Diamond and Inspector-General in Bankruptcy - [2024] AATA 2135

Diamond and Inspector-General in Bankruptcy [2024] AATA 2135 (28 June 2024)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2021/8713
Re:Graeme Diamond
APPLICANT

AndInspector-General in Bankruptcy
RESPONDENT

DECISION
Tribunal:Professor Ann O'Connell, Senior Member
Date:28 June 2024
Place:Melbourne

The Tribunal affirms the decision of the Respondent on Grounds 2 and 3. The Tribunal sets aside the decision of the Respondent and cancels the objection on Ground 1.
................................[SGD]........................................
Professor Ann O'Connell, Senior Member
Catchwords
BANKRUPTCY – Objection to discharge – where bankruptcy trustee filed a notice to objection to the Applicant’s discharge from bankruptcy –– decision under review affirmed on Grounds 2 and 3 – Special Grounds – decision under review set aside on non-special grounds – failure of trustee in bankruptcy to specify reasons
Legislation
Administrative Appeals Tribunal Act 1975 (Cth)
Bankruptcy Act 1966 (Cth)
Bankruptcy Legislation Amendment Act 2002 (Cth)
Cases
Australian Securities and Investment Commission (In the Matter of Richstar Pty Ltd) v Carey (No 6) (2006) 153 FCR 509
Cannane v Cannane Pty Ltd (in liquidation) [1998] HCA 6
Inspector-General in Bankruptcy v Nelson [1998] FCA 684
Kennon v Spry (2008) 238 CLR 366
Mallett and Inspector General in Bankruptcy [2018] AATA 3739
Pascoe v Inspector-General in Bankruptcy [2006] AATA 665
Phillips and Inspector-General in Bankruptcy [2012] AATA 788
Prentice v Wood [2002] FCAFC 48
Re Ansett; Ex parte Ansett v Pattison (1995) 56 FCR 526
Smith v Trustee of the Property of Richard John Smith (a Bankrupt) [2023] FCA 300
Secondary Materials
Australian Rules of Racing, Racing Australia
Constitution, Racing Australia
Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2002 (Cth)
REASONS FOR DECISION
Professor Ann O'Connell, Senior Member
28 June 2024

INTRODUCTION

The Applicant, Mr Graeme Diamond, became bankrupt on 14 August 2018 and in the normal course of events would have been discharged from bankruptcy on 14 August 2021. However, on 20 October 2020, the Trustee in Bankruptcy lodged an objection to discharge extending the period of bankruptcy from 3 to 8 years i.e., until 14 August 2026.
This application is made pursuant to section 149Q(a) of the Bankruptcy Act1966 (Cth) (‘the Act’) and section 25(1) Administrative Appeals Tribunal Act 1975 (Cth), for a review of the decision made by the Inspector-General in Bankruptcy (‘Inspector-General’) on 18 October 2021 confirming the notice of objection to the Applicant’s discharge from bankruptcy.
BACKGROUND
The Applicant became bankrupt on 14 August 2018 upon acceptance by the Official Receiver of his debtor’s petition for bankruptcy under section 57B of the Act. Stephen Dixon was appointed trustee of the bankrupt estate (the former Trustee).
On 1 July 2019, Darryl Kirk (‘the Trustee’) was appointed Trustee of the bankrupt estate pursuant to section 181A of the Act.
On 2 October 2020, the Trustee filed a notice of objection to the discharge from bankruptcy.
On 30 November 2020, the Inspector-General received an application seeking a review of the notice of objection. On 27 January 2021, the Inspector-General made a decision not to conduct a review of the notice of…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2024] AATA 2135
Decision Date: 28 June 2024

CaseChat Overview and Summary

This matter concerned an application for review of a decision by the Inspector-General in Bankruptcy, which affirmed a trustee's objection to the Applicant's discharge from bankruptcy. The Applicant had become bankrupt in August 2018. A trustee filed a notice of objection to the Applicant's discharge in October 2020. Following an initial decision by the Inspector-General not to review the objection, and a subsequent own-initiative review, the Inspector-General ultimately confirmed the trustee's objection in October 2021. The Applicant sought a review of this final decision by the Administrative Appeals Tribunal.

