Farrow, R.W.M v Vince, P. (Trustee of the Estate of the Bankrupt)

[1995] FCA 272

IN THE FEDERAL COURT OF AUSTRALIA

EXERCISING FEDERAL JURISDICTION   No VB 2320 of 1992
IN BANKRUPTCY

BANKRUPTCY DISTRICT OF THE ESTATE OF VICTORIA

RE:      ROBERT WILLIAM McINTYRE FARROW
  Bankrupt

EX PARTE: ROBERT WILLIAM McINTYRE FARROW
  Applicant

AND:               PETER VINCE
         THE TRUSTEE OF THE ESTATE OF THE BANKRUPT
  Respondent

COURT:    NORTHROP J

PLACE:    MELBOURNE

DATE:     9 MARCH 1995

REASONS FOR JUDGMENT

This application raises a number of fairly difficult questions, both of fact and of law, but I have formed a fairly firm view as to what should be done.  I propose to give my reasons now, even though they may not be as elegant nor as full as they would have been if I had reserved my decision.

The applicant, Robert William McIntyre Farrow, is an undischarged bankrupt, having filed his own petition under section 55 of the Bankruptcy Act 1966 in 1992. He was at least a director, and may have been the managing mind, behind a number of companies operating in Victoria which have failed and which have been made the subject of an investigation by Mr Habersberger of Queen's Counsel. Mr Hodgson of the firm Ferrier Hodgson has been appointed liquidator of those companies. One can assume that Mr Hodgson, in his capacity as liquidator, is taking all steps available to him to investigate the affairs of those companies and to get in moneys from persons who may owe money to those companies, including claims against Mr Farrow personally and members of his family in relation to possible moneys given by Mr Farrow to them at times before Mr Farrow became a bankrupt. The particular issue before the Court arises from an application brought under section 178 of the Bankruptcy Act 1966 on behalf of Mr Farrow. The order sought is that the Trustee in Bankruptcy, who is the Official Trustee, be precluded from engaging Mr Peter Vince or any other member or employee of the accountancy firm, Ferrier Hodgson, to assist him in the administration of the bankrupt's estate.

Section 178 of the Bankruptcy Act is a short section but of very wide purport:

"If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the Trustee he may apply to the Court and the Court may make such order in the matter as it thinks just and equitable."

The nature of that power has been discussed in a number of cases and for present purposes reference is made to Re Tyndall  Ex Parte  Official Receiver (1977) 17 ALR 182, and McGoldrick v Official Trustee in Bankruptcy (1993) 119 ALR 253, a decision of a Full Court of this Court consisting of Ryan J, O'Loughlin J and myself. I do not propose to refer in any detail to the principles enunciated in those cases. They were canvassed during the course of argument and are not
really in dispute.  They can be summarised, basically, by what was said by Lee J, a Judge of this Court, in the matter of Glen John Wheeler v Alden John Holz, judgment being given in Perth on 19 September 1994 where his Honour refers to the authorities I have just mentioned and concludes that in order to invoke the power conferred by section 178 the applicant must show a ground on which the trustee's administration of the affairs of the bankrupt should be reviewed. The Australian authorities liberalised quite dramatically the narrower interpretation and application of the section as it appeared in earlier forms and in other jurisdictions.

In the present case the essence of the claim made by the applicant is, that on the facts of this case, which I will refer to shortly, Mr Vince should be precluded from continuing to act as an agent for the Trustee in Bankruptcy on the ground and I quote:

"A reasonable man informed of the facts might reasonably anticipate a danger of the misuse of confidential information and that there is a real and sensible possibility that the interest of the firm in advancing the case of the third and fourth defendants in the present proceeding might conflict with its duty to keep the information given to it by its former client confidential and to refrain from using that information to the detriment of its former client."

That quotation is taken from the reasons of judgment of Hayne J in the case of Farrow Mortgage Services Pty Ltd (in liquidation) v Mendall Properties Pty Ltd, 10 February 1994, in which his Honour had to consider a similar problem in relation to a firm of solicitors which previously had acted
for the company and which was later acting for a conflicting interest.  In the course of that judgment, Hayne J referred to a number of authorities to support the conclusion which I have just quoted.  The essence of this principle, adapting to the facts of this case, is that if there is a real and sensible possibility that the interests of Mr Farrow may be adversely affected by Mr Vince disclosing confidential information to Mr Hodgson because they are partners in the firm of Ferrier Hodgson, a conflict may arise.  It may also be said that it might operate vice versa, that Mr Hodgson might make information of a confidential nature available to Mr Vince.  But this, I think, merely illustrates, to some extent, the unreality of the problem alleged by the present applicant.

