Burness and Jess As Trustees of the Bankrupt Estate of KT Cheung v Cheung; And; Cheung v Burness and Jess As Trustees of the Bankrupt Estate of KT Cheung and Anor
[2017] FCCA 1098
•31 May 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BURNESS AND JESS AS TRUSTEES OF THE BANKRUPT ESTATE OF KT CHEUNG v CHEUNG And CHEUNG v BURNESS AND JESS AS TRUSTEES OF THE BANKRUPT ESTATE OF KT CHEUNG & ANOR | [2017] FCCA 1098 |
| Catchwords: BANKRUPTCY – Trustees appointed to bankrupt’s estate upon making of sequestration order – application for extension of time in which to apply to set aside sequestration order refused – refusal confirmed by Federal Court – application for annulment remitted by Federal Court – sequestration order ought not have been made – factors relevant to exercising discretion considered – significant and unexplained delay in bringing application – solvency at time of presentation of creditor’s petition not shown; applicant insolvent when application for annulment made – full and frank disclosure considered – failure to attend hearing of, or to oppose, creditor’s petition – annulment not conducive to commercial morality – objects of the Bankruptcy Act 1966 (Cth) – not merely inter partes litigation – application for annulment of bankruptcy dismissed – trustees’ application for directions – declaration that property vested in trustees – trustees authorised to sell property and appointed trustees for sale – ancillary orders for possession and to facilitate realisation of estate. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.30, 31, 54, 58, 74, 77, 134, 146, 149, 153B, 156A, 252A, 252B, 303 Bankruptcy Act 1924 (Cth), s.24(2) Federal Circuit Court (Bankruptcy) Rules 2016, r.7.06 Transfer of Land Act 1958 (Vic), s.51 |
| Cases cited: Adsett v Berlouis (1992) 37 FCR 201 |
Applicant: | PAUL ANDREW BURNESS & MATTHEW JAMES JESS AS TRUSTEES OF THE BANKRUPT ESTATE OF KT CHEUNG |
| Respondent: | KT CHEUNG |
| File Number: | MLG 881 of 2014 |
| Applicant: | KT CHEUNG |
| First Respondent: | PAUL ANDREW BURNESS & MATTHEW JAMES JESS AS TRUSTEES OF THE BANKRUPT ESTATE OF KT CHEUNG |
| Second Respondent: | CAPITAL FINANCE AUSTRALIA LTD |
| File Number: | MLG 1426 of 2014 |
| Judgment of: | Judge A Kelly |
| Hearing date: | 6 March 2017 |
| Date of Last Submission: | 6 March 2017 |
| Delivered at: | Melbourne |
| Delivered on: | 31 May 2017 |
REPRESENTATION
| Counsel for the Applicant in proceeding MLG 881/2014 and counsel for the First Respondent in proceeding MLG 1426/2014: | Mr Waldren |
| Solicitors for the Applicant in proceeding MLG 881/2014 and counsel for the First Respondent in proceeding MLG 1426/2014: | Hutchinson Legal |
| Respondent in proceeding MLG 881/2014 and Applicant in proceeding MLG 1426/2014: | In person |
| Counsel for the Second Respondent in proceeding MLG 1426/2014: | Mr Carew |
| Solicitors for the Second Respondent in proceeding MLG 1426/2014: | Kemp Strang |
IN PROCEEDING MLG 881 OF 2014
THE COURT DECLARES AND ORDERS THAT:
The whole of the land comprised in Certificate of Title Volume 10837 Folio 121 being the land known as Unit 901, 8 Waterview Walk, Docklands, Victoria, including any accessory titles to a car parking space and/or storage unit (property) is vested in the applicants as trustees in bankruptcy pursuant to s 58 of the Bankruptcy Act 1966 (Cth) (Act).
The applicants are authorised to sell the property.
The respondent deliver up vacant possession of the property to the applicant within 28 days of the date of this order.
The respondent deliver up to the applicants all electronic passes and keys in her possession which provide access to the property or to 8 Waterview Walk, Docklands, within 28 days of the date of this order.
Should the respondent fail to deliver up vacant possession of the property and all keys in accordance with orders 3 or 4 above, a warrant of possession issue forthwith in favour of the applicants and an affidavit sworn by either applicant or the applicants’ lawyer deposing to the non-compliance with orders 3 or 4 above be sufficient proof to enable the issue of the warrant of possession when filed with the court.
The respondent remove from the property all vehicles, rubbish and chattels which have not vested in the applicants pursuant to the Act (personal effects) within 28 days of the date of this order.
Should the respondent fail to comply with order 6 above the applicants are authorised and empowered to remove and/or dispose of such personal effects as may remain on the property as they see fit and at the cost of the respondent after 28 days have passed from the making of this order, without any obligation to account to the respondent for such personal effects.
The respondent sign all documents as may be necessary (if any) to give effect to a sale of the property within such time as required by the applicants, such documents to be provided and/or prepared by the applicants’ lawyer and/or the lawyer for the purchaser(s).
The applicants be appointed trustees for sale of the property and are authorised and empowered to sign on behalf of the respondent any contract of sale, discharge of mortgage, authority, transfer of land or other document required to effect a sale of the property, should the respondent refuse, fail or neglect to sign such documents within such time as may reasonably be required by the applicants.
A Registrar of the Court is authorised and empowered to sign on behalf of the respondent any contract of sale, discharge of mortgage, authority, transfer of land or other document required to effect a sale of the property, should the respondent refuse, fail or neglect to sign any such document.
The proceeds of sale of the property be applied as follows:
(a)first, in payment of all selling costs including agent’s commission, advertising and marketing expenses, conveyancing and legal costs associated with the sale;
(b)secondly, in payment of any outstanding rates, taxes, charges, owners corporation fees or other outgoings affecting the property or deriving from or associated with the ownership or maintenance of the property up to the time of settlement of the sale of the property;
(c)thirdly, in payment of the moneys which are due or owing to Westpac Banking Corporation under mortgage AF708934H;
(d)finally, all remaining proceeds are to be paid to the applicants as trustees of the bankrupt estate of KT Cheung.
By 4.00pm on 7 June 2017, each party file and serve a submission not exceeding four pages in length addressing the orders to be made in relation to costs of the trustees’ application for directions.
IN PROCEEDING MLG 1426 of 2014
THE COURT ORDERS THAT:
The application for the annulment of the bankruptcy is dismissed.
By 4.00pm on 7 June 2017, each party file and serve a submission not exceeding four pages in length addressing the orders to be made in relation to costs of the application for annulment of the bankruptcy.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 881 of 2014
| PAUL ANDREW BURNESS AND MATTHEW JAMES JESS AS TRUSTEES OF THE BANKRUPT ESTATE OF KT CHEUNG |
Applicant
And
| KT CHEUNG |
Respondent
MLG 1426 of 2014
| KT CHEUNG |
Applicant
And
| PAUL ANDREW BURNESS AND MATTHEW JAMES JESS AS TRUSTEES OF THE BANKRUPT ESTATE OF KT CHEUNG |
First Respondent
And
| CAPITAL FINANCE AUSTRALIA LTD |
Second Respondent
REASONS FOR JUDGMENT
Introduction
On 17 February 2011, Capital Finance Australia Ltd (Capital) obtained an order for the sequestration of the estate of a person now named KT Cheung (Ms Cheung). Mr Paul Burness and Mr Matthew Jess were appointed as trustees of Ms Cheung’s estate. Upon Ms Cheung becoming bankrupt, her property vested in those trustees: s 58 of the Bankruptcy Act 1966 (Cth) (a reference in these reasons to a provision of legislation is a reference to that Act unless indicated otherwise).
The trustees administration of the bankrupt’s estate had been hampered by their inability to obtain a statement of affairs from Ms Cheung for some years. Despite their repeated advice that Ms Cheung should consider and decide whether to initiate an application to set aside the sequestration order, she did not do so for many years. The costs of the administration of the estate continued to escalate in that period. They escalated because of the stance that has been adopted by Ms Cheung throughout the bankruptcy. While Ms Cheung sought to attribute to the trustees the responsibility for her present position, she appears to ignore that the trustees were not appointed as trustees of her estate until the order for the sequestration of her estate was made. They did not seek that order. Ms Cheung is presently aged 43 years and holds a number of tertiary qualifications. She currently resides with her adolescent daughter in a property situate at Unit 901, 8 Waterview Walk, Docklands (Docklands property).
On 2 December 2016, the Federal Court of Australia made orders remitting certain proceedings to this court: Cheung v Burness (Trustee)(No.2) [2016] FCA 1462 (Moshinsky J). The proceedings in the Federal Court arose from orders made on 3 March 2016 in this court following a three day trial held in December 2015. Moshinsky J made orders on 2 December 2016 in the following proceedings:
(a)VID 255/2016 – his Honour allowed an appeal and set aside orders of this court made on 3 March 2016 which had dismissed, with costs, Ms Cheung’s application filed on 16 July 2014 for the annulment of her bankruptcy (Annulment application);
(b)VID 256/2016 – his Honour dismissed Ms Cheung’s application for an extension of time and leave to appeal an order of this court refusing Ms Cheung an extension of time in which to challenge the order for the sequestration order made on 17 February 2011 (Extension of Time application);
(c)VID257/2016 – his Honour remitted for determination an application by the trustees in which they sought directions authorising their proposed administration of the bankrupt’s estate as concerned the Docklands property (Trustees’ application).
An appreciation of why Moshinksy J came to make those orders may be gleaned from his Honour’s observation that Ms Cheung appeared to have had a surplus of assets over liabilities at the time the sequestration order was made: (2017) FCA 1381, [4]. His Honour clearly appreciated that those facts could have been influential in 2011 when the sequestration order was made: cf para 52(2)(a) of the Act; Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8 (Culleton); Compton v Ramsay Health Care Pty Ltd [2016] FCAFC 106. However, Ms Cheung did not appear upon the hearing of the creditor’s petition, whether to demonstrate her solvency or otherwise to oppose the making of orders sought on that petition.
The result of the order in proceeding VID 255/2016 is that Ms Cheung’s application for the annulment of her bankruptcy remains for determination. However, in consequence of the orders above in proceeding VID 256/2016, it is now not open to Ms Cheung to challenge the sequestration order made on 17 February 2011. Also remaining for consideration is what orders, if any, should be made on the Trustees’ application in relation to the Docklands property.
