FEDERAL COURT OF AUSTRALIA Willoughby v Official Trustee in Bankruptcy [2001] FCA 753 BANKRUPTCY – trustee's decision to sell cause of action to party indemnifying defendant – whether decision should be reviewed – whether just and equitable for court to make orders Bankruptcy Act 1966 (Cth) s 178 Re Chirnside, Digby v Union Trustee Co of Australia Ltd [1929] VLR 217 cited Willoughby v Official Trustee in Bankruptcy (WA) [2000] FCA 757 cited Re Carson: ex parte Carson; Sadleir (1960) 19 ABC 108 cited Re Wheeler; Ex parte Wheeler v Halse (1994) 54 FCR 166 referred to Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 141 ALR 667 followed Healey v Prentice (No 2) (2000) FCA 1598 referred to Macchia v Nilant [2001] FCA 7 cited Davy v Garrett [1877] 7 Ch D 473 referred to Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA cited Willoughby v Official Trustee in Bankruptcy [1999] FCA 1715 cited Cummings v Claremont Petroleum (1996) 185 CLR 124 referred to McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547 referred to Re Tyndall (1977) 30 FLR 6 cited Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 cited Healey v Prentice (No 2) [2000] FCA 1598 referred to Re Cheeseman; Cheeseman v Waters (1997) 143 ALR 78 referred to Re Cirillo & Anor; Ex parte Official Trustee in Bankruptcy (1996) 65 FCR 576 applied BERYL FRANCES WILLOUGHBY, JOHN FRANCIS WILLOUGHBY and MICHAEL STEPHEN WILLOUGHBY v THE OFFICIAL TRUSTEE IN BANKRUPTCY and LAWCOVER PTY LTD W 7078 of 1999 RD NICHOLSON J 20 JUNE 2001 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 7078 of 1999 BETWEEN: BERYL FRANCES WILLOUGHBY JOHN FRANCIS WILLOUGHBY MICHAEL STEPHEN WILLOUGHBY APPLICANTS AND: THE OFFICIAL TRUSTEE IN BANKRUPTCY FIRST RESPONDENT LAW COVER PTY LTD (ACN 003 326 618) SECOND RESPONDENT JUDGE: RD NICHOLSON J DATE OF ORDER: 20 JUNE 2001 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The applicants' application for review be allowed. 2. By noon on Monday, 25 June 2001, the parties file and serve a draft of proposed orders. 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 W 7078 of 1999 BETWEEN: BERYL FRANCES WILLOUGHBY JOHN FRANCIS WILLOUGHBY MICHAEL STEPHEN WILLOUGHBY APPLICANTS AND: THE OFFICIAL TRUSTEE IN BANKRUPTCY FIRST RESPONDENT LAW COVER PTY LTD (ACN 003 326 618) SECOND RESPONDENT JUDGE: RD NICHOLSON J DATE: 20 JUNE 2001 PLACE: PERTH REASONS FOR JUDGMENT 1 The applicants bring an application pursuant to s 178 of the Bankruptcy Act 1966 (Cth) ("the Act"). That section provides: "If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable." The decision of the first respondent ("the Trustee") to which the application relates is a decision made by the Trustee to transfer and vest the action WAG 183 of 1998 and underlying causes of action ("the Action") in the second respondent. 2 The application was previously considered before this Court and was the subject of part of the reasons delivered on 10 December 1999 holding the application to be incompetent in view of the decision of the Full Court of the Supreme Court of Victoria in Re Chirnside, Digby v Union Trustee Co of Australia Ltd [1929] VLR 217. That aspect of the judgment was successfully appealed and was the subject of reasons of the Full Court of this Court in Willoughby v Official Trustee in Bankruptcy (WA) [2000] FCA 757. There the Full Court (Burchett, Lee and Hely JJ) allowed the appeal, preferring the reasoning of Clyne J in Re Carson: Ex parte Carson; Sadleir (1960) 19 ABC 108 to that of the Full Court in Re Chirnside. The effect was to hold that there was no reason why a sale by a trustee cannot be an act whereby a bankrupt may be aggrieved within the meaning of s 178. Accordingly, the application was remitted for further consideration and now comes before the Court on that basis. Background circumstances 3 In its reasons the Full Court set out the following statement of background circumstances: "The [applicants] were first declared bankrupt on 10 October 1990. On 16 January 1994 the [applicants] were discharged from bankruptcy by effluxion of time under s 149 of the Bankruptcy Act 1966 (Cth) ("the Act"). In August 1997 the first [applicant] was again made bankrupt. In November 1997 the second [applicant] was again made bankrupt. By deed dated 9 February 1991 between the Trustee and the [applicants] the Trustee assigned back to the [applicants] their interest in a chose in action which the [applicants] and others had against Esanda at the time of their first bankruptcy, for alleged misrepresentation ("the Esanda claim"). The assignment was on the basis that the [applicants] would pay to the Trustee 80 per cent of any net proceeds they recovered from the action against Esanda. In November 1993 the Esanda claim was settled for the sum of $1.9 million. Of that sum $400,000 was applied in payment of legal costs. $1.5 million was paid into a trust account of a firm of accountants on behalf of the claimants, and was said to include payments of $15,000 on behalf of the [applicants]. Shortly thereafter the Trustee received 80 per cent of that sum, viz $12,000. The Trustee was dissatisfied with this outcome, and correspondence issued in relation to it. Ultimately, the Australian Government Solicitor ("AGS"), in a letter dated 25 May 1994 set out the terms of an agreement reached with the [applicants'] solicitor. That agreement provided for payment of the claims of various creditors of the first bankruptcy out of the proceeds of the Esanda claim, after which the balance of the monies were to be released to Willoughby Investments Pty Ltd. The letter concluded: "Once all matters are finalised, a deed will be drawn between the Official Trustee and the bankrupts and their companies to finalise all matters including a release of the Official Trustee's claim to shares in Willoughby Investments Pty Ltd and Contractor Services Pty Ltd." No such deed was ever prepared. It is common ground that: - the creditors referred to in the letter of 25 May 1994 were paid out of the proceeds of settlement of the Esanda claim; - there is no specific reference in the letter to a claim by a Mr Schneider. The significance of Mr Schneider will shortly appear; - at some stage in 1994 the balance of the proceeds of the Esanda claim were released to Willoughby Investments Pty Ltd, apparently with the acquiescence of the Trustee. On 12 September 1994 the [applicants'] solicitors, Verma Associates, wrote to the Australian Government Solicitor confirming: - that Mr Schneider had been given until 18 September 1994 to substantiate his alleged claim against the [applicants]; - that AGS "would appreciate" a statutory declaration that the [applicants] have no other creditors; and there was some discussion on the topic of annulment of the first bankruptcy. The letter also stated that the balance of the settlement of the Esanda claim should be released if the Schneider claim was not substantiated within the time allowed. The [applicants'] solicitor has asserted, and the Trustee has denied, that an assurance was given by the Trustee that provided all creditors of the first bankruptcy were paid, "annulment would follow