FEDERAL COURT OF AUSTRALIA Turner (Trustee) v Ackerman; in the matter of Schipper (Bankrupt) [2003] FCA 679 BANKRUPTCY – summons for examination and production of documents – whether in relation to examinable affairs of bankrupt – whether abuse of process or oppressive – bankrupt executor and sole beneficiary of deceased father's will – evidence that bankrupt involved in procuring mortgage of deceased's house shortly before deceased's death – summons directed to officers of lender and recipient of money lent – whether trustee in bankruptcy entitled to sue for recovery of property to augment deceased's estate – whether entitled to investigate subsequent transaction between lender and recipient of money lent – whether already in possession of information necessary to decide whether to sue – whether seeking to supplant proper process Bankruptcy Act 1966 (Cth) s 81 Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306, applied Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, considered Maguire v Makaronis (1997) 188 CLR 449, referred to Silvia v Thomson (1989) 87 ALR 695, cited Fried v National Australia Bank Ltd[2001] FCA 907 (2001) 111 FCR 322, followed Bridgewater v Leahy(Supreme Court of Queensland, Court of Appeal, Macrossan CJ, Fitzgerald P and Davies JA, 14 March 1997, unreported), followed Karounos v Official Trustee (1988) 19 FCR 330, cited Re Rothwells Ltd (No 2) (1989) 7 ACLC 576, followed Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301, considered Re Excel Finance Corporation Ltd; Wortherley v England (1994) 52 FCR 69, followed Re Nalanda Pty Ltd (in liq) (1983) 1 ACLC 1,000, followed Sent v Andrews [2002] VSCA 209, distinguished IN THE MATTER OF THE BANKRUPT ESTATE OF LEIF SCHIPPER; DENNIS ANTHONY TURNER (AS TRUSTEE IN BANKRUPTCY OF THE ESTATE OF LEIF SCHIPPER) v IAN ACKERMAN, DARRYN PACE, SCOTT VINE AND IRENA TASESKI V 7045 of 2002 GRAY J 4 JULY 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 7045 of 2002 IN THE MATTER OF THE BANKRUPT ESTATE OF LEIF SCHIPPER BETWEEN: DENNIS ANTHONY TURNER (as trustee in bankruptcy of the estate of Leif Schipper) APPLICANT AND: IAN ACKERMAN FIRST RESPONDENT DARRYN PACE SECOND RESPONDENT SCOTT VINE THIRD RESPONDENT IRENA TASESKI FOURTH RESPONDENT JUDGE: GRAY J DATE OF ORDER: 4 FEBRUARY 2003 WHERE MADE: MELBOURNE THE COURT NOTES THAT the trustee in bankruptcy, by his counsel, undertakes to the Court that the documents produced to the Court will be retained in the custody of the solicitors for the trustee in bankruptcy and be preserved and, subject to any order of the Court, returned upon completion of the examination of the person summoned, in the same order and condition as received. THE COURT ORDERS THAT: 1. The time for service of the notice of motion, filed on 30 January 2003, be abridged so as to enable the motion to be heard on 3 February 2003. 1. The motion the subject of paragraph 2 of the notice of motion, filed on 30 January 2003, be dismissed. 1. The documents produced to the Court be released into the custody of the solicitors for the trustee in bankruptcy. 1. The applicants on the motion pay the costs of the trustee in bankruptcy of the notice of motion. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 7045 of 2002 IN THE MATTER OF THE BANKRUPT ESTATE OF LEIF SCHIPPER BETWEEN: DENNIS ANTHONY TURNER (as trustee in bankruptcy of the estate of Leif Schipper) APPLICANT AND: IAN ACKERMAN FIRST RESPONDENT DARRYN PACE SECOND RESPONDENT SCOTT VINE THIRD RESPONDENT IRENA TASESKI FOURTH RESPONDENT JUDGE: GRAY J DATE: 4 JULY 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Leif Schipper was made bankrupt on 29 April 2002. Dennis Anthony Turner is his trustee in bankruptcy. On 3 December 2002, pursuant to s 81 of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"), Mr Turner applied to a registrar of the Court to summon the bankrupt and eight other persons, alleged to be "examinable persons", for examination in relation to the bankruptcy. Six of the alleged examinable persons were apparently officers of a corporation called Liberty Funding Pty Ltd ("Liberty"), one was apparently an officer of a company called Corporate Finance Pty Ltd and the eighth was Abraham Erenboim. The summonses sought were all issued on 13 December 2002. Each required the person to whom it was directed to produce certain documents at 9.30 am on 3 February 2003 and to attend for oral examination at 10.15 am on 5, 6 or 7 February 2003. 