Sheahan v O'Brien & Anor [2003] HCATrans 308 (14 August 2003)

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Sheahan v O'Brien & Anor [2003] HCATrans 308 (14 August 2003)

Last Updated: 21 August 2003

[2003] HCATrans 308

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Adelaide Nos A298 and A373 of 2002

B e t w e e n -

JOHN SHEAHAN

Applicant

and

CHRISTOPHER JOHN O’BRIEN & DEBORAH O’BRIEN

Respondents

Applications for special leave to appeal

GUMMOW J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON THURSDAY, 14 AUGUST 2003, AT 2.26 PM

Copyright in the High Court of Australia

MR P.A. McNAMARA, QC: May it please the Court, I appear for the applicant. (instructed by William Christie)

MR M.L. ABBOTT, QC: If the Court pleases, I appear for the respondent. (instructed by Townsends)

GUMMOW J: Yes, Mr McNamara.

MR McNAMARA: Thank you, your Honour. May it please the Court, the special leave points which the applicant identifies in these matters are, broadly, first of all, whether the single judge in the Federal Court misapplied and misunderstood what your Honours had said in Giumelli v Giumelli some years ago; secondly, whether, in the circumstances found by the single judge, it was a proper case for the vesting effect of section 58 of the Bankruptcy Act to be undone by silence on the part of the first trustee in bankruptcy.

In relation to the second point, your Honours will have noticed that the matters arise out of the Bankruptcy Act and relate principally to the operation of section 58, which is at the very - - -

GUMMOW J: Yes. Now, before Justice Carr, your client was the respondent, is that right?

MR McNAMARA: We were the respondent, thank you, your Honour, yes.

GUMMOW J: This is an appeal to the Federal Court from a federal magistrate?

MR McNAMARA: That is correct, your Honour, thank you.

GUMMOW J: Heard by one judge.

MR McNAMARA: Heard by a single judge. Do your Honours need the statutory framework for that?

GUMMOW J: No. We are becoming all too well aware of that. Now, at paragraph 57 of Justice Carr’s reasons there is a sentence there:

There was no submission from the respondent –

that is your side –

that the appellants were precluded from raising the matter of equitable estoppel on this basis –

of Waltons and Verwayen and so on. That is right, is it not?

MR McNAMARA: By that sentence, your Honour, in my submission, his Honour was referring to preclusion in the procedural sense. What had happened was – I will take your Honours in a moment to the application that was actually before the magistrate, but it was in very confused terms. At first instance, the respondents – Mr Abbott’s clients – had raised and relied on an express representation.

HAYNE J: But the trial of the matter and the appeal to Justice Carr seemed to have proceeded on the basis that resolution depended upon application of the general principles of equitable estoppel - - -

MR McNAMARA: Yes, your Honour, quite so.

HAYNE J: - - - not upon the engagement of any particular feature of bankruptcy law.

MR McNAMARA: Well, yes and no - - -

GUMMOW J: Or, I might add, on the engagement of the Bankruptcy Act with those general principles.

MR McNAMARA: Well, except this - - -

GUMMOW J: There is a real question, maybe, as to the availability of these general law doctrines in the face of a statutory regime such as the Bankruptcy Act.

MR McNAMARA: Precisely, your Honour, and, indeed – if I might respond first to Justice Hayne’s question – the magistrate was very much alive to the interaction of section 58 with the relief which the respondents here were seeking before him. The magistrate, for that reason, went through questions such as, in Mrs O’Brien’s case, has she incurred the expenditure which was in the nature of a detrimental reliance out of moneys which were vested in the trustee, or which were, on the other hand, after-acquired and exempt income?

His Honour Justice Carr really stepped around that and, indeed, in the case of Mr O’Brien, your Honours will have noticed that in order to prevent the equity which his Honour found arose in favour of Mr O’Brien from vesting in the trustee as after-acquired property – application book, page 70, if it please your Honours, paragraph 67, at about line 23, I think. Do your Honours see a sentence beginning:

To give effect to such a similar remedy in relation to Mr O’Brien, and to avoid any possibility that the respondent might seek to “claw back” Mr O’Brien’s equitable entitlements, I shall frame the orders in his favour so that any conveyance to him will take effect forthwith upon his discharge –

So at both levels, their Honours, the magistrate and then Justice Carr, were conscious of the operation and possible effect of section 58. The magistrate was very conscious that, on the face of it, the relief sought by the O’Briens was inconsistent with the Act. Can I take your Honours apropos of that to page 27 of the book, paragraph 69 of the reasons of the magistrate. At the very bottom of the page, do your Honours see a sentence beginning:

However, before I do that I would comment that I could not, in any event, see an estoppel arising out of the words allegedly used by Mr Peel. Apart from the enormous inconsistency between the alleged representation and s.58 of the Bankruptcy Act it seems to me that the representation itself was so uncertain as to be - - -

GUMMOW J: That is right. Now, Justice Carr – and this is the way it may have been run before him in the Federal Court, I do not know – focused upon the second branch of that - - -

MR McNAMARA: Yes, he did.

