FEDERAL COURT OF AUSTRALIA Norgard (as Trustee), In the Matter of Connell (Deceased) v Hayhillock Pty Ltd [1999] FCA 1280 BANKRUPTCY – disposition with intent to defraud creditors – Trustee's claim to set aside disposition under s 121 – interim undertaking of the transferee not to dispose of property – alleged compromise between Trustee and transferee of claim – compromise disputed by Trustee – pending proceedings in Supreme Court – transferee obtaining purchaser – application for release from undertaking subject to retention of proceeds of sale – principles upon which injunctive relief granted under s 30(1)(b) – analogy with Mareva injunctions – Mareva principles not determinative – purposes of the Act requiring maintenance of undertaking. Bankruptcy Act 1966 (Cth) ss 30, 121 Brady v Stapelton (1952) 88 CLR 322, cited Re Bayliss; Ex parte Official Trustee in Bankruptcy (1987) 73 ALR 455, cited Re Hepburn; Ex parte Deputy Commissioner of Taxation (Applicant); Hepburn (Respondent) (Unrep, Fed Court, 10 July 1989, Hill J), cited RE LAWRENCE ROBERT CONNELL (DECEASED) EX PARTE: ROSS STEWART NORGARD (TRUSTEE OF THE ESTATE OF THE DECEASED) v HAYHILLOCK PTY LTD (ACN 009 273 509) and REGISTRAR OF TITLES WG 7008 of 1996 FRENCH J 14 SEPTEMBER 1999 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 7008 OF 1996 BETWEEN: RE: LAWRENCE ROBERT CONNELL (DECEASED) EX PARTE: ROSS STEWART NORGARD (TRUSTEE OF THE ESTATE OF THE DECEASED) Applicant AND: HAYHILLOCK PTY LTD (ACN 009 273 509) First Respondent REGISTRAR OF TITLES Second Respondent JUDGE: FRENCH J DATE OF ORDER: 14 SEPTEMBER 1999 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The motion is dismissed. 2. The First Respondent is to pay the Applicant's costs of the motion. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WG 7008 OF 1996 BANKRUPTCY DIVISION BETWEEN: RE: LAWRENCE ROBERT CONNELL (DECEASED) EX PARTE: ROSS STEWART NORGARD (TRUSTEE OF THE ESTATE OF THE DECEASED) Applicant AND: HAYHILLOCK PTY LTD (ACN 009 273 509) First Respondent REGISTRAR OF TITLES Second Respondent JUDGE: FRENCH J DATE: 14 SEPTEMBER 1999 PLACE: PERTH EX TEMPORE REASONS FOR JUDGMENT 1 Lawrence Robert Connell died on 27 February 1996. On 9 July 1996 his estate was the subject of an order of this Court that it be administered under Part XI of the Bankruptcy Act 1966 (Cth). At the time it had a net asset deficiency of about $340 million. Ross Stewart Norgard was appointed as trustee of the bankrupt estate. 2 On 25 September 1996, Mr Norgard instituted proceedings in this Court under s 121 of the Bankruptcy Act. The application related to the sale of Mr Connell's home at 43 Irvine Street, Peppermint Grove to Hayhillock Pty Ltd ("Hayhillock") which is said to have been done under a written agreement made on or about 25 November 1987 between Mr Connell and the company. It is alleged that a transfer of the property to Hayhillock was executed by Mr Connell on 3 December 1987 and eventually the transfer was registered on 3 October 1988 in favour of Hayhillock. It is said that on or about 11 June 1991 Hayhillock became the unencumbered legal and equitable owner of the property following the discharge of a mortgage over the property. The sale of the property and the discharge of the mortgage were said to have been done by Mr Connell with an intent to defraud his creditors within the meaning of s 121 of the Bankruptcy Act. It was alleged that his actual intention was to transfer the property to Hayhillock to put it out of reach of his creditors. In the circumstances it was alleged by the Trustee that Hayhillock was not a purchaser for valuable consideration in good faith. 3 In the proceedings commenced in this Court on 25 September 1996, the Trustee sought a declaration that the disposition of the interest in the land was void as against him as being a disposition of property with intent to defraud creditors and not being a disposition for valuable consideration in favour of a person who acted in good faith. He sought a declaration that the property is property divisible among the creditors of the estate and an order that it be vested in him as Trustee of the estate. Incidental orders were also sought. 4 Elizabeth Joan Connell is the sole director of Hayhillock, which apparently holds the property in its capacity as Trustee of the E.J. Connell Family Trust. An interim injunction was granted on application of the Trustee by Carr J on 25 September 1996. However, on 3 October 1996 the injunction was dissolved upon an undertaking by Hayhillock that it would not transfer, sell, give, assign, encumber or otherwise deal in any way howsoever with the property without first giving the Trustee seven days written notice of its intention to do so. Similar undertakings in respect of other property were given by Mrs Connell and another company, Eastlode Pty Ltd ("Eastlode"). 5 On 3 September 1999, Hayhillock filed a motion seeking to be released from the undertaking given by it to the Court on 3 October 1996. It also sought an order giving it leave to sell the land at 43 Irvine Street, Peppermint Grove with the net proceeds of the sale to be paid into an account in the joint names of its solicitors and the solicitors for the Trustee. Orders are also sought that provision be made for payment out of the account of the costs and reasonable legal expenses and disbursements incurred in selling the property, outstanding land tax and real estate agent's commission. 