Bovaird v The Trustee of the Bankrupt Estate of Frost (includes Corrigendum dated 6 December 2010) [2010] FCA 1159 (27 October 2010)

Last Updated: 7 December 2010

FEDERAL COURT OF AUSTRALIA

Bovaird v The Trustee of the Bankrupt Estate of Frost [2010] FCA 1159

Citation:		Bovaird v The Trustee of the Bankrupt Estate of Frost [2010] FCA 1159
Parties:		LEON LEWIS MACGILLIVRAY BOVAIRD v THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST MONICA CATHERINE BOVAIRD v THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST DIANA CATHERINE FALLON AND ALAN MAXWELL FROST v THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST DIANA CATHERINE FALLON AND ALAN MAXWELL FROST v MONICA CATHERINE BOVAIRD AND LEON LEWIS MACGILLIVRAY BOVAIRD
File number(s):		NSD 1394 of 2009 NSD 1395 of 2009 NSD 283 of 2010 NSD 470 of 2010
Judge:		PERRAM J
Date of judgment:		27 October 2010
Corrigendum:		6 December 2010
Catchwords:		BANKRUPTCY AND INSOLVENCY – Application by creditors for leave to pursue appeal proceedings against executors of bankrupt deceased estate – Appeal, if successful, will affect personal liability of executors rather than liability of estate – Whether creditors have standing to pursue such an appeal – Whether leave required – Whether leave should be granted BANKRUPTCY AND INSOLVENCY – Proceedings by creditors of deceased bankrupt estate against executors of estate for devastavit – Whether creditors require leave to pursue such proceedings – Whether leave should be granted EXECUTORS AND ADMINISTRATORS – Devastavit – Nature of claim at common law and in equity – Standing of creditor of estate to pursue devastavit proceedings
Legislation:		Bankruptcy Act 1966 (Cth) s 58, 134, 249 Civil Procedure Act 2005 (NSW) Judicature Act 1873 (UK) s 25(11) Law Reform (Law and Equity) Act 1972 (NSW) s 5 Trustee Act 1925 (NSW) s 5 Uniform Civil Procedure Rules 2005 (NSW) Pt 42 r 25
Cases cited:		In re Blow; Governors of St Bartholomew’s Hospital v Cambden [1914] 1 Ch 233 cited Bovaird v Frost [2009] NSWSC 917 cited Commonwealth v McCormack [1984] HCA 57; (1984) 155 CLR 273 cited Crosse v Smith [1806] EngR 79; (1806) 7 East 246; 103 ER 94 cited Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99 applied In re Gale; Blake v Gale (1883) 22 Ch D 820 cited In re Hyatt; Bowles v Hyatt (1888) 38 Ch D 609 cited Job v Job (1877) 6 Ch D 562 cited Jones v Lewis [1750] EngR 57; (1750) 2 Ves Sen 241; 28 ER 155 cited Juul v Northey [2010] NSWCA 211 cited Lacons v Warmoll [1907] 2 KB 350 cited National Trustees Executors and Agency Co of Australasia Ltd v Dwyer [1940] HCA 5; (1940) 63 CLR 1 cited Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 cited Thorne v Kerr [1855] EngR 817; (1855) 2 K & J 54; 69 ER 691 cited
Texts cited:	F W Maitland, Equity: A Course of Lectures (2nd ed, 1949)
Date of hearing:	13 August 2010
Date of last submissions:	29 September 2010
Place:	Sydney
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	41
Counsel for the Executors:	Mr N Cotman SC with Mr B Skinner
Solicitor for the Executors:	MBP Legal
Counsel for the Bovairds:	Mr R Harper SC
Solicitor for the Bovairds:	Garland Hawthorn Brahe
Counsel for the Trustee in Bankruptcy:	Mr M Aldridge SC
Solicitor for the Trustee in Bankruptcy:	Carneys Lawyers

FEDERAL COURT OF AUSTRALIA

Bovaird v The Trustee of the Bankrupt Estate of Frost [2010] FCA 1159

CORRIGENDUM

1. In paragraph 19, eighth sentence, the reference to “Sir Walter Page Wood VC” should be a reference to “Sir William Page Wood VC”.
   

