Federal Court of Australia

Kapp as substituted trustee for The Twin Trust v Aravanis as trustee of bankrupt estate of Kapp [2021] FCA 116

ORDERS

THE COURT ORDERS THAT:

1.    The application for an extension of time and leave to appeal dated 22 July 2020 and filed 24 August 2020 be dismissed.

2.    The applicants pay the respondent’s costs assessed on a lump sum indemnity basis as being $39,216.62.

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

REASONS FOR JUDGMENT

(Delivered ex tempore, revised from transcript)

WIGNEY J:

1    This is an application for an extension of time and leave to appeal from an interlocutory decision made on 19 June 2020. That decision was to refuse an interlocutory application filed by Twin Investors Pty Ltd, as trustee for the Twin Trust, and Mrs Maryann Kapp for the release of funds which were held in a trust account maintained by their solicitors pursuant to a Court order.

2    For the reasons that follow, the application for an extension of time and leave to appeal is to be refused and dismissed.

BACKGROUND

3    This matter has a lengthy history. It is fortunately unnecessary to go into too much detail concerning that history.

4    The matter has its genesis in Mr Philip Kapp (the Bankrupt), lodging a debtor’s petition with the Official Receiver on 4 March 2019. That petition was accepted, and Mr Andrew Aravanis and Mr Alexander Clark (together, the Trustees), were appointed as trustees of the Bankrupt's bankrupt estate.

5    On 18 April 2019, some six weeks after the Bankrupt was declared a bankrupt, Twin Investors, which was then the registered proprietor of a property at 107 Waterfront Street, Swan Bay, NSW, entered into a contract to sell that property. As will be seen, Twin Investors was said to hold the Swan Bay property on trust for a family trust which came to be known as the Twin Trust. The Bankrupt, Mrs Kapp, who is the Bankrupt's wife and the second applicant in this application, and other members of the Bankrupt's family, were beneficiaries under the Twin Trust.

6    The sale of the Swan Bay property by Twin Investors was completed on 31 May 2019. On that day, the Trustees commenced proceedings in this Court against Twin Investors and Mrs Kapp. The Trustees alleged in those proceedings, amongst other things, that Twin Investors and Mrs Kapp held the proceeds of sale of the Swan Bay property on trust for the Bankrupt. The basis of that allegation was, in summary, that the Bankrupt had paid for the purchase and upkeep of the Swan Bay property from his own income. The Trustees claim that as the proceeds of the sale are held on trust for the Bankrupt, they had in effect vested in them as trustees of the Bankrupt’s estate.

7    When they filed the originating application, the Trustees also sought urgent interlocutory relief restraining Twin Investors and Mrs Kapp from dealing with the proceeds of sale of the Swan Bay property pending the hearing and determination of their application for final relief. That urgent interlocutory application was heard by Stewart J on 31 May 2019. His Honour ordered, apparently by consent, that Twin Investors and Mrs Kapp pay the proceeds of the sale of the Swan Bay property into a trust account maintained by their then lawyers. His Honour also ordered that Twin Investors and Mrs Kapp be restrained from dealing with, transferring out, disposing of, or otherwise diminishing the proceeds of sale, other than to cause the funds to be paid into that trust account.

8    It is unnecessary to detail what occurred in the proceeding over the following 12 months. It suffices to note that there were a number of case management hearings before the primary judge to progress the main proceeding. At one or more of those case management hearings, Twin Investors and Mrs Kapp apparently foreshadowed filing an interlocutory application concerning the restrained funds. Eventually, on 18 May 2020, Twin Investors and Mrs Kapp filed an interlocutory application which sought an order for the release of $250,000 from the restrained funds. The order sought by Twin Investors and Mrs Kapp provided that the funds were to be paid into a controlled monies account and would be available to be applied in various ways, including, but not limited to, the payment of the legal fees or costs of Twin Investors and Mrs Kapp in defending the main proceeding. The interlocutory application was supported, or purported to be supported, by an affidavit sworn by the Bankrupt, even though at that point he was not a party to the proceeding and was not one of the applicants for the interlocutory orders.

