Burnitt v Williams

[2015] FCCA 52

FEDERAL CIRCUIT COURT OF AUSTRALIA

BURNITT v WILLIAMS & ORS [2015] FCCA 52

Catchwords:
BANKRUPTCY – Costs – whether controlling trustees should pay applicant’s costs without indemnity from estate – where report to creditors issued without review by trustees.

Legislation:

Bankruptcy Act 1966, ss.155H, 188, 189, 189A(1)(b)

Re Burlock; Burlock v Commissioner of Taxation (1994) FCR 522

Applicant: PETER RAYMOND BURNITT

First Respondent: ROBERT REX WILLIAMS

Second Respondents: JASON SHANE CRONAN AND TERRY GRANT VAN DER VELDE AS TRUSTEES OF THE ESTATE OF ROBERT REX WILLIAMS

Creditor: GPS INVESTMENT FUND LIMITED

File Number: BRG 984 of 2013

Judgment of: Judge Jarrett

Hearing date: 11 December 2013

Date of Last Submission: 20 December 2013

Delivered at: Brisbane

Delivered on: 23 January 2015

REPRESENTATION

Counsel for the Applicant: Mr Morris QC with Mr Brennan

Solicitors for the Applicant: Simmonds Crowley & Galvin

Counsel for the First Respondent: Mr Erskine

Solicitors for the First Respondent: Cronin Litigation

Counsel for the Second Respondents: Mr Hogg

Solicitors for the Second Respondents: directly instructed

Counsel for the Creditor: Mr Pincus

Solicitors for the Creditor: Gadens Lawyers

ORDERS

1. The second respondents pay the applicant’s costs of and incidental to this application to be taxed and paid in accordance with the Federal Circuit Court (Bankruptcy) Rules 2006.

2. The costs payable by the second respondents under order 1 hereof must not be reimbursed by the bankrupt estate of Robert Rex Williams.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT BRISBANE

BRG 984 of 2013

PETER RAYMOND BURNITT

Applicant

And

ROBERT REX WILLIAMS

First Respondent

JASON SHANE CRONAN AND TERRY GRANT VAN DER VELDE AS TRUSTEES OF THE ESTATE OF ROBERT REX WILLIAMS

Second Respondents

GPS INVESTMENT FUND LIMITED

Creditor

REASONS FOR JUDGMENT

1. By this application the applicant sought orders setting aside a personal insolvency agreement that was executed by the first respondent on 24 October, 2013.  He sought a sequestration order against the first respondent’s estate.  He sought a consequential order for the appointment of a trustee to the second respondent’s estate in bankruptcy.  He also sought an order that the applicant’s cost be paid out of the estate in bankruptcy.

2. The second respondents were the trustees of the first respondent’s personal insolvency agreement.

3. When the application came on for hearing before me, each of the parties was represented as set out above.  A creditor appeared to support the respondents’ opposition to setting aside the personal insolvency agreement.  After the cross-examination of three witnesses: one of the second respondents, Mr Cronan, the solicitor for the applicant Mr McFarlane and Mr Lee, a senior accountant in the office of the firm of which the second respondents were members, the parties reached an agreement about the orders that should be made.  In accordance with the parties’ agreement, I made orders that the first respondent’s personal insolvency agreement be set aside pursuant to the Bankruptcy Act 1966.   I made a sequestration order against the first respondent’s estate and a consequential order appointing trustees to his estate in bankruptcy.

4. Two issues remain.  The first is the appropriate order for costs that ought to be made in the applicant’s favour.  The second is whether I ought to refer a transcript of the proceedings to the second respondents’ professional organisation or the Inspector General in Bankruptcy.

Costs

1. The applicant seeks, in the alternative, either payment of his costs out of the estate in bankruptcy, or a personal costs order against the second respondents.  Although not articulated in this way, I appreciate that the form of order sought by the applicant against the second respondents is that they pay the applicant’s costs of the proceedings and that they not be indemnified or reimbursed for those costs from the bankrupt’s estate. 

