Kelly v Western City Credit Union Ltd - [2004] FMCA 668

FEDERAL MAGISTRATES COURT OF AUSTRALIA

KELLY v WESTERN CITY CREDIT UNION LTD

[2004] FMCA 668

BANKRUPTCY – Application to remove trustee.

Bankruptcy Act 1966, ss.156A, 179

Applicant:

TODD WILLIAM KELLY as TRUSTEE OF BANKRUPTCY ESTATE OF LILY WUTTKE

Respondents:

WESTERN CITY CREDIT UNION LTD

File No:

BZ 281 of 2004

Delivered on:

20 August 2004

Delivered at:

Brisbane

Hearing date:

16 August 2004

Judgment of:

Jarrett FM

REPRESENTATION

Counsel for the Applicant:

Mr Daubney SC

Solicitors for the Applicant:

MacDonnells

Counsel for the Respondents:

Mr Skinner

Solicitors for the Respondents:

David Milne & Associates

ORDERS

the application filed by the applicant on 3 June 2004 is dismissed;
the cross-application filed by the respondent on 21 June 2004 is dismissed;
the respondent pay the applicant's costs of and incidental to the cross-application to be taxed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BZ 281 of 2004

TODD WILLIAM KELLY as TRUSTEE OF BANKRUPTCY ESTATE OF LILY WUTTKE

Applicant

And

WESTERN CITY CREDIT UNION LTD

Respondent

REASONS FOR JUDGMENT

(Revised from Transcript)

The Applications

The applicant, Todd William Kelly, is the Trustee in Bankruptcy of the Estate of Lily Wuttke (“the Bankrupt”). Originally the estate was administered by the Official Trustee, but on 28 December 2003, the administration of the Bankrupt's estate was transferred to Mr Kelly pursuant to s.181A of the Bankruptcy Act 1966 (“the Act”). So much is agreed between the parties. The respondent to this application is a creditor of the Bankrupt. In circumstances that I will detail more fully below, it has requisitioned a meeting of creditors to consider a resolution that Mr Kelly be replaced, as it is entitled to, pursuant to s.181 of the Act. No meeting has yet been held.
The applicant commenced this application on 3 June 2004. He seeks an order restraining the respondent from putting to any meeting of creditors a proposal for a resolution to remove him as trustee of the Bankrupt's estate or from voting in favour of any resolution put to a creditors' meeting to remove him as trustee.
The respondent opposes the application and by a cross-application filed on 21 June 2004, it seeks an order that the applicant convene a meeting of creditors for the purpose of considering a resolution that the applicant be removed as trustee of the Bankrupt's estate. Alternatively, the respondent seeks an order that the applicant be removed as trustee of the Bankrupt's estate.
At the commencement of the hearing, the parties accepted that the respondent should proceed first. It was ultimately agreed that I should simply decide whether the applicant should be removed as trustee of the Bankrupt's estate. The parties agreed that the respondent was the major creditor of the Bankrupt so that if a resolution was put to a meeting of creditors, it would follow that the respondent's vote would carry the day. If I decide that the applicant should be removed, I am informed from the Bar table by his Senior Counsel that he will accept the decision and transfer the trusteeship.
If I decide that he should not be removed, I am informed by Counsel for the respondent that it will not press for the meeting of creditors to proceed that it has requisitioned. On that basis, the issue for my determination is whether, in the circumstances that I shall shortly set out, the applicant should be removed as trustee of the Bankrupt's estate.
The respondent proceeded first, it being the party agitating for the applicant's removal. The source of power identified by the respondent for the orders that it seeks are set out in its cross-application. It relies specifically on the power set out in s.156A(4) of the Act.
During the course of the opening for the respondent, Mr Skinner of counsel initially sought an order that would see the cancellation of the applicant's registration as a trustee under the Act altogether. After pointing out that no such relief was sought in the cross-application, the respondent resiled from seeking such an order. There was discussion during the course of the opening between Counsel for each party and the Bench about the source of power to make the orders sought. There was no application made by the respondent to amend its cross-application to seek, for example, orders under s.179 of the Act.

