon advantaged) pending the outcome of the resolution of the issues raised by the CBA on the motion.

14    The orders made by Rothman J on 28 June 2013 were, relevantly:

1.    Separate proceedings be commenced by the applicant [Bank] on the motion seeking to set aside the judgment of Davies J;

2.    The entry of that judgment be set aside;

3.    The execution or enforcement of the judgment of Davies J be stayed pending the outcome of the motion and the separate proceedings;

4.    The motions be stood over to be heard together with the separate proceedings to be commenced by the Commonwealth Bank as earlier stated.

15    The Bank’s Supreme Court proceeding is the proceeding referred to at [15] and [16] of Rares J’s judgment. It is also the proceeding commenced by the Bank pursuant to order 1 of the orders made by Rothman J on 28 June 2013.

16    At [59] of his Honour’s judgment, Rares J concluded:

I am of opinion that it is manifestly in the public interest for this agreement to be set aside. I am satisfied that its terms are unreasonable and are not calculated to benefit creditors generally. It is not in the interests of creditors to allow the agreement to stand when the debtor had omitted material matters from his statement of affairs particulars as to the sale of his and his wife’s property at Tuncurry, the transfer of the shares to his daughter, and the disposal of a cause of action for $1.5 million to Mr McClelland within the preceding five years. It is crucial that this debtor’s examinable affairs be properly investigated by an independent trustee in bankruptcy.

Events following Mr Shannon’s bankruptcy

17    On 17 February 2014, an amended statement of claim was filed in the Bank’s Supreme Court proceeding, seeking the following relief:

1.    An order under rule 36.15(1) and rule 35.16 [of the Uniform Civil Procedure Rules] and in the Court’s inherent jurisdiction setting aside the judgments and orders of the Court made in proceedings No. 2013/117170 on 21 May 2013.

2.    An order under rule 36.15(1) UCPR, rule 36.16 UCPR and in the Court’s inherent jurisdiction setting aside the judgments and orders of the Court made in proceedings No. 2013/123931 on 21 May 2013.

3.    Costs (including indemnity costs).

4.    Such further or other orders as the Court this fit.

18    The defendants named in the amended statement of claim are Mr Shannon, Mr Shannon’s father (Dallas Shannon), D&W Shannon Pty Ltd (“DWS”) and Mr Robson.

19    In late April 2014 Dallas Shannon passed away.

20    On 23 and 24 February 2015 respectively, DWS and Mrs Wilma Shannon as trustee of the estate of the late Dallas Shannon (collectively “judgment creditors”) filed submitting appearances in the Bank’s Supreme Court proceeding. In each case, the form of the submitting appearance is to submit “to the making of all orders sought, and the giving or entry of judgment in respect of all claims made, save as to costs”.

21    On 3 June 2015, Mr Shannon filed, with leave of the Supreme Court, a notice of motion in the Bank’s Supreme Court proceeding seeking that it “be struck from the roll and dismissed”. By an amended notice of motion dated 5 July 2015, Mr Shannon sought that the proceeding be dismissed, struck out or that it be stayed pending leave being granted pursuant to rule 58(3)(b) of the Bankruptcy Act.

22    On 31 July 2015, Hall J held a directions hearing in the Bank’s Supreme Court proceeding. According to Mr Tang (Mr Shannon’s solicitor), during that hearing Hall J:

1.    decided that it was best that the Bank first obtain leave in the Federal Court pursuant to s 58(3) of the Bankruptcy Act before “the rest of” Mr Shannon’s motion was heard;

2.    granted leave to Mr Shannon to file further submissions on the question of his standing;

3.    reserved judgment on the question of Mr Shannon’s locus standi;

4.    adjourned the proceeding to 18 September 2015 for further directions.

23    On 18 September 2015, Hall J adjourned the Bank’s Supreme Court proceeding to 6 November 2015 and required the parties to advise his Honour’s Associate of the timetable in this proceeding.

Statements made by the respondent trustee in bankruptcy

24    The trustee in bankruptcy published a report to creditors dated 19 March 2014. The report states, under the heading “Estimated Return to Creditors”:

Based on the information disclosed by the Bankrupt in his Statement of Affairs, it is unlikely that there will be a dividend to creditors. However, my investigations into the examinable affairs of the Bankrupt are ongoing.

25    On 5 February 2015, the trustee in bankruptcy wrote to Mrs Wilma Shannon, referring to a proof of debt form completed by her on 3 July 2014 claiming an amount of $45,539,167.42. The trustee noted that the form referred to “a Supreme Court judgment given by Davies J in the amount of $22.7 million”.

26    The trustee informed Mrs Shannon that she was not entitled to lodge a proof of debt in respect of the 21 May 2013 judgment because she was not one of the judgment creditors. He referred to Rothman J’s judgment and cited the passage from that judgment set out at paragraph 12 above. The trustee’s letter concludes:

I understand the proceedings brought by the [Bank] to set aside the judgment of Davies J have not been finalised. Therefore, because of the Orders made by Rothman J on 2 September 2013 and his Honour’s comments under the heading “Conclusions of Fact” detailed above, I consider that I would not be able to admit Proofs of Debt lodged by the executor of the deceased estate of Dallas August Shannon and D&W Shannon Pty Ltd should such Proofs of Debt be lodged.

A copy of this letter is being sent to your son.

27    The trustee’s reference to orders made by Rothman J on 2 September 2013 is incorrect. As noted above, his Honour made orders on 28 June 2013 and published reasons concerning those orders on 2 September 2013.