I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Perram.

Associate:

Dated: 6 December 2010

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1394 of 2009

BETWEEN:	LEON LEWIS MACGILLIVRAY BOVAIRD Applicant
AND:	THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST Respondent

		NSD 1395 of 2009
BETWEEN:	MONICA CATHERINE BOVAIRD Applicant
AND:	THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST Respondent

		NSD 283 of 2010
BETWEEN:	DIANA CATHERINE FALLON ALAN MAXWELL FROST Applicants
AND:	THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST Respondent

		NSD 470 of 2010
BETWEEN:	DIANA CATHERINE FALLON ALAN MAXWELL FROST Applicants
AND:	MONICA CATHERINE BOVAIRD LEON LEWIS MACGILLIVRAY BOVAIRD Respondents

JUDGE:	PERRAM J
DATE OF ORDER:	27 OCTOBER 2010
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The parties bring in short minutes of order reflecting the reasons for judgment within 14 days.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1394 of 2009

BETWEEN:	LEON LEWIS MACGILLIVRAY BOVAIRD Applicant
AND:	THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST Respondent

		NSD 1395 of 2009
BETWEEN:	MONICA CATHERINE BOVAIRD Applicant
AND:	THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST Respondent

		NSD 283 of 2010
BETWEEN:	DIANA CATHERINE FALLON ALAN MAXWELL FROST Applicants
AND:	THE TRUSTEE OF THE BANKRUPT ESTATE OF MAXWELL WALTER ALLEN FROST Respondent

		NSD 470 of 2010
BETWEEN:	DIANA CATHERINE FALLON ALAN MAXWELL FROST Applicants
AND:	MONICA CATHERINE BOVAIRD LEON LEWIS MACGILLIVRAY BOVAIRD Respondents

JUDGE:	PERRAM J
DATE:	27 OCTOBER 2010
PLACE:	SYDNEY

REASONS FOR JUDGMENT

I - Introduction

1. Maxwell Walter Allen Frost died on 26 November 2002 just after his 80th birthday. His surviving relatives fall into two camps. In the first is the deceased’s elder sister Monica and her son Leon. In the second, the deceased’s children, Alan and Diana and his estranged wife, Margaret. The source of friction between these two camps is Monica and Leon’s contention that before he died the deceased contractually promised to keep Monica in suitable aged care accommodation, cover her expenses and lend Leon $880,000 interest free for 10 years.
2. Monica and Leon demanded payment from the executors of the deceased estate who, as it happens, are Alan and Diana. The executors declined to meet this demand and litigation ensued. Ultimately, that litigation was determined in favour of Monica and Leon who were awarded $1,239,110 with costs: Bovaird v Frost [2009] NSWSC 917. Hereafter, I refer to Monica and Leon as “the creditors”.
3. At the time that those orders were made by Brereton J on 4 September 2009 the estate did not have sufficient monies to meet its obligations to the creditors under those orders and was, therefore, insolvent. Accordingly, the executors petitioned the Federal Magistrates Court (which is a court with bankruptcy jurisdiction) to administer the estate in bankruptcy under the provisions of Part XI of the Bankruptcy Act 1966 (Cth). Orders of that kind were made on 23 October 2009 and the whole of the estate was placed in the hands, initially, of a Mr Nicols who acted as the trustee in bankruptcy. Subsequently, Mr Nicols was replaced in that office by Mr Woodgate on 31 December 2009 who has himself more recently been replaced by Mr Donnelly.
4. The intercession of the estate’s bankruptcy had significant legal consequences for its administration. That fact now gives rise to three issues:

(a) The question of leave. Although the creditors succeeded at trial before the Supreme Court they nevertheless wish to appeal certain aspects of that decision to the New South Wales Court of Appeal. Since the estate is bankrupt, however, that appeal cannot proceed without the leave of a bankruptcy court which leave they now seek from this Court. The question is whether that leave should be granted.