Background

Soon after his appointment, the applicant discovered a payment by the Bankrupt to the respondent that he considered was recoverable by the estate. He pressed the matter with the respondent and it initially refused to disgorge the payment. Proceedings were issued from this court for the recovery of payment.
On 18 March 2004, the respondent wrote to the applicant, informing him that it wished to appoint another trustee to administer the estate[1]. It requested that the applicant circularise other creditors pursuant to s.181A of the Act. As at 18 March 2004, the proceedings issued by the applicant for recovery for the overpayment were pending. The respondent requested that the applicant take no steps to prosecute the proceedings until the holding of the creditors' meeting as requisitioned by the respondent.
[1] Exhibit "E" to the affidavit of David Keith Gordon Milne filed 15 July, 2004
That request to stay the proceedings was refused by the applicant. On 2 April 2004, the respondent's solicitors wrote[2] to the applicant confirming that:
a)the trustee had refused to act on the respondent's request for a change in trustee; and
b)the trustee had refused to stay his hand in the recovery proceedings until the request to convene a creditors' meeting to deal with his removal had been dealt with.
[2] Exhibit "J" to the affidavit of David Keith Gordon Milne filed 15 July, 2004
That letter enclosed a cheque for the sum sought to be recovered in the proceedings issued by the applicant, and enclosed a proof of debt. The proof of debt lodged by the respondent in the bankruptcy has not yet been admitted to proof by the applicant. The amount claimed is $115,138.01. In oral evidence before me, the applicant said that he remains concerned about the claim because:
a)part of the amount claimed might in fact be in respect of a judgment obtained by the respondent against the Bankrupt's husband, and not against the Bankrupt;
b)no account is taken of certain stock seized by the respondent pursuant to security granted by the Bankrupt to the respondent; and;
c)no account is taken of the costs due to the estate ordered to be paid by the respondent to it in the recovery proceedings.
The proceedings culminated in a consent order in the Federal Magistrates Court of Australia on 21 April 2004. The respondent agreed to pay an additional sum to that remitted under cover of the letter of 2 April 2004, and to pay the estate's taxed costs of the proceedings. The amount agreed to be paid by the consent order has been paid, although the costs remain outstanding. There is no agreement as to the amount of these costs, and they are yet to be taxed.
On 1 April 2004, the respondent's solicitors wrote to the applicant's solicitors and said in part:
(3) In relation to the final paragraph, we are at a loss to understand why your client will not agree to our request [to adopt the s 181A procedure]. Our client is a creditor representing over 50 per cent of the total declared debts. Proceedings under s 181 and calling a creditors' meeting is, in our view, an unnecessary and unwarranted expense as our client is the majority vote. We ask that you either reconsider or advise us of your client's reasons justifying this decision as we have suggested to you before, our client's principal concern is that the costs of the administration be kept to the minimum permissible in the circumstances.
…
We also have our client's instructions that it will reconsider its position relating to a change of trustee provided that you, your client and our client, can come to an agreement relating to costs.
On 23 April 2004, the respondent's solicitors wrote to the applicant's solicitors. The letter[3] said:
We refer to previous correspondence and renew our client's request under s 181 that the trustee call a meeting of creditors. Please confirm whether or not the trustee has complied with this requirement within 14 days of the date hereof.
[3] Exhibit "F" to the affidavit of David Keith Gordon Milne filed 15 July, 2004
There is no evidence of any express request under s.181 of the Act. There was the request to circularise creditors under s.181A of the Act, but that request was not, it seems, pursued. Nonetheless, on 28 April 2004, the applicant's solicitors wrote two letters to the respondent's solicitors. The evidence does not reveal which was the first in time, but it does not matter which came first. One of the letters[4] said this:
[4] item (c) to exhibit "TWK3" to the affidavit of the applicant filed 3 June, 2004
Previously, you indicated that your client was in possession of information that was pertinent to the administration of the estate. Will you, (or your client) please provide this information by return so that the trustee can consider same.
Under section 81 of the Bankruptcy Act 1966, the trustee can conduct examinations into the affairs of the Bankrupt. Presently, the trustee is not in possession of any information that would justify the conducting of examinations.
Please seek your client's instructions.
That letter went, and remains, both unchallenged and unanswered. The second letter[5], in part, said:
2.We are seeking instructions regarding your request for a meeting under s 181.
[5] item (d) to exhibit "TWK3" to the affidavit of the applicant filed 3 June, 2004
In that regard, what is the basis for wanting our client removed?
If it is simply the case that your client wants a trustee who is more conveniently located to them, then why was that proposition not raised with ITSA back in December, when our client's appointment was proposed?
We put it to you that the costs of convening and conducting a meeting will only deplete the assets of the estate.
By letter dated 3 May 2004, the respondent pressed for the holding of the requested creditors meeting. No reasons for the proposed replacement of the applicant were given.
The applicant was overseas on 23 April 2004 and he did not return until 10 May 2004.
On 11 May 2004, the applicant's solicitors wrote to the respondent's solicitors[6] and informed them that if the applicant convened a creditors' meeting, he wished to provide a report to creditors at the same time. The applicant wished to include in the report, the arguments for and against the motion for his replacement. They repeated the applicant's request to be provided with reasons for the respondent wanting to have him replaced so that they might be included in the circular to the creditors.
[6] item (g) to exhibit "TWK3" to the affidavit of the applicant filed 3 June, 2004
Again, on 12 May 2004, the applicant's solicitors wrote to the respondent's solicitors in the following terms[7]:
[7] Exhibit "P" to the affidavit of David Keith Gordon Milne filed 15 July, 2004
We refer to your facsimile of 11 May 2004, complaining that our client has not yet called a Meeting of Creditors.
Our client has not refused to call a meeting.
1.Our client has been on leave and has only had your request since Monday.
2.You have been requested to provide reasons for wanting our client removed so that creditors can be fully informed of the arguments for and against.
3.On 18 December 2003, ITSA wrote to all creditors, advising that they intended to transfer the administration to our client. Your client did not object to our client's appointment at that time. What has changed?
Please provide the information sought.
The applicant's solicitors followed up the letter of 12 May 2004 by further correspondence on 18 May and 19 May 2004[8]. In the latter letter, they said:
Once a positive response is received, our client will decide whether to call a meeting or to apply to the Federal Magistrate's Court for an order that your client desist.
[8] Exhibit "R" to the affidavit of David Keith Gordon Milne filed 15 July, 2004
No response was received from the respondent's solicitors other than a letter, which did not address any of the matters raised by the applicant's solicitors, but simply threatened an application under s.179 of the Act[9]. That application, as I have earlier remarked, has not been made and has never been made.
[9] item (p) to exhibit "TWK3" to the affidavit of the applicant filed 3 June, 2004