In the course of his reasons, Hayne J referred in some detail to the case of Mallesons Stephen Jaques v KPMG Peat Marwick (1990) 4 WAR, T57.  This is an interesting case in that it discusses the concept of the so-called Chinese Wall which has been used in cases of a similar nature to the present and the fact that the Chinese Wall, in reality, does not exist when questions of confidentially arise.  Reference is made to page 374, a passage approved by Gibbs J that a person who engages the services of a partner, acting as such, engages the service of the whole firm and not merely of the person who actually renders the service.  A distinction is to be drawn between that type of case, where a person has been engaged as a member of a firm, and the present case where the evidence discloses that Mr Vince has been engaged in a personal capacity.  Mr Hodgson also is engaged as liquidator
in his personal capacity.  One must assume that there will be a certain degree of knowledge, or rather information, passing between Mr Vince and Mr Hodgson and members of the firm.  There is no affidavit by Mr Vince setting out the fact that he will not disclose confidential information.  A reason may well have been that such an affidavit would not carry much weight if otherwise the Chinese Wall defence was in fact relied on.

In the present case, the Trustee in Bankruptcy has appointed Mr Vince as an agent under paragraph 134(1)(i) of the Bankruptcy Act.  It is not disputed that there is power to do that.  The appointment was made in, I think, July of 1994.  Mr Farrow first became aware of it in October 1994 and immediately objected to the appointment.  It was not until 2 December 1994 that the present application was made.  Counsel for the Trustee has argued that there are questions of bona fides, or rather lack of them, on the part of Mr Farrow.  I find no such allegation made out and place no weight on those submissions.  In the circumstances, the delay is such that no adverse inference can be drawn against Mr Farrow on the basis of timing.

It is also to be noted that there appears to be no funds in the estate of the bankrupt and the trustee has no money in which to take steps to pursue the recovery of moneys for the bankrupt's estate.  In the present case there are indemnifying creditors who are paying for the costs for all these matters, including public examinations.  One of those creditors is Mr Hodgson in his capacity as liquidator of what I will call the
Farrow companies.  It is also said that because of the history of these matters, the reports which have been made and the existence of the Supreme Court proceedings in which Mr Farrow is being sued by Mr Hodgson in his capacity as liquidator, are public.  As well as suing Mr Farrow, Mr Hodgson is suing members of Mr Farrow's family.  Because of technical reasons, the trustee has been made a party to those proceedings, a defendant with Mr Farrow.  It is said this can give rise to conflicts between Mr Vince in his capacity as agent for the trustee and Mr Vince in his capacity as a partner of Mr Hodgson.  But as has been said, the evidence is quite clear here, namely that Mr Vince has been appointed in his personal capacity and not as a partner of the firm of Ferrier and Hodgson.  The real ground put on behalf of the applicant is that there is a conflict of interest in relation to confidential information affecting his partner, Mr Vince, in his capacity as an agent appointed by the trustee to assist the trustee.

It is a duty, it is said, of the trustee, to act to the benefit of creditors to get in the estate of a bankrupt.  It is also the duty of the trustee to ensure that the affairs are administered properly so that if, in due course, moneys are left over after all creditors are paid, the bankrupt gets the benefit of those moneys, although, on the facts of this case, there is little likelihood of that occurring here.  There is no evidence at all of any information, either being obtained by Mr Vince from Mr Hodgson which was obtained by Mr Hodgson in the course of his activities as liquidator, nor of Mr Vince
giving information to Mr Hodgson.  It is argued that there is a possibility of a misuse of confidential information between Mr Hodgson and Mr Vince, information obtained by Mr Vince as agent of the trustee in bankruptcy, and that this is sufficient to bring the matter within the test expressed by Hayne J in the Farrow Mortgage Services Pty Ltd case.

In my opinion there is no material to support any such finding.  There is no real and sensible possibility of conflict of interest arising in this case.  Most of the documents which may be said to be confidential - and there is no evidence of there being any - are, to a large extent, in the public arena already.  A creditor, in this case Mr Hodgson acting as liquidator of the companies, can appear at the examination of Mr Farrow and in the course of that examination put documents to Mr Farrow, and possibly see documents that Mr Farrow has.  The report by Mr Habersberger has been published. 

In addition, many of the documents have already been compelled to be produced by Mr Farrow to Mr Hodgson in the course of litigation in the Supreme Court even though they eventually were produced pursuant to contempt of court proceedings arising from a failure to produce them.  Although, at the present time, Mr Farrow has been found guilty, apparently, of contempt of court relating to this matter, I am not sure whether in fact any penalty has been imposed on him yet or not.
In my opinion there is just no sufficient evidence to justify the Court exercising the supervisory power conferred by section 178 of the Bankruptcy Act to make the order sought by the applicant.  Accordingly, for these reasons, the Court dismisses the application.

Orders made accordingly.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment of The Hon Justice R.M. Northrop.

Associate:

Date:

ATTACHMENT

Counsel for the Applicant:       Mr P. Elliott

Solicitor for the Applicant:     Mr P. Rule

Counsel for the Respondent:      Mr J. Delaney

Solicitor for the Respondent:        Cornwall Stodart

Date of Hearing:                 9 March 1995