FEDERAL COURT OF AUSTRALIA Donnelly (Trustee), in the matter of the bankrupt estate of Hancock v Porteous [2001] FCA 345 INJUNCTIONS – interlocutory injunctions – injunctions to preserve status quo and property pending determination of rights – Mareva orders – factors to be considered by the Court in determining whether orders should be made BANKRUPTCY – administration of bankrupt estate under Part XI of the Bankruptcy Act 1966 (Cth) (Act) – transfer affected by s 120 of the Act – date on which the trustee's claim arises – date from which interest payable by the transferee Bankruptcy Act 1966 (Cth), s 40(1)(b), s120, s 247A(1) Nippon Yusen Kaisha v Karageorgis [1975] 1 WLR 1093 referred to Mareva Compania Naviera SA v International Bulkcarriers SA [1975] 2 Lloyd's Rep 509; [1980] 1 All ER 213 followed Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 followed Glenwood Management Group Pty Ltd v Mayo [1991] 2 VR 49 followed Pearce v Waterhouse [1986] VR 603 followed Jackson v Sterling Industries Ltd (1987) 162 CLR 612 followed Williams v Lloyd (1934) 50 CLR 341 followed MAX CHRISTOPHER DONNELLY (AS TRUSTEE OF THE ESTATE OF THE LATE LANGLEY GEORGE HANCOCK) v ROSEMARIE PORTEOUS & ORS N 8132 of 1999 STONE J SYDNEY 2 APRIL 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8132 OF 1999 BETWEEN: MAX CHRISTOPHER DONNELLY (AS TRUSTEE OF THE ESTATE OF THE LATE LANGLEY GEORGE HANCOCK) APPLICANT AND: ROSEMARIE PORTEOUS FIRST RESPONDENT JOHANNA LACSON NOMINEES PTY LIMITED SECOND RESPONDENT BELLE ROSA HOLDINGS PTY LIMITED THIRD RESPONDENT JUDGE: STONE J DATE OF ORDER: 2 APRIL 2001 WHERE MADE: SYDNEY On the applicant giving the usual undertaking as to damages THE COURT ORDERS THAT: 1. Pending the determination of these proceedings, the First Respondent be restrained by herself, her servants or agents from selling, charging, mortgaging, encumbering or otherwise disposing of or dealing with the property known as "Prix d'Amour" (being Lots 100 and 104, Wellington Street, Mosman Park in the State of Western Australia) without first giving twenty-one (21) days' written notice to the Applicant. 2. Pending the determination of these proceedings, the First and Second Respondents be restrained by themselves, their servants or agents from selling, charging, mortgaging, encumbering or otherwise disposing of or dealing with the property known as Lot 26, Alaqua, Phase 3 in the Country of Seminole, Florida in the United States of America ("the Orlando Property") without first giving twenty-one (21) days' written notice to the Applicant. 3. Pending the determination of these proceedings that, in the event of sale of Prix d'Amour, the First Respondent give not less than twenty-one (21) days' written notice to the Applicant prior to settlement of such sale. 4. Pending the determination of these proceedings that, in the event of sale of the Orlando Property, the First and Second Respondents give not less than twenty-one (21) days' written notice to the Applicant prior to settlement of such sale. 5. In the event of sale of Prix d'Amour, there shall be retained out of the proceeds of such sale and placed in a joint bank account in the names of the Applicant and the solicitor for the Respondents, an amount of $3,242,581.80 together with interest on that amount calculated in accordance with the rates of interest prescribed under Schedule J of the Supreme Court Rules 1970 (NSW) from 8 April 1999to the date of settlement of such sale. 6. In the event of sale of the Orlando Property, there shall be retained out of the proceeds of such sale and placed in a joint bank account in the names of the Applicant and the solicitor for the Respondents, an amount of $1,590,531.54 together with interest on that amount calculated in accordance with the rates of interest prescribed under Schedule J of the Supreme Court Rules 1970 (NSW) from 8 April 1999to the date of settlement of such sale. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8132 OF 1999 BETWEEN: MAX CHRISTOPHER DONNELLY (AS TRUSTEE OF THE ESTATE OF THE LATE LANGLEY GEORGE HANCOCK) APPLICANT AND: ROSEMARIE PORTEOUS FIRST RESPONDENT JOHANNA LACSON NOMINEES PTY LIMITED SECOND RESPONDENT BELLE ROSA HOLDINGS PTY LIMITED THIRD RESPONDENT JUDGE: STONE J DATE: 2 APRIL 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This proceeding involves the estate of the late Langley George Hancock who died on 27 March 1992. On 4 May 1995, the Supreme Court of Western Australia granted probate of Mr Hancock's estate to the executors named in his will. On 8 April 1999, the Federal Court of Australia ordered that the estate be administered under Part XI of the Bankruptcy Act 1966 (Cth) ("Act") and appointed the applicant as the trustee of the estate ("Trustee"). The creditor's petition pursuant to which this order was made was filed by Hancock Prospecting Pty Ltd on 12 December 1997. 