DJO Enterprises Pty Ltd v Howell (as trustee of the Bankrupt Estate of Pamela Anne Thomson)
[2014] FCCA 2023
•3 September 2014
FEDERAL CIRCUIT COURT OF AUSTRALIA
| DJO ENTERPRISES PTY LTD v HOWELL (AS TRUSTEE OF THE BANKRUPT ESTATE OF PAMELA ANNE THOMSON) & ORS | [2014] FCCA 2023 |
| Catchwords: BANKRUPTCY – Application of creditor seeking inquiry into the conduct of joint trustees and removal of trustees from office – whether inquiry warranted – lack of communication by trustees – loss of faith in trustees – s.179(1)(b) of the Bankruptcy Act 1966 (Cth) order for inquiry. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.19(1)(d), 58(1), 178(1), 179(1), 179(1)(b), 181 |
| Boensch v Pascoe [2007] FCA 1977 Liprini v Pascoe (2012) 292 ALR 778; [2012] FCA 886 Macchia v Nilant [2001] FCA 7 |
| Applicant: | DJO ENTERPRISES PTY LTD (ACN 086 640 002) |
| First Respondent: | MALCOLM KIMBALL HOWELL (AS TRUSTEE OF THE BANKRUPT ESTATE OF PAMELA ANNE THOMSON) |
| Second Respondent: | RODERICK MACKAY SUTHERLAND (AS TRUSTEE OF THE BANKRUPT ESTATE OF PAMELA ANNE THOMSON) |
| Third Respondent: | LINDA KAY APAKIAN |
| File Number: | MLG 1609 of 2014 |
| Judgment of: | Judge Hartnett |
| Hearing date: | 22 August 2014 |
| Delivered at: | Melbourne |
| Delivered on: | 3 September 2014 |
REPRESENTATION
| Counsel for the Applicant: | Mr Magowan |
| Solicitors for the Applicant: | Koornang Legal Services |
| Counsel for the First Respondent: | Mr Agardy |
| Solicitors for the First Respondent: | Marsh & Maher Lawyers |
| Counsel for the Second Respondent: | Mr Agardy |
| Solicitors for the Second Respondent: | Marsh & Maher Lawyers |
| The Third Respondent | No appearance |
ORDERS
An inquiry be conducted under s.179(1)(b) of the Bankruptcy Act 1966 (Cth) with respect to the administration or conduct of the bankruptcy.
The matter be listed for directions hearing on 30 September 2014 at 9.30am.
The First and Second Respondents pay the costs of the Applicant as agreed with respect to the hearing on 7 August 2014 and failing agreement as taxed.
The costs of the hearing on 22 August 2014 are reserved.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1609 of 2014
| DJO ENTERPRISES PTY LTD (ACN 086 640 002) |
Applicant
And
| MALCOLM KIMBALL HOWELL (AS TRUSTEE OF THE BANKRUPT ESTATE OF PAMELA ANNE THOMSON) |
First Respondent
| RODERICK MACKAY SUTHERLAND (AS TRUSTEE OF THE BANKRUPT ESTATE OF PAMELA ANNE THOMSON) |
Second Respondent
| LINDA KAY APAKIAN |
Third Respondent
REASONS FOR JUDGMENT
These proceedings commenced upon the Applicant seeking orders, on the grounds as stated in the supporting Affidavit sworn by Nathan Abrahams and filed on 7 August 2014, set out in Application filed on 7 August 2014 and being as follows:-
“(a) An order pursuant to section 179 of the Bankruptcy Act [1966 (Cth)] for an inquiry into the conduct of the First and Second Respondents.
(b) An order pursuant to section 179 of the Bankruptcy Act removing the First and Second Respondents from office as trustees and appointing Simon Nelson to act and (sic) bankruptcy trustee;
(c) Costs.
(d) Such further order as this Honourable Court considers just and equitable.”
