Freeman v National Australia Bank Limited [2004] FCAFC 318 (1 December 2004)

Last Updated: 1 December 2004

FEDERAL COURT OF AUSTRALIA

Freeman v National Australia Bank Limited [2004] FCAFC 318

BANKRUPTCY – vesting of rights of action in trustee – proceeding to compel trustee to prosecute or assign vested actions – no injustice or inequity shown so as to enliven Court’s supervisory jurisdiction under the Bankruptcy Act 1966 (Cth) – leave to appeal refused – appeal dismissed as incompetent




Bankruptcy Act 1966 (Cth) s 60(2), 60(3)
Federal Court of Australia Act 1976 (Cth) s 24(1A)
Uniform Civil Procedure Rules 1999 (Qld) Rule 668



Citicorp Australia Ltd v Official Trustee in Bankruptcy (1965) 71 FCR 550 applied
Hall v Nominal Defendant [1966] HCA 36; (1966) 117 CLR 423 applied
Freeman v National Australia Bank Limited [2003] FCA 1233 affirmed
















LYNTON NOEL CHARLES FREEMAN v NATIONAL AUSTRALIA BANK LIMITED & ANOR
Q 178 OF 2003



LEE, MERKEL & HELY JJ
1 DECEMBER 2004
SYDNEY (HEARD IN BRISBANE)

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	Q 178 OF 2003

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	LYNTON NOEL CHARLES FREEMAN APPELLANT
AND:	NATIONAL AUSTRALIA BANK LIMITED FIRST RESPONDENT MATTHEW LESLIE JOINER AND PHILIP GREGORY JEFFERSON AS TRUSTEES OF THE BANKRUPT ESTATE OF LYNTON NOEL CHARLES FREEMAN SECOND RESPONDENT
JUDGES:	LEE, MERKEL & HELY JJ
DATE OF ORDER:	1 DECEMBER 2004
WHERE MADE:	SYDNEY (HEARD IN BRISBANE)

THE COURT ORDERS THAT:

1. The application for leave to appeal be refused, and the appeal be dismissed as incompetent.

2. The appellant pay the costs of the second respondent.









Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	Q 178 OF 2003

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	LYNTON NOEL CHARLES FREEMAN APPELLANT
AND:	NATIONAL AUSTRALIA BANK LIMITED FIRST RESPONDENT MATTHEW LESLIE JOINER AND PHILIP GREGORY JEFFERSON AS TRUSTEES OF THE BANKRUPT ESTATE OF LYNTON NOEL CHARLES FREEMAN SECOND RESPONDENT

JUDGES:	LEE, MERKEL & HELY JJ
DATE:	1 DECEMBER 2004
PLACE:	SYDNEY (HEARD IN BRISBANE)

REASONS FOR JUDGMENT

THE COURT:

1 Mr Freeman is a bankrupt. By Notices of Motion filed in the bankruptcy proceedings he seeks orders pursuant to s 178 of the Bankruptcy Act 1966 (Cth) (‘the Act’) to compel his Trustees, the second respondent (‘the Trustees’), to prosecute proceedings in the Supreme Court of Queensland against the first respondent (‘the Bank’). The primary judge declined to make the orders sought and ordered that the Notices of Motion be dismissed (see: Freeman v National Australia Bank Limited [2003] FCA 1233 (Spender J)).

2 Mr Freeman filed a Notice of Appeal against that decision. Later he filed a motion seeking leave to file an Amended Notice of Appeal. The motion also asked the Court to grant leave to refer to ‘new (fresh) evidence’.

Leave to appeal is required

3 When the matter came on for hearing, Mr Freeman appeared for himself without the benefit of legal assistance. The Bank did not appear, although the Notice of Appeal had been served upon it. We were informed by counsel for the Trustees that the Bank was aware of the appeal, but did not wish to participate.

4 The Court pointed out to the parties that the judgment from which Mr Freeman purported to appeal was an interlocutory judgment, from which an appeal may not be brought unless the Court or a judge gives leave to appeal: Federal Court of Australia Act 1976 (Cth) s 24(1A); Hall v Nominal Defendant [1966] HCA 36; (1966) 117 CLR 423. Thereupon Mr Freeman requested the Court to treat the Notice of Appeal as an application for leave to appeal, a course which was not opposed by counsel for the Trustees. The Court then embarked upon the hearing of an application by Mr Freeman for leave to appeal.

Background

5 The applications made by Mr Freeman to the primary judge are part of an extensive saga of litigation, which has its origins in a mediation between the Bank and Mr Freeman conducted before the late Mr R R Douglas QC (as he then was) in December 1997, at which Mr Freeman was represented by counsel and solicitors.

