Adsett, N. v Berlouis, H
[1992] FCA 549
•31 JULY 1992
Re: NOEL ADSETT
And: HARRY BERLOUIS; RAYMOND LOUIS BERLOUIS; ARMANDE CELISCA BERLOUIS; LIONEL
JEAN BERLOUIS; KATHLEEN ROSEMARY BERLOUIS; JOSEPH LOUIS BERLOUIS; WILSON
JOSEPH WILDE and ERNEST GEORGE HARRIS
No. Q G183 of 1991
FED No. 549
Bankruptcy
(1992) 109 ALR 100
(1992) 37 FCR 201
COURT
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Northrop(1), Wilcox(1) and Cooper(1) JJ.
CATCHWORDS
Bankruptcy - Annulment pursuant to composition agreed by creditors - Costs of applications relating to administration of bankrupt estates - Order by primary judge that trustee pay costs of bankrupts of contempt proceedings - Order by primary judge that trustee pay his own costs of applications for his removal as trustee and for annulment of the bankruptcies and that no part of such costs be recoverable by him from composition fund - Circumstances in which a trustee may be deprived of indemnity from trust estate - Whether the making of the orders constituted a breach of the duty to provide natural justice to trustee - Whether the orders were within the proper discretion of the Court.
HEARING
BRISBANE
#DATE 31:7:1992
Counsel for the Appellant: D.F. Jackson QC and R. Douglas
Solicitors for the Appellant: Lynch and Co
Counsel for the Respondents: P.R. Dutney QC and T. Matthews
Solicitors for the Respondents: Lippiatt and Co
ORDER
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay to the respondents their costs of the appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. (See also Order 37 rule 2(3)).
JUDGE1
This appeal challenges orders for costs made by a Judge of the Court (Pincus J) following the disposal of three applications concerning the administration of the bankrupt estates of the respondents, Harry Berlouis, Raymond Louis Berlouis, Armande Celisca Berlouis and Lionel Jean Berlouis. The appellant, Noel Adsett, is the former trustee of the estates. The respondents comprise the four former bankrupts, two partners of the bankrupts ("the solvent partners"), Kathleen Rosemary Berlouis and Joseph Louis Berlouis, and two accountants who were appointed trustees of a composition made between the bankrupts and their creditors on 25 June 1991, Wilson Joseph Wilde and Ernest George Harris.
On 4 April 1991 a sequestration order was made against the estates of the four bankrupts. Mr Adsett was appointed trustee. At that time the four bankrupts and the two solvent partners were carrying on two partnership businesses at Hervey Bay, near Maryborough. Within a short time after the sequestration orders Mr Adsett became involved in discussions and actions concerning those businesses, including an application to the Supreme Court of Queensland which was eventually dismissed by Thomas J. It is not necessary for present purposes to detail those steps.
Also fairly shortly after the making of the sequestration orders, a proposal was mooted for a composition with creditors, using funds substantially provided by the National Bank of Australia, and a consequential application for annulment of the sequestration orders. Once again, it is not necessary to descend to detail. It is enough to say that discussions took place between the bankrupts and Mr Adsett concerning the proposals. On 24 May 1991 the bankrupts, pursuant to s.73(1) of the Bankruptcy Act 1966, lodged with Mr Adsett a proposal in writing setting out the terms of the proposed composition. Upon receipt of the proposal, s.73(2) required Mr Adsett to call a meeting of creditors and to send to each creditor before the meeting a copy of the proposal accompanied by a report on it. Mr Adsett did not immediately do so because, apparently, he was not satisfied that the material in his possession revealed all the bankrupts' creditors. On 3 June 1991 the bankrupts, as applicants, filed an application returnable on 5 June seeking an order that Mr Adsett call a meeting of creditors. On Wednesday 5 June the Court, by order, directed Mr Adsett to call the meeting by 4.00pm on the second working day after he received the accounting books and records of the two partnerships for the period from 1 July 1989 to date. The Court also, by order, directed the bankrupts to comply with their obligations under s.77 to produce the books and records to Mr Adsett by 4.00pm on "Tuesday next", being 11 June 1991. The bankrupts supplied a large volume of documents to Mr Adsett. On 11 June 1991 Mr Adsett called the meeting for 25 June 1991. That meeting of creditors by special resolution, being a resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by attorney or by proxy at the meeting and voting on the resolution, overwhelmingly, but not unanimously, accepted the proposal, as amended; see s.73(3) and (4).