2 There was some difficulty with service of the summonses, not all of which could be served. Service was effected, however, on four of the officers of Liberty, Scott Vine, Irena Taseski, Darryn Pace and Ian Ackerman, as well as on the bankrupt, Mr Erenboim and the officer of Corporate Finance Pty Ltd. 3 By notice of motion filed on 30 January 2003, made returnable at 9.30 am on 3 February 2003, Messrs Ackerman, Pace and Vine and Ms Taseski sought orders abridging time for the service of the notice of motion and discharging or setting aside the summons directed to each of them. I heard the motions on the afternoons of 3 and 4 February 2003. At the conclusion of the argument, I had formed a clear view that the motion to discharge or set aside each of the four summonses should be dismissed. Because the proposed oral examinations were due to be held on the following day, I pronounced orders, including an order dismissing that motion, and reserved my reasons for judgment. These reasons for judgment are my reasons for making those orders on 4 February 2003. 4 Mr Turner's desire to examine the alleged examinable persons arises from his wish to investigate a particular transaction, said to be relevant to the extent of the assets of the bankrupt's estate. It is necessary to give a brief account of what is known about that transaction. 5 The bankrupt is the son of Josef Schipper ("the deceased"). On 7 October 2001, the deceased made a will, appointing the bankrupt as sole executor and sole beneficiary of his estate. He died on 28 January 2002, at which time he was aged 93. Between the making of the will and his death, the deceased executed an instrument of mortgage in favour of Liberty, to secure a loan of $200 000. The mortgage document is dated 14 November 2001, although there is a suggestion in the evidence that that was not the date on which it was actually executed. The mortgage secured the loan on the deceased's home in Caulfield ("the Caulfield property"). There is evidence that Liberty did not deal directly with the deceased, but dealt through the bankrupt. The bankrupt's signature appears on the mortgage document as witness to the deceased's signature. The proceeds of the loan were directed into a bank account in the name of a company of which Abraham Erenboim is a director. There is evidence that the deceased told the bankrupt's sister before his death that he was unaware that there was a mortgage on his house. 6 Probate of the will has not been granted. The bankrupt's sister has lodged a caveat against the grant of probate of the will and has instituted a proceeding in the Supreme Court of Victoria, seeking to have the will set aside. Counsel for Mr Turner informed me that, if that proceeding were to succeed, its effect would be to revive an earlier will under which the estate of the deceased was to be divided equally between the bankrupt and his sister. 7 On 29 April 2002, Mr Turner was appointed trustee in bankruptcy of the bankrupt's estate. Liberty subsequently sought possession of the Caulfield property, alleging that default in repayments of the loan had occurred on and after 14 July 2002. On 9 September 2002, the bankrupt, as executor of the will of the deceased, accepted an offer to purchase the Caulfield property for $650 000. Settlement of the sale was due to be completed on 16 December 2002. Liberty was willing for the sale to proceed, although it was not a mortgagee's sale. Because there had been no grant of probate of the will, Mr Turner, as the bankrupt's trustee in bankruptcy, obtained letters of administration ad colligendum bona of the estate of the deceased, to enable him to take the necessary steps to complete the sale and to hold the proceeds of sale pending the determination of the proceeding brought by the bankrupt's sister. The grant of letters of administration was dated 21 November 2002. Settlement of the sale of the property took place on 17 December 2002. Liberty provided a discharge of mortgage in exchange for payment in full of the amount said to be due under the mortgage, $232 224.44. 8 There is evidence that, at some time after the death of the deceased, Abraham Erenboim and Margaret Judith Erenboim purchased a property in Elsternwick and that their purchase was partly funded by a loan from Liberty. 9 By means of a subpoena, Mr Turner has obtained Liberty's file dealing with the mortgage of the Caulfield property. As a consequence of reading that file, he sought further information about the transaction from Liberty. In particular, he directed a series of written questions to Liberty. Some months of correspondence between Mr Turner's solicitors and Liberty's solicitors ensued. It is unnecessary to detail that correspondence. Its result was that Liberty refused to supply further information in response to the written questions. 