(b) The question of the waste proceedings. The creditors have alleged that the executors of the estate paid out substantial sums of money to third parties, including the deceased’s estranged wife, as a result of which the estate has been wrongfully depleted. In separate proceedings before the Supreme Court the creditors sue the executors in the tort of devastavit seeking compensation from them for the loss caused to themselves by the making of those alleged payments. The executors, Alan and Diana, now apply to this Court, as a bankruptcy court, to stay those proceedings permanently.

(c) The question of the trustee’s directions. The trustee in bankruptcy also seeks directions from this Court as a bankruptcy court about various aspects of his administration. In particular, he wishes to know:

(i) whether he can indemnify the executors for their costs of the Supreme Court trial proceedings, the impending Court of Appeal proceedings, the devastavit proceeding and these proceedings;

(ii) whether he should participate in the Court of Appeal proceedings; and

(iii) whether he should pay an interim dividend to creditors.

5. It is convenient to deal with these questions in turn.

II – The Leave Issue

6. The creditors filed their appeal on 4 December 2009. The judgment debt they obtained from the Supreme Court was a debt provable in the administration of the bankrupt’s estate. Consequently, s 249(3)(b) of the Bankruptcy Act 1966 meant that it was “not competent for a creditor ... except with the leave of the Court ... to commence any legal proceedings in respect of such a debt or take any fresh step in such a proceeding”. There is no dispute between the parties that the effect of s 249(3)(b) is that the creditors require this Court’s leave to pursue their proceedings in the Court of Appeal insofar as they concern a debt provable in the administration.
7. There are four aspects to the proposed appeal. These are:

(a) an argument that the Supreme Court erred in not awarding the creditors a larger sum;

(b) an argument that the Supreme Court erred in not awarding the creditors’ costs on an indemnity basis against the executors;

(c) an argument that the Supreme Court erred in permitting the executors to be indemnified for the costs of the proceedings out of the estate; and

(d) an argument that the Supreme Court’s determination about the liability of a company associated with the deceased, AFM Pty Ltd, who had been the third defendant in those proceedings, should also be varied.

8. All parties have agreed that leave is not required for the appeal insofar as AFM Pty Ltd is concerned and this is plainly correct. Its liability does not concern a debt provable in the bankrupt estate. However, there is debate about the first three issues. It is necessary to deal with each in turn.

Increasing the judgment sum

9. There are no creditors of the estate apart from Monica and Leon. Mr Aldridge SC, who appeared for the trustee in bankruptcy, informed me that the estate is presently worth about $835,000 which I accept. An affidavit of Mr Woodgate (the former trustee) sworn on 1 April 2010 indicated that the deceased estate had realisable assets of $927,968.80 and estimated that $421,383.80 would be available to be distributed to creditors. He also indicated that there was some possibility that in the future the Commissioner of Taxation might become a creditor but this was likely to be for a very small claim in the vicinity of a couple of thousand dollars. Accepting that to be so the only substantive creditors are Monica and Leon. Whatever sum is eventually available for the creditors they are essentially going to receive all of it. In those circumstances, doubling the size of their judgment debt is a futile exercise. I decline to grant leave to permit such an undertaking.

