Bertram v Naudi (No 2)
[2024] FCA 1239
•25 October 2024
FEDERAL COURT OF AUSTRALIA
Bertram v Naudi (No 2) [2024] FCA 1239
File number(s): SAD 87 of 2021 Judgment of: O'SULLIVAN J Date of judgment: 25 October 2024 Catchwords: BANKRUPTCY — application by bankrupt for three contribution assessments to be set aside on the basis that they are void or invalid — where applicant is a discharged bankrupt — where the Trustee found the bankrupt received a benefit in the form of payment of legal services within the meaning of s 139L(1)(a)(v) of the Bankruptcy Act (1966) (Cth) — whether the applicant received a benefit within the meaning of s 136 of the Fringe Benefits Tax Assessment Act (Cth) — whether the Trustee erred in law and/or fact in concluding the applicant received a benefit and thereby income for the purposes of ss 139L(1)(a)(v) of the Act — whether the Trustee erred in law and/or in fact in concluding in the alternative that the bankrupt received the value of a loan for the purposes of s 139L(1)(a)(vi) of the Act — whether the Trustee was satisfied for the purposes of s 139W(2) of the Act that the income that was derived by the bankrupt during the relevant period was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period — where the Trustee cross-claims for the amounts due under the three contribution assessment periods — where the Trustee disregarded information provided by the applicant pursuant to s 139X of the Act — where information provided by the applicant was false — where other information provided by the applicant was incorrect — application dismissed — judgment for the respondent on its cross claim. Legislation: Administrative Appeals Tribunal Act 1975 (Cth), s 44
Bankruptcy Act 1966 (Cth), ss 81, 139L(1)(a)(v) & (vi), 139W, 139W(1), (2) & (4), 139X, 139Z, 139ZA, 139ZF, 149, 149J, Schedule 2
Fringe Benefits Tax Assessments Act 1986 (Cth), ss 45, 50, 136
Insolvency Practice Rules (Bankruptcy) 2016 (Cth)
Cases cited: Bond v Trustee of Property of Bond (a bankrupt) (1994) 52 FCR 304; (1994) 34 ALD 385
Borg v de Vries (Trustee), in the matter of the Bankrupt Estate of David Morton Bertram [2018] FCA 2116
Djokovic v Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2022] FCAFC 3; (2022) 289 FCR 21
Frost v Sheahan [2009] FCAFC 20
Ibrahim v Minister for Home Affairs [2019] FCAFC 89; (2019) 270 FCR 12
In Moore v Macks [2007] FCA 10
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Kelly (as joint and several liquidators of Halifax Investment Services Pty Ltd (in liq) v LOO (No 8) [2020] FCA 533
Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101
Mehajer v Weston [2020] FCA 924
Metropolitan Gas Company v Federal Commissioner of Taxation [1932] HCA 58; (1932) 47 CLR 621
Miao v Michell [2015] FCA 22
Minister for Immigration and Citizenship v SZMDS [2010] HCA 16; (2010) 240 CLR 611
North Australian Aboriginal Justice Agency Ltd v Northern Territory [2015] HCA 41; (2015) 256 CLR 569
R v Connell, Ex parte Hetton Bellbird Collieries [1994] HCA 42; (1944) 69 CLR 407
Re Dingle: Westpac Banking Corporation v Worrell (1993) 47 FCR 478
Re Ellis, ex parte Jefferson and Stevenson [1995] FCA 81
Re Tyndall; Ex Parte Official Receiver [1977] FCA 15; (1977) 17 ALR 182
Re Wheeler; Ex parte Wheeler v Halse [1994] FCA 1348; (1994) 54 FCR 166
Tinkler v Melluish [2017] FCA 52
Weiss v Official Trustee in Bankruptcy (1983) 1 FCR 40
Thomas on Powers (2nd ed) [1.64]
Division: General Division Registry: South Australia National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Number of paragraphs: 388 Date of hearing: 7 & 8 June 2022; 29 May – 2 June 2023; 27 & 28 June 2023 Counsel for the Applicant: Mr R Whitington KC with Mr S McDonald SC Solicitor for the Applicant: CCK Lawyers Counsel for the Respondent: Mr B Roberts KC Solicitor for the Respondent: Charlton Rowley ORDERS
SAD 87 of 2021 BETWEEN: DAVID MORTON BERTRAM
Applicant
AND: ROBERT WILLIAM NAUDI
Respondent
ORDER MADE BY:
O'SULLIVAN J
DATE OF ORDER:
25 OCTOBER 2024
THE COURT ORDERS THAT:
1.The application is dismissed.
2.There will be judgment for the respondent on the cross-claim in the sum of ONE HUNDRED AND SIXTY TWO THOUSAND, NINE HUNDRED AND SIXTY EIGHT DOLLARS AND THIRTY FOUR CENTS ($162,968.34) plus pre-judgment interest to be calculated.
3.The parties are to provide orders reflecting these reasons within 7 days.
4.I will hear the parties on the question of costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
O’SULLIVAN J
Mr David Bertram, (or the applicant) was declared bankrupt on 16 December 2017 and was discharged from bankruptcy on 23 December 2020 by reason of the operation of s 149 of the Bankruptcy Act 1966 (Cth).
Apart from the applicant, these reasons also make reference to his brother, Mr Richard Bertram, his mother, Ms Chaya Bertram (“together the Bertram family”) and Darisha Holdings Pty Ltd, a company controlled by Richard.
No disrespect is intended by referring to the various parties associated with the applicant by their first names.
The respondent, Mr Robert William Naudi, is a registered trustee in bankruptcy and as from 21 December 2018 until the applicant’s discharge from bankruptcy on 23 December 2020, was the Trustee of his estate.
CCK Lawyers was retained by the applicant on or about 20 July 2018 in relation to an examination summons issued out of the District Court of South Australia (District Court proceedings) by judgment creditors who had obtained various judgments against companies with whom the applicant had been involved in relation to a property development. As a result of those instructions, CCK opened file no. 261894-1 in David’s name (David’s file).
On 13 June 2019, on the instructions of Richard, CCK opened file no. 262261- 2 in Richard’s name (Richard’s file).
Pursuant to Division 4B of Part VI of the Act, there were three contribution assessment periods (CAP) during the course of the applicant’s bankruptcy. The first ran from 16 December 2017 to 15 December 2018 (CAP 1); the second from 16 December 2018 to 15 December 2019 (CAP 2); and the third from 16 December 2019 to 15 December 2020 (CAP 3).
After a long series of interactions between Mr Naudi, the applicant and CCK, on or about 14 July 2020 Mr Naudi applied to this Court for an examination summons to be issued, directed to Richard, Chaya, Mr Lachlan Paterson, the applicant, and Mr James Cudmore, who is a partner at CCK.
On 1 September 2020, the Court ordered that the examination summons be issued.
The Bertram family applied to set aside the examination summons. That application was resolved as between the Bertram family on the one part and Mr Naudi on the other part, by the parties entering into a Settlement Memorandum.
One of the conditions of the Settlement Memorandum was that the Trustee would agree to the examination summons against each of Mr Paterson, Richard and Chaya being discharged and would not object at any time to the discharge of the bankrupt on 17 December 2020.
As a part of the obligations under the Settlement Memorandum, CCK wrote to Mr Naudi on 7 December 2020 providing documentation, including an electronic file comprising an Excel spreadsheet setting out by reference to dates, narrative description and other data, time entries for work performed by CCK on David’s file and Richard’s file.
On 11 February 2021, Mr Naudi wrote to the applicant informing him he had made 3 CAP assessments in which he had assessed the applicant as being in receipt of income during each of the three CAP periods and enclosing the CAP assessments.
Following correspondence from CCK dated 4 March 2021, on 18 March 2021 Mr Naudi wrote to the applicant informing him that pursuant to s 139W of the Act, he had made a revised assessment of the applicant’s income for CAP 1, CAP 2 and CAP 3 in the amounts of $23,804.75, $86,480.67 and $77,537.84 respectively. The 18 March 2021 letter enclosed:
(a)The three revised CAP assessments;
(b)A Certificate of outstanding contribution in the sum of $178,401.76; and
(c)An electronic file comprising an Excel spreadsheet which replicated in its entirety the content, narrations and other data included in the WIP records provided by CCK but included in it breaks referable to 22 November 2019, 20 December 2019 and 2 December 2020 in which the total amount for the WIP for each respective CAP was set out: annexure HJG-16 to the first Gillis affidavit pp 341-346, 347-359.
In these reasons, both the electronic file provided by CCK in its letter dated 7 December 2020, and the electronic file accompanying Mr Naudi’s letter dated 18 March 2021, are referred to as the WIP records.
It is the three revised CAP assessments made on 18 March 2021 with which this matter is concerned and a reference to the CAP 1, CAP 2 and CAP 3 assessments in these reasons is a reference to those revised assessments.
The applicant seeks a number of orders in its Originating Application. It is important to recognise that amongst other things, the primary relief the applicant seeks in its OA (to which the applicant refers in the Amended Statement of Claim), is that the CAP 1, 2 and 3 assessments be set aside on the basis they are void or invalid. There is no relief claimed that the quantum of the assessed income in any of CAP 1, 2 or 3 be varied. To that extent, the relief the applicant seeks is an all or nothing proposition.
The applicant’s pleaded case and orders sought
The applicant pleads a number of factual matters at [1]-[23] of the ASoC to which the respondent pleads but the gravamen of the applicant’s case commences at [24].
In summary, the applicant pleads from [24] that:
(a)In issuing the revised CAP 1, CAP 2 and CAP 3 assessments, Mr Naudi was not and could not have been satisfied for the purposes of s 139W(2) that the applicant had derived income within the meaning of s 139L(1)(a)(v) of the Act: ASoC [24];
(b)In issuing the revised CAP 1, CAP 2 and CAP 3 assessments, Mr Naudi was not and could not have been satisfied for the purposes of s 139W(2) that the applicant had derived income within the meaning of s 139L(1)(a)(vi) of the Act: ASoC [25], [26];
(c)Mr Naudi knew or ought to have known that:
(i)No amount of money had been paid to the applicant or at his direction by reference to all of the data set out in the WIP records;
(ii)Not all of the work in progress described in the WIP records had been charged to any person or invoiced by CCK (with the consequence that no person was liable to pay any amount of money to CCK referable to unbilled work in progress); and
(iii)Mr Naudi could not, therefore have been satisfied for the purpose of s 139W(2) of the Act that any amount of money had been paid to the applicant or at his direction by reference to the WIP records: ASoC [27];
(d)As a consequence of the matters pleaded, Mr Naudi was not authorised to make the CAP 1, CAP 2 and CAP 3 assessments, each of which is invalid, void and of no effect and the Certificate is invalid, void and of no effect: ASoC [28];
(e)Further or in the alternative, each of the CAP 1, CAP 2 and CAP 3 assessments did not comply with the requirements of s 139W(4) of the Act, such that it was not possible for the applicant to know or understand by reference to each of the CAP assessments the basis upon which the Trustee had made the assessment, nor was it possible for the applicant to be in a position to exercise any rights to challenge or seek a review of the revised CAP 1, CAP 2 and CAP 3 assessments, whether under s 139ZA of the Act or otherwise: ASoC [29]; and
(f)Mr Naudi failed to comply with various rules within the Insolvency Practice Rules, (Bankruptcy) 2016 (Cth): ASoC [29A]-[29C].
The applicant then pleads a number of further matters against Mr Naudi:
(a)First, a want of good faith in issuing the CAP assessments: ASoC [30], [31];
(b)Second, that none of the amounts in the CAP assessments, which were described as “non-cash benefits (legal)” were a benefit or a benefit of any value within the meaning of s 139L(1)(a)(v) provided to the applicant by any other person for the purposes of that section. That is alleged to be because the legal services provided by CCK, which were the subject of the amounts set out in the WIP records, were performed for the purpose of vindicating and protecting the vested rights of the applicant, Richard, Chaya and Darisha, which is not a benefit to the holder of that right nor a benefit of any value within the meaning of s 139L(1)(a)(v): ASoC [32];
(c)Third, to the extent that the applicant has received any benefit or the value of any benefit by reason of his having had legal advice and representation from CCK:
(i)That benefit is not a benefit within the meaning of s 139L(1)(a)(v); and/or
(ii)Sections 139L(1)(a)(v) and 139W(2) do not impose a liability on the applicant to make any contribution under Part 4B of Division VI of the Act for any amounts described as “non-cash benefits (legal)” in each of the revised CAP assessments: ASoC [33].