28    On behalf of Mr Shannon, it was submitted that the trustee’s letter evidenced a decision to reject proofs of debt from the judgment creditors. I do not agree. The language of the letter is clearly contingent on the finalisation of the Bank’s Supreme Court proceeding and lodgement of proofs of debt which, according to the letter had not been lodged. Mr Shannon’s evidence did not demonstrate that the relevant proofs of debt have ever been lodged.

29    It was also submitted that the trustee “has advised he does not intend to admit either of the disputed judgments to proof in the bankruptcy”. As set out above, the trustee has not expressed himself so broadly. In any event, the trustee could not be bound by his statement of intention. He will be required to consider any proof of debt according to law if and when it is submitted.

Offers to settle the Bank’s Supreme Court proceeding

30    On 14 October 2014, Stacks Law Firm, acting for Mrs Shannon on behalf of the judgment creditors, made an offer to the Bank to the effect that they would consent to a discontinuance of the Bank’s Supreme Court proceeding with no order as to costs on the basis that they would also consent to orders that Davies J’s judgment be set aside.

31    By email dated 21 October 2014, the Bank rejected the 14 October 2014 offer.

32    By email dated 4 December 2014, Stacks Law Firm wrote to the Bank’s lawyers, Gadens, as follows:

I am instructed to make the following proposal on behalf of [DWS and the estate of the late Dallas Shannon] to resolve this proceeding. The proposal is also made on behalf of [Mr Shannon], and I have copied [Mr Shannon’s] solicitor to this email (who will also confirm by separate email that this offer is made on [Mr Shannon’s] behalf).

The proposal is as follows:

1.    [DWS, the estate of the late Dallas Shannon and Mr Shannon] will apply to set aside the judgments before Davies J in the separate proceedings by consent by notice of motion to be filed within three business days of these terms being documented between the parties.

2.    The current proceeding be adjourned to a date in March 2015 to enable sufficient time for the order setting aside the Davies J judgment to be obtained.

3.    Upon the judgment in the separate proceedings being set aside, this current proceeding be discontinued with no orders as to costs.

Can you please let me have your client’s instructions.

33    By letter dated 22 December 2014, Gadens wrote to Stacks Law Firm as follows:

Commonwealth Bank of Australia, trading as Bankwest v Shannon & Ors Supreme Court of NSW proceedings no. 2013/217325 (Proceedings)

We refer to your email of 14 October 2014 and to the offer made under cover of that email to:

1.    discontinue the above Proceedings no order as to costs; and

2.    to have the judgments entered against Geoffrey Shannon in the following proceedings (the Davies J Proceedings) set aside by consent:

(a)    Dallas Shannon v Geoffrey Shannon (Supreme Court proceedings no. 2013/117170); and

(b)    D & W Shannon Pty Limited v Geoffrey Shannon (Supreme Court proceedings no. 2013/123931).

As you are aware, our client’s position is that Geoffrey Shannon was not in fact indebted to the estate of the late Dallas Shannon and D & W Shannon Pty Limited (together the Related Creditors) for the amounts set out in the respective judgments or at all.

Rather, Geoffrey Shannon procured entry of the judgments against him for the purposes of allowing him or his family members to control the voting of creditors in his bankrupt estate.

In these circumstances, setting aside the judgment only partly resolves our client’s concerns. This is because the proposal does not contain any restraint on the Related Creditors subsequently asserting an entitlement to vote or seek a distribution from the estate of Geoffrey Shannon (the Estate).

To address these concerns we propose that the Related Creditors, our client and Maxwell Prentice enter into a deed whereby the Related Creditors agree to refrain from asserting any indebtedness in the Estate in exchange for the CBA refraining from seeking costs in the Proceedings at the time of any discontinuance (Deed).

Further we also propose the following additional terms.

1.    That the respective applications in the Davies J Proceedings to have the consent judgments set aside be filed by no later than Monday 19 January 2015 (Applications).

2.    That a copy of the Applications and all affidavits in support be provided to our office by no later than Monday 19 January 2015.

3.    That in the event the Related Creditors and Geoffrey Shannon fail to comply with 1 or 2 above, that consent orders be entered in the Proceedings granting the relief sought by our client.

4.    That the Deed be entered into by Monday 9 February 2015.

5.    That unless the Applications are favourably determined by 27 March 2015, that consent orders be entered in the Proceedings granting the relief sought by our client.

Please let us know whether these terms are acceptable. We will then seek to document this by way of a short heads of agreement. No binding agreement will arise until the heads of agreement are entered into.

34    By letter dated 10 February 2015 Gadens wrote to Stacks Law Firm:

We refer to our letter of 22 December 2014, putting forward a proposal that the offer put forward under cover of your email of 4 December 2014 to resolve the Proceedings, be supplemented by the parties also entering into a deed.

This was because your client’s offer to set aside the judgment only partly resolves our client’s concerns.

The proposed deed would, amongst other things, contain a restraint on certain related creditors subsequently asserting an entitlement to vote or seek a distribution from the estate of Geoffrey Shannon.

Despite our letter and subsequent following up emails of last month, we have not received a response.

As you are aware, the proceedings are listed for directions on 25 February 2015. Unless the matter can be resolved on commercially acceptable terms prior to that date, we expect to receive instructions to have the proceedings set down for hearing.

35    By letter dated 4 August 2015, Blueprint Law, solicitors for Mr Shannon, wrote to Gadens as follows:

Commonwealth Bank of Australia Ltd –V– Geoffrey Anthony Shannon & Ors (NSW Supreme Court Case No. 2013/217325)

We refer to the above proceedings.

