Re Karas, Tom; Pattison, Paul (as Trustee of the Bankrupt Estate of Tom Karas) v Conmore Pty Ltd (ACN 053 243 995) & Ors [1998] FCA 350

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 7216 of 1998

RE: TOM KARAS

Bankrupt

BETWEEN: PAUL PATTISON (as Trustee of the Bankrupt Estate of Tom Karas)

Applicant

AND: CONMOORE PTY LTD (ACN 053 243 995)

First Respondent

IRENE KARAS (NEE MELETSIS)

Second Respondent

AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD

(ACN 005 357 522)

Third Respondent

TOM KARAS

Fourth Respondent

JUDGE: RYAN J

DATE: 8 APRIL 1998

PLACE: MELBOURNE

REASONS FOR JUDGMENT In support of his application for injunctive relief, the applicant, Mr Pattison ("the trustee"), who is the trustee of the bankrupt estate of Tom Karas, contends that he has an arguable prospect of establishing that either or both the first respondent, Conmoore Pty Ltd ("Conmoore") or the second respondent, Irene Karas, who is the wife of the bankrupt, are respondent entities within the meaning of s 139A of the Bankruptcy Act 1966 in relation to a property at 320 Drummond Street, Carlton ("the property"). Section 139A provides: The trustee of a bankrupt's estate may, at any time within 6 years after the date of the bankruptcy, apply to the Court for an order under this Division in relation to an entity (in this Division called the "respondent entity"). "Entity" is defined in s 5(1) of the Act to mean "a natural person, company, partnership or trust. Section 139D of the Act provides by sub-ss (1) and (2): (1) Where, on an application under section 139A, the Court is satisfied that: (a) the bankrupt supplied personal services to, or for or on behalf of, the respondent entity at a time or times, during the examinable period and before the end of the bankruptcy, when the bankrupt controlled the entity in relation to the supply of those services; (b) either: (i) the bankrupt received for those services no remuneration in money or other property; or (ii) the remuneration in money or other property that the bankrupt received for those services was substantially less in amount or value than a person supplying those services in similar circumstances might reasonably be expected to have received if the person had dealt with the entity at arm's length in relation to the supply of those services; (c) during the examinable period, the entity acquired an estate in particular property as a direct or indirect result of, or of matters including, the supply by the bankrupt of those services; (d) the bankrupt used, or derived a benefit from, the property at a time or times during the examinable period when the bankrupt controlled the entity in relation to the property; and (e) the entity still has an estate in the property; subsections (2) and (3) have effect, whether or not the bankrupt has ever had an estate in the property. (2) The Court may, by order, vest in the applicant: (a) the entity's estate in the whole, or in a specified part, of the property; or (b) a specified estate in the whole, or in a specified part, of the property, being an estate that could, by virtue of the entity's estate in the property, be so vested by or on behalf of the entity. The evidence discloses that the property was purchased for $442,000 on 19 March 1994 by or in the name of Conmoore. Conmoore is, or was, the trustee of the Karas Family Trust No 1 of which both the bankrupt and his wife were beneficiaries. In June 1997 Conmoore resolved to distribute all of the assets of that trust to Irene Karas and to determine the trust. The evidence further suggests that the moneys for the purchase of the property came from various sources other than trust funds under the control of Conmoore. The bulk of the purchase price was apparently advanced by way of loan of about $320,000 from Australian Securities secured by mortgage over the property. It seems likely that some personal services were supplied by the bankrupt in connection with the purchase of the property, principally by way of arranging the necessary borrowings. The bankrupt also seems to have exerted himself to obtain town planning permits for the erection of a number of units on the property. There is also evidence that from mid-1994 the bankrupt's income was insufficient to meet his living and other day-to-day expenses. As a result of the winding up of the Karas Family Trust No 1 and the distribution of its assets to Mrs Karas, she became the registered proprietor of the property on or about 7 July 1997. Various loans were then made to Mrs Karas by the third respondent, Australia and New Zealand Banking Group Ltd ("the Bank"). Those loans were secured by interlocking mortgages over a number of assets including the property. Of the moneys advanced in that way, approximately $320,000 was applied in discharge of the existing mortgage over the property in favour of Australian Securities. Mrs Karas subsequently sold the property to Rosebee Glen Pty Ltd for $825,000 by a contract of sale dated 11 October 1997. The applicant, accepting that sale to have been at arm's length and for fair market value, does not seek to prevent its completion which is appointed to occur tomorrow, 9 April 1998. However, the applicant seeks by way of interlocutory relief an order that the proceeds of sale, after deduction of the usual costs and fees and the sum of $320,000 advanced by the Bank for discharge of the prior mortgage over the property, be paid into an interest-bearing trust account and held there until the hearing and determination of the trustee's substantive application or until further order. The basis of the application for interlocutory relief is set out as follows in para 5 of the affidavit of Paul Anthony Pattison sworn 6 April 1998: In reliance on the said sources of information and documents my belief is that the facts of the case regarding the ANZ mortgage is as follows: (a) The ANZ extended a series of loans to Irene Karas as trustee of the Karmel Family Trust between 8th July 1997 and 22nd September 1997 and took security over a number of properties including 320 Drummond Street Carlton. The securities were in the form of all monies mortgages and were linked to each of the borrowings. The ANZ obtained its security over the property in respect of a loan for $320,000 made on or about 19th September 1997 and sought to file a caveat in relation thereto on 27th November 1997. While I do not dispute that the ANZ has an entitlement to be repaid the amount it advanced to extinguish the prior mortgage of Australian Securities I say that in all other respects its interest in the property comes after the commencement of the bankruptcy in time and after the interests of the creditors as reposed in me in priority. (b) If