GUMMOW J: - - - and came to the conclusion it was not so uncertain, et cetera.

MR McNAMARA: That is right, but one might put a gloss on that, your Honours. Before the magistrate, the matter seems to have been conducted on the basis of express representation or not and hence - - -

HAYNE J: There was a good factual fight about what had been said.

MR McNAMARA: Precisely. Thank you, your Honour. Before his Honour, his Honour has inferred a representation by silence. His Honour has not overturned the magistrate on the factual question, was there an express representation? What his Honour found was that there came a time when the trustee should have done something, and he then spelled out a representation from silence.

HAYNE J: But the point that troubles me, so that you can deal with it, is that it is treated as though you look at that only through the spectacles of estoppel. You do not look at that in any way affected by the existence of whatever the statutory obligations and statutory regime may be.

MR McNAMARA: Quite so.

HAYNE J: It seems to me that therefore, if we were to grant leave, we would, for the first time at any stage in this case, be asked to consider the intersection between the Bankruptcy Act and bankruptcy law and these general law principles. It is a difficulty about the promising nature of the vehicle.

MR McNAMARA: Yes, your Honour is quite right – as far as concerns the reasons of Justice Carr, your Honour is perfectly right. But the magistrate was alive to the fact that section 58 was not so much hovering in the background, but really it is - - -

GUMMOW J: I know he was alive to it, but did not have to decide it, because of the view taken about uncertainty, et cetera.

MR McNAMARA: Your Honour is quite right. There was a finding of fact at first instance that there was no - - -

GUMMOW J: It has not been decided at either level. The point that Justice Hayne is putting to you has not been decided at either level.

MR McNAMARA: That is correct.

GUMMOW J: It is then suggested to you this is a vehicle without the necessary number of wheels.

MR McNAMARA: Well, it is, your Honour, because when one stands back from it, the facts are quite simple. On the findings at first instance, not disturbed in the Federal Court, there was no express representation. What the respondents were told on the findings was that, by virtue of section 58, the property vested in the trustee. There was some discussion about valuations – your Honours have read about that in the reasons. Time goes by. Before either bankrupt is discharged, on the findings of Justice Carr, it becomes reasonable to spell out a representation by silence. In reaching that conclusion, his Honour has not addressed – your Honours are quite right about that – the operation of section 58. But when one has regard to the finding at first instance that there was an express statement - - -

GUMMOW J: It is not so much a question of the operation of 58. It is a more fundamental question, in a way. It is, is there any room for these general law doctrines, which effect or may bring about change in property ownership – is there any room for their operation, given the scope and purpose of the bankruptcy legislation?

MR McNAMARA: We would say not, your Honour, and this is an appropriate vehicle to test that because - - -

HAYNE J: But if it is that root and branch argument, we do not see it at trial, we do not see it at appeal, and we are then asked to look at it for the first time in this Court.

MR McNAMARA: Well, yes and no, your Honour. Your Honours will accept this, that at first instance the respondents bore the onus of proof of all elements of an equitable estoppel. Now, if, as it turns out, there are issues of law about section 58, they can be determined by this Court. The findings of fact, in my submission - - -

GUMMOW J: Well, they can be. The question is, should they be - - -

MR McNAMARA: They should be, your Honour.

GUMMOW J: - - - in the absence of some assistance from the other courts?

MR McNAMARA: Your Honours will find this, that if a certain view is taken about the operation of section 58, there are simply no findings which the respondents will be able to point to which will withstand its operation. So, in that sense, it is an appropriate vehicle. There were no findings of express representations that section 58 would not operate. There were no express representations at all by the trustee. We would say that, notwithstanding those difficulties, it is an appropriate vehicle.

The main complaint which the trustee has is not so much about the finding of liability, but about the measure of relief. Your Honours will have seen that in substance – and the respondents accept this – they have profited from the bankruptcy. If I could take your Honours to paragraph 30 of the application, your Honours have there, in fairly crude terms, the arithmetic which flows from the reasons of - - -

HAYNE J: Sorry, which page?

MR McNAMARA: I am sorry, your Honour, application book 88. We say that in the circumstances his Honour in the Federal Court has been overly generous. His Honour, as your Honours have seen, imposed a constructive trust. Can I take your Honours first to 30.4, two-thirds of the way down page 88. At the date of the trial, the property was worth $370,000. The equity in it was about half that, $187,000. The amount owing to the bank, the other amount, $183,000. 30.5: on the evidence, the repayments which the respondents had made to the bank in the way of principal was only $17,000.