as a matter of practice" under the Act. The sum of $4,000 was credited to the account of each of the bankrupt estates on 20 December 1993, reflecting the $12,000 received from the Esanda claim. On 26 February 1996 debits of $1,269.10, $1,270.09 and $1,269.09 representing Trustee's fees were posted to the respective accounts for the individual bankrupt estates resulting, in each case, in a nil balance. It is apparent from the AGS' letter of 23 October 1996 that earlier in that month there was some discussion with the [applicants] on the topic of annulment of the first bankruptcy. By that letter, AGS confirmed that the first bankruptcies could not be annulled until: - the issue of Mr Schneider's claim has been resolved; - Trustee's fees of about $1,845 for each of the three estates, totalling about $5,500 had been paid. On 22 December 1998 the [applicants] together with Mark Robert Willoughby commenced proceedings in this Court against Clayton Utz in Action No WAG 183 of 1998 ("the Action"). The Action was based upon acts or omissions of Clayton Utz said to have occurred in late 1993, prior to the discharge of the [applicants] from their first bankruptcy. The [applicants] and the first respondent ("the Trustee") proceeded upon the basis that the chose in action against Clayton Utz was after acquired-property in the 1990 bankruptcies (s 58(1)(b); 58(6)) and divisible property within s 116(1)(a). As such, the interests of the [applicants] in the chose in action vested in the Trustee, and remained vested in the Trustee notwithstanding the discharge of the [applicants] from bankruptcy: Daemar v Industrial Commission of NSW (1990) 99 ALR 789 at 793, 795. There was no challenge to any of these propositions in the present proceedings. The Trustee has power to sell or assign any part of the property of the bankrupt: s 134(1)(a). That power includes a power to sell or assign the chose in action against Clayton Utz either to the bankrupt or to a third party: Citicorp Australia Limited v Official Trustee in Bankruptcy (1996) 141 ALR 667. In March 1999 the [applicants] requested the Trustee to assign the right of action against Clayton Utz to the [applicants]. The precise circumstances in which this occurred were not the subject of evidence. The Trustee's administration of the first bankruptcy had long since been completed, and with the possible exception of Mr Schneider, the debts of the first bankruptcy had been discharged out of the proceeds of the Esanda claim. The only other matter which might stand in the way of an annulment of the first bankruptcy was the fees due to the Trustee as notified in AGS' letter of 23 October 1996. On 8 March 1999 the Trustee's solicitor wrote to Mr John Willoughby, and to the solicitors acting for the second respondent ("Lawcover"). The letter stated that the [applicants] have requested an assignment of the rights of action against Clayton Utz for a sum of $100 each plus a percentage of the proceeds of the action if successful. The letter advised that the Trustee does not wish to assign the rights of action for a percentage of the proceeds of the action, as this might conceivably lead to an argument that the Trustee should be liable for the cost of the action in the event that it is unsuccessful. For that reason, the Trustee advised that he was only prepared to assign the rights of action for a fixed sum payable within twenty eight days. The Trustee invited the [applicants] and Clayton Utz to submit any offers they might wish to make for the purchase of the causes of action which the [applicants] might have against Clayton Utz arising from the action against Esanda. Any such offer should be by way of a fixed lump sum payable within twenty eight days with the assignment only to take effect upon payment being made. The Trustee stated that he was likely to accept what he considered to be the best offer and did not propose to give either party a subsequent opportunity to increase its offer. Excluded from the chose in action proposed to be assigned were claims under the Trade Practices Act 1974 (Cth) which had apparently been brought outside the limitation period and which, in the assessment of the Trustee, had "demonstrably no prospects of success". By letter dated 19 March 1999 the [applicants] responded to the Trustee's invitation. B F and J F Willoughby each offered to pay her and his second bankrupt estate the sum of $100 and full payment of all creditors to a maximum amount of 50 per cent of all funds received as a result of the prosecution of the claim against Clayton Utz. On 24 March 1999 the Trustee informed Mr J F Willoughby that his offer of 19 March 1999 had not been accepted. An offer of $5,100 from Phillips Fox (the solicitors for Lawcover) had been accepted. The letter continued: "Pursuant to s 178 of the Bankruptcy Act 1966 you may appeal to the Court against the Trustee's decision." On 14 April 1999 the Trustee and Lawcover executed a deed ("the deed"). The deed recited that the chose in action against Clayton Utz was an after-acquired asset in the first bankruptcies. The deed provided that upon full payment being received of the sum of $5,100 payable under the deed, the Trustee would thereby transfer and vest the action pending in the Federal Court against Clayton Utz under action number WAG 183 of 1998, and underlying causes of action (apart from causes of action under the Trade Practices Act), "to" Lawcover as purchaser. The Trustee undertook not to transfer or vest the Trade Practices Act claims "to" any person and consented to those claims being dismissed. Clause 6 of the deed provided that if the "transfer and vesting" to Lawcover under the deed is set aside or declared invalid by a court for any reason, then the Trustee is to refund to Lawcover monies paid under the deed. The effect of the deed (assuming that it operates according to its terms), was to put an end to the [applicants'] claims against Clayton Utz both under the Trade Practices Act and under the general law in return for a payment of $5,100 from Clayton Utz's professional indemnity insurer. The $5,100 realised was applied to the estate of the [applicants] administered by the Trustee in respect of their joint debts and was appropriated in payment of the petitioning creditor's costs, fees due to the Trustee and other expenses. On 18 June 1999 the [applicants] applied to the Court under s 178 of the Act for a review of the Trustee's decision to transfer and vest the action WAG 183 of 1998 and underlying causes of action to Lawcover, and sought a determination that the decision was invalid." 4 On 29 August 2000 the first named applicant was discharged from bankruptcy by operation of law. Evidence 5 Affidavits of the second applicant together with exhibited documentary material including correspondence were admitted on behalf of the applicants. 