I have concluded that the power to annul the bankruptcy was engaged, but that Ms Cheung’s Annulment application should be refused on discretionary grounds. Directions should be made as sought by the trustees in the Trustees’ application. These reasons for judgment concern the determination of the issues raised by the parties consequent upon the orders of Moshinsky J remitting the proceedings to this court.
Much of the history set out below is analysed in the judgment of Moshinsky J in Capital Finance Australia Ltd v Cheung [2016] FCA 1381. It was also examined in detail by the learned judge who conducted the trial in December 2015. In the result, many of the same facts and circumstances are now being examined a third time.
Judgment, bankruptcy and procedural history
In light of issues raised by the present applications, it is necessary to examine the facts and circumstances which followed the making of the sequestration order. In particular, it is necessary because Ms Cheung’s application for the annulment of her bankruptcy may engage the discretion which is reposed in the court whether to grant such an order if the primary condition for annulment is otherwise made out. How the discretion might be exercised entails consideration of the facts and circumstances which followed the making of a sequestration order.
On 24 September 2010, following substituted service of court documents, Capital obtained a judgment against Ms Cheung in the Magistrates Court of Victoria. The judgment (for approximately $33,500.00), was based upon her failure to pay a debt alleged to be due under a guarantee dated 10 July 2004. I note that in 2004, Ms Cheung and her husband separated.
The judgment was obtained in default of the filing by Ms Cheung of a defence setting out her answer to Capital’s claim. The default judgment was grounded on Ms Cheung’s alleged liability as a signatory to the guarantee.
The Official Receiver, at the request of Capital, issued a Bankruptcy Notice to Ms Cheung. The Bankruptcy Notice relied upon Capital’s judgment debt. On 7 October 2010, Capital filed a creditor’s petition seeking a sequestration order against Ms Cheung. The petition was served on Ms Cheung on 2 February 2011, relying on her failure to comply with the Bankruptcy Notice: see ss 40(1)(g), 41(1)(a), 43(1). The petition was served personally: [2016] FCA 1381, [20].
On 17 February 2011, Capital presented the creditor’s petition before a Registrar of the then Federal Magistrates Court of Australia. As noted, Ms Cheung did not appear at the hearing of the creditor’s petition. An order was made for the sequestration of Ms Cheung’s estate: s 52(1). Only then were Mr Burness and Jess appointed as trustees of the bankrupt’s estate.
Three years later, in February 2014, the Magistrate’s Court of Victoria refused an application by Ms Cheung for a re-hearing of the proceeding in which judgment (upon the guarantee) had been entered against her.
On 12 May 2014, the trustees commenced a proceeding in this court seeking directions as to the taking of possession of the Docklands property.
On 16 July 2014, Ms Cheung commenced a proceeding in this court seeking to annul the bankruptcy consequent upon the sequestration order made on 17 February 2011.
On 23 January 2015, Ms Cheung issued an application for leave to bring an application for review of the sequestration order. This application was treated as being, in substance, an application for an extension of time in which to obtain a review of the sequestration order made on 17 February 2011.
During the interlocutory phase of these proceedings, orders were made seeking the appointment pro bono of a barrister to assist Ms Cheung in the course of a mediation (I note from the orders made on 13 July 2015, that Mr Glick of Her Majesty’s Counsel appeared on behalf of Ms Cheung both in the Trustees’ application with respect to the Docklands property and in Ms Cheung’s Annulment application). In addition to Mr Glick, QC, Ms Cheung’s submissions identified at least 16 law firms or barristers whom she had sought to enlist in her bankruptcy. Given the series of lawyers that have represented her over the period of her bankruptcy, I do not infer that Ms Cheung has been without access to legal advice. Whether she declined to follow advice and whether this was the reason why she has changed solicitors on several occasions are matters I do not decide.
In December 2015, the Federal Circuit Court conducted a three day trial to determine preliminary questions arising in consequence of the applications to annul the bankruptcy and obtain an extension of time in which to review the making of the sequestration order. Although Ms Cheung was self-represented at this trial, there is some force in Capital’s submission that Ms Cheung conducted herself with studied regard for her rights, including that she issued a series of subpoenas (on each of the trustees, Capital and a hand writing expert), and made submissions on relevant issues.
At the hearing of those preliminary questions it was common ground that the court was entitled to go behind the judgment so as to determine whether there was in truth and reality a debt due by Ms Cheung to a petitioning creditor: see Wren v Mahony (1972) 126 CLR 212, 223. It will not always do so: Shaw v Yarranova Pty Ltd [2016] FCA 88, [11].
The basis upon which Ms Cheung sought to go behind the judgment was that her purported signature as guarantor upon the guarantee, upon which that judgment was based, was a forgery. For the purposes of determining that question the trustees had obtained the opinion of a handwriting expert. The opinion of the expert was inconclusive.
The handwriting expert was confronted by several difficulties including the lack of a sufficient number of contemporaneous examples of Ms Cheung’s signature. One of the interlocutory orders made had required that Ms Cheung file and serve an affidavit addressing the whereabouts of documents containing her original signature from the period 2004 (i.e. documents executed by Ms Cheung at a time contemporaneous to the date of the guarantee).
On 3 March 2016, orders were made by this court:
(a)dismissing Ms Cheung’s application for an extension of time in which to seek to review the sequestration order;
(b)dismissing Ms Cheung’s Annulment application;
(c)that Ms Cheung deliver up to the trustees vacant possession of the Docklands property together with a series of ancillary orders.
Ms Cheung then filed an application in the Federal Court of Australia seeking an extension of time for appealing, and leave to appeal, the orders made on 3 March 2016 which dismissed her applications. At the same time, Ms Cheung commenced appeals from the orders made on 3 March 2016 which dismissed her application for the annulment of bankruptcy and the orders for vacant possession of the Docklands property.
On 26 and 27 July 2016, each of Ms Cheung’s applications for an extension of time, leave to appeal and the appeals were heard by Moshinsky J. His Honour delivered reasons for judgment on 21 November 2016 by which he re-listed the matter for the purpose of hearing further submissions on the form of orders to be made in each of the matters before him: Cheung v Burness (Trustee) [2016] FCA 1381. The further hearing of those matters took place on 1 December 2016 and on the following date orders were made to the effect described above: Cheung v Burness (Trustee)(No.2) (2016) FCA 1462.
The conclusions and reasoning of Moshinsky, J was as follows:
(a)his Honour held that the Extension of Time application should be dismissed on the basis that no error was shown in the conclusion of the primary judge. Moshinsky J reasoned that the period of extension sought by Ms Cheung was a lengthy one and had been sought in circumstances where she had long been on notice of her ability to apply for the sequestration order to be set aside, but had not done so. His Honour found that Ms Cheung had not provided an adequate explanation for the delay in making the application. Moshinsky J concluded that the magnitude of the proposed extension of time, coupled with the absence of a satisfactory explanation for the delay “point so strongly against the exercise of the discretion to extend time, that my conclusion below in relation to the forgery issue does not provide a sufficient basis to disturb His Honour’s conclusion in relation to the extension of time application” (2016) FCA 1381, [12(a)]; [66] [68(d)], [69] (emphasis added): [2016] FCA 1462, [3];
(b)as to the Annulment application, Moshinsky J found that the primary judge had proceeded, correctly, on the basis that the court should go behind the judgment but reasoned erroneously that it was for Ms Cheung to establish that her signature had been forged. Properly analysed, the onus of proof rested on Capital to establish that Ms Cheung owed a debt to it (and thus, Capital bore the onus of establishing that Ms Cheung had executed the guarantee). In those circumstances, the finding that Ms Cheung had signed a guarantee could not stand and in place of that holding, it was held that Capital had not discharged the onus of proving that Ms Cheung signed the guarantee;
(c)in the result, Capital had not established that Ms Cheung was indebted to it under the guarantee. The court was entitled therefore to go behind the judgment founded on the guarantee. The failure to comply with the bankruptcy notice based upon that judgment did not constitute an act of bankruptcy and for that reason the creditor’s petition should have been refused;
(d)apart from dealing with the question of forgery and beyond observing that the application must be seen to have little chance of success, the court had not dealt sufficiently with other issues potentially arising in the Annulment application. While the court had made that finding, no argument was heard nor was a concluded view reached on the issues: (2016) FCA 1462, [4]-[5]. Moshinsky J considered that those other issues potentially arising in the Annulment application remained to be considered;
(e)in the Trustees’ application, Moshinsky J held that the primary judge had not conducted a hearing on whether, if the finding were otherwise than that the guarantee had not been forged, orders for possession and sale of the Docklands property should have been made so that the application should also be remitted for consideration by this court: (2016) FCA 1462, [9]-[10].
It was in those circumstances that the matter was remitted to this court.
Administration of the bankrupt’s estate
The trustees’ submissions identified each of the affidavits upon which they proposed to rely in relation to the applications before the court. These comprised affidavits of Mr Jess sworn 12 May 2015 and 24 February 2017, Mr Burness sworn 7 August 2014 and 19 October 2015 together with excerpts of the transcript of proceedings before Judge Burchardt on 1, 2 and 4 December 2015.
In contrast with the stance taken by Ms Cheung in earlier phases of the proceedings, she did not file any affidavit in support of her application.
The following findings are drawn from the evidence relied upon by the parties. For the purposes of this narrative, intending no disrespect, where reference is made to the trustees this is a reference to the trustees or to their staff as the case requires.
Following the making of the sequestration order on 17 February 2011, the trustees wrote to Ms Cheung on 22 February 2011, advising that the court had made a declaration of her bankruptcy, of the appointment of trustees over her estate and of the persons who would be assisting the trustees in the administration of her estate. Ms Cheung was also advised of her obligations pursuant to s 54 to complete and return a statement of affairs within 14 days and that Ms Cheung would not be discharged from bankruptcy until three years after the filing of her statement of affairs. The trustee’s letter furnished other information with respect to Ms Cheung’s property, her books, records and other responsibilities.