The bankrupts promptly made application to the Court pursuant to s.74 for approval of the composition and for orders annulling the bankruptcies. At the hearing of the application, there was debate about the proper interpretation of the deed of composition approved by the creditors, the question being whether it made provision for the payment out of the composition fund of the trustee's reasonable remuneration and expenses. Although he criticised the drafting of the deed, Pincus J found that, upon its proper construction, the deed did so provide. On 9 December his Honour made orders as follows:
"1. The respective compositions accepted by the creditors of Harry Louis Berlouis, Raymond Louis Berlouis, Armande Celisca Berlouis and Lionel Jean Berlouis by special resolutions passed in a meeting of the creditors on 25 June 1991 be approved.
2. The bankruptcies of the bankrupts dated 4 April 1991 be annulled.
3. The sum payable as remuneration to Noel Adsett, the trustee of the bankrupts' estate be fixed by a District Registrar as contemplated by s.162(4) of the Bankruptcy Act 1966.
4. The said trustee's application to commit the bankrupts for alleged contempt be dismissed."
The final line of the reasons for judgment delivered on 9 December was: "I shall hear the parties on costs". When he delivered judgment and made the orders set out above, his Honour drew attention to this fact and initiated a discussion about the convenient time for addresses on costs. During the course of this discussion, he remarked to the solicitor for Mr Adsett, who had said that his counsel was currently engaged in the Supreme Court, "the question of costs isn't really very complicated." In the result, it was agreed that costs would be argued at 2.15 that afternoon when counsel, Mr G W O'Grady, was expected to be available.
The Court reconvened at 2.15 pm on 9 December when Mr O'Grady appeared. Both he and Mr P R Dutney QC, senior counsel for the former bankrupts, made submissions on costs. His Honour considered those submissions overnight. On the following day, 10 December, he gave oral reasons for making the following orders:
"1. The trustee of the bankrupts' estate, Noel Adsett, pay the costs of the application to commit the bankrupts for alleged contempt and no part of those costs so ordered to be paid be included in any sum payable to the trustee under the compositions.
2. The said trustee pay his own legal costs and outlays of the application for his removal as trustee and of the application for the approval of the compositions and the annulment of the bankruptcies of the bankrupts and that no part of such costs and outlays be included in any sum payable to the trustee under the compositions."
The appellant now challenges these two orders of 10 December, in particular the concluding words of each order precluding the trustee from recovering out of the composition fund the costs respectively ordered to be paid and borne by him. On his behalf two grounds are advanced: denial of natural justice and miscarriage of discretion. Counsel for the trustee specifically disclaim any submission that the learned judge lacked power to make the orders. They concede that the judge had the necessary power. We think that this is correct.
In order to deal with the matters in issue it is necessary to state some additional facts. First, the bankrupts filed an application for removal of Mr Adsett as trustee on 31 May 1991. The application was due to be heard on 19 July 1991. On 5 June 1991, during the course of a discussion which followed the making of the directions that Mr Adsett call the meeting of creditors and that the bankrupts produce the documents, Spender J said: "If the personal records haven't been produced by 4.00 pm on Tuesday next I expect that a motion will be made returnable to this Court to imprison people." Contrary to a suggestion later made by Mr Adsett, his Honour did not direct the initiation of contempt proceedings.
On the following day, 6 June, a considerable volume of partnership books and records was made available to the trustee. The trustee apparently inspected these documents and formed the view, rightly or wrongly, that not all relevant material had been delivered. He did not, however, contact the bankrupts - or their solicitors or accountants - to draw attention to the perceived omissions. Instead, on 14 June - after the day on which he convened the creditors' meeting - Mr Adsett filed an application for the committal of the bankrupts for contempt of court, the allegation being that they had failed to comply with Spender J's order of 5 June. Mr Adsett did not, however, immediately serve the application. He retained the application unserved until 1 July, after the meeting of creditors which had approved the composition. He then effected service. The application was made returnable on 19 July.
At the 25 June meeting of creditors a resolution was passed, by a majority of more than two thirds in value of the creditors represented, supporting the pending application for removal of the trustee and the appointment of other trustees.
On 6 July 1991 the bankrupts filed an application for approval of the composition and annulment of the bankruptcies. This application was also made returnable on 19 July.