Changing the Supreme Court’s costs order

10. The Supreme Court ordered the executors to pay the creditors’ costs of the proceedings before it. The executors were being sued as the representatives of the estate. Since the estate has not yet been administered the trusts contemplated by it have not yet arisen. Accordingly, they were not trustees. Rule 42.25 of the Uniform Civil Procedure Rules (NSW), entitles trustees to be paid their costs out of the funds held by them “subject to sub-rule (2)”. Sub-rule (2) allows the Supreme Court to make an order taking that right away from a trustee who “has acted unreasonably” or “has in substance acted for his or her own benefit rather than for the benefit of the fund”. It is not obvious to me why r 42.25 applied to the executors since they were not relevantly trustees. Although the word “trustees” in the Trustee Act 1925 (NSW) includes legal representatives (s 5), there is no corresponding provision in the Civil Procedure Act 2005 (NSW) or, indeed, the Uniform Civil Procedure Rules 2005. Nevertheless, it was on that assumption that that rule applied that the creditors sought an order under it from Brereton J. The practical reasons for their pursuit of that order become clearer when it is brought to account that the executors’ costs would inevitably reduce the pool of assets available to pay their judgment sum.
11. The learned trial judge dealt with this issue at length and delivered considered reasons for declining to deprive the executors of their entitlement to costs out of the fund. Significantly, the executors did not submit, and his Honour did not find, that the creditors had no standing to seek such an order.
12. In their proposed Court of Appeal proceeding, the creditors now seek to disturb this conclusion of the Supreme Court. The order they seek on appeal is an order that the executors’ costs not be paid out of the estate. Significantly for present purposes, they do not seek an order from the Court of Appeal that the executors refund any moneys they have paid to, or on behalf of, themselves from the estate under the costs order made by the Supreme Court. No occasion arises, therefore, to examine in whom the restitutionary rights discussed by the High Court in Commonwealth v McCormack [1984] HCA 57; (1984) 155 CLR 273 at 276 might now be vested. Rather, and I think contrary to the submissions made on the executors’ behalf by Mr Cotman SC, the issue is whether a creditor has standing to pursue an order under r 42.25. It may well be that the right to recover those moneys from the executors is a right vested in the trustee in bankruptcy. However, that is not presently the right being asserted.
13. As I have already noted, no objection was taken before Brereton J to the standing of the creditors to seek an order under r 42.25. Unfortunately, the rule does not indicate who can apply for such an order. There may be much to be said for the view that a party economically affected by the existence of the trustee’s right of indemnity and, in fact, directly involved in litigation with that trustee will have a sufficient interest to pursue an order under r 42.25 in that litigation. However, I do not think that I need to resolve that issue. The question of whether the creditors have sufficient standing to pursue orders under r 42.25 is, subject to one further remark, a question for the Court of Appeal: cf Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99 at 115 per Beaumont J. The further remark is that leave would not be granted to pursue an appeal if the point were hopeless and that would apply if it were very obvious that the creditors did not have standing under r 42.25. However, the situation is far from that case, for the question of whether a creditor has standing under r 42.25 is plainly arguable. The force of that observation is increased by the fact that consistently therewith the executors did not object to the standing of the creditors at first instance which may present difficulties in the executors raising the point for the first time in the Court of Appeal.

Indemnity costs

14. The creditors already have the benefit of a costs order against the estate. By itself, increasing the magnitude of that costs order is likely to have little utility since it will only increase the size of the creditors’ proof of debt in circumstances where there are no other material creditors. However, if the creditors are successful in their appeal on r 42.25 then the party liable for their costs will be the executors personally and, in that circumstance, increasing the sum of the costs award does not lack utility.
15. In those circumstances I propose to grant leave to pursue the appeal insofar as it concerns r 42.25 and the question of indemnity costs.

III – The Waste Proceedings

16. On 16 February 2010 the creditors commenced fresh proceedings against the executors in the Supreme Court. They alleged in those proceedings that the executors breached their duties as executors by paying away substantial sums from the estate when, it is alleged, they had no business doing so until the claims of the creditors were met and the estate finalised. The sums alleged to have been paid away by the executors in breach of their duties are as follows:

Sum	Recipient	Date
$265,000.00	Margaret Frost	18 February 2004
$4,675.00	Margaret Frost	20 February 2004
$110,305.39	Addisons Solicitors	19 February 2004