6 As a result of the mediation, the Bank and Mr Freeman executed an agreement on 4 December 1997 (‘the mediation agreement’). The mediation agreement led to the establishment by the Bank of a bill facility of $1,020,000 in favour of Mr Freeman which was due for repayment on 6 April 1998. By the mediation agreement, Mr Freeman agreed to use his best endeavours to refinance the Bank’s debt or to sell the property ‘Glasford Vale’ by 4 March 1998. Settlement of any sale or refinancing was to be effected by 6 April 1998. The mediation agreement contained a provision (Cl 9.1) under which Mr Freeman released the Bank from claims which he had or might have had against the Bank in respect of a wide range of matters.

7 Mr Freeman was unable to refinance the Bank’s debt, or sell ‘Glasford Vale’ by 4 March 1998. On 1 May 1998 the Bank commenced proceedings (No SC 4013 of 1998) in the Queensland Supreme Court for possession of ‘Glasford Vale’ (which had been mortgaged to the Bank), and for monies owing under the expired bill facility.

8 The proceedings were heard before Ambrose J over a period of four days in September 2000, when Mr Freeman was represented by counsel. On 11 October 2000 Ambrose J gave judgment for the Bank for possession of ‘Glasford Vale’, and for the sum of $1,427,890.08 and indemnity costs. His Honour:

- rejected Mr Freeman’s case that he was mentally incompetent when the mediation agreement was concluded;
- found that the release was effective to release the Bank from all of the claims made by Mr Freeman in his counter claim; and
- held that in any event Mr Freeman had no real prospect of success in establishing those claims.

9 On 2 November 2001 Mr Freeman unsuccessfully appealed to the Court of Appeal from the decision of Ambrose J (No 9718 of 2000). On 14 March 2003 the High Court refused special leave to appeal from the decision of the Court of Appeal. One of the matters relied upon in argument by counsel for Mr Freeman at the special leave application was an alleged failure on the part of the Bank to give proper discovery, a matter which had not been raised in the Court of Appeal. In any event, special leave to appeal was refused by the High Court because no arguable error had been demonstrated in the courts below.

10 On 11 March 2002 Mr Freeman commenced proceedings against the Bank in the Supreme Court of Queensland (No S2339/02) seeking damages for the sale of his property ‘Glasford Vale’ at an alleged undervalue. The property had been sold by Receivers appointed by the Bank in July 2001, hence one of the issues in the proceedings was whether the Bank was responsible for any default on the part of the Receivers who were deemed by the mortgage documents to be the agent of Mr Freeman.

11 On 12 March 2002 Spender J made a sequestration order in relation to Mr Freeman’s estate on the application of the Bank. His Honour held that a prima facie case of fraud, or collusion, or miscarriage of justice had not been made out so as to impeach the judgment of Ambrose J. His Honour also found the claim of a sale of the mortgaged property at an undervalue to be legally a claim against the Receivers, and not against the Bank. On 9 April 2002 Spender J stayed the sequestration order pending an appeal to the Full Court.

12 On 7 May 2002 Muir J dismissed an application by the Bank for summary dismissal of proceedings No S2339/02 upon the basis that there was a triable issue as to whether the Bank had intermeddled in the Receivers’ sale so as to render it liable for any default on the part of the Receivers.

13 On 26 August 2003 the Full Court of the Federal Court dismissed Mr Freeman’s appeal from the sequestration order. Mr Freeman unsuccessfully sought to adduce further evidence before the Full Court, which the Court declined to receive because it could have been placed before Spender J.

14 On 27 August 2003 Mr Freeman commenced further proceedings in the Queensland Supreme Court under Rule 668 of the Uniform Civil Procedure Rules 1999 (Qld) (‘the UCPR’) seeking orders setting aside the judgment in action S4013/98 on the basis of fresh evidence. Rule 668 provides:

‘668 Matters arising after order

(1) This rule applies if –

(a)	facts arise after an order is made entitling the person against whom the order is made to be relieved from it; or
(b)	facts are discovered after an order is made that, if discovered in time, would have entitled the person against whom the order is made to an order or decision in the person’s favour or to a different order.

(2) On application by the person mentioned in subrule (1), the court may stay enforcement of the order against the person or give other appropriate relief.

(3) Without limiting subrule (2), the court may do one or more of the following –

(a)	direct the proceedings to be taken, and the questions or issue of fact to be tried or decided, and the inquiries to be made, as the court considers just;
(b)	set aside or vary the order;
(c)	make an order directing entry of satisfaction of the judgment to be made.’