The primary legal issues before the Tribunal were whether the trustee's notice of objection to the Applicant's discharge from bankruptcy was validly made, and whether the Inspector-General's decision to confirm that objection was correct. Specifically, the Tribunal had to consider the requirements for a notice of objection under section 149C of the *Bankruptcy Act 1966* (Cth), including the distinction between "special grounds" and other grounds for objection, and the obligation to state reasons for the objection. The Tribunal also had to determine the ownership of certain horses, as this was central to the grounds of objection.

The Tribunal reasoned that while the trustee's notice of objection did not specify any "special grounds" as defined in the Act, it was still required to set out the grounds of objection, refer to the supporting evidence, and state the trustee's reasons for objecting. The Tribunal examined the evidence presented by the Applicant regarding the ownership of several horses, including financial records and transfer forms. It found that the Applicant had failed to provide definitive proof of ownership for the horses, and that the available evidence, particularly transfer of ownership forms signed by the Applicant as "owner," supported the trustee's conclusion that the horses were owned by the Applicant personally, by a syndicate of which the Applicant was a part, or by the syndicate after the bankruptcy. The Tribunal noted that the use of a trust's bank account or ABN on registration forms was not probative of ownership.

The Tribunal concluded that the trustee's notice of objection was validly made, and that the Inspector-General's decision to confirm the objection was correct. The Tribunal found that the evidence established that the horses were owned by the Applicant or a syndicate associated with him, and that this provided sufficient grounds for the trustee to object to the Applicant's discharge from bankruptcy. The application for review was therefore dismissed.

Orders

Orders of the court

Full text does not contain this section.

Background

Background to the litigation

This application is made pursuant to section 149Q(a) of the Bankruptcy Act1966 (Cth) (‘the Act’) and section 25(1) Administrative Appeals Tribunal Act 1975 (Cth), for a review of the decision made by the Inspector-General in Bankruptcy (‘Inspector-General’) on 18 October 2021 confirming the notice of objection to the Applicant’s discharge from bankruptcy.BACKGROUND The Applicant became bankrupt on 14 August 2018 upon acceptance by the Official Receiver of his debtor’s petition for bankruptcy under section 57B of the Act. Stephen Dixon was appointed trustee of the bankrupt estate (the former Trustee). On 1 July 2019, Darryl Kirk (‘the Trustee’) was appointed Trustee of the bankrupt estate pursuant to section 181A of the Act. On 2 October 2020, the Trustee filed a notice of objection to the discharge from bankruptcy. On 30 November 2020, the Inspector-General received an application seeking a review of the notice of objection. On 27 January 2021, the Inspector-General made a decision not to conduct a review of the notice of objection on the basis that the reasons for requesting a review did not appear to justify conducting a review. The Applicant made an application to the Administrative Appeals Tribunal (‘the Tribunal’) dated 24 February 2021 for a review of the decision of the Inspector-General not to conduct a review of the notice of objection. During the course of the application in the Tribunal, further information was made available to the Inspector-General. On 17 August 2021, the Inspector-General made a decision to carry out an own-initiative review of the notice of objection under section 149K(1)(a) of the Act. On 18 October 2021, the Inspector-General (the Respondent) determined to confirm the Trustee’s decision objecting to the Applicant’s discharge from bankruptcy. The Applicant now seeks a review of that decision.LEGISLATIVE FRAMEWORK Section 149 of the Act provides that the bankrupt is, by operation of law, discharged from bankruptcy at the end of the period of three years from the date on which the bankrupt filed his or her statement of affairs. Section 149A provides that bankruptcy is extended when an objection is made, unless the objection is withdrawn or cancelled. Section 149B provides that at any time before the bankruptcy ends, the trustee in bankruptcy may file a written notice of objection. Section 149C provides for the form of a notice of objection. The requirements differ depending on the ground(s). It provides: (1) A notice of objection must:(a) set out the ground or each of the grounds of objection, being a ground or grounds set out in subsection 149D(1) … and(b) refer to the evidence or other material that, in the opinion of the trustee, establishes that ground or each of those grounds; and(c) state the reasons of the trustee for objecting to the discharge on that ground or those grounds.(1A) Paragraph (1)(c) does not apply to a ground specified in para 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (ia), (k) or (ma).