2. There is no opposition to the making of an order for the payment of the applicant’s costs of these proceedings out of the first respondent’s estate in bankruptcy.  The applicant, however, presses as his primary order that the second respondents should pay his costs of the application personally.  They oppose that order.

3. To understand the application for costs made by the applicant, it is necessary to understand a little of the background to the application.  The following facts do not appear to be contentious.

4. The applicant has a judgment of the District Court of Queensland against the first respondent for $865,434.71 (including interest) and assessed costs.

5. On or about 13 September, 2012 the first respondent signed an authority pursuant to s.188 of the Bankruptcy Act 1966. On 18 September, 2013 the second respondents consented to act as controlling trustees of the first respondent’s estate.

6. The second respondents produced a report to creditors dated 11 October, 2013.  The report contained the following facts and opinions:

   a)a statement that the report had been prepared “in accordance” with Part X of the Bankruptcy Act;

   b)a statement that the essential terms of the first respondents’ proposed personal insolvency agreement were:

   i)that the first respondent (or, more particularly, his wife) would pay $40,000;

   ii)that the $40,000 payment would be applied, first to the controlling trustees,

   iii)any balance would be applied to the trustees of the personal insolvency agreement, with the balance to be distributed to the first respondent’s unsecured creditors; and

   iv)that the second respondents would not have a right to recover any amounts that would be otherwise recoverable by a trustee “in relation to undervalued transactions, transfers to defeat creditors and/or avoidance of preferences”.

   c)a statement that the second respondents’ costs as controlling trustees amounted to $22,522 (plus GST) up to 11 October, 2013 and that their future remuneration “may be in the region of $7,500 to $15,000 (plus GST)”.

   d)statements that:

   i)a number of motor and water sports vehicles in the name of the first respondent required “further evidence” to establish his contention that they did not in fact belong to him; and

   ii)whilst certain items of real property at Byron Bay and at Darra were in the joint names of the first respondent and his wife, he had informed the second respondents that these properties were held on trust for the benefit of his family trust, and that further investigations were required to verify his assertions in respect of these properties.

   e)a statement in the following terms:

   As mentioned previously at this point in time we do not have sufficient information to provide a recommendation to creditors. Accordingly, at the meeting of creditors we recommend that creditors resolve to adjourn the meeting to a later date (between 7 to 14 days) to allow us to conduct further investigations into Mr Williams’ financial affairs and provide a recommendation to creditors.

   f)a statement that a meeting of creditors was to be held on 24 October, 2013.

   g)a statement that the second respondents were to provide another report to creditors after the meeting of creditors.

   h)a statement that the first respondents’ total unsecured debts amounted to $8,787,831.

7. The creditors’ meeting proceeded on 24 October, 2013.  The applicant was represented at the meeting by his solicitor, Mr McFarlane.  The chairman of the meeting was one of the second respondents’ employees, Mr Leon Lee. The meeting was attended by 8 creditors.  Of those, Mr Lee (or his staff) held proxies for 6 of those creditors who were admitted for voting purposes. The first respondent disclosed debts totalling just under $8 million for the purposes of the meeting.  The creditor that appears in these proceedings, GPS Investment Fund Limited, was admitted for voting purposes for a debt of almost $5 million.  No issue was taken with the admission of creditors for voting purposes.

8. At the meeting, the chairman orally recommended that the first respondents’ personal insolvency agreement be accepted and carried into effect.  A resolution to that effect was passed, although Mr McFarlane voted against the resolution.

9. On 28 October, 2013 Mr McFarlane wrote to the second respondents:

   a)requiring that they provide a copy of the minutes of the creditors meeting;

   b)requesting that no money be distributed pursuant to the personal insolvency agreement;

   c)rejecting the purported oral recommendation; and

   d)providing a copy of the decision in Re Burlock; Burlock v Commissioner of Taxation (1994) FCR 522.

