Khoury v Pascoe
[2009] FMCA 676
•10 September 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KHOURY v PASCOE | [2009] FMCA 676 |
| BANKRUPTCY – Application to review notice by trustee of objection to discharge from bankruptcy – whether there was a reasonable basis for the ground of objection relied upon considered. |
| Bankruptcy Act 1966 (Cth), ss.50, 77, 81, 139U, 139WA, 139ZG, 149, 149A, 149B, 149C, 149D, 149J, 149K, 152, 178 Bankruptcy Law Amendment Bill 2002 Corporations Act 2001 (Cth) |
| Broadley v Inspector General in Bankruptcy [2007] FMCA 1714 Cummings v Claremont Petroleum NL (1996) 185 CLR 124 Frost v Sheahan [2005] FCA 1014 Frost v Sheahan [2008] FCA 1073 Frost v Sheahan [2009] FCAFC 20 Healey v Prentice (No 2) [2000] FCA 1598 Health Insurance Commission v Trustee in Bankruptcy of the Estate of Ioakim Alekozoglou [2003] FCA 848 Inspector-General in Bankruptcy v Nelson (1998) 86 FCR 67 Macchia v Nilant [2001] FCA 7 McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547 Merrag Pty Ltd v Khoury [2008] NSWSC 1286 Nguyen v Pattison [2005] FCA 650 Prentice v Wood [2002] FCAFC 48; (2002) 119 FCR 296 Re Ansett; ex parte Ansett v Pattison (1995) 56 FCR 526 Re Wheeler; ex parte Wheeler v Halse (1994) 54 FCR 166 Thomas v Donnelly [1997] FCA 1142 Van Reesema v Official Trustee in Bankruptcy (1983) 69 FLR 424; 50 ALR 253 Wharton v Official Receiver in Bankruptcy [2001] FCA 96; (2001) 107 FCR 28 |
| Applicant: | GEORGE KHOURY |
| Respondent: | SCOTT DARREN PASCOE in his capacity as trustee of the bankrupt estate of George Khoury |
| File Number: | SYG 852 of 2009 |
| Judgment of: | Driver FM |
| Hearing dates: | 16 July, 10, 11 August 2009 |
| Delivered at: | Sydney |
| Delivered on: | 10 September 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr J Baird |
| Solicitors for the Applicant: | Watson Mangioni |
| Counsel for the Respondent: | Mr A Spencer |
| Solicitors for the Respondent: | Sally Nash & Co |
ORDERS
The application is dismissed.
The trustee’s costs and disbursements of the application are to be treated as costs of the administration of the bankrupt estate.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 852 of 2009
| GEORGE KHOURY |
Applicant
And
| SCOTT DARREN PASCOE in his capacity as trustee of the bankrupt estate of George Khoury |
Respondent
REASONS FOR JUDGMENT
Introduction and background
This is an application under s.178(1) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) seeking review of a notice of objection issued by the respondent trustee and dated 13 February 2009 in respect of the expiration of the applicant bankrupt’s bankruptcy. The effect of the notice of objection was to extend the period of the bankruptcy to eight years from the date of filing the bankrupt’s statement of affairs.
The application is opposed by the respondent trustee on the basis that the evidence establishes that the ground specified in the objection of the trustee to the expiration of the bankruptcy is made out. The ground of objection under s.149D(1)(ma) of the Bankruptcy Act is that the bankrupt had intentionally failed to disclose to the trustee the bankrupt’s interest in property.
The following statement of background facts is derived from the respondent’s written submissions filed on 11 August 2009.
The applicant became bankrupt when a sequestration order was made on 23 August 2006. Prior to that time Mr Pascoe had been appointed his controlling trustee pursuant to an order made under s.50 of the Bankruptcy Act on 11 May 2006 .
On 25 September 2006 the bankrupt provided the trustee with his first statement of affairs. The statement of affairs contained several omissions including any reference to a company called Merrag Pty Limited.
On 19 October 2006 the trustee signed his first report to creditors, a copy of which he dispatched to the 11 unsecured creditors listed in the statement of affairs. Amongst those listed were Rose Khoury, Rodney Khoury and A&R Khoury and Company Pty Ltd (respectively the mother of the bankrupt, a brother of the bankrupt and a company owned by the parents of the bankrupt.
On 25 October 2006 the bankrupt wrote to Mr Scott (the person within the trustee’s office dealing with his estate) in the following terms:
I was sent 2 (two) Statement of Affairs to fill out and I sent you the wrong one
The letter also enclosed a further statement of affairs. A comparison of these two documents demonstrates that they are entirely separate iterations (ie the later one was not simply an amended copy of the first). The second statement of affairs relevantly amended the answers to several questions and disclosed that the bankrupt had been a director and shareholder in Merrag.
Merrag
Merrag Pty Limited (“Merrag”) was a company which purchased land at 11-13 Oaks Avenue, Dee Why. On that land it had constructed approximately 30 apartments and some shops. In November 2006 the bankrupt estimated the value of the building at $10-11 million.