Interim orders were also sought by the Applicant which resulted in Orders made on 7 August 2014 as follows:-
“ THE COURT ORDERS THAT:
1. The respondents place the balance of the proceeds of sale of the real property known as and situate at 55 Holywood Grove Carnegie in the State of Victoria in the trust account of Saxbys Lawyers to be invested in an interest bearing term deposit in the name of the bankruptcy trustees. Such monies to be only released upon agreement between all the parties or further order of the Court. The balance of proceeds of sale is the amount remaining after deduction of the first registered mortgage, real estate agents commission, council and water rates, fees to Saxbys Lawyers and insurance costs.
2. The respondents file and serve any affidavit material on which they seek to rely by 4pm on 19 August 2014.
3. Otherwise all extant applications be adjourned for hearing with priority on 22 August 2014 at 10am.
4. The Applicant and Third Respondent’s costs of this application are reserved.
AND THE COURT NOTES THAT:
The Applicant, through its solicitor, gave an undertaking as to damages as follows:-
a) to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, adversely affected by the operation of the interlocutory order or undertaking or any continuation (with or without variation) thereof; and
b) to pay the compensation referred to in (a) to the person there referred to.”
On the occasion of the hearing of the interim application on 7 August 2014, Mr Magowan of Counsel appeared on behalf of the Applicant (as he continued to do on 22 August 2014) and Mr Lilley appeared on behalf of the First and Second Respondents. Mr Lilley was the solicitor who had the conduct of the conveyancing file upon the sale of real property at 55 Holywood Grove Carnegie in the State of Victoria (‘the Carnegie property’), being property of Ms Thomson, a bankrupt which vested in the First and Second Respondents as trustees of her bankrupt estate.
It was indicated, on 7 August 2014, by Mr Lilley that his firm’s costs which would be deducted from the proceeds of sale were $7,507.66.
At the hearing on 22 August 2014, Mr Agardy of Counsel appeared on behalf of the First and Second Respondents, instructed by Marsh & Maher Solicitors. The First and Second Respondents failed to file any affidavit material by 19 August 2014 as required by earlier order of the Court and, in fact, filed such material on 21 August 2014.
The Third Respondent, Ms Apakian, filed an Affidavit in the proceedings on 19 August 2014 but failed to attend the hearing. It was indicated by Mr Argady, Counsel for the First and Second Respondents on the hearing, that the Third Respondent did not intend to participate in the proceedings and would abide by any order of the Court.
The orders sought by the First and Second Respondents on the hearing of the matter were as follows:-
“1. The first and second respondents call a meeting of creditors under section 181 of the Bankruptcy Act 1966 to consider and if thought fit pass a resolution for their removal as trustees of the bankrupt estate of Pamela Anne Thomson, such meeting to be held no later than 12 September 2014.
2. If the applicant intends to proceed with its claim for an inquiry into the conduct of the first and second respondents it file and serve written submissions by 19 September 2014.
3. The first and second respondents file and serve any written submissions in response by 3 October 2014.
4. Paragraph 1 of the order of Judge Hartnett made 7 August continue until further order.
5. The hearing of the applicant’s application dated 7 August 2014 be adjourned to 10 October 2014.
6. Liberty to apply.
7. Costs reserved.”
The orders sought by the Applicant on the hearing of the matter were as follows:-
“1. The Court determines pursuant to section 179 of the Bankruptcy Act to conduct an inquiry into the conduct of the First and Second Respondents.
2. The Court determines that as a result of that inquiry that pursuant to section 179 of the Bankruptcy Act the First and Second Respondents be removed from the office as trustees of Pamela Anne Thomson and hereby appoints Simon Nelson to act as bankruptcy trustee.
3. The Court hereby directs the First and Second Respondents to forthwith deliver up the bankruptcy file of Pamela Anne Thomson to Simon Nelson.
4. The Court hereby directs Saxbys lawyers to forthwith transfer the monies held by it in an account pursuant to order 1 of 7 August 2014 to Simon Nelson as property in the bankruptcy of Pamela Anne Thomson.
