FEDERAL COURT OF AUSTRALIA

Aravanis (Trustee) v Twin Investors Pty Ltd, in the matter of Kapp [2019] FCA 887

ORDERS

Upon the Applicants by their Counsel giving the usual undertaking as to damages:

THE COURT ORDERS THAT:

1.    Pursuant to s 30 of the Bankruptcy Act 1966 (Cth) (Act) by 5:00pm on 4 June 2019 the First Respondent and the Second Respondent shall pay, or cause to be paid, the whole of the proceeds of sale (excluding the costs of such sale) of the property known as 107 Waterfront Street, Swan Bay, NSW, being Folio Identifier 1/714955 (Proceeds of Sale) into the Trust Account maintained by Drayton Sher Lawyers Pty Ltd ACN 164 485 554 t/as Drayton Sher Lawyers (Trust Account).

2.    Each of the First Respondent and the Second Respondent be restrained from dealing with, transferring out, disposing of or otherwise diminishing the Proceeds of Sale other than to cause such funds to be paid into the Trust Account pursuant to Order 1.

3.    The Proceeds of Sale be held in the Trust Account until further Order.

4.    Pursuant to s 30 of the Act the First Respondent and Second Respondent provide within seven (7) days all documents showing or tending to show the source of monies for the purchase, maintenance and preservation of the Property by the First Respondent, including but not limited to all monies received from or at the direction of Philip James Kapp (Bankrupt).

5.    The First Respondent and the Second Respondent are to pay the costs of the application for interim relief on a party/party basis as agreed or assessed.

6.    The matter remain allocated to the provisional docket of the National Operations Registrar of the Court from which it will be docketed to a judge of the Court to be listed for case management as soon as practicable but preferably within 14 days.

7.    Parties have liberty to apply on such notice as is reasonable in the circumstances but preferably not less than 2 days.

THE COURT NOTES:

8.    Alison Drayton, the solicitor for the Respondents and principal of Drayton Sher Lawyers, undertakes to the Court not to deal with, transfer out, dispose of or otherwise diminish the Proceeds of Sale from the Trust Account without further Order of the Court in these Proceedings.

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

REASONS FOR JUDGMENT

(DELIVERED EX TEMPORE)

STEWART J:

1    The applicants are the trustees in bankruptcy of Philip James Kapp whom I shall refer to as the bankrupt. The applicants were appointed on 4 March 2019 when the bankrupt lodged a debtor’s petition. The first respondent is the trustee of The Twin Trust and was the registered proprietor of a property at Swan Bay, which I will refer to as the property. The second respondent is the sole director of the first respondent and the spouse of the bankrupt.

2    The bankrupt was a director of the first respondent until 4 March 2019, the day on which he lodged a debtor’s petition. The bankrupt was the settlor of The Twin Trust, a discretionary family trust, which was settled in November 2013. The bankrupt is a former practising solicitor as partner of a large national law firm.

3    The Twin Trust conducted a bank account with the Commonwealth Bank of Australia which received payments from time to time, some of which would appear on their face to have originated from the bankrupt although that is yet to be determined. It would also appear from the bank accounts of the trust that moneys were withdrawn to pay for the purchase of the property, and possibly its maintenance, but that is also still to be determined.

4    On 24 May 2019, the applicants were notified by a conveyancer that the property was to be sold with settlement to take place on 30 May 2019. The sale contract provides for a purchase price of $445,000. The property was unencumbered as at the sale date of 30 May 2019.

5    The applicants assert, and have presented some evidence in support, that the purchase of the property by the trust in 2015 was, in effect, funded by money from the bankrupt. The bank accounts of the trust also appear to support an assertion that the bankrupt has contributed money to the trust between then and now and the applicants ask that the inference be drawn that that money has been used to maintain and preserve the property.

6    The applicants, as trustees of the bankrupt, apprehend that they may have claims to the proceeds of sale of the property arising from the brief facts set out above.

7    Concerned to ensure that the proceeds of the sale when paid on 30 May 2019 were not dissipated by the first respondent, the applicants sought an undertaking from the respondents that that would not occur. That undertaking was first sought by email on 28 May 2019 in the morning. It was sought at least in part on the basis of the applicants’ then understanding that the bankrupt was a beneficiary of the trust.

8    Ms Drayton, a solicitor on behalf of the respondents, replied on the afternoon of 28 May 2019 saying that she had been instructed that the bankrupt had been removed as a beneficiary of the trust. She said that there is therefore no basis for the undertaking that had been sought. She said that any proceedings as had been threatened to be commenced to seek payment of the proceeds of the sale into court would, in the time honoured phrase, “be vigorously defended”.