15 The application was heard and dismissed by de Jersey CJ on 15 October 2003 on the ground that Mr Freeman did not have standing to pursue the application in view of his bankruptcy.

16 On 31 October 2003 Spender J dismissed the Notices of Motion which are the subject of the present appeal.

17 On 6 February 2004 Dowsett J rejected an application made by Mr Freeman under s 153B of the Act to annul the sequestration order made by Spender J on 12 March 2002. One of the grounds relied upon by Mr Freeman was the claimed availability of fresh evidence which, had it been before Spender J, would have led him to decline to make a sequestration order.

Election under s 60 of the Act

18 Section 60(2) of the Act provides that an action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes an election, in writing, to prosecute or discontinue the action. Section 60(3) provides that if the trustee does not make such an election within 28 days after notice or the action is served upon him or her by the defendant or other party to the action, he or she shall be deemed to have abandoned the action.

19 By letter dated 5 April 2002 the Bank’s solicitors wrote to the Trustees in relation to the proceedings No S 2339/02 in the Queensland Supreme Court. The letter asserted that if the Trustees intended to adopt Mr Freeman’s claim against the Bank, then the Bank would be entitled to recourse against the Trustees personally to satisfy any costs order that might be made in favour of the Bank. The letter continued:

‘We formally put you on notice pursuant to section 60 of the [Act] that we require you to make an election in writing as to whether you intend to prosecute the Bankrupt’s claim or discontinue it. Pursuant to the Act you have 28 days to advise us of your decision otherwise you will be deemed to have abandoned the claim.’

20 By letter dated 24 April 2002 the Bank’s solicitors notified the Trustees’ solicitors that the Bank had reconsidered its position with regard to the s 60 notices issued in relation to the High Court and the Supreme Court proceedings. The cause for that reconsideration was the impact of the stay of the sequestration order granted by Spender J on what would otherwise be the operation of s 60. In substance, the letter proposed that the time pursuant to the s 60 notice would be in abeyance until the determination of the appeal to the Full Court of the Federal Court against the making of a sequestration order, at which stage time pursuant to the notices would run again. The letter included the following:

‘This will allow Mr Freeman to proceed with his High Court appeal and the Supreme Court proceedings without the trustee having to make a determination as to how they intend to proceed with the action.’

Advice was sought as to whether the Trustees were agreeable to the proposed course.

21 By letter dated 2 May 2002 the Trustees’ solicitors responded that as a result of the stay order made by Spender J on 9 April 2002, the Trustees were unable to make a s 60 election for either the proceedings in the Queensland Supreme Court, or the High Court. The letter noted that the Bank was not seeking to force the Trustees to make such an election. The letter also asserted that the Trustees could not ‘agree’ to the proposed course of action insofar as ‘allowing’ Mr Freeman to proceed with the High Court appeal and the Supreme Court proceedings as Mr Freeman’s rights in that respect were a matter for the relevant Courts to consider. The letter sought confirmation that whatever the outcome of the Bank’s summary judgment application in S 2339/02 scheduled to be heard on 7 and 8 May 2002, the Bank would not be seeking a costs order against the Trustees.

22 As noted above, on 26 August 2003 the Full Court of the Federal Court dismissed Mr Freeman’s appeal, and accordingly the stay of the sequestration order was lifted. The Trustees’ view was that the lifting of the stay meant that they were required to consider the Bank’s demand to make an election under s 60 of the Act by 22 September 2003.

23 By a letter received by the Trustees on 12 September 2003 the Bank’s solicitors requested the Trustees to make a decision pursuant to s 60 of the Act as to whether they intended to prosecute or discontinue the application made by Mr Freeman under Rule 668 of the UCPR (proceedings No SC 4013 of 1998). On 14 October 2003 the Trustee responded that he had not made any election pursuant to s 60(2) of the Act, and that accordingly he considered the proceedings to have been abandoned by virtue of subs 60(3). As noted above, these proceedings were dismissed in any event by de Jersey CJ on 15 October 2003, on the ground that Mr Freeman, as a bankrupt, lacked standing to prosecute them.

24 In the meantime, the Trustees forwarded a report to creditors dated 2 October 2003. That report stated (inter alia) that the Trustees had abandoned proceedings SC 2339 of 2002, and refused to assign them to Mr Freeman, for reasons which were given.