5. Malcolm Kimball Howell and Roderick Mackay Sutherland (in their personal capacities) are each jointly and severally ordered to pay the costs of and incidental to this proceeding, to be taxed in default of agreement.
6. The proceeding is otherwise dismissed.”
The Third Respondent, as indicated in paragraph 6 hereof, sought no orders of the Court.
The orders as sought by the First and Second Respondents involve the accumulation of further legal costs and consequent delay. The Applicant, and Court, made clear on 7 August 2014 that the respondents were to meet the Application filed on 22 August 2014, and not at a time thereafter.
The Applicant sought to press its application for final relief as set out in paragraphs (a) to (d) of the originating Application filed 7 August 2014. As ancillary orders, the Applicant sought the delivery of the file to Mr Nelson, and for the monies deposited in Saxbys Lawyers trust account (pursuant to order 1 of Orders made 7 August 2014) to be transferred to Mr Nelson as property in the bankruptcy.
History
The Applicant is a judgment creditor of the Bankrupt, Pamela Thomson. Such debt arises out of a judgment of the County Court of Victoria made 27 November 2013 in proceedings wherein the Applicant was the plaintiff and Premier Photo Imports International Pty Ltd (‘the company’) and others were the defendants. The company was formally controlled by the Bankrupt and a Mr Apakian. Mr Apakian is the husband of the Third Respondent in these proceedings. He was made a bankrupt on 21 June 2013. The Bankrupt in these proceedings, Ms Thomson, was the sole registered proprietor of the Carnegie property. On 27 August 2013 and following the commencement of the County Court proceedings referred to above, the Third Respondent, Mrs Apakian, lodged a Caveat as purported ‘chargee’ over the title of the Carnegie property with a purported date of claim of 11 June 2012. The ‘lodging party’ was the then bankrupt, Mr Apakian. On 16 December 2013, a further Caveat was lodged by the Third Respondent over the title to the Carnegie property claiming an interest as ‘mortgagee’ with a date of claim of 12 June 2009. The Applicant does not accept, that such caveats lodged support legitimate transactions, and seeks a thorough examination as to their legitimacy. In that regard, the Applicant made available the judgment of Anderson J of 27 November 2013 in the County Court to the First and Second Respondents. The plaintiff in those proceedings (and Applicant in this matter) obtained both orders for possession of properties and substantial monies to be paid to it, including the sum of $610,160.36 by the now bankrupt, Ms Thomson.
On 14 January 2014 and following the judgment of Anderson J in the County Court, as referred to in paragraph 12 above, a meeting occurred between the (at the time not appointed) joint trustees of the Bankrupt, the Bankrupt and Mr Apakian.
On 13 February 2014, Ms Thompson became a bankrupt and the trustees were appointed. In the Trustee’s Report to Creditors dated 13 March 2014 (‘the Report’), the trustees (in section 2.4.1 thereof) refer to the Carnegie property as follows:-
“The Carnegie property is also subject to a caveat in favour Ms Linda Apakian (“Ms Apakian”). The bankrupt as a joint borrower and guarantor (together with Mr Vahe Apakian (“Mr Apakian”) and Premier Photo International Pty Ltd) entered into three Deeds of Loans (“Deeds”) with Ms Apakian on 12 June 2009, 23 August 2011, and 11 July 2012 for loans totalling $460,000. Ms Apakian at this stage has not confirmed the balance outstanding in relation to the Deeds however in accordance with a demand letter issued to the bankrupt in November 2013, we believe the amount owing under the Deeds may exceed $460,000 after adding interest.
Although the Deeds appear prima facie to be in order, we have not at this stage confirmed that consideration was passed to the borrowers in relation to the above loan from Ms Apakian. Our investigations in this regard are continuing.
Based on the above values, and subject to confirmation of the legitimacy of Ms Apakian’s secured interest in the property, it is unlikely that any funds will be realisable from the sale of the Carnegie property. Please refer to our calculations below.
