Supreme Court New South Wales Medium Neutral Citation: Alan Maxwell Frost and Diana Catherine Fallon [2013] NSWSC 1619 Hearing dates: 25 October 2013 Decision date: 06 November 2013 Jurisdiction: Equity Division Before: Darke J Decision: (1)Pursuant to s 63 of the Trustee Act 1925 the Court advises: (a)That the plaintiffs would be justified in pursuing an appeal from the judgment of Perram J in Bovaird v Frost [2013] FCA 974 to the Full Court of the Federal Court on the grounds set out in annexure "A" to the Summons and in accordance with the advice of counsel dated 4 October 2013, subject to the qualification that if for any reason the application in this Court to amend the Statement of Claim in proceedings number 2010/41888 proceeds in advance of the said appeal and the contentious amendments are not allowed, thereby rendering the appeal futile, the executors would not be justified in continuing to pursue the appeal; and (b)That the plaintiffs would be justified in incurring costs in pursuing the said appeal in accordance with paragraph (a) above, with such costs to be recouped from the funds of the estate, subject to the qualification that such recoupment only occur in accordance with a direction given by a court with bankruptcy jurisdiction to the trustee in bankruptcy of the estate. Catchwords: EQUITY - trusts and trustees - applications to the court for advice - insolvent deceased estate - whether executor justified in pursuing appeal - where success on appeal might prevent expansion of scope of other litigation involving estate - judicial advice given that executors would be justified in pursuing appeal Legislation Cited: Bankruptcy Act 1966 (Cth) Family Provision Act 1982 Trustee Act 1925 Cases Cited: Bovaird v Frost [2009] NSWSC 337 Bovaird v Frost [2009] NSWSC 917 Bovaird v Frost [2013] FCA 974 Bovaird v Frost [2013] NSWCA 91 Bovaird v The Trustee of the Bankrupt Estate of Frost [2010] FCA 1159 Bovaird v The Trustee of the Bankrupt Estate of Frost (No 2) [2011] FCA 465 Frost and Fallon [2011] NSWSC 591 Frost v Bovaird [2012] FCACFC 60; (2012) 203 FCR 95 Frost v Bovaird (No 2) [2012] FCAFC 69 Macedonian Orthodox Community Church St Petka Incorporated v Bishop Petar (2008) 237 CLR 66; [2008] HCA 42 Category: Principal judgment Parties: Alan Maxwell Frost (First plaintiff) Diana Catherine Fallon (Second plaintiff) Representation: Counsel: N A Cotman SC with R J Carruthers (Plaintiffs) Solicitors: MBP Legal (Plaintiffs) File Number(s): 2013/310399 Publication restriction: Nil Judgment 1The plaintiffs (to whom I will refer as "the executors") are the executors of the estate of Maxwell Walter Allen Frost ("the deceased"), who died on 26 November 2002. By a Summons filed on 15 October 2013 the plaintiffs seek the advice of the Court pursuant to s 63 of the Trustee Act 1925. The advice is sought on the following questions: (a)Would the plaintiffs be justified in pursuing an appeal from the judgment of Perram J in the Federal Court in Bovaird v Frost [2013] FCA 974 to the Full Court of the Federal Court on the grounds set out in Annexure "A" to the Summons and in accordance with the advice of counsel dated 4 October 2013? and (b)Would the plaintiffs be justified in incurring costs in pursuing the said appeal, with such costs to be recouped from the funds of the estate, but subject to any direction given by a court with bankruptcy jurisdiction to the trustee in bankruptcy to pay such funds to the plaintiffs? 2As the second of those questions suggests, the estate of which the plaintiffs are executors is insolvent. After the completion of certain proceedings in this Court in 2009, the plaintiffs petitioned the Federal Magistrates Court to have the estate administered under Part XI of the Bankruptcy Act 1966 (Cth). Orders to that effect were made on 23 October 2009. Since that time the estate has been under the control of a trustee in bankruptcy. Accordingly, the executors do not have control of the funds of the estate, and cannot be paid any costs unless a direction to that effect is given to the trustee in bankruptcy by the court administering the bankruptcy. 3The estate has been bedevilled by litigation for some time. It is necessary, in order to describe the current circumstances facing the estate, to briefly summarise the course of that litigious history. 4By his last will, the deceased left the entirety of his estate (which was valued at approximately $2.4 million) to the Australian Cancer Research Foundation. In 2004, Monica Bovaird, a sister of the deceased, brought proceedings in this Court seeking orders pursuant to the Family Provision Act 1982. 