In the Matter of an Application by Tracy Joy Dare of 9 Streeton Court, Rothwell in the State of Queensland to be Registered as a Trustee under the Bankruptcy Act 1966

[1992] FCA 717

17 j92-

JUDGMENT No. .,z. .... .......m~.r

IN THE FEDERAL COURT OF AUSTRALIA	)	A.R.T. 2 of 1992
GENERAL DIVISION	1
BANKRUPTCY DISTRICT OF	1
THE STATE OF OUEENSLAND	1

IN THE MATTER of an application by

TWY JOY DARE of 9 Streeton Court,

Rothwell in the State of Queensland to be registered as a Trustee under the Bankruptcy Act 1966

CORAM: Drummond S

PLACE: Brisbane

m: 18 September, 1992

The applicant applies under S. 155(2) of the Bankruptcy Act 1966 ICthL for registration as a trustee in bankruptcy.

I am satisfied that she is well-qualified for

Chartered Accountants.

registration.

The applicant has tertiary, including post-graduate, qualifications in accountancy and has completed the Insolvency Practitioners Association of Australia Advanced Insolvency Course; she is an associate member of the Institute of

In February 1982 the applicant commenced employment with a firm of chartered accountants and has remained in the employ of that firm or the firms with which it and its successors have merged. She is presently a senior manager in the Reconstruction and Insolvency Division of Messrs. KPMG Peat Marwick.

Over the last ten years she has had very extensive

involvement	- in a wide range of insolvency and other
;a+ninistraiions, including numerous administrations in	- .

bankruptcy. While she herself has not had personal responsibility for any such administration, her involvement has, over recent years at least, been at a senior level.

The Official Receiver has reported that he is satisfied, after having interviewed the applicant, that she has a good knowledge of the Act and a good understanding of the responsibilities of a trustee in bankruptcy and that generally, she is a proper person to be registered as a

trustee.

It is the fact that she is in employment that

requires further consideration to be given to her application.

It was held in v Reqistrar in Bankruptcy (VicL

(1984) 56 A.L.R. 521 that the fact that a person is an employee is not necessarily incompatible with her being registered as a trustee in bankruptcy, a construction of the relevant provisions ot the Act which is confirmed by subsequent amendments to the Bankruptcy Rules: see rule

But where an applicant for registration as a trustee is an employee that requires careful consideration to be given to the arrangements proposed by the applicant's employer to see if the employee will, as trustee, enjoy that independence from external control which 'is essential to the proper discharge of the duties of a trustee in bankruptcy.

In Re Hurt: Ex parte Hurt (1988) 80 A.L.R. 236 , French J, at page 238 , identified the factors that the court should consider in deciding whether in a particular case the circumstances of an applicant's employment are compatible with the independence that a registered trustee must have, saying:

"(1) That the proposed trustee will not be subject to direction from his employer as to the performance of his work as a trustee - including directions as to the manner in which

(2) That the employer understands and accepts the the work will be done and decisions to be taken in the exercise of discretion as a trustee. requirement for the trustee's independence and
undertakes to respect it.

(3) That the arrangements in respect of disposition of the trustee's fees should be such as to reflect his independence - an arrangement under which trusteeship fees are paid by the trustee to his employers, may be evidence of loss of independence and raise questions of the propriety of his conduct as a trustee.

(4) That both trustee and employer are aware of possible conflicts of interests between the duties of the trustee as such and his duties as an employee."

I have affidavits from both the applicant and Mr.

K -

Hennessy, a partner of her employers to whom she is directly responsible who is himself a registered trustee in bankruptcy and an official liquidator, which satisfy me that, if she is granted registration, the applicant will, in the performance of her work as a trustee in bankruptcy, be free from any direction from her employer, the partners of the firm, touching on the performance of her work as trustee which would not be compatible with the performance of her duties as trustee.

The applicant deposes to her keen awareness of the need to maintain her independence should she be registered as a trustee, as does Mr. Hennessy, on behalf of the partners. But there is one matter that gives me some concern about whether the applicant and her employers have a proper understanding of what is involved in the notion of an employee

being in a position of true independence in relation to work	done as a trustee in bankruptcy, should the applicant become
so registered.
The only evidence concerning how the matter of fees earned by the applicant as a trustee will be regulated comprises a statement by the applicant, confirmed by Mr. Hennessy, which is as follows:

"It is intended that my terms ot employment with Messrs. KPMG Peat Marwick will permit me to render fees in any particular bankruptcy administration to which I am appointed as a trustee in bankruptcy in my own name."

This statement appears, superficially at least, to meet the concern in relation to the arrangements as to fees between an employer and an employee seeking registration as a trustee which is mentioned by French J in Re Hurt. But it is the existence of actual independence in the exercise of an employee's duties as trustee that is the critical matter, not the mere appearance of independence, which is all that is created by the applicant being permitted to render accounts for fees earned as a trustee in her own name, rather than in that of the firm.