10 It is certainly the case that neither the Caulfield property, nor the proceeds of its sale yet forms part of the estate of the bankrupt. In Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 312 – 314, the High Court of Australia made it clear that neither legal nor equitable ownership of property part of the estate of a deceased person vests in the named beneficiary at the time of death. The bankrupt had no proprietary interest in the Caulfield property, or in the proceeds of its sale, and will have none until the estate is administered. By s 58(1)(b) of the Bankruptcy Act, however, after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt in the trustee in bankruptcy. The expression "after-acquired property" is defined in s 58(6) to mean property acquired by, or devolving on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt. Accordingly, when the estate is administered, whatever part of the proceeds of sale of the Caulfield property devolves upon the bankrupt will become part of the bankrupt's estate. The administration of the estate will not be complete until the proceeding in the Supreme Court of Victoria is resolved. In any event, the proceeds of the sale of the Caulfield property are frozen by order of that court, pending the outcome of that proceeding. The share of the proceeds of the sale of the Caulfield property that will fall into the bankrupt's estate, pursuant to s 58(1)(b), will be quantified in part by the outcome of the Supreme Court proceeding. It will be either all or half. 11 Plainly, the after-acquired property of the bankrupt could be augmented if the mortgage transaction could be set aside on the ground that it was procured by undue influence, or other unconscionable conduct, to which Liberty was a party. Compare Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. Counsel for the four Liberty officers submitted that no order would be made setting aside the mortgage without requiring the doing of equity by the repayment of the monies lent with interest. He relied on Maguire v Makaronis (1997) 188 CLR 449, in which the High Court imposed such repayment as a condition of setting aside a mortgage. It is true that a court might require the doing of equity by that means. Whether it would do so would depend upon the circumstances that it found to have existed. It is noteworthy that no such order was made in Amadio. 12 It is clear on these facts that it is appropriate for Mr Turner to investigate the transaction relating to the mortgage of the Caulfield property. Mr Turner, as trustee in bankruptcy, has an entitlement, if not an obligation, to maximise the extent of the bankrupt's estate in the interests of the creditors. If he has a prospect of instituting a proceeding that would result in the setting aside of the mortgage and the augmentation of the bankrupt's estate, to the extent of all or part of the amount paid out of the proceeds of the sale of the Caulfield property to procure the discharge of mortgage, he should institute such a proceeding. At present, Mr Turner has not yet decided to institute such a proceeding. He does not presently have sufficient information as to the roles played by Liberty and Mr Erenboim in relation to the mortgage transaction. He is presently unaware of the extent of the knowledge of those parties of any disability or special disadvantage from which the deceased might have suffered when he executed the mortgage. He does not know the precise details of the relationship or relationships between the bankrupt, Liberty and Mr Erenboim that may have caused the bankrupt to procure his father's signature on the instrument of mortgage without Liberty apparently having any direct dealing with the deceased, and which caused the proceeds to be paid to a company of which Mr Erenboim was a director. The question whether any of the funds borrowed by means of the mortgage were used to purchase the Elsternwick property is as yet unanswered. Only if information can be obtained with respect to these matters would Mr Turner be in a position to decide whether to institute proceedings. 13 On the basis of these findings, it is necessary to turn to the specific grounds upon which the four Liberty officers sought to discharge or set aside the summonses for their examination. 