At [34] of the ASoC, the applicant alleges that:
(a)To the extent that the applicant has received any benefit or the value of any benefit within the meaning of s 139L(1)(a)(v), the value of the benefit or benefits represented by data provided by CCK is to be worked out in accordance with the provisions of the Fringe Benefits Tax Assessments Act 1986 (Cth) as in force on 1 July 1992, as modified by provisions of the Act and the Bankruptcy Regulations (now repealed) such that any benefits received are residual benefits within the meaning of s 45 of the FBTA Act;
(b)The legal services referable to the WIP records (contrary to the applicant’s case) are residual benefits with the value of the residual fringe benefit to be a cost to the provider: ss 45, 50 FBTA Act:
(c)The applicant is the recipient of the benefit; the provider of the benefit is CCK; no one had paid CCK for any benefit provided by it to the applicant, the value of the benefit provided by CCK is the cost to it in providing the benefit and not the amount or amounts which CCK may have, but did not charge for the provision of that benefit;
(d)Mr Naudi did not work out the value of the benefit in accordance with s 139L(1)(a)(v); and
(e)Mr Naudi did not attend to his duties as Trustee under the Act, act in good faith, nor satisfy himself to the extent required in s 139W(2).
The applicant pleads that as a consequence of the matters pleaded in [34], each of the CAP assessments is invalid, void and of no effect: ASoC [35].
The respondent’s cross-claim
By Mr Naudi’s amended statement of cross-claim, he claims that the applicant is liable to pay the sum of $174,901.76 together with pre-judgment interest on that sum. That sum is the total of the amounts alleged to be due for CAP 1 ($23,804.75), CAP 2 ($86,480.67), and CAP 3 ($77,537.84) less amounts paid by the applicant on 18 March 2021 and 11 October 2021 totalling $12,951.50. During the closing submissions, the respondent conceded as not being assessable properly as income for the purposes of s 139L, the sum of $11,933.42 such that before interest, the amount sought by Mr Naudi is $162,968.34.
Legislation
The applicant’s pleadings rely, in particular, on two provisions in the Act: s 139L(1)(a)(v), and (vi) and s 139W.
Section 139L(1)(a)(v) and (vi) of the Act
Section 139L(1) defines income for the purposes of Division 4B. Relevant for the purposes of this matter are ss 139L(1)(a)(v)(A) and (B) and 139L(1)(a)(vi)(A) and (B):
139L Meaning of income
(1) In this Division:
income, in relation to a bankrupt, has its ordinary meaning, subject to the following qualifications:
(a)the following are income in relation to a bankrupt (whether or not they come within the ordinary meaning of “income”):
…
(v)the value of a benefit that:
(A)is provided in any circumstances by any person (the provider) to the bankrupt; and
(B)is a benefit within the meaning of the Fringe Benefits Tax Assessment Act 1986 as in force at the beginning of 1 July 1992 (other than a benefit that would be an exempt benefit for the purposes of that Act if the provider were the employer of the bankrupt as an employee and the provider had provided the benefit in respect of the employment of the bankrupt);
being that value as worked out in accordance with the provisions of that Act but subject to any modifications of any provisions of that Act made by the regulations under this Act;
(vi)the value of a loan made to the bankrupt by an associated entity of the bankrupt, including:
(A)a loan under which the loan money is not paid to the bankrupt, but is paid or applied at the bankrupt’s direction; and
(B)a loan that is not enforceable at law or in equity.
Section 139W of the Act
Section 139W forms part of Division 4B of the Act which deals with contribution by the bankrupt and recovery of property. It provides:
Assessment of bankrupt's income and contribution
(1)As soon as practicable after the start of each contribution assessment period in relation to a bankrupt, the trustee is to make an assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period under section 139S.
(2)If at any time, whether during or after a contribution assessment period, any one or more of the following paragraphs applies or apply:
(a)the trustee is satisfied that the income that is likely to be derived, or was derived, by the bankrupt during that period is or was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period;
(b)the base income threshold amount increased or decreased after the making of the last preceding assessment in respect of that period and before the end of that period;
(c)the trustee is satisfied that the number of the bankrupt's dependants increased or decreased after the making of the last preceding assessment and before the end of that period;
The trustee is to make a fresh assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period.
(3)The powers of the trustee under subsection (2) may be exercised on the trustee's own initiative or at the bankrupt's request, but the trustee is not required to consider whether to exercise those powers at the bankrupt's request unless the bankrupt satisfies the trustee that there are reasonable grounds for the trustee to do so.
(4)As soon as practicable after the making of an assessment the trustee must give to the bankrupt written notice setting out particulars of the assessment and informing the bankrupt about the possibility of a variation under section 139T.
Issues
The matter has been made difficult and more complicated than need be by the applicant conflating two different concepts. The first concept concerns the issue of whether the applicant was in receipt of income within the meaning of ss 139L(1)(a)(v) and/or (vi). It raises a question of law and/or fact as to whether a benefit and/or a loan was provided to the applicant as a consequence of legal work being carried out for the applicant by CCK. If so, the issue that arises is the value of that benefit and/or loan. The second concept is whether the Trustee had the required state of satisfaction within the meaning of s 139W.
Accordingly, the following issues arise in this matter:
(a)Did the Trustee err in law and/or in fact in concluding that legal services provided by CCK to the applicant and paid for by a third party, and to the extent CCK’s work was unbilled or unpaid, a third party had assumed an obligation to meet those unbilled/unpaid fees, comprises income within the meaning of s 139L(1)(a)(v) and/or (vi)?
(b)If yes to (a) above, was the Trustee satisfied within the meaning s 139W that the applicant had derived income during the three CAP periods? and
(c)Are the CAP 1, CAP 2 and CAP 3 assessments void or invalid?
It is for the reasons which follow that:
(1)The application is dismissed.
(2)There will be judgment for the respondent on the cross-claim in the sum of $162,968.34 plus pre-judgment interest to be calculated.
The nature of the application
The applicant framed his case in the following terms:
(a)First:
(i)In purporting to make fresh assessments (as that term is used in subsection 139W(2) of the Act) for each of the relevant contribution assessment periods, Mr Naudi acted without authority;
(ii)This was so because Mr Naudi, as a trustee holding office under the Act, did not satisfy himself, and could not have satisfied himself, in a manner that a reasonable trustee who correctly understood the meaning of the power conferred by subsection 139W(2) (when considered with s 139L(1)(a)) could be satisfied such as to permit him to make a fresh assessment; and
(iii)The purported fresh assessments were therefore not made within authority and were not valid;
(b)Second:
(i)Mr Naudi made no attempt, or no proper attempt, to identify the “benefit” (which he described as a “non-cash benefit”) said to be received by the applicant, and had not made any proper attempt to attend to the requirements of s 139L in identifying and assessing the value of any benefit;
(ii)In particular, Mr Naudi did not work out, and made no attempt to work out, the value of the benefit in accordance with s 139L(1)(a)(v), which required that the value be worked out in accordance with the FBTA Act as in force at the beginning of 1 July 1992 but subject to any modifications of any provisions of that Act made by the regulations under the Bankruptcy Act 1966 (Cth) (the Act); and
(iii)Instead, Mr Naudi had merely aggregated the whole of the time records maintained by CCK and treated the whole of that aggregate amount as an assessment of income.
The following points arise out of the way in which the applicant frames his case:
(a)The description of the applicant’s case in (a)(i) and (ii) above demonstrates the flaw in the applicant’s approach and the conflation of the two concepts to which I have referred earlier. “Satisfaction” and whether Mr Naudi was “satisfied” for the purposes of s 139W is a different concept from whether the services provided to the applicant by CCK was income within the meaning of s 139L, which is a question of law and/or mixed fact and law;
(b)The contention in (b)(i) above, when taken with the absence of any relief sought by way of a re-assessment of the quantum of the income, demonstrates the applicant taking an “all or nothing” approach;
(c)The contention in (b)(ii) above is directed to whether Mr Naudi erred in law or in fact and/or law; and
(d)The contention in (b)(iii) above raises the same factual/legal issue as in (b)(ii), which is whether Mr Naudi erred in law or in fact and/or law for the purposes of s 139L(1)(a)(v) and/or (vi). The applicant does not put a specific dollar value of that income in issue, other than to say the Trustee erred in the total assessment.
The applicant contends these proceedings were never intended by the applicant to be analogous to a “merits review” of the purported assessments. Whether or not that was intended, it is not reflected in the matters raised in the ASoC, the evidence called, and the relief claimed.
Internal review available
An internal review by the Inspector-General pursuant to s 139ZA of the Act was available to the applicant.
Section 139ZA provides for an administrative review by the Inspector-General in Bankruptcy of a trustee’s decision to make a CAP assessment. That right may be exercised either on the Inspector-General’s own initiative or upon request by a bankrupt, subject to the Inspector-General considering the reasons advanced by the bankrupt being sufficient to justify such a review. The Inspector-General’s review is itself subject to review by the Administrative Appeals Tribunal: s 139ZF.
The applicant contended further that these proceedings were brought by him because it was considered that any application for a review by the Inspector-General pursuant to s 139ZA would not resolve the question of the validity of the CAP assessments but assume their validity. It is not clear why that would be so.
In any event, on 17 May 2021, Mr Cudmore sent an email to the Inspector-General advising that an application had been made to this Court on 17 March 2021 seeking relief and to the extent necessary, the email should be treated as a request for the purposes of s 139ZA(3) for a review of the decisions of Mr Naudi in making the CAP assessments. No response to the email had been received from the Inspector-General and no party submitted that anything of consequence arose from that exchange.
The Court’s power to review an assessment
There is no doubt the Court may review a decision of the AAT reviewing a decision of the Inspector-General in Bankruptcy following a review under s 139ZA of the Act: s 44 Administrative Appeals Tribunal Act 1975 (Cth).
The applicant applies for relief pursuant to s 90-15 of Schedule 2, Insolvency Practice Schedule (Bankruptcy) (Schedule 2) of the Act.
90‑15 Court may make orders in relation to estate administration
Court may make orders
(1)The Court may make such orders as it thinks fit in relation to the administration of a regulated debtor’s estate.
Orders on own initiative or on application
(2) The Court may exercise the power under subsection (1):
(a) on its own initiative, during proceedings before the Court; or
(b) on application under section 90‑20.
Examples of orders that may be made
(3)Without limiting subsection (1), those orders may include any one or more of the following:
(a)an order determining any question arising in the administration of the estate;
(b)an order that a person cease to be the trustee of the estate;
(c)an order that another person be appointed as the trustee of the estate;
(d)an order in relation to the costs of an action (including court action) taken by the trustee of the estate or another person in relation to the administration of the estate;
(e)an order in relation to any loss that the estate has sustained because of a breach of duty by the trustee;
(f)an order in relation to remuneration, including an order requiring a person to repay to the estate of a regulated debtor, or the creditors of a regulated debtor, remuneration paid to the person as trustee.
Matters that may be taken into account
(4)Without limiting the matters which the Court may take into account when making orders, the Court may take into account:
(a)whether the trustee has faithfully performed, or is faithfully performing, the trustee’s duties; and
(b)whether an action or failure to act by the trustee is in compliance with this Act and the Insolvency Practice Rules; and
(c)whether an action or failure to act by the trustee is in compliance with an order of the Court; and
(d)whether the regulated debtor’s estate or any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the trustee; and
(e)the seriousness of the consequences of any action or failure to act by the trustee, including the effect of that action or failure to act on public confidence in registered trustees as a group.
Costs orders
(5)Without limiting subsection (1), an order mentioned in paragraph (3)(d) in relation to the costs of an action may include an order that:
(a)the trustee or another person is personally liable for some or all of those costs; and
(b)the trustee or another person is not entitled to be reimbursed by the regulated debtor’s estate or creditors in relation to some or all of those costs.
Orders to make good loss sustained because of a breach of duty
(6)Without limiting subsection (1), an order mentioned in paragraph (3)(e) in relation to a loss may include an order that:
(a)the trustee is personally liable to make good some or all of the loss; and
(b)the trustee is not entitled to be reimbursed by the regulated debtor’s estate or creditors in relation to the amount made good.
