Juratowitch v Iannotti - [2009] FMCA 1133

FEDERAL MAGISTRATES COURT OF AUSTRALIA

JURATOWITCH v IANNOTTI

[2009] FMCA 1133

BANKRUPTCY – Bankrupt trustee of family trust – trustee’s right of indemnity and associated lien – vesting of indemnity in trustee in bankruptcy – trustee in bankruptcy selling trust property – unopposed application for directions.

Bankruptcy Act 1966, ss.30, 116(2)(a), 181A
Trustee Act 1936 (SA), s.15
Bankruptcy (Estate Charges) Act 1997

Octavo Investments Pty Ltd v Knight 144 CLR 360
In Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99
Agusta Pty Ltd as trustees for Cavallino Unit Trust v Official Trustee in Bankruptcy as trustee of bankruptcy Estates of Ferella [2008] NSWSC 685
13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377
Re; Ex parte Worrell v Matheson (1994) 49 FCR 454
McDonald v Sanders [2007] FMCA 649

Applicant:

DANIEL PETER JURATOWITCH
(AS TRUSTEE OF THE BANKRUPT ESTATES OF ANTHONY IANNOTTI AND JOSIE IANNOTTI)

Respondent:

ANTHONY IANNOTTI (AS TRUSTEE OF THE IANNOTTI FAMILY TRUST)

File Number:

MLG 644 of 2009

Judgment of:

Burchardt FM

Hearing dates:

18 September & 26 October 2009

Date of Last Submission:

26 October 2009

Delivered at:

Melbourne

Delivered on:

27 November 2009

REPRESENTATION

Counsel for the Applicant:

Mr P. Fary

Solicitors for the Applicant:

B2B Solicitors

The Respondent:

No Appearance

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 644 of 2009

DANIEL PETER JURATOWITCH (AS TRUSTEE OF THE BANKRUPT ESTATES OF ANTHONY IANNOTTI AND JOSIE IANNOTTI

Applicant

And

ANTHONY IANNOTTI (AS TRUSTEE OF THE IANNOTTI FAMILY TRUST)

Respondent

REASONS FOR JUDGMENT

Introductory

The applicant trustee in bankruptcy of Mr and Mrs Iannotti seeks various declarations and orders and has proposed to give certain undertakings in aid of those declarations and orders sought.
It is not possible to set out in any summary way either the issues in this case or the Court’s ultimate disposition. That is simply too complicated.
It is fair to say, nonetheless, that the primary overarching issue arises out of the fact that, before he went bankrupt, Mr Iannotti was the sole trustee as well as a beneficiary of the Iannotti Family Trust. That trust owned a property in Melbourne Street, Adelaide, and that property has been sold.
In large part, the case concerns the propriety or otherwise of that sale and what should happen to the funds engendered thereby.
For the reasons that follow, I think the way in which the property was dealt with was wrong, but I think that it is not practicable at this stage to do anything much about it.

Introductory Facts

It is clear from the materials filed, most particularly the annexures to the affidavit of Mr Juratowitch filed on 29 May 2009, that on

19 November 1986, the Tony Iannotti Family Trust was created with Ianton Pty Ltd as the original trustee.
It is clear that Mr and Mrs Iannotti were beneficiaries of the trust (exhibit DPJ4 schedule E).
On 12 August 1993, Mr and Mrs Iannotti became trustees of the trust to replace Ianton Pty Ltd.
It appears from exhibit DPJ6 that, at least from 10 November 1993,