Consideration

1. At the hearing of the application before me, one of the second respondents, Mr Cronan was cross-examined.  It became apparent during the course of his cross-examination that Mr Cronan:

   a)allowed the report to creditors to be issued purportedly under s.189A of the Act without first reviewing that report;

   b)allowed the report to be issued without ensuring that it contained the recommendation required by s.189A(1)(b) of the Act. That is, a statement as to whether the trustee believed that the creditors’ interests would be better served by accepting the debtor’s proposal of a personal insolvency agreement or by the bankruptcy of the debtor; and

   c)allowed an employee, Mr Lee, who he appointed to chair the meeting of creditors, to make an oral recommendation at a meeting of creditors to accept a debtor’s proposal of a personal insolvency agreement without himself having personally formed the view that the recommendation should be made.

2. The process by which the personal insolvency agreement came to be executed by the first respondent was clearly flawed. The report clearly failed to state the second respondents’ opinion as required by s.189A(1)(b) of the Bankruptcy Act. It failed, therefore, to comply with Part X of the Bankruptcy Act.

3. More than that, I accept the applicant’s contentions that the non-compliance with s.189A(1)(b) of the Act was a very serious departure from the prescribed method of entry into the deed: cf: Re Burlock (above) at 529.

4. The applicant submits that the deficiencies in the process under Part X of the Act are entirely the responsibility of the second respondents.  It is apparent that the first respondent took no part either in preparing the draft deed or in taking the procedural steps appropriate to set up the meeting of creditors.  The second respondents do not contend to the contrary. 

5. The evidence of Mr Cronan was most unsatisfactory.  He was a difficult witness who clearly avoided answering clear and direct questions.  For example:

   Mr Morris:    I see.  Well, what other security does that creditor possess?‑‑‑I’m not aware of any.

   What investigations have you conducted?‑‑‑In particular in relation to this debt?

   In relation to security held by that creditor?‑‑‑The information that was provided to us was a statement of claim at the meeting, and any security that was held was third party security which isn’t to be reduced off the debt.  So that’s been the limit of our investigations in relation to that.

   So was the answer that you have conducted no investigation?‑‑‑No, that’s not.

   In relation to security held by that creditor?‑‑‑Sorry, I’m not sure what the specific question you’re asking here is.

   The specific question is one I have asked you three times, and I would appreciate receiving the answer.  What investigations have you conducted in relation to security held by GPS Investment Fund Limited?‑‑‑The investigation that had been conducted in relation to what securities are over related properties and related entities, and then a statement of claim that was provided to determine whether that’s personal security against Mr Williams or not.  So the documents, as I understand, were provided at that meeting.  But I didn’t chair that meeting.

   So, look, is the fact that you have conducted no investigations into securities held by GPS Investment Fund Limited.  Is that the fact?‑‑‑I don’t think that’s correct, no.

   I see.  Well, at the meeting, GPS Investment Fund Limited voted as a creditor to the tune of something over $5 million.  You’re aware of that?‑‑‑Yes.

   But so far as your investigations show, GPS may be in a position to recover its entire debt from the securities which it holds from the principal debtor?‑‑‑I can’t say that with certainty.  Sorry, sir.

   No, you can’t say that with certainty because you haven’t investigated it, have you?‑‑‑That’s not correct, no.

   Well, why can’t you say it with certainty?‑‑‑Because I don’t know personally the extent of the value of the security and what is covered.

   And that’s because you haven’t investigated it?‑‑‑I think we’ve done some investigation.  I wouldn’t say we haven’t investigated.

   And, in any event, it may be the case, for all you know, that GPS will be able to recover its entire debt without relying on the guarantee?‑‑‑I can’t speculate, to be honest with you, but that’s possible, I guess.

6. Mr Cronan’s evidence made it clear that he had very little knowledge of the circumstances leading to the production and dissemination of the creditor’s report.  He could give no reliable evidence about the nature and extent of any investigations undertaken by or on behalf of the second respondents so that they could properly inform themselves of the first respondent’s circumstances so as to make a proper recommendation to creditors.