25 On 24 October 2003 one of the Trustees, Mr Joiner, filed an affidavit in the proceedings before the primary judge stating that:

‘12. The Trustees abandoned the proceedings in S2339 of 2002 for the following reasons:

(a) The Trustees did not consider it to be in the interests of creditors to prosecute the proceedings or assign them to the Applicant Mr Freeman was willing to provide consideration to the bankrupt estate for an assignment of the proceedings to him of $1.00;

(b) No funding was available from the Commonwealth Government to conduct a detailed assessment of the proceedings;

(c) The Trustees had strong reservations about the prospects of the proceedings being successful;

(d) The Trustees were aware of the various risks associated with electing to prosecute or assign the proceedings, including exposing the Trustees to an adverse costs order, for which there were no funds in the estate to indemnify ourselves with. I considered that should the Trustees have elected to prosecute the proceedings, the Trustees would have become substituted as plaintiffs in the proceedings and thereby possibly become exposed to costs, if unsuccessful.

13. The following factors were considered relevant to the Trustees decision to abandon the proceedings:

(a) With respect to Mr Freeman’s allegations of new evidence that the Bank colluded with the Receivers and Managers in breaching a duty of care afforded to Mr Freeman by selling the properties and assets at undervalue, I referred to the reasons for judgment issued by the Full Federal Court on 26 August 2003 in the proceedings between Mr Freeman and the Bank (Q44 of 2002). In particular, I noted the Full Federal Court’s comments that it had considered the reasons for judgment issued by Justice Spender in earlier proceedings involving Mr Freeman and the Bank. At Paragraph 31, His Honours stated "His Honour (Justice Spender) said he was not to be taken as indicating any view as to the strength of the point but was not prepared to say it was inarguable given that the property was sold at a figure which was considerably less than the valuation which the bank’s valuer had placed on the property at a not irrelevant time". Further, I considered the contents of Paragraphs 69, 70, 71, 72 and 73 of the Full Federal Court’s reasons for judgment.

(b) I considered that various reasons for judgment issued by the Federal Court of Australia placed doubt on whether the alleged loss suffered by Mr Freeman could be sheeted to the Bank and that, if there are grounds to pursue the alleged claim of damages and loss, then the involvement of the Receivers and Managers, sold the properties and assets, ought to be investigated.

14. Mr Freeman was requested to provide the Trustees with all relevant evidence to allow the Trustees to assess the Receivers and Managers’ involvement. However, no evidence has been forthcoming to date.’

The decision of the primary judge

26 The primary judge held:

- that the issue is whether the decisions made by the Trustees effectively to abandon the two pieces of litigation are unjust or inequitable, such as to require the Court in the proper exercise of its supervisory jurisdiction under s 178 of the Act to make orders of the kind for which Mr Freeman contends;
- the history of the litigation suggests there are very real grounds for thinking that the prospects of success, particularly in the UCPR 668 proceedings, are ‘far from rosy’;
- that he was not satisfied that the Trustees had reached a perverse or necessarily wrong conclusion about the prospects of the proposed litigation being successful;
- the fact that the bankrupt estate is without funds, and that no funding is available from either creditors or the Commonwealth Government is a very real consideration; and
- the Trustees’ decision not to prosecute proceedings relying on UCPR 668, nor to prosecute the proceedings in respect of the claim for damages against the Bank in respect of the sale at an alleged undervalue by Bank appointed receivers, had not been shown to be either unjust or inequitable.

27 No argument appears to have been directed to the primary judge as to whether the Court may, by means of an order made under s 178 of the Act, effectively override a deemed abandonment of proceedings under s 60(3). Nor was this issue the subject of any detailed submissions before us. We therefore express no opinion upon that question, as it is not necessary for us to do so in order to resolve the present application.

Should leave to appeal be granted?

28 The appellant placed a large volume of material before us which was primarily directed towards establishing that the decision of Ambrose J was wrong, and that ‘Glasford Vale’ was sold by the Bank’s Receivers at an undervalue. Subject to one qualification, there was little focus on the issues before us, namely:

- whether in all the circumstances the decision of Spender J is attended by sufficient doubt to warrant its being reconsidered by a Full Court; and
- whether substantial injustice would result if leave were refused supposing the decision to be wrong.

29 The qualification referred to above is that Mr Freeman submitted that Spender J erred in taking into account that no funding was available to the Trustees for the prosecution of the proceedings, as Mr Freeman was prepared to prosecute them himself, and the Bank had agreed that Mr Freeman could do so without exposing the Trustees to any liability for costs. This agreement is said to be derived from or defined in the letters of 24 April 2002 and 2 May 2002 which we have summarised above.

30 That exchange of correspondence did not result in an agreement to the effect of that asserted by Mr Freeman. The letters did not go beyond establishing a modus operandi pending the outcome of the appeal to the Full Court from the making of the sequestration order. The letters do not create or evidence any agreement on the part of the Bank not to seek costs from the Trustees if the Trustees thereafter permitted the unsuccessful prosecution of proceedings against the Bank.