5Further proceedings were brought in this Court by Monica Bovaird and her son Leon Bovaird in relation to a contract allegedly made by the deceased to the effect that he would pay certain aged care accommodation and other expenses for his sister, and lend a sum of money to her son for the purpose of financing the development of a residential property. 6All of those proceedings were heard by Brereton J in February 2009. His Honour delivered a judgment on 30 April 2009 in Bovaird v Frost [2009] NSWSC 337. His Honour delivered a further judgment on 4 September 2009 in Bovaird v Frost [2009] NSWSC 917. In summary, Brereton J found that the deceased had made a contract as alleged and had breached such contract. A substantial award of damages was made against the executors of the estate in favour of Monica Bovaird, and an award of nominal damages was made in favour of Leon Bovaird. Various orders for costs were also made against the executors of the estate. However, Brereton J refused applications that the costs payable by the executors be paid on an indemnity basis and, further, that the executors be denied indemnity from the estate in respect of their own costs and the costs which were payable by them. 7Monica and Leon Bovaird instituted appeals against aspects of the decision of Brereton J. 8In addition, Monica and Leon Bovaird, as creditors of the estate, commenced devastavit proceedings in this Court against the executors of the estate. These proceedings raise numerous allegations to the effect that the executors wrongfully paid away the assets of the estate. The devastavit proceedings (being proceedings number 2010/41888) remain on foot. 9Various applications were made in the Federal Court (the court administering the affairs of the bankrupt estate) in relation to the appeal proceedings and the devastavit proceedings. In short, these were applications for leave to proceed pursuant to s 249(3) of the Bankruptcy Act 1966 (Cth) and various applications made by the executors including an application for declarations in relation to their rights to be indemnified out of the estate in respect of their costs of defending those proceedings. 10These applications were heard by Perram J. His Honour delivered two judgments, these being: Bovaird v The Trustee of the Bankrupt Estate of Frost [2010] FCA 1159 and Bovaird v The Trustee of the Bankrupt Estate of Frost (No 2) [2011] FCA 465. In essence, his Honour gave leave to proceed with the appeal proceedings (save as to quantum of damages) and the devastavit proceedings, but rejected the claims by the executors that they were entitled to be paid their costs out of the estate. He also concluded that it was premature to make any determination as to priority as between the executors' right of indemnity and the trustee in bankruptcy's right of indemnity. 11The order made by Perram J in respect of the devastavit proceedings was in the following terms: The applicant is granted leave, nunc pro tunc, to proceed with Supreme Court of New South Wales Equity Division proceedings number 2010/41888. 12The executors, after obtaining judicial advice from this Court (see the judgment of Ward J, as her Honour then was, in Frost and Fallon [2011] NSWSC 591) pursued an appeal to the Full Court of the Federal Court. That appeal was allowed in part (see Frost v Bovaird [2012] FCAFC 60; (2012) 203 FCR 95). In particular, the Full Court directed that until determination of the appeal proceedings, or further order, the trustee in bankruptcy was justified in paying the executors' legal costs in relation to the conduct of the appeal proceedings. However, in relation to the devastavit proceedings, the Full Court upheld the decision of Perram J to the effect that the trustee in bankruptcy would not be justified in paying to the executors the costs they incurred in the defence of those proceedings. The Full Federal Court made formal orders, including as to costs, on 15 May 2012 (see Frost v Bovaird (No 2) [2012] FCAFC 69). In this regard, it should be noted that the Full Court dismissed cross-appeals brought by Monica Bovaird and Leon Bovaird including in relation to the conclusion that the leave to proceed with the appeal proceedings did not extend to seeking relief concerning the quantum of damages. It should also be noted that the Full Court agreed with Perram J that it was premature to determine the question of priority as between the executors and the trustee in bankruptcy. 