The identity of, and total amount owed to, creditors of the estate were unknown when the sequestration order was made. They remained unknown for some time. As events evolved, some new creditors emerged. At the same time, some of the known creditors abandoned their claims. When Ms Cheung completed a statement of affairs, she included substantial debts that she owed to various family members.
By letter dated 4 March 2011, Chiodo & Madafferi, solicitors, wrote to the trustees advising that that firm had been approached by Ms Cheung and that she had provided them with the trustee’s letter of 22 February 2011. Those solicitors stated that Ms Cheung disavowed awareness of any summons or any debts which had resulted in her bankruptcy and requested details of any debt or judgment which had led to such bankruptcy. Further, the solicitors stated that Ms Cheung was seeking the assistance of an accountant to complete the statement of affairs and that she would attend an interview with the trustees on 11 March 2011.
On 8 March 2011, the trustees responded to the requests of Chiodo & Madafferi. The trustees’ response attached a copy of the order made on 17 February 2011 for the sequestration of Ms Cheung’s estate. The trustees further advised, correctly, that it was a matter for the court and not the trustees to have been satisfied that the debt upon which the creditor’s petition was based was due and payable. The trustees also advised of the judgment which was obtained on 24 September 2010, including the order for substituted service which had been obtained in relation to that proceeding. The trustees enquired whether Ms Cheung’s solicitors required any further information before the meeting scheduled for 11 March 2011. There was no reply.
Ms Cheung attended an interview with the trustees’ staff on 11 March 2011 in the course of which Ms Cheung said that she:
(a)would lodge her statement of affairs on 18 March 2011;
(b)disputed signing the guarantee which had led to the judgment and sequestration order, and;
(c)requested copies of the documents she had signed relating to the guarantee.
At all events, no statement of affairs was lodged by 18 March 2011.
In the course of the meeting held on 11 March 2011 there was also discussion between the trustees and Ms Cheung in relation to the options by which she might seek to annul her bankruptcy. As appears below, the trustees continually sought to engage with Ms Cheung in relation to the possible annulment of her bankruptcy.
On 28 March 2011, the trustees transmitted two emails to Ms Cheung:
(a)firstly, advising that the trustees were awaiting documents from Capital and would forward them to her once they became available. This email also attached a copy of an agreement with, and a letter of demand from,BMW Finance;
(b)secondly, attaching the documents relating to the debt owed to Capital. The documents attached to this second email included a copy of the default judgment together with a copy of the agreement and guarantee and indemnity with Capital. The email advised that Ms Cheung would find her “alleged signature on the last page of the attachment.”
By letter dated 31 March 2011, the trustees wrote to Ms Cheung referring to the meeting with the trustees’ staff on 11 March 2011, stating:
. . . You were provided with a range of options to annul your bankruptcy without the need to realise the following properties . . .
Unit 901/8 Waterview Walk DOCKLANDS VIC 3008;
13 Akuna Avenue, KNOTTING HILL VIC 3168
At the conclusion of that meeting you were advised that this office would provide you with a one (1) month grace period to allow you to explore the possibility of raising sufficient finance with which to repay all creditors of your estate in full, and that in the interim the trustees would take no realisation action in relation to the properties . . .
Two months later, by letter dated 31 May 2011, the trustees advised Ms Cheung that the period of grace afforded to her had now expired, that during that period the trustees had not heard further from her and that she had not responded to telephone calls. The trustees advised Ms Cheung that if she did not respond within a further 14 days, the trustees intended to retain solicitors to proceed to transmit and realise properties forming part of the bankrupt’s estate. The trustees’ letter further warned Ms Cheung that the process of realising the properties would add to the costs of the bankruptcy and that there would be potential capital gains tax implications. The trustees’ letter dated 31 May 2011 concluded in advising Ms Cheung that, if she did not respond within 14 days, the trustees would proceed to realise the properties and that their letter would be the trustees’ final notice prior to realisation action being taken in relation to the properties.
On the same date, 31 May 2011, Ms Cheung’s solicitors, Chiodo & Madafferi, wrote to the trustees recording their instructions that Ms Cheung had no knowledge, and did not acknowledge any responsibility to Capital in respect of the debt by reason of the guarantee. The solicitors contested that the signature upon the guarantee was that of Ms Cheung. Ms Cheung’s lawyers concluded by advising that a draft affidavit was being prepared in support of an application to set aside the bankruptcy and, once that had been done, an application would be made to the Magistrates Court.
Thus it is apparent that by at least May 2011, Ms Cheung had in contemplation that she would apply to set aside the orders relating to her bankruptcy. However, Ms Cheung did not then apply to set aside the sequestration order.
On 11 July 2011, the trustees again wrote to Ms Cheung. This letter was addressed to Ms Cheung both to her home address and to her then solicitors, Chiodo & Madafferi. The trustees urged that Ms Cheung not ignore their letter and enclosed a copy of their previous letter dated 31 May 2011. The trustees observed that Ms Cheung had given instructions to seek to set aside the sequestration order, and that the trustees had allowed an extension of time within which Ms Cheung might make that application. The trustees’ letter concluded that if Ms Cheung did not provide written confirmation and evidence that she was seeking to apply to set aside the sequestration order they proposed to realise the properties as earlier advised. This letter concluded that this constituted the trustees “final notice this office will provide prior to realisation action commencing in respect to the properties.”
By letter dated 12 July 2011, Ms Cheung responded. She referred to the communications between her solicitors and the trustees for the stated purpose of coming “to an agreement to take the matter to the Magistrates Court to have the bankruptcy annulled.” Ms Cheung contested any liability for the trustees’ costs and observed that she would make a decision in the ensuing week to decide whether or not she would continue to retain Chiodo & Madafferi as her solicitors.
On 14 July 2011, the trustees replied to Ms Cheung’s letter advising that her letter did not constitute sufficient evidence that Ms Cheung had taken steps to set aside the sequestration order. They reiterated the need for her to do so.
As matters evolved, it was not until February 2012 that the trustees heard anything further from Ms Cheung or anything of substance from her solicitors.
Sale of Notting Hill property
On the making of the sequestration order and the appointment of the applicants as trustees of the bankrupt’s estate on 17 February 2011, Ms Cheung’s interest in any property vested in the trustees: ss 58(1)(a), 156A(3)(a). As at 17 February 2011, Ms Cheung was registered as proprietor of property situate in Notting Hill and in Docklands.
A land title search discloses that on 25 February 2011 the trustees lodged a caveat over the Notting Hill property. Later, on 21 October 2011, an application was made by the trustees for their registration as trustees of the bankrupt estate of KT Cheung over the title to that land: see Transfer of Land Act 1958 (Vic), s 51(1).
On 1 December 2011, the trustees wrote to Ms Cheung and Chiodo & Madafferi notifying them that the property would be auctioned on 10 December 2011.
The trustees letter to Ms Cheung stated in part:
At this stage, the auction is set to be 10 December 2011 . . . From my understanding of the liabilities in your bankruptcy, the realisation of this property may lead to an annulment of your bankrupt estate, and possibly the return of surplus funds (if any) to you . . . (emphasis added)
The Notting Hill property was sold at auction on 10 December 2011, realising a sale price of $457,500.
To this point, Ms Cheung had still not lodged a statement of affairs.
In February 2012, the sale of the Notting Hill property was completed.
Events post sale of Notting Hill property
On 6 February 2012, Ms Cheung sent an email to the trustees responding to their letter dated 1 December 2011. Ms Cheung’s email threatened to institute legal proceedings and to file a formal complaint to the trustees “professional licensing body” in respect of the sale of the Notting Hill property. Ms Cheung’s email attributed responsibility to the trustees for having “knowingly bankrupted” her. Ms Cheung’s email included a contention that she had not signed “those papers,” and was “not legally responsible for the debts.” Ms Cheung had by this time characterised the trustees as having responsibility for the making of an order for the sequestration of her estate.
On 7 February 2012, the trustees wrote to Ms Cheung, providing a draft statement of affairs for completion by her, together with a summary which (on the trustees then state of awareness), identified the known assets and liabilities of Ms Cheung’s estate. The summary of known assets and liabilities indicated that the estate’s net realisable assets were estimated at $421,000 and that the liabilities amounted to $380,832. There was a small surplus. The trustees letter advised:
. . . I remind you that it is my duty as trustee to realise (sell) your assets and then to distribute the proceeds amongst your creditors. As you will recall, given the apparent surplus in net assets I initially provided you with an opportunity to refinance your debts, or procure sufficient funds, to pay out all creditors in full; and in turn annulling your bankrupt estate. Given your repeated failure to work with my office however, I have now begun to realise the assets which I have vested in the bankrupt estate. (emphasis added)
The trustees thereby reminded Ms Cheung of their statutory duty as trustees of a bankrupt’s estate and of the existence, at that time, of a surplus in her estate.
The trustees’ letter dated 7 February 2012 proceeded to advise Ms Cheung of three options which were open for consideration before taking steps to realise the Docklands property and urged Ms Cheung to consider carefully those options.
On 17 February 2012, Ms Cheung attended an interview with the trustees in which she was told that if she disputed the validity of the bankruptcy order, the onus fell to her to make an application to have the validity of the order determined. At this meeting Ms Cheung was provided copies of proofs of debt by the petitioning creditor, Capital, and of BMW Finance and the documents said to support them. Ms Cheung responded that she would seek new legal representation and that she would inform the trustees by 21 February 2012 of the identity of her new lawyer.
On 20 February 2012, the trustees wrote to Ms Cheung listing eight matters which, as they contended, had been discussed and agreed with Ms Cheung during a meeting held with the trustees on 17 February 2012. Included in this letter was advice that, on present indications, the net proceeds from the sale of the Notting Hill property would not be sufficient to pay out in full all known creditors of the bankrupt’s estate with the result that further assets would need to be realised by the trustees. As concerned sequestration and annulment, the letter stated:
You were advised by the trustee that the onus is on you to bring an application before the court to have the validity of the order determined, as you will appreciate you have provided no evidence to this office of those matters.
The trustees further advised that they would not delay further the progress of their administration given the delay since the making of the sequestration order and “the number of past occasions you had indicated that you would be bringing an application before the court which had not occurred.” The trustees underlined that if Ms Cheung was to make an application to contest the validity of the sequestration order then time was of the essence. They also advised that costs would continue to accrue until all creditors had been paid out in full.
