FEDERAL COURT OF AUSTRALIA

Hundy as Trustee for the Bankrupt Estate of Ryan v Southorn, in the matter of Ryan [2020] FCA 1050

ORDERS

THE COURT ORDERS THAT:

1.    An amount of $50,000 be released from the funds held in trust by the respondent’s solicitor pursuant to an undertaking given on 20 April 2018, which funds are released for the sole purpose of financing the respondent’s estimated legal costs of defending the substantive proceedings in a two to three day hearing in this Court.

2.    The respondent is permitted to give her evidence in the substantive proceeding by audio-visual link.

3.    The costs of the interlocutory application be costs in the proceeding.

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

REASONS FOR JUDGMENT

GRIFFITHS J:

Introduction

1    By an interlocutory application filed on 30 June 2020, the respondent seeks inter alia an order that her solicitor be released from an undertaking made on 20 April 2018 so far as it is necessary to pay the respondent’s reasonable legal costs in respect of defending the substantive proceeding and in respect of the making of an application to the Family Court of Australia at such time as the respondent may be advised.

2    Broadly, the substantive proceeding is between the applicant (who is trustee of the bankrupt estate of Mr Mark Ryan) and the respondent, who was evidently in a de facto relationship with Mr Ryan for many years. The applicant claims that the bankrupt was the registered proprietor of several properties in Canberra and that he entered into several transactions with the respondent that are void pursuant to ss 120 and 121 of the Bankruptcy Act 1966 (Cth).

3    The transactions include a financial agreement to separate property and resources between the bankrupt and the respondent following the alleged breakdown of their de facto relationship, a loan agreement granting the respondent a right to a second mortgage over a property, and the transfer of two units (the Monarch Units) to the respondent for consideration which the applicant says are less than market value. The Monarch Units were originally bought by the bankrupt and the respondent as joint tenants in August 2006.

4    In the substantive proceedings the applicant seeks declarations and orders including that the respondent execute all necessary instruments to effect the transfers of the relevant properties to the applicant.

Factual background and the parties’ submissions summarised

5    Mr Ryan was declared a bankrupt in mid-2016. Before that date, on 20 May 2015, the bankrupt sold his interests in various properties to the respondent. On 29 May 2015, a loan agreement was executed by the bankrupt and the respondent recording a loan of $700,000 plus $136,000, with a second mortgage over another Canberra property (the Canberra Avenue property). The loan was said to be for money which the respondent “has invested in “the bankrupt’s businesses and him personally”. By a contract dated 9 June 2015 the bankrupt agreed to sell the property to the respondent for a price of $1.36m. The Monarch Units were subsequently transferred to the respondent’s sole name following the settlement of the contracts on 27 November 2015.

6    The Canberra Avenue property was transferred to the respondent on 4 February 2016. It was a special condition to the sale contract that amounts of $700,000 and $136,000 (subsequently amended to $145,000) be returned immediately to the respondent. On the settlement of the sale, approximately $850,000 was allowed in the respondent’s favour, which reduced the purchase price payable on settlement. The trustee claims that the amount payable on the purchase was the exact amount which was required to discharge obligations to the mortgagee and pay the sale costs, with no proceeds flowing to the bankrupt.

7    The respondent owned another property in Spence in Canberra, which she sold on 9 June 2017 with the respondent receiving approximately $300,000 from the proceeds of the sale.

8    By a letter dated 13 April 2018, the trustee’s solicitor conveyed the trustee’s concern that another property in Narrabundah, owned by the respondent, was about to be sold. The letter was written shortly after bankruptcy examinations were conducted in the Court. The respondent gave unchallenged evidence in the present proceeding, which I accept, that the Narrabundah property was bought by the respondent on 2 July 1996, before she commenced a relationship with the bankrupt. The letter dated 13 April 2018 set out at some length the trustee’s opinion why many transactions involving the bankrupt and the respondent were liable to be set aside under ss 120 and 121 of the Bankruptcy Act. With specific reference to the Narrabundah property, the solicitor wrote:

Narrabundah Proceeds

During the examination on 22 March 2018, it was raised that Unit 26/42 Jerrabomberra Avenue, Narrabundah is or will shortly be listed on the market for sale.