Relevantly, on 5 September 2005 the Consumer, Trader and Tenancy Tribunal (“CTTT”) made an order in favour of Leonie McEntee and Paul Gerlack against the bankrupt in the amount of $296,640.75 together with an order that he pay the costs of both Leonie McEntee and Paul Gerlack and Allianz Insurance Limited. The CTTT also directed that the conduct of the bankrupt in undertaking a contract in the amount of $438,000 (when he was only licensed to do work to the value of $12,000) and various other matters warranted the attention of the Director General.
At some time shortly before 20 September 2005, the bankrupt communicated with Karen Marshall, an employee of Vincent Aboud and Associates, his desire to transfer his one share in Merrag to his brother Rodney. Ms Marshall sent the forms, which he completed and returned under cover of a letter which stressed his desire to remain a director.
On 2 May 2006, the bankrupt was served with a bankruptcy notice.
On 28 July 2006 an order was made appointing Mr Pascoe as controlling trustee of the property of the bankrupt under s.50 of the Bankruptcy Act.
On 27 July 2006 the bankrupt spoke to Ms Marshall in relation to the fact that he remained a director and perhaps also a shareholder. As a result he was sent forms to record his resignation. He completed these forms and sent them to Ms Marshall on 1 August 2006 under cover of a letter in which he promised to forward the profit and loss statement and balance sheet for Merrag for 2005 (perhaps to evidence the value of his share) by (3 August 2006).
On 19 September 2006 the bankrupt was in contact again with Ms Marshall by email (after the sequestration order) (exhibit R2).
Notwithstanding his bankruptcy, the bankrupt continued to have some involvement with Merrag.
Notwithstanding having communicated with Ms Marshall on 1 august 2006 and on 19 September 2006 (four days before completion of his first statement of affairs) in his first statement of affairs the bankrupt made no mention of having been a director of Merrag (answering “no” to question 43A of the statement of affairs) and also failed to mention he had owned a share in that company (as required by question 43E of the statement of affairs).
A month later, the bankrupt disclosed in answer to question 43A on the second statement of affairs that he had been a director of Merrag although next to the space in which he confirmed that he had been a director he wrote “Mid 2005 forced off”. In answer to question 43E he disclosed that he had previously held the one share, but omitted the name of the transferee and any reference to the $1 he had received as a result of the transfer.
Proceedings in the CTTT
On 14 December 2004 the bankrupt commenced proceedings in the CTTT against Mr and Mrs Sorbara. In the space provided to set out details of the nature of the dispute, the application said:
Failure to pay balance outstanding on building contract. Also retained bank guarantees which as per contract were supposed to be released upon occupation.
The bankrupt sought an order for the payment of $55,000 plus release of the bank guarantees. A cross-claim was apparently lodged by the Sobaras and the matter was settled on 27 April 2005 by terms of settlement which provided:
i)The home owners would deposit $55,000 in the trust account of the solicitor nominated by the builder Mr Khoury on or before 16 May 2005.
ii)The home owners would release the bank guarantees immediately.
iii)The builder agreed to undertake and rectify in a good and workman like manner the defects set out in the architect’s list of defects annexed.
iv)The builder undertook to start the rectification on 16 May 2005 but not later than 23 May 2005. rectification works were to be completed in four weeks (subject to weather constraints) such works were to be completed on or before 20 June 2005.
v)Mr Khoury undertook to personally supervise the rectification works.
vi)Mr Horace Rapisarda architect was to inspect and approve if satisfied the rectification works.
vii)Subject to the works being certified as in (vi) above the money was held in trust to be released to the builder Mr Khoury forthwith.
On 20 June 2005 the bankrupt wrote to the CTTT indicating that he could not comply with order (iv) including the length of the defect list.
Notably on 9 September 2006 the bankrupt commenced further proceedings in the CTTT. The nature of the dispute this time was said to be:
(i) Refund to me as contractor all monies due 75,000 plus interest
(ii) Claim/involvement of architect in dispute joint respondent I require a conclave on site to resolve my dispute
The new proceedings claimed an order for payment of $75,000 together with interest and costs of $15,000. The new application was also accompanied by a statement given by Mr Khoury and prepared by Cromer Consulting Services on his behalf.
Notwithstanding having commenced proceedings 14 days earlier the bankrupt did not include any reference to the claim in his first statement affairs (including in answer to question 31: “Do you have any debts owed to you?”, or in his second statement of affairs.
The second application also contained a claim against the architects which claim was withdrawn on 16 October 2006. Ultimately, the application was listed for directions on 18 December 2006 and the bankrupt failed to appear at which time the application was dismissed.
On 10 April 2007 the bankrupt commenced yet another set of proceedings in the CTTT. In the proceedings the bankrupt claimed $55,000 together with legal costs and interest of a further $15,000 and named his address for notices as “c/- Forster Solicitors 42 Belgrave St Manly”. In the annexure to the application which was signed by Mr Khoury the following appears:
The applicant asserts that he has rectified the alleged defects as specified in Paragraph 3 of the Terms of Settlement and is entitled to the sum of $55,000.00 referred to in paragraph 1. The respondent has failed to deposit the $55,000.00 as specified in Paragraph one and is in breach of the terms of settlement.