The trustees’ letter of 20 February 2012 was transmitted to Ms Cheung by email. Ms Cheung replied to that letter on the same date, contending that the matters outlined in the trustees’ letter had not been explained or highlighted in the course of the meeting held on 17 February 2012. Whether or not Ms Cheung’s contention be accepted, the trustees’ letter set out unambiguously the trustees position in relation to each of those matters.
Settlement of the sale of the Nottinghill property took place on 24 February 2012. By the trustees estimate at that time, further realisations were required to pay out all creditors of the bankrupt’s estate.
Some four weeks after Ms Cheung’s meeting with the trustees, on 14 March 2012, Ms Cheung wrote to the trustees by email making demand that “my funds be made available to me to pay for legal representation.” Attached to the email was a letter dated 28 February 2012 responding to the trustees’ letter of 20 February 2012. Ms Cheung also attached a change of name certificate evidencing her change of name from Katie Loi Cheung to KT Cheung. The many name changes employed by Ms Cheung is a matter that has been explored in the Federal Court and in the earlier proceedings in this court: see [2016] FCA 1381 at [15].
On 22 March 2012, the trustees told Ms Cheung that they were unable to consider her request for funds for legal representation until she had furnished a completed statement of affairs. On 16 April 2012, the trustees again wrote to Ms Cheung, reminding her that she had yet to complete her statement of affairs and requesting advice within 28 days whether Ms Cheung had filed an application to set aside the sequestration order. The trustees reminded Ms Cheung of their duties as trustees of her estate to realise the assets and pay the creditor’s debts. The trustees also provided Ms Cheung with a copy of ss 54, 146 and 149 of the Act.
In a series of emails which the parties exchanged on 16 April 2012, the trustees, amongst other things, again encouraged Ms Cheung to make application to court to resolve the issues in her bankruptcy. The trustees also restated that her request for funding for legal fees would be considered once she had lodged her statement of affairs. Ms Cheung responded that she had appointed new lawyers. A month later, on 18 May 2012, Ms Cheung sent the trustees an email advising that she was again seeking alternate legal representation and attaching a letter dated 3 May 2012 from Westpac Banking Corporation addressed to Ms Cheung entitled “final warning in respect of outstanding arrears under a variable rate investment property loan.”
Later in May 2012, Ms Cheung repeated a request for documents relating to her bankruptcy including the creditor’s petition, affidavits and notices. The trustees provided, without delay, further copies of those documents to Ms Cheung.
On 31 May 2012, Ms Cheung sent the trustees an email stating that she wished to report the petitioning creditor and others for fraud. The trustees replied to Ms Cheung by email, advising of the net proceeds of sale from the settlement of the Notting Hill property. The trustees attached copies of the trustees’ receipts and payments in the administration of the estate to that date and a summary of the trustees’ fees and costs. The trustees informed Ms Cheung of her ability to obtain “up-to-date information on our fees and receipts and payments” from the trustees’ website and provided a password for her to use for that purpose.
On 31 May 2012, the trustees also sent an email to Ms Cheung providing a detailed response to a series of emails she had sent them. The trustees reminded Ms Cheung that she had been provided with documentation both on the occasions she had attended their offices and as attachments to a number of emails. They informed Ms Cheung that they had been appointed trustees after the making of the sequestration order and of their duties under s 19 to, amongst other things, take steps to realise property for the benefit of the estate. The trustees reminded Ms Cheung that they had refrained from realising the Notting Hill property for almost 12 months so as to allow her to make application to set aside the bankruptcy order. They concluded, stating:
We have encountered on a number of past occasions situations where bankrupt have contested their bankruptcy orders. This is a matter which usually takes days (or at most a few weeks) before an application is filed. To date your bankruptcy has continued for over 12 months and no application has yet been filed by you . . . if you do not bring an application in the short term [we] will have little alternative other than to continue to realise your assets to satisfy the creditor’s claims. You need to appreciate this is an obligation of the trustees under the Bankruptcy Act to do so . . .
From the history of the matter to date, it is clear that in the period February 2011 to May 2012, the trustees had explained to Ms Cheung on several occasions the need for her to apply to set aside the sequestration order and of the costs which continued to accrue in the administration of her estate. They had supplied her, more than once, with the documentation she had requested for the purpose of enabling her to provide exhibits for an affidavit in support of any such application. By contrast, Ms Cheung seemingly continued to blame, and then to escalate her criticism of, the trustees for her situation notwithstanding that they had been appointed as trustees in consequence of the making of the sequestration order.
Authenticity of guarantee
In the period between June and August 2012, the trustees communicated with the petitioning creditor and BMW Finance noting the allegations by Ms Cheung of fraud and seeking advice in relation to that matter. The petitioning creditor responded stating that Ms Cheung had first raised the issue of fraud with its solicitors in June 2011 and that nothing further had been heard until June 2012. Earlier communications on behalf of Capital with Ms Cheung indicated that she was aware of the debt to Capital “but she refused to enter into a payment plan at this time.” Capital further stated that they had not engaged a handwriting expert but that the signatures on the copy driver’s license and guarantee appeared to be similar.
By letter dated 22 August 2012, the trustees wrote to Ms Cheung noting that some 18 months had elapsed since the making of an order for the sequestration of her estate and referred to her continued failure to provide a statement of affairs. The trustees requested that Ms Cheung file, within 21 days, any application for review of the sequestration order, file a completed statement of affairs and confirm in writing her allegations of fraud in relation to the bankruptcy.
On 17 September 2012, the trustees agreed to extend the deadline within which Ms Cheung might address the matters in their earlier letter. They stated that if Ms Cheung did not, by 8 October 2012, bring an application to set aside the sequestration order the trustees would, without further notice, make application for directions with respect to the conduct of the bankruptcy, together with orders to secure and realise the assets of the estate, including the Docklands property, and to enable the trustee to distribute funds in the estate to creditors.
Completion of statement of affairs
Although Ms Cheung was required to complete her statement of affairs within 14 days of the making of the sequestration order she did not, despite repeated request, do so for some two years. In February 2013, the trustees provided Ms Cheung’s new lawyer, Mr Zindilis, with a further draft statement of affairs. The statement of affairs was completed by Ms Cheung on 5 March 2013.
By letter dated 6 March 2013, Insolvency and Trustee Service Australia (ITSA) wrote to the trustees providing a copy of Ms Cheung’s statement of affairs.
ITSA took the opportunity to advise the trustees of their duties to administer the estate as efficiently as possible by unnecessary expense: see s 19(a). ITSA also drew the trustees attention to ITSA practice direction 6.2 with respect to its expectation that:
. . . where the bankrupt is solvent or has resources to pay out all the debts, the trustees should identify this early and give the bankrupt an opportunity to pay and take advantage of s.153A before incurring any unnecessary expense, adopting a minimalist approach to the administration, safeguarding assets and working with the bankrupt.
ITSA reminded the trustees of the need for an efficient administration of a bankrupt’s estate and of ITSA’s expectation for solvent estates to be assessed in light of the matters detailed above. As the history of events above demonstrates, the trustees did identify early that Ms Cheung appeared to have a surplus and took steps actively to afford Ms Cheung an opportunity to apply to set aside the sequestration order, or annul her bankruptcy and deferred the process of realising the property of the bankrupt for a significant period. At the same time, the trustees were conscious, and informed Ms Cheung, of their duties as trustees to the creditors of her bankrupt estate.
On 7 March 2013, ITSA accepted Ms Cheung’s statement of affairs.
On 12 March 2013, the trustees wrote to Ms Cheung recording that they had spoken with Ms Cheung’s new lawyer (Thomas Egan & Associates). The trustees sought advice as to the likely legal action Ms Cheung was intending to pursue, including the costs and merits of success. Insofar as the recently completed statement of affairs identified debts of approximately $200,000 owed to family members, the trustees requested that each of them complete an attached proof of debt and confirm whether they would forego immediate payment of their debts “to the extent of any money that has been advanced to her for the purpose of engaging a solicitor” in respect of the claims that she wished to pursue.
On 12 April 2013, the trustees sent a further email to Ms Cheung following up their email of 12 March 2013 and requesting a response as a matter of urgency. The trustees advised that they had put ‘on hold’ their application for directions on the stated basis of trying to minimise costs.
In the period May to August 2013, the trustees sought to assist Ms Cheung in advancing the administration of her estate by, with her agreement, engaging a handwriting expert to examine the signature on Capital documentation.
In the course of doing so, Ms Cheung provided some signature specimens for the purposes of that investigation. The handwriting expert engaged for this purpose was unable to arrive at a conclusion. The handwriting expert’s explanation for that conclusion was in part “due to insufficient signature specimens of the respondent.” The handwriting expert advised that an opinion could not be formed whether her signature had been forged on Capital documentation.
The trustees wrote to Ms Cheung providing reasons why they had decided not to accept her contention that the signature on the guarantee was forged. The trustees advised Ms Cheung that she could seek review of the trustees’ decision to admit the claim by Capital and directed her attention to s 104 of the Act. The trustees further reminded Ms Cheung that it was open to her to seek the court’s indulgence to apply for a review of her sequestration order. The trustees concluded with advice of their intention to proceed, after 21 days, with the realisation of the Docklands property and to pursue other matters outstanding from Ms Cheung.
A further meeting was held by the trustees with Ms Cheung to discuss and explain the trustees’ decision to admit the Capital debt together with Ms Cheung’s allegations of fraud and her appointment of a new solicitor, Tait Lawyers.
On 29 May 2013, BMW Finance advised the trustees that it was withdrawing its proof of debt. The evidence adduced in this application suggests that this proof was withdrawn in consequence of the intervention of the trustees.
During the period September – October 2013, the trustees and Ms Cheung continued to communicate in relation to the administration of the estate. In the course of doing so, the trustees advised Ms Cheung that while they could not elevate the payment of her solicitor’s fees over and above the interests of creditors, they would endeavour to reach a fair accommodation if Ms Cheung would provide the abovementioned proofs of debt and letters from her family creditors, which they had been requesting for some time.
Docklands property
The Docklands property, being an apartment, is the land comprised in Certificate of Title, Volume 10837 Folio 121. Westpac Banking Corporation is registered as first mortgagee of that property.