Particulars
ERV ($)
Carnegie property
825,000
Mortgage to Bank of Queensland
(632,044)
Less caveat to Ms Linda Apakian*
(460,000)
Estimated Surplus/ Deficiency
(Subject to selling costs)
(267,044)
* Ms Apakian is secured against the two other properties. Subject to confirmation of her security, the balance payable to Ms Apakian will be adjusted to take into consideration any funds she recovers from the sale of the two other properties if applicable.
Should we determine that Ms Apakian does not have a priority interest in the Carnegie property, there may be a potential surplus realisable of $192,956 ($825,000 - $632,044) subject to selling costs.
Creditors should note that the Carnegie property was put on the market for sale by way of auction prior to our appointment by the bankrupt. The auction is scheduled to occur on Saturday, 15 March 2014 however at this stage, a Sale Contract has not yet been prepared and there are numerous documentation in relation to the recent renovation on the property which are missing and are required for the sale. Accordingly it is unlikely that the sale will proceed.
Notwithstanding the above, we are continuing discussions with Ms Apakian to realise the property on the basis that any surplus funds after the settlement of selling costs and the mortgage with BOQ be held in trust until we are satisfied that Ms Apakian has a priority interest in the Carnegie property.
Ms Apakian is keen to recover her funds from the property and has agreed that all costs of selling the property including the Trustees’ remuneration and costs be paid in priority prior to any priority distribution she may be entitled to from the sale proceeds pursuant to the Deeds.
We will provide creditors with an outcome of the sale of the Carnegie property in our next report to creditors.”
Creditors were also advised by the trustees that if they had any information as to the assets and liabilities of the Bankrupt not disclosed in the Report on the general administration of the bankrupt estate, to contact Mr Victor Vuong of the Trustee’s office.
Thereafter, the Applicant’s solicitor attempted to communicate with the trustees and Mr Vuong as to the sale of the Carnegie property and application of the proceeds of sale. There was an effective lack of response from the trustees. Matters as to who was selling the property and why, and the application of the net proceeds of sale were questions left unanswered by the trustees. Due to the imminency of the settlement of sale date of the Carnegie property and the failure of the First and Second Respondents to provide an undertaking, the Applicant was obliged to attend at Court and argue for a restraint on the distribution of the net proceeds of sale. This was due to a complete lack of engagement by the trustees. In the meantime, the Applicant sought out another trustee and on 6 June 2014 Mr Simon Nelson signed the necessary consent to act in the event that became appropriate. The lack of provision of relevant information to the Applicant is as set out in paragraphs 24 to 42 of Mr Abrahams Affidavit sworn 7 August 2014, the contents of which are accepted by the Court. Indeed Counsel for the First and Second Respondents conceded the trustees should have been more available and responsive in their communication with the Applicant’s solicitor.
Affidavit of the Third Respondent
The Third Respondent deposes to having, over a period of some four years, loaned Premier Photo Imports International Pty Ltd in excess of $500,000. The company, she deposes, was jointly owned by her husband, Vahe Apakian (now bankrupt) and by Pamela Anne Thomson, the Bankrupt. The company was an importer and wholesaler of photographic accessories. The Third Respondent annexes to her Affidavit various alleged deed of loan agreements. She deposes in paragraph 6 of her Affidavit sworn 19 August 2014 that:-
“6. … In order to secure the loans, both Vahe Apakian and Pamela Anne Thomson signed on behalf of the company and as personal guarantors to cover the loans. In addition, Pamela Thomson agreed to use her residential home at 55 Holywood Gve. Carnegie 3163, as security for the loans.
7. A mortgage document over Ms. Pamela Thomson’s property was signed by both parties in October 2013, but I was unable to register it since Ms. Thomson was behind in her mortgage payments and the Bank of Queensland, being the first lender and mortgagee would not agree to a second mortgage to be registered. (Annexure 7) Subsequently a caveat was registered on 13th December 2013. (Annexure 8)”
The Third Respondent further deposes in paragraph 9 of her Affidavit sworn 19 August 2014 that Ms Thomson’s trustees in bankruptcy and their lawyers have acknowledged her mortgagee status and, in respect thereto, she attached a letter as Annexure 9 to her Affidavit.