31 It follows that Spender J was correct in taking into account the fact that there was no funding available for the prosecution of the proceedings and on relying on that fact as a ‘very real consideration’ in concluding that Mr Freeman has not made out his claim that the Trustees should be compelled to further prosecute the proceedings.

32 Nor has Mr Freeman established that substantial injustice would result if leave to appeal were refused, even supposing the decision of Spender J to be wrong. In the course of submissions, Mr Freeman made it clear that his substantial complaint is of a failure on the part of the Trustees to assign to Mr Freeman the causes of action which Mr Freeman claims to have against the Bank, and which vested in the Trustees upon his bankruptcy. Mr Freeman wishes to be in a position to pursue those claims upon his discharge from bankruptcy.

33 The motions before Spender J do not seek any relief in relation to the matter of assignment, nor is the issue one which was addressed by Spender J in his reasons for decision. The Notice of Appeal from the decision of Spender J does not seek any relief in relation to the matter of assignment, nor is the matter raised in any of the grounds of appeal. The issue first emerges in the proposed Amended Notice of Appeal, where Mr Freeman complains that Spender J did not examine the question of assignment in the judgment under appeal, and seeks an order:

‘(2) That the Trustee assigns to Lynton Noel Charles Freeman, immediately, all the rights in litigation, and all choses in action, held under Trust by him in the Bankruptcy Estate of Lynton Noel Charles Freeman.

* OR immediately Freeman is discharged from Bankruptcy.

That the consideration be $100 and the Trustees’ lawful costs of the Trust be paid out of the benefits of the litigation. That the debts of the Creditors be paid out of the proceeds, of the litigation, other than the National Australia Bank or any other litigant, either as plaintiff or defendant, arising from this assignment.’

34 The probable explanation for the failure of Spender J to advert to the question of assignment in his reasons for decision is that he did not regard that as being part of the matter which was before him. It was not a matter raised by the Notices of Motion. It was, however, a related matter, as one of the reasons given by the Trustees for abandoning the proceedings was that they did not consider it to be in the interests of creditors to assign the proceedings to the appellant, and they were of the view that there were risks associated with the assignment of the proceedings, including exposure to adverse costs orders, having regard to the strong reservations which the Trustees had about the proceedings being successful.

35 It would not be proper for a trustee in bankruptcy to assign a cause of action which demonstrably had no prospects of success. In Citicorp Australia Ltd v Official Trustee in Bankruptcy (1965) 71 FCR 550 the Full Court put the matter in this way (at 56):

‘... in a case where it is clear that the claim sought to be pursued by the bankrupt or other assignee is frivolous or vexatious, the trustee of the court should not allow the assignment to occur. A claim with no reasonable prospect of success would be a frivolous one, and the prosecution of such a claim would be vexatious. As earlier noted, in most cases it will not be clear that an alleged claim has no reasonable prospects of success. However, when a clear case arises, the trustee as an officer of the Court, and the Court itself, in the public interest should not allow the assignment to occur, even where an immediate sum of money is offered as consideration that would benefit the estate of the bankrupt.’

36 It is open to Mr Freeman, if he wishes, to ask the Trustees to revisit the question of assignment, and to place before them any proposal which Mr Freeman wishes to advance in that respect, and any submission which he wishes to put in support of that proposal. The fact that Mr Freeman is able to take such a course demonstrates that no substantial injustice flows from the refusal of the present application for leave to appeal.

37 It would not be appropriate for us to determine how the Trustees should respond to any such proposal, as the matter is not one which is in issue in the present proceedings. However, for the assistance of the parties, we state that in our view the Trustees would not be bound to respond to any such proposal unless sufficient funds were made available to them so that legal advice could be obtained as to whether the proposal is one to which the Trustees could lawfully agree.

Conclusion

38 For the above reasons we have concluded that the decision of Spender J is not attended by sufficient doubt to warrant it being reconsidered by a Full Court. We have also concluded that substantial injustice would not result if leave to appeal were refused supposing the decision to be wrong. Accordingly, the application for leave to appeal is refused, and the appeal is dismissed as incompetent. Mr Freeman is to pay the second respondent’s costs.

I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Dated: 1 December 2004

	The appellant appeared in person
Counsel for the Second Respondent:	G J Handren
Solicitor for the Second Respondent:	Forbes Dowling Lawyers
Date of Hearing:	11 November 2004
Date of Judgment:	1 December 2004