The Applicant's Concerns

The applicant's solicitors wrote the final correspondence on 2 June 2004. It summarised the applicant's concerns as follows[10]:
[10] item (q) to exhibit "TWK3" to the affidavit of the applicant filed 3 June, 2004
Our client is concerned that:
(a)your client has already had an opportunity to oppose our client's initial appointment but did not do so;
(b)your client is not representative of the body of creditors;
(c)your client's conduct is motivated either by:
(i)some style of revenge in response to our client's successful recovery action against it; or
(ii)a desire to conceal or obscure some other dealing, particularly having regard to the fact that the bankrupt's spouse is a former board member of your client and that in initial telephone discussions, you intimated that your client had further information relevant to the estate, but has since declined to reveal that information;
(d)the greater body of creditors will suffer a further reduced dividend as a consequence of the prescribed meeting process.
If cogent arguments for our client's removal were made, then at the very least, the body of creditors would be making an informed decision and, further, those reasons might result in our client resigning voluntarily.
In addition to the reasons set out in the letter of 2 June 2004, the applicant swears in his affidavit filed 25 June 2004, that he believes that:
a)the respondent does not represent the body of creditors;
b)the respondent may be attempting to manipulate the estate for its own purposes, and;
c)the respondent may have a possible ulterior motive for seeking his removal.
As to the first matter referred to in the preceding paragraph, it is plain that there are many creditors of the Bankrupt. In terms of the size of the debt, however, it is conceded by the applicant that the respondent is the largest creditor. He does not concede that any of the other creditors, let alone a large majority of the other creditors, feel the same way as the respondent about him. Be that as it may, if the matter went to a vote, the respondent would, it seems, carry the day. Even if the respondent does not represent the sentiments of the body of creditors, it is not a matter that I consider significant in this application.
As to the second matter, the applicant says that the conclusion that the respondent may be attempting to manipulate the administration of the estate for its own purposes can be drawn from the following circumstances:
a)the respondent did not object to the applicant's appointment in December 2003;
b)the respondent's demands for his removal only commenced after he began agitating to recover what he perceived to be estate funds from the respondent;
c)the respondent sought to have the recovery proceedings stayed whilst at the same time seeking a creditors' meeting to remove him;
d)the solicitor for the respondent advised the applicant in oral conversations on a number of occasions that the respondent wanted "our trustee" to conduct the administration;
e)the respondent had suggested that it might reconsider its call for the replacement of the applicant if an agreement could be reached with the respondent as to the costs of the recovery proceedings;
f)the respondent's solicitor indicated to the applicant and his solicitor on separate occasions that the respondent was possessed of information that was relevant to the administration.
Despite at least three requests for that information to be provided, it was never communicated to the applicant, despite having the opportunity to do so. The respondent's solicitors have never denied the conversations alleged by the applicant's solicitors in that regard. It is telling, in my opinion, that there is no evidence to the contrary in the respondent's case.
As to the third matter referred to above, the applicant says that the conclusion that the respondent may have a possible ulterior motive for seeking his removal can be drawn from the following circumstances:
a)the Bankrupt's husband, Joel William Wuttke, was at relevant times the Deputy Chairman of the respondent;
b)Joel Wuttke owed money to the respondent;
c)Joel Wuttke transferred assets to the Bankrupt so that he had no assets left in his name;
d)those transfers were invalid as far as the respondent was concerned, and;
e)the respondent wanted the Bankrupt to provide security for the respondent.
Those facts, taken either separately or together, do not, it seems to me, lead to the conclusion that the respondent, in this case, is actuated by any ulterior motive.