They spent an indeterminate and unproven amount on rates and taxes and on what they called “improvements”, but for an outlay of $17,000 in the way of reduction of principal on the debt due to the first mortgagee and for payments of interest, which were 50-something thousand, they have made a windfall. They have regained, in effect, an asset in which the equity is $170,000 – $180,000. The applicant’s submission is that is simply unjust to the unsecured creditors, particularly when one has regard to this, that the - - -

GUMMOW J: Now, that flows from the orders made by Justice Carr?

MR McNAMARA: Yes, it does, your Honour.

GUMMOW J: Where do they appear?

MR McNAMARA: In application book 71, paragraph 70 of his Honour’s reasons. Then your Honours have - - -

GUMMOW J: They are proposed orders.

MR McNAMARA: They are proposed orders, thank you, your Honour. Your Honour has the formal - - -

GUMMOW J: Did his Honour hear the parties before the final orders were made?

MR McNAMARA: The final orders, your Honour, begin at 74.

GUMMOW J: I know, but did his Honour hear the parties in between pages 71 and 74?

MR McNAMARA: I do not know, your Honour, but I would assume so.

GUMMOW J: I mean, if this was going this consequence of these orders, there should have been an objection, I suppose.

MR McNAMARA: Yes, except this, your Honour, that it is not clear whether his Honour was conscious that this was - - -

GUMMOW J: I know. The time to make him conscious is between pages 71 and 74.

MR McNAMARA: Quite so, your Honour, or, indeed, at the hearing before his Honour. What his Honour was aware of was that the respondents had spent some moneys in the way of servicing the mortgage. Can I take your Honours to application book page 57, paragraph 11. His Honour sets out there in table form payments by the respondents to the first mortgagee, the bank. Your Honours see in the left-hand column there are the dates of the payments. The representation which his Honour found was made in March 1999.

Your Honours will see that while it is not possible to say how much was spent after March, for an amount of no more than $32,000 in principal and interest and an unproven amount spent in rates and taxes and an unproven amount spent in improvements, the respondents make a profit from their bankruptcy. They have made no contribution to their unsecured creditors and, in my submission, what your Honours said in Giumelli v Giumelli was that, while the Court has a discretion about a remedy in the case of equitable estoppel and the Court can impose a constructive trust, the Court should generally do no more than reverse detriment.

If his Honour Justice Carr had directed himself in those terms, in substance the orders which his Honour would have made would have been to really leave the judgment of the magistrate on foot in respect of Mrs O’Brien, because the magistrate’s orders worked out an accounting in relation to her which would have seen her recoup her expenses after discharge. With Mr O’Brien, he failed at first instance but at the very best he could only hope for something similar to Mrs O’Brien.

So we would say, your Honours, that the real error of law which Justice Carr has made is in overcompensating the respondents where there is no finding of any deliberate unconscientious conduct on the part of the trustee. The finding was of a representation by silence.

Those findings, in my submission, will not withstand scrutiny, but what his Honour has failed to address is that he was reversing the operation of an Act of Parliament and an Act of Parliament the operation of which the respondents were aware of. He has found that silence during the period of the bankruptcy has undone the effect of the Act even though there was no evidence from the respondents that before their bankruptcy came to an end, any particular step would be taken.

So, in my submission, your Honours, it is an appropriate vehicle for special leave for resolving the operation of section 58 in circumstances such as this. Those are my submissions, your Honours.

GUMMOW J: We will take a short adjournment.

AT 2.44 PM SHORT ADJOURNMENT

UPON RESUMING AT 2.54 PM:

GUMMOW J: We do not need to call on you, Mr Abbott.

In the courts below the determination of the matter has been understood as depending upon the application of well-established principles of equitable estoppel to the particular facts of the case rather than upon any aspect of the law of bankruptcy, including any question as to the scope left by the statutory scheme of insolvent administration for the operation of the general law principles of estoppel.

The decision of the Federal Court from which special leave to appeal is sought in the two applications was dependent upon the conduct of the particular litigation. That conduct included the form of the orders entered in March 2003 which were in the same form as those proposed in the judgment which had been delivered on 21 October 2002. The decision of the Federal Court therefore should not be understood as establishing any generally applicable principle of law relating to estoppel in the administration of bankrupt estates.

An appeal upon either application would enjoy insufficient prospects of success to warrant a grant of special leave. We grant the necessary extension of time in application A373 of 2002, but in each application special leave is refused with costs.

AT 2.58 PM THE MATTERS WERE CONCLUDED