2 It is alleged by the applicant that, at the date of his death, Mr Hancock was unable to pay his debts as they became due from his own monies. It is further alleged that on 23 October 1991 Mr Hancock made a gift of $254,129.71 to the respondent and that this gift was an act of bankruptcy pursuant to s 40(1)(b) of the Act. If these allegations are correct then, the administration of Mr Hancock's estate under Part XI is deemed, under Section 247A(1) of the Act, to have relation back to and to have commenced at that date. This commencement date is significant for the reason, among others, that under s 120 of the Act gifts made within a period of 5 years prior to the commencement date are, subject to one exception, void as against the Trustee. The exception is that a gift made more than two years prior to the commencement date will not be void as against the Trustee if the transferee proves that the transferor was solvent at the time of the transfer; s 120(3). 3 It is not necessary here to describe the applicant's claims in detail. In brief, the Trustee is seeking to recover under s 120 of the Act, numerous gifts of money that are said to have been given by Mr Hancock to the first respondent in the 5 years prior to 23 October 1991 as well as interest on the relevant amounts. Some of that money, it is alleged, was invested directly or indirectly in certain properties identified in the Notice of Motion. Pending the determination of these proceedings, the Trustee is concerned to ensure that these properties (or the proceeds if they are sold) are available to satisfy any orders made in favour of the Trustee. Consequently by Notice of Motion filed on 15 March 2001 he seeks the following orders: 1. An order that pending the determination of these proceedings the First Respondent be restrained by herself, her servants or agents from selling, charging, mortgaging, encumbering or otherwise disposing of or dealing with the property known as "Prix d'Amour" (being Lots 100 and 104, Wellington Street, Mosman Park in the State of Western Australia) without first giving twenty-one (21) days' written notice to the Applicant. 2. An order that pending the determination of these proceedings the First and Second Respondents be restrained by themselves, their servants or agents from selling, charging, mortgaging, encumbering or otherwise disposing of or dealing with the property known as Lot 26, Alaqua, Phase 3 in the Country of Seminole, Florida in the United States of America ("the Orlando Property") without first giving twenty-one (21) days' written notice to the Applicant. 3. An order that pending the determination of these proceedings the First Respondent be restrained by herself, her servants or agents from selling, charging, mortgaging, encumbering or otherwise disposing of or dealing with the property known as 4-10 Bay Street, Double bay in the State of New South Wales (being the property comprised in Folio Identifier 100/712017) ("the Double Bay Property") without first giving twenty-one (21) days' written notice to the Applicant. 4. In relation to each of Prix d'Amour, the Orlando Property and the Double Bay Property, an order pending the determination of these proceedings that in the event of sale of any of such properties, the First and Second Respondents give not less than twenty-one (21) days' written notice to the Applicant prior to settlement of such sale. 5. In the event of sale of Prix d'Amour, an order that such amount be retained out of the proceeds of such sale and be placed in a joint bank account in the names of the Applicant and the solicitor for the Respondents respectively as is equal to the total of the Applicant's claims in respect of Prix d'Amour in paragraphs 17, or alternatively 19, and 20 of the Application herein filed 13 October 1999 together with interest thereon pursuant to the Federal Court Act from the respective dates of payment of those amounts or their constituent elements. 6. In the event of sale of the Orlando Property, an order that such amount be retained out of the proceeds of such sale and be placed in a joint bank account in the names of the Applicant and the solicitor for the Respondents respectively as is equal to the total of the Applicant's claims in respect of the Orlando Property in paragraph 13, or alternatively 15, of the Application herein filed 13 October 1999 together with interest thereon pursuant to the Federal Court Act from the respective dates of payment of those amounts or their constituent elements. 