the bank is entitled to take the whole of the proceeds of the sale to Rosebee Glen Pty Ltd which is due to settle on 9th April 1997 then the creditors will lose the benefit of such proceeds which are rightly attributable to the bankrupt's estate. Proceedings have been pending in the Supreme Court of Victoria since January 1998 whereby the trustee has been resisting an application for removal of a caveat which he lodged against the property. The trustee, as part of his case in the Supreme Court, has made an affidavit sworn on 8 January 1998 in which he has set out the factual basis of his claim to an interest in the property by operation of s 139D. A further affidavit filed in the same proceedings which was sworn on 23 March 1998 contained this paragraph in relation to the Bank, which is the first defendant in the Supreme Court proceedings: As to the material filed by the first defendant to this application, I note that it does not disclose any of the financial data provided to the bank by Mrs Karas in support of her request for borrowings in excess of $1,000,000.00 generally and for approximately $317,000.00 in relation to this property. I note that by reason of the re-financing of the property by Mrs Karas the property now secures borrowings in excess of $1,200,000.00 where it was previously subject to a charge of only $317,000.00 approximately. I note that in her tax returns as discovered to me Mrs Karas earned $5356.00 taxable income in the year ended 30 June 1996 and never earned more than $26,000.00 in any of the preceding 3 years. In the circumstances it is not clear to me how the bank saw fit to lend the sums to Mrs Karas in her own name. To the extent that the borrowings were to her as trustee of the Karmel Family trusts (if at all) I note that in her examination Mrs Karas revealed that she is no longer trustee of that trust, that role now being filled by State Securities Pty Ltd, of which she is the sole director. In the circumstances it may be that the bank is fixed with actual or constructive notice of the prior claim of the estate of Mr Karas, or at least is unable to rely on their lack of knowledge by reason of failing to adequately inquire as to her circumstances. Assuming in favour of the applicant that either or both Conmoore and Mrs Karas, as respondent entities, have an interest in the property which is susceptible to an order under s 139D, I am not persuaded that the trustee has made out an arguable case for relief in the terms sought against the Bank. The Court can only vest in an applicant pursuant to s 139D(2) the whole or part of the estate of the entity which the entity itself could so vest. Whether the entity in the present case be identified as Conmoore or Mrs Karas, its or her estate in the property is qualified by the presence of the Bank's estate or interest as mortgagee. As Mr Marks of Counsel for the Bank put it, the only estate or interest susceptible to a vesting order under s 139D(2) is analogous to an equity of redemption. Since it is common ground that the amount for which the bank is secured over the property, amongst others, will far exceed the net proceeds of the sale to Rosebee Glen Pty Ltd, there is no utility in granting an injunction in the terms sought to preserve the presumptive interest in the property of either Conmoore or Mrs Karas. There is no suggestion in the evidence that the Bank has not given full consideration by way of advancing all of the moneys secured by the "all moneys" mortgages of, amongst others, the property. Nor has there been any suggestion that the Bank has been guilty of fraud in the sense used in s 43 of the Transfer of Land Act 1958 in its dealing with the registered proprietor of the property. I accept that an injunction may be granted under s 30 of the Bankruptcy Act on limited material to preserve the position so that a trustee's investigations can be completed in order to ascertain whether certain disputed property forms part of a bankrupt's estate. Thus in Re Bayles; Ex parte Official Trustee in Bankruptcy (1987) 73 ALR 455 Pincus J observed at 457: It appears to me to follow, inter alia, that it is not necessary in every such case as this to show that there is a serious question to be tried; it may be that at an early stage so little information is available with respect to the matter in relation to which an injunction is sought that the "serious question" test cannot be passed. Where one has an unco-operative bankrupt who has arranged his affairs in a complex way, the trustee may have difficulty in showing, shortly after bankruptcy, where and how the bankrupt's money has gone; interlocutory orders to hold the position may nevertheless be very necessary. However, that was a case where an order was made freezing the proceeds of sale of a property, a half interest in which had formerly been held by the bankrupt and had been transferred to a company controlled by his children. The trustee contended that the transfer was void under s 120 or s 121 of the Act. What his Honour did there was far removed from interfering with the interest in a property of a third party acquired at arm's length and for full consideration. In a case such as the present I consider it is incumbent on the trustee to demonstrate a serious question to be tried on the principles enunciated, for example, in Australian Coarse Grains Pool Pty Ltd v The Barley Marketing Board of Queensland (1982) 57 ALJR 425 as to whether that third party can have recourse to proceeds of sale in priority to an actual or inchoate interest in the property of a trustee in bankruptcy. In my view no such serious question has been made out in the present case. Even if I were wrong in the views just expressed, I would be inclined to exercise my discretion against granting relief in the terms sought for two reasons. In the first place I am not persuaded that any interest which the trustee might be able to establish in priority to the security claimed by the Bank could not adequately be recouped by restitutionary order against the Bank for payment of an appropriate money amount. Secondly, the trustee has been pursuing the proceedings in the Supreme Court for some three months during which adjournments have been granted to enable him to complete examinations under ss 77C and 81 of the Bankruptcy Act, yet the present application was instituted only three days before the proposed completion of the sale of the property. For these reasons, I decline to grant interim relief in the terms sought. I shall adjourn the directions hearing in the substantive application to 8 May 1998. The costs of all parties of the application for interlocutory relief will be reserved. I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.