We are instructed by the First Defendant to make the following offer of settlement:

1.    that the default judgments entered pursuant to Justice Davis’ orders of 21 May 2013 be set aside; and

2.    that there be no order as to costs entered against the First Defendant with respect to these proceedings.

We note that you stated in open Court at last Friday’s hearing that your client would not be seeking any order of costs against the First Defendant in these proceedings.

Please note that this is an open offer in all respects.

The above offer is open for acceptance until close of business on Tuesday, 18 August 2015, after which time it will be automatically withdrawn.

36    By letter dated 11 August 2015, Gadens made the following counter offer:

We refer to your letter of 4 August 2015 containing the offer of settlement.

In circumstances where our client maintains that the judgments entered by Davies J on 21 May 2013 (Judgments) were procured for the purposes and benefit of controlling the voting of creditors in your client’s bankrupt estate, the setting aside of the Judgments only partly resolves our client’s concerns.

This is because, as set out in our letter of 22 December 2014, the proposal to set aside the Judgments does not contain any restraint on Mrs Shannon, in her capacity as executrix of the estate of the late Dallas Shannon, or D & W Shannon Pty Limited (the Related Creditors) from still asserting an entitlement to vote in or seek a distribution from the bankrupt estate of your client.

Whilst a hearing of our client’s claim may culminate in orders to set aside the Judgments, the overarching purpose of such hearing is to enable a Court to make findings of fact as to the true nature and purpose of the Judgments. Such findings by a Court would ultimately assist the trustee in adjudicating any proofs of debt submitted by the Related Creditors.

Counter offer

We refer to our without prejudice letter of 22 December 2014.

We are instructed to repeat the substance of the offer made under cover of that letter. Namely that:

1.    The Related Creditors, our client and Maxwell Prentice (the Trustee) enter into a deed whereby the Related Creditors agree to refrain from asserting any indebtedness in the Estate (the Restraint).

2.    That consent orders be entered in the above proceedings granting the relief sought by our client with no order as to costs. (Alternatively we are prepared to afford your client time to bring an application in the respective Davies J proceedings to have the judgments set aside, following which the Proceedings can be discontinued no order as to costs).

3.    No binding agreement would arise until the deed is entered into on terms satisfactory to our respective clients.

We make this offer having had regard to your client’s written submissions dated 27 July 2015 (prepared for the purposes of last month’s interlocutory hearing before Hall J) and in particular paragraph 1.11.13 of those submissions.

Under cover of those submissions it was put to the Court that the Proceedings lacked utility because the claims submitted by Mrs Shannon as trustee for her late husband’s estate were on 5 February 2015 rejected by the Trustee. In other words, since the Trustee had adjudicated on this proof and time for any appeal to the Courts having expired, our client’s proceedings lacked any utility.

We do not accept that the Trustee has already adjudicated on proofs by the Related Creditors. However for the purposes of resolving the Proceedings it would appear that based on your client’s own version of events, the Related Parties can suffer no prejudice by being a party to a deed which contains the Restraint.

This is in circumstances where:

1.    the Related Creditors have already filed a submitting appearance in the Proceedings;

2.    the Restraint is a matter that ought to only concern the Related Creditors (as opposed to your client); and

3,    the Restraint’s purpose is to protect the Trustee and creditors from the costs associated with having to respond to a challenge, ostensibly by the Related Creditors, to a proof rejection.

Whilst our client’s offer does not directly concern your client, it appears from the correspondence the Trustee has provided us with, that your client is intimately involved with the proof process. In this regard we refer you to the attached email from your client to Nicolle Greentree on behalf of the trustee’s office dated 5 February 2015. Accordingly we expect that your client will be able to respond on behalf of the Related Parties in terms of whether they are prepared to provide the Restraint.

Kindly note that our client’s counter offer remains open for acceptance until 5pm, Thursday, 13 August 20 15, thereafter it lapses.

37    By letter dated 2 October 2015 to Mrs Shannon, Gadens made the following additional offer:

Offer

We enclose the two alternative sets of consent orders for your consideration concerning the setting aside of the Judgments obtained in Supreme Court proceedings 2013/117170 and 2013/123931 (Judgment Proceedings).

The first provides for the judgments to be set aside and for the Judgment Proceedings to be discontinued on the basis no further monetary claim can be made by either Related Creditor on Mr Geoffrey Shannon’s estate in bankruptcy.

The second provides for the judgments to be set aside and the Judgment Proceedings to be progressed to a hearing on the merits.

Invitation

We invite you to return to us, by no later than Monday 12 October 2015, a signed copy of your preferred form of consent orders together with documentary evidence confirming your legal capacity to sign the consent orders for the Related Creditors. Should you fail to do so by this date, the offer set out above lapses.

Provided we are satisfied with your capacity to execute the consent orders we will then take steps to notify Geoffrey Shannon on the Consent Orders and seek to file same with the Court.

38    By two letters dated 27 November 2015, Paul Anthony Stack Lawyers on behalf of Mrs Shannon (in her separate capacities as executrix of the estate of the late Dallas Shannon and as sole director of DWS) wrote to Gadens. The letters complained that –

… the CBA’s conduct in continuing to pursue the Court Case [is] completely inappropriate and an abuse of process as she has already previously agreed to have the Judgment set aside.

39    On behalf of the estate and DWS, Mrs Shannon offered –

… to the CBA, on an unconditional basis, to have the Judgment set aside in the Court Case, including taking all steps needed to set aside, overturn or vacate the Judgment. This offer is open for acceptance until Thursday, 3 December 2015.

