" pore canoe . CATCHWORDS BANKRUPTCY ~ creditor indemnifies trustee for costs of litigation - property recovered by letter threatening litigation - whether power to make order favouring indemnifying creditor. Bankruptcy Act, 1966 s.109(10) Re: Marion Alice Webb Ex parte: Alan Richard Taylor & Ors. Qld BN 758 of 1984 PINCUS J. BRISBANE 7 JULY 1987 RTCSIVED -9 JUL 1987 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY ? v ' Setar Stee Mod "UN a IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) QLD BN 758 of 1984 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF OURENSLAND ) RE: MARION ALICE WEBB EX PARTE: ALAN RICHARD TAYLOR Applicant MERCANTILE CREDITS LIMITED First Respondent AUSTRALIAN GUARANTEE CORPORATION LIMITED Second Respondent PINCUS J. 7 JULY 1987 REASONS FOR JUDGMENT This is an application by the trustee of the estate of the bankrupt, Mrs. Webb, for orders under s.109(10) of the Bankruptcy Act 1966, which is set out below. The provision empowers the Court in certain circumstances to make an order giving an advantage to a creditor who has given the trustee an indemnity for costs resulting in the recovery of property. Here, the indemnifying creditor's case is that property was recovered under an indemnity and that it should have all the money, or most of the money, which has been so obtained. There is only one other creditor and the contest is between the two. we mnt war yore mips mm <emi S e ceased ba Section 109(10), so far as relevant, reads as follows: "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; ene eee 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 ... 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." The facts are, in brief, that a creditor, Mercantile Credits Limited, gave an indemnity to the trustee, prompting him to pursue an investigation of property transactions in which the bankrupt and her husband had engaged. In consequence in the facts ascertained, it was decided to begin proceedings and the papers were settled by counsel, but a threatening letter induced the bankrupt's husband to surrender his interest in the property in question. The opposing creditor is Australian Guarantee Corporation Limited which did not even become aware of the bankruptcy until after all the events just mentioned had occurred. In more detail, what happened was that on 4 May 1983, Mrs. Webb transferred real property at Moorooka to her husband as a gift. In April 1984 Mr. Webb mortgaged that property for $45,000, and using the proceeds, bought land at Greenbank for $40,000. On 26 November 1984, on the petition of Mercantile Credits Limited, Mrs. Webb was made bankrupt and on 13 January 1985 the trustee had conversations with the Queensland credit wom es Moyers ma eying ee ae. <r en pci ser Dsalied-euieteanaeeea Manager of the petitioning creditor in which the possibility of investigating the matter further was discussed. On 28 March 1985 the trustee instructed solicitors to search the Moorooka property and the transfer to Mr. Webb was found. On 13 June 1985, a representative of the trustee met a representative of Mercantile Credits Limited, and it was agreed that the solicitors would be instructed to look into the matter further, to act for the trustee in a public examination of the bankrupt, and thereafter to apply to attack the transfer of the Moorooka property to Mr. Webb - ail at the expense of Mercantile Credits Limited. That was later confirmed in writing by a document executed on 27 August 1985, which does not quite accord with the facts because 1t refers to "a further application to the Court for a declaration in relation to the real property currently owned by Mrs. Webb." Counsel for Australian Guarantee Corporation Limited pointed out that there was never really any question of an application in relation to "real property currently owned by Mrs. Webb". Any interest of hers had passed to the trustee. However, I do not think this error in the drafting of the document creates any doubt as to the true scope of the indemnity, which was given orally. The public examination was duly conducted, and in the course of it, further information was obtained. As a result of that and of a search which was done on 29 August 1985 the solicitors for the trustee were told to institute proceedings to apply to recover both properties mentioned above, that is the Moorooka property and the Greenbank property. Although there is no direct evidence on the subject, I think I should infer that insofar as the application related to the Greenbank property, it was also covered by the indemnity. rot wr meee oe - ? fi ' TT ats oe ns ne or or es oe . aN pee fees According to a bill of costs which 1s in evidence, on 6 September 1985 a letter before action was sent to Mr. Webb, but there is no copy of such letter. On 11 September 1985 the solicitors delivered a brief to counsel to settle the necessary documents for application to this Court in relation to both properties, and the papers, duly settled, were returned the next day. On 17 September 1985, the solicitors wrote to Mr. Webb a (or another) letter of demand threatening to file the papers in Court if he did not agree immediately to give up his interest in the properties. On 19 September 1985 two things happened, namely the application was filed in this Court, and solicitors for Mr. Webb wrote to say that he would hand the properties over if the trustee paid the costs of the transfers. That was ultimately agreed to, a deed of settlement being executed on 21 October 1985, but in the meantime Australian Guarantee Corporation Limited had come to know of the bankruptcy and lodged a proof of debt, on 9 October 1985. The amount recovered from the Webb properties was $47,876.85 but the trustee says that only about $35,000 is available for distribution