9    The interlocutory application was heard by the primary judge on 29 May 2020. The Bankrupt sought leave to appear for or on behalf of Twin Investors in support of the application. He contended that he should be permitted to appear because the interlocutory application had been brought by Twin Investors as trustee of the Twin Trust, but that Twin Investors had since resigned as trustee and he had been appointed trustee in its stead. He effectively submitted that he should therefore be permitted to appear in his capacity as trustee. The Bankrupt did not seek leave to appear for Mrs Kapp, the other applicant on the interlocutory application. She appeared for herself.

10    The primary judge refused to grant the Bankrupt leave to appear for Twin Investors. Her Honour noted that the Bankrupt had previously been refused leave to appear for Twin Investors and Mrs Kapp in the main proceeding. More significantly, her Honour reasoned that the relevant party in both the main proceeding and the interlocutory application was Twin Investors, albeit in its capacity as trustee of the Twin Trust. The Twin Trust was not itself a party. It followed that the Bankrupt's apparent appointment as the new trustee of the Twin Trust did not provide a sufficient basis to enable him, an undischarged bankrupt, to appear on behalf of Twin Investors, a corporate entity.

11    As already noted, however, Mrs Kapp appeared for herself at the hearing of the interlocutory application and made some, albeit fairly brief, submissions in support of it.

12    Three other points should be made concerning the hearing of the interlocutory application.

13    First, much of the evidence in the affidavit sworn by the Bankrupt in support of the interlocutory application was objected to by the Trustees. The primary judge ruled on and upheld most, but not all, of those objections.

14    Second, the Trustees relied on an affidavit sworn by their solicitor, Mr Colin Brown, in opposition to the interlocutory application. As will be discussed later, the evidence in that affidavit at the very least raised questions about the financial position of the Twin Trust. That was relevant because the apparent basis of the interlocutory application was that, unless funds were released from the restrained funds, Twin Investors and Mrs Kapp would not be able to fund their defence to the main proceeding.

15    Third, the primary judge, having considered the evidence and heard submissions from Mrs Kapp and the Trustees, indicated that she was unlikely to allow the restrained monies to be released to fund the defence of Twin Investors and Mrs Kapp to the main proceeding unless some security was provided to cover those released funds in the event that their defence failed. Her Honour indicated that she would give Twin Investors, Mrs Kapp or the Twin Trust time to provide such security. Her Honour was plainly concerned that any dissipation of the restrained funds would, if no security was provided, ultimately be to the detriment of the Bankrupt’s creditors if the Trustees’ action was successful.

16    In those circumstances, the interlocutory application was adjourned to 19 June 2020. At the adjourned hearing, Mrs Kapp told the primary judge that the Twin Trust did not have any security that could be put forward to cover any funds released from the restrained funds and used to fund her and Twin Investors’ defence of the main proceeding. Her Honour dismissed the interlocutory application and delivered an oral judgment. Her Honour's ex tempore reasons were, in due course, published in writing on 23 June 2020.

THE APPLICATION FOR AN EXTENSION OF TIME AND LEAVE TO APPEAL

17    Any application by Twin Investors or Mrs Kapp for leave to appeal from the primary judge's dismissal of the interlocutory application was required to be filed by 3 July 2020. On 3 July 2020, the Bankrupt sent the Trustees’ solicitor an email which attached, amongst other things, an unfiled copy of an application for leave to appeal. It would appear the Bankrupt had unsuccessfully attempted to electronically file that document on the 3 July 2020.

18    The application for an extension of time and leave to appeal was eventually filed on 24 August 2020, about seven weeks after the expiry of the time period for the filing an application for leave to appeal.

19    The application for the extension of time and leave to appeal refers to the applicants as being the Bankrupt “as substituted trustee for Twin Trust" and Mrs Kapp. Twin Investors was not included as an applicant, despite the fact that it was one of the applicants in the interlocutory application.

Relevant principles

20    The principles relevant to the exercise of discretion to grant an extension of time are well-established and do not need to be rehearsed in detail: see, for example, BAO15 v Minister for Immigration and Border Protection (2016) 151 ALD 352 at 356; [2016] FCA 214 at [19], citing Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 at 348-349. The length of the delay in filing the application is a relevant consideration and an applicant must generally give an adequate explanation for the delay. Any prejudice to the respondent would also militate against the grant of an extension of time, though the absence of such prejudice alone would generally not, without more, justify an extension.