6 For the respondents, affidavit evidence was admitted from M/s Coombs, an officer of the Official Reviewer and from Mr Goodman of the solicitors for the second respondent. The applicants' case 7 The first and second named applicants appeared in person. The third named applicant agrees with the submissions made by the second named applicant and agrees to be bound by the Court's decision in relation to the application. As the applicants were unrepresented their contentions made in writing and orally are set out at greater length than may normally be the case in order to ensure all their arguments are formulated for consideration. 8 The second named applicant filed a statement of issues in which he relied on the following two principal grounds: (1) Was there any relevant fraud or collusion between the first and second respondents in relation to the sale of the Action by the first respondent to the second respondent? (2) Was the offer of sale of the Action made on behalf of the applicants a better one than the offer accepted by the first respondent from the second respondent? 9 For the second respondent it was accepted these issues are justiciable in the sense referred to by Lee J in Re Wheeler; Ex parte Wheeler v Halse (1994) 54 FCR 166 at 169 – 170. 10 In relation to the issue of fraud or collusion, the applicants case is developed in the statement by reference to the following points: "1.1 By letter dated 4 February 1999, the solicitor for the First Respondent advised the Second Respondent that the Applicants had requested the First Respondents assign the rights to the action against the Clayton Utz back to the Applicants. 1.2 The Bankruptcy was the second bankruptcy of the Applicants. 1.3 The first Respondent was also the Trustee in the Applicants' first Bankruptcy. 1.4 In that Bankruptcy the Trustee assigned back to the Applicants their causes of action against Esanda Finance Ltd and certain other parties, for $100.00. 1.5 The Trustee, in that case, did not advise the defendants to those causes of action (Esanda) of the bankrupts' request for assignment of the causes. Nor did the Trustee put the causes of action up for tender or auction. 1.6 The particular point to which the First Respondent's solicitor refers is outlined in a letter from the First Respondent to the other parties of 8 March 1999. The point of law is misleading as it was overruled on appeal to the Full Court and is also taken out of context. 1.7 An experienced insolvency practitioner such as Mr Carles would be aware of this. 1.8 The Applicants requested certain details of the First Respondent in relation to its decision to sell the cause of action to the Second Respondent by letter of 19 March 1999. 1.9 Neither of the Respondents ever provided any answer to the Applicants in relation to the queries other than a suggestion by Mr Carles that if unhappy with the Respondent's actions, the Applicants could appeal under section 178 of the Bankruptcy Act. 1.10 The First Respondent then resiled from this position when it supported the Second Respondent's submission at the original hearing of this application regarding re Chirnside. 1.11 The Trustee, once aware of the Applicants' position regarding sale of the causes of action should have sought the court's directions with respect to the sale, as it now has done. 1.12 The First and Second Respondents knew at all material times the effect of the Second Respondent purchasing the causes of action would be to protect the Second Respondent from a potentially high award of damages and would be to the detriment of creditors and the Applicants. 1.13 The Respondents chose to ignore any benefit to the creditors that may result from assigning the causes of action to the Applicants. 1.14 There exists no good reason, in fact or at law, for the First Respondent to have sold the causes of action to the Second Respondent other than to benefit the Second Respondent as outlined above and to benefit the First Respondent by ensuring payment of his fees. 1.15 In the premises it is implied that the Respondents have colluded with respect to the formation, and execution, of the Deed and to the detriment of the Applicants. 1.16 The Second Respondent has procured the rights of the trade practices after the acceptance of its bid. This section of the chose was not made available to the Applicants as the Trustee has erroneously told the Applicants that due to time constraints it had "demonstrably no prospects of success"." 11 The issue of which offer was better is developed in the statement in the following way: "2.1 The offer made by the Applicants is the only offer that is of any benefit to creditors and the bankrupts and it is this dual function that ought to guide the Trustee in administering the estate. (Citibank/Cirillo F.C.) The offer of $5100 accepted by the Trustee triggered a $2000 administration fee and substantial legal costs which the Trustee knew was a likely occurrence as it was put to the Applicants when they were notified of the Second Respondents successful tender that an appeal was their only avenue of redress. 2.2 The acceptance of the Second Respondent's offer was made prior to the Trustee responding to a legitimate enquiry made by the Applicants in regard to the status of the creditors in the bankrupt estate of the Second and Third Applicants and without properly informing the Applicants of what amounts were owed by each of the Applicants in the estate in which the Trustee was determined to conduct the tender of the chose. 2.3 There are now more fees outstanding in the "joint estate" of the Applicants than was owed prior to the Trustee accepting the Second Respondent's offer and this appraisal does not include any legal fees incurred as a consequence of this act. 2.4 The Applicants offered a chance for all the creditors, including the Trustee to have all claims fully satisfied and at no risk or expense to any party accept the Applicants and it is for this reason that the Applicants' offer ought to have been preferred by the Trustee." 12 The second named applicant also filed written submissions (described as "Summary of Argument") and supported them by oral submissions. The written submissions canvassed many matters of evidence and no regard has been given to those portions of either form of submission which seek to state matters of evidence. 13 Turning to the written submissions the following grounds were relied upon to contend that the Trustee erred in making the decision: (1) The Trustee treated the bankrupts as one entity whereas Michael Willoughby was not made a bankrupt for a second occasion. (2) The offer accepted by the Trustee was inferior in that the interests of all parties who stand to benefit from the Action proceeding successfully have been ignored; namely the creditors involved in the second bankruptcies of the first two named applicants and the applicants themselves. (3) The Trustee proceeded on a wrong basis in considering that the applicants' offer carried with it the risk that a loss of the Action would lead to the creditors somehow being seen as stakeholders in the Action and liable to be pursued for costs by the second respondent. (4) The Trustee's decision had no regard to the second bankruptcies of the first two named applicants even though the conduct complained of in the Action caused the second bankruptcies. (5) The decision meant that no effort was made to maximise the return to all creditors. (6) The effect of the decision is to allow the defendants in the Action or their agents to retain ownership of the rights of the Action so that they will in effect be rewarded for what is alleged misleading conduct. 