40    Gadens replied to Paul Anthony Stack Lawyers by letter dated 30 November 2015, saying relevantly:

The setting aside of the Judgments without condition fails to resolve the issues concerning the circumstances of the debts forming the basis of the Judgments.

Your client would remain able to lodge a proof of debt in Geoff’s estate in respect of the disputed debts. As a consequence, the trustee would then be required to adjudicate the veracity of the debts, a decision which ultimately is likely to be challenged should the proofs be either accepted or rejected.

In our view, the proof of debt process is not the appropriate forum for such a determination to be made. The appropriate forum for such a determination is a Court of law.

In the interests of resolving these issues our client again puts forward the same offer as set out in our letter of 2 October 2015. That is, to discontinue the Judgment Proceedings on the basis no further monetary claim can be made by your client in either capacity on Mr Geoffrey Shannon’s estate in bankruptcy or alternatively, to progress the Judgment Proceedings to a hearing on the merits.

41    By email dated 6 December 2015, Paul Anthony Stack Lawyers, on behalf of the judgment creditors wrote to Gadens as follows:

3.    We have today been advised by Messrs. Blueprint Law that Counsel assisting in these proceedings has prepared and served submissions for the hearing in the Fed. Court matter NSW 935 of 2015 on 7 December 2015, in which he alleges that our clients have failed to offer to pay your clients costs (including indemnity costs) as claimed in Para.3 of your client’s Amended Statement of Claim in this matter.

4.    Please note firstly that we dispute that our clients offers of 27 November 2015 do not contain an offer to pay your client’s costs. It is certainly our belief that that [sic] an objective reading of the last paragraph of page 1 of those correspondences should be understood to include payment of your Client’s costs.

5.    However, for the avoidance of doubt, please note that our client’s hereby amend their settlement offers of 27th November 2015 to include an offer to pay your client’s costs (including indemnity costs) as claimed in para.3 of your clients Amended Statement of Claim in this matter, upon acceptance of our clients’ settlement offers of 27 November 2015 (hereinafter called “the clarified offers’)

6.    The clarified offers are open for acceptance until 10.15AM on Monday, 7 December 2015.

7.    Our clients and Geoff Shannon will rely on this Correspondence, and produce this correspondence, in the hearing in the Fed. Court matter NSW 935 of 2015 on 7 December 2015.

42    On 17 December 2015 after the hearing of this matter, Mr Shannon made a further offer to settle the Supreme Court proceeding on the following terms:

1.    The judgments and orders of the Court made in proceedings number 2013/117170 on 21 May 2013 be set aside.

2.    The judgments and orders of the Court made in proceedings number 2013/23931 on 21 May 2013 be set aside.

3.    Costs to be taxed on an indemnity basis.

43    The Bank rejected the 17 December 2015 offer.

Principles governing application for leave to proceed

44    Section 58(3) of the Bankruptcy Act 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: 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328 (“7Steel”) at [10]; Stoker (Trustee), in the matter of Starr (Bankrupt) v Starr [2011] FCA 746 (“Stoker”) at [11].

45    In Health Services Union v Jackson (No 3) [2015] FCA 694 at [14], Tracey J stated:

The purpose served by s 58(3) was explained by Hill J in Re Rose; Ex parte Devaban Pty Ltd, an unreported judgment of his Honour which was quoted by Flick J in [7Steel] at [10]:

“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 among 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.”

46    In Mango Media Pty Ltd v Velingos [2008] NSWSC 202; (2008) FLR 176, Barrett J said (at [13]):

… the objective of s 58(3)(b) … is clearly enough, to ensure that the bankrupt estate and the provable claims upon it remain under the control and supervision of the courts having jurisdiction in bankruptcy. The legislation as a whole is aimed at marshalling assets, ascertaining debts and claims and applying the former towards satisfaction of the latter. The procedures by which the process is to be conducted and the objective is to be achieved are set out in the Bankruptcy Act and administered by those courts to which exclusive jurisdiction in bankruptcy is given by Parliament. To the extent that an attempt is made to resort to any other process of dealing with debts and claims, particularly if resort is to be had to courts other than the bankruptcy courts, there must first be screening by a bankruptcy court.

47    It is relevant to the exercise of the discretion conferred by s 58(3) that the facts are complex and that it may be preferable for those facts to be resolved at hearing rather than by way of a proof of debt: 7Steel at [12] referring to Allanson v Midland Credit Ltd [1977] FCA 14; (1977) 30 FLR 108 at 114 (“Allanson”) (applied by Jacobson J in Stoker at [12]). In Allanson, a Full Court (Bowen CJ, Riley and Deane JJ) said:

Where a court is given power to grant leave to perform a particular act or pursue a particular course of action and the question whether the need for such leave has arisen involves difficult and complicated questions of law or fact, it is permissible, in an appropriate case, to proceed on the basis that such leave is necessary rather than involve the parties in the futile exercise of determining, possibly after a series of appeals, whether the need for such leave has arisen: (1977) 30 FLR 108 at 114.

48    In Stoker, Jacobson J granted leave to proceed “to the extent such leave is required” where a question may have arisen as to whether the proceeding was in respect of a “provable debt”. At [19], his Honour expressed the view that the relevant legal and factual issues were “more appropriately dealt with by the Supreme Court than by the trustee in bankruptcy”.

49    In SBA Music Pty Ltd v Hall (No 2) [2014] FCA 1116, Wigney J granted leave to proceed “[if] and to the extent that it [was] necessary by reason of the provisions of s 58(3) “where there was an issue about whether the proceedings were “in respect of a provable debt”, it being argued that the debt fell within the exclusion in s 82(2) of the Bankruptcy Act.