Section does not limit Court’s powers
(7)This section does not limit the Court’s powers under any other provision of this Act, or under any other law.
Section 90-15 of Schedule 2 replaced s 178 of Act which was a provision permitting the bankrupt, a creditor, or any other person affected by an act, omission or decision of a trustee to apply to the Court, and the Court to make such order in the matter as it thinks just and equitable. Accordingly, the scope of the power of s 90-15 would seem to be similar to the repealed s 178: Frost v Sheahan [2009] FCAFC 20 at [8] (Ryan, Mansfield and Jagot JJ) and the decisions under the former s 178 are applicable to applications to review decisions under s 90-15.
In Re Ellis, ex parte Jefferson and Stevenson [1995] FCA 81, Drummond J left open the question of whether under s 178 of the Act, the Court could review an income contribution assessment by a trustee. In an observation which is obiter, his Honour considered that as:
[A]n appeal lies to the Federal Court, on questions of law only, from the AAT under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth); it is therefore unlikely that, having enacted Div 4 B, the Legislature intended that there would co-exist with the power to review a trustee’s decision with respect to a contribution assessment vested in the Inspector-General and the AAT, power in the Court to review the trustees decision under s 178 on both fact and law.
With the greatest of respect to Drummond J, subsequent decisions of the Court are at odds with his Honour’s observations, and I am unable to agree with his Honour’s obiter observation.
In Kelly (as joint and several liquidators of Halifax Investment Services Pty Ltd (in liq) v LOO (No 8) [2020] FCA 533 at [51] Gleeson J (as a member of this Court) observed that by use of the language “such orders as it thinks fit”, s 90-15 confers a very broad power on the Court. The power of the Court to make such orders as it thinks fit under s 90-15 “is at large” and “must be exercised … in the particular circumstances of each case”: Mehajer v Weston [2020] FCA 924, at [21] (Rares J).
In Re Tyndall; Ex Parte Official Receiver [1977] FCA 15; (1977) 17 ALR 182 at p 186, Deane J (as a member of this Court) said:
In my view, the wording of s. 178 of the Act is such as to confer upon the court the widest possible discretion as to the appropriate order which should be made in the particular case and is quite inconsistent with the approach that, upon an application made pursuant to the section by a bankrupt, creditor or other person affected by an act, omission or decision of the trustee, the court is only empowered to interfere with the trustee's act, omission or decision if it is of the view that the trustee has acted absurdly or unreasonably or in bad faith. Once the matter is properly before the court, the court is, by the express words of s. 178, empowered (and , as I have said, obliged) to make such order in the matter as it thinks just and equitable.
This is not, of course, to say that the court should either disregard the relevant decision of the trustee or ignore the well-established policy under bankruptcy legislation that the court should not unduly interfere with the day-to-day administration of a bankrupt's estate by a trustee. The trustee is made responsible for the administration of the bankrupt estate under the general provisions of the Act. He must, in the course of that administration, make a variety of decisions aimed at enabling the administration to be carried out with promptness and efficiency. Some of these decisions will be business or commercial decisions in which the business or commercial experience of the trustee would itself provide a basis for arguing that, unless it were shown that the trustee's decision was preverse or clearly wrong, it would be inappropriate and unjust for the court to interfere. Again, under the present legislation, the trustee will ordinarily be the official receiver and the court must be conscious of the fact that the official receiver will be made responsible for the administration of an extraordinarily large number of estates. In such circumstances, the administration of the Bankruptcy Act demands that the court take into account, in exercising its functions under the provisions of s. 178 of the Act, the opinion of the official receiver, as trustee, as to what is expedient in the interests of the prompt and efficient administration of a particular bankrupt estate. That is, however, a completely different thing to saying that the court can only interfere with an act, omission or decision of the official receiver, as such trustee, when it is of the view that the official receiver has acted unreasonably, absurdly or in bad faith in so acting or failing to act or in reaching that decision.
(emphasis added)
Deane J’s observation in ReTyndall above concerning the width and discretion under s 178 were approved by the Full Court in Re Dingle: Westpac Banking Corporation v Worrell (1993) 47 FCR 478, 485.
In Tinkler v Melluish [2017] FCA 52 at [18]-[22], Nicholas J discussed a number of the authorities from this Court, including the decisions of French J in Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101, Deane J in Re Tyndall and Bowen CJ in Weiss v Official Trustee in Bankruptcy (1983) 1 FCR 40. See also the decision of Beach J in Miao v Michell [2015] FCA 22 at [31]. In Moore v Macks [2007] FCA 10 at [28], Besanko J noted the following about s 178:
1.Under the section, the court is fulfilling a supervisory role judicially, rather than an administrative role standing in the shoes of the trustee. As such, grounds for judicial review must be established by an applicant Re Wheeler; Ex parte Wheeler v Halse (1994) 54 FCR 166 (‘Wheeler’) at 170 per Lee J, and the exercise of the court’s power is wholly in its discretion. The court has the ‘widest possible discretion as to the appropriate order which should be made in the particular case’ (Re Tyndall; Ex parte Official Receiver (1977) 17 ALR 182 (‘Re Tyndall’) at 186 per Deane J).
2.The impugned act, omission or decision of the trustee in bankruptcy need not be absurd, unreasonable, or taken in bad faith before it is subject to review or a resultant order of the court under the section (Re Tyndall at 186 per Deane J). Indeed, the act, omission or decision of the trustee may be subject to review even though it was commercially sound at the time it was made: Macchia at 116 per French J. At the same time the trustee’s opinion will be a relevant factor in the exercise of the court’s discretion, and there is no presumption that the court will intervene in a given case. The fact that the court might have taken a different course to the trustee in bankruptcy at the relevant time is not, without more, a basis to disturb the trustee’s decision: Re Tyndall at 186 per Deane J; Macchia at 116 per French J.
3.The court is able to take into account information which was not available to the trustee at the time of an impugned act, omission or decision (Gray v Clout (1990) 27 FCR 141, 144 per Pincus J).
4.The exercise of the discretion is subject to the principle that the court will not unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee in bankruptcy: Re Tyndall at 186 per Deane J.
5.The section does not provide an avenue for a bankrupt to pursue his or her personal interests at the expense of creditors (Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 139 per Brennan CJ, Gaudron and McHugh JJ) nor does it ‘create a cause of action which sounds in damages’, either in tort or under the general law (Macchia at 119). Both of these propositions reflect the purpose of the section which is to give the court a supervisory role with respect to a trustee in bankruptcy in the administration of the bankrupt’s estate.
6.Ultimately the question is what result would be ‘just and equitable’ in the circumstances of the case.
An application to the Court without utilising the mechanism of a review by the Inspector-General (and the AAT on an application for review from the Inspector-General’s review), is a matter which may be taken into account in the exercise of the discretion.
I am satisfied that the Court has jurisdiction to review the Trustee’s decision to issue CAP 1, 2 and 3 and that the Court in the exercise of its discretion under s 90-15 may make such orders as it considers just and equitable.
The applicant’s witnesses
None of the applicant, Richard or Chaya gave evidence, with the only witnesses being called for the applicant being members of CCK. Each of the witnesses called by the applicant gave their evidence in chief by way of affidavit with those affidavits being received into evidence.
Hamish John Gillis became a partner of CCK on 7 December 2020, but at the relevant time was a senior associate. Mr Gillis swore three affidavits:
(a)Sworn 17 May 2021, filed 21 May 2021 (first Gillis affidavit);
(b)Sworn 15 October 2021, filed 15 December 2021 (second Gillis affidavit); and
(c)Sworn and filed 20 March 2022 (third Gillis affidavit).
Overall, Mr Gillis was a satisfactory witness, although on occasions defensive when giving evidence in relation to the payment of money into trust by Darisha on account of CCK’s fees and statements made by the applicant to the Trustee in relation to the payment of CCK’s fees. He worked under the supervision of Mr Cudmore on David’s file, file no. 262261-1 opened in Darisha’s name (Darisha’s file) and Richard’s file. I treat those parts of his evidence where he was being defensive with caution.
James Michael Cudmore is a partner at CCK. He swore one affidavit on 9 August 2022, filed 10 August 2022 (Cudmore affidavit). Mr Cudmore was the partner responsible for the conduct of David’s, Richard’s and Darisha’s files.
As with Mr Gillis, Mr Cudmore was a satisfactory witness for part of his evidence, but in giving his evidence he was also defensive when giving evidence in relation to the payment of money into trust by Darisha on account of CCK’s fees about statements made by the applicant to the Trustee in relation to payment of CCK’s fees and the opening of Richard’s file.
In that context, Mr Cudmore is a very experienced practitioner and was clearly aware of the potential consequences for, at least the applicant, of the position taken by CCK both in relation to the payment of CCK’s fees from money paid into CCK’s trust account by Darisha but not transferred to CCK’s firm account, and CCK’s assertions in correspondence with the Trustee in relation to the payment of those fees. I treat those parts of his evidence where he was being defensive with caution.
Adam Rosser was a partner at CCK at the relevant time. He swore one affidavit on 16 August 2022. He is no longer a partner of CCK.
Mr Rosser was not generally involved in the conduct of David’s, Richard’s and Darisha’s files, but had primary conduct of the matter in Mr Cudmore’s absence throughout the period late May 2019 to early July 2019. His evidence reflected his limited involvement with the files, but again, as with Mr Gillis and Mr Cudmore, he was defensive on the topic of money paid into trust by Darisha. As with Mr Gillis and Mr Cudmore, I treat his evidence on that issue with caution.
The respondent’s witness
Mr Naudi gave his evidence in chief by way of affidavit sworn 20 August 2021 which was received into evidence.
Mr Naudi was an impressive witness. He understood that his primary obligation as a trustee was to act honestly, fairly and impartially towards the bankrupt and that he had obligations both as an Officer of the Court and as a model litigant. Mr Naudi answered questions directly, succinctly and made appropriate concessions. He was a truthful witness whose evidence I have no hesitation in accepting.
Factual narrative
This factual narrative contains the findings I have made and which are relevant to the exercise of the Court’s discretion.
In setting out the factual narrative it must be firmly borne in mind that there is no allegation of fraud on the Trustee. Rather, the respondent puts his case on the basis that given the overall circumstances he was entitled to treat the information with which he was provided by the bankrupt as incorrect and unreliable: s 139X. He invites the Court to reject the evidential foundation put forward by the applicant and find the work done by CCK was always done for the applicant, that I should infer that was the case, and that the value of the benefit received by the applicant was income within the meaning of s 139L(1)(a)(v) or (vi).
As to s 139W, the Trustee contends there is no basis to find that he was not satisfied within the meaning of s 139W(2) and that the claim should be dismissed.
I keep in mind that I am able to take into account information which was not available to the Trustee at the time he issued the CAP assessments: Gray at p 144.
The applicant became bankrupt on 16 December 2017 when he presented his own debtors petition. The initial trustees of his estate were replaced by an order of White J on 21 December 2018 at which time Mr Naudi became his Trustee: Borg v de Vries (Trustee), in the matter of the Bankrupt Estate of David Morton Bertram [2018] FCA 2116. The applicant was discharged from bankruptcy on 23 December 2020.
At the relevant time, Mr Gillis was a senior associate working on Mr Cudmore’s team and under his supervision. CCK had a general policy that any correspondence of substance would be reviewed by a partner.
David’s file
Mr Cudmore was the CCK partner with primary conduct of the matter and took the initial instructions from the applicant in relation to the District Court proceedings as well as other matters to do with the applicant’s bankruptcy. He signed a retainer letter from CCK on 20 July 2018: exhibit R4, p 1. Mr Gillis worked on David’s file under Mr Cudmore’s supervision.
The retainer letter refers to CCK continuing to act only upon ongoing arrangements being made to secure its anticipated fees. That came to involve a tripartite arrangement between CCK, the applicant and Richard/Darisha, whereby Darisha would pay funds into CCK’s trust account on account of CCK’s fees. The retainer letter enclosed CCK’s standard terms which included at clause T9.2, that CCK had a lien over any funds held in trust for the payment of its fees or disbursements.