14 The written submissions support these contentions by reference to Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 141 ALR 667 and opinion said to be there expressed that the sale of any right of action to a respondent which would bring about the termination of an action was a course viewed unfavourably. 15 Examination of the transcript of the second named applicant's oral presentation shows the following contentions having been made: (1) In their letter of 19 March 1999 to the Trustee the applicants, in addition to making their offer, asked critical questions of the Trustee. In particular they asked: · what interest did the Trustee have in their 1990 estate given they were discharged in 1994? · what relationship did any of the creditors in the second bankruptcies of BF & JF Willoughby have to do with the Action? Additionally it was stated in the letter that they protested against the auction of the Action and wished to have their day in court on it. 16 In this context the applicants' case points s 170(2) of the Act which reads: "The trustee shall, at the request of the bankrupt, furnish to the bankrupt information reasonably required by the bankrupt concerning his property or affairs" It is submitted that in the period following this letter the Trustee conducted a continuous correspondence with the second respondent but did not respond to the queries made on behalf of the applicants. The next communication to the applicants by the Trustee was the letter from the Trustee dated 24 March advising of his decision. For the applicants it is said that if the Trustee had been frank and honest he would have been prompted by the questions in the letter of 19 March 1999 and the applicants' offer of a percentage of the Action and would have advised the applicants that if the outstanding amounts in their estate were paid off, no auction of the Action would have been required. It is further said this is particularly so when there was no commercial sense in sale of the Action where the sale consideration yielded a sum in the vicinity of the outstanding amounts. Furthermore, it made sense that Michael Willoughby having no subsequent bankruptcy, and Mark Willoughby, never having been bankrupt but having an interest in the Action, would have assisted the objective of contributing to payment of amounts due to preserve an action considered to be valuable to the applicants. (2) The creditors in the second bankruptcy had an interest in the success of the Action. The Trustee did not give weight to this consideration. (3) By the time the auction of the Action occurred it is said that it could no longer be claimed the Action was frivolous and vexatious (other than in relation to the trade practices claims) in that the pleadings had been amended. It is submitted that in any event the Citicorp case makes it apparent the Trustee cannot set themselves up as a judge of the prospects of success of the Action. Additionally, the Action could not both be frivolous and result in the Trustee being liable for costs (as the Trustee claimed in the letter of 8 March 1999 if the Action were unsuccessful). (4) The Trustee had an interest in avoiding the Action coming to trial. It is likely the Trustee would be joined in the Action at trial because it would be relevant why the Trustee made no attempt to investigate where $1.5 million of the settlement from the first bankruptcy went which Clayton Utz controlled. In an extension of this argument it is contended that, as the Action arises from the work of Clayton Utz in relation to the Deed of 9 February 1991 and the Deed assigned the Esanda action to the applicants, the Trustee now had no entitlement to it to effect a sale. This contention was not further supported and does not have any apparent merit. (5) The Trustee gave no weight to the applicants' part in obtaining the settlement from Esanda after a successful appeal to the Full Court. (6) A chose in action cannot be sold to the party against whom or against which the chose could be exercised adversely; that is, as Gaudron J said on the special leave application in the Citicorp case, the best that could be done was to seek a discharge of the cause of action or a release upon payment of a sum. If the interests in the chose were joint, sale could not discharge them. Second Respondent's contentions 17 For the second respondent it is accepted that the Court may intervene if the conduct of the trustee was incorrect, or if other conduct would be preferable and if justice and equity require the Court's intervention. The onus of establishing this is on the applicants. It is submitted the Court should not be too ready to intervene for fear of making the role and work of a trustee unmanageable. It is said not to be to the point that the judge who hears a review application might have acted differently from the way a trustee did or with the benefit of hindsight. The question is whether it is just and equitable that the Court should afterwards intervene in some fashion. See Healey v Prentice (No 2) (2000) FCA 1598 per Madgwick J at [21]; Macchia v Nilant (2001) FCA 7 per French J at [36] – [38]. 18 It is said that the Court in applying s 178 faces a two tiered process. The first question is whether a justiciable issue is made out. The second is whether justice and equity requires the Court's intervention. Fraud or collusion 19 It is submitted for the second respondent that fraud and collusion must be distinctly alleged and distinctly proved. It is not allowable to leave fraud and collusion to be inferred from the facts: see Davy v Garrett [1877] 7 Ch D 473 at 489 per Thesiger LJ, cited with approval in Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255 per Ipp J at [35]; and Willoughby v Official Trustee in Bankruptcy [1999] FCA 1715 per RD Nicholson J at [21]. 20 As to fraud, what is required is evidence of deliberate dishonesty. It is submitted there is no evidence of fraud in that sense in any of the papers before the Court. 21 As to collusion, it is said that it is required that there be an agreement between two or more persons to act to the prejudice of a third party, or to effect some other improper purpose. The power of the Trustee to transfer the causes of action to the second respondent is beyond question – see Willoughby v Official Trustee in Bankruptcy (2000) FCA 757 at [12] – so there was no improper purpose. For there to be collusion in a relevant sense, it must be shown that the respondents intended to cause detriment to the applicants. 