I think it is essential for the court to be informed not just how the appearance of independence in this regard will be maintained, but how it is proposed to assure to the applicant her independence in fact.

I would not be prepared to grant this application without information as to the arrangements that will regulate what happens to the trustee's fees that are received by the applicant and as to the arrangements, if any, that are to be made for giving her access to the firm's staff and equipment which may be necessary to enable her to carry out her duties as trustee and also as to the arrangements that will be made for any payment that she might have to make to the firm for access to such facilities.

In m, after making some general comments about the incompatibility with the role of trustee of the status of an employee who is subject to direction as to when and how she performs her duties as trustee, Smithers ACJ, with whom Northrop J agreed, said at page 528:

"But it is not essential to the relationship of employer and employee that it should ihvolve such a surrender (of independence) ... The evidence is that the firm would not interfere in the performance of those duties against the wishes of the appellant. If this is thought less of a declaration of his independence than is desirable, it has to be recognised that the trustee has the advantage of the use of the premises of his employers and of members of the staff and of their office equipment. These factors must be allowed for in the financial terms of the trustee's employment. They assist him to run his affairs as trustee. At one stage of this hearing the court was informed by counsel that the agreement between the appellant and his employers was that remuneration earned by him as a trustee was payed directly to his employers ... An arrangement under which the employee's trusteeship fees were paid by him to his employers would appear to me to be evidence of loss of independence and accordingly

conduct as a trustee." likely to raise questions as to the propriety of his

In Re Hurt, the evidence was that the employee would continue to receive a fixed salary which would not be affected by any fees he might earn as trustee in bankruptcy; it was proposed that fees for his work as trustee would be charged as an account for professional services by his employer, calculated by reference to the number of hours spent by, and hourly rates applicable to, each member of staff involved in the work, including the employee-trustee himself. French J said at page 240.

"The charging Xarrangements do give cause for concern. The remuneration of a registered trustee is fixed pursuant to S. 162 of the Act ...

The statutory source of the trustee's entitlement to remuneration makes it difficult to see how his employer would have any right to render in the employer's name an account for the trustee's remuneration.

When a trustee is appointed to administer a bankruptcy or for other purposes contemplated by the Act, he is appointed in his own right, not as an agent for his employer."

For these reasons, his Honour held that the proposal for the employer to charge in its own name in respect of the employee's work as trustee was objectionable.

However, of more relevance to the present application, since it is intended, as I have said, that the applicant will render accounts for her work as trustee in her own name, is the consideration that his Honour gave to that

part of the proposal which involved the employee handing over	to his employer the fees he earned as trustee. At page 241,
French J said:

"A further difficulty arises from the provisions of

S. 165(l) (b) of the Act, which provides that a

trustee of the estate of a bankrupt shall not 'make an arrangement for giving up or give up, a part of his remuneration to the bankrupt or any other person'. No doubt the scope of that provision must be read somewhat less than literally to avoid absurdity. But it could well be infringed by an arrangement under which the trustee in effect seeks to alienate his remuneration at source by abdicating to his employer the right to charge for his

services. "

.,

The term "arrangement" in S. 165 ( l) (b) is a word of

wide import. Its ordinary dictionary meeting connotes the act of coming to an agreement or understanding; the t e n does not refer only to a legally binding agreement, but also encompasses understandings, formal or informal, oral or written, which the parties intend to govern their relationships, even though they may not be intended to have legal force. But as French J said, it is necessary to read down S. 165(l) (b) so as to avoid absurdity. If it was given its literal meaning, it might be wide enough to prevent a trustee who is a partner in a firm of accountants bringing his earnings as trustee into the pool of partnership income, despite the special nature of the interest a partner has in partnership property, including the income he earns which is partnership income. Given the fact that for very many years members of partnerships have commonly been appointed as

trustees in bankruptcy and the fact that their trustees'

remuneration would commonly be partnership income, that cannot

be the legislative intent. Moreover, it is hard to identify any policy of the Bankru~tcv Act that would be served by reading S. 165(l) (b) as imposing such a restriction on a trustee who is in partnership with others, just as it is difficult to identify any policy in the Act that would be served by reading the sub-section as preventing a trustee dedling howsoever he chooses with his remuneration, so long as the dealing was for his own benefit.