On 26 July 2018, Richard sent an email to Mr Cudmore: exhibit R24, confirming that he had placed $8,000 in trust “for the work for David but before you commence anything I’d like to have a brief chat with you as we are providing the funds.” The payment submission accompanying that email was described as “D Bertram Loan 4 legals”.
Mr Cudmore knew that Richard, in his capacity as a Director of Darisha, “… was arranging payment of fees and providing instructions to my firm, including in connection with protecting his family interests and the interests of [David] …”: Cudmore affidavit [60].
Apart from the District Court proceedings, CCK was also advising the applicant about his rights to retain artwork as against Mr Naudi, about numerous other entitlements or rights and obligations he had in respect of property vis-à-vis his dealings with Mr Naudi, and with inquiries being made by Mr Naudi in connection with the administration of the bankrupt estate. Until June 2019, CCK dealt with whatever bankruptcy issues that arose in connection with the applicant’s dealings with his Trustee on David’s file.
The District Court proceedings were struck out on 26 July 2019. A Master of the District Court ordered the judgment creditors, who had sought to examine the applicant, pay his costs fixed at $23,866.84. That cost order was satisfied by a payment in favour of the applicant of $23,866.84.
The time spent on the District Court proceedings and advice the applicant might need in connection with his bankruptcy were matters that were recorded in CCK’s WIP records on David’s file. There was much heated correspondence between Mr Naudi seeking information and the applicant deflecting Mr Naudi’s requests.
Darisha’s file
A meeting of creditors of the applicant’s bankrupt estate was held in Sydney on 26 July 2018. Mr Rowley, of Charlton Rowley Solicitors, was acting for the judgment creditors and attended the meeting. He challenged the admission of Darisha’s proof of debt by the then trustees of the applicant’s bankrupt estate, which was in an amount exceeding $9 million. Darisha’s proof of debt was admitted for voting purposes.
Following the meeting in Sydney, Mr Rowley’s clients commenced proceedings in this Court - SAD 241 of 2018, seeking an order removing the existing trustees of the applicant’s bankrupt estate and the appointment of Mr Naudi as the Trustee. They also sought an order setting aside Darisha’s proof of debt.
On 30 October 2018, CCK was retained by Richard on behalf of Darisha to intervene in the proceedings in this Court for the purpose of opposing the orders sought by Mr Rowley’s clients as a consequence of which CCK opened Darisha’s file. The applicant did not seek to intervene in the proceedings.
Ultimately, Mr Rowley’s clients abandoned the application to challenge Darisha’s proof of debt, with no order as to costs being made. Mr Naudi was appointed in place of the existing trustees. Charlton Rowley acted for Mr Naudi in his role as the Trustee.
Darisha’s file was not solely concerned with challenging the refusal of Darisha’s proof of debt in the applicant’s bankruptcy, but was also for general advice.
Richard’s file
During Mr Cudmore’s absence on leave from late May 2019 to early July 2019, Mr Rosser was the CCK partner with the conduct of David’s file.
On 11 June 2019, Mr Rosser had a telephone conversation with Richard which included Mr Gillis. That telephone conversation also included the applicant, however Mr Rosser did not depose to that fact in his affidavit of evidence-in-chief. In cross-examination, he said that the applicant was on the call but did not recall him saying anything during the call.
Mr Rosser was instructed by Richard to open Richard’s file, “to deal with matters relating to the effect of the trustee’s conduct on the interests of members of the wider Bertram family other than Mr David Bertram”: Rosser affidavit [13].
Richard’s file was described as for “General Advice”: exhibit R15.
When asked in cross-examination about the topic for which the file in the name of Richard was opened on 13 June 2019, Mr Rosser’s evidence was that: T 157.35 - 38
“… practically in relation to the - you know, the knock-on effects, if I can call it that, of David’s bankruptcy and his dealings on the other members of the family.
I do not accept Mr Rosser’s evidence that the file was entered in Richard’s name to deal with matters which related to the “trustees conduct on the interests of members of the wider Bertram family other than Mr David Bertram”.
The very conversation in which Mr Rosser was instructed by Richard to open a new matter in Richard’s name to deal with matters affecting members of “the wider Bertram family other than David”, had the applicant as a party to the telephone conversation, albeit it would seem listening rather than actively participating.
Further, it would be very unusual to, in effect, quarantine the applicant from Richard’s file.
Still further, Mr Gillis worked on Richard’s file under the supervision first of Mr Rosser and upon his return from leave, Mr Cudmore. Mr Gillis said that some, but not all, of the general advice provided on Richard’s file dealt with the applicant’s bankrupt affairs: T 102.45 – 103.9.
Mr Gillis said in his evidence, that as from mid-2019, Richard wanted CCK to review correspondence from the Trustee, advise the applicant about it, prepare draft responses and have those draft responses provided back to the Trustee. That work was to be done on Richard’s file.
It was the impact of Mr Naudi’s interactions with the applicant on the balance of the Bertram family that was a major concern for Richard and CCK. Mr Gillis said that the work done on Richard’s file was previously conducted on David’s file and Mr Gillis kept recording some of his time until the end of July 2020 on David’s file through inadvertence.
Mr Gillis’ evidence was also that after Richard’s file was opened, nothing changed in terms of the nature of the legal services that Mr Gillis was providing to the applicant, but simply the legal services were provided under a new file number (Richard’s file). Mr Gillis did not recall turning down any work that the applicant needed in respect of his bankruptcy and the applicant still engaged extensively in communications with his Trustee throughout 2019. Further, a preponderance of the applicant’s correspondence with the Trustee was authored by CCK, in the order of 120 email exchanges, many of which had attachments.
Further, CCK regarded the applicant and the Bertram family as having a common interest and that there appeared to be cohesion within the Bertram family sufficient to be able to use one law firm: T 207.7 – 45.
That indicates to me there was a very close alignment between the matters the subject of David’s file and Richard’s file, such that there was no appreciable difference between the work that had been done on David’s file and the work that was being done on Richard’s file.
Mr Naudi had written to the applicant on 7 May 2019: exhibit R6, in which Mr Naudi asked, “please advise what payments have been made to each of these lawyers and any others either by you or on your behalf from and including 16 December 2019” (sic 2016). The reference to “these lawyers” was a reference to CCK and Mills Oakley. There is no suggestion Mills Oakley is involved in this matter.
Prior to going on leave at the end of May 2019, Mr Cudmore was aware that Mr Naudi was mooting a revised assessment of income for the applicant, including by an inquiry as to the circumstances of the payment of CCK’s fees since December 2016. As a consequence, Mr Cudmore considered the issue about what constituted a benefit under s 139L of the Act but was unable to say whether that consideration occurred before he went on leave or after he returned.
I deal with the 7 May 2020 letter in detail later in these reasons, but Mr Cudmore denied that the decision to open Richard’s file on 13 June 2019, and to thereafter perform the same legal services as being provided on the applicant’s file, was causally related to the enquiries being made by the Trustee concerning the levying of an income assessment based on the provision of a benefit to the applicant.
Mr Cudmore accepted that rather than changing file numbers, another letter of retainer could have been written on David’s file addressing responsibility for CCK’s fees, but denied that opening a new file was a wrongful or manipulative endeavour to put a barrier between the applicant and the Trustee. He said that opening Richard’s file was for billing purposes: T 206.20 – 24.
I do not need to determine whether or not the decision to open Richard’s file, and thereafter to perform the same legal services as provided on David’s file, was causally related to the inquiries by the Trustee so as to put a barrier between the applicant and the Trustee. However, on the basis of Mr Gillis’ evidence and also that of Mr Cudmore, which I set out later in these reasons, the work done for the applicant by CCK did not appear to change with the change in file.
The work done for the applicant from 27 May 2019
As at May 2019, the applicant was having extensive contact with CCK in relation to the dealings he was having with his Trustee.
As at 13 June 2019, CCK was doing work for the applicant on David’s file and Darisha had paid money into CCK’s trust account for the purpose of meeting CCK’s fees incurred on Darisha’s file.
By June 2019, Mr Gillis was aware that it was Darisha that was providing CCK with funds relating to the legal services provided by CCK on David’s file.
The last work recorded on David’s file in the WIP records was on 16 November 2020, but save for work done between 27 July 2020 and 16 November 2020, all the time recorded on David’s file between 27 May 2019 and 27 July 2020 was transferred to Richard’s file.
Apart from the WIP recorded on David’s file after 28 May 2019, some of which was transferred to Richard’s file, the applicant’s dealings with the Trustee, and in relation to which CCK assisted the applicant, were recorded in a time recording sense on Richard’s file.
Annexure HJG-16 to the first Gillis affidavit comprises the WIP records for Richard’s file. On p 349, the records commence on 15 July 2019 and on p 351, the last entry for 2019 is on 23 December 2019. Mr Gillis agreed that although these WIP records were recorded on Richard’s file, the vast preponderance of the communications in that approximate six-month period were between CCK and the applicant, and not CCK and Richard. Further, he agreed that during that period, there were repeated issues being pressed by the Trustee in relation to the applicant’s bankruptcy. Mr Gillis also agreed that Richard’s file was unrelated to the Darisha proof of debt matter in the applicant’s bankruptcy but related to the broader issues connected with the applicant’s bankruptcy.
Throughout June and July 2019, the applicant was engaging with CCK on a very frequent basis in relation to his bankruptcy. Mr Gillis said that:
(a)The invoicing on David’s file stopped on 21 May 2019, as recorded in invoice no. 36447, dated 28 May 2019, (as to which see later in these reasons) however there was no reason for it to have ceased at that time;
(b)The role performed by CCK throughout June and July 2019 continued unabated in the same way as it had in the period leading up to 21 May 2019, which was the last entry on the last invoice issued on David’s file - invoice no. 36447; and
(c)By the end of July 2019, there was a recognition by CCK that the Trustee was contending that the provision of legal services to the applicant with payment of the fees for those services being made by a third party gave the Trustee the basis of a claim against the applicant.
Mr Gillis disagreed that from the point of opening Richard’s file, he continued to take instructions from the applicant largely to the exclusion of Richard. Having said that, he accepted that CCK was working with the applicant day-to-day but regarded Richard as the client. He denied the reason CCK was working with the applicant day-to-day was because the legal services that were being provided related to the applicant’s legal affairs. However, Mr Gillis also said that the applicant was the one being attacked “day in, day out by the trustee” and that most of the communications were with the applicant because he was the person that CCK were dealing with day in, day out “on the front line”: T 99.16 - 100.12.
No oral evidence was called by the applicant as to the work that was done on Richard’s file. Whereas I accept that both the applicant and Richard would have been entitled to claim legal professional privilege over the content of the legal advice given by CCK, that would not prevent them from giving evidence as to the non-privileged matters, such as for example, who gave instructions and perhaps in relation to which broad topic, without comprising any claim for legal professional privilege.
Mr Naudi made a Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 submission that an inference should be drawn against the applicant that evidence from the applicant and Richard would not have assisted the applicant’s case.
No explanation has been forthcoming as to why the applicant and/or Richard was unavailable to give evidence.
In the circumstances, an inference is readily available that the applicant’s case would not be assisted by evidence given by the applicant or by Richard. I draw that inference.
The prime focus of the work done on Richard’s file was for the applicant. So much so is abundantly clear from the WIP records annexed as part of annexure HJG-12 to the first Gillis affidavit, which has numerous references to communications with the applicant, or the applicant and Richard, on Richard’s file. That is because what happened to the applicant directly impacted Richard, Chaya and Darisha.
Whereas I accept Richard, Chaya and Darisha had an interest in what happened in the applicant’s bankruptcy, that does not mean that advice given to the applicant and paid for by Richard or Darisha was exclusively for the assistance of Richard, Chaya and Darisha. On the contrary, the applicant was the point from which Richard, Chaya and Darisha’s relevant interests could be protected. By protecting the applicant’s interests vis-à-vis the Trustee, so too, could the interests of the others be protected. The fact that Richard was the client was, as Mr Cudmore said in evidence, for billing purposes.
Clearly, the applicant was seeking legal advice from CCK in connection with how he should be dealing with the Trustee, and CCK was providing legal advice or legal assistance to him in connection with those dealings. Although CCK had broad instructions from Richard in connection with the applicant’s bankruptcy, nonetheless the person who was “on the front line and dealing with the trustee” was the applicant: T 63.28 - 64.4.