13The appeal proceedings were eventually dismissed in April of this year (see Bovaird v Frost [2013] NSWCA 91). It appears that the appellants abandoned the grounds of their appeal save for the grounds concerning the amounts of the monetary judgments. However, in relation to those remaining grounds, Basten JA concluded (at [16]) that nothing had been placed before the Court to raise a doubt as to the conclusion of the Full Court of the Federal Court that the appeal in respect of quantum of damages would be an exercise in futility, and that accordingly, the appeals should be dismissed. In the course of reaching that conclusion Basten JA referred to the existence of the devastavit proceedings. His Honour noted, at [14], that the recovery in the devastavit proceedings, if entirely successful, would be in the order of $500,000, a figure less than the deficiency in the funds of the estate. In relation to the contention that the appellants proposed to make amendments in the devastavit proceedings which, if successful, might render the estate solvent, Basten JA said at [15]: ... It is apparent from the judgment of Perram J that the appellants would be required to return to the Federal Court to obtain leave in order to make a further claim in the devastavit proceedings. 14In August 2013 Leon Bovaird (on his own behalf, and as executor of Monica Bovaird's estate, she having died in 2011) filed a Notice of Motion in the devastavit proceedings seeking leave to amend, and also made an application to the Federal Court to "cross-vest" the proceedings to this Court and, to the extent necessary, obtain leave under s 249(3) of the Bankruptcy Act to amend the Statement of Claim in the devastavit proceedings. The application was heard by Perram J who gave reasons for judgment on 27 September 2013 (see Bovaird v Frost [2013] FCA 974). 15Section 249(3) of the Bankruptcy Act is in the following terms: (3) Except as provided by this Act, after an order has been made for the administration of the estate of a deceased person under this Part, it is not competent for a creditor: (a) to enforce any remedy against the estate in respect of a debt provable in the administration; or (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceedings in respect of such a debt or take any fresh step in such a proceeding. 16Perram J accepted (at [4]) that if s 249(3) applied in the circumstances then the proposed application to amend the Statement of Claim would be the taking of a fresh step. However, his Honour concluded that s 249(3) did not apply in the circumstances because the terms of the prior grant of leave (made on 3 May 2011, see paragraph 11 above) meant that the prohibition on taking a fresh step was removed and it followed that further leave was not necessary (see at [9]-[11]). 17His Honour further declined an application by the executors to vary the grant of leave so that certain of the amendments sought could not be pursued. Perram J was of the view that it was not the concern of the court of bankruptcy to superintend the behaviour of the parties to litigation relating to provable debts but was, rather, to ensure that the conduct of that kind of litigation is in the interest of the creditors as a whole (see at [20]). His Honour further expressed the view that conduct of the devastavit proceedings (as sought to be amended) would not directly affect the position of the estate, although there was a contingent risk that the pursuit of the amendment application may ultimately expose the estate to a future claim for indemnity from the executors (see at [24]-[27]). His Honour ultimately concluded (at [29]) that the estate was unlikely to suffer any real harm if the question of the proposed amendments was left to this Court. Accordingly, Perram J declined to vary the existing order for leave. 18The executors now seek judicial advice from this Court in relation to the pursuit of an appeal against the orders made by Perram J on 27 September 2013. In view of the time constraints for filing of appeals the executors filed a Notice of Appeal prior to the hearing date of their Summons for judicial advice. That Notice of Appeal is in substantially the same terms as the draft Notice of Appeal which is annexure "B" to the Summons. 19On the hearing, the material provided to the Court in support of the Summons consisted of a Statement of Facts, the draft Notice of Appeal, an Opinion of counsel (Mr Cotman SC and Mr Carruthers) dated 4 October 2013, and an affidavit of the plaintiffs' solicitor Mr Tony Bates sworn 15 October 2013 which attached various documents relevant to the litigation between the parties, including judgments, pleadings and affidavits. I was also provided with a letter from the solicitor for the trustee in bankruptcy of the estate dated 10 May 2012 which indicated that, at that time, the net assets of the estate were worth in the order of $765,000. The present size of the estate is not known to me, but it is likely to be a bit smaller than it was in May 2012. 