Boral Montoro Pty Ltd v McLachlan - [2007] FMCA 533

FEDERAL MAGISTRATES COURT OF AUSTRALIA

BORAL MONTORO PTY LTD v MCLACHLAN

[2007] FMCA 533

BANKRUPTCY – Trustee – appointment of trustee – entitlement of debtor to challenge appointment of proposed trustee.

Bankruptcy Act 1966, ss.30(1), 52(1)(c), 52(2)(b), 156A, 178, 179

Glover v Roche [2003] FMCA 576
Rondo Building Services Pty Ltd v Starkey [2005] FMCA 275
Cobbs Hill (Tasmania) Meat Suppliers Pty Ltd v L El Moustafa (1998) 83 FCR 403
Griffin v Triscott [2004] FMCA 403
Deputy Commissioner of Taxation v Niemann (1984) 69 FLR 79

Applicant:

BORAL MONTORO PTY LTD

Respondent:

SANDRA MCLACHLAN

File number:

BRG 15 of 2007

Judgment of:

Wilson FM

Hearing date:

23 March 2007

Date of last submission:

23 March 2007

Delivered at:

Brisbane

Delivered on:

13 April 2007

REPRESENTATION

Counsel for the Applicant:

N/A

Solicitors for the Applicant:

James Conomos Lawyers

Counsel for the Respondent:

Mr. D. Keane

Solicitors for the Respondent:

Cooke & Hutchinson Lawyers

ORDERS

Pursuant to s.30(1)(b) Bankruptcy Act it is declared that Nick Jim Combis should not act as trustee of the bankrupt estate of the respondent debtor.
That the hearing of the creditor’s petition be adjourned to enable:
(a)The withdrawal of the consent by Nick Jim Combis to act as trustee; and
(b)The creditor to prove the matters required by s.52(1)(c) of the Act.
The applicant creditor pay the respondent debtor’s costs of and incidental to the appearances on 14 and 23 March 2007.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BRG 15 of 2007

BORAL MONTORO PTY LTD

Applicant

And

SANDRA MCLACHLAN

Respondent

REASONS FOR JUDGMENT

This application raises a short but interesting point, and one which I am told is devoid of direct authority. The applicant creditor has presented a creditor’s petition and the respondent debtor accepts that a sequestration order should be made. However, the respondent debtor opposes the appointment of Nick Jim Combis as trustee of her estate. Mr Combis has executed a Consent to Act in Form 12.
Mr Combis is a member of Vincents Chartered Accountants, and a Registered Trustee, as that term is defined. It is common ground that Vincents Chartered Accountants is a creditor of the debtor in a modest amount. The question is whether, in those circumstances, Mr Combis ought be appointed trustee and, more fundamentally, whether the respondent debtor can object to his appointment. Those issues were referred to this court by order of the Registrar on 9 March 2007.
The applicant creditor submits that s.156A Bankruptcy Act is an exclusive code dealing with the circumstances in which a Trustee can be removed. As it does not permit the debtor or bankrupt to apply to remove the trustee, it is said that the issues before the court should be decided adversely to the respondent.
Section 156A(1) of the Act provides that a Registered Trustee may consent to act as trustee of the estate by signing an instrument, as