Mr Naudi’s attempts to get information
Mr Gillis described that what would occur on many occasions in relation to the communications between Mr Naudi and the applicant, was that the applicant would send the communication to CCK, who would consider the matter and then discuss them with the applicant before providing him with a draft communication for sending back to the Trustee.
Mr Naudi made a number of attempts to obtain information from the applicant as to who was paying for his legal fees from CCK.
There is no doubt that throughout the period May to July 2019, individuals within CCK were providing legal services to the applicant and were aware of the potential for the Trustee to render an income contribution in respect of services being performed on the applicant’s file.
Mr Naudi’s letter dated 7 May 2019
On 7 May 2019, Mr Naudi wrote to the applicant with a series of questions: exhibit R6. Question 14 in that letter reads:
From the commencement of your bankruptcy, being 16 December 2016, you have engaged lawyers being Mills Oakley and CCK Lawyers.
14Please advise what payments have been made to each of these lawyers and any others either by you or on your behalf from and including 16 December 2019.
Exhibit R9 is the applicant’s email in response, sent on 13 June 2019 at 6:04pm. It reads:
Question 14
We note your letter incorrectly refers to 2019. We assume you meant 2016. No payments have been made by me or on my behalf from and including 16 December 2016.
Mr Gillis’ evidence on the 13 June 2019 response
Mr Gillis was cross-examined on the applicant’s email sent 13 June 2019. The following exchange occurred: T 45.44 – 43.
Q. Then says this:
No payments have been made by me or on my behalf from and including 16 December 2016.
Now, that, I suggest, is something that, if I had seen this email at the time, you would have regarded as a dishonest statement being made by David Bertram to his trustee? ---
A. Perhaps.
Q.Well, you say “perhaps”. You knew, at that time, that payments had been made to your firm in respect of legal fees being incurred by David Bertram preceding this email of 13 June 2019; you agree? ---
A.Yes, I agree.
Q.Payments were being made on his behalf from and including 16 December 2016 in respect of legal fees being provided by CCK Lawyers; you agree? ---
A.That’s my recollection, yes.
Q.And a statement to the effect made by David Bertram in that email would, at the very least have been a misleading statement; do you agree? ---
A.It appears to be, yes.
Q.Now, I want to suggest, Mr Gilles, that your firm was ultimately involved in the authorship of this email from David Bertram to Mr Naudi. To do that, I need to take you to --- ? ---
A.Just reflecting on that, Mr Roberts, it is possible that payments may have been made into our trust account but not actually made by fees by that stage. I cannot recall now ---
I was --- ? --- whether that may have been the case.
Q.I was going to suggest that very thing, Mr Gilles. And you agree that a statement:
No payments have been made on my behalf from and including 16 December 2016
Would, at the very least, be a misleading and incomplete statement insofar as payments have been made by Darisha into your firm’s trust account referable to legal services provided by your firm to David Bertram? ---
A.It’s perhaps walking a fine line. I would not agree that it is misleading, no. If that was the case, if money had only been paid into the trust account and not to the lawyers.
Q.Paid to the lawyers held in their trust account you would regard as a sufficient basis for a statement being made that no payments have been made from and including 16 December 2016; is that your evidence? ---
A.My evidence is that is walking a fine line but, on a technical basis, I think he has answered the question correctly if it is the case that money was only in the trust account and hadn’t been paid in satisfaction of the lawyers’ fees.
Q.And was that a fine line that your firm tactically took as at 13 June 2019? ---
A. I can’t recall.
Mr Gillis accepted that he knew a trustee could assess certain things such as income but was unsure whether he knew that as at June 2019. He accepted that the role he was performing in June 2019 was running a “blocking stake trying to fend off the trustee in relation to that issue” [of an income assessment]. He understood that what the Trustee was asking for was how much has been paid by third parties in respect of legal services to the applicant, as well as other things. He accepted that what comprises income (for the purposes of the Act) was a question he researched on many occasions but was not sure when he commenced doing that: T 107.37 - 108 .46.
A common theme throughout Mr Gillis’ evidence in relation to the issue of whether the Trustee had a legitimate basis to enquire as to whether the applicant’s legal fees were being paid by a third party, was that the applicant was continuing to “fob off” those enquiries: T 112.7 – 8.
It was put to Mr Gillis in cross-examination that the applicant’s answer was dishonest. That is not something that I need to determine. Nonetheless, the response by the applicant sent 13 June 2019 was at best misleading, if not false. That is because by 13 June 2019, Darisha had paid money into trust on account of fees on the applicant’s file: exhibit R17, and CCK’s retainer terms specifically claimed a lien over money in trust.
So too, the extent of Mr Gillis and Mr Rosser’s roles in drafting and settling the email sent by the applicant to the Trustee on 13 June 2019, is not something I need to determine.
Mr Cudmore’s evidence on the 13 June 2019 response
In cross-examination, Mr Cudmore was shown the email sent on 13 June 2019 from the applicant to Mr Naudi in reply to Mr Naudi’s letter dated 7 May 2019. Mr Cudmore was on leave at the time this email was sent, nonetheless, he agreed he would have reviewed emails upon his return in early July 2019.
Mr Cudmore was directed to the applicant’s answer to question 14 in Mr Naudi’s letter dated 7 May 2019 (exhibit R6) in which the answer is given:
We note your letter incorrectly refers to 2019. We assume you meant 2016. No payments have been made by me or on my behalf from and including 16 December 2016.
Mr Cudmore did not accept that the statement by the applicant in the 13 June 2019 email that, “No payments have been made by me or on my behalf from and including 16 December 2016” was misleading to the Trustee because although Darisha had paid money into CCK’s trust account on account of those fees, at that stage it had not been applied against CCK’s fees.
I do not accept that evidence for the reasons I have set out above.
Mr Naudi’s letters dated 19 June 2019 and 25 June 2019
On 19 June 2019, Mr Naudi sent a letter to the applicant by email: exhibit R10. The email was copied to Mr Cudmore, who was still on leave. He did not see it until his return from leave in early July 2019.
On page 2 of that letter, Mr Naudi poses the question:
Have CCK lawyers been involved in any way on matters relating to your bankruptcy to date, including matters relating to the change in Trustee, where they are remunerated or expected to be remunerated or written-off or carry forward work in progress?
The letter continues on page 3:
By default only one of two positions can represent the circumstances at hand. Either CCK Lawyers are assisting you for free, or CCK lawyers are yet to invoice someone or some entity for services rendered to date ...
Please explain in detail the arrangements with CCK lawyers …
Not having received a response to those questions, on 25 June 2019, Mr Naudi wrote to the applicant: exhibit R11, in which, amongst other things, Mr Naudi referred to an email from the applicant sent on 21 June 2019 at 3.04pm. In reference to his letter dated 19 June 2019, Mr Naudi asked:
CCK Lawyers
…
… You have not responded to the matters raised in my letter of CCK Lawyers Fees …. Given these issues impact my reassessment of your income contributions I request this information be provided no later than Friday 5 July at 5 PM.
The applicant’s response to Mr Naudi was sent by email on 11 July 2019: exhibit R12. It responded to Mr Naudi’s letters dated 19 June 2019 and 25 June 2019. Paragraph 26 of that email contains a statement:
… however I have already informed you that CCK Lawyers has received no payment from me, David Bertram, or from anyone else on my behalf. What legitimate purpose could you then have to ask those further questions?
As I have noted, at that time (i.e. July 2019), money had been paid into CCK’s trust account by Darisha on account of the applicant’s outstanding fees on David’s file totalling $26,186.07: exhibit R4, p 93 and CCK had a lien over the funds. That sum was transferred from trust on 23 December 2019.
In view of those payments by Darisha into trust on account of CCK’s fees, the applicant’s response was at best misleading if not false.
Mr Naudi’s letter dated 23 August 2019
On 23 August 2019, Mr Naudi wrote yet again to the applicant: exhibit R18, in which, on page 4, under the heading “Clarification regarding Lawyers Engaged”, Mr Naudi explained the purpose of seeking the information requested was for the assessment of the applicant’s income.
Exhibit R19 is the applicant’s response by email to Mr Naudi’s letter in which he responds, “again, your letter of 23 August 2019 is, in many respects, inappropriate. It requires further, unnecessary time and trouble in dealing with your repeated requests.”
Self-evidently, by that response, the applicant was avoiding answering Mr Naudi’s request for clarification.
CCK’s bills rendered on David’s file and Richard’s file
At the relevant time, CCK used a time recording system using accounting software, although, it is possible that at the early days of acting for the applicant in relation to the District Court proceedings, Mr Cudmore handwrote on a daily time sheet his attendances, which were entered into the accounting system by administrative assistants.
Generally, it was not Mr Cudmore’s practice to record an entry on his timesheet for settling email correspondence prepared by Mr Gillis.
As a part of the billing process, accounts would print out a draft invoice and upon examination of that invoice, if time had been incorrectly recorded on a matter and should have been recorded on another matter, there would be an instruction from the partner responsible for the matter to the accounts team to transfer it to the correct file.
It was not uncommon for time recorded in one matter to be changed to another file number if the billing arrangements necessitated that change. Partners are responsible for billing which is assisted by the time recording made on a matter, but the partner responsible for billing on a particular matter may make amendments to time entries and descriptions to ensure accuracy and that only properly billable work is billed.
Exhibit R14 is a draft invoice dated 25 July 2019 addressed to the applicant concerning his bankruptcy. On that draft invoice, there is a notation “transfer all to file no. 262261-2 as per JMC - then make changes on new draft for file no. 262261-2”. File no. 262261-2 is Richard’s file. The words “OK” at the top of that page are in Mr Cudmore’s writing. The balance of the notice was written by a CCK staff member.
CCK sent 16 invoices on David’s file and Richard’s file over the period 10 August 2018 to 30 October 2020. Each of those invoices form part of annexure HJG-12 to the first Gillis affidavit and are as follows, with the amount being the total amount of the bill, including office expenses, any disbursements and including GST:
Date
Invoice No.
File No.
Addressee
Amount
10/8/2018
34732
261894-1
David
$8,992.61
27/9/2018
34987
261894-1
David/Darisha
$6,174.85
30/11/2018
35370
261894-1
David/Darisha
$7,366.72
31/1/2019
35906
261894-1
David/Darisha
$3,651.89
28/2/2019
36086
261894-1
David/Darisha
$10,916.29
29/3/2019
36240
261894-1
David/Darisha
$20,185.93
30/4/2019
36347
261894-1
David/Darisha
$3,300.00
28/5/20219
36447
261894-1
David/Darisha
$4,469.30
31/7/2019
36963
262261-2
Richard
$30,603.65
29/8/2019
37010
262261-2
Richard
$12,871.43
30/9/2019
37288
262261-2
Richard
$16,280.50
31/10/2019
37342
262261-2
Richard
$3,777.40
31/1/2020
37966
262261-2
Richard
$8,375.24
28/2/2020
38096
262261-2
Richard
$14,714.81
30/3/2020
38238
262261-2
Richard
$10,954.13
30/10/2020
39492
262261-2
Richard
$2,869.20
[This table excludes invoice no. 36447 which was not in annexure HJG-12 but referenced to in Mr Cudmore’s affidavit of 9 August 2022 at [107]. The details of that invoice are found in the letter dated 7 December 2020 at [1.2] – p 226 of the first Gillis affidavit]
On 26 May 2020, Richard sent an email to Mr Cudmore in which he proposed a regime for the payment of CCK’s fees and which attached a number of documents: exhibit R17.
The proposal was not accepted.
The attachments to the 26 May 2020 email include a bill history for David’s file, a bill history for Richard’s file, a trust statement for David’s file, and a trust statement for Richard’s file. Those attachments reveal:
(a)On David’s file:
(i)Eight invoices had been rendered during the period 10 August 2018 to 28 May 2019 for professional fees totalling $58,129 (excluding GST). As at 26 May 2020, there remained outstanding fees for professional services of $34,921 (excluding GST); and
(ii)As at 24 February 2020, during the period 27 July 2018 to 1 March 2019, Darisha had paid $26,106.07 into CCK’s trust account on account of CCK’s fees and disbursements on David’s file. That sum was not transferred to CCK in payment of its first four invoices rendered between 1 August 2018 and 31 January 2019 until 23 December 2019;
(b)On Richard’s file:
(i)Five invoices had been rendered during the period 31 July 2019 to 31 January 2020 for professional fees totalling $64,863 (excluding GST). As at 26 May 2020, there remained outstanding fees for professional services of $37,334 (excluding GST); and
(ii)On 16 September 2019, Darisha had paid $30,962.63 into CCK’s trust account on account of CCK’s fees and disbursements on Richard’s file. That sum was transferred to CCK in payment of its invoice no. 36963 and part payment of invoice no. 37010 on 23 December 2019.
