Federal Court of Australia

Jones v Robson, as Trustee for the estate of Jones [2023] FCA 497

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 109(10) of the Bankruptcy Act 1966 (Cth), the net balance of property held by the respondent trustee for the benefit of the estate of Jeffery William Jones shall be applied in its entirety in part payment of the admitted debt of the applicant David Charles Jones in priority over the admitted debts of each other unsecured creditor in the bankrupt estate.

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

REASONS FOR JUDGMENT

MCELWAINE J:

1    A person who provides an indemnity to a trustee in bankruptcy in order to recover divisible property may, in the event of recovery, apply for a priority distribution: s 109(10) of the Bankruptcy Act 1966 (Cth) (the Act). The applicant is a judgment creditor in the bankrupt estate of Jeffery William Jones (also known as Jeffrey William Jones) whose estate was sequestrated on 28 March 2012. With effect from 11 January 2013, Mr William Roland Robson has acted as the trustee in bankruptcy of the estate (the Trustee).

2    The applicant, despite sharing the same surname, is not related to the bankrupt. On 30 July 2009, judgment was entered in favour of the applicant and against the bankrupt in the sum of $1,081,749. The judgment debt remains unsatisfied. As a creditor of the bankrupt estate, the applicant became concerned that the bankrupt had failed to list as part of his assets a property at 43 Birch Grove Templestowe in Victoria (the property). During the period of his bankruptcy, the bankrupt caused a transfer of the property to be registered in favour of a Mr Wayne Bonnici. The bankrupt filed a debtor’s petition under a spelling of his name which differed from the name recorded as the registered proprietor of the property. The applicant was convinced that the property ought to have been included as part of the divisible estate of the bankrupt and raised this with the Trustee. Through correspondence between solicitors, Mr Bonnici asserted that the bankrupt held the property as trustee for him. The applicant did not accept that assertion.

3    In February 2016, the applicant proposed to the Trustee that he would fund litigation to recover the property for the benefit of the estate. The Trustee sought the advice of all of the creditors, and in particular whether any other creditor was prepared to fund litigation to recover the property. No creditor responded positively. On 7 June 2018, a proceeding was commenced in the Supreme Court of Victoria in the name of the Trustee as plaintiff against Mr Bonnici in order to recover the property for the benefit of the estate. The applicant provided an indemnity to the Trustee in order to fund the litigation, although the deed was not entered into until 5 June 2019. Pursuant to the indemnity, the applicant unconditionally and irrevocably indemnified the Trustee against, inter alia, all of the costs and expenses of the litigation including any costs that the Trustee may be ordered to pay. The indemnity did not provide for an upper limit.

4    The Supreme Court proceeding was settled at a mediation on 30 November 2020. The agreement reached required Mr Bonnici to pay a total amount of $401,500 inclusive of costs, in full settlement and by specified instalments. The settlement amount was paid. After deducting costs and administration charges, the Trustee held as at 4 May 2023 the amount of $228,504.20 referable to the settlement amount. The Trustee estimates that after the deduction of further costs and estate realisations charge, there will be left a balance of approximately $216,663.86 available for distribution to the unsecured creditors of the bankrupt estate.

5    On 14 March 2023, the Trustee sent a circular to each of the creditors of the bankrupt estate. The document provided details as to the settlement, the amount recovered and the amount held for the benefit of creditors. It also stated that the applicant had advised of his intention to apply for a priority payment pursuant to s 109(10) of the Act for the entirety of the balance held by the Trustee. The Trustee advised the creditors that he was supportive of the application by the applicant, but did not intend to participate in this proceeding unless requested to do so by the Court or otherwise determined by the creditors. No creditor responded to the Trustee, and no creditor has sought to be heard upon this application.

6    The applicant relies upon three affidavits: one made by himself on 25 January 2023 and two made by his solicitor Mr Peter Thompson on 16 February and 10 May 2023 respectively. I am positively satisfied that the applicant undertook a significant risk in providing the indemnity to the Trustee in order to recover divisible property for the benefit of the estate. He incurred significant costs and disbursements. There can be no doubt that the amount recovered in consequence of the settlement was solely due to the efforts of the applicant. Had it not been for the persistence of the applicant, I am satisfied that the Trustee would not have been funded in order to pursue recovery of the property in the Supreme Court proceeding. I am also satisfied that the other unsecured creditors in the bankrupt estate were provided with an opportunity to contribute to the funding of the proposed litigation and none did. The litigation was complex. The applicant is the largest creditor in the bankruptcy.