That letter is important and its details are set out herein:-
a)the letter was written to the Third Respondent on 24 July 2014;
b)the letter was from RM Sutherland and MK Howell, joint trustees of the bankrupt estate of Pamela Anne Thomson;
c)the letter was as to the Carnegie property;
d)the letter said, in part, as follows:-
“We refer to the further documents you delivered to our office to substantiate your secured debt against the bankrupt’s properties.
Please be advised that we are satisfied with the information you have provided to substantiate your mortgage over the bankrupt’s property. Accordingly we consent to releasing the net proceeds from the sale of the property to you in accordance with the Priority Agreement.
Should you have any queries, please do not hesitate to contact Mr. Victor Vuong of our office.”
Further, in respect of the sale of the Carnegie property, the Third Respondent deposed, at paragraph 8 of her Affidavit sworn 19 August 2014:-
“… Since I had second mortgage, it was decided that I would handle the sale as vendor, because of building insurance certificate and other renovation certificate issues, which could not be issued to a bankrupt. A letter of agreement was put in place, for the trustee to bear all costs of expenses with regards to certificates and policy covers.”
Affidavit of the Second Respondent
The Affidavit of the Second Respondent, sworn by him on 21 August 2014, and being the only material before the Court from the trustees of the Bankrupt, contains Annexure RMS-8 being correspondence dated 15 August 2014 from the First and Second Respondents as joint trustees to Mr Nathan Abrahams, the solicitor for the Applicant in these proceedings. Included in that correspondence is the following paragraph with respect to the sale of the Carnegie property:-
“We confirm that we initially took steps to realise the Carnegie property. However due to issues arising with recent renovations conducted on the Carnegie property prior to our appointment we were unable to obtain the relevant insurances or provide the relevant warranties required to sell the property.”
Thereafter, the First and Second Respondents indicate that they “consented to a mortgagee sale of the Carnegie property by [the Third Respondent]”. They state further:-
“A Deed of Priority was entered into with [the Third Respondent] to regulate the sale process and the sale proceeds would be dealt with pending examination of [the Third Respondent]’s claim.”
The Deed of Priority referred to by the First and Second Respondents is a signed but undated document. In submissions made by Counsel for the First and Second Respondents, it was said that the document came into existence around 16 May 2014. From the correspondence on 15 August 2014 of the First and Second Respondents to Mr Nathan Abrahams, it would appear that the Deed of Priority had been entered into prior to the sale of the Carnegie property.
The Priority Agreement noted in its recitals as follows:-
a)on 13 February 2014, the Bankrupt was made bankrupt and the trustees were appointed as the trustees of her bankrupt estate;
b)the Bankrupt is the registered proprietor of the Property. Pursuant to s.58(1) of Bankruptcy Act 1966 (Cth) (‘the Act’), the Carnegie property vests in the trustees;
c)the Chargee asserts an interest in the Carnegie property pursuant to the Charge and has lodged the Caveat against the title to the Carnegie property to support the charge. The trustees dispute the validity of the Charge;
d)the parties are in agreement that the Carnegie property should be sold and entered into the agreement to regulate:-
i)the manner in which the Carnegie property is sold; and
ii)the manner in which the sale proceeds are dealt with.
Amongst the terms on which the parties agreed were those set out in clauses 2.2 and 2.3 of the Priority Agreement which are as follows:-
“2.2 The Trustee hereby relinquishes possession of the Property in favour of the Chargee, who accepts possession of the Property. The Bankrupt consents to, and shall not make any objection to, the Chargee taking possession of the Property.