7. In the event of sale of the Double Bay Property, an order that such amount be retained out of the proceeds of such sale and be placed in a joint bank account in the names of the Applicant and the solicitor for the Respondents respectively as is equal to the total of the Applicant's claims in respect of the Double Bay Property in paragraph 3, or alternatively 5, of the Application filed 23 October 2000 in Proceedings No. N7891/2000 together with interest thereon pursuant to the Federal court Act from the respective dates of payment of those amount or their constituent elements. 4 The s 120 claims against the Orlando Property and Prix d'Amour are made in this proceeding. The claim against the Double Bay Property is made in proceeding N 7891 of 2000 brought by the Trustee against Mrs Rosemarie Porteous, the first respondent in this proceeding. On 30 November 2000, Sackville J ordered that N 7891 of 2000 be heard together with this proceeding. Despite this, the Notice of Motion was only filed in this proceeding although the application and statement of claim in N 7891 of 2000 were submitted in evidence. The respondents raised no objection on this basis to the orders sought against the Double Bay Property and plainly, any such objection could have been overcome by giving the applicant leave to file in Court an appropriate notice. Despite this slight anomaly therefore, I see no reason on this ground not to consider the orders sought against the Double Bay Property. 5 The orders sought in the Notice of Motion were described by Mr Burnside, senior counsel for the respondents, as Mareva orders because, in his words, "In every instance the dispositions which are the subject matter of the proceedings are dispositions of money which the trustee seeks to trace into property which was brought by Mrs Porteous in her name." 6 Mr Burnside submitted that such an order is a drastic remedy not to be granted lightly. The applicant must establish thatthere is at least a good arguable case against the respondents and a real risk of dissipation of the relevant assets or their removal from the jurisdiction. Mr Coles, while not disagreeing with the respondents' submissions about Mareva orders commented that such orders commonly are directed to restraining a person from dealing with any of his assets or taking any of them out of the jurisdiction. He pointed out that the orders sought by the applicant here are much less draconian in that they seek only for the Trustee to be notified if the assets are to be sold and, in that event, for a portion only of the proceeds to be subject to any restriction. 7 There is little profit, it seems to me, in attempting to determine whether the orders sought should properly be called Mareva orders. That name is used to refer to a range of orders which have developed from the type of orders first made in Nippon Yusen Kaisha v Karageorgis [1975] 1 WLR 1093 but commonly more identified with Mareva Compania Naviera SA v International Bulkcarriers SA [1975] 2 Lloyd's Rep 509; [1980] 1 All ER 213. The doctrinal basis of such orders was analysed by the High Court in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380. In their joint judgment, Gaudron, McHugh, Gummow and Callinan JJ, at [27]-[44], traced the development of Mareva orders and distinguished them from the equitable remedy of injunction and from statutory "injunctions". Statutory 'injunctions' are "a particular species of order, the making of which the law in question provides as part of a new regulatory or other regime, which may be supported by penal provisions". Their Honours described how the courts have developed various interlocutory remedies that may be deployed where the equitable remedy of injunction does not lie. An example is the court's power to appoint a receiver to preserve property pending the determination of proceedings impeaching an assignment or conveyance fraudulent upon creditors. Their Honours stated that the Mareva order should be seen as a further development in this line. Where such orders are sought against persons not party to the proceeding, the focus is on the administration of justice. Where, as here, the orders sought are against parties to the proceeding against whom final relief is sought, the focus is on preventing abuse or frustration of the Court's process. 