Mr and Mrs Iannotti were the registered proprietors of the property, although Mr Iannotti’s statement of affairs says the date of purchase of the property was November 2001.
In 2005, Mr and Mrs Iannotti executed a further “Deed of Retirement of Trustees” and a “Deed of Variation of Trust and Retirement of Trustees”, although no greater specificity than the year was provided, whereby Mrs Iannotti retired as a trustee and Mr Iannotti continued as the sole trustee. The name of the trust was changed from “the Tony Iannotti Family Trust” to “the Iannotti Family Trust”.
From exhibit DPJ8, it is apparent that Mr Iannotti alone became the sole registered owner of the property from 13 September 2005 onwards.
On 27 July 2005, a Sequestration Order was made against Mr and Mrs Iannotti’s estates in this Court (exhibit DPJ10). The order states:
“A Sequestration Order be made against the estate of Anthony Iannotti and Josie Iannotti.”
The order was made in a proceeding in which Mr and Mrs Iannotti were described together as “respondent debtor”.
On the same day, 27 July 2005, Deryk Rowan Andrew, then a director of Bentleys MRI, Sydney, was appointed trustee of the bankrupt estates.
I shall return to what Mr Andrew did in due course, but to round out this aspect of the matter, it is sufficient to note that on 1 July 2006, the insolvency divisions of the Melbourne and Sydney offices of Bentleys MRI merged and formed Cor Cordis Pty Ltd, a firm of accountants.
On or about 8 February 2008, Mr Andrew retired from public practice, and on 18 February 2008, there being no objection by creditors,

Mr Juratowitch became the trustee of the bankrupt estate pursuant to s.181A of the Bankruptcy Act 1966 (“the Act”). Mr Juratowitch is a director of Cor Cordis Pty Ltd.

What happened to the property after the Bankruptcy?

The first document available to the Court following the bankruptcy which is relevant was a “Notice to Creditors” from Mr Andrew dated

16 February 2006. At page 2 of that report, Mr Andrew wrote:
“Antonio Beli Iannotti and Giuseppina Iannotti were proprietors of property at 101 - 103 Melbourne Street, North Adelaide, South Australia (Folio 5154/383) for the period 10 November 2000 to 26 May 2005. This property was transferred to Antonio Iannotti (solely) on 26 May 2005. My inquiries into the ownership of this property are continuing.
Although the Assets and Liabilities shown at Attachment “A” of this Notice indicates an estimated surplus, until the position of

Mr Iannotti’s assets and liabilities is confirmed, the position in regard to a dividend cannot be estimated.”
It should be noted that by that stage Ms Iannotti had provided an incomplete Statement of Affairs which had not been accepted for filing with ITSA and Mr Iannotti had not done so at all. It should also be noted that there is no evidence before the Court, other than this extract, so far as I can see, that confirms that the date of 26 May 2005 was the date of the transfer to Mr Iannotti solely of the Melbourne Street property. This date is adopted in the applicant’s written submissions (paragraph 10).
The report went on to state at page 3:
“Mr and Mrs Iannotti were joint proprietors of a business named House of the Bride. Mr Iannotti is the trustee of the Iannotti Family Trust. Mr Iannotti claims the real property registered in his name is held in trust for this trust.
My inquiries in relation to the business and the family trust are continuing.”
The Annexure A to which reference has been made expressed a value for the real estate (clearly the Melbourne Street property) of $970,000, encumbered by a secured creditor in the value of $637,000.
Mrs Iannotti signed a Statement of Affairs on 15 May 2006. It gave her residential address as 103 Melbourne Street, North Adelaide, and disclosed little in the way of either assets or liabilities. Under the section dealing with trusts, however, the land at 101 to 103 Melbourne Street, North Adelaide, was given a value (taking into account land value improvement and plant and equipment) of just over $782,000. The trust was wrongly identified as the Tony Iannotti Family Trust.
In his Statement of Affairs filed on 22 May 2006, Mr Iannotti likewise did not disclose anything very startling in the way of either assets or liabilities apart from the Melbourne Street property.
Mr Iannotti referred to the 103 Melbourne Street, North Adelaide property under the section dealing with real estate and ticked the box marked “yes” in answer to the question: “Do you own or are you buying any land or buildings in Australia or overseas?”
He did not give a value under that section to the property, but identified two debts of $635,000 and $120,000 respectively in relation to mortgages on the property. He also ticked the box marked “yes” to the question “Are there any other owners?” and identified the other owner as a family trust.
Apart from identifying a trust named the Anthony Iannotti Family Trust under paragraph 44 of his Statement of Affairs, Mr Iannotti did not otherwise detail the trust or his property.
Exhibit DJP11 shows that, on 2 November 2006, Mr Andrew sold the Melbourne Street property. The schedule to the commercial contract describes the vendor as:
“Deryk Rowan Andrew as the Trustee of the Property of Antonio Beli Iannotti a Bankrupt.”
The price received was $1.42 million plus GST.
Some insight as to what occurred is obtained from the “First Report to the Creditors” by Mr Andrew dated 15 May 2007 (exhibit DPJ14). From that report, a number of relevant issues emerged:
(a)Mr Iannotti was previously made bankrupt in April 2001 and