7. Mr Lee confirmed that he did not discuss the report to creditors with Mr Cronan or Mr Van der Velde, though he was conscious that the report was not in compliance with the Bankruptcy Act. He was seemingly satisfied to speak with another director in his office without troubling either of the two registered trustees.

8. It is also clear from Mr Lee’s evidence that Mr Van der Velde did not even know that a recommendation was going to be made on his behalf.  Mr Cronin’s evidence is that whilst there were some discussions with him, it was left on the basis that Mr Lee, a person who is not a registered trustee, was left entirely to make his own judgment as to what he should do.   Mr Lee told Mr Cronan that he intended to make a recommendation that the creditors accept the first respondent’s proposal, but Mr Cronan made no such recommendation, nor resolved to make such a recommendation himself.

9. I formed the distinct impression from Mr Cronan’s evidence that he had very little understanding of the first respondent’s financial circumstances notwithstanding that he had been one of the first respondent’s controlling trustees and then a trustee under the personal insolvency agreement.

10. Mr Leon Lee gave evidence and was cross-examined.  His evidence confirmed the impression I had formed about the extent to which either of the second respondents had applied themselves to the positions to which they had been appointed in respect of the first respondent’s estate.

11. Mr Lee gave evidence that he was responsible for the day-to-day conduct of the first respondent’s “file” within the firm of which the second respondents were members.  Whilst Mr Lee gave evidence that he did discuss some of his work with other directors of the firm for which he worked, he did not discuss any of his work in respect of the first respondent’s matter with Mr Van der Velde.  He had only cursory discussions with Mr Cronan.

12. Mr Lee gave evidence that he was responsible for compiling the report to creditors.  He did not show the report to creditors to either Mr Van der Velde or Mr Cronan before it was given to the first respondent’s creditors. 

13. He acknowledged that the report to creditors contained a recommendation to those creditors that the creditors meeting should be adjourned.  Notwithstanding that, he gave evidence that at the commencement of the creditors meeting, he announced that the trustees recommended that the first respondent’s proposals to enter into the personal insolvency agreement should be accepted. 

14. Mr Lee held a number of proxies on behalf of various creditors of the first respondent.  Cross-examination revealed that he had not told those creditors that he was going to make such a recommendation on behalf of the second respondents:

    Mr Morris:    Did you inform them in your capacity as proxy holder that you were going to be making this recommendation at the meeting?‑‑‑I didn’t, but they indicated on the proxies how they wished to vote.

    They gave an indication on the proxies before they had been told about these things.  That’s the point.  Did you say, “Look, I’ve received your proxy, but I want to tell you that I’m going to be making this recommendation:  that rather than recommending an adjournment, as I had originally recommended, I will be recommending we go ahead with the deed”?  Did you tell them that?‑‑‑I didn’t.

15. Mr Lee’s evidence confirmed that he was responsible for drawing the personal insolvency agreement.  He used a “precedent in the office” for that purpose.  The precedent included a clause to the effect that the second respondents would not have a right to recover any amounts that would be otherwise recoverable by a trustee “in relation to undervalued transactions, transfers to defeat creditors and/or avoidance of preferences”.   Mr Lee confirmed in his cross-examination that the first respondent did not request the inclusion of such a term nor did any creditor.  He conceded in cross-examination that he did not turn his mind to the effect of that clause upon the first respondent’s creditors’ entitlements to maximise their return.

16. Whereas Mr Cronan’s evidence concerning the investigations undertaken by the second respondent’s into the asset and liability position of the first respondent was most unclear, Mr Lee’s was much clearer.  Mr Lee confirmed that apart from undertaking publicly available searches, no real investigation was undertaken in respect of the claims made by the first respondent about the nature and extent of his assets.  The evidence revealed a breathtaking failure to properly scrutinise the claims made by the first respondent about his assets:

    Mr Morris:    No.  Now, you will be aware that the – your investigations identified some property in New South Wales – I think at Byron Bay if my memory serves correctly, that was registered in the joint names of Mr Rex Williams and his wife, Wendy Jean Williams?‑‑‑Yes.