Evidence

Evidence Before The Court

Where there is at least one ‘special ground’ within the meaning of that term as defined in section 149N(1A) of the Act, the effect of section 149N(1) is modified. Section 149N(1A) provides: (1A) An objection must not be cancelled under subsection (1) if:(a) the objection specifies at least one special ground; and(b) there is sufficient evidence to support the existence of at least one special ground specified in the objection; and(c) the bankrupt fails to establish that the bankrupt had a reasonable excuse for the conduct or failure that constituted the special groundFor this purpose, special ground means a ground specified in paragraphs 149D(1)(ab), (d), (da), (e),(f), (g), (h), (ha), (ia), (k), or (ma).[emphasis added] Thus, where the Tribunal would otherwise have to cancel the objection under section 149N(1), it must not do so if it is satisfied that there is sufficient evidence to support the existence of any of the grounds raised and that the bankrupt did not have a reasonable excuse for his conduct or failures which constituted the special grounds: paragraphs 149N(1A)(b) and (c). The notion of ‘special grounds’ was introduced into the Act by the Bankruptcy Legislation Amendment Act 2002 (Cth). The Explanatory Memorandum of the Bill stated the rationale for the introduction of ‘special grounds’ as follows:47 In practice, trustees often have found it difficult to maintain objections. Frequently, objections have been cancelled on review by the Inspector-General, the Administrative Appeals Tribunal (AAT) or the Federal Court. The reasons for cancellation vary. Some trustees have found it difficult to differentiate clearly the ground(s) of an objection and the reason for filing the objection. Moreover, on occasions, the AAT has upheld a bankrupt’s challenge to an objection simply because, either during an AAT hearing or just before it occurs, the bankrupt eventually has provided information long sought by the trustee and the non-supply of which information was the ground of the trustee’s objection. Such decisions undermine a prime purpose of the objection regime which is to induce a bankrupt to cooperate, promptly, with the trustee of the bankrupt estate. 48 The Full Federal Court decision in Inspector-General in Bankruptcy v Nelson (1998) 168 ALR 340 establishes that a sufficient reason for filing an objection under the current provisions is that doing so will advance the trustee’s administration of the bankrupt estate. However, conversely, punishment of the bankrupt for failure to cooperate was found to be an impermissible reason for filing an objection.49 To address these deficiencies in the present law which have hampered a trustee’s capacity to elicit cooperation from some bankrupts, and to strengthen the trustee’s hand, the Bill proposes a tougher objection-to-discharge regime under which it is expected that more objections will withstand the review process.50 It is proposed that trustee objections will fall into one of two groups, namely, those which specify at least one ‘special ground’ and those which specify none. In the first group, the trustee’s notice of objection still will have to set out the ground(s) of objection and the evidence relied on to establish it or them, but need not state the reasons for filing an objection to the bankrupt’s discharge from bankruptcy. For objections which contain no ‘special ground’, the trustee will be obliged, as now, to provide in the notice the trustee’s reasons for filing an objection.51 The existing objection grounds in paragraphs 149D(1)(d) to (h) inclusive will now constitute special grounds, as will those in proposed new paragraphs 149D(1)(ab), (da), (ha) and (ma). The existing objection grounds in paragraphs 149D(1)(a), (b) and (h) to (n) inclusive will constitute other grounds, as will the ground in proposed new paragraph 149D(1)(aa). Special grounds are directed at deliberate actions by the bankrupt to defeat creditors or to hinder the trustee’s administration. The bankrupt’s pre-objection conduct, rather than the trustee’s capacity to show that an objection will advance the conduct of the administration, will determine whether any notice of objection will have to state the reason(s) why it has been lodged. Examples of special grounds that may be listed in an objection notice and regarding which no reasons are required include:(a) any transfer is void against the trustee in the bankruptcy because of section 121 (ie, the section which deals with property transfers to defeat creditors) (proposed new paragraph 149D(1)(ab)); and (b) after the date of the bankruptcy, the bankrupt intentionally provided false or misleading information to the trustee (proposed new paragraph 149D(1)(da)) .52 Proposed new subsection 149N(1A) identifies the special ground paragraphs. As noted, they relate to deliberate actions which can disrupt a trustee’s administration or which are intended to defeat creditors. While it can be difficult to infer intention, in each instance the burden of proof which the trustee will bear if an objection is challenged is the civil onus, ie, proof on the balance of probabilities. 53 Further, by proposed subsection 149N(1B), a reviewer will not be able to cancel an objection by taking into account any conduct of the bankrupt after the time when the ground first commenced to exist. Objections on special grounds will be reviewable only as to whether the ground(s) and evidence are made out, unless the reviewer is satisfied by the bankrupt that the facts supporting the objection arose without any fault on the bankrupt’s part. 54 While a trustee’s hand is strengthened greatly by the proposed new provisions, it remains the case that a trustee does not have to file an objection unless subsection 149B(2) applies, and a trustee can cease to object on a particular ground (section 149H) or withdraw an objection at any time (section 149J).