Mr Iannotti was still an undischarged bankrupt under his first bankruptcy at the time of Mr Andrew’s appointment in 2005. It appears there had been difficulties in that administration, which remained unfinalised in 2007;
(b)Mr Andrew’s position was that the Statements of Affairs did not reflect the true financial position of the bankrupts;
(c)the estimated deficiency in the separate estate of Anthony Iannotti prior to the cost of administration was in excess of $205,000;
(d)the estimated surplus in the separate estate of Mrs Iannotti was likely to be just in excess of $146,000;
(e)the estimated surplus in the joint estate of Mr and Mrs Iannotti prior to the cost of administration was over $13,700; and
(f)the balance sheet of the Iannotti Family Trust disclosed that as at 30 June 2005:
i)Mr Iannotti owed the trust $156,806; and
ii)Mrs Iannotti was owed $169,649 by the trust.
The interim report went on to deal at some length with the Tony Iannotti Family Trust (as it was described).
Relevantly, at page 7, Mr Andrew observed:
“The bankrupt advised that this property was an asset of the Tony Iannotti Family Trust and he held no beneficial interest in the property. This position is supported by the financial statements of the trust that recognise the property as an asset. I also note that the mortgagees of the property were aware of the status of the borrower and their security documentation noted that the borrowings were in respect of advances made personally and in his capacity as a trustee.
The mortgagees were keen to have the property sold and their mortgages repaid and I wanted to realise any funds available for the benefit of the bankrupt estates. I determined to sell the property as the legal title had vested in me as trustee of the registered proprietor. The property was sold by me at public auction on the 2 November 2006 with a nominated reserve price of $1,150,000. The property sold for $1,420,000 plus GST. (Emphasis added).
Upon settlement the mortgages and all statutory rates and charges were paid in full. A summary of the application of the sale proceeds is annexed to this report and marked as Annexure “C”.”
Annexure C shows that amongst the other parties paid out was a body known as Whitby (Aust) Pty Ltd, which was a second mortgagee. That payment out had required considerable negotiation and investigation by the trustee in bankruptcy and followed a commercial settlement with Whitby.
Following all those payments, there was in excess of $532,000 net available. The trustee went on to note (at page 11) that:
“Although I expect to provide a substantial dividend to unsecured creditors in this administration, at this time I am unable to quantify the likely return for creditors in each estate.
In order to determine the extent of the dividend payable, I will have to resolve the extent of the liabilities of the Family Trust and determine if the individual bankrupts have a beneficial interest in the relevant assets of the trust. At this time, due to the lack of current financial records of the family trust, I am unable to establish the claims of the creditors and beneficiaries of the Family Trust. It may be necessary to complete income tax returns for the trust to identify any assessable capital gains made on the sale of the property. It is possible that I will request directions of the Federal Court in regards to the distribution of the monies recovered due to the difficulties being faced in determining the position.”
It should be noted that the trustee’s remuneration to that point was in excess of $78,000 and the likely final total was expected to exceed $142,000. As earlier indicated, Mr Juratowitch replaced Mr Andrew in February 2008 as trustee. Both Mr Iannotti and Mrs Iannotti were discharged from bankruptcy in May 2009 and as at 17 September 2009,

Mr Juratowitch holds a balance of $271,384.08.
Mr Iannotti has been served with all the relevant documents giving rise to this application. He wrote to the Court on 14 September 2009 on his own behalf and that of Mrs Iannotti. He raised a number of issues in that letter but indicated that he would not be able to attend.
The trustee has proposed to give certain undertakings which in part involve an investigation of the matters complained about by

Mr Iannotti in his letter dated 14 September 2009.
The application seeks a number of directions. It is convenient, however, to address the questions that arise in the order and terms in which they are set out in the applicant’s written submissions.