22 On this evidentiary question it is then submitted for the second respondent that it undeniably intended to bring the applicants' claim against Clayton Utz to an end, and reached an agreement with the Trustee for that purpose, but that does not amount to collusion in any relevant sense. The respondents were not motivated by any desire to injure the applicants. The first respondent was motivated solely by concerns of effectively and efficiently realising an asset in the proper administration of the estates while avoiding the cost of defending a claim for a successful defendant's costs of the action. It is said it can be inferred that the second respondent was motivated solely by the protection of its commercial interests as the insurer of Clayton Utz. There is no evidence that either respondent was motivated by any desire to injure the applicants or to effect any other improper purpose. 23 Turning to the points made in the applicants' statement of issues, I accept the submission for the second respondent that pars 1.2 – 1.7, 1.10, and 1.11 are patently irrelevant to the question of collusion (and indeed to the wider question of whether it would be just and equitable that the Court should set aside the deed). 24 It is then submitted for the second respondent that the allegations in the remaining paragraphs (if true) do not support any implication of collusion in any relevant sense nor support the intervention of the Court. Which was the better offer 25 It is submitted that the applicants' offer was $100.00, plus 50% of all funds received, from each of the first and second applicants, and nothing from the third applicant. The second respondent's offer was $5,100.00. A finding that the applicants' was the better offer requires that the applicants satisfy the Court that there was (at least) a probability that the amount ultimately payable by the first and second applicants would exceed $5,100.00 by a margin sufficient to justify both the dual risks of non-recovery and defending a claim for costs, and the considerable delay before any having prospect of receiving payment. The second respondent's offer is therefore said to have been manifestly better. Furthermore, it is submitted that there is nothing which the applicants raise in relation to this second issue requiring the intervention of the Court in the interests of justice and equity. First respondent's submission 26 Counsel for the first respondent supported the submissions for the second respondent. Scope of s 178 27 The scope of s 178 has been considered in passing by the High Court, to some greater degree by the Full Court and on a number of occasions by single judges of this Court. Its history and purpose was recently comprehensively reviewed by French J in Macchia v Nilant [2001] FCA 7. Without seeking to limit or inappropriately abbreviate anything that has been said in those prior authorities, I draw the following statement of principles from an examination of them: (1) The section confers "supervisory jurisdiction over the conduct of the trustee: Cummings v Claremont Petroleum (1996) 185 CLR 124 at 133 (Brennan CJ, Gaudron and McHugh JJ). It confers a power to "in substance" review the decision of the trustee: McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547. (2) However, despite the width of the power: (a) It is not necessary to find the existence of any unreasonableness, absurdity or bad faith in the decision of the trustee for the power to be exercised: Re Tyndall (1977) 30 FLR 6 at 9 per Deane J approved by the Full Court in Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 at 485. (b) It is not relevant whether the judge who hears an application under this section might or would have acted differently from the trustee: Healey v Prentice (No 2) [2000] FCA 1598. (c) It is not the case that the judge hearing the application is at large to remake the decision to which the application relates. The power is a judicial power of review, not an administrative power for substitute decision making: Re Wheeler. (d) It is not appropriate for the court to be too ready to intervene, for that will make the role and work of a trustee unmanageable: Healey supra. (3) The application of the section is to be determined (aside from the question of whether it is just and equitable to make an order) with regard to the following features: (a) The justiciable issue raised in the application: Re Wheeler at 170. (b) Whether the applicant has shown a ground on which the trustee's administration of the affairs of the bankrupt is to be reviewed: Re Wheeler at 170. (c) The statutory context in which the particular issue identified arises: Re Wheeler at 170. (d) Whether the trustee had adequate regard to the interests of the creditors of the bankrupt estate in question as a whole: Re Cirillo; Ex parte Official Trustee in Bankruptcy (1996) 65 FCR 576 at 585 per Branson J undisturbed on appeal in Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 141 ALR 667. (e) Whether the trustee properly considered the legitimate interests of the bankrupt: Cirillo at 585. (f) Whether the trustee properly considered the legitimate interests of other parties likely to be effected by the decision to which the application relates: Cirillo at 585. Having considered those matters the Court must form a judgment on whether there was "an adequate decision making process" (Re Wheeler at 171) and whether the Trustee did not "properly evaluate" the issue (Re Wheeler at 171). (4) In relation to a justiciable issue raised by an application concerning whether a trustee should have approved the assignment of a cause of action: (a) It is not necessary that a trustee can only assign such a cause if he or she is satisfied it has a realistic chance of success: Citicorp at 680. (b) However, the trustee or the court should not allow such an assignment to occur in a case where it is clear that the claim sought to be pursued by the bankrupt or other proposed assignee is frivolous or vexatious: Citicorp at 682. (c) Where a creditor or intervening party contends that an assignment should not be authorised because the proposed claim has no prospect of success, it is for that party to demonstrate the absence of any prospect of success: Citicorp at 683. (d) There is no obstacle to assignment of choses in action where one of the proposed defendants asserts a cross-claim: Citicorp at 684 – 5. (5) If the justiciable ground for review of the application is established then the court must consider what order is "just and equitable". 28 Examination of the language of s 178 discloses that the Court is required to take at least the following steps: (1) Identify the applicant for the exercise of the supervisory jurisdiction of the court – is it a bankrupt, a creditor, "any other person" or a discharged bankrupt? (2) Identify the relevant act, omission or decision of the trustee to which the application relates. (3) Find that the applicant is "affected" by the relevant act, omission or decision of the trustee. (4) Be satisfied that the act, omission or decision of the trustee was made in such a way that there is a justiciable ground for the exercise of the court's supervisory jurisdiction. (5) In the event it is satisfied that the ground is established, consider what order is "just and equitable" in the matter. Here there is no dispute concerning (1) – (3). The issues relate to (4) and (5). Whether onus discharged on fraud and collusion 29 I accept the submission for the second respondent that there is no evidence of fraud in any of the papers before the Court. 