For the reasons contained in this letter, it is likely that the BFA and the related transfers are not genuine and will need to be set aside or wound-back. Narrabundah will likely need to be considered part of the joint assets if Mr Ryan and Ms Southorn wish to re-initiate the process of splitting their assets. Alternatively, if sufficient proceeds cannot be realised from the sale of the Turner apartments and the Canberra Avenue Property then any short-fall in a claim against Ms Southorn would likely come from the Narrabundah property as Ms Southorn’s only other major asset.

Kindly provide an update as to the status of any planned disposal of major assets including the Narrabundah property. To prevent the necessity of any injunctive action, please confirm that your client will not dispose of any real property or further encumber it without first notifying or seeking the consent of the Trustee. Alternatively, we seek an undertaking that any proceeds will be held on trust until the claims against your client are resolved.

9    In response, the respondent’s solicitor provided an undertaking on 20 April 2018 with respect to the proceeds of the sale of the Narrabundah property “not to distribute or part with proceeds until agreement or order”. Thus, the respondent’s solicitor currently now holds $105,090.69 in trust for the purpose of isolating the funds until there is a determination in the substantive proceedings. It may also be noted that despite the bankrupt and respondent having said that they are separated, the trustee claims that they continue to reside together in the Canberra Avenue property and share many domestic duties and expenses.

10    In the substantive proceedings, the trustee claims that the transactions between the bankrupt and the respondent have been for less value than the consideration that should have been received by the bankrupt on the sale of the Canberra Avenue property and the Monarch Units. The trustee claims, and I accept, that the money held in trust by the respondent’s solicitor is the only liquid asset held by the respondent. I also note that the Canberra Avenue property and the Monarch Units are currently owned by the respondent, but they are apparently subject to various caveats, including in respect of the trustee.

11    It appears that if the trustee is successful in having the transactions declared void, the respondent intends to commence proceedings in the Family Court seeking a determination on the division of the property at the time the relationship with the bankrupt allegedly ended, which would include the proceeds of the sale of the Narrabundah property.

12    The trustee submits that the substantive proceedings are ready to go to a hearing, subject to valuations being obtained in respect of the Canberra Avenue property and the Monarch Units. Pursuant to orders made on 2 July 2020, a mediation is scheduled to take place following the filing and service of expert valuation evidence.

13    The trustee claims, and I accept, that the matter has proceeded to this point on the basis that there is some security as value in the properties and the undertaking that the proceeds from the Narrabundah sale will not be distributed.

14    In short, absent any new facts or significant circumstances which were not reasonably known or foreseeable at the time the undertaking was given, the trustee’s position is that no monies should be released because the parties have proceeded in reliance on the undertaking by isolating the proceeds of the sale pending a Court determination of the parties’ respective entitlements.

15    The respondent’s submissions in support of amending the undertaking may be summarised as follows. The respondent did not dispute the circumstances in which the undertaking was given on 20 April 2018. The respondent stated, however, that in the substantive proceedings the trustee does not seek any relief in respect of the proceeds of the sale of the Narrabundah property and that that property has no relationship to the bankrupt. The respondent submitted that it is reasonable for her to be able to use the funds from the amount held in trust in her defence of these proceedings and potentially in other proceedings in the Family Court.

16    The respondent submitted that an analogy should be drawn with freezing orders, where the practice has developed that such orders may be varied to allow payment of debts incurred in the ordinary course of business, even if not legally enforceable (citing Jackson v Sterling Industries Ltd [1987] HCA 23; 162 CLR 612).

Consideration and determination

17    The Court raised with the parties the question of the Court’s jurisdiction or power to make the order sought in order 1 of the interlocutory application. The Court drew the parties’ attention to the doubts which were expressed on that matter in Hycenko v Hrycenko [2016] VSC 247; 50 VR 726, where Sifris J referred at [20] to the Associate Judge below raising the issue whether the Court had power to release a lawyer from a private undertaking given in the course of a lawyer’s professional duties and the fact that there did not appear to be any relevant authority. In the event, Sifris J did not need to determine the matter. The Court also drew the parties’ attention to Logan J’s judgment in Halsted (Bankrupt) v The Official Trustee in Bankruptcy, in the matter of Halsted (Bankrupt) [2011] FCA 1242 and, in particular, his Honour’s reference at [5] to Greenwood J having made orders in earlier proceedings that the bankrupt’s solicitors be released from an undertaking. That order was made in the context of bankruptcy proceedings. There are no reasons for judgment available in respect of Greenwood J’s earlier order and the source of power to make the order is unclear, although it may well be in the exercise of the Court’s power under s 30 of the Bankruptcy Act.