20An affidavit sworn by Mr Bates on 11 September 2013 shows that since the conclusion of the proceedings before Brereton J, the executors have incurred legal costs of approximately $710,000 in the various proceedings (including the earlier judicial advice proceeding). About $500,000 of that amount was incurred in proceedings where the executors have the benefit of orders for the payment of the costs (to some extent at least) out of the estate. The remaining $210,000 has been incurred in the devastavit proceedings. It is conceivable, but by no means certain, that some or all of those costs will eventually become payable out of the estate as well. In addition, an amount for the costs of the trustee in bankruptcy will ultimately be borne by the estate. When account is further taken of the judgments for damages and costs in favour of the Bovarids, where the damages alone amount to almost $1.24 million, the position of the estate can be accurately described (as it was put to me by Mr Cotman) as dire. 21The application for judicial advice centres upon whether it is appropriate for the executors to proceed with the prosecution of the appeal which has been commenced. 22That question is, in my opinion, a question respecting the management or administration of the property of the estate within the meaning of s 63 of the Trustee Act. Whilst the property of the estate is now vested in the trustee in bankruptcy, the executors remain the executors of the estate. They are being sued, as such, in the devastavit proceedings. The costs which the executors incur in connection with those proceedings might ultimately be the subject of claims against the assets of the estate, pursuant to an exercise by the executors of a right of indemnity. The appeal would, if successful, reduce what would otherwise be the executors' costs of the devastavit proceedings. Pursuit of the appeal thus bears upon the extent of the executors' claim for indemnity. It may also have a bearing upon the issue of priority as between the executors and the trustee in bankruptcy in relation to the property of the estate. 23Accordingly, the jurisdictional bar to relief under s 63 of the Trustee Act is in my view satisfied (see Macedonian Orthodox Community Church St Petka Incorporated v Bishop Petar (2008) 237 CLR 66; [2008] HCA 42 at [58]). 24It then becomes necessary to consider whether to exercise the discretion given to the Court by s 63, to give its opinion, advice or direction on the question. That discretion is confined only by the subject matter, scope and purpose of the legislation (see Macedonian Church Case (supra) at [59] and [196]). The paramount consideration is the interests of the trust estate (see Macedonian Church Case (supra) at [104] - [105], [107], [125], [196] - [197]). 25It is the opinion of counsel that there are reasonable prospects of success on the appeal against the decision of Perram J. A number of arguments are raised, but these may be fairly reduced to three principal contentions. 26First, it is contended that Perram J erred (at [9]-[12]) in interpreting his earlier grant of leave to proceed as being "at large", and thus sufficient to cover pursuit of the expanded devastavit proceedings. It is put that a grant of leave to proceed, nunc pro tunc, with "Supreme Court of New South Wales Equity Division proceedings number 2010/4188" should be construed as leave to pursue the proceedings "as then constituted", which is determined by the scope of the Statement of Claim, and should not be construed as leave to pursue the proceedings even if their scope is expanded (perhaps greatly) by amendments to the Statement of Claim. It is further contended that, on its true construction, s 249(3)(b) does not permit an order for leave which would obviate the need to seek leave before a "fresh step" is taken in any legal proceedings. Otherwise, it is put, the intended operation of s 249(3)(b) would be rendered nugatory. 27Secondly, it is contended that Perram J erred in refusing the executors' application for the terms of the leave to be varied so that the proposed amendments that raised new matters would not be able to be pursued. It is put that Perram J (at [24]) seemed to regard a "direct" and perhaps immediate effect upon the estate as necessary in order to warrant a variation of the terms of the leave, and this was an unjustified "gloss" upon s 249(3)(b). 