On 19 July 1991 Pincus J sat to deal with three applications: the bankrupts' applications for removal of the trustee and for approval of the composition and annulment of the bankruptcies and the trustee's application for committal for contempt. The trustee was represented by two senior counsel: Mr F. Douglas QC in relation to the contempt matter and Mr W. Sofronoff QC in connection with the other applications. Each senior counsel led Mr O'Grady. Mr Douglas informed the Court that, in the light of events which had transpired since the application for committal for contempt was filed, the trustee did not wish to pursue that application. He then withdrew and his Honour turned to the application for approval of the composition. In his report Mr Adsett had questioned whether the deed of composition made proper provision for his remuneration and expenses. On the basis that it did not, he opposed the composition. Under cross-examination Mr Adsett agreed that he had not raised this objection at the meeting of creditors. This was despite the fact that the deed had been amended at the meeting to accommodate other concerns; notably to increase the guaranteed minimum dividend to creditors from 50 cents in the dollar to 85 cents.
During the hearing on 19 July Mr Dutney QC made an oral application for an order pursuant to s.179 of the Bankruptcy Act that the trustee not be entitled to indemnity from the assets of the bankrupt estates in relation to some items of remuneration and expenses. His Honour directed that a list of the challenged items be provided on the following day, a Saturday, and adjourned the further hearing of the matter until the following Monday, 22 July. A list of items was provided on the Saturday. Amongst the items were the costs incurred by Mr Adsett in connection with the Court applications then pending.
The matter was dealt with briefly on the Monday. No transcript of that hearing is available. It is, however, agreed that, on that day, Mr O'Grady informed the Court that his client, Mr Adsett, proposed to resign as trustee on completion of the hearing of the application to approve the composition. Moreover, there was discussion about the oral application under s.179 made by Mr Dutney on the previous Friday. Its substance emerges from a note put on the transcript of the following day's hearing by Pincus J, which the parties accept as accurate.
"HIS HONOUR: Yes, perhaps I should mention something, which is that yesterday at a brief hearing which was not recorded I received submissions on the question of whether or not the court should go into the issues which Mr Dutney wished to raise on behalf of the applicant as to the trustee's costs. After the matter was discussed and I received an assurance from Mr O'Grady, who is appearing for the trustee, Mr Adsett, that the time before the proposed hearing and the volume of material was such that he felt unable to prepare for the matter in time.
I therefore directed that the case would go ahead on the issues which are already in a sense pleaded and the question of costs would have to be left for later determination."
His Honour then continued the hearing of the application to approve the composition, Mr Adsett's evidence continuing. It was during that evidence that Mr Adsett referred to a "direction" about a motion for contempt; although it is only fair to say that, when this description was challenged, Mr Adsett withdraw that word and referred, more correctly, to an understanding by Spender J that an application would be brought. Following Mr Adsett's evidence, counsel addressed, including in relation to the proper construction of the deed of composition, and Pincus J reserved his decision on the application for approval of the composition. The application for Mr Adsett's removal was not formally dealt with, no doubt because of the previous day's intimation. True to that promise, Mr Adsett did resign as trustee after the conclusion of the 23 July hearing.
As already indicated, Pincus J delivered judgment approving the composition on 9 December. He then made the orders already set out and adjourned the matter until 2.15pm for argument on costs. That hearing continued until 2.58 pm when his Honour reserved his decision on costs until the following day. Unfortunately, for reasons not explained to us, only part of the hearing on the afternoon of 9 December was recorded. Mr Dutney's opening submission is not available, neither is the bulk of Mr O'Grady's submission in response. Because the context of these submissions was thought to be important to their natural justice point, the appellant's advisers obtained from Mr O'Grady an affidavit setting out his recollection of his submission on costs. The respondents countered with an affidavit from Mr M W Lippiatt, the solicitor instructing Mr Dutney on 9 December. Both Mr O'Grady and Mr Lippiatt were briefly cross-examined before us.