50    See also Westpac Banking Corporation v Ollis [2007] FCA 1194 at [18] to [20].

51    The power of the Court to grant leave under s 58(3)(b) includes the power to grant leave nunc pro tunc in an appropriate case: Re Veghelyi; Smith v Official Trustee in Bankruptcy (1993) 45 FCR 413; Scott v Bagshaw [2000] FCA 816; (2000) 99 FCR 573 at [24] to [26].

Consideration

Is the Bank’s Supreme Court proceeding “in respect of a provable debt”?

52    “Provable debt” is defined by s 5 of the Bankruptcy Act to mean a debt or liability that is, under the Bankruptcy Act, provable in bankruptcy.

53    Section 82(1) of the Bankruptcy Act provides:

Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

54    Mr Shannon did not dispute that the Bank’s Supreme Court proceeding is “in respect of a provable debt”. To the contrary, he relied upon that fact in support of his argument based on s 229 of the Bankruptcy Act, considered below.

55    On behalf of the Bank, it was submitted that its Supreme Court proceeding is in respect of the judgment debts arising from Davies J’s judgment. This submission is inconsistent with its case in the proceeding, which is founded on the allegation that there is in truth no debt owing by Mr Shannon to either of the judgment creditors. It was not clear whether the Bank put its application on the alternative basis that the proceeding is in respect of one or more provable debt owed to the Bank.

56    A judgment debt will not necessarily prove the existence of a provable debt. The trustee is both entitled and obliged to go behind a judgment to satisfy himself or herself that there is in fact a real debt due and owing: Wren v Mahoney [1972] HCA 5; (1972) 126 CLR 212 at 224.

57    The question whether the judgment debts are provable remains in issue between the parties. If the Bank were to succeed on its claim to set the judgments aside, that may well entail a conclusion that the judgment debts are not, in truth, provable debts so that leave is not required. However, where the judgment creditors maintain that the debts are provable debts, in my view, this is an appropriate case to grant leave to proceed to the extent that it is necessary if the circumstances otherwise warrant the grant of leave.

Abuse of process

58    Mr Shannon opposed the Bank’s application for leave to proceed on the basis that it is an abuse of process.

59    The Court has an implied incidental power to prevent abuse of its processes: Rana v Commonwealth [2008] FCA 907 at [55]. The power extends to prevent misuse by litigants of its processes to the detriment of others: Lehman Brothers Australia Ltd v Wingecarribee Shire Council [2009] FCAFC 63 at [41]; (2009) 176 FCR 120.

First allegation of abuse: Bank’s conduct in failing to accept offers

60    The first allegation of abuse of process is premised on the factual claim that the Bank has been offered everything that it can hope to obtain in the Bank’s Supreme Court proceedings, but has not accepted those offers. In those circumstances, Mr Shannon argues that the Bank’s application is an abuse of process because it:

(a)    Violates the principle of proportionality;

(b)    Was instituted for an ulterior purpose; and

(c)    Lacks utility.

61    An argument that the application “amounts to little more than the pursuit of a vendetta” by the Bank was not pressed at the hearing.

62    The offers on which Mr Shannon relied are set out above.

63    Mr Shannon’s argument fails for two reasons. First the offers do not constitute everything the Bank could hope to obtain in the Supreme Court proceeding. If the proceeding cannot be settled, the Bank will be entitled to submit to the Supreme Court that the Court should make findings, including a finding that there was no relevant indebtedness, in support of a decision to set aside Davies J’s judgment even though the judgment creditors might consent to the order.

64    Contrary to the submissions on behalf of Mr Shannon, a submission that the Court should make findings does not involve a suggestion that the Court should embark on a non-judicial, investigative process. Any findings would be made on the basis of evidence tendered by the Bank.

65    Second, it was eminently reasonable for the Bank to seek an agreement from the judgment creditors that they would not make a claim in Mr Shannon’s bankruptcy as part of the resolution of the Supreme Court proceeding.

66    Dr Woolf argued that it was an abuse of process on the part of the Bank to continue its Supreme Court proceeding “for a purpose or to effect an object beyond that which the legal process offers”: see Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 523. In particular, he relied on the following passage from the judgment of Brennan J (at 535):

There is no impropriety of purpose (whatever may be said of motive) when a plaintiff commences or maintains a proceeding desiring to obtain a result within the scope of the remedy, even though the plaintiff has an ulterior purpose – or motive – which will be fulfilled in consequence of obtaining the legal remedy which the proceeding is intended to produce. To amount to an abuse of process, the commencement or maintenance of the proceeding must be for a purpose which does not include – at least to any substantial extent – the obtaining of relief within the scope of the remedy. As Isaacs J. said in Varawa v. Howard Smith Co. Ltd. (92):

“the term ‘abuse of process’ connotes that the process is employed for some purpose other than the attainment of the claim in the action. If the proceedings are merely a stalking-horse to coerce the defendant in some way entirely outside the ambit of the legal claim upon which the Court is asked to adjudicate they are regarded as an abuse of process for this purpose.”

67    In Williams v Spautz, the abuse of process was the commencement of criminal proceedings alleging variously criminal defamation, conspiracy to criminally defame and conspiracy to criminally injure for the predominant purpose of exerting pressure upon Dr Spautz’s employer to reinstate him or agree to a favourable settlement of his case for wrongful dismissal.