In Ms Cheung’s statement of affairs signed on 5 March 2013, she stated in relation to the Docklands property as follows:
Amounts paid to acquire or purchase the property $590,000
What is the estimated resale value of the property? $800,000
How much you owe to creditors who
have security over this property? $360,000However, in early December 2013, the trustees obtained a valuer’s appraisal of the Docklands property which indicated that the apartment would likely sell in the range of $560,000 to $616,000 and noted a recent sale of a property three floors above the apartment which had sold in April 2013 for $595,000. The trustees’ enquiries in relation to the Docklands property indicated that the following amounts were owed in relation to it:
Westpac mortgage
$381,775.46
Owners Corporation fees
$60,612.24
In the result, Ms Cheung’s assessment of the value of the property at that time was more than $200,000 above the valuer’s appraisal while her statement of indebtedness to Westpac Banking Corporation was below that as ascertained by the trustees. She also omitted any reference to unpaid owners corporation fees, rates and taxes.
In the period from before the making of the sequestration order in February 2011 to the present date, Ms Cheung has continued to reside at the Docklands property. She has lived there with her now teenage daughter. In that six year period, Ms Cheung has not paid all amounts due under the mortgage over the Dockland property. Nor, it appears, has she paid amounts due in respect of land tax, rates or to the owners corporation. Consequently, the liabilities of the bankrupt’s estate have swelled commensurately in a sum represented by the aggregate of those unpaid liabilities.
Despite the trustees urgings, in the period February 2011 to July 2014 Ms Cheung did not institute any application for the annulment of her bankruptcy. Nor did she institute any proceeding until 2013 to challenge the judgment debt which had been obtained by the petitioning creditor (Capital), in September 2010. Nor did Ms Cheung raise any challenge against acceptance of Capital’s proof of debt in respect of which the trustees advised her (twice) of her right of appeal.
Trustees’ application for directions
On 12 May 2014, the trustees commenced proceeding MLG 881 of 2014 seeking directions. The trustees sought orders for declaratory and other relief which, in substance, would confirm that the Docklands property was vested in the trustees and authorising its sale. By their application, the trustees sought directions that they were justified in taking steps to realise that property despite Ms Cheung’s allegations challenging “the validity of the petitioning creditor’s debt and the validity of the sequestration order made on 17 February 2011.”
By the date of commencement of the Trustees’ application, the trustees estimated that there was a deficiency in the estate of $61,785.
In support of the trustees’ application, Mr Jess swore an affidavit on 12 May 2014 providing a detailed history of the administration of the estate from the making of the sequestration order on 17 February 2011 to May 2014 inclusive. Mr Jess’ affidavit exhibited extensive contemporaneous records of events which had occurred during the administration of the estate in the period of April 2011 until May 2014. Mr Jess deposed that there were no funds available to pay out the creditors in the estate. He deposed that despite Ms Cheung’s allegations and her failure to apply to have the sequestration order set aside, the trustees had been hindered in forming a clear view as to the overall position of the estate. Mr Jess also deposed of his belief that Ms Cheung had been afforded reasonable time to take steps with respect to the matter. He was unable to say whether there was any substance in Ms Cheung’s allegations but he considered his office had afforded Ms Cheung every available assistance in terms of providing documents to enable her properly to make out her claims.
In the circumstances deposed to, Mr Jess sought directions as he considered that the trustees were obliged to take further action to realise the Docklands property for the benefit of the bankrupt estate and to do so without further delay.
A series of orders were made for substituted service of the Trustees’ application upon Ms Cheung.
Ms Cheung’s Annulment application
On 7 July 2014, Ms Cheung appeared at a directions hearing on the Trustee’s application. In consequence of this hearing, an order was made granting leave to Ms Cheung to file and serve any application to set aside the bankruptcy.
On 16 July 2014, Ms Cheung filed the Annulment application.
On 7 August 2014, Mr Burness swore an affidavit which addressed the financial position of the bankrupt estate, the Capital debt, Ms Cheung’s complaints and the trustees position in relation to Ms Cheung’s Annulment application. Mr Burness deposed that while Ms Cheung asserted her solvency, the trustees had prepared a statement as to the current financial position of the bankrupt estate. The trustees assessed that there was, at that date, an estimated deficiency of between $138,776 and $193,776 in the estate. Mr Burness deposed that such deficiency did not take into account asset realisation charges payable to the ITSA (which would be equal to 6% of the proceeds of sale of the Docklands property, less amounts payable for rates and to discharge the Westpac mortgage), outstanding fees and disbursements of the trustees or the outstanding costs of the trustees’ solicitors and counsel.
Mr Burness expressed his opinion that Ms Cheung’s estate was insolvent as at August 2014. He also deposed that the estate had deteriorated over time as a consequence of the combined effect of the lack of cooperation provided to the trustees during the administration of the estate and by reason of her delay and inaction in bringing the present Annulment application.
As concerned the Capital debt, Mr Burness deposed as to the investigations concerning Ms Cheung’s claim contesting that debt and the inconclusive results of the trustees’ investigations. He exhibited an opinion from counsel in relation to the Capital proof of debt and Ms Cheung’s challenge to the underlying guarantee. Counsel’s advice was that the Capital proof of debt should be accepted unless conclusive proof was produced as to the forgery of Ms Cheung’s signature. Counsel’s advice observed: “Currently, the expert evidence is unsatisfactory. Ms Cheung is the only person who can supply the further documents required by the expert which she has been unable to do . . .”
On 23 January 2015, Ms Cheung filed her application for an extension of time within to set aside the sequestration order made in 2011.
As stated above, a hearing was conducted over three days commencing on 1 December 2015 in relation to the foregoing applications, two of which are now remitted to this court.
At the time of that hearing, Ms Cheung’s estranged husband was serving a sentence of more than eight years imprisonment upon convictions for fraud.
In the course of that hearing:
(a)an email sent by Ms Cheung’s solicitor, Mr Chiodo, was admitted into evidence. The email, transmitted in August 2011, advised Ms Cheung of two courses of action which she might take, including that she could: (a) apply to annul the bankruptcy order; (b) apply to set aside the judgment. Mr Chiodo advised that the trustees consented to either course of action;
(b)Ms Cheung gave evidence. Ms Cheung stated in cross-examination that the Westpac mortgage over the Docklands property was also a forgery. This evidence is to be considered in part because Ms Cheung had earlier provided the trustees with a letter of demand dated 3 May 2012 by which Westpac gave notice that it would take possession of the Docklands property unless arrears due under the mortgage were paid. Ms Cheung had asked the trustees to pay those arrears – she had not sought to contest liability under that mortgage on the basis that the mortgage was forged;
(c)Ms Cheung twice stated in evidence in chief that she was not notified of the sale of the Notting Hill property. Then in cross-examination she said that she did not recall if she had received notification. Ultimately, she agreed that she had received notification of the sale by email “but whether I read it or not is a totally different matter.”
In some respects, Ms Cheung’s evidence displayed a lack of candour.
On 3 March 2016, orders were made dismissing Ms Cheung’s applications for an extension of time in which to set aside the sequestration order and for an annulment of her bankruptcy. The matter was stood down so as to allow the parties some time for discussion. Orders were then made on the Trustees’ application that Ms Cheung deliver up vacant possession of the Docklands property to the trustees together with a range of ancillary orders. Ms Cheung then instituted her applications in the Federal Court.
I have set out above the history of the matter which led to the applications before the Federal Court and how it is that certain applications came to be remitted to this court.
Since the orders remitting the Annulment application and the Trustees' application to this court were made, the trustees have filed further evidence which addresses, amongst other things, their estimate of the current position of the bankrupt’s estate. This evidence (below) demonstrates Ms Cheung’s insolvency.
Consideration
On 15 February 2017, orders were made in each of the remitted proceedings with respect to the filing and service of outlines of submissions, the identification of evidence to be relied upon, drafts of the final orders sought and permitting each party who wished to rely on any further evidence to file and serve such evidence by 24 February 2017. Each proceeding was fixed for hearing on 6 March 2017. The parties were agreed that evidence in one proceeding be evidence in the other and orders were made to that effect.
Each of the trustees and Capital identified with precision the affidavits and other evidence on which they relied. Ms Cheung did not do so.
Only the trustees filed further evidence. Mr Burness deposed that the trustees had administered the bankrupt estate and adjudicated on the Capital debt on the basis of the information available to them. He deposed that there were no assets within the bankrupt estate available to pay out creditors in full. As concerned the Trustees’ application he sought orders to enable the realisation of the Docklands property for the benefit of the creditors and sought that, if an annulment order were made, provision be made for the costs, charges and expenses of the administration of the bankruptcy: see s 154(1)(b).
On 24 February 2017, Mr Jess swore an affidavit in relation to the present applications. Mr Jess exhibited two spreadsheets providing estimates of the financial position of Ms Cheung’s estate and including an updated estimate as at 24 February 2017. This estimate demonstrated that there was a deficiency in the bankrupt’s estate of some $336,800 as at 24 February 2017.
Although Ms Cheung had sworn several affidavits earlier in these proceedings she did not take the opportunity to do so given by the orders made on 15 February 2017. Nor did she identify any specific evidence upon which she proposed to rely (see Order 4(b) made on 15 February 2017). Instead, Ms Cheung filed a chronology, addressing submissions to the matters raised in that document. Attached to that chronology was a series of submissions and documents, each of which I have considered.
Each party filed and made oral submissions. While I have examined closely both the written and oral submissions of each party, much of that stated by Ms Cheung was repetitious of matter that has also been considered and rejected in the Federal Court and in this court or relates to matter that is outside the scope of the present proceedings. Insofar as these reasons do not address submissions that were made by Ms Cheung, it is because, having considered those matters, I have concluded they are beyond the scope of the issues that have been remitted to this court: cf [2016] FCA 1381, [64]-[65].
It is convenient to address Ms Cheung’s Annulment application and then to consider the Trustees’ application.
Annulment application
While the sequestration order may not be set aside, the question remains whether an order should be made for the annulment of the bankruptcy pursuant to s 153B of the Act.