14 One such ground was that an investigation into the procuration of the mortgage was not within the "examinable affairs" of the bankrupt, as that expression is used in s 81 of the Bankruptcy Act. By s 81(1A), a summons is to require the attendance of a person to be examined on oath "about the relevant person and the relevant person's examinable affairs." By s 81(1B), a summons may require the person to produce at the examination books in his or her possession relating "to the relevant person or to any of the relevant person's examinable affairs." The expression "examinable affairs" is defined in s 5(1) of the Bankruptcy Act as follows: "'examinable affairs', in relation to a person, means: (a) the person's dealings, transactions, property and affairs; and (b) the financial affairs of an associated entity of the person, in so far as they are, or appear to be, relevant to the person or to any of his or her conduct, dealings, transactions, property and affairs". 15 Two terms within this definition are also defined in s 5(1). They are: "'associated entity', in relation to a person, means: (a) an entity (other than a company) that is, or has been, associated with the person; or (b) a company that is, or has been, associated with the person at a time when the company is, or was, as the case may be, a private company; ... 'property' means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property". 16 It should also be mentioned that the word "entity" is defined as meaning a natural person, company, partnership or trust. Section 5C of the Bankruptcy Act contains provisions defining extensively the circumstances in which a natural person is associated with another person. Among those provisions is s 5C(2), which provides: "A natural person (the 'associate') is also associated with another person if the associate has acquired or disposed of property as a result of dealing with the other person." 17 These definitions are broad and should not be construed restrictively. 18 It is not open to me to hold that the deceased was an "associated entity" of the bankrupt. The deceased did not fall within any of the provisions of s 5C. In particular, although it might have been the case that the deceased disposed of property as a result of dealing with the bankrupt, s 5C(2) would only operate to make the bankrupt an associate of the deceased. It does not have an element of reciprocity, and only operates where the "person" (in this case, the bankrupt), has acquired or disposed of property as a result of dealing with the associate. 19 Nevertheless, the proposed examination does relate to the bankrupt's own dealings, transactions, property and affairs. Unless the words "dealings", "transactions", "property" and "affairs" are given artificially narrow meanings, each is apt to apply to the events of which Mr Turner has some knowledge. It appears from the evidence so far available that the bankrupt had dealings or transactions with the deceased, when he procured the execution of the mortgage document, even though those dealings or transactions did not result in the acquisition or disposal by the bankrupt of any property. The bankrupt may well have had dealings or transactions with Mr Erenboim or his company, in consequence of which the funds borrowed on the security of the Caulfield property were paid into the bank account of the company. As I have already said, the likelihood of the devolution on the bankrupt of money, as a result of whichever of the deceased's wills was operative at the time of his death, will determine the size of the bankrupt's estate. Questions directed to establishing the amount of money coming to the bankrupt's estate from the estate of the deceased go to the property or affairs of the bankrupt. They are certainly within the definition of "property" in s 5(1), which expressly includes future property and contingent property. In the absence of complete knowledge of the parts played by the bankrupt and other parties to the mortgage transaction, it is legitimate to conduct an examination of the kind contemplated on the basis that what is sought to be discovered by the examination concerns the bankrupt's examinable affairs. It is not to the point to say, as counsel for the Liberty officers attempted to do, that the only dealing was between Liberty and the deceased. 20 It was suggested that, to the extent to which documents were sought, Mr Turner already had them, by virtue of having received Liberty's file. That may be the case, but the truth of it cannot be known until each recipient of the summons is asked on oath as to whether he or she has any further documents. The mere assertion that all the documents have already been handed over is insufficient. 