The inconvenience and potential embarrassment of this course is obvious. This case emphasises the desirability of all submissions being recorded, whether or not it is necessary immediately to transcribe them. If the recollections of Mr O'Grady and Mr Lippiatt had substantially differed, the Court would have been placed in a difficult position in evaluating the appellant's first submission. Fortunately, the two witnesses agreed as to the effect of the submissions made. In particular, they both recalled that Mr Dutney requested Pincus J to make an order disentitling Mr Adsett to reimbursement of the costs of the various applications out of the bankrupts' estates. Mr O'Grady appreciated that such an order would be both unusual and onerous. He responded accordingly. But he did not seek an adjournment to allow consideration of the question whether his client should adduce evidence as to the circumstances surrounding his decisions to initiate and to resist the various applications. Mr O'Grady was content to allow Pincus J to evaluate Mr Dutney's submission on the basis of the evidence already before him. (In making that last observation, we do not mean to suggest that Mr O'Grady should have sought an adjournment or tendered any further evidence. It is probable that all relevant material was already before the Court. We merely make the observation that, knowing the nature of the application, counsel was content to have it immediately decided.)
As already indicated, Pincus J considered the matter overnight and, on 10 December, made the orders now under challenge.
At the hearing of the appeal counsel for Mr Adsett sought that order 1 of 10 December be varied by deleting the words "and no part of these costs so ordered to be paid be included in any sum payable to the trustee under the composition" and that order 2 be varied by deleting the words "and that no part of such costs and outlays be included in any sum payable to the trustee under the composition". The effect of the latter variation would be to make the trustee personally liable for those costs; in other words pay them out of his own pocket. There is a question as to the meaning of order 1. We will return to that matter later.
The first submission of the appellant is that, although Pincus J had power to make the orders which he did, he ought not to have done so at that time. Counsel point to the history of the matter, correctly stating that on 23 July 1991 Pincus J had postponed until a later date the bankrupt's application under s.179 for disallowance of the trustee's right of indemnity in respect of the items listed on 20 July. Those items included the costs of the applications finally disposed of on 9 and 10 December. Counsel rightly say that Pincus J did not, on 9 December, disavow that general approach. In his reasons for judgment of that day, Pincus J included the following paragraph:
"There remains the procedural question: how is the proper sum payable to the trustee to be determined? In the events which have happened, it seems to me right to direct that the remuneration be fixed by a District Registrar as contemplated by s.162(4) of the Act. It may be that this will involve the Registrar in determining some difficult questions of fact and exercising judgment as to whether the trustee has, as the bankrupts would contend, been in some respects unnecessarily obstructive; his decision may of course be reviewed by a Judge."
Note also order 3 of the orders of 9 December, set out above.
Counsel also point to his Honour's remark to the solicitor for Mr Adsett immediately after delivering judgment on 9 December. That remark suggests that his Honour did not then anticipate that he would be asked to deal with the matter of the trustee's indemnity. At that stage he apparently had in mind only argument concerning party-party costs orders.
However, accepting these matters of fact, it appears to us that the complaint of denial of natural justice cannot survive the evidence regarding the afternoon. Even if his Honour did not previously contemplate immediately dealing with the matter of the trustee's indemnity, and this is not certain as order 3 refers only to "remuneration" and not to expenses, it was open to Mr Dutney to request him to do so. Pincus J had not made any direction as to when the objected items would be determined. It was not necessary for all to be determined at the one time. Nor was Mr Dutney's request unreasonable. There was an advantage in his Honour determining the reasonableness of the trustee's conduct in relation to the applications he had determined. He had heard the trustee's explanations for his actions and observed the conduct of the applications by both sides. His Honour was about to leave the Court. It would be difficult for a Registrar, or another Judge on reference from a Registrar, to capture the atmosphere of what had occurred.
As it seems to us, the only procedural question which could arise out of Mr Dutney's submission was whether there was any unfairness in the Court dealing immediately with the matter of the trustee's indemnity concerning the costs of the applications. If Mr O'Grady had opposed his doing so, his Honour would have needed to consider the appropriate course to take. However, probably because he saw no advantage in delay, Mr O'Grady acquiesced in his Honour immediately proceeding to a decision on the submission made by Mr Dutney. In the absence of any contemporaneous protest, or suggestion of unfairness, by the experienced counsel then representing Mr Adsett, it seems to us untenable to contend that, in determining a matter argued before him by both counsel, Pincus J denied Mr Adsett natural justice.