30 In relation to the issue of collusion, there is no evidence of any adverse intention displayed or open to inference from the letter of 8 March 1999 written on behalf of the solicitors for the first respondent setting out reasons why the Official Trustee sought to assign the rights of action and the basis on which that could occur. The same is the case in relation to the letter of 23 March 1999 in response. There is nothing in the evidence to show the elements necessary to establish collusive conduct. Furthermore, the evidence discloses proper purpose in the steps taken to sell the right of action. In my opinion the applicants' case does not make out the allegation of collusion. Whether applicants' offer shown to be better 31 The thrust of the submission for the respondents in relation to this ground is that the applicants have not discharged the burden of showing that their offer was better. That is, that there is nothing to demonstrate the probability that their offer would yield an amount in excess of $5,100.00. 32 There are four specific considerations raised in the submissions for the applicants which require separate consideration. Failure of trustee to respond to legitimate inquiry 33 The obligation on the Trustee to furnish to the bankrupt information reasonably required by the bankrupt does not impose on a trustee an obligation to obtain information which is in the possession of a third party: Re Cheeseman; Cheeseman v Waters (1997) 143 ALR 78; appeal dismissed (1997) 77 FCR 221. It follows that the information requested must be in the possession of or available to a trustee. 34 In the letter of 19 March 1999 written on behalf of the applicants in response to the letter of 15 March 1999 outlining the Trustee's intention to conduct a tendering process in respect of the Action it is clear that the applicants were making inquiries. Furthermore, the point of their inquiries was directed to information within the knowledge of or accessible to the Trustee. While it is the case that the letter includes an offer, reading the letter as a whole, it is clear that the offer is made only because of the insistence on "auction of the rights" and over the protests of the applicants that the matter would not go to court. Their attitude was clearly one which could have benefited from and been informed by a point by point response from the Trustee to those issues requiring a response. It may be that the omission to do so by the Trustee would itself found an application to the Court pursuant to s 178 of the Act. 35 However, it is in the realm of conjecture whether the preparation of the information in response by the Trustee would have occasioned the Trustee to adopt a different course of action to that reflected in the decision under review. Furthermore, no case has been made and no case is presently apparent that compliance with s 170 is a necessary precondition to the making by the Trustee of the decision under review. Indeed, the existence of the power of review in relation to the decision provides the opportunity for issues which might have been the subject of information requested but not supplied to be taken into account in assessing the justiciability of the issues raised in relation to the decision and whether any intervention by the Court would be just and equitable. 36 The major question asked in the letter of 19 March 1999 was what interest did the Trustee have in the 1990 estate of the abovementioned. The answer which could have been given as the correct answer would have been that the three applicants were not discharged from their 1990 bankruptcies until 16 January 1994. The consequence is that those rights of action became after-acquired property in the 1990 bankruptcies pursuant to ss 58(1)(b) and 58(6) of the Act and divisible property within s 116(1)(a). Commerciality of the offer 37 It is contended for the applicants that the offer of $5,100.00 triggered a $2,000.00 administration fee and substantial legal costs which the Trustee knew was a likely occurrence. In short, it is submitted that on the face of it, the offer of $5,100.00 was not likely to yield a good position for all interested parties. 38 However, the up-front component offered by the applicants was only $200.00 as opposed to $3,500.00 offered by the bankrupts in Citicorp. The $200.00 would not have covered even the legal costs of the Trustee in dealing with the issue of assignment. 39 As will appear from reasons which follow, I do not consider that anything material in the Citicorp case hinged upon the quantum of the offer made by the bankrupts by way of initial payment. What was material was the prospects of success of return to the creditors and the bankrupts which the pursuance of the rights of action embodied. The point may also be made that the amount offered on behalf of Citicorp substantially exceeded the amount offered by the bankrupts in that case. However, it is to the prospect of return to creditors and the bankrupts from pursuit of the litigation to which it is necessary to turn. Consideration of the position of creditors and bankrupts - whether justiciable issue arises 40 For the respondents it is submitted that the onus in respect of this sub-ground could only be made out if it could be shown that in respect of the offer made by the applicants, it was more probable than not that the interests of the creditors of the bankrupt estate in question would be better met by the acceptance by the Trustee of the applicants' offer. 41 It is of assistance on this submission to turn to the Citicorp case. The facts were that Citicorp advanced $500,000.00 to a company on security of a debenture. Mr Cirillo and M/s Grieves were the only shareholders and directors of the company. Citicorp appointed receivers and managers to the company. An order for its winding up was made in the Supreme Court of South Australia on 11 March 1985. 42 On 14 January 1991 a statement of claim was issued by Mr Cirillo and M/s Grieves claiming damages from Citicorp consequent upon the appointment of the receivers as receivers and managers to the company. On 20 May 1992, on the application of Citicorp, the service of the summons and statement of claim in that action was set aside. 43 On 4 June 1992 the estate of Mr Cirillo was sequestrated. On 7 July 1992 notice of action No 80 of 1991 was served upon his trustee in bankruptcy. 44 On 7 April 1993 the estate of M/s Grieves was sequestrated. On 20 June 1995 Mr Cirillo was discharged from bankruptcy by force of law. 45 On 10 September 1995 he offered to purchase from the official receiver for $2,000.00 all rights in the chose in action which vested in the trustee upon his bankruptcy in respect of action No 80 of 1991. M/s Grieves made a similar request. Citicorp was advised of the offer to purchase but vigorously opposed it. 46 On 20 November 1995 the trustee advised creditors of the bankrupt estate of Mr Cirillo of his offer. Of the 38 creditors to whom the advice was sent, only 5 responded. Creditors with debts to the value of $146,201.00 were in favour of accepting the offer, one creditor was uncommitted, and one creditor claiming debts of $463,526.00 opposed acceptance. 