The substantive reason why the Annulment application was remitted to this court for further consideration lay in Moshinsky J’s conclusion that the primary judge had stopped at the point of observing that the application appeared to have little chance of success but without then proceeding to determine that application on its merits. In the way that the proceedings were heard before him, no argument was heard, or concluded view reached by the primary judge, as to the Annulment application: Cheung v Burness (No.2) [2016] FCA 1462, [5].
Should this bankruptcy be annulled?
Part VII of the Act concerns the subjects, Discharge and Annulment. Division 5 of that Part, Annulment of bankruptcy, comprises ss 153A – 154. Section 153A addresses annulment upon payment of debts, while s 153B deals with annulment by the court. Annulment might also be secured in other circumstances: cf s 74(1), 252A, 252B. Section 154 is concerned with the effect of annulment.
Relevantly, s 153B provides:
(1)If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.
(2)In the case of a debtor's petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.
(3)-(4) . . .
Annulment is not a term defined by the Act. The full extent of the meaning of annulment may be a matter of some controversy including whether it means that, in law, the debtor was never a bankrupt: cf Battenberg v Union Club [2005] NSWSC 242, [16]-[25] (Campbell J); Battenberg v Union Club (2006) 66 NSWLR 1 (CA); Hudson v Sigalla [2015] FCAFC 140, [20]-[24]. Older authority held that the effect of annulment was to treat the bankruptcy as if it had never occurred: Oates v Commissioner for Taxation (1990) 27 FCR 289.
The effect of annulment was considered in another context in Re Culleton [No 2]: [2017] HCA 4. In examining the issue, the plurality considered that whether annulment operated prospectively or retrospectively would depend upon the statutory context in which it was used: [2017] HCA 4, [25]. Their Honours held that in the context of the statute under consideration, that legislation did not purport retrospectively to treat a conviction as if it had never occurred: [2017] HCA 4, [29]. Nettle J reasoned slightly differently, preferring on this issue the view that the annulment had “retrospective operation to the extent that a person’s convict status in relation to events occurring after annulment is that he or she is not to be regarded as convicted”: [2017] HCA 4, [61]. The precise scope and operation of annulment in the context of bankruptcy law remains to be worked out in the cases.
The burden upon an applicant seeking annulment of a bankruptcy is a heavy one: Shaw v Yarranova Pty Ltd [2016] FCA 88, [6]. However, the right to seek annulment is long standing: cf s 54(2) Bankruptcy Act 1924 (Cth); Cameron v Cole (1944) 68 CLR 571, 608 (Rich J).
On established principles, two matters must be shown. First, whether the sequestration order ought not to have been made. Secondly, whether as a matter of discretion, the order should be discharged: Re Williams (1968) FLR 10, 23 (Gibbs J) citing Delph Sing v Wood (1918) 25 CLR 497, 498. In Thredgold v Fyfe Pty Ltd [2013] FCA 1363 at [9], White J identified those criteria and observed that the principles were settled: see also Rigg v Baker [2006] FCAFC 179, [59]; (2006) 155 FCR 531, 543-544 (French J, Spender J agreeing generally).
The right to apply for annulment exists in light of the significant consequences of a sequestration order. In Kleinwort Benson Ltd v Crowl, Deane J observed that the spectrum of persons who may be made bankrupt ranges from the unscrupulous to the honest, albeit unbusinesslike or naïve persons whose bankruptcy may spring from causes which evoke sympathy rather than indignation. Important consequences of bankruptcy include that it effects a change in status of the person to a bankrupt and to render a person susceptible to liability for criminal punishment for conduct which would otherwise be lawful: (1988) 165 CLR 71, 82; see also Culleton [2017] FCAFC 8, [40], [44]. Annulment is a route by which a bankrupt person may shed that status, securing control of their affairs: see para 154(1)(c). It is because of these significant consequences that specific criteria are stipulated by s 52 which must be satisfied before a sequestration order is made.
Sequestration order ought not have been made
The power to make an order annulling a bankruptcy is engaged when it is established that a sequestration order ought not to have been made. The authorities establish that ought is synonymous with must as employed in s 153B in the expression ‘ought not to have been made’: Re Papps; Ex parte Tapp (1997) 78 FCR 524, 533G-534E. There, O’Loughlin J observed, the term ought could be used in an imperative sense such that annulment was not open unless the court was satisfied that the sequestration order must not have been made: (1997) 78 FCR 524, 534A citing Comber v Leyland v Bullins [1898] AC 524, 528.
In Boles v Official Trustee in Bankruptcy, Emmett J held that “the expression ‘ought not to have been made’ requires that, before annulling a bankruptcy, the court must be satisfied that the trial judge was, on the facts disclosed on the hearing of the application, bound not to make the order”: (2001) 183 ALR 239, [16] (Katz and Conti JJ agreeing), citing Re Frank; Ex parte Piliszky (1987) 16 FCR 396. In Re Ginnane; Ex parte Ginnane Ryan J explained that the condition could not be met by demonstrating, for example, that it was open to the debtor to have taken some alternative course such as allowing a meeting of creditors: (1994) 60 FCR 429 at 445.
In Re Williams (1968) FLR 10, Clyne J made a sequestration order when a petition was called on at 12.45pm. When the court resumed sitting at 2.35pm, counsel for the debtor appeared and applied for the order to be rescinded. As the report shows, the debtor had been served and knew of the hearing date. Clyne J refused the application. An application for annulment was filed two and a half years later. Gibbs J posed the question whether sufficient reason was shown to annul a sequestration order which, he found, had been made on inadmissible evidence. His Honour held that the court was entitled to consider not only the case as disclosed at the time the order was made, but as it would have been disclosed had the true facts been before the court on the making of the order: (1968) FLR 10, 23 citing Re Cook (1946) 13 ABC 245, 259. Gibbs J held that although the sequestration order had been based on inadmissible evidence, on the facts as disclosed at the time of the annulment application, the matters necessary to satisfy the conditions for making of a sequestration order were in fact established. The first criterion for annulment – whether the sequestration order ought not to have been made – was not made out: (1968) FLR 10, 24; see also Re Raymond; Ex parte Raymond (1992) 36 FCR 424, 426; Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239, [16].
In Bulic v Commonwealth Bank of Australia, Tracey J adhered to the view that a sequestration order ought not to have been made if on the facts known at the time of the annulment application the court would have been bound not to make the sequestration order: [2007] FCA 307, [12]. His Honour repeated the oft stated principle that an applicant for annulment bears a heavy burden, but accepted that the first criterion was satisfied where it is established that the debtor was not indebted to the petitioning creditor at the time the sequestration order was made (citing Re Deriu (1970) 16 FLR 420, 422).
Accordingly, for the purpose of deciding whether a sequestration order ought not have been made, the court may consider the facts that were known at the time of the making of the sequestration order and the true facts either not disclosed or unknown: Thredgold v Fyfe Pty Ltd [2013] FCA 1363 at [10] citing Bulic and Rigg v Baker.
By contrast, the court is not entitled to have regard to matters which occurred after the making of the sequestration order: Re Scott [1975] Qd R 125. The circumstances of that case require some consideration. Lucas J refused to annul a bankruptcy where, after the making of the sequestration order, the default judgment on which the bankruptcy was based had later been set aside. His Honour distinguished Bayne v Baillieu (1907) 5 CLR 64, 66 where the High Court, allowing an appeal, had annulled a sequestration order against a deceased estate, made in circumstances where a notice of appeal from the subject judgment had been filed before the sequestration order was made.
Re Scott was not followed by Spender J in Re Raymond; Ex parte Raymond (1992) 36 FCR 424. In my view, a more detailed statement of the applicable principle may be derived from Re Ginnane; Ex parte Ginnane (1994) 60 FCR 429. Ryan J said at 445:
While the facts relied upon must have been in existence at the time of the sequestration order, they need not have been before the Court at the time when the order was made and may be established by proof of facts occurring after that time.
(footnotes omitted)
See also Rigg v Baker (2006) 155 FCR 531, [61]-[63] (French J, Spender J agreeing); [108]-[110] (Cowdroy J diss’); cf Cameron v Cole (1944) 68 CLR 571.
Upon the principles disclosed by the authorities considered above, the sequestration order ought not to have been made against Ms Cheung. As Moshinsky J observed, the primary judge had been correct in the decision to go behind the default judgment grounded upon the guarantee. As his Honour held, Ms Cheung did not bear the onus of proving that she had not signed the guarantee. Moshinsky J did not affirmatively hold that the sequestration order ought not have been made. In remitting the matter, his Honour merely declared that Capital had not established that Ms Cheung signed the guarantee: [2016] FCA 1462. But by its submissions Capital accepted that it adduced no further evidence on whether, and had not established that, Ms Cheung was otherwise indebted to it for the sum for which the judgment was obtained. Those considerations undermined Capital’s bankruptcy notice. Ms Cheung had not committed the act of bankruptcy relied upon in that notice: see para 41(1)(a). The creditor’s petition was lacking the foundation on which it was based – failure to comply with the bankruptcy notice: para 40(1)(g). For those reasons, the court could not be satisfied of the proof it required on the hearing of the creditor’s petition of the matters specified by sub-s 52(1).
As the sequestration order ought not to have been made against Ms Cheung, the power to annul her bankruptcy is engaged.
Discretionary considerations
Where the applicant satisfies the condition expressed in sub-s 153B(1) that the sequestration order ought not to have been made, the court is authorised to make an order annulling the bankruptcy. Nonetheless, it is said that “the nature of annulment with its restorative consequence invites caution in its application”: Rigg v Baker [2006] FCAFC 179, [60]; (2006) 155 FCR 531, 544 (French J) citing Cameron v Cole (1944) 68 CLR 571, 583 (Latham CJ), 594 (Starke J).
A corollary of that caution is the heavy burden borne by an applicant for annulment. The weight of that burden stems from the combined effect of the need to demonstrate the order ought not to have been made and from the range of considerations that have been identified in the authorities as being relevant to the exercise of discretion whether an order annulling the bankruptcy should be made.
Sub-section 153B(1) provides that the court may make an order for annulment. The power, being one that is conferred on a court, is conferred in discretionary terms that are otherwise unqualified. The court is not bound to annul the order, but must consider, in light of all the circumstances, whether the bankruptcy ought to be annulled: see Re Williams (1968) FLR 10, 23 Gibbs J, citing Delph Sing v Wood (1918) 25 CLR 497, 498-499; Re Lawson (1939) 11 ABC 137, 139; Layton v Westpac Banking Corporation (2000) 181 ALR 603, [17].