2.3 For the avoidance of doubt, by relinquishing possession of the Property in favour of the Chargee, as provided for in clause 2.2, the Trustees reserve all of their rights with respect to the Charge and shall not be taken to have accepted or consented in any way to the validity of this Charge.”
In respect of the application of the proceeds, the Priority Agreement provided as follows at clause 5:-
“5. APPLICATION OF SALE PROCEEDS
5.1Upon a settlement of a Contract of Sale occurring, the Sale Proceeds shall be applied in the following order of Priority:
5.1.1first, in payment in full of the out of pocket expenses incurred with third parties but unpaid as at the Settlement Date in relation to the sale of the Property, including (but not limited to) real estate agent’s fees and Solicitor’s fees;
5.1.2secondly, in reimbursement to the Trustees of any out of pocket expenses paid by the Trustees prior to the Settlement Date in accordance with clause 4.3;
5.1.3thirdly, in payment of the Trustee’s remuneration incurred in relation to the sale of the Property fixed in the amount of $15,000 (plus any applicable goods and services tax); and
5.1.4fourthly, the balance (the surplus Sale Proceeds) is to be paid into a trust account maintained by the Solicitors pending resolution of the validity of the Charge in accordance with clause 6, on the basis that the Solicitors shall not release or disburse such amount except:
(a) pursuant to a written direction in accordance with clause 6.2; or
(b) pursuant to an order of a court; or
(c) to invest same in accordance with clause 6.3.1; or
(d) for the purpose set out in clause 6.3.2.
Clause 6.1 of the Priority Agreement provided:-
“Upon a settlement of a sale of the Property occurring and the balance of the Sale Proceeds being paid into the Solicitors’ trust account in accordance with clause 5.1.4, the Trustees and the Chargee shall use their best endeavours to resolve as promptly as possible any dispute between them in relation to the validity of the Charge and/or amount payable to the Chargee pursuant to the Charge.”
Clause 6.2 of the Priority Agreement provided:-
“If the Trustee and the Chargee reach agreement in relation to the matters referred to in clause 6.1, then the Trustee and the Chargee shall prepare, sign and deliver to the Solicitors a joint written direction to the Solicitors directing the Solicitors as to how the surplus Sale Proceeds are to be disbursed.”
Clauses 6.3.1 and 6.3.2 of the Priority Agreement provided:-
“The Trustee and the Chargee:
6.3.1 shall; if no direction is issued to the Solicitors within (30) days of settlement of the sale of the Property occurring, jointly direct the Solicitors to invest the surplus Sale Proceeds In an interest bearing account at the best available interest rate at the time (in the Solicitors’ discretion);
6.3.2 agree that the Solicitors shall be entitled to charge a reasonable amount by way of their remuneration for maintaining and dealing with the surplus Sale Proceeds;…”
The Priority Agreement was entered into between the First and Second Respondents in their joint and several capacities as trustees of the bankrupt estate of Pamela Ann Thomson, the Third Respondent and Pamela Ann Thomson. It was prepared by Saxbys Lawyers. It had attached to it a Settlement Statement dated 8 August 2014 wherein the sale price of $840,000 was noted and a deposit paid of $84,000 was accounted for. The monies paid out to the Bank of Queensland Ltd of $652,348.53 were accounted for. The payment to Saxbys Lawyers for their legal costs was accounted for amongst other incidental amounts paid out, the monies paid into Saxby Lawyers Pty Ltd Limlaw practice trust account, being the net sale proceeds of $92,593.30, was accounted for.
Following the making of Orders on 7 August 2014, and by the letter of 15 August 2014 earlier referred to, the joint trustees made available to the solicitor for the Applicant the Priority Agreement. The correspondence indicated that an amount of $161,735.05 was then held in Saxby Lawyers Pty Ltd trust account. The joint trustees stated further “we confirm that we will provide creditors with a summary of our investigations [into Ms Apakian’s claim] into the loans prior to dispersing the sale proceeds”. Little appeared to have been done by way of investigation into both the Applicant and Third Respondents claims to that date. Despite that, the Priority Agreement terms and the trustees’ letter to the Third Respondent of 24 July 2014 suggested that monies would have been paid out to the Third Respondent upon settlement of the sale.