Mr Combis has done in the present case. That instrument is in the approved form. Section 156A(3) is important. It provides:
“(3)   Where:
(a)     at the time when a debtor becomes a bankrupt, a registered trustee has, under subsection (1), consented to act as the trustee of the estate of the debtor and the consent has not been revoked, the registered trustee becomes, at that time, by force of this subsection, the trustee of the estate of the bankrupt; and
(b)     at the time when 2 or more debtors, being members of a partnership or joint debtors who are not in partnership with one another, become bankrupts, a registered trustee has, under subsection (1), consented to act as the trustee of the joint and separate estates of those debtors and the consent has not been revoked, the registered trustee becomes, at that time, by force of this subsection, the trustee of the joint and separate estates of those bankrupts.”
The court does not appoint the trustee and if a Consent to Act has been executed, the trustee is appointed as a result of the making of a sequestration order. No further order is required. Therefore, in the present case, if a sequestration order is made, Mr Combis would by reason of s.156A(3)(a), become the trustee of the bankrupt estate of the respondent: see Glover v Roche [2003] FMCA 576 at [8].
Section 156A(4) of the Act is inapplicable in the present circumstances. It deals with the circumstances in which a creditor may apply to remove a trustee, already appointed. Whilst the trustee’s primary duty is to administer the bankrupt’s estate for the benefit of her creditors, I do not think it can be seriously gainsaid that the trustee also owes duties to the bankrupt. One of those fundamental duties is to be impartial. It is difficult, at first blush, to see how a trustee who is also a creditor can meet that obligation.
In my view, s.156A of the Act is not an exhaustive statement of the circumstances in which a trustee can be removed. For example, the court can order the removal of a trustee pursuant to s.179 of the Act, as well as under s.178 of the Act. It is relevant to note that s.179 of the Act entitles a bankrupt to apply for the removal of his or her trustee.
Here the argument about the suitability of the trustee has been raised before the making of a sequestration order. In those circumstances the debtor can not avail herself of s.178 or 179 of the Act.
However, in my view, s.30(1) of the Bankruptcy Act does entitle the court to decide whether a particular trustee should be appointed. Section 30(1) provides:
“(1)   The Court:
(a)     has full power to decide all questions, whether of law or fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and
(b)     may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.”
In Rondo Building Services Pty Ltd v Starkey [2005] FMCA 275, Rimmer FM held that section 30 empowered the court to remove a trustee for a conflict of interest (on application of a creditor). Her Honour’s decision was not overturned on appeal. Indeed, counsel for the respondent debtor referred to the decision of French J: [2005] FCA 1801, as supporting his submission that a trustee must be and must be seen to be impartial. His Honour said at [57]:
“There is specific provision to remove a trustee because of his or her connection or relationship to a bankrupt. That provision is to be found in section 156A(4) of the Act. There is also a power under section 179 of the Act to inquire into the conduct of a trustee in relation to a bankruptcy and to remove the trustee from office. … A discussion of ss 178 and 179 and their legislative ancestry may be found in Macchia v Nilant (2001) 110FCR 101 at 112-121. A trustee can also be removed by resolution of the creditors under section 181.”
Later, at [66] his Honour said:
“In re Lamb; ExParte Registrar in Bankruptcy (1984) 1 FCR 391 Sweeney J considered an application for the deregistration of a registered trustee on the basis of want of independence following his change in status from principal to employee. His Honour referred to the requirement that in the administration of estates a trustee must be independent and be seen to be independent. He cited his own earlier decision in that regard in re Hetherington (unreported, FCA, Sweeney J, 14 December 1982) and a decision of Lockhart J. in Partridge (unreported, FCA 22 September 1982). In the later case, in a passage quoted by Sweeney J in re Lamb (at 397) Lockhart J said of the trustee:
“He must be scrupulously careful to ensure that he never allows himself to be placed in a position of conflict between various duties or between duty and interests; nor must he ever allow the situation to arise where he may be seen to be in that position of conflict or potential conflict. A registered trustee must not only be impartial; he must be seen to impartial.”
Similar views were expressed by Marshall J in Cobbs Hill (Tasmania) Meat Suppliers Pty Ltd v L El Moustafa (1998) 83 FCR 403 at 408.
Starkey v Rondo Building Services Pty Ltd concerned an application to remove the trustee by a creditor but in my view, his Honour’s remarks, particularly at [57], make it plain that a conflict arising because of a relationship between the putative trustee and the debtor may justify the trustee’s removal. There is, in my view, no reason in principle why a bankrupt should not be entitled to raise this matter before the trustee is appointed to his estate. The avoidance of cost and potential duplication of work is one obvious consideration in that regard.
In Griffin v Triscott [2004] FMCA 403 an application was made to appoint an additional trustee in Bankruptcy due to a potential conflict of interest between the trustees, who were partners of the liquidators of a company which intended to bring claims against the bankrupt estate. In that case Rimmer FM appointed the additional trustee to overcome the potential conflict of interest. That case is a good example of the principle that a trustee should not act where there is a perception of a conflict of interest and duty. It is well accepted that a trustee of a bankrupt estate must not only act impartially in the interest of all creditors, but must also be seen to so act: Bankruptcy in Australia, McQuade at [51.202]. There, the learned author, by reference to Deputy Commissioner of Taxation v Niemann (1984) 69 FLR 79 expounds the principle that a trustee should consider whether by becoming a trustee he or she may become exposed to a conflict between interest and duty or to any conflict between any existing duties flowing from any relationship with the debtor or a creditor. A person should not rely upon what that person conceives to be her or his own ability to reconcile any such conflict but should rather ensure that the conflict does not arise.
In the present case the proposed trustee is a partner of a firm which is a creditor of the debtor. That may give rise to a conflict. The trustee may be perceived by the debtor at least as lacking impartiality. In my view, the debtor is entitled to seek to persuade the court not to make a sequestration order which would have the effect of appointing such a person as her trustee. The appearance of a conflict was not lost on the proposed trustee. The solicitor for the petitioning creditor advised the court that the firm of which the trustee is a member would not prove in the bankruptcy thereby seeking to dispel any suggestion of a conflict. However, the matter is not so simple, the appearance of such a conflict already exists and is not dispelled by such an intended course of action.
The solicitors for the petitioning creditor have now obtained the consent of “independent” trustees to act as trustees of the bankrupt estate once a sequestration order is made.
In my view it is inappropriate that Mr Combis be appointed trustee of the estate of the respondent. Because the effect of making a sequestration order would be, as I have said, to appoint Mr Combis, and his consent to act not having been withdrawn, the better course is to decline to make a sequestration order, as I have power to do pursuant to section 52(2)(b) of the Act to avoid that consequence. I think that in the present case the appropriate cause is not to dismiss the petition but rather to adjourn it to enable the consent of Mr Combis to be withdrawn. Upon the consent of Mr Combis being withdrawn, and upon the creditor proving the matter referred to in s.52(1)(c) of the Act, a sequestration order will be made against the estate of the respondent debtor.
The remaining issue concerns the costs of this application. The solicitors for the debtor raised their client’s concern as to the appointment of Mr Combis before the matter was first raised before the Registrar on 9 March (see letter exhibit A to affidavit of C Yam filed

9 March 2007). Subsequently, the debtor filed an affidavit deposing to the history of her relationship with Vincents Chartered Accountants and appearances were required before Federal Magistrate Burnett on

14 March 2007 and before myself on 23 March 2007. Those appearances could have been avoided had the petitioning creditor taken the appropriate course and sought the appointment of an alternative trustee. In my view, the applicant creditor should pay the respondent’s cost of and incidental to the appearances on 14 and 23 March 2007.

I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Wilson FM

Associate: Lynnette Chin

Date: 13 April 2007