17. I interpolate that Margaret Frost is the deceased’s estranged wife. The creditors also claim other unquantified payments. One of these payments concerns one of the executor’s (Diana’s) costs of pursuing proceedings before the Guardianship Tribunal in which she sought, unsuccessfully, to have orders made taking Monica’s affairs out of Leon’s hands and placing them in hers. Others include the costs of AFM Pty Ltd before Brereton J and certain amounts of withholding tax.
18. Section 249(3)(b) of the Bankruptcy Act 1966 provides that it is not competent, without this Court’s leave, for a creditor to commence “any legal proceeding in respect of” a debt provable in the administration of a deceased estate under Part XI of that Act. The two principle issues are, therefore, whether the proceedings on a devastavit are “in respect of” a provable debt and, if they are, whether the Court should grant leave. Both of these questions should be answered in the affirmative. The terms of s 249(3)(b) are not materially different to the terms of s 58(3)(b) which serves the same function in relation to bankrupt estates of the living. Under that provision if an application is a step taken towards the satisfaction of a creditor’s individual debt it will be “in respect of” that provable debt and hence leave will be required: Fraser v Commissioner of Taxation (1996) 69 FCR 99 at 115 per Beaumont J (Black CJ and Tamberlin J agreeing).
19. What is the nature of the creditors’ claim? Devastavit is an expression describing both a common law tort and an action in equity. In an administration suit in equity a creditor or legatee may bring an application for account on a wilful default basis against the executors for parting with, or failing to get in, estate assets. From the outset Chancery refused to permit recovery from executors without wilful default on their part being demonstrated: Jones v Lewis [1750] EngR 57; (1750) 2 Ves Sen 241; 28 ER 155 per Lord Hardwicke. On the other hand, at common law the position was different and it was accepted that a creditor or legatee could recover from executors who parted with, or failed to get in, estate assets without any fault being demonstrated on their parts: Crosse v Smith [1806] EngR 79; (1806) 7 East 246 at 258-259; [1806] EngR 79; 103 ER 94 at 99 per Lord Ellenborough CJ. In a subsequent series of administration suits various Chancery judges decided that claims against executors based on devastavit allegations were analogous to the claim at law, that the claim at law was an action on the case and that, therefore, the limitation statute then applying to actions on the case - 21 Jac I, c 16, s 3 – applied in the administration suit by analogy. The consequence was that such claims became barred in Chancery after 6 years by analogy. The first of these decisions was Thorne v Kerr [1855] EngR 817; (1855) 2 K & J 54; 69 ER 691 where Sir Walter Page Wood VC referred to the claim as one in “trespass” by which he can only have meant, and was subsequently certainly taken to have meant, an action on the case. The view that this was the content of the common law rule flourished in Chancery: In re Gale; Blake v Gale (1883) 22 Ch D 820 at 825 per Bacon VC; In re Hyatt; Bowles v Hyatt (1888) 38 Ch D 609 at 616 per Chitty J; In re Blow; Governors of St Bartholomew’s Hospital v Cambden [1914] 1 Ch 233 at 240 per Cozens-Hardy MR, 243 per Swinfen Eady LJ and 251 per Phillimore LJ. Subsequently the common law judges came to the same view although, it should be said, solely on the basis of the statements made by Chancery judges as to the content of the common law: Lacons v Warmoll [1907] 2 KB 350 at 360-362 (CA). In National Trustees Executors and Agency Co of Australasia Ltd v Dwyer [1940] HCA 5; (1940) 63 CLR 1 Latham CJ (at 18) referred to Lacons v Warmoll to reach the conclusion that the tort claim was an action on the case.
20. As already noted, the content of the common law rule did not require wilful default whereas the corresponding claim for an account in an administration suit did. From 1873, s 25(11) of the Judicature Act 1873 (UK) provided that where there was “any conflict or variance between the rules of equity and the rules of the common law with reference to the same matter, the rules of equity shall prevail” and similar provision is now made in New South Wales by s 5 of the Law Reform (Law and Equity) Act 1972 (NSW). In Job v Job (1877) 6 Ch D 562 Jessel MR concluded that s 25(11) rendered the fault element of both the Chancery suit and the common law claim the same (“The rule, then, at law as well as in equity, now is that an executor or administrator is in the position of a gratuitous bailee, who cannot be charged with the loss of his testator’s assets without wilful default”). Maitland described this decision as “the best example I have found of the operation of sub-section 11”: Equity: A Course of Lectures (2nd ed, 1949) p 155. The modern position then is that an executor can be liable for a devastavit in an administration suit where an order for account on a wilful default basis is sought. Such an executor will also be liable at law in an action on the case provided wilful default is shown.