21    The merits of the substantive appeal, if an extension were granted, must also be considered. It will seldom be in the interests of justice to grant an extension of time where an appeal would have little or no prospects of success: see MZABP v Minister for Immigration and Border Protection (2015) 242 FCR 585 at 597-598; [2015] FCA 1391 at [62], approved on appeal in MZABP v Minister for Immigration and Border Protection (2016) 152 ALD 478 at 586; [2016] FCAFC 110 at [38].

22    Where the application for an extension of time is in respect of the filing of an application for leave to appeal, it is also necessary to have regard to the principles applicable to the grant of leave to appeal: see Hunter Valley Developments at 348-350; SZTRY v Minister for Immigration and Border Protection [2015] FCAFC 86 at [6]; Marsden v The Queen [2002] FCAFC 229 at [19]; Parker v The Queen [2002] FCAFC 133 at [17]. The test for the grant of leave to appeal from an interlocutory decision is that the decision is attended by sufficient doubt to warrant it being reconsidered by an appellate court and that substantial injustice would result if leave were to be refused, supposing the decision to be wrong: Décor Corp Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 398-400. The question on an application for an extension of time and leave to appeal is whether there are reasonable prospects of that test being satisfied to warrant an extension of time.

Application by the Bankrupt for leave to appear

23    At the hearing of the application for an extension of time and leave to appeal, the Bankrupt sought to appear for both himself, in his capacity as trustee of the Twin Trust, and Mrs Kapp. That course was opposed by the Trustees, essentially on the basis that the Bankrupt lacked standing to bring the application. The Trustees contended, in that regard, that the Bankrupt was not a party to the interlocutory application, the determination of which is the subject matter of the proposed appeal, and therefore is not a proper party to the application for an extension of time and leave to appeal. The Trustees also submitted that, even if the Bankrupt had at some point been appointed trustee of the Twin Trust, as he contended, he was no longer capable of filling that position given the terms of the relevant trust deed and the Bankrupt’s recent mental health issues. The Trustees finally noted that the Bankrupt had advanced no proper basis upon which he should be permitted to appear for Mrs Kapp.

24    There was considerable merit in the Trustees’ submissions concerning the Bankrupt’s standing and capacity to make submissions in support of the application for an extension of time and leave to appeal. I nevertheless permitted the Bankrupt to appear and make submissions for essentially two reasons. First, while the Bankrupt may not have been a party to the relevant interlocutory application, the main basis of the interlocutory application for the release of funds was that the funds should be released from the restrained funds so that the respondents to the main proceeding can be legally represented in their defence. The Bankrupt has now been joined as the third respondent in the main proceeding, apparently on the basis of his appointment as trustee of the Twin Trust. It follows that he has at least some legitimate interest in the subject matter and outcome of the proposed appeal. Second, and in any event, if the Bankrupt was unable to appear and make submissions in support of the application for extension of time and leave to appeal, the Court would not have had the benefit of any submissions at all in support of the application.

Evidence

25    The application for an extension of time and leave to appeal was supported by an affidavit sworn by the Bankrupt. The Trustees objected to virtually all of the Bankrupt's affidavit. The essence of the objection was that the affidavit did not contain any admissible evidence, but essentially comprised submission or argument. There was considerable merit in that objection. Ultimately, the Bankrupt agreed that his affidavit should be read as his submissions and should not be admitted as evidence.

26    The Trustees relied on a number of affidavits sworn by their solicitor. Those affidavits annexed or exhibited voluminous documentary evidence, mostly, but not exclusively, correspondence between the Trustees and the Bankrupt. As events transpired, it was and is unnecessary to refer to much of the evidence adduced by the Trustees.

Proposed grounds of appeal

27    No draft notice of appeal was filed as required by r 35.14(3)(d) of the Federal Court Rules 2011. The application for an extension of time and leave to appeal did, however, effectively identify five proposed grounds of appeal.

28    The first ground was that the hearing of the interlocutory application was procedurally unfair because the evidence relied on by the Twin Investors and Mrs Kapp was "struck out on highly technical grounds" and because the Bankrupt was prevented from appearing in his capacity as trustee of the Twin Trust.