21 Objection was taken to the production of documents concerning the mortgage over the Elsternwick property. The objection was on the basis that that transaction could not be connected to the bankrupt's examinable affairs. The findings I have already expressed refute this argument. An examination of documents relating to that transaction might well assist in casting some light on the part played by Mr Erenboim in the transaction relating to the mortgage of the Caulfield property. It may cast light on the question whether any of the funds borrowed on the mortgage of the Caulfield property can be traced into the Elsternwick property. It must be remembered that, if Mr Turner is to bring any proceeding, it might be against Mr Erenboim or his company. There could be no objection to the use of documents procured from Liberty in a case brought against Mr Erenboim. 22 It was objected that Mr Turner would be unable to bring any proceeding in any event, because he only administers the estate of the bankrupt. He does not administer the estate of the deceased, for whom the bankrupt is named as executor. All that has vested in Mr Turner is a chose in action, being the bankrupt's right as a beneficiary to have the estate of his deceased father administered properly. Reliance was placed on Silvia v Thomson (1989) 87 ALR 695 at 696, as well as Official Receiver v Schultz, to which I have referred already. It was said, therefore, that any legal proceeding to seek to set aside the mortgage was a matter only for the executor, and not for the executor's trustee in bankruptcy. Since Mr Turner would be unable to bring any proceeding, the conduct of an examination to gather possible evidence for such a case would be an abuse of process and oppressive. I note that, at least in some circumstances, a beneficiary is entitled to bring proceedings in relation to a deceased estate when the executor fails or refuses to do so. The authorities are canvassed in part in Fried v National Australia Bank Ltd[2001] FCA 907 (2001) 111 FCR 322 at [180] – [193]. See also Bridgewater v Leahy(Supreme Court of Queensland, Court of Appeal, Macrossan CJ, Fitzgerald P and Davies JA, 14 March 1997, unreported) at 5 per Fitzgerald P. Standing in the shoes of the bankrupt as beneficiary, Mr Turner may well be able to bring proceedings to recover property that is properly part of the deceased's estate, provided the bankrupt as executor and all possible beneficiaries are parties to such proceedings. Even if there is a need for "special circumstances" before such proceedings can be brought, there is no ground for saying that a court would hold that such circumstances did not exist. 23 In relation to abuse of process and oppression, reference was made to a number of cases concerning the circumstances in which a summons under s 81 of the Bankruptcy Act (or equivalent legislation relating to corporations) will be refused, or the summons will be set aside, on the basis of an abuse of process. The cases included Karounos v Official Trustee (1988) 19 FCR 330, Re Rothwells Ltd (No 2) (1989) 7 ACLC 576, Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301 and Re Excel Finance Corporation Ltd; Wortherley v England (1994) 52 FCR 69. In Excel at 90 – 91, the Full Court said: "The Australian jurisprudence eschews the English distinction in favour of the more useful test of whether the person seeking the examination order has the purpose of obtaining a forensic advantage not otherwise available: see per Gleeson CJ in HongkongBank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 519. However, as Gleeson CJ also points out: '... the possibility that a forensic advantage will be gained does not mean that a making of an order will not advance a purpose intended to be secured by the legislation.' Street J … in Re Hugh J Roberts Pty Ltd (In liq) [1970] 2 NSWR 582 ... warned, of course, that the process should not be abused, giving, as an illustration, an attempt, where litigation was either contemplated or commenced, to summon the prospective or existing defendant's probable witnesses and examine them simply for the purpose of destroying their credit. So to do would involve using the examination process to obtain a forensic advantage in litigation, whether or not that litigation was yet commenced. Another, albeit related, case of abuse would be the conduct of an examination to enable a 'dress rehearsal of the cross-examination' to be instituted of a trial impending or contemplated. Other examples may be the use of an examination summons to obtain de facto discovery where a discovery order had been refused in proceedings already on foot. It is neither possible nor desirable to catalogue all the circumstances where use of an examination summons might constitute an abuse of process." 