The law
As submitted by Counsel for the Applicant and agreed to by Counsel for the First and Second Respondents, a useful summary of the principles in relation to the application of s.179 of the Act can be found in Boensch v Pascoe [2007] FCA 1977 per Buchanan J at paragraphs 10 to 15:-
“[10] Examination of this issue sheds light on the quality of the case necessary to order that an inquiry be held under s 179 of the Act. A Full Court said recently that 'a clear case must be made out to warrant an inquiry' (Maxwell-Smith v Donnelly [2006] FCAFC 150 at [53]; see also Moore v Macks [2007] FCA 10 at [30]. The necessity to establish some adequate foundation for removal of a trustee has been long established. In Miller v Cameron (1936) 54 CLR 572 Dixon J with whom Evatt and McTiernan JJ agreed) said (at 580-581):
The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.
[11] In this Court, when s 179 of the Act is invoked, the question is usually posed whether a trustee has erred in the administration of the estate or failed to act as required by the Act or the general law. Sometimes the issue is focussed or decided by reference to whether 'misconduct' has occurred.
[12] In Re Gault; ; Gault v Law (1981) 57 FLR 165 Ellicott J said (at 173):
the court should be loath to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. If the court considers that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved.
[13] In Adsett v Berlouis (1992) 109 ALR 100 a Full Court of this Court explored the general duty of a trustee under the Act as follows (at 107-108):
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. The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; secondly, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act: Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 at 329 ; 72 ALR 251 ...
The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but 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 the return from estate assets, and thereby to maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt.
[14] In Trkulja v Morton [2005] FCA 659 Gray J said (at [4]):
The Court should be reluctant to undertake an inquiry, unless there are substantial grounds for believing that the trustee erred in the administration. If an inquiry is unlikely to reveal misconduct, it should not be undertaken. The Court should not unduly interfere with the day-to-day administration of a bankrupt's estate by the trustee. In order to remove a trustee in bankruptcy, it is necessary to find misconduct on the part of the trustee.'
[15] A matter of central importance is to assess, therefore, whether there is any real likelihood that the administration of the estate has miscarried so that creditors, and eventually perhaps Mr Boensch, have been denied the opportunity of an adequate return (or surplus) from the bankrupt estate after the necessary and reasonable costs of administration have been met.”
Further, courts have frequently cited approvingly the judgment of French J (as he then was) in Macchia v Nilant [2001] FCA 7 and in particular, paragraphs [49] and [50] which are as follows:-
“[49] As appears from the language of s179 it invites first a consideration, albeit upon application by a person with standing, of whether the Court should inquire into the conduct of the trustee. If inquiry is undertaken, the next question is whether the trustee should be removed from office and/or any other order made. The first question requires the Court to consider whether, on the grounds and facts before it, a case has been made for an inquiry - Re Alafaci at 268. The application of s179 to that first step involves a broad discretion as to whether or not there are sufficient grounds to make an inquiry appropriate - Turner v Official Trustee in Bankruptcy (Full Court, 27 November 1998, unreported). The Full Court there quoted with approval the observation of Ellicott J in Re Gault that:
…
The policy consideration referred to by Deane J in Re: Tyndall that the court should not unduly interfere with the day-to-day administration of a bankrupt's estate by a trustee" applies also to the operation of s179 - Turner at p2-p3.
[50] S179 operates in aid of the Court's supervision of trustees who are its officers. That operation, however, is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry. Like s178, it may be invoked by a bankrupt after discharge and in part for the same reason, namely that the trustee's powers continue in the various ways referred to in Cheesman. It may also be the case that the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way. As is the case with s178, it is not a vehicle for pressing claims for common law damages under the general law. That is a matter for a court of appropriate jurisdiction. In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes. For “although the court is given a broad discretion under s179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt's estate”- Re Challen (A Bankrupt); Ex parte Brown (Beaumont J, 23 April 1996, unreported) cited with approval by Merkel J in Cheesman at first instance, p114.”