6 Since the undertaking was given there have evidently been a number of without prejudice discussions between the Trustee and Mrs Connell and her associated companies. Mrs Connell alleges that on 28 May 1999 she and Hayhillock and Eastlode reached an agreement to settle the proceedings under s 121. It was said to have been an express term of the agreement, so far as it related to the Irvine Street property: "(a) In consideration of the Trustee forbearing from continuing the proceedings the Connell interests would pay the Trustee an agreed sum of money on or before 31 December 1999. (b) Hayhillock Pty Ltd could sell the property at 43 Irvine Street for the purpose of paying that sum to the Trustee. (c) Hayhillock would give the Trustee a first registered mortgage over the property until the sum was paid. (d) The terms of the agreement would be set out in a deed which would be fuller and more precise but not different in effect to the agreement and which the parties would execute." Mrs Connell says that since 28 May 1999 she and the companies have been ready and willing to do all things necessary on their part to perform and carry the agreement into effect. She says, however, that the Trustee has refused to enter into the agreed deed and has therefore indicated an intention no longer to be bound by the agreement. 7 She also alleges that under the terms of the agreement and in part performance of it, on 28 June 1999, Hayhillock entered into a written exclusive agency agreement with Mack Hall & Associates to sell the property on terms set out in that agency agreement. Her solicitor is said to have made contact with the Trustee's solicitor, seeking the Trustee's consent to Hayhillock selling the property. She says that by a letter dated 23 July 1999 from the Trustee's solicitors to her solicitors, the Trustee refused to allow Hayhillock to sell the property. 8 It is not in dispute that on or about 23 July 1999, the Trustee lodged a caveat against the title to the property for the purpose, from his perspective, of protecting the interests of the estate and its creditors. On that day Eastlode, Hayhillock and Mrs Connell commenced proceedings in the Supreme Court against the Trustee referring to the proceedings in the Federal Court and the agreement which they asserted had been concluded on 28 May 1999 with the Trustee. They asserted that by his conduct in refusing to enter into a formal deed the Trustee had evinced an intention no longer to be bound by the agreement and had thereby repudiated it. Hayhillock, Eastlode and Mrs Connell alleged however that they had not accepted such repudiation but insisted upon performance of the agreement in accordance with its terms. They also claim to have and to be likely to suffer loss and damage. They claimed an order for specific performance of the agreement and damages for breach of contract. 9 In the Supreme Court proceedings the Trustee has filed a defence in which he says, inter alia, that he met with Mrs Connell on 28 May 1999 and agreed in principle upon the main terms on which they would be prepared to contract for settlement of the claims made by the Trustee against Mrs Connell, Eastlode and Hayhillock in the Federal Court proceedings. The terms of the in principle agreement resembled, in its salient features, those of the agreement alleged in the statement of claim. However, according to the Trustee, the discussions and in principle agreement did not constitute a final and binding agreement at law. The in principle agreement was said to be neither final, complete nor certain, the parties were said to have contemplated further negotiations and no final and binding agreement until the execution of a mortgage of the property on terms acceptable to the Trustee. 10 On 3 August 1999, the Supreme Court ordered that the proceedings be entered into the expedited list. They have been listed for trial on 25, 26 and 27 October 1999. 11 On 30 August 1999, Hayhillock received an offer to purchase the property. The offer is for a purchase price of $3.5 million, with settlement on 15 December 1999. It was a cash offer. Having regard to the undertaking given to the Court by Hayhillock in October 1996, the offer has not been accepted and no counteroffer made. 12 Hayhillock wants to make a counteroffer on the same terms as the offer, but at a higher price and with the deletion of one of the special conditions. On 1 September 1999, Hayhillock's solicitors sought the Trustee's consent to making a counteroffer at a higher price. It appears that no reply was received to that request and it is obvious that the consent is not forthcoming. 13 Mrs Connell has been informed by the real estate agent, Mack Hall of Mack Hall & Associates, that the price in the offer is very satisfactory and is at the high end of the range of prices that Hayhillock could expect to achieve. Moreover she is advised that the prospective purchaser is likely to withdraw the offer if it is not accepted in the very near future and no counteroffer is made by Hayhillock. Mrs Connell asserts that Hayhillock is likely to be prejudiced if it is not able to sell the property because under the terms of the agreement with the Trustee, if the settled sum is not paid to the Trustee on or before 31 December 1999, the Trustee can exercise his rights under the mortgage. There is no certainty that the company would receive another offer on the same or better terms prior to 31 December 1999. This proposition, of course, is put on the assumption that the Supreme Court proceedings are resolved in favour of Mrs Connell, Hayhillock and Eastlode. 