8 As indicated in [6] above, Mr Coles pointed to the fact that the proposed orders do not purport to restrain all dealing with the subject properties. He might also have pointed to the fact that the orders seek to restrain only parties to the proceeding. The majority of the High Court in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [50] explicitly recognised that there are significant differences between an order protective of the court's process made against a party to an action, and an order affecting the property of persons who are not parties to the action. Their Honours also warned that such orders should not be made lightly saying that such an order, "requires a high degree of caution on the part of a court invited to make an order of that kind. An order lightly or wrongly granted may have a capacity to impair or restrict commerce just as much as one appropriately granted may facilitate and ensure its due conduct." 9 An applicant seeking Mareva orders must show: · that he has a "good arguable case" (Glenwood Management Group Pty Ltd v Mayo [1991] 2 VR 49 at 49) or "a sufficiently realistic prospect of success in the proceedings" (Pearce v Waterhouse [1986] VR 603 at 605); and · that refusing the order would involve a real risk that a judgment or award in his favour would remain unsatisfied because of the concealment or dissipation of assets by the defendant (Jackson v Sterling Industries Ltd (1987) 162 CLR 612) ; and · that the balance of convenience requires that such an order be made; Pearce v Waterhouse [1986] VR 603 at 607. 10 The claim for principal relief in this proceeding hinges on the claim that at the date of his death, Mr Hancock was unable to pay his debts as they became due from his own monies. Unless this allegation is correct, the date of commencement of the administration of the estate is deemed under s 247A(1)(c) to be the date of the presentation of the creditors petition, namely 12 December 1997. In that case the Trustee's claims under s 120 of the Act in respect of the properties mentioned in the proposed orders must fail. It should also be noted that under s 120(3), a gift made more than 2 years prior to the commencement date will not be void as against the Trustee if at the time of the transfer Mr Hancock was solvent. For these reasons it seems to me that the question of Mr Hancock's solvency is an important element on the good arguable case that the applicant must establish. 11 The Statements of Claim in this proceeding and in N 7891 of 2000 particularise the allegation that at the date of his death Mr Hancock was insolvent with reference to debts due to Clough Building Pty Ltd, The Hancock Family Memorial Foundation Limited and Hancock Mining Limited. The applicant submitted a considerable volume of documentary evidence concerning the finances of the first respondent and the gifts made to her by Mr Hancock. Although the material contains references to some of the debts referred to in the statement of claim, it is not clear what was the status of these debts at the date of Mr Hancock's death. Mr Burnside submitted that the applicant adduced no evidence as to Mr Hancock's solvency at the date of his death or at any earlier period. He submitted that all that was before the court was assertions and pleadings. In his submission, a good arguable case cannot be established by assertion in pleadings but only by adducing evidence. 12 This argument is reminiscent of the position in which Vincent J found himself in Pearce v Waterhouse [1986] VR 603. In that case, the plaintiff sought orders to restrain the defendant from dealing with certain paintings pending the determination of the plaintiff's principal claim. His Honour, at 604, made the following comment: "It is not possible in these proceedings, nor indeed would it be proper, to attempt to determine or assess what the probable outcome of the action might be. Essentially, what have been put before me are allegations, claims and counterclaims relating to a range of factual matters which are strenously contested on each side." 13 His Honour contrasted this position with a situation where consideration of the pleadings themselves and of affidavit material might enable an assessment to be made and commented at 605: "However, in the circumstances such as those with which I am presently confronted, where the matters raised are essentially matters of fact and will ultimately involve careful assessment of evidence and the credibility of witnesses, it may be very difficult indeed to attempt any serious assessment of the outcome…" 14 Nevertheless his Honour went on to conclude: "In my view, the plaintiffs' claim in the present matter is one which satisfies the test that it should disclose a good arguable case. If the issues of fact upon which it depends are determined in favour of the plaintiffs it would be reasonable to anticipate that there would be judgment in their favour and probably for a substantial sum representing damages suffered and losses incurred. A number of serious criticisms have been raised by Mr. Archibald Q.C., senior counsel appearing on behalf of the defendant, as to that claim and I am not unmindful of them. However, as I have indicated, in a situtation where there is a clear contest of evidence, even if it were proper to do so, any serious attempt to make an assessment of the strength of the relative cases or the general credibility of any of the deponents whose affidavits have been filed in the proceedings would be for practical purposes, impossible." 