47 On 12 December 1995 the trustee applied to the court for directions. 48 On 9 January 1996 the solicitors for Citicorp offered on behalf of their client to pay $3,500.00 to the trustee for the absolute discharge of any claim which he may have in his capacity as trustee of the bankrupt estates of both Mr Cirillo and M/s Grieves against Citicorp or, alternatively to purchase such claims. 49 The consequence was that Mr Cirillo increased the amount of his offer to $3,500.00 plus 10% of any award of damages obtained. On 4 April 1996 the solicitors for Citicorp advised of their clients willingness to pay $10,000.00. 50 On 10 April 1996 the official trustee accepted Mr Cirillo's offer. Accordingly, the trustee amended the application to the court to seeking authorisation for the sale and assignment to Mr Cirillo. The total debts in his estate were $3.136 million including a proof of debt from Citicorp for $229,498.00. 51 The view of the trustee before the court was that it was only Mr Cirillo's more recent offer which could possibly give rise to a dividend payable to creditors in the two bankrupt estates. Therefore it was his offer which should be preferred. 52 The approach followed by the trial judge (Branson J), with which the Full Court agreed, was that "a trustee under the general law must exercise judgement so as to save the estate unnecessary expenditure of money, and that a trustee in bankruptcy is required to discharge the public duty imposed by the Act conformably with the trustee's obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt" (at 678). The Full Court considered that "as a matter of practical and commercial reality" this approach was likely in many, if not most cases, to provide a straightforward and expeditious way for the trustee to administer the estate "with the minimum of risk and expense to the estate, while at the same time retaining for the estate some prospect of a cost free gain from the creditors" (at 678). It there continued: "Where allegations by the bankrupt give rise to the need to investigate complex commercial dealings it will often be impossible for the bankrupt to demonstrate, or for the trustee or creditors to form a view about, the reasonable prospects of successfully prosecuting a claim until those investigations have been carried out…Until issues of credit, and major conflicts in the evidence are resolved, the mass of information now available does not enable a meaningful view to be formed as to which of the factual allegations made by Mr Cirillo and M/s Grieves are well founded. The information does, however, indicate that if the major allegations of fact made by Mr Cirillo have substance the legal position generally and the precise identification of all available causes of action in particular, is, to say the least, complex…The cases will be few where some decisive point exists on which the trustee or the court can be satisfied that the claim has no reasonable prospect of success." 53 In arriving at this view the Full Court referred (at 678) to the general duties of a trustee in bankruptcy summarised by another Full Court in Adsett v Berlouis (1992) 37 FCR 201 at 208 (per Northrop, Wilcox and Cooper JJ) as follows: "A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt's estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules 1968 (Cth). The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act: see Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 at 329." 54 In the Citicorp case, as here, the prospects of claims arose out of facts rendered unusually difficult to assess because of the date at which they occurred and the barring of some causes of action by time limits contained in the Trade Practices Act 1974 (Cth) and otherwise. The Full Court considered that the practical approach adopted by the trial judge recognised these difficulties. On the question whether the court was required to carry out the painstaking investigation (for which Citicorp contended), the Full Court held that there was a consistent line of authority supporting the approach followed by the trial judge. A limitation to that would be where it is clear that the claim sought to be pursued by the bankrupt or other proposed assignee is frivolous or vexatious (at 682). Furthermore, the Full Court accepted that where a creditor or intervening party contends that an assignment should not be authorised because the proposed claim has no prospect of success, it is for that party to demonstrate the absence of any prospect of success (at 683). Later, the Full Court said that the offer by Mr Cirillo was the only offer that held out a prospect of return to creditors and, therefore it was a reasonable and appropriate decision for the trustee to prefer that offer. 55 In my view this review of the reasoning of the Full Court in the Citicorp case demonstrates that the way in which the submissions for the respondents describe the onus in relation to this aspect of the application cannot be accepted. It is not the case that the applicants had to show that the offer made by them had about it such a degree of certainty that it could be said it was more probable than not that the interests of the creditors would be better met by the acceptance of the applicants' offer. The fact was that the applicants' offer was the only claim which held out the prospect of a return to creditors and the bankrupts. It has not been contended that the applicants' claim (in its non trade practices elements) was frivolous or vexatious. In short, there is nothing which shows that acceptance by the Trustee of the applicants' offer would not have provided a straightforward and expeditious way for the Trustee to administer the estate with the minimum of risk and expense to the estate, while at the same time retaining for the estate some prospect of a cost free gain for the creditors. 56 The Trustee, however, did not take that approach. The Trustee accepted the offer made on behalf of the second respondent. That offer did not include the prospect of a free gain for the creditors or the bankrupts. It is to be borne in mind that the trustee in Citicorp accepted the offer of Mr Cirillo in the amount of $3,500.00 plus 10% in preference to the offer made to Citicorp of $10,000.00. In that factual scenario it is apparent it was the percentage and the prospect of return to creditors (and the bankrupts) which weighed heavily. It not having weighed heavily here, it seems to me that the justiciable nature of the issue is established and that it is appropriate for review. There is nothing to take the matter here outside the general approach approved by the Full Court in Citicorp. 