    And what Mr Williams told you is that that land should have been in the name of the trust?‑‑‑Yes.

    What documentation did he provide to you to verify that assertion?‑‑‑Mr Williams didn’t provide any documentation.

    So what investigations did you conduct as to whether or not that property might be property available for distribution for evidence?‑‑‑I believe we conducted public searches or publicly available searches and we obtained copies of the family trust which showed that the – well, the financial statements disclosed that the family – that the family trust were the owner of that property. 

    Sorry.  This is the trust of which Jalco Proprietary Limited is the trustee?‑‑‑Yes.

    But the property was registered in the names of Mr and Mrs Williams?‑‑‑That’s right.

    So what searches did you conduct that showed that that the property registered in the name of Mr and Mrs Williams was actually property of the trust controlled by Jalco Proprietary Limited?‑‑‑My recollection is that we conducted further searches which showed the property was held in the names of Mr Williams and his wife as trustees and I believe Mr Williams told me that that property was purchased prior to Jalco being appointed trustees of the family trust.

    But Jalco was appointed trustee of the family trust on 28 June 1996 and the land wasn’t purchased until August 2002.  Did you find that out?‑‑‑I would have to have a look before…      

    Look, what efforts did you actually make in relation to this issue, to ensure that the interests of creditors were looked after?‑‑‑I believe we obtained as much information as we could.  We obtained information from third parties.

    Which third parties?‑‑‑The family trust’s accountant.

    Yes.  Yes.  He’s one of the creditors, isn’t he?‑‑‑Yes.

    And he’s one of the creditors who supported the proposed deed?‑‑‑Yes.

    Okay.  Any other third parties?‑‑‑No.

    Any solicitors involved in purchasing the land, for example?‑‑‑No.

1. In relation to real property owned by the first respondent at Darra:

   Mr Morris:    Okay.  Well, anyway, they have this property at Darra registered in their names and Mr Williams told you that he thought that that was owned by a trust?‑‑‑Yes.

   And what investigations did you conduct in relation to that issue?‑‑‑We obtained an appraisal of the property.  We conducted further public searches and we obtained a payout figure from the mortgagee on the property.

   Yes.  But in relation to the issue of whether that was trust property or not trust property, what investigations did you conduct?‑‑‑So we did those searches.

   No, in relation to the issue of whether or not it was trust property, what investigations did you conduct?‑‑‑Public searches to see – I guess, what name the property was in the name of.

   And you found it was in the name of Mr and Mrs Williams?‑‑‑Yes.

   All right.  So what else did you do to find out whether or not Mr Williams was telling the truth when he said that he regarded it as trust property?‑‑‑I believe due to the time constraints Mr Williams said that is how it should have happened, or, like, that’s how the transaction was supposed to have occurred.  But, I guess, from our perspective, even if it was – even if it was held in his name and his wife’s name, so from a trustee’s perspective, if it was realisable, there was an equity in the property anyway.

2. The conclusion to be drawn from the evidence of Mr Cronan and Mr Lee is that the conduct of the matters placed in the hands of the second respondents by the first respondent was woefully inadequate.  The second respondents’ actions were not carried out with a view to the interests of the first respondent’s creditors.  Were those interests in the forefront of the second respondents’ minds or that of Mr Lee, much more investigation of the first respondent’s position would have, and should have been undertaken.  It is concerning that the amount proposed to be paid under the personal insolvency agreement was little more than the total of the costs incurred by the controlling trustees up to the date of the meeting and their future anticipated costs in circumstances where the investigations undertaken by the second respondents into the first respondent’s financial position were, on any view, inadequate.