14 The Trustee in his affidavit contends, as in the defence in the Supreme Court proceedings, that he disputes that any concluded agreement was reached to settle the Federal Court proceedings. As to the existence or non-existence of a concluded agreement, I am in a position to form no view other than to say that there appears to be a serious question to be tried on both sides of the argument. In his affidavit he notes that Mrs Connell and her children currently reside at the house and that his solicitor has raised with her solicitors the question of what arrangements she and her children would be making about accommodation in the event the property is sold. According to the Trustee, Mrs Connell's solicitor flagged the possibility that she would make an application to have access to the proceeds of sale for the purposes of meeting the costs of rented accommodation. 15 As to the price being offered for the property, the Trustee sought the opinion of another real estate agent, Mr William Porteous of Acton Consolidated, as to: "(a) What would be the process or method of sale most likely to maximise the sale price received for the property. (b) What sale price the property is likely to fetch if that process or method of sale were adopted; and (c) The current state of the market for top properties and the likely state of the market in the next six-twelve months." Exhibited to his affidavit was a report prepared by Mr Porteous dated 9 September 1999. In that report Mr Porteous indicates that he has not seen the property since it was completely rebuilt after a fire several years ago. Basically, however, he is aware of the layout and what he describes as the "exceptional interior presentation that the home offers". He describes it as "one of Peppermint Grove's finer residences". As to method of sale, Mr Porteous says he does not believe that the house should be sold privately. In his opinion, the most effective way to market the property would be by way of tender or public auction. In his opinion, the property could sell in the vicinity of $3.5 million to $4 million. A premium on that figure could be achieved by going to auction or tender as the house represents a very desirable commodity. He would recommend a major marketing campaign giving the property maximum exposure and an advertising budget of $20,000. He concluded his report saying: "It is my belief that the market is a very good one and it will continue to be so. We are presently seeing a lot of very solid local money as well as buyers from overseas going into top properties. I am still advising my clients that a lot of the top properties are under valued and expect those properties to appreciate over the next twelve to eighteen months." 16 Hayhillock argues that the undertaking which it has given is in the nature of a Mareva injunction and that it is customary for the form of order granting a Mareva injunction initially to be in very wide terms and later to be varied. Variations are made, for example, to allow a Mareva defendant to make transactions in the ordinary course of business or to provide for reasonable living or legal expenses. Reference was made to a number of cases in which that was done. It was submitted that the purpose of the Mareva jurisdiction is not to improve the position of the claimants in an insolvency, but to prevent the injustice of a defendant removing his or her assets from the jurisdiction which might otherwise have been available to satisfy a judgment. Even where a plaintiff has provided adequate grounds for believing that there is a risk of the assets being removed before judgment, the courts must be vigilant to ensure that the Mareva defendant is not treated like a judgment debtor. The test for determining whether a request for a variation to a Mareva injunction should be allowed is said to be whether such variation would result in assets being utilised for purposes which conflict with the principles leading to the grant of the injunction in the first place. The conversion of an asset into cash is not the type of transaction that a Mareva injunction is designed to protect against. 17 It was submitted for Hayhillock that pursuant to the agreement, the company has until 31 December to sell the property and pay the settled sum to the Trustee. If the settled sum is not paid before 31 December 1999, the Trustee can exercise powers of sale of the mortgagee. Even though the Supreme Court proceedings are listed for trial commencing on 25 October, the outcome of the trial may not be known until some time thereafter. 18 This aspect of the submissions, of course, proceeded upon the basis that Hayhillock succeeds in establishing the existence of the agreement and that pursuant to the agreement, a mortgage has been granted to the Trustee to secure payment of the settled sum. 19 It was argued for Hayhillock that if it is permitted to sell the property and preserve the proceeds, it will be able to comply with its obligations under the agreement and, in the alternative, the proceeds will be preserved until further order. There could be no suggestion that it would not seek the best price reasonably obtained for the property in circumstances where, under the agreement, Hayhillock retains the difference between the price obtained and the settled sum. 20 The Trustee asserts, on the other hand, that Hayhillock has not placed any material before the Court which would suggest that there has been any change of circumstance to demonstrate that the Trustee's case under s 121 does not have merit and that the undertaking should be discharged. The Trustee says that Hayhillock seeks to rely on the fact that it has commenced proceedings in the Supreme Court, but this does not provide, it is said, an adequate basis for a discharge of the undertakings. The Trustee says there is no demonstrable or urgent need for the undertaking to be discharged because: 1. The Supreme Court proceedings will be heard and no doubt determined by the end of October. 