In each case, Mr Cudmore deposed that not all of the time recorded on the printout for the work in progress was included in the invoice because a decision was made not to charge for that time when the bill was prepared and then signed. That may, or may not, have been the case but in the absence of a claim for a varied assessment of quantum, it is irrelevant and in the absence of any evidence as to what was written off (if at all), it is of no or very limited weight.
Invoices on David’s file
In the case of David’s file, save for the first and last invoices sent on that file, being invoices no. 34732 and no. 36447 respectively, which were addressed only to the applicant, on each of the remaining six invoices (as from 27 September 2018), the client was named as “Mr D M Bertram Darisha Holdings Pty Limited”. That was done on the instructions from Richard because Darisha was responsible for payment of the invoices issued against David’s file.
CCK’s last invoice on David’s file is dated 28 May 2019. The narration to that bill showed that the last work done on the file and reflected in the invoice was performed on 21 May 2019 by Mr Gillis. To that point, the work being undertaken by CCK for the applicant concerned the District Court proceedings, as well as any advice that the applicant might require in connection with his bankruptcy.
Invoice no. 36963 on Richard’s file
CCK invoice no. 36963 for the sum of $30,603.65 is dated 31 July 2019 and issued on Richard’s file. It contains time recorded on David’s file which had been transferred to Richard’s file. Mr Cudmore said it was addressed to Richard because he had requested the bill to be designated, “… because my firm regarded [Richard] to be, and [Richard] had agreed to be, responsible for the payment of fees being charged by my firm in connection with the work then being undertaken on instructions from [Richard]”: Cudmore affidavit [108].
Whatever Mr Cudmore and CCK may or may not have considered, that does not change the character of the work or for whom, in reality, the work was done.
Payment on both files
CCK was receiving payments into trust from Darisha on both David’s and Richard’s files and Mr Cudmore wanted to ensure Richard was liable for payment of CCK’s fees. He said: T 206. 20 - 24
Very simply put, we were performing legal services in connection with a bankruptcy and we wished for our client to be a person who was responsible for the payment of the fees contractually, not by some informal telephone/email arrangement.
Exhibit R16 is an email from Richard to Mr Cudmore dated 23 December 2019 listing payments made to date totalling $100,736.74 over the period 29 August 2018 to 30 September 2019. The email does not allow for any reconciliation of amounts paid against invoices issued on either file, but it continues:
We are not in a position to keep paying David’s legal fees as that we have other obligations to meet and I kindly ask that you do no further work under Darisha’s name without seeking approval.
The examination summons issued out of the Federal Court
In July 2020, Mr Naudi applied in this Court for orders under s 81 of the Act for the examination of a number of persons in connection with the applicant’s bankrupt estate, including the applicant, Richard, Chaya and Mr Cudmore. The orders and examination summons were issued on 1 September 2020.
The examination summons sought information from Richard in relation to CCK’s representation of the applicant and who was paying the fees for that representation. The same information was sought from Chaya and the applicant.
On 5 November 2020, Mr Naudi wrote to the applicant: annexure HJG-29 to the second Gillis affidavit sworn 15 October 2021, in which he says:
As you are aware there has been a great deal of correspondence with you and your lawyers (CCK lawyers) where I have been attempting to ascertain the benefit of the value of legal services received by you.
At every step I have been met with a claim of Legal Professional Privilege as a reason why documents or information cannot be provided to me. While I concede that some documentation and information I have requested may be subject to claims of Legal Professional Privilege, no such privilege can be claimed over financial information and matters that have been the subject of requests by me and otherwise form part of your examinable affairs.
I am now aware that you and your lawyers are resisting my attempts to publicly examine you.
As such my ability to provide transparency as to the benefits received by you is now impossible.
I am now in a position that I am not capable of performing my obligations in relation to these matters before the cessation of your bankruptcy. This is an untenable position.
As such I provide you a final opportunity to provide sufficient documentation and information to enable me to properly assess the benefits you have received by way of legal services provided to you.
The requested information is strictly required by 4:00PM, 19 November 2020. Please be aware, NO further extensions will be granted and you should prioritise your response rather than leave it to the last minute in such circumstances. If I have not received information to enable me to make a proper evaluation of the benefit received together with substantiating evidence then your bankruptcy will be extended pursuant to s149D(1 )(d), (e) of the Bankruptcy Act 1966 (Cth).
To avoid confusion, the benefit you have received by way of legal service constitutes income by virtue of s139L(1)(v) or subject to the details of any arrangement which to date is denied by you, s139L(1)(vi).
It remains my view that a detailed record of time spent by your lawyers assisting you in any legal matter or in your conduct as a Regulated Debtor or responding to my queries are what is required together with your lawyer's standard charge rates, or such agreed rates as may apply.
The text of this letter makes abundantly clear the difficulty Mr Naudi was experiencing in getting information both from the applicant and from CCK and also reveals that he did not accept what he had been told.
CCK applied to set aside the examination summons for the applicant, Richard, Chaya and Mr Cudmore.
A component of the legal work done by CCK on Richard’s file was in connection with the application to set aside the examination summons.
The application to set aside the examination summons was settled by agreement between the parties which was recorded in the Settlement Memorandum: annexure JMC-9 to the Cudmore affidavit. Amongst other things, the Settlement Memorandum provided that the examination summonses addressed to the applicant, Richard, Chaya and Mr Cudmore would be set aside. It was a further term of the Settlement Memorandum that Mr Naudi would not object under s 149B of the Act to the discharge of the applicant from bankruptcy on 17 December 2020.
There were a number of conditions precedent recorded in the Settlement Memorandum. Clause 1.2 provided that as a condition precedent:
CCK providing disclosure to the Trustee of documentation to enable to Trustee to:
1.2.1.Calculate or otherwise assess the benefit of legal services received by the Bankrupt during the period of his bankruptcy (including but not limited to retainer agreements, fee invoices and WIP ledger reports).
1.2.2.Calculate or otherwise assessing any direct or indirect benefit provided by Chaya and Richard to the Bankrupt from [last reporting date].
CCK’s 7 December 2020 letter
On 7 December 2020, CCK wrote to Mr Naudi: first Gillis affidavit annexure HJG-12, p 225. As at that date, CCK was holding $60,000 in its trust account. That sum was referable to invoices that had been issued to the applicant or Richard on their respective files: exhibit R20.
Mr Cudmore was responsible for drafting and settling the 7 December 2020 letter. He regarded the 7 December 2020 letter as sufficient to satisfy cl 1.2.1 of the conditions precedent and also understood that what was required, was a full and frank disclosure, whether it be good or bad.
In the letter, CCK identifies outstanding invoices both on David’s file ($26,023.29) and Richard’s file ($58,465.12) totalling $84,488.41.
CCK also provided to Mr Naudi, amongst other things, CCK’s WIP records setting out time recorded as work in progress against both David’s and Richard’s files.
Mr Gillis resisted the suggestion that these two WIP records were provided for the purposes of enabling Mr Naudi to calculate or otherwise assess the benefit of legal services received by the applicant during the period of his bankruptcy, on the basis that the settlement was conditional on documents being provided “including … WIP ledger reports” and that they had been provided because they were specifically requested: T 22.11 – 39.
That is not so. The purpose for which the documentation was provided was clearly set out in clause 1.2 of the Settlement Memorandum.
On 18 December 2020, White J made orders discharging the examination summons against the applicant, Richard, Chaya and one other. No order was made in relation to the examination order for Mr Cudmore.
Paragraphs 5 to 14 of the 7 December 2020 letter
Paragraphs 5 to 14 inclusive of the 7 December 2020 letter state:
5.We opened our matter 261894-1 [David’s file] at that time. That is the only matter which we have ever opened for Mr David Bertram. As can be seen from the enclosed invoices, we have sent invoices addressed to Mr David Bertram. To the extent that these invoices have been paid, they have been satisfied:
5.1 first, from the costs order made by Master Blumberg against the plaintiffs in District Court proceedings 1214 of 2017, in which we acted for Mr David Bertram in connection with the examination order made in those proceedings, which costs order was taxed and paid in the amount of $23,866.84; and
5.2secondly, from limited funds paid into our trust account by Darisha.
Subparagraph 1.2.1: Our retainer to act for Chaya Bertram, Richard Bertram and Darisha
6.In about October 2018, we were retained by Richard Bertram to act for Darisha. We were initially instructed in relation to the challenge to Darisha's proof of debt which had been admitted for voting purposes in David's bankruptcy by his former trustees, Messrs de Vries and Solomon. We opened our matter 262261-1 [David’s file] in connection with our representation of Darisha in relation to these issues in the Federal Court.
7.Subsequently, on instructions from Richard Bertram, we have also commenced to act for Richard Bertram in his personal capacity, and for his and David's elderly mother, Chaya Bertram, in connection with David's bankruptcy and the effect of that bankruptcy on his family. We opened our matter 262261-2 [Richard’s file] for that purpose.
8.In relation to each and every attendance which has been recorded in connection with our matter 262261-2, we have acted on instructions from Richard Bertram, and not on instructions from David Bertram. Our concern has been, in relation to that matter, to protect the interests of Richard and his family. That is why Richard, Chaya and Darisha are our clients in that matter.
9.Clearly enough, it is in the interests of Richard, Chaya and Darisha that David's bankruptcy be managed appropriately, and that they receive, where necessary, legal advice and representation. Clearly, also, the interests of Richard, Chaya and Darisha on the one hand, and David on the other hand, are closely aligned. This is because, as would be well known to Mr Naudi, the financial and other interests of all members of the Bertram family are connected.
10.In this regard, our clients in relation to this matter are Chaya, Richard and Darisha, and not David. We note that the defi nition of 'client' in the Australian Solicitor's Conduct Rules is in the following terms:
“client” with respect to the solicitor or the solicitor's law practice means a person (not an instructing solicitor) for whom the solicitor is engaged to provide legal services for a matter.
11.It follows that our services as recorded in our matter number 262261-2 were for the benefit of Chaya, Richard, and Darisha, notwithstanding that David's interests may also, on occasion, have aligned with theirs.
12.It should be recalled, and is not without significance, that the first documents which were ordered to be produced by David in connection with the examination order made in the District Court proceedings were documents which related to the testamentary arrangements of the late Michael Bertram.
As set out above, we performed work on behalf of David Bertram in those District Court proceedings. However, the interest of Chaya, Richard and Darisha in those proceedings, and the reason for them to agree to meet David's costs in respect of those proceedings (quite apart from their familial relationship with David and desire to provide him with support), ought be plain to see.
13.The position in relation to our matter 262261-2 is likewise. On occasion, as can be seen from the narrations of individual time entries made in relation to our matter 262261-2, we have performed legal work in consultation with David, and have included David in confidential and privileged communications. In doing so we have at all times acted on instructions from Richard, and on the basis that our firm has been retained in that matter for the purpose of providing representation, advice and assistance in connection with protecting the interests of Chaya, Richard and Darisha. Of course, we do not waive privilege over any communications we have had with any member of the Bertram family.
14.It follows that our view is that no benefit of the kind contemplated by s139L of the Bankruptcy Act has been provided to David Bertram by reason of our retainer to act for Chaya, Richard and Darisha.
(Square brackets provided)
The applicant has not demonstrated that Mr Naudi erred in law and/or fact.
Outstanding amounts and unbilled work – David’s file
The information provided in the 7 December 2020 letter asserted an amount outstanding on David’s file as at 28 May 2019 totalling $26,023.29, whereas CCK’s full bill history – exhibit R17, reveals that as at 24 February 2020, the amount outstanding on David’s file for bills issued to 28 May 2019, totalled $38,871.52 (including GST, office expenses and disbursements) or $34,921 (ex-GST) solely for professional services.