The second basis of complaint is that his Honour's decision involved a miscarriage of his discretion. Counsel accept that the decision on costs was one falling within the principle applied in such cases as House v The King (1936) 55 CLR 499, Lovell v Lovell (1950) 81 CLR 513 and Gronow v Gronow (1979) 144 CLR 513, so as to be vulnerable on appeal only if the discretion miscarried as a result of an error of law or principle, a mistake of fact, a failure to take into account a relevant consideration or regard to some extraneous circumstance. But they say that his Honour did err in principle, that he should have approached the matter on the basis that only a trustee in bankruptcy who has recklessly instituted or precipitated the litigation should be deprived of the right to recover his or her costs from the bankrupt estate. In the present case, they say, it was reasonable for the trustee to initiate the contempt proceedings; he had reason to believe that the bankrupts had not fully complied with Spender J's order. As regards the other applications, these were initiated by the bankrupts. Counsel say that it was reasonable for Mr Adsett, in response to the application for his removal, to defend his administration and reputation; and that it was not merely his entitlement but his duty to put before the Court his concerns about the adequacy of the composition deed. In relation to the latter point, counsel draw attention to Pincus J's criticisms of the form of the deed.
A number of observations must be made about these submissions. First, we do not accept that the circumstances under which a trustee may be deprived of his or her costs indemnity are as limited as counsel suggest. It is necessary to refer to the pertinent principles. A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt's estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules. The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act (Re Campbell; ex parte Official Trustee (1987) 13 FCR 326 at 329). The conduct of the trustee is subject to the supervision of the Court (eg. Division 4 of Part VIII of the Act) and a trustee in bankruptcy has historically been regarded as an officer of the relevant court (Ex parte James, Re Condon (1874) LR 9 Ch App 609 at 614; Scranton's Trustee v Pearse (1922) 2 Ch 87; Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq.) (1948) 76 CLR 463 at 482; Re Henderson (1934) 7 ABC 273 at 277-278). A trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee (In Re Silver Valley Mines (1882) 21 Ch D 381 CA at 386, 392). The trustee is required to bring reasonable skill to the performance of his or her duties (Silver Valley Mines at 392; Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 at 284).
A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money (In Re Grimthorpe, Deceased (1958) 1 Ch 615 at 623; In Re Whitley (1962) 1 WLR 922 at 931). A trustee in bankruptcy is in no different position. The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee's obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt. We adopt, as a correct statement of the duty of a trustee and the proper manner of its performance, the words of Smithers J in Mannigel v Aitken (1983) 77 FLR 406 at 408-409:
"In the case of bankruptcy the Trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the Trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the Trustee. It was said by Rogerson J. in Re Ladyman (1981) 55 FLR 383 at 394-396 that the standard of conduct required of the Trustee will ordinarily be the standard required of a professional man and perhaps higher. The learned judge referred to 'the high standard of conduct required of trustees'. In Re Brogden (1888) 38 Ch D 546 Lord Justice Fry said at 571: 'A Trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion is never an absolute one. It is always limited by - the dominant duty - the guiding duty of recovering, securing and duly applying the trust fund; and no Trustee can claim any right of discretion which does not agree with that paramount obligation'.
Where an order is sought that the Trustee be removed and to make good the losses suffered by the estate, it must be established that the Trustee has been guilty of a breach of duty to act 'diligently and prudently in regard to the business of the Trust'. See Riley J. in Re Alafaci ((1976) 9 ALR 262) at 285.
According to Halsbury's Laws of England (3rd ed) Vol. 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. The Trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs. But beyond this he is not bound to adopt further precautions. It was said by their Honours Dixon C.J., McTiernan and Windeyer JJ. in Elder's Trustee and Executor Co. Ltd. v. Higgins (1963) 113 CLR 42 that:
'We are not to judge what the Trustee then did or failed to do by the light of later events...The duty of the Trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator's estate...The argument that the Trustee having, it was said, exercised a discretion, its conduct is now unchallengeable is sufficiently answered by a passage from the judgment of Fry L.J. in Re Brogden ... Whether or not one calls (the trustee's action) an exercise of discretion, the question remains was it the act of a prudent Trustee'."
A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act or Rules (Re Ladyman (1981) 38 ALR 631 at 643). The Act confers no right on a trustee to be reimbursed in respect of the costs, charges or expenses incurred in the administration of the estate. The trustee's right to an indemnity is provided under the general law.
Under that law a trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred by the trustee (Turner v Hancock (1882) 20 Ch D 303 at 305; In Re Love; Hill v Spurgeon (1885) 29 Ch D 348 at 350; In Re Beddoe; Downes v Cottam (1893) 1 Ch 547 at 558).