2. There is no suggestion that if Hayhillock were successful in the Supreme Court the price offered by the potential purchasers would not then be able to be obtained. On the contrary, there was evidence that if the property were openly marketed, a higher price can be obtained – this is a reference to the report from Mr Porteous. 3. Even if Hayhillock were not able to sell for an equivalent or better price than the current offer, it would have in the Supreme Court proceedings claimed damages to meet that eventuality. There was no suggestion the Trustee would not be able to pay any such damages claimed. If, on the other hand, Mrs Connell were not successful in the Supreme Court proceedings, the Federal Court proceedings would continue and if the property had been sold in the meantime she would have no accommodation and Hayhillock would not be in a position to meet any liability for any loss that the Trustee might suffer if, having been successful in the Federal Court proceedings, the Trustee could not sell the property by openly marketing in a rising property market. 21 The Trustee also made the point that the discharge of the undertaking would have no practical benefit unless he consented to the sale of the property. For if he succeeded in the Federal Court proceedings, the title in the property will be held to have vested in him from the date of commencement of the bankruptcy or from the date of commencement by the trustee of these proceedings – Brady v Stapelton (1952) 88 CLR 322 at 332-334. So Hayhillock could not pass title to any purchaser. The only basis upon which a purchaser from Hayhillock could obtain title not subject to defeasance by the Trustee would be if the purchaser purchased the property from Hayhillock in good faith and without notice of the Trustee's claim to the title – s 121(8) of the Act. It was submitted for the Trustee the only circumstance in which the property can be sold where the purchaser from Hayhillock can obtain clear title, is if the Trustee consents to the sale. This he has not done, and does not intend to do. So it was submitted for the Trustee that any discharge of undertakings in the circumstances contemplated would: (a) Expose potential purchasers with notice of the claim to acquiring bad title and becoming involved in litigation with the Trustee. (b) Expose the creditors of the bankrupt to the increased costs of and delay associated with, an expanded litigation against Hayhillock and the proposed purchasers; and (c) Expose the creditors of the bankrupt estate to the risk that Hayhillock would sell to other purchasers who did not have notice of the Trustee's claim. Reasoning 22 This matter is not without difficulty. The two sides come before the Court with two unresolved disputes. The primary dispute is as to the validity of the original transfer of the property to Hayhillock. The second side of the dispute is whether that primary dispute has been resolved in terms which bind both sides. The property is itself the subject matter of the primary dispute. It is said to be property that belongs to or should be vested in the Trustee to be sold for the benefit of the creditors of the late Mr Connell. 23 The subject of the primary dispute is the ownership of that property. It is not simply a case in which the Trustee is suing the owner of property for a judgment sum and seeking to restrain the owner from dissipating or removing from the jurisdiction assets which would otherwise be available to satisfy a judgment debt. The claim made by the Trustee is in the discharge of his statutory duty and is designed to bring back into the estate assets which, on his contention, should never have been removed from it. In this connection he can seek the assistance of the Court to preserve the subject matter of the claim pending the resolution of the claim. This assistance can be provided under s 30 of the Bankruptcy Act which provides, among other things, that: "30(1) The Court: . . . (b) may 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." 24 The power so conferred is general in its terms, subject to its exercise for the purposes of carrying out or giving effect to the Act. And while the principles developed for the grant of interlocutory and other injunctions may be helpful in the exercise of the discretion, injunctions restraining the disposition of property which is the subject matter of a claim, are not to be granted only on Mareva principles. As Pincus J said in Re Bayliss; Ex parte Official Trustee in Bankruptcy (1987) 73 ALR 455 at 457: "…the power to grant an injunction where it is necessary for the purposes of giving effect to the Act is simply derived from s 30(1)(b)." It is also of importance to note that the word "necessary" as used in par (1)(b) does not require a claimant for injunctive relief to demonstrate necessity before injunctive relief is granted. It is sufficient if the injunctive relief is shown to be necessary in the interests of justice having regard to the purposes of the bankruptcy law, including the preservation of assets which are the property of the bankrupt so that those assets may be distributed rateably among the creditors – Re Hepburn; Ex parte Deputy Commissioner of Taxation (Applicant); Hepburn (Respondent) (Unrep, Fed Court, 10 July 1989, Hill J). 