In any event, to the extent that invoices remain unpaid on David’s file, Mr Naudi concluded that those amounts comprised a residual benefit under s 45 of the FBTA Act to that value and thereby income of the applicant to that value within the meaning of s 139L(1)(a)(v). He was correct to do so.
So too, Mr Naudi concluded that unbilled work on David’s file comprises a residual benefit under s 45 of the FBTA Act to that value and thereby income of the applicant to that value within the meaning of s 139L(1)(a)(v). He was correct to do so.
The applicant has not demonstrated that Mr Naudi erred in law and/or fact.
Amounts paid – Richard’s file
Mr Naudi concluded that work done on Richard’s file was done in relation to the applicant’s bankruptcy. That conclusion was open to him on the basis of the information available to him.
CCK’s fees for work done on Richard’s file were paid for by Darisha to the extent of $30,962.63 as at 24 February 2020. That amount was applied to CCK’s invoice no. 36963 and part payment of invoice no. 37010: exhibit R17. To that extent, the applicant received an expense payment benefit to that value within the meaning of ss 20 and 23 of the FBTA Act and thereby received income to that value within the meaning of s 139L(1)(a)(v).
It is not clear how much more (if any) has been paid against outstanding bills on Richard’s file although, as I have noted, as at 9 December 2020, the balance in the CCK trust account on Richard’s file was $60,000: exhibit R20.
In the event Richard and/or Darisha paid for CCK’s fees on Richard’s file in addition to the amounts I have identified, whether directly or by paying money into trust on account of CCK’s fees, given that Mr Naudi concluded the work done on Richard’s file was done in relation to the applicant’s bankruptcy, the applicant received an expense payment benefit to that value within the meaning of ss 20 and 23 of the FBTA Act and thereby received income to that value within the meaning of s 139L(1)(a)(v).
The applicant has not demonstrated Mr Naudi erred in law and/or fact.
Outstanding amounts – Richard’s file and unbilled work
As to Richard’s file, the information provided in the 7 December 2020 letter asserted an amount outstanding on Richard’s file as at 30 October 2020 totalling $58,465.12, whereas CCK’s full bill history: exhibit R17, reveals that as at 24 February 2020, the amount outstanding on Richard’s file for invoices issued to 31 January 2020 totals $40,945.59 (including GST, office expenses and disbursements) or $37,334 (excluding GST) solely for professional services.
To the extent the amounts set out in CCK’s letter dated 7 December 2020 in relation to Richard’s file differ from those in the full bill history, that is explicable by a typographic error whereby invoice no. 37288 has been included twice in [1.4] of the 7 December 2020 letter, but attributed to two different amounts such that the invoice numbers that follow do not match with amounts the subject of those invoices.
In any event, Mr Naudi concluded that invoices which remain unpaid on Richard’s file comprise a residual benefit under s 45 of the FBTA Act to that value and thereby income of the applicant within the meaning of s 139L(1)(a)(v). He was correct to do so.
So too, Mr Naudi concluded that unbilled work on Richard’s file comprises a residual benefit under s 45 of the FBTA Act to that value and thereby income of the applicant to that value within the meaning of s 139L(1)(a)(v). He was correct to do so.
The applicant has not demonstrated Mr Naudi erred in law and/or fact.
Work that was alleged to have been written off
It was put to Mr Naudi in cross-examination that he had not considered work in the WIP records that had been written off, a proposition with which he agreed.
The applicant submits that Mr Naudi ignored the fact that invoices were issued for work periods covered by the WIP entries in amounts less than the amount of the WIP. I proceed on the basis that that submission is directed at a failure by Mr Naudi to account for work that had been written off.
Mr Naudi was not provided with any information as to what work in the WIP records had or had not been written off. Had that been the case, it was incumbent upon the applicant to inform him both in accordance with the applicant’s obligations under s 77 of the Act as well as in accordance with the Settlement Memorandum.
The applicant had an opportunity to inform Mr Naudi that work had been written off, if in fact that was the case, both in CCK’s letter dated 7 December 2020 and after the initial CAP assessments issued on 11 February 2021 when CCK wrote its letter dated 4 March 2021. It does not sit well with the applicant to now contend that work had been written off.
In the circumstances, Mr Naudi was justified in proceeding on the basis that none of the work recorded in the WIP records had been written off.
The applicant has not demonstrated that Mr Naudi erred in law and/or fact.
Conclusion on s 139L(1)(a)(v)
The Trustee’s conclusion that the applicant had received income within the meaning of s 39L(1)(a)(v) to the value of the benefit provided to him worked out in accordance with the provisions of s 139L(1)(a)(v) was correct as a matter of law and/or fact.
Section 139L(1)(a)(vi)
The applicant submits that Mr Naudi did not see the need to distinguish between the provision of a benefit under s 139L(1)(a)(v) or (vi) and that Mr Naudi’s approach in treating the assessed benefit under either of these two provisions as the same is flawed by reference to s 18 of the FBTA Act which provides:
Taxable value of loan fringe benefits
(1)Subject to this Part, the taxable value, in relation to a year of tax, of a loan fringe benefit provided in respect of the year of tax is the amount (if any) by which the notional amount of interest in relation to the loan in respect of the year of tax exceeds the amount of interest that has accrued on the loan in respect of the year of tax.
The applicant submits that the effect of this provision is that a loan fringe benefit is not to be valued at the face or capital value of the loan, but by references to an assessment of the extent to which the interest payable on the loan in an annual period is less than the notional market rate of interest.
Mr Naudi accepted there was a difference between the definition of income in s 139L(1)(a)(v) and (vi) but considered that irrespective of whether the applicant’s income came within s 139L(1)(a)(v) or (vi), the result is the same.
I do not accept the applicant’s submission. Section 139L(1)(a)(vi) makes no reference to the FBTA Act. The provision refers to the value of a loan and includes a loan that is not enforceable at law or in equity. To that extent, there is a broad definition of what may be deemed to be a loan.
It was put to Mr Naudi in cross-examination that he made no attempt to value any loan in accordance with the FBTA Act, however he was not obliged to do so.
The end position is that in the circumstances of this matter the value of the benefit under s 139L(1)(a)(v) and the value of any loan under s 139L(1)(a)(vi) is the same and Mr Naudi was correct in reaching that conclusion as a matter of law and/or fact.
Section 139W
On its terms, s 139W(2) provides, relevantly:
(2) If…
(a)the trustee is satisfied that the income that is likely to be derived, or was derived, by the bankrupt during that [contribution assessment period] is or was greater or less than the amount of that income as assessed by the last preceding assessment in respect of that period;
(b)…;
(c)…
The trustee is to make a fresh assessment of the income that is likely to be derived, or was derived, by the bankrupt during that period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period.
Mr Naudi submits that for four reasons, the central aspect of the applicant’s case that Mr Naudi could not properly have been satisfied as to the extent of the income that was assessed in the CAP assessments, misapprehends the operation of the Act.
The applicant confuses and conflates two separate questions
The first and second reasons are that the applicant’s pleaded case confuses and conflates the question of the trustee being “satisfied” that a fresh assessment to be issued with the question of whether the trustee can be satisfied as to the precise quantum of the further income assessed.
The respondent refers to [12] and [12A] of the ASoC where it is pleaded that the state of satisfaction is that stated in s 139W(2) of the Act yet, at [24]-[27] of the pleading, the complaint is that the trustee had to be satisfied not only that the applicant had derived income but the amount of that income was the value of the benefit worked out in accordance with either s 39L(1)(a)(v) or s 139L(1)(a)(vi): ASoC [24] [24.1], [26.2], [27].
Put another way, the applicant confuses and conflates the concept of income under s 139L and the amount of that income, which is a question of mixed fact and law, with the concept of the trustee being “satisfied” within the meaning of s 139W(2). If the Trustee errs as a matter of fact and law in his conclusion that the service provided by CCK and paid for by a third party or in relation to unpaid invoices or unbilled fees, a third party assumed an obligation to pay for those unpaid invoices or that unbilled work, the applicant received income within the meaning of s 139L, there can be no question that he cannot have been satisfied that income is likely to be derived or was derived by the bankrupt during the relevant periods.
However in circumstances where the Trustee has concluded, correctly, that the value of the benefit received by the applicant, or the value of the loan to the applicant, was income within the meaning of s 139L, the question then becomes whether the Trustee could be satisfied as to whether the amount of that income derived during the relevant period was greater than the amount of that income as assessed by the last preceding assessment in respect of that period.
Accordingly, I accept the respondent’s submission that the state of satisfaction required on the part of the Trustee is that the amount of income that was derived by the applicant during the relevant CAP assessment was greater or lesser than the amount of income assessed by the last preceding assessment in respect of that period.
It is that state of satisfaction which may be reviewed by the Court and if found to have been reached unreasonably or was not capable of being reached on proper material lawful grounds, will not be taken to be a lawful satisfaction for the purposes of the statute.
As to the requirement that the Trustee be satisfied, in Djokovic v Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2022] FCAFC 3; (2022) 289 FCR 21 (Allsop CJ, Besanko and O’Callaghan JJ), the Full Court said: at [20]-[27]
20Thus it is not the fact of Mr Djokovic being a risk to the health, safety or good order of the Australian community; rather it is whether the Minister was satisfied that his presence is or may be or would or might be such a risk for the purposes of s 116(1)(e)(i), through s 133C(3).
21The satisfaction of the Minister is not an unreviewable personal state of mind. The law is clear as to what is required. If, upon review by a court, the satisfaction is found to have been reached unreasonably or was not capable of having been reached on proper material or lawful grounds, it will be taken not to be a lawful satisfaction for the purpose of the statute. In such a case the precondition for the exercise of the power will not exist and the decision will be unlawful and will be set aside. That is, the lawful satisfaction is a jurisdictional precondition, a form of jurisdictional fact, for the exercise of the power or discretion: Minister for Immigration and Multicultural Affairs v Eshetu [1999] HCA 21; 197 CLR 611 at 651 [131] and the cases cited at footnote 109.
22The expression of the requirements of lawful satisfaction have been set out in a number of High Court cases beyond which it is unnecessary to go: Council of the Municipality of Bankstown v Fripp [1919] HCA 41; 26 CLR 385 at 403; Boucaut Bay Company Ltd (in Liq) v Commonwealth [1927] HCA 59; 40 CLR 98 at 101; R v Connell; Ex Parte Hetton Bellbird Collieries Ltd (No 2) [1944] HCA 42; 69 CLR 407 at 430; Avon Downs Pty Ltd v Federal Commissioner of Taxation [1949] HCA 26; 78 CLR 353 at 360; Federal Commissioner of Taxation v Brian Hatch Timber Co. (Sales) Pty Ltd [1972] HCA 73; 128 CLR 28 at 57; Buck v Bavone [1976] HCA 24; 135 CLR 110 at 118–119; Eshetu 197 CLR at 651–654 [130]–[136]; and Wei v Minister for Immigration and Border Protection [2015] HCA 51; 257 CLR 22 at 35 [33].
23Relevantly, where the satisfaction depends upon satisfaction of a factual state of affairs in particular one involving an opinion, the approach of Latham CJ in R v Connell, of Gibbs J in Buck v Bavone, of Starke J in Boucaut Bay (approved by Windeyer J in Brian Hatch Timber) and of Gummow J in Eshetu should be noted.
24Chief Justice Latham in R v Connell approached the matter as presenting the question: “whether or not there was evidence upon which [the decision-maker] could be satisfied that [the] rates were anomalous”.
25Justice Gibbs in Buck v Bavone said (amongst other things) the decision-maker must “act in good faith; [he or she] cannot act merely arbitrarily or capriciously” and “where the matter of which the [decision-maker] is required to be satisfied is a matter of opinion or policy or taste it may be very difficult to show that … [the] decision could not reasonably have been reached”.
26Justice Starke in Boucaut Bay said, amongst other things, that the decision-maker “must not act dishonestly, capriciously or arbitrarily … So long, however, as the Minister acts upon circumstances … giving him a rational ground for the belief entertained, then … the Courts of law cannot and ought not interfere”.