29    The second ground was the primary judge erred in law in not taking account of judicial statements concerning freezing orders or Mareva injunctions.

30    The third ground was that the primary judge erred in not taking into account evidence concerning the financial circumstances of Twin Investors or the Twin Trust, in particular, bank statements recording the balance of Twin Trust’s bank account.

31    The fourth ground was that the refusal to release the restrained funds for the payment of the mortgage or other expenses associated with another property apparently held on trust for the Twin Trust was contrary to the best interests of the Bankrupt's creditors.

32    The fifth ground was that the primary judge erred in ordering that the released funds be moved from the account maintained by the former solicitors for Twin Investors and Mrs Kapp to an account maintained by the Trustees’ solicitor. It was contended that Twin Investors and Mrs Kapp were not given sufficient notice of the Trustees’ intention to apply for that order.

MERITS OF THE APPLICATION

33    Before briefly addressing the apparent merits of those proposed grounds of appeal, and whether they would warrant a grant of leave to appeal, two fundamental problems with the application for an extension of time and leave to appeal should be noted.

No explanation for the delay

34    The first problem with the application is that there was no reasonable or satisfactory explanation for why no application for leave to appeal was filed within time. Perhaps more significantly, there was no explanation at all for why it took about seven weeks to file an application for an extension of time.

35    Even if it may be accepted that the Bankrupt and Mrs Kapp encountered some technical difficulties in electronically filing an application for leave to appeal on 3 July 2020, that may not have been a problem if they had not sought to file the application the very last day of the applicable time period. There was no explanation for why they waited until the very last day of the time period before attempting to file their application. In any event, the evidence concerning the technical issues or problems in filing of the application was not particularly compelling.

36    This may not have been a problem if the Bankrupt and Mrs Kapp had resolved the technical issues and filed their application for an extension of time and leave to appeal shortly after 3 July 2020. The main problem for them is that they did not. It is clear that the Bankrupt and Mrs Kapp became aware that their attempt to file the application on 3 July 2020 had been unsuccessful shortly after that date, yet they did nothing further to progress their application or proposed application for another seven weeks. There was no explanation whatsoever for that delay. No attempt was made to justify it.

37    This manifest deficiency in the application for an extension of time would alone have provided a sufficient basis to dismiss the application. It was not, however, the only problem for the Bankrupt and Mrs Kapp.

No substantial injustice

38    The second fundamental difficulty with the application was that, even if there was some merit in any of the proposed appeal grounds, it has not been demonstrated that the applicants would suffer any injustice, let alone any substantial injustice, if leave to appeal were to be refused. This issue was not addressed in the evidence adduced or the submissions advanced by the Bankrupt and Mrs Kapp.

39    As has already been noted, the main submission or contention advanced in support of the release of funds from the restrained funds is that if those monies were not released, the respondents to the main proceeding would not be able to fund their defence. The problem for them is, however, that they adduced no evidence capable of demonstrating that the primary judge’s refusal to allow the release of funds has caused them any material problems in conducting their defence or will cause them ongoing difficulties if they are unable to pursue their appeal against the refusal to release funds.

40    Another problem is that, because the primary judge’s refusal to release funds was only an interlocutory order or judgment, there is nothing to stop the Bankrupt or Mrs Kapp from filing a new interlocutory application for the release of funds, perhaps supported by further or better evidence or arguments. It may perhaps be expected that unless they are able to show that the circumstances have changed, or unless they are able to remedy the evidentiary defects and deficiencies with the original application, any such further application may also be doomed to fail. That circumstance alone, however, is not capable of constituting substantial injustice such as to warrant leave to appeal.

Apparent merits of the proposed grounds of appeal

41    Even putting aside those two difficulties with the application for an extension of time and leave to appeal, the even more fundamental problem for the Bankrupt and Mrs Kapp was that there was insufficient merit in any of the proposed grounds of appeal to warrant the grant of leave to appeal. An extension of time would therefore be futile.

42    As for the first proposed grounds of appeal, there was no merit in the claim that the hearing of the interlocutory application was procedurally unfair.