Decision

Reasons for decision

Each of these transfers are after the date of the meeting with the Trustee in October 2019. There is no evidence of transfer of ownership for any horses before the bankruptcy or before the date of the meeting with the Trustee. Conclusion on ownership of the Horses Having considered the evidence advanced by the Applicant, including the financial records, the Tribunal is satisfied that none of this evidence is definitive proof of ownership. The only definitive proof would be evidence of purchase of each of the horses – it is somewhat surprising that the Applicant was not able to produce evidence of acquisition five years after the Trustee raised the issue of ownership. The 4 transfer of ownership forms that are available indicate that the Applicant signed those forms as ‘owner’. In the absence of evidence about the purchase of each of the other horses by the Company, the Tribunal finds that, based on the transfer of ownership forms and the Racing Australia report which clearly refers to the Syndicate, that there was sufficient evidence for the Trustee to find that 10 horses (Group 1) were owned by the Applicant in his own name, 12 horses were owned by the Syndicate at the date of bankruptcy (Group 2), a further 3 horses were owned by the Syndicate at the date of the meeting with the Trustee in October 2019 (Group 3). The remaining 4 horses were acquired by the Syndicate after the meeting with the Trustee but before the Objection was filed on 2 October 2020 (Group 4). Another argument that was not the subject of submissions by the parties is whether, if the horses were acquired by the Company as trustee for the Trust, the Applicant could nevertheless be said to have a proprietary interest or beneficial interest. It is generally understood that a beneficiary of a discretionary trust does not have a proprietary interest in the assets of the trust, but rather has an ‘expectancy’ i.e., a right to be considered. However, there are cases where the statutory context has been held to give rise to a proprietary or beneficial interest in the beneficiaries of a discretionary trust. For example, in the context of corporate insolvency, in Australian Securities and Investments Commission, In the Matter of Richstar Pty Ltd v Carey (No 6)[102] French J held that the beneficiary who effectively controls the trustee’s power of selection because he is the trustee or one of them and/or has the power to appoint a new trustee, has something approaching a general power and the ownership of the trust property.[103] French J described the trustee as effectively the ‘alter ego’ of the relevant beneficiary.[104] In the context of what constitutes matrimonial property, the High Court in Kennon v Spry[105] held that, in part because of the husband’s power of appointment, the assets of the discretionary trust should be viewed as property of the parties to the marriage.[106][102] (2006) 153 FCR 509.[103] Ibid, [37].[104] Ibid.[105] (2008) 238 CLR 366 [60],[62].[106] Ibid, [60] and [62] per French CJ and [137] per Gummow and Hayne JJ.