3. The second respondents submit that given the extent to which the first respondent was indebted to GPS Investment Fund Limited, it was inevitable that the first respondent’s personal insolvency agreement proposal would be accepted.  The second respondents point out that given that GPS was in favour of the proposal for a personal insolvency agreement, no resolution could have been passed at the meeting that it opposed.

4. The difficulty, however, with that argument is that whatever view GPS had formed, it was likely to have been formed on the basis of the material in the inadequate report to creditors that had been made by the second respondents.    Had the report been adequate in the sense that all relevant investigations had been carried out and a proper picture of the first respondent’s financial position presented, GPS’s position may have been different.

5. The second respondents argue that even if the first respondent’s proposal had not been accepted at the creditors’ meeting, the applicant would have been obliged to proceed under the Bankruptcy Act for sequestration of the first respondent’s estate in the usual way if he wished to see the first respondents’ estate sequestrated. Thus, the applicant has incurred no additional costs. But that ignores the nature of the present application and the circumstances in which it has come about. I reject the submission.

6. The second respondents accept that their conduct of this matter was wanting. However, they submit that their conduct was not so poor that the Court should depart from the ordinary form of costs orders.  I disagree.  As the second respondents submit, the impression the applicant wishes to paint of the second respondents is that of two trustees who wilfully delegated their responsibilities to an unqualified employee.  The second respondents submit that the evidence does not bear that impression out “so starkly”.  But I disagree. 

7. No doubt trustees in the position of the second respondents in this case carry out much of their work through employees and others. But the extent of the delegation in this case goes beyond the efficient use of employees to assist the discharge of the trustees’ functions under the Bankruptcy Act.

8. Whilst Mr Lee is an experienced practitioner, neither Mr Cronan nor Mr Van der Velde saw the report to creditors that he drafted.  That ‘other directors of similar experience’ reviewed the report before it was sent out is not to the point. 

9. The report is made in the name of the controlling trustees.  It purports to be signed by one or other of them.  It is couched in language that conveys the impression that the report is that of the trustees.  For example:

   2.  GUIDE TO REPORT

   This report has been prepared in accordance with Part X of the Bankruptcy Act 1966 (“the Act”) to comply with our statutory obligations and to provide creditors with details of our investigations of Mr Williams’ affairs.

10. Creditors are entitled to rely upon the report as just that – a report of the controlling trustees to the first respondent’s creditors.  However, that is not what it was.  It was a report prepared by someone who was not one of the controlling trustees which was reviewed by others who similarly were not either of the controlling trustees.   Neither of the controlling trustees saw the report before it was issued.

11. Senior counsel for the applicant submitted that the second respondents’ conduct was ‘outrageous’ and ‘scandalous’. The second respondents disavow that description and say he goes too far. I disagree. The delivery of a report to creditors purportedly made by the second respondents but in respect of which neither had any input nor saw before it was delivered is plainly a gross dereliction of the second respondents’ duties under the Bankruptcy Act.

12. The applicant should have his costs of the application from the second respondents.  They should not be reimbursed from the estate in bankruptcy.

Referral to the Inspector General in Bankruptcy (Australian Financial Security Authority)

1. The Inspector General is the appropriate person to review the conduct of a registered trustee in bankruptcy: s.155H of the Act. Mr Cronan has already voluntarily submitted the transcript of the hearing before me to the Inspector General. The second respondents submit that the trustee’s file for this administration was already included in the regular review of trustee’s files and so it was appropriate to refer the further information arising out of this matter to the regulator in those circumstances.

2. In those circumstances there is nothing to be lost by directing the Registrar of this Court to send to the Inspector General in Bankruptcy the papers in this matter, including a copy of these reasons.

Conclusion

1. I make the orders set out at the commencement of these reasons.

I certify that the preceding forty-four (44) paragraphs are a true copy of the reasons for judgment of Judge Jarrett

Deputy Associate: 

Date:       23 January 2015