7    The Act relevantly provides at s 109(10):

Where in any bankruptcy:

(a)    property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or

(b)    expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;

the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.

8    Self-evidently the applicant is an indemnifying creditor within the meaning of this provision. Although subparagraph (a) does not expressly refer to an indemnity given to a trustee that is how the provision has been construed: Green v Official Trustee in Bankruptcy (2003) 128 FCR 383; [2003] FCA164 at [22] per Moore J. The provision was comprehensively analysed by the Full Court in Low v Barnet (2017) 250 FCR 562; [2017] FCAFC 60 per Flick, Jagot and Gleeson JJ. The provision requires an evaluative assessment of the comparative advantage sought by the indemnifying creditor judged against the risk assumed. At [34]-[37], their Honours explained the operation of the provision:

Section 109(10) recognises that when making an order for the “just and equitable” distribution of property, a court may give “consideration of the risk assumed”. The “risk” there referred to is that the monies advanced by an indemnifying creditor to fund (for example) speculative litigation may be lost and the prospect that an order for costs may be made against the trustee.

Section 109(10), it is concluded, should be confined to conferring a comparative “advantage” in respect to the “risk” assumed by the indemnifying creditor. It may not be “just and equitable” for one creditor to assume the “risk” of funding speculative litigation which ultimately proves successful and thereby increases the pool of property but to nevertheless leave that pool available for rateable distribution. But for the “risk” assumed by the indemnifying creditor, the pool of property may well be less than would otherwise be the case.

Section 109(10), it is concluded, should not be construed as conferring a “windfall” upon an indemnifying creditor beyond that which is necessary to give effect to the “advantage” of the indemnifying creditor over other creditors.

The concern of s 109(10) is to confer that “advantage” by reference to that “risk”; the concern of s 109(10) is not to confer an “advantage” upon the indemnifying creditor beyond the “risk” assumed.

9    In Woodgate, in the Matter of Eaton (a Bankrupt) [2010] FCA 550 at [5], Nicholas J provided a useful summary of matters which ordinarily require consideration where a creditor seeks to engage the discretion that is conferred. His Honour’s inclusive list mentions the risk assumed and costs incurred by the indemnifying creditor, the value of the property recovered, whether an opportunity was afforded to other creditors to participate in the provision of an indemnity, the proportions between the debts of the indemnifying creditor and others, the opposition or support of other creditors to the application for priority and the public interest in encouraging creditors to provide an indemnity in order to recover divisible assets. To this list I add the view of the Trustee.

10    As I have mentioned, I am quite satisfied that the applicant undertook a significant risk in funding the litigation in the Supreme Court and indeed but for his tenacity, it is unlikely that the property would have been considered by the Trustee as a potential asset of the bankrupt estate and where no other creditor was prepared to contribute to the litigation fund. It is significant that the applicant provided a complete and uncapped indemnity to the Trustee. The proceeding was not straightforward given the contention of Mr Bonnici that the property was held in trust by the bankrupt for his benefit. There was clearly a point of public interest, that the applicant took upon himself, to pursue for the benefit of the estate a significant asset that the bankrupt omitted from his statement of assets. But for the efforts of the applicant, there would not have been any material recovery of assets for the benefit of creditors, and very little money to fund the administration of the estate. Despite being put on notice of this application, no creditor has advised the Trustee of opposition to the orders sought and none has sought to be heard upon this application.

11    In these circumstances I am satisfied that it is just and equitable to confer an advantage upon the applicant over the other creditors in the bankrupt estate in consideration of the risk that the applicant assumed, to order that the net balance of the recovered settlement sum be paid by the Trustee in part satisfaction of the admitted proof of debt of the applicant and in priority to each other creditor of the bankrupt estate.

12    Accordingly, I order that:

1.    Pursuant to s 109(10) of the Bankruptcy Act 1966 (Cth), the net balance of property held by the respondent trustee for the benefit of the estate of Jeffery William Jones shall be applied in its entirety in part payment of the admitted debt of the applicant David Charles Jones in priority over the admitted debts of each other unsecured creditor in the bankrupt estate.

Associate:

Dated:    22 May 2023