Once it is concluded that the sequestration order ought not to have been made, the discretion to annul a bankruptcy falls to be exercised having regard to the scope and purposes of the Act: Klein v Domus Pty Ltd [1963] HCA 54; 109 CLR 467, 473; Coal & Allied Operations Pty Ltd v AIRC (2000) 203 CLR 194, [19]. In Bear v Official Receiver (1941) 65 CLR 307, 312, Rich J observed that the Bankruptcy Act should be construed to give the largest discretion possible to the court.
Amongst the purposes of making a sequestration order are that the bankrupt’s estate may be secured for division amongst the bankrupt’s creditors and that a measure of protection may be afforded to the bankrupt. By these means, amongst others, trustees are enabled to achieve an orderly administration of the estate and to protect the bankrupt and her property from dissipation: cf Hudson v Sigalla [2015] FCAFC 140, [24]; Iron Mountain Mining Ltd v K&L Gates [2016] WASCA 166, [40] (CA). Where the bankrupt is discharged from bankruptcy and the property of the bankrupt applied in payment of the Trustee’s costs, the remainder of the property of the former bankrupt reverts to him or her: sub-s 154(1)(c).
In Bulic v Commonwealth Bank of Australia, Tracey J identified authority which established that the court was not precluded from granting an annulment by reason that the bankrupt had not sought to set aside a default judgment or failed to oppose the creditor’s petition. Nonetheless, his Honour recognised, and applied, the principle that the court was not bound to grant an annulment by reason that the sequestration order ought not to have been made.
Adopting that analysis it is apparent that the discretion conferred by the section would be otiose if all that was required was establishing that the sequestration order ought not to have been made: cf Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239, [16], [36]. The requirement to establish that the sequestration order ought not to have been made is a condition which must be established and is separate from the discretion in s 153B: Thredgold v Fyfe Pty Ltd [2013] FCA 1363 at [12]. Until it is demonstrated that the sequestration order ought not to have been made, the discretion does not arise for consideration.
Factors which may be relevant to the exercise of discretion to grant an annulment application include whether or not: (1) there is unexplained delay in the making of the application; (2) the applicant: (a) was solvent; (b) had made full and frank disclosure of their financial affairs; (c) had failed to attend the hearing of, and to oppose, the creditor’s petition: see Francis v Eggleston Mitchell Lawyers Pty Ltd [2014] FCAFC 18, [16] citing Bulic [2007] FCA 307, [12]; Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239, 243; Re Williams (1968) 13 FLR 10; Re Papps; Ex parte Tapp (1997) 78 FCR 524; Rigg v Baker [2006] FCAFC 179; Cottrell v Wilcox [2002] FCA 1115, [7]; see also DA Hassall, Annulment of Bankruptcy and Review of Sequestration Orders (1993) 67 ALJ 761.
Annulment should be refused
As a matter of discretion, I would refuse Ms Cheung’s application for annulment. In my view, the preponderance of considerations militate in favour of a conclusion that this bankruptcy ought not be annulled.
Delay
The reported decisions are replete with examples of annulment being refused where there had been delay in bringing the application. It is not especially instructive to examine or catalogue those decisions. Each case will fall for consideration upon its own facts and circumstances.
In Thredgold v Fyfe Pty Ltd [2013] FCA 1363 at [70], White J considered a 17 month delay between entry of the default judgment and the application to set it aside in the face of an ongoing bankruptcy as a ‘long delay.’ In the present case, delay is longer and unexplained.
Since 2011, Ms Cheung was invited on several occasions to make an application to set aside the sequestration order or to seek an annulment. Her delay in instituting the application should not be ignored. At one point in the proceeding, Ms Cheung was afforded pro bono assistance of senior counsel in relation to the matter at the instigation of the court. Her delay in instituting the Annulment application has been significant. Ms Cheung has been bankrupt since 2011. Since that time, the claims of her creditors have been, in all practical effect, stayed. Creditors have been precluded from continuing or commencing any legal proceedings to recover their debts and otherwise unable to enforce any remedy, whether as against Ms Cheung or her property, in respect of a provable debt: sub-s 58(3). The administration of the bankrupt estate of Ms Cheung has been long delayed, in part by reason of her failure or neglect in completing and providing a statement of affairs to the trustees: sub-s 54(1). Rather than provide that statement to the trustees within 14 days of the making of the sequestration order, Ms Cheung did not do so for some years.
The relevance of misconduct may be contrasted with laudable conduct. In Marek v Tregenza (1963) 109 CLR 1, the High Court reversed the decision below and granted an annulment in circumstances where the bankrupt, before discharge, set about repaying all creditors, including by borrowing monies on security for that purpose. It was not surprising that Kitto and Menzies JJ observed at 6:
The sequestration order having been made, the appellant, . . . might well have looked upon bankruptcy as giving him a fresh start without the burden of his past debts. But he took a more commendable view. He continued to work . . . he raised a mortgage . . . , paid off the mortgage . . . , and paid the balance of the mortgage money to the official receiver, thereby enabling the unsecured debts to be paid in full . . .
The case, then, is one of a man in a small way of business who became bankrupt . . . without having been guilty of any conduct frowned upon by the Act.
The favourable exercise of discretion was readily understandable.
While Re Lawson may be distinguished on its facts from the present case, the principle upon which Capital relied may be applicable. I have not ignored the manner in which Ms Cheung has acted during the administration of her estate. I do not consider the facts of the present case are in any way comparable to those of Marek v Tregenza.
Sixthly, I also accept the trustees’ submission that they have been hampered in their ability to confidently assess the financial position of the bankrupt’s estate by reason that the statement of affairs was not provided to them within 14 days but instead for a period of more than two years after the sequestration order was made.
Seventhly, the trustees submitted that many of the matters addressed above had already been considered by the primary judge in relation to the Extension of Time application which had been refused and that the findings made upon the issues of unexplained delay, solvency, disclosure and co-operation by Ms Cheung were not disturbed on appeal. I have not approached my consideration of any of those factors from the perspective that I should simply adopt the conclusions of the primary judge (undisturbed on appeal) on each of these issues. I regard the remitting of the application for annulment as requiring reconsideration of the matter anew.
Trustees’ costs and conduct
I cannot ignore that the trustees’ costs are now substantial.
Nothing said above is to be taken as conclusive of the position as concerns quantification of the Trustees’ costs in this matter. By s 4A, the Second Schedule to the Act takes effect. This schedule relates to insolvency practice in bankruptcy and provides by Part 3, a series of general rules relating to administration. Division 60 in Part 3 of the Second Schedule provides for the remuneration of trustees.
Ms Cheung relied upon Kyriacou v Shield Mercantile Pty Ltd (No.2) [2004] FCA 1338, where Weinberg J considered what orders were appropriate in light of his Honour’s earlier decision that a bankrupt notice was invalid and should have been set aside. The choice presented to the court in that case was whether to annul the bankruptcy or set aside the sequestration order. The ramifications of that choice entailed that if annulment was ordered, the Official Receiver was entitled to recoup the costs, charges and expenses of the administration of the estate by force of sub-s 154(1)(b), whereas such recovery was not open if the sequestration order was set aside. A lacuna in the Act meant that the bankrupt or the Official Receiver would bear the consequences of the bankruptcy notice being set aside. His Honour held that the rights of the appellant prevailed over those of the Official Receiver who was left to bear his own costs and expenses of the administration: [2004] FCA 1338, [38]-[43].
In my view, Kyriacou is distinguishable. First, the choice being considered in that case – which Weinberg J characterised as the most difficult issue to be determined – was whether an order should be made to annul the bankruptcy or set aside the sequestration order. However, this is not the choice presented in these remitted proceedings – the Federal Court has already determined the Extension of Time application and Ms Cheung can no longer seek an order to set aside the sequestration order. The only choice open here is the grant or refusal of the Annulment application. Secondly, for the reasons above, the application for annulment has been refused. There is no room in those circumstances for the operation of s 154(1)(b) – in this case, the recovery of the trustees’ costs does not stem from that provision. Thirdly, Ms Cheung relied upon Kyriacou as being relevant to the question of costs of the administration of the bankrupt estate as distinct from the costs of the proceeding. Weinberg J accepted that as the successful party, the appellant was entitled to his costs of the proceeding. However, his Honour addressed separately the question of whether the petitioning creditor should be liable for such costs. Here, this latter issue remains for determination.
Ms Cheung also relied upon Owners Strata Plan No 23007 v Cross [2006] FCA 900 at [115]-[118], where Edmonds J confronted the need to strike a balance in choosing between an order to set aside a sequestration order or one annulling the bankruptcy. His Honour recognised that striking that balance involved choosing between “the rights of the applicant who should never have been made bankrupt in the first place and the Trustee who has simply done what the Act requires him to do.” The bankrupt was a person under a disability. On the facts of that case, the sequestration order was set aside.
A similar result followed in Vaucluse Hospital Pty Ltd v Philips [2006] FMCA 44, in which a sequestration order was made grounded upon a judgment of less than $5,000 (see now para 41(1)(a)(ii) of the Act). Riethmuller J, who examined the principles in detail, declined to annul the bankruptcy, instead setting aside the sequestration order.
Again, I consider that the decisions in both Owners Strata Plan No 23007 v Cross and Vaucluse Hospital Pty Ltd v Philips are distinguishable for the reasons given above in relation to Kyriacou.
However, the reasoning in each of those decisions, serves to underline the importance of giving consideration to why an annulment might be ordered or refused in a particular case. In Cross, the personal circumstances of the applicant provided a powerful basis for the conclusion that the sequestration order ought not to have been made and that the discretion conferred by s 153B(1) should be exercised in her favour. Likewise, in Vaucluse Hospital, the court recognised that the creditor could as easily have pursued other means of recovery than seeking to exploit the leverage of bankruptcy as a means of execution. By contrast, with the present case, there is no question of setting aside the sequestration order, and the Annulment application has been refused on the discretionary bases that are analysed above.
It is no part of the present applications to engage in any quantification of the Trustees’ costs. The evidence demonstrates that the trustees took steps to appraise Ms Cheung of the rising quantum of their costs and expenses in the administration including by providing her access via a secure website where she could identify what those costs were.