43    The primary judge did not err in refusing to grant leave to the Bankrupt to appear on behalf of Twin Investors, which at that point in time was one of the applicants. Rule 4.01(2) of the Rules provides that a corporation must be represented by a lawyer. The Bankrupt put forward no case as to why that rule should be departed from in the circumstances of his case, particularly as he was an undischarged bankrupt and not a director or officer of Twin Investors. Indeed, he was unable to be involved in the management of that corporation as he was a bankrupt. It was essentially immaterial that Twin Investors was said to have made the relevant interlocutory application in its capacity as trustee of the Twin Trust and that the Bankrupt may have been a beneficiary of that trust. It was and is equally immaterial that by the time the interlocutory application was heard, the Bankrupt was said to have been appointed trustee of the Twin Trust. The Twin Trust itself was not and could not be a party to the proceeding or the interlocutory application.

44    The Bankrupt’s argument concerning the rejection of most of the evidence in the Bankrupt's affidavit also has no merit and does not support any arguable claim of procedural fairness. Mrs Kapp was afforded procedural fairness in relation to the objections to the evidence. She was given the opportunity to make submissions concerning the Trustees’ objections to the Bankrupt’s affidavit. The fact that, for the most part, she did not take up that opportunity was immaterial. In any event, it is clear upon even the most cursory perusal of the Bankrupt’s affidavit that the parts of it which were rejected by the primary judge were properly rejected. No attempt was made to persuade the Court on this application that any of the evidentiary rulings by the primary judge were wrong.

45    The transcript of the hearing of the interlocutory application before the primary judge was in evidence on this application. The Bankrupt did not take the Court to any part of the transcript to make good his claim that he was denied procedural fairness. Having read the transcript, I am not at all persuaded that there was any unfairness whatsoever in the way the primary judge heard and determined the application.

46    As for the second proposed ground of appeal, it may be accepted that freezing orders, also known as Mareva or asset preservation orders, frequently make provision for the release of funds: see the example form of freezing order in annexure A to the Court’s Freezing Order Practice Note (GPN-FRZG). The authorities do not, however, go so far as to demonstrate that freezing orders should always permit or make provision for the payment of legal fees or expenses from the restrained assets. More significantly, the difficulty here is that the order in question in this case was not a typical freezing order. It did not restrain Twin Investors and Mrs Kapp from dealing with any of their assets pending the determination of the proceeding. It simply restrained Twin Investors and Mrs Kapp from dealing with the proceeds of sale of one property on the basis that the proceeds had been held on trust for the Bankrupt and had vested in the Trustees. The basis for the order was not, as is typically the case with freezing orders, that Twin Investors and Mrs Kapp might dissipate all their assets and therefore defeat any judgment which may be made against them. The reliance placed by Twin Investors and Mrs Kapp on the authorities concerning freezing orders was accordingly misplaced.

47    Even more fundamentally, it is also clear that one of the main reasons that the primary judge declined to allow the release of funds from the restrained funds was that her Honour was not satisfied that the Twin Trust did not have other funds or assets available to it to fund the defence of the main proceeding. That was because there was evidence which suggested that at various points in time, even after the commencement of the proceeding, the bank account maintained by the trustee of the Twin Trust had a large credit balance. While it appeared that the funds standing to the credit of the account had subsequently been withdrawn or transferred out of the bank account, the use of the funds or the destination of the transfers had not been explained or accounted for by Twin Investors or Mrs Kapp. It is perhaps not surprising, in those circumstances, that the primary judge was not persuaded that the Twin Trust had no assets or funds which could be used to fund the defence of the proceeding if funds were not released from the restrained funds.

48    It would appear that the Bankrupt maintained before the primary judge, as he did on this application, that the Twin Trust no longer had any assets or funds available to it. The problem for the Bankrupt is that his assertion to that effect was not backed up by any, or any cogent or reliable, evidence. The mere fact that the one bank account which was the subject of evidence no longer had a credit balance was not capable of proving, in all the circumstances, that the Twin Trust had no other assets. The primary judge has not been shown to have erred in so finding.

49    That point also disposes of the third proposed appeal ground.

50    Even if, as the Bankrupt maintained, the bank account of the Twin Trust did not have a credit balance as at the date of the hearing of the interlocutory application, the fact remains that no reliable explanation had been given as to why the funds that had previously been in that account were no longer available to pay for the legal fees in defence of the main proceeding. That was the critical consideration for the primary judge.