68    After considering cases where the plaintiff’s objective lies outside the relief which might be obtained by verdict or order, Brennan J concluded (at 537) that “if there be a reasonable relationship between the result intended by the plaintiff and the scope of the remedy available in the proceeding, there is no abuse of process.”

69    The legal claim upon which the Supreme Court is asked to adjudicate in the Bank’s Supreme Court proceeding is based on, among other things, an allegation that there was no relevant indebtedness on the part of Mr Shannon to the judgment creditors. The agreement sought by the Bank is squarely referable to that allegation.

70    The fact that the Bank’s statement of claim does not seek injunctive relief analogous to the restraint sought by agreement does not mean that there is an impropriety in the settlement terms proposed by the Bank, as Brennan J’s judgment read as a whole makes clear. The proposed terms go no further than what is appropriate to ensure that the Bank obtains the practical benefit of having Davies J’s judgment set aside, which can only be that the judgment creditors will not make a claim on Mr Shannon’s bankrupt estate based on the debts alleged in the proceedings before Davies J. It follows that the 17 December 2015 offer did not advance Mr Shannon’s case.

71    Contrary to the argument made on Mr Shannon’s behalf, the fact that the Bank’s terms have not been accepted tends to demonstrate the utility of granting leave to proceed because it strongly suggests that that the judgment creditors do intend to make a claim in Mr Shannon’s bankruptcy. If they did not intend to do so, there would be no good reason not to accede to the Bank’s reasonable request.

Second allegation of abuse: disproportionality

72    Separately from the first allegation, Mr Shannon argued that the Bank’s application was disproportionate in the absence of evidence of surplus assets in the bankrupt estate. The concept of abuse of process on the basis of disproportionality was discussed in Bleyer v Google Inc LLC [2014] NSWSC 897 at [56] to [62]; (2014) 88 NSWLR 670.

73    I do not accept that the absence of evidence of surplus assets renders the application an abuse where the trustee in bankruptcy has not concluded his investigations into the examinable affairs of the bankrupt. While there is no evidence of surplus assets, there is also no evidence to support a conclusion that there is no prospect of surplus assets: cf Re AJ Benjamin Ltd (in liq) (1969) 2 NSWR 374 at 376; Haviland v Joslow (No. 4) [1979] 2 NSWLR 318 at 319.

74    On behalf of Mr Shannon, it was noted that the Bank has not funded investigations by the trustee, and that given this choice the Bank should not enjoy the benefit of any doubt regarding the possible existence of assets. Given the quantum of the debts the subject of Davies J’s judgment and the unpreparedness of the judgment creditors to agree not to pursue those debts in Mr Shannon’s bankruptcy, I do not accept this submission. So long as those debts may be provable, the fruits of any investigation are at risk of being shared with the judgment creditors. That is an obvious disincentive to the Bank’s preparedness to fund the trustee.

75    Mr Shannon relied upon Mr Robson’s circular to creditors dated 14 June 2013 as evidence of the lack of assets. The circular states that, based on available information, creditors would receive nil in any bankruptcy scenario. However, that circular pre-dates the conclusion of Rares J that it was “crucial that this debtor’s examinable affairs be properly investigated by an independent trustee in bankruptcy”. There is no evidence that there has been a proper investigation of Mr Shannon’s examinable affairs.

Third allegation of abuse: ulterior purpose

76    For the reasons given above, the Bank’s application is not an abuse of process merely because it did not accept the settlement offers made to it. Whether its purpose is to seek findings of fact as to the non-existence of the relevant debts, or to seek an agreement on the terms proposed in its settlement offers, either purpose is not “ulterior” to the Bank’s Supreme Court proceeding.

77    To the extent that Mr Shannon maintained the alternative submission that the Court should infer that the Bank is “simply intent on damaging the reputation of” Mr Shannon, I do not draw that inference. The plain fact is that the Bank is seeking, properly and reasonably, to ensure that the judgment creditors do not prove in Mr Shannon’s bankruptcy the debts alleged in the proceeding before Davies J.

Fourth allegation of abuse: lack of utility

78    The contention was that, once Mr Shannon was declared bankrupt, “the mechanism of the Act assumed the sole legislative framework of submitting claims against his bankrupt estate. From that point of time onwards, these proceedings lacked all utility”.

79    The purposes of the Bankruptcy Act, identified by Hill J in Re McMaster (1991) 33 FCR 70 at 72-73, apply to s 58(3). The first purpose is to ensure that the assets of the bankrupt are distributed rateably among creditors. In this case, a grant of leave to proceed in respect of the Bank’s Supreme Court proceeding is likely to assist in the identification of the creditors of Mr Shannon’s estate by the Bank seeking findings of fact from the Court on the basis of the amended statement of claim.

80    On behalf of Mr Shannon, it was contended that the trustee is entitled to go behind any judgment. That submission ignores the persuasive value of a reasoned judgment which addresses the question of the existence of a debt. As Allanson and the cases applying it demonstrate, the particular circumstances may make it useful to have a decision from a Court about the existence of a provable debt, rather than leaving the assessment to the summary assessment of the trustee (with the right of an appeal from the trustee’s decision).

Bank’s standing in its Supreme Court proceeding

81    The written submissions on behalf of Mr Shannon put forward the argument that the amended statement of claim in the Bank’s Supreme Court proceeding does not allege that Davies J’s judgment was obtained in breach of any duty or obligation, contractual or otherwise, owed to the Bank by Mr Shannon or the judgment creditors. Nor does the Bank expressly plead that Davies J’s judgment has resulted in the Bank suffering loss or damage.