Removal of the Applicant

As I have recorded above, the only issue for me to decide is whether the applicant should be removed as trustee of the Bankrupt's estate. The power relied upon the respondent to make such an order is s.156A(4) of the Act. It is necessary to consider s.156A of the Act. Relevantly, it provides:

(3)Where:
(a)at the time when a debtor becomes a bankrupt, a registered trustee has, under subs (1), consented to act as the trustee of the estate of the debtor and the consent has not been revoked, the registered trustee becomes at that time, by force of this subsection, the trustee of the estate of the bankrupt; and
(b)…

(4)A creditor may file with the Court an application for the removal by the Court of a trustee of the estate of a bankrupt, being a trustee who is the trustee of that estate by virtue of subsection (3), on the ground:
(a)that the trustee is not fit to act as trustee, or;
(b)that the connection of the trustee with or the relation of the trustee to the Bankrupt is likely to make it difficult for him or her to act with impartiality in the interests of creditors generally.

(5)Where an application under subsection (4) is filed, the Court may, if a ground specified in that subsection is established, remove the trustee from office and may appoint another registered trustee to be trustee in his or her place.

The ability of a creditor to apply under s.156A(4) is limited, by the words of that subsection, to applying for the removal of a trustee who is a trustee of the relevant estate by virtue of s.156A(3) of the Act. The trustee in the present case is not a trustee of the estate by virtue of s.156A(3). It is plain (and is agreed between the parties) that he is a trustee by virtue of the procedure set out in s.181A of the Act. Section 181A(5) provides that for the purposes of the Act, the new trustee (that is, the trustee appointed by the s.181A procedure) is treated as having been appointed by the creditors.
That provision, however, whilst it enables the respondent in the present case to give a notice under s.181 of the Act, does not cure what I see to be a fatal difficulty with the application under s.156A. The application to remove the trustee based on s.156A(4) is simply, in my view, incompetent.
In the event that that view might be wrong or it might be said that this is, in truth, an application under s.179 of the Act, it seems to me that the conduct of the applicant and the respondent in this case is such that the application to remove the trustee should, nonetheless, be dismissed.

I have gone to some length in these reasons to record the correspondence passing between the respective solicitors, which sets out the basis for the applicant's belief that the respondent might be attempting to manipulate the course of this administration. There are significant concerns raised by the applicant in the correspondence that has simply gone unanswered. Of the gravest concern, are the assertions by the respondent and by its solicitors that it has information in its possession relevant to the administration, but which it has refused or failed, at the very least, to disclose to the applicant.
Coupled with the other matters identified by the applicant, the fact that it would take such a stance in this matter is sufficient to raise a serious concern about the motivation of the respondent in the present case. Whilst the respondent is entitled to give a notice under s.181 of the Act seeking the holding of the creditors' meeting for the purposes of removing the applicant, the application before me has moved beyond that and is now an application seeking the removal of the trustee. Removal of the trustee is not automatic even when it is an application by a creditor who would, on all the evidence, succeed if a creditors' meeting requisitioned under s.181 of the Act was held.
Relief under s.179(1) of the Act is discretionary. Even if there was a properly constituted application before me under that section, I would exercise my discretion against the grant of such relief.
In the circumstances, the cross-application filed by the respondent on 21 June 2004 will be dismissed. Given the intimations of the parties at the commencement of the hearing, the application filed by the applicant on 3 June 2004 will also be dismissed.
I order that the respondent pay the applicant's costs of and incidental to the cross-application to be taxed.

I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for judgment of Jarrett FM

Associate: Susan Haysom

Date: 1 October 2004