15 In my opinion, the approach taken by Vincent J is correct in the circumstances he describes. The situation here is very similar to that confronting his Honour. In my opinion, the material submitted by the applicant supports a strongly arguable case in favour of the claims made by the applicant in this proceeding. The position in relation to the claims made in proceeding N 7891 of 2000, which relates to the Double Bay Property, is more complex. 16 Proceeding N 7891 of 2000 is also an application under Section 120 and Part XI of the Bankruptcy Act 1966 brought by the Trustee against the first respondent in this proceeding, Mrs Rosemarie Porteous. The application states that the Trustee claims, as against the Mrs Porteous, a declaration that an amount of $5,500,000 paid to Mrs Porteous should be refunded together with interest. According to the statement of claim supporting the application, in 1988 Mr Hancock paid the $5,500,000 to Mrs Porteous (then Mrs Rose Hancock) to establish the Rose and Lang Hancock domestic fund ("the fund"). The terms of the fund are said to be that the $5,500,000 was to be invested by Mrs Porteous at her absolute discretion and the annual income used to pay all domestic and residential expenses for Mr Hancock, his wife and her daughter. On his death, Mrs Porteous was to be released from all obligations and restrictions in respect of the fund, which would then be for her sole use and benefit. The Trustee alleges that Mrs Porteous, in breach of trust, utilised the fund, directly or indirectly, for the discharge or partial discharge of registered mortgages on the Double Bay Property. It is also contended that the release and discharge of Mrs Porteous' obligations on Mr Hancock's death, amounted to a transfer to her of the sum of $5,500,000 that is void as against the Trustee pursuant to S 120(1) of the Act. 17 The establishment of the trust is disputed by the respondents. While this dispute, which depends on the resolution of conflicting factual claims may be susceptible to the approach taken by Vincent J in Pearce v Waterhouse [1986] VR 603, there are more serious difficulties. I have difficulty in seeing how the release and discharge of Mrs Porteous's obligations on the death of Mr Hancock could amount to a transfer to her of the corpus of the trust. Furthermore even if there were breaches of trust during Mr Hancock's lifetime, it is difficult to see how those breaches could be proved at this stage. There appears to be no evidence of any complaint on this score by Mr Hancock during his lifetime. These and other difficulties lead me to conclude that the Trustee does not have a strongly arguable case in relation to the claim in proceeding N 7891 of 2000 and therefore I decline to make any order affecting the Double Bay Property. 18 In relation to Prix d'Amour and the Orlando property it is still necessary to consider if refusing the order would involve a real risk that a judgment or award in the Trustee's favour would remain unsatisfied because of the concealment or dissipation of assets by the defendant. Among the material submitted by the applicant is a bundle of newspaper and magazine clippings concerning the proposed sale of Prix d'Amour by Mrs Porteous and a transcript of evidence given on oath by Mrs Porteous in the course of an examination pursuant to s 81 of the Act. The examination occurred on 15 and 16 November 2000 and 14 and 15 February 2000. During the examination Mrs Porteous testified that Prix d'Amour and the Orlando property were on the market but that she had no intention of expatriating the proceeds of the former and that she intended to bring the proceeds of the sale of the Orlando property back to Australia. There is no reason to doubt that Mrs Porteous was telling the truth about her intentions at that date. The impression created by the whole of the transcript, however, is that Mrs Porteous's life plans are presently rather fluid. The question of her purchasing a French chateau was discussed along with other plans she has for her future. While the particular property might be beyond her reach, the discussion shows that she is not inimical to living overseas. In addition there is, as counsel for the applicant observed, a certain inconstancy of intention. In my opinion there is a strong possibility that Mrs Porteous may alter her plans and deal with the properties in a manner inconsistent with preserving the assets (or their proceeds) in a form accessible to the Trustee. 