28Thirdly, it is contended that Perram J erred (at [27]) in that he "excluded from consideration" the possibility that the proposed amendments might be allowed, resulting in the executors incurring significant additional costs which might ultimately be claimable out of the estate. It should be noted in this regard, however, that his Honour further stated (at [28]) that in any event he did not have material before him to enable an assessment to be made of such a potential liability of the estate. 29Having considered the opinion of counsel, and the various contentions raised in support of the appeal, I am prepared to accept that those contentions are properly arguable and that the appeal, particularly insofar as it is based on the first of the contentions referred to above, has reasonable prospects of success. However, the question whether the executors would be justified in pursuing the appeal is not to be answered simply by reference to those factors. It is also necessary to consider broader considerations, such as the costs and benefits which are likely to accrue in the event that the appeal succeeds, and in the event that the appeal fails. 30Viewed broadly, the aim of the appeal is to prevent an expansion of the scope of the devastavit proceedings. Whilst there is undoubtedly a personal interest of the executors involved, the interests of the estate are, for the reasons referred to above, also involved, particularly insofar as the expansion of the scope of the devastavit proceedings would likely give rise to significant additional costs which might ultimately be borne by the estate. 31The amendments which are sought to be made to the Statement of Claim are numerous, but only some of them would, if allowed, expand the scope of the proceedings. However, it seems to me that some of the amendments would, if allowed, expand very substantially the scope of the case. 32The present Statement of Claim seeks damages in respect of seven alleged defaults. I was informed that a defence has been filed and that the parties have filed their evidence. The proposed Amended Statement of Claim adds a further four alleged defaults of the executors. These are: (a)the incurring of costs in defending the proceedings before Brereton J and the payment of such costs out of the estate; (b)the failure to account for an asset of the estate, namely, a Barina motor vehicle; (c)the incurring of costs in the various Federal Court proceedings and seeking to have such costs paid out of the estate; and (d)the incurring of legal costs in various proceedings (including but not limited to those referred to in (a) and (c) above) for the purpose of thwarting the Bovairds from recovering any benefit from the estate. 33 In addition, the relief claimed is expanded to include, for example, an account and inquiry, part of which would involve the appointment of a referee to conduct an inquiry and report to the Court concerning the amounts of costs payable pursuant to various orders for costs. 34The particulars of loss and damage are also sought to be amended to include a claim for loss of opportunity to develop a residential property. 35It appears from an affidavit sworn on 7 August 2013 by a solicitor for the Bovairds, Mr Brenden Miller, that the proposed amendments identify a "three stage procedure to resolve the dispute". The threes stages are, first, a hearing to determine whether the executors should account on either a wilful default or common form basis (and, if so, to what extent) in respect of the relevant dealings with the estate; secondly, an account and inquiry, part of which would involve a reference out to a costs consultant and another part of which would be concerned with "the complex assessment of damages" in respect of the loss of the opportunity claim; and thirdly, a hearing by the Court as to the final relief that should flow. 36The executors argue that, for various reasons, some of the amendments ("the contentious amendments") should not be permitted. (These are amendments other than those identified in paragraph 14 of the written submissions of counsel for the executors dated 10 September 2013 relied upon at the hearing of the application before Perram J). For example, it is said that some are objectionable attempts to re-litigate decisions as to costs made by Brereton J, the Court of Appeal and the Full Federal Court or, further, that the proposed account and inquiry misconceives the true nature of such, which is to be consequential upon rights established at a trial. The executors contend that the determination of any questions as to whether costs were properly incurred would have to take place in a trial. 