Consideration
The Applicant is a creditor in the Bankrupt’s estate. It claims to be adversely affected by the lack of response of the joint trustees, and the conflicting stated decisions of the trustees as set out in letter to the Third Respondent of 24 July 2014 and post letter to it of 15 August 2014. Further, it was required to obtain an injunction from the Court in the absence of an undertaking being given by the trustees as sought. The Applicant has the necessary standing to bring this application pursuant to s.178(1) of the Act. The Applicant applies for an order pursuant to s.179(1) of the Act that an inquiry be made by the Court into the conduct of the First and Second Respondents in relation to their administration of the bankrupt estate, together with an order for removal of the First and Second Respondent’s from office as trustees. The Court is required, as a first step, to determine whether on the facts in evidence, an inquiry into the joint trustees administration and/or conduct is warranted. Counsel for the First and Second Respondents argue this is not necessary nor warranted and that it is open to the Applicant, as a creditor, to seek to remove the trustees from office if it so wished, by an ordinary resolution of creditors under s.181 of the Act. That is so, but what is sought by the Applicant is an inquiry into the conduct of the trustees as a first step.
The facts here establish:-
a)a concerning lack of communication, by the joint trustees in arguable breach of s.19(1)(d) of the Act, to the Applicant’s solicitor about relevant matters;
b)a lack of response by the joint trustees to the request to provide an undertaking, requiring an urgent application to be made to the Court by the Applicant for an injunction which was granted by the Court;
c)a tardiness by the joint trustees in filing affidavit material in the Court which lead to non-compliance with procedural orders of the Court; and
d)contrary information and perhaps misleading information being supplied by the joint trustees to the Applicant, by reason of the letter sent by them to the Third Respondent on 24 July 2014, and the letter sent to the Applicant on 15 August 2014. Furthermore, there remains the question as to why the trustees did not make available to the Applicant a copy of the Priority Agreement prior to the sale of the Carnegie property. Perhaps because the terms of the Priority Agreement allowed for the trustees to pay the net sale proceeds of the Carnegie property out to the Third Respondent upon agreement between them. There are also matters pertaining to the sale such as why a bankrupt, Mr Apakian, was seeking building certificates in respect of a sale conducted by his wife, the Third Respondent. This has lead to a claimed loss of faith in the joint trustees by the Applicant and a total breakdown of that relationship.
There has however been a sale of the Carnegie property at market value which is not disputed by the Applicant, and the net proceeds are secured. The Applicant argues that is so by virtue of the injunction and that a further amount of $15,000 would have been paid out to the trustees (as provided for in the Priority Agreement) in circumstances where it is not apparent same was authorised by the creditors.
Any proper investigation into the Third Respondent’s claims by the trustees is also arguably not present, noting the contradictory position put by the Third Respondent in the proceedings in the County Court referred to in paragraph 12 of these Reasons.
The Court in the exercise of its discretion concludes there is a sufficient case for an inquiry and that it should be conducted by the Court. The Court in so exercising its discretion is mindful that the power to order an inquiry is not ordinarily exercised. The Court has considered what utility there might be in such an order but is satisfied that there is reasonable cause to believe that the trustees may have failed to act in relation to the bankruptcy in the manner required by the Act.[1] Further, the trustees have lost the confidence of the Applicant creditor. The inquiry shall be directed to the matters of concern raised herein. The inquiry has been pressed. The payment of costs will be considered upon its conclusion.
[1] Liprini v Pascoe (2012) 292 ALR 778; [2012] FCA 886 at [4] (Jagot J.).
I certify that the preceding thirty-five (35) paragraphs are a true copy of the reasons for judgment of Judge Hartnett
Associate:
Date: 3 September 2014
0
10
2