51    As for the fourth proposed appeal ground, the Bankrupt's argument that the refusal to release funds to pay the mortgage and other expenses in respect of another property apparently owned by the Twin Trust was contrary to the interests of his creditors was not significantly developed in his submissions. Nor was it supported by any, or any cogent or reliable, evidence, either before the primary judge or on this application. The Bankrupt’s arguments appear to depend on evidence that was correctly rejected by the primary judge at the hearing of the interlocutory application.

52    Another fundamental problem with this proposed appeal ground is that the question whether payment of the mortgage and other expenses relating to another property owned by the Twin Trust was in the best interests of the Bankrupt’s creditors was really a matter for the Trustees to consider in their administration of the bankrupt estate. Twin Investors and Mrs Kapp did not demonstrate why those expenses should be paid out of the restrained funds, let alone why the payment of those expenses was in the best interests of the Bankrupt’s creditors. No arguable error has been demonstrated.

53    Finally, the fifth proposed ground of appeal may be dealt with shortly. Even if, as contended by Twin Investors and Mrs Kapp, they were given no notice of the making of the order providing for the transfer of the restrained funds to an account maintained by the Trustees’ solicitor, they have not identified any arguable basis upon which they could have opposed the making of that order. Indeed, the order was manifestly reasonable and sensible. Twin Investors and Mrs Kapp were apparently no longer represented by the solicitors who maintained the account into which the restrained funds were originally paid. It made sense, in those circumstances, for the funds to be transferred to a controlled monies account maintained by the Trustees' solicitor until further order. It is difficult to see how the making of that order could possibly have resulted in any prejudice to Twin Investors, the Twin Trust, Mrs Kapp or the Bankrupt. Indeed, it would appear that substantial interest has been earned as a result of the fact that the funds have been transferred to a controlled monies account maintained by the Trustees’ solicitor.

54    It follows that none of the proposed appeal grounds have been shown to have any merit or to be even reasonably arguable. The judgment of the primary judge is, accordingly, not attended by sufficient doubt to warrant the grant of leave to appeal. There is no sound basis upon which to grant leave to appeal. In all the circumstances, the application for an extension of time and leave to appeal must be dismissed with costs.

COSTS

55    The Trustees applied for a lump sum costs order. They also contended that the lump sum should be assessed on an indemnity basis. The Trustees relied on two affidavits sworn by their solicitor which quantified the Trustees’ legal expenses and disbursements. Those affidavits also provided an evidentiary basis for the claim that the lump sum costs order should be assessed on an indemnity basis.

56    In short, the Trustees made two offers to settle or resolve the present application, both of which were expressly or impliedly rejected by Twin Investors, Mrs Kapp and the Bankrupt. In particular, on 31 August 2020 the Trustees offered not to seek a costs order if the Twin Investors, Mrs Kapp and the Bankrupt agreed to the dismissal of their application. That offer was obviously rejected. The reasons that have been given for dismissing the application demonstrate why the rejection of that offer was unreasonable and provides a proper basis for the assessment of the lump sum costs order on an indemnity basis.

57    As for the quantification of the lump sum indemnity costs order, the Bankrupt did not advance any, or any cogent, arguments for why the Trustees’ solicitor’s calculation or quantification of the costs order was not reasonable. The costs claimed, which totalled $39,216.62, would appear, in all the circumstances, to be justifiable and reasonable.

CONCLUSION AND DISPOSITION

58    The application for an extension of time and leave to appeal has been shown to be unmeritorious and must be dismissed. No adequate or sufficient explanation for the delay was provided and it has not been shown that there is a proper basis for the grant of leave to appeal. It not shown that there would be substantial injustice if leave were not granted and, more significantly, it was not demonstrated that the judgment of the primary judge was attended by sufficient doubt to warrant the grant of leave.

59    There is no doubt that costs should follow the event. The Trustees also demonstrated not only that a lump sum costs order was appropriate in the circumstances, but that the amount of the order should be assessed or quantified on an indemnity basis. The evidence established that a lump sum costs order in the amount of $39,216.62 was reasonable and appropriate.

Associate:

Dated:    18 February 2021