21. The claims made by the executors have been filed in the Equity Division but it is quite obvious that the executors pursue the common law claim and are not seeking an order for account on a wilful default basis in an administration suit (cf. Juul v Northey [2010] NSWCA 211 at [188] ff per McColl JA). The creditors plead in their statement of claim that they are creditors of the estate and it is that allegation which founds their standing, in tort, to pursue the claim. Further, the whole point of the action is to assist them in making up the shortfall in what they will receive in the administration and what was originally owed to them under the original provable debt. Are those two elements sufficient to make the claim one which may be described as “with respect to” a provable debt (that is the judgment debt) within the meaning of s 249(3)(b)? I think the answer to this must be that it is. Not only is it a step towards the satisfaction of the original debt but the entire right of the creditors to bring the claim is based firmly on their status as creditors (cf. Fraser 69 FCR at 114D).
22. Accordingly, the creditors’ devastavit action is one to which s 249(3)(b) applies. Unless the leave of the Court is obtained the proceedings are incompetent. The creditors have not applied for leave. On the basis that no leave has been obtained the executors apply for a stay of the proceedings. Although no application has been made I propose, subject to one matter to which I return below, to grant leave to proceed for the reasons which follow.
23. The terms of the discretion conferred by s 249(3)(b) are apparently at large. In Fraser Beaumont J thought that a number of matters were relevant in that case: whether the proceedings had been commenced before the bankruptcy, the prejudice to all parties caused by a stay of proceedings already substantially advanced, the willingness of the trustee in bankruptcy to bring the same proceedings, and the ability of the Court, by means of conditions imposed on the grant of leave, to ensure that one creditor did not obtain any advantage over the others (69 FCR at 115).
24. I see some advantages to the creditors pursuing this claim in terms of expense rather than the trustee. Evidently, some work has been done already. In any event, I have had no indication that the trustee wishes to conduct the devastavit proceedings. It is true that the proceedings could have been commenced after seeking leave but I do not think that matters terribly much in the present case.
25. The real concern of the executors, as I understand it, relates to their position as secured creditors of the estate and the position of Monica and Leon as unsecured creditors. If the trustee in bankruptcy were to recover from the executors any verdict for waste the executors say they would be entitled to payment pursuant to their indemnity and that that payment would be secured over the estate assets by reason of their lien. But, they submit, if the creditors are permitted to recover from them in devastavit then the moneys thus recovered will not form part of the estate and the funds available to them under their lien will be correspondingly reduced. Standing back from the whole situation, so they say, the creditors will, in substance, have defeated their lien.
26. I think this is a valid concern, however, I do not think it requires the refusal of leave. Assuming that the trustee in bankruptcy could maintain a suit against the executors for breach of duty, the present devastavit proceedings provide the potential for prejudice to the secured creditor. The risk is potential – it is not plain at this stage whether the executors will be entitled to be indemnified or, if so permitted, for how much. Further, it is possible that the two claims may not come into conflict. However, these matters cannot be known at this stage. In the circumstances, what I propose to do is to impose conditions similar to those imposed in Fraser which will require the creditors to undertake not to oppose any application by the trustee to be joined to the devastavit proceedings and also to undertake to keep the trustee informed of the orders which are to be sought.