37Certain of these objections appear to have some force, and it may well be that some, or even all, of the contentious amendments will ultimately not be permitted by this Court. However, having regard to the way the matter has proceeded (as to which see the judgment of Perram J at [30]), it is reasonable to assume that any appeal to the Full Federal Court is likely to be determined prior to the hearing of the amendment application in this Court. Moreover, and as pointed out by Mr Cotman, the factors which the Federal Court would take into account if it were considering the question whether the Bovairds should be given leave to proceed with the amendment application differ from (and are wider than) those which this Court would take into account on a question of leave to amend the Statement of Claim. In these circumstances, the pursuit of the appeal offers some prospect that the devastavit proceedings will not be able to be expanded beyond their present scope. 38Perram J (at [34]) expressed the views that the litigation was "a disaster for everyone involved" and "the sooner it is settled and the executors and judgment creditors can disentangle themselves from the litigation nightmare in which they now find themselves ensnared the better". I agree. 39I have therefore given careful consideration to whether giving advice as sought by the executors would merely serve to facilitate yet another chapter in the dispute, and thus whether it would be better to withhold such advice. 40In the end, I have decided that, on balance, it is appropriate that I give advice to the executors to the effect that they would (subject to one qualification) be justified in pursuing the appeal to the Full Federal Court. 41It seems to me that the proposed amendments to the devastavit proceedings would, if permitted, so expand the scope of that case (and so delay its determination) that very considerable additional legal costs would need to be incurred. That raises a very real prospect of the already poor estate facing significantly greater liabilities than it already has. I recognise, of course, that the costs of the appeal (particularly if it fails) will also have such an effect, but this is likely to be on a much smaller scale. 42The appeal offers the possibility that the devastavit proceedings will not be expanded in scope. Further, whether the appeal is successful or not, the determination of the appeal will provide certainty as to whether it is open to the Bovairds to pursue in this Court the proposed expansion of the devastavit proceedings. 43In all the circumstances, I conclude that the executors would be justified in pursuing an appeal from the judgment of Perram J in Bovaird v Frost [2013] FCA 974 to the Full Court of the Federal Court on the grounds set out in annexure "A" to the Summons and in accordance with the advice of counsel dated 4 October 2013. However, I think it is appropriate to add a qualification to the effect that if, for any reason, the application in this Court to amend the Statement of Claim proceeds in advance of the appeal, and the contentious amendments are not allowed, thereby rendering the appeal futile, the executors would then not be justified in continuing to pursue the appeal. 44I also conclude that the executors would be justified in incurring costs in pursuing the said appeal (subject to the stated qualification) with such costs to be recouped from the funds of the estate, subject to the further qualification that such recoupment should only occur in accordance with a direction given by a court with bankruptcy jurisdiction to the trustee in bankruptcy of the estate. 45The orders of the Court will be: (1)Pursuant to s 63 of the Trustee Act 1925 the Court advises: (a)That the plaintiffs would be justified in pursuing an appeal from the judgment of Perram J in Bovaird v Frost [2013] FCA 974 to the Full Court of the Federal Court on the grounds set out in annexure "A" to the Summons and in accordance with the advice of counsel dated 4 October 2013, subject to the qualification that if for any reason the application in this Court to amend the Statement of Claim in proceedings number 2010/41888 proceeds in advance of the said appeal and the contentious amendments are not allowed, thereby rendering the appeal futile, the executors would not be justified in continuing to pursue the appeal; and (b)That the plaintiffs would be justified in incurring costs in pursuing the said appeal in accordance with paragraph (a) above, with such costs to be recouped from the funds of the estate, subject to the qualification that such recoupment only occur in accordance with a direction given by a court with bankruptcy jurisdiction to the trustee in bankruptcy of the estate. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 November 2013