A trustee's right to remuneration for his or her own efforts, as distinct from reimbursement of outgoings, is not conferred by the general law. A trustee, generally speaking, has no right to remuneration. Neither does the right to remuneration arise out of the indemnity in respect of "costs, charges or expenses". That collocation of words does not include the value of services provided by the trustee in administering the estate. The concepts of remuneration and outgoings are distinct. It is true that in some statutory provisions - for example, s.109 of the Bankruptcy Act - the trustee's remuneration is specifically included amongst the "costs, charges and expenses of the administration of the bankruptcy". But such special provisions, giving an extended meaning to "costs, charges and expenses", do not remove the conceptual dichotomy between remuneration and outgoings. Rather, they group the two concepts for the limited purposes of the relevant sections.
Where a trustee in bankruptcy is appointed in the expectation that he or she will be remunerated, and there is no prior agreement to act gratuitously, the Act assumes the existence of a right to be remunerated. Section 162 provides a mechanism for fixing the quantum of the remuneration (Mayne v Jaques (1960) 101 CLR 169 at 172, 173, 175, 180 - 181). The right to remuneration for work done is enforceable by the trustee by calling a meeting of creditors to fix the remuneration by resolution or, if the creditors so resolve, to have the remuneration fixed by the committee of inspection, if any (s.162(1)). Where remuneration is not fixed by the creditors or the committee of inspection, the Registrar may fix the remuneration (s.162(4)). The remuneration to which the trustee is entitled is to be just and proper (Mayne v Jaques at 183), or reasonable remuneration in all the circumstances (Re Palmer; Ex parte Taylor (1988) 79 ALR 621 at 632), for the work carried out by the trustee. The right to payment is only lost for a specific reason, as, for examples, if no work was done or needed to be done or misconduct by the trustee (Mayne v Jaques at 171, 180). As to the loss of the right under the general law see Turner v Hancock at 305, 306 and In Re Love at 350).
The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate (Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175). Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation. In the general area of the administration of trusts, the position was stated by Lindley L.J. in Re Beddoe at 558:
"I entirely agree that a trustee is entitled as of right to full indemnity out of his trust estate against all his costs, charges, and expenses properly incurred: such an indemnity is the price paid by cestuis que trust for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally. The words 'properly incurred' in the ordinary form of order are equivalent to 'not improperly incurred'".
Bowen L.J. expressed a similar view at 560:
"The fallacy of the Respondent's argument lies in supposing that because a trustee has to pay costs in a collateral suit, it is as costs that he inflicts them on his own trust fund. It is only as 'charges and expenses' that he can recover them...'"
and at 562:
"The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust - a proposition in which the word 'properly' means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him. If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred."
See also In Re England's Settlements Trusts; Dobb v England (1917) 1 Ch 24 at 28, 31.
The principle enunciated by Bowen L.J. in Beddoe applies to the administration of bankrupt estates (In Re Bryant, Ex parte Gordon (1889) 6 Morrell 262 at 266; Re Dusseck, Ex parte The Trustee v Australian Mosaic Flooring Ltd (1964) 20 ABC 159 at 165). In Bryant, Cave J expressed himself at 266 as follows:
"Trustees must understand that it is not because they are trustees and have a right to bring motions and initiate proceedings which, if properly brought, will be paid for out of the assets of the estate, that they are recklessly to institute litigation either by bringing motions or by leading other persons to bring motions. Where the trustee has shown such carelessness and want of sense in a case in which, if he had exercised common sense, it would probably have saved litigation, I shall certainly make him pay the costs out of his own pocket."
The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout. It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper. Nor is it profitable to attempt a detailed rule covering all circumstances. But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Re Beddoe, which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not "properly incurred". The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment.
In principle, there is no difference in the approach to be taken when the questions of the trustee's right to indemnity and right to remuneration fall for consideration. That is, the trustee's right to remuneration is limited to work properly undertaken. In this context, "properly" means work reasonably and bona fide undertaken for the purpose of administering the estate or performing any public duty imposed by the Act, conformably with the trustee's duty to perform the work with reasonable care and skill and in an efficient and economical way.