Issues before the Court

This is the first issue raised for the Court’s determination:
“Did Mr and Mrs Iannotti, as Trustees of the Trust, have a right of indemnity out of the assets of the trust?”
It should be noted at the outset that this question is, in my view, misconstructed. It seems clear to me that Mrs Iannotti had divested herself of her interest in the Melbourne Street property before she became bankrupt. There is no reason for me to assume error in the date of 26 May 2005 asserted by the trustee. I can only infer that her resignation as a trustee preceded that date. It is Mr Iannotti against whom this proceeding has been brought alone.
That, however, is a minor matter. The issue of principle remains.
There is no doubt that a trustee is entitled to be indemnified from trust assets against personal liability incurred in conducting the business of the trust and for the purposes of enforcing the indemnity the trustee possesses a charge or right of lien over those assets

(Octavo Investments Pty Ltd v Knight 144 CLR 360).
The right of indemnity passes to the trustee in bankruptcy if the trustee of the trust becomes bankrupt (In Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99).
I have been referred to a considerable quantity of authority and have had proper regard to all that authority. I note in particular the distillation of principles contained in Agusta Pty Ltd as trustees for Cavallino Unit Trust v Official Trustee in Bankruptcy as trustee of bankrupt Estates of Ferella [2008] NSWSC 685 at [35], and the review of authority by Finkelstein J in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377.
In that latter case, Finkelstein J said at page 7 of 8 in the copy with which I have been provided:
“These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.
The position is a little more involved as regards work done and expenses incurred in what may be described as general liquidation matters. If that work is unrelated to the beneficiaries and their claims it is difficult to see how the cost could be charged against their assets … But it is unlikely that this will be so where the company did not act solely as trustee or at least did not act in that capacity to a significant extent. In that event, the liquidator will be required to estimate those of his costs that are attributable to the administration of trust property and only those costs will be charged against the trust assets.”
I have, with respect, found the decision of Spender J in Re; Ex parte Worrell v Matheson (1994) 49 FCR 454 to be of considerable assistance. I refer to the whole of that judgment but would give emphasis to the following snapshots: At [9] Spender J said:
“As a corollary of this, it is my opinion that when a trustee becomes bankrupt, the creditors of that person’s estate will include creditors whose claims arise out of debts existing at the date of the bankruptcy incurred by the bankrupt person for trust purposes.”
At [19], his Honour went on to say:
“The next difficulty that arises in the application of the principles in Re Octavo is how rights which pass to the Trustee are to be exercised. One view is that the legal interest in the family trust property passes to the Trustee along with the limited equitable interest arising out of the lien. Should this be so, the Trustee (being, by operation of law, in possession of both legal control of, as well as an equitable interest in, the trust property) will be in a position to realise the trust assets to the benefit of the trust creditors.”
His Honour went on to consider Re Octavo, which was of course a case involving a trustee company, and said at [23]:
“This separation of control from ownership does not exist in the bankruptcy context because bankruptcy involves natural persons rather than corporations. The question of whether legal ownership passes to the trustee in bankruptcy is an important one from a practical point of view.”
I note that in oral submissions, counsel for the trustee indicated that the trustee was seeking appointment of the trustee as trustee of the family trust, rather than confirmation that the trustee already is, by operation of law, the trustee of the family trust.
I have not had the benefit of argument on the question, but having regard to s.116(2)(a) of the Act, I think the better view is that while the trustee has a charge or right of lien over the trust property, in respect of trust debts as at the date of the bankruptcy, the legal title to the trust property does not pass to the trustee in bankruptcy.
His Honour went on to deal with the conflict in the authorities as to the use which may be made of trust funds appropriated by a trustee, including the judgment of King CJ in Re Suco Gold at [45]:
“I respectfully agree with King CJ. In my opinion, the mere act of appropriation of trust property by the Trustee pursuant to the Trustee’s right to indemnity from the trust does not strip from such funds their nature as funds impressed with trust obligations.”
It should be noted that in Agusta, Nicholas J pointed out as one of the relevant principles that if a trustee had discharged a liability, he was entitled to recoup himself out of trust property, but that if he has not discharged the liability, he is entitled to resort to the trust property for the purpose of discharging the liability thereby freeing his personal estate from the burden of the liability. If the trustee is bankrupt and the trust liabilities have been discharged, the trustee in bankruptcy is entitled to recoup the bankrupt estate out of the proceeds of the trust property. If the liabilities have not been discharged, the trustee in bankruptcy may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities thereby exonerating the bankrupt estate to the extent of the value of the available trust assets.
All of the above, in my respectful view, is consistent with what a right of indemnity actually is. A right of indemnity is described by Butterworths Australian Legal Dictionary 1997 edition as “In the context of the law of trusts, the equitable right to be reimbursed for expenses incurred on behalf of or for the benefit of another.”