18    At the Court’s invitation, the parties filed brief post-hearing supplementary submissions on these issues. The trustee submitted that there was no such jurisdiction and that the Court should not interfere with what the trustee described as an undertaking “which is akin to a private contract”. The trustee submitted that s 30 of the Bankruptcy Act has no application because the undertaking was not provided in proceedings and its operation stretched further than the issues in dispute in the bankruptcy. The trustee sought to distinguish Talacko v Talacko [2010] FCAFC 54; 183 FCR 311 on the basis that there was a specific power in s 50 of the Bankruptcy Act for the Court to require the bankrupt to surrender his or her passport. The trustee submitted that the respondent had not shown that release from the undertaking was “necessary for the purposes of carrying out or giving effect to the Bankruptcy Act”.

19    The trustee then submitted that, if there was such jurisdiction, it was necessary for the respondent to show that there were changed circumstances for the power to be exercised. The trustee submitted that the respondent’s stated intention to commence proceedings in the Family Court indicated that there were no changed circumstances.

20    It is unnecessary to summarise the respondent’s submissions other than to state that, because I take the view that s 30 provides sufficient authority for the Court to make the requested order in appropriate circumstances, it is unnecessary to determine the respondent’s alternative contention that such jurisdiction also exists because of the combined operation of s 580 of the Legal Profession Act 2006 (ACT) and s 4(1) of the Jurisdiction of Courts (Cross-Vesting) Act (1993) (ACT).

21    I find that the Court has the jurisdiction in an appropriate case to make an order releasing or varying an undertaking given by a legal practitioner in the context of bankruptcy proceedings. By s 30(1)(b) of the Bankruptcy Act, the Court is empowered to “make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter” (referring to any case of bankruptcy or any matter under Pts IX, X or XI coming within the cognizance of the Court). In Talacko, the Full Court said at [18] that the breadth of the text in s 30(1) “supports a conclusion that it should not be construed narrowly or in a confined or limited way”. Reference was made to Neaves J’s decision in Re Bilen; Ex parte Sistrom [1985] FCA 141, where it was stated that this provision does not limit the Court’s jurisdiction and that it is “a facultative provision giving the Court full power, within the limits of its jurisdiction to be found elsewhere, to make such orders as it considers should be made in order to carry out and give effect to the Act”.

22    The Full Court in Talacko stated at [19]:

The judicial power conferred is intended to assist in the exercise of jurisdiction in bankruptcy. It is an ingredient of the exercise of discretion under such a power that it be ‘necessary for the purposes of carrying out or giving effect to’ the Bankruptcy Act. In express terms, it is contemplated that the Court may make orders granting injunctions or other equitable remedies. The legislature is to be taken as having intended that the Court would adopt the same approach to making such orders as it adopts in the exercise of other broad discretionary powers in support of its jurisdiction.

23    In Vale v Sutherland [2009] HCA 26; 237 CLR 638 at [19] the High Court said (footnotes omitted):

… This concerns the interrelation between s 139ZS and s 30(1) of the Act. The latter endows courts of bankruptcy with "full power to decide all questions, whether of law or of fact, in any case of bankruptcy" and to make "such orders ... as the Court considers necessary for the purposes of carrying out or giving effect to this Act ...". Section 30 has a provenance which includes s 72 of the Bankruptcy Act 1869 (UK), s 105 of the Bankruptcy Act 1914 (UK) and s 25 of the Bankruptcy Act 1924 (Cth). It is to be generously construed, but, consistently with the reasoning in cases such as Anthony Hordern & Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia, it does not authorise the making of an order which would bring about a result which differs from that prescribed elsewhere in the Act…

24    I do not consider that ordering the release of an amount of money for the purposes of defending bankruptcy proceedings from an undertaking given by a solicitor to another solicitor who acts for the trustee in bankruptcy is inconsistent with any other provision of the Bankruptcy Act. This is to be contrasted with cases such as Tyler v Thomas [2006] FCAFC 6; 150 FCR 357 and Skalkos v Nichols [2009] FCA 346; 175 FCR 547.