27Justice Gummow in Eshetu, after referring to Gibbs J in Buck v Bavone, said the following at at 654 [137]:
… where the criterion of which the authority is required to be satisfied turns upon factual matters upon which reasonable minds could reasonably differ, it will be very difficult to show that no reasonable decision-maker could have arrived at the decision in question.
It is not for the Court to be satisfied but for Mr Naudi. There is nothing that has been put before the Court sufficient to draw the conclusion that Mr Naudi was not satisfied for the purposes of s 139W(2) of the Act that the applicant had derived income during the relevant CAPs which was greater than the amount of income assessed by the last preceding assessment in respect each of the CAP periods.
Further, Mr Naudi’s satisfaction was reached on a correct understanding of the law in the sense that the applicant had received income within the meaning of s 139L such that the precondition for the exercise of the power in s 139W to issue fresh CAP assessments was met: R v Connell, Ex parte Hetton Bellbird Collieries [1994] HCA 42; (1944) 69 CLR 407, 430-432; Ibrahim v Minister for Home Affairs [2019] FCAFC 89; (2019) 270 FCR 12 at [52], Metropolitan Gas Company v Federal Commissioner of Taxation [1932] HCA 58; (1932) 47 CLR 621, 631-632.
The precise level of income
The third reason is that the Trustee does not need to be satisfied as to the precise level of income that is the subject of the income assessment.
I accept that submission. There is no requirement that the Trustee be satisfied for the purpose of determining the value of a benefit within the meaning of s 139L(1)(a)(v).
Section 139Z provides:
139Z If bankrupt claims not to be in receipt of income
(1) If a bankrupt:
(a)does not provide information about whether he or she is likely to derive, or derived, income or a particular class of income during a contribution assessment period; or
(b)claims not to be likely to derive, or not to have derived, any income or a particular class of income during a contribution assessment period;
but the trustee has reasonable grounds for believing that the bankrupt is likely to derive, or derived, income, or income of that class, during that period, then, for the purpose of making an assessment, the trustee may determine that the bankrupt is likely to derive, or derived, income, or income of that class, during that period and may also determine the amount of that income.
(2) …
The applicant submits that s 139Z does not allow the Trustee to assess on the basis of whim as opposed to reason. So much so may be accepted.
In circumstances where the applicant claimed that he had not derived any income from the receipt of legal services during the CAP assessments, but the Trustee had reasonable grounds to believe that the applicant had derived income, s 139Z empowered the Trustee to make his own determination of that income.
In my view, the Trustee had reasonable grounds for believing that the applicant derived income during the relevant contribution assessment period as a result of which the precondition contained within s 139Z was enlivened. The Trustee was empowered to determine that the applicant had derived income during the relevant contribution assessment period and the amount of that income.
A merits review regime
The fourth reason is that if the Trustee’s exercise of power miscarries, there is a comprehensive regime for a merits review in Subdivision G of Division 4B of the Act.
I accept that submission but for the reasons I have set out above, I do not accept that the exercise of the Court’s supervisory jurisdiction is constrained by the merits review process in that part of the Act. Having said that, I accept that it may be that the Court will decline to exercise its jurisdiction in circumstances where that merits review regime has not been followed, however is not appropriate to be prescriptive as to what those circumstances are or may be.
Conclusion on s 139W
The respondent was satisfied for the purposes of s 139W that the applicant had derived income during the relevant CAP periods. That state of being satisfied was not affected by any error of law nor was it unreasonable or irrational.
The exercise of the discretion
In considering this matter, the court is fulfilling a supervisory role judicially rather than an administrative role standing in the shoes of the trustee. The exercise of the court’s power is wholly within its discretion and it has the “widest possible discretion is the appropriate order which should be made in the particular case”: Re Tyndall at p 186. In considering whether to exercise the power, grounds for judicial review must be established by an applicant: Moore at [28], citing Re Wheeler; Ex parte Wheeler v Halse [1994] FCA 1348; (1994) 54 FCR 166 at 170 (Lee J).
There is no need for the impugned act to be absurd, unreasonable or taken in bad faith and the trustee’s decision may be subject to review even though commercially sound at the time was made: Macchia at p 116 (French J). Nonetheless, the trustee’s opinion will be a relevant factor in the exercise of the court’s discretion and there is no presumption the court will intervene in a given case. The fact that the court might have taken a different course to the trustee in bankruptcy at the relevant time is not, without more, a basis to disturb the trustee’s decision: Re Tyndall at p 186 per Deane J; Macchia at p 116 per French J.
The exercise of the discretion is subject to the principle that the court will not unduly interfere with the day-to-day administration of a bankrupt estate by a trustee in bankruptcy: Re Tyndall at p 186 per Deane J and ultimately the question is what would be “just and equitable” in the circumstances of the case.
There is no doubt that the Trustee encountered significant difficulty in obtaining information from the applicant and/or CCK in relation to the services provided by CCK to the applicant and who was paying for those services or who had assumed the obligation to meet any unpaid invoices or unbilled work in progress.
The Trustee went to great lengths to try to obtain information on that question, to the extent that he applied for examination summons issued out of this Court. Ultimately, he was provided with information in CCK’s letter dated 7 December 2020, however that information was incomplete and, for the reasons I have explained, was in part inaccurate.
There is no doubt that the Trustee did not accept what he was being told by the applicant and CCK prior to 7 December 2020 nor after that date because, amongst other things, the information that had been provided was inconsistent with the information with which he had been provided.
The Trustee made no error of law and/or fact in his conclusion that the applicant received a benefit within the meaning of s 139L(1)(a)(v). I do not consider the Trustee acted unreasonably or irrationally in assessing the value of the benefit in accordance with that provision. Further, the Trustee was entitled to proceed under s 139X.
The Trustee was not provided with any information that revealed a particular percentage or range of percentage that comprised work done for the applicant. Instead, he was confronted by a bare denial that work done on Richard’s file was done for the applicant. Not only did the Trustee not accept that position, as I have noted, the evidence adduced in this matter is to the contrary. Had the Trustee, for example, concluded that the value of the benefit was a percentage of the WIP, on the basis of the information provided, that would have amounted to no more than speculation.
So too, the Trustee made no error of law and/or fact in his conclusion that the applicant received the value of a loan within the meaning of s 139L(1)(a)(vi). It is for the same reasons that I do not consider the Trustee acted unreasonably or irrationally in assessing the value of that loan in accordance with that provision. Further, the Trustee was entitled to proceed under s 139X.
It may well be that faced with the circumstances which confronted the Trustee, the Court may have reached a different conclusion as to the value of the benefit provided under s 139L(1)(a)(v), or the value of any loan provided under s 139L(1)(a)(vi), but that is not the test. Further, even if the Court was to consider a lesser value as income, in the absence of any evidence the Court would be speculating as to what percentage or range of percentage of work was done on Richard’s file for the applicant. To that extent, it would be in no better position than the Trustee.
As to whether the Trustee was satisfied that the applicant had derived income during the relevant contribution assessment periods, it is for the reasons I have explained that I do not consider the applicant has established that no reasonable decision-maker could have arrived at the decision in question.
It is for these reasons that the three CAP assessments were not invalid or void.
Nonetheless, the Court may still exercise its discretion to set aside the CAP assessments. The Trustee’s opinion is a relevant factor in the exercise of the Court’s discretion. As I have noted, the fact that the Court might have taken a different course to the Trustee at the relevant time is not, without more, a basis to disturb the Trustee’s decision.
In all the circumstances, I am not satisfied that the Court should exercise its discretion to set aside the CAP assessments.
The District Court costs order
There is no issue that although Mr Naudi did not include the costs received by the applicant as a result of the costs order in the District Court proceedings totalling $23,866.84, nonetheless he did consider the WIP time entries for doing work, at least in part, as part of his assessment of the applicant’s income. That is an exempted benefit under s 136(1) (definition of fringe benefit) as varied by cl 23 of Schedule 2 to the Bankruptcy Regulations.
The applicant’s case proceeded on an entirely different basis and there is no suggestion by the applicant that because of that error the CAP assessments or any one of them are invalid or void such that they should be set aside.
On the cross-claim, the respondent claims an entitlement to the sum of $174,901.76 based on the Certificate issued to the applicant pursuant to s 139ZG of the Act issued on 18 March 2021 which reflects the total of the amounts in the CAP assessments.
Pursuant to s 139ZG(5), the Certificate is prima facie evidence of the existence of the debt and the amount of the debt. In view of the conclusion I have reached, there is no issue as to the existence of a debt, however the prima facie evidence of the amount of the debt has been displaced in relation to CAP 3.
After making allowance for the District Court costs order, the amount of the debt due is $162,968.34: respondent’s closing submissions, Annexure ‘A’.
The respondent is entitled to judgment for that amount together with pre-judgment interest in an amount to be calculated.
Section 77A Notice to Excension Advisory Pty Ltd
The applicant seeks an order setting aside a Notice issued pursuant to s 77A of the Act by the respondent on 16 April 2021 addressed to Excension Advisory Pty Ltd.
The applicant refers to the Notice being issued after the applicant had been discharged from bankruptcy and that the Notice refers to the Trustee conducting an investigation of the bankrupt pursuant to s 19AA of the Act.
The applicant submits that s 77A of the Act makes it clear that the trustee may only issue a Notice under that section where there is an investigation under s 19AA “relating to a person (in this section called the bankrupt) …”
Section 19AA provides:
(1) The trustee of the estate of a bankrupt may investigate:
(a)the bankrupt’s conduct and examinable affairs; and
(b)books, accounts and records kept by the bankrupt;
so far as they relate to the bankruptcy.
The applicant submits that from the date of his discharge from bankruptcy on 23 December 2020, Mr Naudi no longer occupied or held the office of “trustee of the estate of a bankrupt” in relation to the applicant. He contrasts s 19AA with ss 139WA, 139ZJ and 81.
Section 139WA provides that an assessment under s 139W may be made at any time, including a time after the bankrupt is discharged. Section 139ZJ is a definition section which defines bankrupt as including a person who has been discharged from bankruptcy and s 81 refers to an examination summons which may be issued before or after the end of the bankruptcy.
I do not accept the applicant’s submissions.
Under s 81, the court or a registrar may at any time whether before or after the end of the bankruptcy on the application of amongst others, the trustee, summons a relevant person or examinable person in relation to the relevant person for examination in relation to the bankruptcy. The construction of s 19AA advanced by the applicant is contrary to the power given to a trustee to apply to the court or a registrar under s 81, notwithstanding the bankruptcy has ended.
Accordingly, I decline to set aside the s 77A Notice.
Bad faith
In [34.7] of the ASoC, it is alleged that Mr Naudi did not act in good faith in relation to each of the CAP assessments issued on 18 March 2021.
That allegation is not pressed.
Section 139W(4) and the Insolvency Practice Rules (Bankruptcy) 2016 (Cth)
The applicant alleges breaches of s 139W(4) and the Insolvency Practice Rules (Bankruptcy) 2016 (Cth).
As to s 139W(4), the section provides:
139W Assessment of bankrupt’s income and contribution
(4)As soon as practicable after the making of an assessment the trustee must give to the bankrupt written notice setting out particulars of the assessment and informing the bankrupt about the possibility of a variation under section 139T.
The applicant contends the Trustee did not comply with that provision.
I do not accept that to be the case. The Trustee provided the applicant with particulars of the assessment in each of the CAP 1, 2 and 3 assessments.
As to the applicant’s rights under s 139T, it appears that the Trustee did not advise the applicant of his rights under s 139T, however the point was not developed by the applicant in any way.
In any event, I would not change my decision to not exercise my discretion by reason of this omission.
As to the Insolvency Practice Rules (Bankruptcy) 2016 (Cth), the applicant contends that the Trustee did not comply with r 42-18(4)(a) in that the Trustee did not give sufficient particulars to enable the applicant to understand or ascertain how the amount of the income contribution had been assessed.
I do not accept that contention. The Trustee was clear in his explanation as to the basis of the CAP assessments and provided sufficient information to allow the applicant to understand the basis of the assessment.
Conclusion
The applicant is not entitled to the relief it seeks.
The respondent is entitled to judgment on the cross-claim in the sum of $162,968.34, together with pre-judgment interest.
I will hear the parties on the form of the final orders and on the question of costs.
I certify that the preceding three hundred and eighty-eight (388) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Sullivan. Associate:
Dated: 25 October 2024
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