19 I turn finally to the balance of convenience. At this point it is relevant to consider the undertakings given in the past in respect of Prix d'Amour, the Orlando property and other properties. On 13 March 2000, Mrs Porteous made an undertaking to the Court not to sell or encumber three properties, Prix d'Amour, the Orlando property and a property known as Milgraum House without giving 14 days written notice to the Trustee. In May 2000, the solicitors for Mrs Porteous indicated in writing that their client would like to sell those Prix d'Amour and the Orlando Property but that she was prepared to hold the amounts claimed by the Trustee in trust "together with an appropriate interest component" once the properties had been sold. No notice was given in respect of Milgraum House and the parties appear to accept that the undertaking remains operative in respect of that property. 20 Subsequently the parties negotiated as to the form of undertaking that Mrs Porteous would be prepared to give. In discussions between Mrs Porteous' solicitor and the solicitors for the Trustee, it appeared that the only controversial issue was the amount of interest that should be held in trust in addition to the capital amounts in respect of each property. The solicitors for Mrs Porteous stated that interest should be calculated at a rate of 10.5% from 18 June 1999. The significance of that date appears to be that it was when the Section 139ZQ notices was served on Mrs Porteous. The applicant claims to be entitled to interest on the amounts that Mr Hancock gave to Mrs Porteous from the date of payment of those amounts or their constituent elements. Because of this dispute, the negotiations for further undertakings were unsuccessful. However the fact that the interest was the only outstanding issue between the parties confirms my view that the balance of convenience lies in the making of the orders in respect of Prix d'Amour and the Orlando property. It is also relevant to this conclusion that the orders contemplated do not totally restrict dealings with the properties and do not require the whole of the proceeds to be held pending the outcome of the proceedings. 21 In my opinion, the applicant's argument in relation to interest does not give cognisance to the words of s 120. A transfer that is affected by s 120 is not thereby void for all purposes. It is "void as against the trustee in the transferor's bankruptcy". The effect is not to vest the relevant property in the trustee but merely to extinguish the title that the donee of the gift would otherwise have. Whether or not the property vests in the trustee may depend on factors such as whether any entitlement to the property has otherwise arisen and whether that title has priority over that of the trustee. All that s 120 establishes is that the trustee's claim will prevail over that of the donee. It is clear, however, that this claim cannot arise prior to the trustee's appointment. The limited effect of a provision such as s 120 was recognised by Dixon J in Williams v Lloyd (1934) 50 CLR 341. His Honour commenting on a predecessor section to s 120 stated at 374: "[The section] does not avoid the entire transaction for all purposes. It makes the 'settlement' void against the trustee in the bankruptcy. Such a provision means voidable at the instance of the trustee as from the time as at which his title accrues… It invalidates the 'settlement' only 'against the trustee', which means for the purpose of letting in his claim; in order that his demand may be given effect to… In all other respects and after the demands of the trustee have been satisfied the settlement stands…" (authorities omitted) 22 In this case the Trustee was appointed on 8 April 1999. Prior to the date the Trustee had no claim on the gifts and therefore cannot be entitled to interest prior to that date. 23 I will make orders in accordance with these reasons. However, because each party has been partially successful on the Notice of Motion I do not propose to make any order as to costs. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 2 April 2001 Counsel for the Applicant: Mr B A Coles QC appearing with Mr C R C Newlinds Solicitor for the Applicant: Kemp Strang Counsel for the Respondent: Mr J W K Burnside appearing with Mr D Collins Solicitor for the Respondent: Slater & Gordon Date of Hearing: 23 March 2001 Date of Judgment: 2 April 2001