25    The undertaking was given prior to the present proceedings being commenced, but it is notable that the undertaking was given after the trustee had conducted examination proceedings, presumably under s 81 of the Bankruptcy Act, and issued a letter of demand to the respondent. Upon commencement of the present proceedings, the Court plainly had jurisdiction. The release from the undertaking is sought for the purpose of applying the released funds to the respondent’s defence of those proceedings. Finally, it is relevant to note that terms of the undertaking themselves contemplated that the undertaking might be varied by an “order” (see [9] above), which is a plain implicit reference to an order by the Court in proceedings which were then clearly contemplated. I do not doubt that, in these circumstances, the Court has jurisdiction. As will shortly emerge, I also consider that this is an appropriate case for the Court to exercise the power under s 30(1).

26    For the following reasons, I consider that it is also appropriate to make an order which releases from the trust funds sufficient money to cover the estimated costs of the respondent’s defence of the substantive proceedings in this Court. It is important to note that despite the numerous transactions which have given rise to the trustee’s concerns as expressed above, the Narrabundah property is solely owned by the respondent and was purchased by her before she entered into a relationship with the bankrupt. Moreover, the trustee did not contest that no relief was sought by him directly in respect of the Narrabundah property. It is evident, however, that if the respondent brings proceedings in the Family Court consideration may need to be given in that proceeding to the Narrabundah property. But that is a separate proceeding from the one which is currently before this Court.

27    I am also satisfied that there has been a material change in circumstances since the undertaking was given on 20 April 2018. In particular, subsequent to that date, the applicant commenced these proceedings seeking relief under the Bankruptcy Act. It is in the interests of justice that the respondent, who is the sole respondent in those proceedings, have access to adequate funds to enable her to defend those substantive proceedings. I do not consider it appropriate at this stage, however, to also release funds in respect of the proposed Family Court proceeding which, at this stage, is entirely hypothetical.

28    Mr Hubert, solicitor for the respondent, provided evidence that he had outstanding professional fees owing by the respondent in the amount of $4,383.50 as at 22 June 2020. Mr Hubert also provided a costs estimate from counsel in respect of the proceedings not only in this Court but also in the Family Court. Unfortunately, the estimate did not sufficiently distinguish between the likely costs of the proceedings in the Federal Court or the Family Court and the counsel’s estimate explicitly stated that there may be additional costs relating to preparation of affidavits, productions of documents and mediation but that he was not in a position to offer a better estimate in respect of those costs.

29    Mr Hubert gave evidence that his present estimate of the respondent’s costs for a two to three day hearing in the Federal Court were in the region of $50,000 to $75,000, including preparation and various applications. Unfortunately, he did not provide a detailed breakdown of those estimates. I am prepared, however, to accept the bottom of that range which appears appropriately to reflect the likely costs of a party in preparing for and conducting up to a three day hearing in this Court.

30    For these reasons, I will order that an amount of $50,000 be released from the undertaking given by Mr Hubert on 20 April 2018 for this purpose.

Future conduct of the matter

31    In her interlocutory application, the respondent also raised the question of her health and its implications for her participation in the proceeding. She provided medical evidence from two doctors attesting to her serious health situation. It is unnecessary to provide details of her health condition but I can indicate that I accept that her health is such that it would be dangerous for her to give any evidence in person in Court. Mr Robens of counsel (who appeared for the trustee applicant) properly responded by saying that he was instructed not to oppose the respondent giving her evidence by audio-visual link. The Court raised with the parties the desirability of them discussing and arranging the logistics and related conditions for Ms Southorn giving her evidence by audio-visual link, most probably by Microsoft Teams.

Conclusion

32    The Court will make orders accordingly, including an order that costs of the interlocutory application be costs in the proceeding (noting that the respondent did not seek costs).

Associate:

Dated:    27 July 2020