9    On 29 May 2019, the applicants wrote saying that they had not received adequate responses to various notices served on the bankrupt under s 77 and other notices served under s 77A of the Bankruptcy Act 1966 (Cth) and in the absence of substantive responses to those notices, they could not be satisfied that they, as the bankrupt’s trustees, did not have an interest in some or all of the assets of the trust or otherwise have a claim to some or all of those assets. They said that in the circumstances they again sought an undertaking from the respondents that they would “retain possession of and would not deal with, transfer, or otherwise secure or encumber the proceeds of sale” of the property without providing at least 14 days’ written notice.

10    Later that day, the second respondent as a director of the first respondent provided an undertaking dated 28 May 2019 in the following terms:

I, Maryann Kapp, as director of Twin Investors Pty Limited, the trustee of the Twin Trust, hereby undertake:

That I will retain possession of and not deal with the transfer or otherwise secure or encumber the net proceeds of sale of [the property] unless first providing fourteen (14) days written notice to Andrew Aravanis of Alex Clark, Trustees of the Bankrupt Estate of Philip Kapp.

11    That undertaking was provided at approximately 1:00 pm on 29 May 2019 under cover of an email sent at that time from the respondents’ solicitor to the applicants’ solicitor. The email stated that it was hoped that “the documents regarding the Trust” would be provided in the next few days.

12    The applicants’ solicitor responded approximately half an hour later stating that as the settlement of the sale of the property was due to occur the next day, confirmation of the total amount of the proceeds of the sale to be received by the first respondent was sought. Additionally, they requested that those proceeds be held in the respondents’ solicitor’s trust account during the term of the undertaking.

13    Timed at 12.36 pm on 30 May 2019, approximately an hour and half before settlement was scheduled to occur, the respondents’ solicitors sent an email to the applicants’ solicitors which attached a letter and various enclosures. The enclosures dealt with the question of the bankrupt’s apparent removal as beneficiary of the trust with effect from 1 December 2013. The letter stated that various documents were attached and then stated as follows:

Finally, now that the required documents have been provided please find attached Withdrawal of Undertaking to your clients.

14    The withdrawal of undertaking, which was dated 30 May 2019, was in the following terms:

I, Maryann Kapp, as the director of Twin Investors Pty Limited, the trustee of The Twin Trust, hereby WITHDRAW the Undertaking provided yesterday, but dated 28 May 2019 to the following effect: …. [the terms of the undertaking that had been given were then set out].

15    The applicants thereafter sought the listing of an application for urgent interlocutory relief in this Court, which came before me as duty judge during the afternoon of 31 May 2019. By the time the matter came to me, the injunctive relief that was sought had been resolved between the parties, and I will make orders to that effect shortly. In short, the respondents consented to injunctive relief acceptable to the applicants such as to protect their position with regard to their claims to the proceeds of sale.

16    The outstanding question was one of costs. Mr Combe, on behalf of the applicants, sought punitive costs against the respondents and relied on indications in the evidence of, essentially, two things: first, that the applicants had a strong prima facie case for the interlocutory relief that they sought and, secondly, the conduct of the respondents in the face of the requests for undertakings and the withdrawal of the undertaking in the circumstances in which it was withdrawn. In particular, attention was drawn to the fact that the withdrawal of the undertaking was provided less than two hours before settlement of the sale of the property was scheduled to occur.

17    The applicants submitted that these matters evidenced, in essence, a lack of good faith on behalf of the respondents in the way in which they had conducted matters and, in particular, that that conduct had precipitated the need for this application, and, on that basis, they sought costs on a punitive basis.

18    In the ordinary course in matters such as this on the duty list, where interim relief is sought and then agreed and the ultimate rights and wrongs are still to be resolved, I would be inclined to reserve costs. I am certainly not inclined to try to get to the bottom of questions of the conduct and rights and wrongs such as to justify a punitive costs order. It may be, for example, that the withdrawal of the undertaking in the circumstances in which it was withdrawn was done on the basis of an innocent misapprehension as to two things: first, that the undertaking was sought and required pending provision of full documentation and, therefore, once documentation had been provided which was thought to be full, the undertaking was no longer required and, secondly, that it could be withdrawn with immediate effect.

19    However, I am persuaded to order costs at this stage in this case because the undertaking that was given could not, on my view, be withdrawn other than on at least 14 days’ notice. To the extent that that is not explicit, it is certainly implicit in the wording used in the undertaking. If that were not so, the 14 day notice provision would be pointless, because the undertaking could simply be withdrawn with no notice and then the proceeds paid over. It must be that if the undertaking was to be withdrawn, it would require a minimum of 14 days’ notice to do so.

20    The purported withdrawal of the notice with immediate effect is what precipitated this matter having to come to court for the urgent determination of interim relief, and for that reason I order that the respondents pay the costs of that application.

21    Insofar as the main relief is concerned, Mr Combe of counsel on behalf of the applicants gives the usual undertaking as to damages.

22    Orders as made above.

Associate:

Dated:    31 May 2019