after payment of costs and outlays. The Mercantile Credits Limited debt 1s said to he $31,013.12, plus costs and interest, and the Australian Guarantee Corporation Limited has proved for $83,443.53. The proofs do not seem to have been admitted and I assume this may be because of some question about interest charges; I note that the Australian Guarantee Corporation Limited debt is said to be the amount due as at 9 October 1985, well after the date of bankruptcy. Bt Sone eee RIT pS ere ern By < oye ' picts pe eee ro SN eee ree meee The reason Australian Guarantee Corporation Limited did not come to know of the bankruptcy until rather late was two-fold. Firstly, they did not see the advertisement of the bankruptcy or that relating to the public examination; secondly, the bankrupt was unco-operative and did not tell the trustee of the existence of the debt in question. By way of explanation of the former circumstance, I was told that the company does not have any systen of checking in the relevant publications to see if guarantors, such as the bankrupt was, are listed there. It appears to me, however, that the failure of Australian Guarantee Corporation Limited to ascertain the fact of the bankruptcy should be regarded as virtually neutral and ought not to tell much against that company. Counsel for Australian Guarantee Corporation Limited argued that property had not been recovered under an indemnity for costs of litigation. Firstly, he said, most of the money was spent in the investigative process, and secondly, although litigation was commenced, it should not be found that the recovery of the property resulted therefrom. The expression "recovered under an indemnity for costs of litigation" is a little elliptical. It seems to mean "recovered by reason of steps taken under an indemnity for costs of litigation"; an indemnity cannot itself directly bring about recovery. Counsel argued that there is no intention in the section to give a creditor an advantage by reason of having given an indemnity for the costs of any investigation with a view to possible litigation and referred to in Re Shadler (1905) 5 \ S.R.N.S.W. 33. In that case, Walker J. held that s.77 of the N.S.W. Bankruptcy Act 1899 applied ina winding up under the Companies Act but that, giving that section (which was similar in terms so far as relevant to s.109(10)) a strict interpretation, the costs of inquiry into whether or not litigation should be instituted were not covered by the section. It follows from Shadler's case that here, if there had been an indemnity only for the costs of investigation, the section would not have applied; but the indemnity in the end covered both investigation and litigation, as 1t did not in Shadler's case. The question whether the property was recovered "under" the indemnity is one of some difficulty. Giving the provision the construction mentioned in the preceding paragraph, however, I find that the property was so recovered. It seems a reasonable inference that it was the threat of immediate litigation which induced Mr. Webb to offer to transfer the properties, and that threat was made in the course of the solicitors pursuing their retainer covered by the indemnity for the costs of litigation. In my view, that indemnity covered the preliminary steps such as preparing the Court papers and writing a letter of demand. It is true that, had it not been for the investigative work which was done, and in particular the public examination, it seems unlikely that the trustee would have been able to ascertain the facts; had he not known the relevants facts, then the instructions to sue would never have heen given. But I do not think that the fact there was also an indemnity in respect of the costs of the investigative work should be held to deprive the oan eae Prot wep oes wee tos 7, yn a pS indemnifying creditor of whatever benefit would otherwise flow from the indemnity for the costs of litigation. Counsel for Australian Guarantee Corporation Limited also pointed out that in no reported case does the provision seemed to have been applied at such an early stage; here the proceedings do not even appear to have been served at the time Mr. Webb agreed to transfer the properties. But the provision does not say "recovered by means of litigation" and I am satisfied, as I have said, that the present facts are caught by the provision. Apart from the costs already expended, I am told a sum in the region of $6,000 may have to come out of the fund to meet the parties' costs of the present application, assuming all costs come out of the fund. As set out below, the costs of Australian Guarantee Corporation Limited will not wholiy come from the fund. On the basis that there is a net amount of about $30,000 to be distributed, and taking into account the relative size of the two debts and the risk run, I have come to the conclusion that Mercantile Credits Limited should receive, in the first place, half the net amount recovered, and that the other half should be distributed pro rata. There is a complication as to costs in that, in my view, Australian Guarantee Corporation Limited should have its costs out of the fund, but limited to one day's hearing in view of the wre gt pte a ey te ee ee "a af PID on een ree ri ee inadequacy of its initial notice of intention to oppose. I shall invite counsel to address me generally as to costs. i certify that this and the "7 preceding pages are a true copy of the reasons for judgment herein of His Honour Mr, Sustice Pincus Associate Dated T July V8 9 Counsel for the Applicant: Mr. A.J.H. Morris Solicitors for the Applicant: Cooper Grace and Ward Counsel for the Respondents: Mr. K.N. Wilson Solicitors for the Respondents: Henderson Trout Date of Hearing: 7 July 1987 + eer ae ee ee ee ee me me oes