It is in my view inherent in the notion of a right of indemnity that the person concerned either has already disbursed funds in respect of which he is entitled to be repaid or that some real prospect of a call upon them is in existence which the indemnity can be paid in aid to defeat.
All of this is relevant to what happened here. The question posited namely “Whether as the trustee of the trust Mr (and Mrs) Iannotti had a right of indemnity out of the assets of the trust”, is readily answered. And the answer to that question is “yes”. The difficulty comes with what the trustee in bankruptcy actually did.
Upon receipt of the statements of affairs of Mr and Mrs Iannotti, the trustee was reasonably entitled, in the manner identified by Finkelstein J in 13 Coromandel, to investigate the affairs of the trust to see what personal liabilities might be in existence for either Mr and Mrs Iannotti with a view, in the ultimate, if need be to discharging them.
It is plain that the trustee embarked upon the sale of the property as though the sole beneficial title in the property had vested in him alone without any reference to the trust and its beneficiaries (see the passage emphasised in paragraph 29 above).
This was the case even though the trustee in bankruptcy appears to have understood both that the Iannottis were asserting that the Melbourne Street property was owned by the trust and that there was force to such assertions.
The trustee, far from seeking directions of the Court at that stage, went blithely ahead with selling the property because that is what the secured creditors wanted. That was not a proper course of action.
It was quite open to the trustee to leave the secured creditors to their surety. It was reasonably apparent, even allowing for hindsight, that the proceeds of sale of the property would be likely to discharge the secured creditors.
The affairs of the trust as then disclosed suggested that there were roughly countervailing debts and credits wholly involving Mr and Mrs Iannotti. The only other debts were unspecified loans of $95,423 and a provision for GST of $97,791.
In my opinion, the 2004 to 2005 financial statements of the trust ought to have alerted the trustee to the fact that the right of indemnity enjoyed in particular by Mr Iannotti was not likely to give rise to any additional creditors in Mr Iannotti’s personal bankrupt estate. That is because the debts even at their highest point (before the commercial settlement with Whitby Pty Ltd) were not likely to exceed the sale price.
The trustee’s course of action was plainly predicated on what I find is an erroneous assumption that he became the owner both at law and in equity of the property upon the bankruptcy of Mr Iannotti. I prefer, with respect, the views of Spender J and of the Full Court of South Australia in Re Suco Gold. The trust property does not vest in the trustee in bankruptcy. All that vests is the right of indemnity and the associated lien.
Thus, while Mr Iannotti undoubtedly did have a right of indemnity out of the assets of the trust, the way in which the trustee dealt with the sale of the property was improper.

Following Settlement of the Property, was the Value of the Right of Indemnity of the Former Trustee against the Assets of the Trust $402,735.81?

This brings us fairly and squarely to the report of Mr Turner of

PKF Chartered Accountants and Business Advisers who has been retained by the trustee to provide an expert report.
There is no doubt that Mr Turner is indeed an expert in his field. A preliminary issue arose as to whether the fees he had charged for his report were reasonable, and rather than have endless further evidence as to whether that was so or not, I cut the Gordian knot by fixing those costs myself. The amounts charged by Mr Turner were plainly well within the scope of fees that such experts would attract for the level of work that the report indicates has taken place.
The report of Mr Turner proceeds on a number of assumptions detailed for him in the letter from B2B Lawyers dated 10 September 2009 (Annexure A to Mr Turner’s report). Assumption number 2 was that:
“Upon the bankruptcy of the trustee, the trustee’s right of indemnity vests in the trustee’s trustee in bankruptcy as an asset of the bankrupt estate of the trustee (in this case the joint estate of Anthony and Josie Iannotti).”
I do not think that that assumption is correct. Mr and Mrs Iannotti had purported to execute, at a time that I find more probable than otherwise was before the Sequestration Order was made, a deed whereby