57 In relation to the question of whether the Action had no prospect of success, the Trustee's solicitor had considered the statement of claim. The second respondent made submissions in relation to it. The Trustee decided it could not be said there were demonstrably no prospects of success (except in relation to the Trade Practices causes of action precluded on limitation grounds). Here it is the case that the Trustee formed a view on the prospects of success of the Action and considered them to be low. However, the reasoning of the Full Court in Citicorp and its reference to the decided line of authority accepted the position that no trustee was likely to have the resources to undertake the painstaking investigation necessary and to form the final judgments needed to reach a decisive view on that matter. For a trustee to do so and to not permit the prospects of success to be properly pursued was to fail to recognise the importance of allowing the existence of even some prospect of a cost free gain to creditors to be fully explored. Indeed, this is frankly accepted in the submissions for the first respondent which conclude that "the Trustee is entitled to form a view as to the prospects of the litigation being fruitful although that view will inevitably be based on superficial grounds". 58 It was submitted that if the Court reaches the view that the Trustee's decision should be reviewed, nevertheless it should be seen that the Trustee made a correct decision insofar as it decided that the Trade Practices Act causes of action should not be assigned to anyone because they had demonstrably no prospect of success by virtue of the limitation period having expired. I do not consider this requires any exception to be made by the Court from the subject matter of the review. Rather, those causes of action would fall for assessment among the issues relating to the prospects of success of all causes of action. 59 The Trustee expressed concern at the possibility of being liable for costs in the event of an unsuccessful outcome. It is said this concern existed because the Court has a discretion to award costs against a non-party to proceedings who stands "behind" the named litigant and stands to gain from an action. While that may have been a legitimate consideration for the Trustee to have in mind, in my opinion it could not have outweighed the important possibility that the claim in Action contained in it "some prospect of a cost free gain for the creditors" (at 678). The Trustee was bound to give paramountcy to that factor. 60 I do not consider that the Citicorp decision can be relevantly distinguished on the basis that Citicorp was a major creditor as well as the defendant in the action sold, whereas here the second respondent is not a creditor. The ratio of the reasoning of the Full Court in approving the approach of the trial judge has equal application in either situation. I accept that the Citicorp decision does not have as its ratio that a trustee must accept the bankrupt's offer in preference to the defendant's offer in every case. The question is, however, whether the trustee, having considered both offers, has made a choice in relation to which it can be said that a justiciable issue arises. In my opinion the reasoning of the Full Court in Citicorp, even though it had addressed a different statutory base, provides the ratio applicable to the review pursuant to s 178. - whether just and equitable to intervene 61 There are two interrelated matters which make it just and equitable that the Court should intervene. 62 The first is that the Trustee was the principal creditor (and perhaps the only creditor) when the decision was made. It was in a position of conflict as between it and the bankrupts. That position had the consequence that the decision of the Trustee may have had undue regard to its recovery of its debt and too little regard to the interests of the bankrupts contrary to the duties of the Trustee as set out in Adsett and cited in Citicorp at 678. There is also the possibility of some remaining estate indebtedness to Mr Schneider. 63 Secondly, it is clear that the bankrupts have a considerable interest in the Action. The Trustee's decision gave no weight to the fact that the bankrupts stood the chance to possibly benefit from pursuing their rights in the Action. 64 Those considerations, involving as they do in each case considerations of an equitable character, establish it is just and equitable that the Court should intervene to make orders setting aside the Trustee's decision and otherwise addressing the consequent issues. 65 There can be no question that the Trustee was entitled to and indeed required to take into account the fact that the applicants are not the only claimants in the Action. However, the party other than the applicants who is able to pursue the Action has no estate accountable to creditors and it cannot be surmised on what basis the financial arrangements between family members may be rearranged (as was suggested for the respondent). Whether cause of action was properly sold 66 Here the facts are that the sale of the chose of action was made to the professional indemnity insurer of the respondents to the Action. The effect of that would be that, even if the rights of the bankrupts thus vested in the second respondent were not extinguished, in practical reality they would not be exercised. 67 It was submitted for the applicants that the cause of action could not be sold to the party liable under the cause of action. That submission was based on dicta of Gaudron J on a special leave application in Citicorp and dicta of Burchett J on the hearing of the appeal in this proceeding. That submission was not answered for the respondents. If the issue was decisive to this application, I would have required submissions on it and considered whether or not the powers in FCR O 80 were available to enable counsel to be appointed to assist the applicants on the point. 68 This case is distinguished by the fact that the assignment of the Action does not affect the rights of the non-bankrupt plaintiff, Mark Robert Willoughby, who is at liberty to pursue the Action. 69 However, in view of the fact that I consider the Trustee's decision is properly open to review and intervention in the light of the reasoning of the Full Court in Citicorp, it is not necessary to examine this issue further. It would have been a relevant consideration if I had reached the view either that the second respondent's offer was better, or, that the offers could not be distinguished in that respect so that the question of whether the sale approved in the Trustee's decision was open at law would become a relevant consideration. Given that I reached the view that the decision should be reviewed on other grounds, it is not necessary that this issue be pursued. Conclusion 70 For these reasons I consider that the decision should be reviewed and that it is just and equitable for the Court to make orders in the circumstances. Opportunity will be given to the parties to file and serve draft proposed orders. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson. Associate: Dated: 20 June 2001 Mr John Willoughby appeared on behalf of the applicants Counsel for the First Respondent: Ms S Lloyd Solicitor for the First Respondent: Carles Solicitors Counsel for the Second Respondent: Mr P Van Hattem Solicitor for the Second Respondent: Freehills Date of Hearing: 20 March 2001 Date of Judgment: 20 June 2001