Ratio Decidendi

Legal Principle Established

The Applicant produced 275 pages of a document headed ‘General Ledger Trustee for the Storm Creek Trust’.[56] The Applicant contended that this proved that the Company had paid the expenses for the horses and that this was probative of ownership.[57] The ledger commences in February 2016 and lists hundreds of entries for a wide range of items, most of them general in nature and not clearly linked to particular horses. However, there are some specific references to certain horses. For example, there are 40 references to the horse ‘My Delilah’.[58] The Tribunal accepts on the basis of this evidence that the Company did pay some of the expenses associated with the horses in the relevant period. However, once again this does not prove ownership of the horses. [56] See Annexure to A1 pp 499-774 (and repeated at pp 854-1129).[57] Applicant’s submissions dated 16 April 2024, p 14.[58] See Annexure to A1, pp 499-774 (and repeated at pp 854-1129).Transfer and registration forms A fourth argument for the Applicant was that transfer and registration forms for a number of horses show that the horses were transferred/registered with the ABN of the Trust. According to the evidence produced by the Applicant, there are 4 horses for which evidence is available. Three horses are the same as the horses identified by the Respondent[59] and are discussed above.[60][59] The horses are Slave, Flybridge and Perfect Angel.[60] See para 48 above. The first horse is ‘Slave’. The form provided is a Transfer of Ownership form. It describes the outgoing owner as Barry Lockwood and under ‘Surname of Owner/Registered Syndicate Name/Company Name/Stud Name’ is written Storm Creek Racing and Breeding. Under ‘Given name of Owner/Full Name of Syndicate Manager/Company Representative/Stud Representative’ is written ‘Graeme Diamond’. Under ‘Bank Account Name’ is written ‘Trustee for the Storm Creek Trust’. Importantly, the form is signed by the Applicant ‘as owner’. The Applicant contends that the reference to the Trust’s bank account is probative of ownership. As discussed previously, using a bank account on a registration form does not signify ownership. The second horse is ‘Flybridge’. The evidence provided by the Applicant is a bank statement of the Trust showing a debit to ‘Inglis’ from the Trust on 29 March 2019 for $19,212.60.[61] There is a hand-written notation on the bank statement that says ‘Flybridge’.[62] The fact that the payment is 5 months after the acquisition and that the Applicant simply asserts that the payment relates to this horse is not probative of ownership. Furthermore, there is a transfer of ownership form dated 30 November 2019 that is signed by the Applicant as ‘owner’.[63][61] See Annexure to A1, attachment 4.[62] See Annexure to A1, attachment 5.[63] See R1, pp 88-90. The third horse is ‘Perfect Angel’. The form provided is a transfer of ownership form dated 1 May 2020.[64] The form includes a Managing Owner’s Declaration signed by the Applicant, with the outgoing owner listed as ‘Storm Creek Racing and Breeding’.[65] Under ‘New Managing Owner’ is written ‘Storm Creek Racing and Breeding’ and under ‘Given Names’ is written ‘Graeme Diamond’.[66] The bank account details are those for the Trust and the Trust’s ABN is included under ‘Declare your GST status’.[67] Importantly, the Applicant signs the form as ‘owner’.[68] It is difficult to know what to make of this form as Storm Creek Racing and Breeding is listed as both the outgoing and new owner. The fact that the Trust’s bank account and ABN are used is not probative of ownership. [64] See ibid 91.[65] Ibid, 92.[66] Ibid.[67] Ibid.[68] Ibid.