82    In my view, the question of the Bank’s standing in the Supreme Court is a matter for that Court to determine: cf Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99 at 115; (1996) 138 ALR 689 (Beaumont J, Black CJ and Tamberlin J agreeing). There is authority for the proposition that an order of the Supreme Court may be set aside on the application of any person whose interests are affected by the order and not only by the party against whom the order operates: Nicholson v Nicholson [1974] 2 NSWLR 59 at 64. In my view, there is a reasonable argument that the Bank’s interests are affected by Davies J’s judgment because it evidences two provable debts. If the judgment is set aside, then that can be expected to significantly reduce the quantum of debts proved in Mr Shannon’s bankruptcy. Conversely, in my view, I think that it is unlikely that the Bank’s standing will be determined by reference to the language of the amended statement of claim because the question of the Bank’s standing is a question of fact.

83    Accordingly, I would not refuse leave to proceed on the basis that the Bank lacks standing in its Supreme Court proceeding.

Section 229 of the Bankruptcy Act

84    Section 229 provides:

Personal insolvency agreement to bind all creditors

(1)    A personal insolvency agreement that:

(a)    is entered into in accordance with this Part; and

(b)    complies with the requirements of this Part;

is, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor.

(2)    If a personal insolvency agreement has become binding on the creditors of the debtor, it is not competent for a creditor, so long as the agreement remains valid:

(a)    to present a creditor's petition against the debtor, or to proceed with such a petition presented before the agreement became so binding, in respect of a provable debt; or

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

(c)    to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

(3)    This section does not:

(a)    affect the right of a secured creditor to realise or otherwise deal with the creditor's security; or

(b)    prevent a creditor, after all the obligations that a personal insolvency agreement created have been discharged, from taking any proceeding or enforcing any remedy in respect of a provable debt from which the debtor is not released by the operation of the agreement.

(4)    This section does not prevent a creditor from enforcing any remedy against:

(a)    a debtor who has executed a personal insolvency agreement; or

(b)    any property of such a debtor that is not subject to the agreement;

in respect of any liability of the debtor under a maintenance agreement or maintenance order (whether entered into or made, as the case may be, before or after the commencement of this subsection).

85    On behalf of Mr Shannon, it was noted that Mr Shannon’s PIA was executed on 5 July 2013 and the Bank’s statement of claim in its Supreme Court proceeding was filed on 17 July 2013 (that is, before the PIA was set aside). It was argued that the PIA was valid as at 17 July 2013 and, as a result, it was not competent for the Bank to commence its Supreme Court proceeding, being a legal proceeding in respect of a provable debt.

86    The PIA was executed following a meeting of Mr Shannon’s creditors, held under Part X of the Bankruptcy Act, on 26 June 2013. The meeting was convened by Mr Robson. At the meeting:

(a)    Mr Robson admitted for voting purposes debts claimed by the judgment creditors in amounts approximating the amounts found by Davies J;

(b)    Mr Robson admitted the Bank’s debt in the sum of $1, which Rares J found (at [19]) was “a most remarkable valuation”;

(c)    A majority of creditors, by number and value voted in favour of Mr Shannon executing a draft personal insolvency agreement.

87    Section 229(2) applies if a PIA has become “binding on the creditors of the debtor”. By s 229(1), a PIA becomes so binding upon being duty executed if the agreement:

(a)    is entered into in accordance with Part X of the Bankruptcy Act; and

(b)    complies with the requirements of Part X.

88    Rares J’s decision to set aside the PIA was made pursuant to s 222(1)(d) and (e) of the Bankruptcy Act. Section 222(1) provides relevantly:

If a personal insolvency agreement is in force, the Court may, on application by:

…

(c)    a creditor; make an order setting the agreement aside if the Court is satisfied that:

(d)    the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally; or

(e)    for any other reason, the agreement ought to be set aside.

89    Section 222(1) may be contrasted with s 222(2) which empowers the Court to set aside a personal insolvency agreement if the agreement was not entered into in accordance with Part X or does not comply with the requirements of Part X.

90    Rares J did not deal explicitly with the question whether the PIA was entered into in accordance with Part X or did not comply with the requirements of Part X. However, he referred to s 204 of the Bankruptcy Act which provides relevantly:

(1)    The creditors may, at a meeting called in pursuance of an authority under section 188 , by special resolution:

(a)    where the debtor’s property is subject to control under this Division, resolve that the debtor’s property be no longer subject to control under this Division;

(b)    require the debtor to execute a personal insolvency agreement; or

(d)    require the debtor to present a debtor's petition within 7 days from the day on which the resolution was passed.

(2)    A special resolution requiring a debtor to execute a personal insolvency agreement must specify the provisions to be included in the agreement.

91    Rares J found (at [54]) that there was a material difference between the provisions specified to be included in the agreement by the relevant special resolution and the provisions that the PIA ultimately comprised of. As put to the creditors meeting, and in the form circulated to creditors under cover of Mr Robson’s 14 June 2013 circular to creditors, clause 3(f) provided:

A major creditor of the Estate, being Mr & Mrs D & W Shannon will agree to waive their rights to participate in any distribution out of the funds referred to in paragraph 3(b) above.

92    Paragraph 3(b) provided:

In addition, the Debtor will contribute $200,000 over the course of 12 months, comprised of payment of $100,000 within 6 months after the execution of this Deed following acceptance by creditors, and a further payment of $100,000 within 12 months after the execution of this Deed following acceptance by creditors. Such funds to be available for the purposes of payment of a dividend to the admitted creditors of the debtor.