25 In the present case the undertaking was originally offered in lieu of an injunction under s 30(1)(b) which injunction was dissolved. In accepting the undertaking, however, the Court exercised a power coextensive with its power to grant injunctive relief. It could not accept an undertaking which went beyond that power for in the end the undertaking will be enforced as if it were imposed by injunctive order. So in making an order releasing Hayhillock from its undertaking the Court would be making an order under s 30(1)(b) and would be exercising a power coextensive with its power to vary an injunction granted under that provision. 26 The question for the Court in this case is whether maintenance of the undertaking offered is necessary for the purposes of carrying out or giving effect to this Act. In my opinion the answer to that question is in the affirmative. The Trustee's claim to the property under s 121 is on foot. It is a claim which warranted the grant of an interim injunction and, in lieu thereof, the acceptance of the undertaking which presently stands. 27 The Trustee's claim is subject to a contention that he has compromised it. This is a contention which will be tested in the Supreme Court in proceedings to be heard as a matter of urgency. It can be accepted, as I have observed, that there is a serious case to be tried on both sides of that argument. But in the end that does not tip the balance of merit one way or the other. It does not of itself establish a basis for releasing Hayhillock from its undertaking. 28 As a general proposition it was submitted for Hayhillock that the conversion of an asset into cash is not the type of transaction that a Mareva injunction is designed to protect against. That may be accepted. But we are not dealing in this case with a Mareva injunction. We are dealing with an undertaking in lieu of a statutory restraint which is to maintain the subject matter of a property claim brought by the Trustee in Bankruptcy. It may be accepted, as submitted for Hayhillock, that the test for determining whether a requested variation to a Mareva injunction should be allowed, is whether such variation would result in assets being utilised for purposes which conflict with the principles which led to the grant of the injunction in the first place. In this case, however, the relevant principles must all fall within the framework of that which is necessary for the purposes of carrying out or giving effect to the Bankruptcy Act in this case. The conversion of this property to cash would deprive the Trustee, if successful, of the opportunity of recourse to anything other than the price which Hayhillock was able to obtain for the property. This does not involve any implied criticism of the real estate agent engaged by Hayhillock to sell the property. Indeed according to the statement of claim, Mack Hall & Associates was approved by the Trustee as an element of the agreement between Hayhillock and the Trustee to handle the sale. That was, or course, on the assumption that there was a fixed price for the settlement within the expected market value of the house. And although there is no direct evidence on the matter, I am prepared to take judicial notice of the fact that both the agent engaged by Hayhillock and the agent whose report the Trustee relies upon, are well known and experienced agents in the relevant market segments. 29 There will always be a concern that a private treaty might not fetch the price that would be available if the property were put to auction or tender. These questions are necessarily matters, to some extent, of speculation and judgment. So too are the observations about the future state of the market. There is no doubt, however, that the options available to the Trustee, if he succeeds in his s 121 action, are dramatically reduced if the undertaking is released and this sale proceeds. On the other hand, there are remedies available to Hayhillock in the event that it vindicates the settlement agreement. It will obviously be against the Trustee's interests to proceed with a sale under mortgage in a way that would diminish the value able to be obtained for the home. The general terms of the settlement agreement, of course, will be well known to prospective purchasers, and it would be surprising if they were not known to the purchasers who had made the offer which is the subject of these proceedings. It is significant that notwithstanding the public nature of the circumstances surrounding the proceedings relating to this house, an offer which is within the market range suggested by Mr Porteous has been made. I am not prepared to infer that the position would be any worse in the event that Hayhillock had to await the outcome of its action in the Supreme Court. 30 In all the circumstances, I am of opinion that the purposes of the Act are best served by refusing the motion. The motion will be dismissed with costs. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Ex Tempore Reasons for Judgment herein of the Honourable Justice French. Associate: Dated: 2 March 2000 Counsel for the Applicant: Mr A. Siopis Solicitor for the Applicant: Blake Dawson Waldron Counsel for the First Respondent: Mr P. Tottle Solicitor for the First Respondent: Clayton Utz Date of Hearing: 14 September 1999 Date of Judgment: 14 September 1999