24 In Grosvenor Hill at 311 – 312, the Full Court said: "It is impossible in advance to lay down all of the relevant circumstances which will affect the exercise of a discretion to exercise the power or to subject it to limitations or conditions. Some of the relevant circumstances are set forth in the judgment of Nicholson J in Re Rothwells Ltd (No 2) (1989) 7 ACLC 576 at 587 – 589. However, in the final analysis, it must be left to the Court in any particular instance, guided by the evident statutory purpose of the section, to determine whether or not the information is relevant to the liquidator for the purpose of performing his statutory duty and whether and in what manner any proposed examinee needs to be safeguarded beyond the ordinary safeguards of court control of the examination process from any oppressive exercise of the power." 25 In Rothwells at 587 – 589, Nicholson J attempted to summarise the effect of the authorities. Among the propositions set down by his Honour, at 588, was the identification of the test for determining whether it will be just and beneficial to provide for a compulsory examination: "whether the examination is genuinely for the information of the liquidator to aid him in considering whether there is a cause of action upon which he will proceed; and the Court will be alive to the possibility of oppression where the application is merely to advance the action, whether actual or proposed." The quote is taken from Re Nalanda Pty Ltd (in liq) (1983) 1 ACLC 1,000 at 1,002. Instances Nicholson J cited of misuse referred to such things as overcoming a refusal to answer interrogatories or a refusal of leave to administer them, and the examination of prospective witnesses simply for the purpose of destroying their credibility. His Honour said that the basic rule is that the liquidator is not entitled to have a dress rehearsal of the cross-examination. 26 It is clear from what I have said that the present case falls squarely on the side of the divide favouring the conduct of an examination. Mr Turner proposes to examine the Liberty officers, as well as the other recipients of summonses, genuinely for his information to aid him in considering whether there is a cause of action upon which he will proceed. He is not merely advancing the action. As I have already pointed out, Mr Turner needs more information before he can decide whether to bring the proceeding. 27 A related objection was that an examination is for the purpose of providing information to a trustee who is largely ignorant about the affairs of a bankrupt. Counsel for the Liberty officers argued that Mr Turner already has the Liberty file relating to the mortgage of the Caulfield property and has access to information from the bankrupt, who witnessed the execution of the mortgage instrument. It was said that Mr Turner needs no further information to consider whether to mount a case. The purpose was merely to obtain pre-trial depositions, which is unnecessary and improper. Reference was made to Sent v Andrews [2002] VSCA 209 at [23] – [26] per Buchanan JA, with whom Vincent JA agreed. The findings I have already expressed are sufficient to refute this objection. The case is very different from Sent. Mr Turner does not yet know whether he can commence a proceeding and, if he can, against whom he should bring it. The examination contemplated is in no sense a dress rehearsal for a trial. 28 Counsel for the Liberty officers also argued that the size of the bankrupt's estate could not be increased by success in any proceeding, because of the requirement to do equity by repaying the amount of the loan with interest. I have already dealt with this argument. Even if it might turn out that the estate will not be augmented as I have suggested, there must exist the possibility that it will. One matter Mr Turner will have to consider, before deciding whether to bring a proceeding, is whether it is likely to be fruitless because of the requirement to do equity by repaying the outstanding amount of the mortgage loan. He does not yet have enough information to make that decision. If the case turned out to be within the Amadio principles, there might be no requirement to repay. 29 The remaining objection was that the proposed examinations were based on the assumption that the bankrupt would sustain his entitlements under the will, whereas the will was subject to challenge by the bankrupt's sister. I have also dealt with this point. Whatever might be the outcome of the challenge to the will of 7 October 2001, the bankrupt's estate will be augmented either to the extent of half of the deceased's estate, or the whole of it. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gray. Associate: Dated: 4 July 2003 Solicitor for the Applicant: Kahns Counsel for the Respondents: N Mukhtar QC and MK Gurvich Solicitor for the Respondents: Russell Kennedy Date of Hearing: 3 and 4 February 2003 Date of Judgment: 4 July 2003