A guide to the limitations that should be placed on

S. 165(l)(b) is I think provided by its precursor, S.

134(l)(b) of the Bankru~tcv Act 1924, which provided:

"(1) A trustee shall not, under any circumstances

whatever -

(a) ... or

(b) make any arrangement for giving up, or give up, any part of his remuneration, either as receiver, manager, or trustee to the bankrupt, or any solicitor or other person employed about the bankruptcy or to any creditor; or

The old S. 134(l) (b) struck at a number of things. First, it prohibited, for obvious reasons, the trustee making an arrangement to hand over part of his fees to the bankrupt. Secondly, it prohibited the entry by a trustee into an arrangement to share his fees with any person such as a

trustee to provide professional services in connection with	solicitor, accountant or auctioneer who was employed by the
the trustee's administration of the bankrupt's estate which might result in that professional obtaining remuneration for his services in excess of that fixed pursuant to 5 . 136 of the old Act; S. 136 limited such a professional's remuneration to that fixed by taxation. Thirdly, it prohibited the making by the trustee of an arrangement with a creditor of the bankrupt

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which might result in the creditor receiving a larger dividend	I
l
through his share in the trustee's remuneration than other	i t '

creditor's in the bankruptcy would receive.	(An example of	! ;
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such an illegal arrangement was discussed in Farmers' Mart	I - .
4 *
i
Ltd. v Milne [l9151 A.C. 106.)	; :
I
If S. 165(l)(b) is read as covering much the same ground as the old S. 134(l) (b) , as I think it probably should be, it does not strike at the simple case of a trustee who is a partner in a firm bringing his earnings as trustee into the pool of partnership income; nor would it strike at an employee-trustee paying over or arranging to have paid to his employer his fees earned as trustee. However, while the arrangement in the latter case would not involve any infringement of S. 165(l) (b) as so understood, it would still leave unanswered a real question whether the employee-trustee who hands over his fees to his employer is sufficiently independent of the employer to be a proper person to act as a trustee.
French J, in Re Hurt, recognised that if an employee-trustee makes an arrangement with his employer whereby the employer will receive the fees earned as trustee, this does not necessarily involve an infringement of S. 165(l)(b) of the Act. He said at page 241:

"... provided internal arrangements are made to

properly protect the trustee's independence, he can dispose of the remuneration which he has earned to his employer without being compromised."

Hls Honour, however, did not give any guidance as to what "proper internal arrangements" might comprise.

So long as the arrangements between the employer and the employee-trustee were such as to ensure that the employee would never act as trustee for a bankrupt of whom her employer was a creditor and so long as they were such as to ensure that the trustee's employer would not be in a position to earn as an adviser in a particular administration in excess of that allowed by S. 167(1) of the Bankru~tcv Act by taking in addition to such remuneration the whole or part of the employee-trustee's own remuneration and so long as there was nothing else in the overall arrangements between the employer and the employee including the arrangements for access to the employer's facilities that would result in the employee- trustee's independence being compromised, I do not think there would be anything inappropriate in an arrangement involving the employee-trustee passing over to her employer the whole or a part of her trustee's remuneration.

There is one other matter that requires

consideration.

I m satisfied that both the applicant and her employer are aware of the need for her to avoid conflicts of interest between her duty as a trustee and her duties as an employee. However, it is not possible to be satisfied on the material before me that, apart from having an awareness of

this need, the applicant's employer intends to put her in a position in which she will have full capacity to take such action as is necessary to avoid such conflicts, even if that means that her duties as;' trustee take precedence, as they must, over her duties as employee. In paragraph 6 of his second affidavit, Mr. Hennessy deals with the extent to which the applicant, as a trustee, will be subject to directions from the firm when questions arise as to how conflicts of interest are to be avoided. The position is not made clear. If what Mr. Hennessy intends to convey is that, in this respect, the applicant will be subject only to the same limitations that apply to partners of the firm who are themselves registered trustees and if the limitations in question can be seen to be designed solely for the purpose of ensuring adherence to proper professional standards and solely for acceptable ethical and work quality reasons, then they would very likely be compatible with the applicant nevertheless having the independence she must have if she is to be a proper person for appointment as a trustee.

Clarification of these matters is necessary if the applicant	is to be granted registration.
It is for the applicant to satisfy the court that the arrangements that will be made, including the arrangements concerning what is to happen to the remuneration she earns as trustee and concerning her access to the firm's facilities for the purpose of carrying out her duties as trustee, will be such that she will, as a matter of practical fact, be in a position to discharge the duties of her office as trustee with true independence or, as it has been put, without fear, favour or affection. Clarification on the matters I have referred to is required. In the absence of further information on the proposed arrangements in relation to the applicant's remuneration as trustee and associated matters, I would not be prepared to make the order for registration that is sought. However, I propose to give the applicant an opportunity to adduce further evidence on the matters of concern to which I have referred.
I certify that this and the
preceding twelve pages is a true copy of the reasons
for judgment herein of the
Honourable Mr. Justice
Date : 18 September, 1992