27. I adverted above to a limitation on this conclusion. The limitation is that the creditors must make a formal application for leave and the executors, who have not been heard on this point, should have the opportunity to make such submissions as they think fit. I do not think further written submissions are appropriate but I will re-list the matter on the question of leave at a time suitable to the parties if necessary.
28. I turn then to the executors’ second basis for applying for a stay. The argument, as I apprehended it, was that only the trustee had standing to pursue the devastavit claims. This was so, the executors submitted, because the trustee had a right to pursue proceedings against the executors for devastavit by reason of s 134(1)(j) of the Bankruptcy Act 1966 which confers upon the trustee a power to “institute or defend any action or other legal proceeding relating to the administration of the estate”. I reject this argument. Section 134(1)(j) does not give to the trustee in bankruptcy causes of action; rather, it permits the trustee to commence proceedings in respect of already existing legal or equitable rights. Necessarily, therefore, the executors need to point to some other place from which the trustee’s right to make a claim in devastavit might derive. No such attempt was made and no more need be said. In particular, it is not necessary to ascertain how the executors could have had a cause of action against themselves which could have vested in the official trustee under s 249(8) of the Bankruptcy Act 1966 on the making of the administration order. Nor did the executors seek to run the gauntlet of explaining how, even if that problem could be surmounted, it could warrant the conclusion that the rights vested in the creditors (not being rights against the debtor) were thereupon divested.
29. The executors next sought to rely upon the principle of reflective loss discussed in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 which denies shareholders in a company the ability to pursue proceedings which can also be maintained by the company itself. That principle rests upon the need to avoid an unauthorised reduction in a company’s capital which would occur if a shareholder recovered assets which could also have been recovered by the company itself. The executors drew an analogy between, on the one hand, the positions of a shareholder and a company and, on the other, a creditor of a bankrupt estate and the trustee in bankruptcy. Permitting one creditor to recover a debt prevented, so the argument ran, the trustee recovering that debt and this, in turn, reduced the pool of assets available to the trustee and hence on distribution to the remaining creditors. In substance, property was moved out of the estate other than in accordance with the terms of the Bankruptcy Act 1966.
30. This argument may or may not ultimately succeed. However, at best it is an argument about standing. It does not turn on any particular provision of the Bankruptcy Act 1966, for example, such as s 249. The Supreme Court has just as much ability to determine that question of standing as this Court does. In Fraser it was argued that the Court should stay the proceedings pending in the Family Court because the Commissioner did not have standing to pursue them. The argument was that the Commissioner had ceased to be a creditor by reason of the husband’s bankruptcy and his only entitlement to interfere with the consent property settlement orders between the husband and wife was by reason of his being a creditor, a status he now lacked. The Full Court rejected this argument (69 FCR at 115) on the basis that it was a question for the Family Court and also on the basis that standing issues should not be considered until all of the evidence was on. There is no need to proceed differently in this case. There is no doubt, leave having been granted, that the Supreme Court can determine whether the creditors have standing, in light of the Prudential point, to pursue devastavit proceedings. Further, by the time of the trial of that action the evidence about who the creditors are and, in particular, whether the executors are entitled to the status of creditors and their extent of their claim will be clearer. If it transpire that the executors are not creditors of the estate then the question of standing will be largely moot.
31. The creditors should have leave subject to the conditions I have indicated nunc pro tunc. The stay application should be rejected.