Mrs Iannotti retired as a director.
It is a moot point whether that disposition was in fact lawful because of the terms of s.15 of the Trustee Act 1936 (SA). I think it probably was lawful – clause 12.1 of the trust deed does not appear to make the appointment of a second trustee mandatory (and see s.15(3) of the Trustee Act (SA). Assuming it was lawful its effect would, I think, have been thus; from the date of the execution of the deed of retirement, as I shall describe it, Mrs Iannotti, whatever prior obligation she may have had in respect of the debts previously incurred by the trust became relieved from those debts and became the subject of an express indemnity in her favour to the extent of all of the assets of the trust.
Thus, in my view, the application before the Court in this instance is correctly entitled insofar as it assumes that Mr Iannotti is the sole person in respect of whom the right of indemnity subsisted at the date of bankruptcy and which therefore vested in the trustee in bankruptcy as earlier discussed.
Indeed, there is an element of artificiality in the entirety of the dealings in this matter. The matter has proceeded as though there were three bankrupt estates, namely those of Mr and Mrs Iannotti separately, and then a third estate consisting of their joint estates. That, in my view, is at least arguably not correct. Rather, there are only two estates that have been made bankrupt, and each of those estates has a measure of responsibility on a joint and several basis in respect to a number of debts. Whatever accounting principles may be brought to bear, it would seem to me that as a matter of practical politics, each of Mr and Mrs Iannotti were liable in the absence of evidence to the contrary to pay half of the outstanding debts that were in their joint names.

I appreciate that this does not reflect the nature of joint and several liability, but for the purposes of working out what someone’s debts are in a bankruptcy, I can easily see why the trustee elected to deal with the joint and several debts in a separate way, but they are not in truth a third bankrupt estate. Having said that, there are various other matters that give rise to comment. The report of Mr Turner proceeds on the footing that the unsecured trust creditors were in the sum of $402,735.81. That includes a provision for GST which followed a proof of debt lodged by the Australian Taxation Office referred to in the report to the creditors. It also included what was described as “loan – various,” an extract taken from the 2004 - 2005 financial statements of the trust. There is no indication as to who the various creditors were.
The only other unsecured creditors were Mrs Iannotti and Anne Iannotti who, I infer, is a daughter of Mr and Mrs Iannotti.
If the right to indemnity included Mrs Iannotti, then one would be faced with the ridiculous outcome that Mrs Iannotti would be liable to discharge, on behalf of the trust, the debt to herself of about $169,500. The trustee would be entitled to take out of the trust funds, pursuant to the vesting of the right to indemnity in him, $169,500 for the purpose of paying it to Mrs Iannotti, a circular process devoid of any sense.

Did the Right of Indemnity Vest in the Trustee of the Bankrupt Estate of Mr and Mrs Iannotti?

In my view, the right to indemnity lay squarely with Mr Iannotti as the continuing trustee and Mr Turner’s report is inaccurate in that sense. Nonetheless, the trust’s records do appear to show liabilities of $402,735.81 for which Mr Iannotti was personally liable as trustee.

I wish to hear, however, further submissions about the debts that make up this total figure.
This is one issue which, subject to the identity of the person in whom the right of indemnity subsisted, is relatively straightforward. In my view, the right of indemnity vested in the trustee of the bankrupt estate of Mr Iannotti.

Were or Are Mr Andrew and Mr Juratowitch entitled to Payment of their Reasonable Remuneration and Expenses out of the Assets subject to the Right of Indemnity in Performing the Tasks Performed in relation to the Trust?

In my view, the authorities show that this is the case provided that the trustee’s actions were reasonable. Although, for reasons I have earlier given, I do not think that the trustee’s actions in selling the property were themselves proper, the work done by Mr Andrew and then by

Mr Juratowitch was, given the uncertainty surrounding the affairs of Mr and Mrs Iannotti and the trust generally, reasonable. It is apparent not only that Mr and Mrs Iannotti both misled the trustee in bankruptcy (to a greater or lesser extent) by their statement of affairs, but that the information contained in the trust financial statements for the year 2004 - 2005 was materially inaccurate for the reasons given by

Mr Turner. The work involved in sorting all of this out has been substantial and in my view the conduct of both Mr Andrew and

Mr Juratowitch in this regard was reasonable.