93    In the PIA dated 5 July 2013, clause 3(f) provides:

D & W Shannon Pty Ltd, Mr Dallas Shannon and Mrs [sic] Kerri Shannon, will agree to waive their rights to participate in any distribution out of the funds referred to at paragraph 3(b) above. Such parties will provide written notice to this effect in which this Deed is reliant upon receipt of same.

94    Rares J found relevantly:

54. … the addition to cl 3(f) of the debtor’s sister and the final sentence of the personal insolvency agreement after the creditors meeting was a substantive change that had not been specified by the resolution under s 204(2). It added a conditional element to the agreement so that it was able to be frustrated by a lack of consent from the debtor’s family members. That was a material matter that was not before the creditors or upon which they were able to make an informed vote. Rather, the impression conveyed to the meeting by the draft form of the agreement circulated to the creditors and executed by the debtor suggested that his parents (and DWS, as their company, although it was not named) were happy to waive their rights to prove, thereby increasing the dividend that would be available to the creditors.

…

57. …The effective right of veto of the agreement at a later time and when they choose that each of the debtor’s father, sister and DWS obtained is unreasonable. The right of veto was not created at the meeting in respect of the debtor’s sister and is not supported by s 204(2). While the creditors are likely to have understood that the reference to Mr and Mrs D & W Shannon in the draft agreement included DWS, the debtor’s sister was not referred to at all in this context. The veto’s existence leaves completely uncertain whether the creditors will receive any return. The trustee made no investigations at all as to whether the promised funding would be forthcoming. That had effectively left the debtor and his family in control of vetoing the performance of the agreement in circumstances where, in a very short period of time, he had given radically different explanations of his supposed financial position….

95    I respectfully agree with Rares J’s reasons set out above. It follows that the PIA was not entered into in accordance with the requirements of Part X in that the special resolution requiring Mr Shannon to execute a personal insolvency agreement did not specify correctly the terms of clause 3(f) to be included in the PIA. Further, the proposal for dealing with Mr Shannon’s affairs under Part X did not include a draft of the PIA as executed, and therefore did not comply with s 188(2E) of the Bankruptcy Act.

96    Finally, s 216 of the Bankruptcy Act requires a PIA to be executed by the debtor and the trustee within 21 days from the day on which the special resolution requiring the debtor to execute the agreement was passed. No such agreement was executed: the special resolution required Mr Shannon to execute an agreement that was materially different from the PIA.

97    Accordingly, I reject the submission that leave should not be granted on the basis that it was not competent for the Bank to commence its Supreme Court proceeding.

Should the Bank be granted leave to proceed?

98    In my view, leave to proceed should be granted (to the extent that it is necessary) because there is an unresolved issue between the parties about whether the Davies J judgment is in respect of provable debts. That issue is unresolved because, although the judgment creditors have agreed to consent to an order setting aside the judgment, they have declined to agree not to lodge proofs of debt. Having regard to the serious nature of the allegations made by the Bank (to the effect that the debts are non-existent and that documents were falsely created to support false claims about the existence of the debts) it is more appropriate that those allegations be determined by the Supreme Court than by way of the proof of debt process (although I acknowledge that the Supreme Court may decline to determine the allegations having regard to the judgment creditors’ consent to an order setting aside the judgment).

99    The grant of leave to proceed will therefore promote the orderly determination of the issue whether the judgment creditors are owed debts which may be proved in Mr Shannon’s bankruptcy.

100    Additional considerations are that there is no good reason why this Court should refuse leave to proceed and a refusal to grant leave may inhibit the Supreme Court’s examination of whether its processes have been abused. In my view, the Court should not refuse leave to proceed in those circumstances where to do so would not promote the objectives of the Bankruptcy Act.

Delay

101    Although Mr Shannon became a bankrupt on 16 December 2013, the Bank’s application for leave to proceed was only filed on 10 August 2015.

102    The Bank’s apparent delay in filing its application was explained in an affidavit of Justin Bates, a partner of Gadens. Mr Bates’ evidence, which I accept, was that until July 2015 the requirement to obtain leave to proceed had not been raised by the judgment creditors or Mr Shannon and had not been considered by him. Mr Bates noted that the Bank’s Supreme Court proceeding does not involve any claim against Mr Shannon’s bankrupt estate. He also noted that the proceeding was commenced before Mr Shannon’s bankruptcy and that, in the period between 16 December 2013 and July 2015, the following events took place:

(a)    Mr Shannon appealed against Rares J’s decision and the appeal proceedings continued up until the end of August 2014;

(b)    Mr Shannon consented to the filing of the amended statement of claim in the Bank’s Supreme Court proceeding;

(c)    The judgment creditors filed submitting appearances (in February 2015);

(d)    On 25 February 2015, directions were made in the Bank’s Supreme Court proceeding for the Bank to file the balance of its evidence in chief by 18 March 2015 and for Mr Shannon to file his evidence in reply by 29 April 2015;

(e)    In June 2015, Mr Shannon filed a motion seeking to have the Bank’s claim struck out and dismissed.

103    Mr Shannon argued that leave nunc pro tunc should not be granted where the Bank knew or ought to have known of the requirement for leave to proceed but simply chose to ignore it.

104    The evidence does not support the submission that the Bank chose to ignore the requirement for leave.

105    In the absence of any suggestion of prejudice to Mr Shannon or the judgment creditors, and having regard to the serious allegations raised by the Bank’s Supreme Court proceeding, I am satisfied that leave to proceed should be granted nunc pro tunc.

Associate:

Dated:    8 February 2016