IV – Directions sought by the trustee in bankruptcy

32. As has already been noted Mr Woodgate became the trustee in bankruptcy for the estate on 31 December 2009. On 25 March 2010 he applied for directions from the Court pursuant to s 134(4) of the Bankruptcy Act 1966. There are three substantive questions upon which he (and now his successor, Mr Donnelly) seek directions. They are:

(a) the extent to which he should indemnify the executors for their legal expenses in the Supreme Court, Court of Appeal and devastavit proceedings and also of the costs of these proceedings;

(b) whether he should take part in the Court of Appeal proceedings; and

(c) whether he should pay an interim dividend.

33. I deal with these in turn.

Whether the trustee in bankruptcy should meet the executors’ costs of the various proceedings

34. The proceedings in the Supreme Court are those before Brereton J (in which the creditors successfully sued the deceased estate), the Court of Appeal proceedings (in which the creditors seek to deny the executors their entitlement to an indemnity out of the estate assets) and the devastavit proceedings (in which the creditors claim that the executors have been guilty of maladministration).
35. The issue which is pending in the Court of Appeal is whether the executors are entitled to an indemnity out of the estate for the costs of the proceedings before Brereton J. That matter has been determined at first instance in favour of the executors but is now the subject of an appeal. For reasons I have already given that appeal is not frivolous. The material referred to in the devastavit proceedings may lend credence to the creditors’ contention that the executors have misused their offices to pay third parties substantial sums and to conduct litigation which may not have been in the estate’s interests. Certainly, it shows payments were made to third parties. Those matters, which appear largely to have come to light only after the appointment of the trustee in bankruptcy, may be material to the issues in the Court of Appeal. It would be premature until that Court determines whether the executors have abused their office in defending the proceedings before Brereton J for the trustee in bankruptcy to meet costs to which it may ultimately transpire they are not entitled. So too, insufficient is known at this stage to say, in advance, that the executors’ conduct of the appeal will be reasonable. If the Court of Appeal were to conclude that the executors were unreasonable in defending the proceedings before Brereton J it is not difficult to see that a similar attitude might be taken to their defence of that position in the Court of Appeal itself.
36. Very much the same remark may be made about the devastavit proceeding. It is possible that the executors will be vindicated but it is also possible that they will not. It would be inappropriate to permit payment of their legal expenses in advance of a determination by the Court hearing that matter of the issue of whether the executors have engaged in the conduct alleged.
37. Accordingly, the trustee in bankruptcy would not be justified, at least at this stage, in meeting the executors’ legal costs in the Supreme Court, the Court of Appeal or in the devastavit proceedings. When those Courts have finished examining the conduct of the executors this issue will, naturally enough, need to be revisited. As to the proceedings in this Court a similar analysis applies. If it transpires that the executors’ conduct of the underlying proceedings is such that they should not have been pursued then a similar position is likely to be taken to what is occurring in this Court. Until the Court of Appeal determines that question it would be premature for the trustee to permit the estate assets so to be used.

Trustee in bankruptcy’s role in the Court of Appeal proceeding

38. The trustee has also sought directions as to whether he should take part in the Court of Appeal proceedings. In my opinion, he should not. The only three questions involving the estate in those proceedings will be:

(a) whether the executors are personally entitled to indemnity out of the estate;

(b) whether the costs ordered against the estate should be paid on an indemnity basis; and

(c) whether the costs of the Court of Appeal proceedings should be borne by the executors or the estate.

39. I consider that the interests of the bankrupt estate are sufficiently protected in relation to (a) and (c) by the presence of the creditors. It would be wasteful to have the trustee take part in that debate. The issue in (b) – indemnity costs – is only relevant if the Court of Appeal determines that the executors should bear the costs personally. If that happens, the trustee will have no interest in the outcome. If that decision is not reached, however, then the making of an indemnity costs order will simply increase the creditors’ proof of debt against the estate without enlarging the pool of assets. In either case, there is no utility in the trustee in bankruptcy being involved in that debate. The trustee submitted that he should be permitted to take part in the Court of Appeal proceedings otherwise they would be unopposed. I do not agree. The parties with a direct economic interest in the outcome of the Court of Appeal proceedings are the executors and the creditors. The executors plainly have a sufficient interest to oppose the creditors’ appeal – indeed they are named as parties to it. There is no need for the trustee to perform that role.

Interim dividend

40. The trustee seeks a direction that he be permitted to distribute a dividend of four cents in the dollar. The bankrupt estate presently holds assets worth approximately $835,000. The four cent dividend, if paid, will result in a payment to Monica and Leon of less than $50,000. The trustee is of the view that the estate can make this payment and still have sufficient funds to meet the claims of the executors if they are ultimately entitled to their indemnity. The legal expenses of the executors to March 2010 which have already been paid are $670,747.66. I do not think, should they be entitled to indemnity, that the expenses occasioned to the executors by the remaining proceedings could approach that figure. Since the trustee will not be taking part in the Court of Appeal proceedings, his costs are not likely to exceed $50,000. In those circumstances, I see no reason why an interim dividend should not be paid at this stage. Although there is an interesting question of priorities between the executors’ right of indemnity and the trustee’s right of indemnity there are sufficient assets in the estate at this stage such that that question does not presently – and may never – require resolution.

V – Result

41. The creditors should have leave to proceed with the Court of Appeal proceedings other than so much of their appeal as would increase the quantum of damages. The trustee in bankruptcy would not be justified in participating in those proceedings. The creditors should have leave to proceed with their devastavit claims subject to the conditions and limitations I have indicated. The trustee should not meet the executors’ legal expenses in any of the four sets of the proceedings at this stage. An interim dividend of no more than four cents may be paid. The parties are to bring in short minutes of orders reflecting these conclusions. I will hear the parties on costs if they wish. However, my preliminary view is that the executors should pay the costs of the other parties.

I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Associate:

Dated: 27 October 2010