Reasonable Remuneration and Expenses

Mr Turner has given an assessment that the sum of $61,211.23 inclusive of GST was the sum expended in matters appropriate to the investigation and administration of the trust but that the balance of $9,154.75 was exclusively for the administration of the bankrupt estates themselves.
Ms Andonis has given evidence that $25,116.51 of Cowell Clarke’s fees and disbursements related to trust activities but the balance of just in excess of $3,700 did not.
I accept that the fees generated by both the trustee and Cowell Clarke, insofar as they dealt with trust matters, were both reasonably necessary and of themselves reasonable.
Further, for the reasons given by FM Driver in McDonald v Sanders [2007] FMCA 649, I accept that this Court has power to fix the remuneration of the trustee pursuant to s.30 of the Act.

Whether Universal Distributing Amount Payable out of the Trust

The question posited in paragraph 48 of the applicant’s written submissions can, I think, be answered in principle fairly straightforwardly. Any entitlement under Universal Distributing principles is to be paid out of the assets the subject of the right of indemnity at first footing because that is the matter that vests in the trustee in bankruptcy.
In my view, such other assets of the trust as there might be said to be would never properly vest in the trustee because of the terms of s.116 of the Bankruptcy Act.
Nonetheless, in the light of the circumstances of this case. I suspect there is in fact no controversy in this aspect of the matter. I will hear counsel further as to whether it is necessary to give any further consideration to this matter.

Distribution

For the reasons I have already given, it is clear that the funds that are available should be distributed to trust creditors only and not to the general body of creditors. I accept the authority of Re Suco Gold and the other authorities to which I have referred in this case.

The Accuracy of the Flow Chart in Annexure I to Mr Turner’s Report

I will require further submissions in the light of my earlier views expressed as to who had the right of indemnity before the bankruptcy. I note that if the right of indemnity was an asset of the joint estates of Anthony and Josie Iannotti, the operation of s.110 of the Bankruptcy Act would be accurately reflected in the flow charts prepared by

Mr Juratowitch and confirmed by Mr Turner.

The Charge under the Bankruptcy (Estate Charges) Act 1997

I wish to hear further submissions as to why the applicant submits that the proceeds from the sale of the property were not an amount realised within the meaning of the Bankruptcy (Estate Charges) Act 1997.

Costs and Expenses of Application

Once again I have accepted the force of Re Suco Gold. To the extent that the costs and expenses are referable to the administration of the bankrupt estates, they should be paid out of the relevant estate and to the extent that they are referable to the trust, they should be paid out of the assets of the trust.

Conclusion

It will be readily apparent that this set of reasons for judgment is merely a halfway house. Regrettably, it has not been possible for me to achieve concluded views about each and every subject of controversy. It should be noted, however, that the applicant himself only saw the proceeding advancing by separate stages, and that position was no doubt informed by the complexities to which the case gives rise.
It will be necessary for me to provide further reasons for judgment when I have heard further from counsel about the matters arising from this judgment.
Finally, I should say that there is yet another aspect of this matter that gives rise to comment. While what the trustee did about selling the property was in my view wrong, he proceeded without material challenge, it would appear, from any party. The reality is that Mr and Mrs Iannotti are discharged from their bankruptcy and have elected, for whatever reason, not to participate in this proceeding. They do not apparently seek or expect any return from any of the funds presently held by the trustee in bankruptcy.
Furthermore, the trustee in bankruptcy has advertised this matter appropriately and no party has come forward to assert any interest.
In many ways, it might be thought that putting the trustee in bankruptcy to further time and expense is a waste of whatever funds are still presently available. The Court might be thought to have an overarching power under s.30 of the Bankruptcy Act to impose a resolution that ensures that the creditors of the trust are paid and the remainder of the funds disbursed in a sensible and appropriate way.
As I have said, I will hear further from counsel before making any further orders or declarations in this matter.

I certify that the preceding ninety (90) paragraphs are a true copy of the reasons for judgment of Burchardt FM

Associate: Ms B Evans

Date: 27 November 2009