Discretionary considerations favour refusal of application
For the reasons above, I conclude that the discretion conferred by sub-s 154B(1) favours refusal of this application. Ms Cheung’s delay in initiating this application was not explained. It was a long delay. The delay was compounded by her discharge from bankruptcy and the release upon creditors whose otherwise valid claim are now barred.
I have not accepted that Ms Cheung was solvent when the creditor’s petition was presented. Moreover, the authorities make plain that solvency at the date of the application for annulment is no less relevant as a discretionary factor to be evaluated in the exercise of discretion. No attempt was made by Ms Cheung to establish her solvency and (in contrast with the issue of forgery that was decided by Moshinsky J), it is clear that Ms Cheung bore the onus of establishing solvency.
As concerns her known assets and liabilities, the evidence demonstrates that there was a marked discrepancy in the estimated value of the Docklands property and in the quantum of liabilities affecting that property. The property has been occupied by Ms Cheung since 2011 and liabilities attaching to that property as encumbrances have increased markedly. Over the period of the administration, the bankrupt estate has been diluted in greater measure by reason that the costs and expenses of administration have also increased. There has been a lack of candour on the part of Ms Cheung as demonstrated by the prolonged delay in filing her statement of affairs, the disclosure of family creditors and the non-disclosure of her income for the greater part of the administration.
Ms Cheung did not appear on the creditors petition to oppose the making of the sequestration order or to demonstrate her solvency. Ms Cheung was served personally with the creditor’s petition. The consequences of her failure to do so lie at her feet and not those of the trustees. There has been no offer or proposal of any arrangement as concerned the costs of the petitioning creditor or the trustees.
The application for annulment is accordingly refused.
Trustees’ application
In light of my conclusion that the bankruptcy should not be annulled, it remains to consider the Trustees’ application for directions. Ms Cheung has been afforded the opportunity identified by Moshinsky J that she might make submissions why an order for possession ought not be made. She has taken that opportunity.
I accept the trustees’ submission that more than one attempt was made, over a prolonged period, to avoid a sale of the Docklands property. The trustees attempted to negotiate with Ms Cheung to achieve that result. Ms Cheung would not be drawn on a negotiated resolution of the matter as proposed by the trustees.
The history of the administration of the bankrupt’s estate demonstrates why the trustees decided it was necessary that they seek directions. By the combined effect of ss 30(1)(b), 31(1)(f) and 303 of the Act, the trustees are entitled to bring their application seeking directions in relation to their administration of the estate. Despite Ms Cheung’s discharge from bankruptcy, the proceedings brought in or in respect of the bankruptcy are deemed to have been validly taken: sub-s 153(5).
I accept, as Ms Cheung submitted, that trustees of a bankrupt estate must consider the interests, not only of creditors but of the bankrupt also. Ms Cheung relied upon Adsett v Berlouis (1992) 37 FCR 201 (Berlouis). There Northrop, Wilcox and Cooper JJ held at [26] that:
A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt's estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules 1968 (Cth). The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act. . . . The conduct of the trustee is subject to the supervision of the court (eg Div 4 of Pt VIII of the Act) and a trustee in bankruptcy has historically been regarded as an officer of the relevant court. (footnotes omitted)
Ms Cheung relied upon Doolan v Dare (2005) 142 FCR 287 at [19], a decision of the Full Federal Court which endorsed the reasoning in Berlouis insofar as it held that a trustee in bankruptcy is appointed in the expectation that he or she will be remunerated, and that where there is no prior agreement to act gratuitously, the Act assumes the existence of a right to, and provides a mechanism for fixing, such remuneration. I do not see that this decision is of particular assistance to this case.
More recently, in Riva NSW Pty Ltd v Official Trustee [2017] FCA 188, Perry J considered the nature of the duties owed by the trustee of a bankrupt estate. After referring to s 19 of the Act and to the holding in Berlouis above, her Honour stated as follows:
Accordingly, while the Trustee must exercise a great deal of discretion and judgment, the Trustee must do so conformably with the discharge of the public duty imposed by the Act upon her or him, and “also conformably with the trustee's obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors’ claims and any possible surplus for the bankrupt”. Thus a trustee in bankruptcy must exercise judgment so as, among other things, to save the estate unnecessary expenditure of money.
The standard to which the trustee in bankruptcy must perform these obligations is that of “reasonable skill”: Adsett at 208. Consistently with this, where an order is sought for removal of the trustee in bankruptcy and to make good losses allegedly suffered by the estate, “it must be established that the trustee has been guilty of a breach of duty to act ‘diligently and prudently in regard to the business of the Trust.’ However, beyond executing the trust with fidelity and reasonable diligence in accordance with these principles, the trustee in bankruptcy “is not bound to adopt further precautions.” (footnotes omitted)
Although I question whether Ms Cheung’s submissions relying upon Berlouis and other authorities traverse issues beyond those presented by the remitted proceedings, it is as well to say something about them.
Nothing in my analysis of the facts and circumstances which led to the applications that are now remitted to this court leads me to find that the trustees have conducted themselves other than with discretion and judgment. I find that they have adhered to a standard that would be reasonable to expect of a trustee of such an estate. The trustees conduct displayed a level of patience toward Ms Cheung and that she was encouraged to proceed with the types of applications that her lawyers had identified from the outset as necessary to address the matter. The trustees met with and provided Ms Cheung and her various lawyers with copies of the documents that were sought to enable those applications to be made. They provided her copies of draft statements of affairs. The trustees communicated with Ms Cheung on the steps that they considered necessary to undertake and acted only after giving her final notice of their intention to do so. It was not to the trustees account that Ms Cheung did not read emails that she agreed she had in fact received. Nor was it to their account that Ms Cheung did not communicate with them for extended periods or that she did not return telephone calls. The trustees were fixed with a statutory function to administer the bankrupt estate in the interests of the creditors and the bankrupt and it was inimical to that function to delay the administration interminably. The steps that they took were steps authorised by the Act. A constant theme that emerged in the administration was one of Ms Cheung responding in one way or another only once the trustees had initiated some further step in the administration. The trustees were both entitled and obliged to proceed in the administration of the estate and in my view acted with prudence and caution in their several attempts to contain the costs to the estate in doing so.
Insofar as Ms Cheung made submissions, written and oral, alleging fraud and dishonesty on the part of the trustees, I reject those allegations. The circumstance that Ms Cheung decided to pursue such allegations is perhaps supportive of a conclusion that, instead of addressing the considerations relevant to annulment, Ms Cheung remained focussed on the trustees as the target of her criticism.
Before initiating the sale of the Notting Hill property, the trustees afforded Ms Cheung several indulgences so as to allow her to apply for annulment or to set aside the bankruptcy. The trustees sale of that property drew a sharp response from Ms Cheung whereby she made allegations against the trustees suggesting their responsibility for the making of the sequestration order. Ms Cheung introduced the spectre of impropriety in the manner of the trustees’ administration. Her allegations were without foundation.
The property of the bankrupt vested in the trustees upon their appointment: s 58. The trustees were obliged to get that property in: ss 19(1)(f), 129(1). They were conferred with powers to realise it: s 134(1)(a). The same duties, rights, powers and obligations attend the Docklands property. The trustees decision to seek directions was wholly warranted in the circumstances of this case.
There are good reasons why the trustees should seek directions. The trustees, in effecting a power of sale require some reasonable level of certainty in dealing with the Docklands property. A sale may be protected and enhanced by an order for vacant possession. The trustees will be assisted in their endeavours to maximise a sale price by an order that removes the spectre of challenge to the sale process. Prospective purchasers will be able to consider the property secure in the knowledge that the property is vested in trustees who are able to sell with vacant possession. The history of the matter to date does not inspire confidence that the sale process will occur free of difficulty without orders and directions to the effect sought.
It is of passing note in the present case that time limits are placed on trustees in respect of the period before which property re-vests in a person who has been discharged from bankruptcy: s 129AA(3)(a). Given that six year time limit and the fact of the discharge of Ms Cheung from bankruptcy on 7 March 2016, the six year limitation period is not about to expire in the near future.
Orders should be made, substantially in the terms sought.
Conclusion
In Culleton, the Full Federal Court observed that delay and prevarication is often times in no one’s interests, including that of the debtor: [2017] FCAFC 1578, [54]. Their Honour’s observation was made in the context that it is not uncommon for some debtors to delay and prevaricate in the determination of the hearing of a creditor’s petition: cfKleinwort Benson Ltd v Crowl (1988) 165 CLR 71, 82. I consider that those observations are apposite to the parties conduct during the administration of a bankrupt’s estate. The present is a clear example of the reasons why it is undesirable and in the interests of no one to delay in the administration of a bankrupt’s estate.
Ms Cheung did have a surplus of assets over liabilities at the date the sequestration order was made. However, instead of taking steps which she was told were open to be taken by her to seek an order setting aside the sequestration order or for the annulment of the bankruptcy, her conduct demonstrates a conscious strategy to target the trustees and to ascribe responsibility to them for her plight.
The trustees did recognise at an early stage in their administration that Ms Cheung’s estate was probably solvent at the time the sequestration order was made. They adopted a proactive stance of engaging with Ms Cheung upon the prospect that she make application to set aside the sequestration order or annul her bankruptcy. For an extended period they adopted an attitude of forbearing in allowing and reminding Ms Cheung of the need for her to initiate an application. They provided her with relevant documents on many occasions. At the same time, they reminded Ms Cheung that they were under a range of statutory duties to act in the interests of the bankrupt’s estate, including that they should administer that estate without undue delay.
The application for annulment should be refused and the trustee’s given directions substantially in the terms which were sought.
I accept the trustees’ submission, based upon Flint v Richard Busuttil & Co Pty Ltd (2013) FCR 375, that the parties should be afforded an opportunity to make submissions in relation to costs. The parties’ submissions should also address the discrete question whether the issue of costs may be addressed in chambers: s 31(2). Should they prefer the matter to be addressed in open court, their submissions should say so.
I certify that the preceding two hundred and eighteen (218) paragraphs are a true copy of the reasons for judgment of Judge A Kelly
Associate:
Date: 31 May 2017
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