Secondly, in relation to the submission of counsel for the appellant, the facts noted by them require consideration in their context. It is true that the trustee had reason to believe that there were omissions in the documentary material provided to him by the bankrupts. But he had no reason to believe that the bankrupts were being obstructive or defiant in relation to their documents. Whatever their previous defaults, on 6 June 1991 they delivered a large quantity of documents to the trustee. The suspected omissions were relatively minor and concerned documents whose existence was uncertain. In our opinion, a trustee acting reasonably and economically would have drawn the bankrupts' attention to the suspected omissions and asked whether those documents existed and, if so, their whereabouts. If the bankrupts' responses were unsatisfactory, it may have been reasonable to commence contempt proceedings. But, in the face of apparent co-operation by the bankrupts, it was unnecessary and unreasonable to initiate the contempt proceedings on 14 June. This is particularly the case when it is remembered that, by that date, the trustee had sufficient information to convene the creditors' meeting and to prepare his report. It is true that he could not know whether the creditors would accept the proposed composition - which was at that stage only 50 cents in the dollar - but there must have been some prospect of acceptance; a matter which Mr Adsett seems to have acknowledged by withholding service of the application until 1 July, after the meeting of creditors on 25 June. It has not been explained why Mr Adsett thought it useful to proceed with the contempt application after the meeting and in the face of the creditors' approval of the composition and support for his removal as trustee. By so doing, he put the bankrupts to the expense of compiling a lengthy affidavit dealing with the existence and whereabouts of various documents and of instructing lawyers to resist the threat of their imprisonment. Moreover, Mr Adsett took the extraordinary course of retaining separate senior counsel to prosecute the application, only to abandon that application when it came before the Court. There has been no explanation of Mr Adsett's change of heart between 1 July and 19 July. It does not appear that there was any relevant change of circumstances between these dates. In our opinion, Pincus J was fully justified in holding that Mr Adsett's conduct in relation to the contempt application was not reasonable. Whether or not this was intended, the course which he took had the effect of maximising, rather than minimising, expense to both the bankrupts and himself.
Similar observations may be made about the other applications. It is true that they were initiated by the bankrupts rather than the trustee. The application for removal may or may not have been justified. As the facts were never investigated, we have no opinion about that matter. We make no assumption adverse to Mr Adsett. If Mr Adsett thought the application unmeritorious, he was justified in his initial decision to resist it. On that hypothesis, any costs incurred by him prior to the creditors' meeting were reasonably incurred. But these costs must have been minimal. And, whatever the position before the meeting, the decisions at that meeting ought to have changed the trustee's attitude. The composition had been approved, so there was a substantial prospect of an early termination of the bankruptcies. Even more importantly, the creditors had voted decisively in favour of the trustee's removal from office. Except in the most unusual of circumstances - as, for example, where there is a question about the conduct or representativeness of the vote - a trustee who has lost the confidence of the majority of creditors ought not to cling to office, but make way for someone else. For a trustee to involve the estate in litigation about his or her past performance, especially when a composition is likely to be approved, is to incur unnecessary expense.
We accept that it was proper for Mr Adsett to draw the Court's attention to the perceived inadequacy in the deed of composition. It is true that the inadequacy related to a matter in which he had a personal interest, his remuneration and expenses. Nonetheless it was important to ensure, by one means or another, that this matter was covered. We share the view of Pincus J that it would have been helpful for Mr Adsett to ask the creditors to address the problem at the meeting of 25 June, especially in the light of their willingness to insist upon other changes. Although the matter had been mentioned in his report to the creditors, it would have been sensible for Mr Adsett to follow up the matter orally. It is difficult to accept his claim that he, an experienced trustee, felt inhibited by the conduct at the meeting of the bankrupts' solicitor. The meeting was chaired by another person, an accountant. But, be that as it may, it remained necessary for Mr Adsett to report to the Court: see s.74(3) of the Bankruptcy Act. It was proper for him to refer in that report to his concern about remuneration and expenses.
We need not decide whether it was reasonable for Mr Adsett to incur the expense of legal representation in connection with the application for approval of the composition. It can be so argued; it was predictable that the Court would welcome submissions concerning the proper interpretation of the deed. But submissions could have been made by Mr Adsett's solicitor, who was fully conversant with the matter and had attended the creditors' meeting, or, at the most, by junior counsel. We are unable to see the necessity for retaining senior counsel and for the hearing being conducted, not as a matter for attention by the Court in making its orders, but as a ground of objection to the composition. In the result, instead of the matter occupying an hour or so, the hearing regarding the composition extended over much of two sitting days, 19 and 23 July, with a directions hearing on Monday, 22 July.
It follows from what we have said that we agree that it would have been reasonable for the trustee to incur some costs in respect of these applications. Under such circumstances, counsel for the appellant not unnaturally argue that it was an error of principle for Pincus J entirely to deprive Mr Adsett of his right of indemnity.
This submission raises the question earlier noted of the proper meaning of order 1. It will be recalled that the trustee was ordered to "pay the costs of the (contempt) application". Counsel for the appellant apparently initially understood that the effect of this order was to make Mr Adsett pay the bankrupts' costs of that application, without any right of indemnity from the estate, and also personally to bear his own costs, that is without indemnity. During the course of argument this understanding was questioned and the matter was left on the basis that the question whether Mr Adsett should be indemnified for his own costs was unresolved by the order and could be dealt with under the pending s.179(1)(b) application. But on reflection we came to doubt whether this was so. We felt that Pincus J had intended to deal with the matter of indemnity for these costs, a subject raised before him by Mr Dutney. However, we felt that, having regard to the course of argument, we should not act on this view without affording the parties an opportunity of addressing it. Accordingly, we invited written submissions on the matter. They were furnished by both parties. Counsel for the appellant submit that order 1's denial of indemnity pertains only to the costs ordered to be paid by Mr Adsett to the bankrupts. They support this conclusion chiefly by contrasting the wording of order 1 with that of order 2. Counsel for the respondents, in contrast, argue that order 1 was intended to cover both sets of costs. They say that the words "the costs of the application" included the costs of both parties. They contend that his Honour was clearly of the view that no part of the costs associated with the application should be visited upon the bankrupts, either directly or by resort to a claim for indemnity. They also refer to order 2, suggesting that it indicates his Honour's ability to indicate any intention to limit the effect of an order to the costs of a particular party.
We accept the respondents' submission on this matter, mainly for the reasons which they give but also because it would be strange for Pincus J to have taken the unusual and extreme step of depriving Mr Adsett of his indemnity in relation to the costs of the opposite party to the litigation but to have failed to take the more common step of depriving him of his indemnity in relation to his own costs. It is obvious that Pincus J took a serious view of Mr Adsett's conduct in connection with the contempt application. We think that he intended that no part of the costs of that application should be borne by the bankrupts. The words he used in order 1 were apt to express that intention.
Construing order 1 in this way, we consider that the orders on costs were open to Pincus J. Although there were some items in respect of which Mr Adsett would normally and reasonably expect to be indemnified, there were expenditures forced upon the bankrupts and the solvent partners - the persons who would ultimately bear the burden of the indemnity - which ought not to have been forced upon them. Pincus J was entitled to balance out these considerations. In their written submissions, counsel for the respondents contended that Pincus J did carry out a balancing exercise. They summarised the matters alluded to by his Honour in his reasons:
"(a) the extravagance with which the appellant conducted the litigation;
(b) the need not to discourage proper applications by trustees;
(c) the need to discourage unnecessary applications;
(d) the substantial nature of the point raised by the appellant in opposing the compromise;
(e) the failure of the trustee to raise the complaint in the proper forum of the creditors' meeting."
Some of these matters point in favour of allowing a full indemnity, some in favour of the opposite extreme of requiring Mr Adsett to pay out of his own pocket all the costs incurred in relation to the applications. In what, we agree, was obviously a balancing exercise, his Honour took the intermediate course of throwing onto Mr Adsett personally the whole costs of the contempt proceedings and of requiring him to meet his costs of the other applications out of his own pocket; but of not requiring him to meet the bankrupts' costs of those applications. Minds may differ as to the appropriateness of the balance struck by his Honour. But the result was well within the range of his Honour's discretion. Pincus J did not fall into any error of law or principle. He was aware of the general rule that a bankruptcy trustee, acting reasonably, is entitled to an indemnity for costs; that was the whole point of the special consideration on which he was invited by Mr Dutney to engage. In deciding how to exercise his discretion, his Honour was entitled to have regard to the whole course of events concerning the relevant applications and, also, the facts out of which they arose. We do not think that he erred in law or in his understanding of the facts, that he had regard to any irrelevant matter or omitted consideration of anything which was relevant.
The appeal should be dismissed with costs. The appeal having been initiated after Mr Adsett resigned as trustee, there is, of course, no question of an indemnity in relation to those costs.
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