Once again the bankrupt did not tell the trustee that he had commenced the proceedings.
On 5 September 2007 the third application was dismissed.
The bankrupt sought to revive the first application on 24 March 2008. At that time he gave his address as “c/- Doyles Construction Lawyers, Level 2, 148 Elizabeth Street, Sydney NSW 2000”. He sought an order for the payment of $55,000.
On 17 June 2008, solicitors instructed by the bankrupt offered to compromise the proceedings in return for payment to the bankrupt of $50,750. The bankrupt did not seek the trustee’s consent to this proposal.
On 8 July 2008 Mr Sorbara launched his own set of proceedings claiming to be relieved of the obligation to pay the $55,000 and an order that he be paid $83,329. Again the bankrupt failed to inform the trustee about that application.
Apparently on 22 August 2008, the solicitors acting for the Sobaras discovered that Mr Khoury was bankrupt and wrote to his solicitors complaining of that fact. That letter apparently prompted Mr Khoury to write to his trustee advising him for the first time of the existence of the CTTT proceedings.
On 13 February 2009 the respondent filed with the Official Receiver a Notice of Objection to Discharge pursuant to ss.149B, 149C and 149D of the Bankruptcy Act. The evidence of the bankrupt is that he received the Notice of Objection to Discharge on 27 February 2009 (para 3 affidavit 9 April 2009). The application was in any event filed within time.
Evidence and submissions
The application is supported by two affidavits by Mr Khoury made on 9 April 2009 and 2 July 2009. The trustee also relies upon two affidavits by himself made on 1 June 2009 and 1 July 2009. Both deponents were cross-examined on their affidavits.
The bankrupt submits that the evidence clearly establishes that the asset or property which the bankrupt has allegedly intentionally failed to disclose to the trustee, was at all times illusory and of no value. He submits that s.149D(1)(ma) of the Bankruptcy Act deals only with items of commercial value which should be available to creditors[1].
[1] Pattison v Inspector General in Bankruptcy [2007] AATA 1517
The relevant asset is a chose in action being the benefit of litigation in the CTTT. The bankrupt pursued that litigation after the commencement of the bankruptcy without disclosing it to the trustee but submits that although perhaps misguided, he was at all times acting bona fide in the interests of creditors, not for himself. By the litigation the bankrupt sought access to $50,000 held pursuant to an agreement between the parties to the litigation entered into prior to the bankruptcy. Access to the funds, pursuant to the agreement, required rectification building work being performed which the bankrupt submits he was incapable of undertaking because he had lost his building licence. The bankrupt submits that it is in his interest to be discharged from bankruptcy so that he could again obtain a builders licence and return to gainful employment. He submits that his interests outweigh the interests of creditors in extending the bankruptcy as there is not likely to be any benefit to creditors in the continued bankruptcy.
The trustee submits:
(i) that the evidence clearly establishes that the ground specified in the objection is made out;
(ii) the Bankrupt has failed, in material respects to comply with his obligations both to his Trustee and at law under the Bankruptcy Act;
(iii) the Bankrupt’s failures have resulted in the loss of the opportunities which might have been available to the Trustee to realise assets for the benefit of creditors and have substantially hindered the administration of his estate;
(iv) even now, the Bankrupt has not complied with his obligations under the Act including failures that would support other objections based on special grounds (although he has made cursory attempts to do so having appreciated that his failures were jeopardising this application);
(v) it is clear that the only prospect of the Bankrupt complying with his obligations is if his failure to do so stands in the way of a discharge; and
(vi) it is in the interests of his creditors that the administration of his estate continue.
The trustee submits that the only reason Mr Khoury disclosed the CTTT proceedings was that he anticipated that the trustee would find out about the proceedings anyway. The trustee submits that that behaviour is consistent with his approach to disclosure of his shareholding in Merrag. The trustee submits that the bankrupt has failed to show that the objection of the trustee is incorrect either in fact or law. The trustee submits that the Court should find that the bankrupt intentionally failed to disclose to the trustee that he had a beneficial interest in the claims made in the CTTT and that the bankrupt has failed to establish that he had a reasonable excuse for the conduct or failure that constituted the special ground.
The trustee further submits that the bankrupt has failed to provide complete information relating to his income for the years 2008 and 2009 until August 2009 in the course of the present proceedings. Even the material now provided to the trustee is said to be “manifestly deficient”. The trustee submits that the bankrupt’s evidence lacks credibility.
The trustee further submits that the bankrupt’s affairs remain largely a mystery to the trustee. Although it seems unlikely, the trustee submits that one cannot rule out the prospect that the CTTT claim may still yield something for the estate. The trustee further submits that it is possible that if full particulars of the bankrupt’s income (including the value of benefits received) was known, he would be liable for income contributions. The trustee submits that the only way in which the bankrupt can be made to discharge his duties is to have him compelled to do so before he can be discharged.
In conclusion, the trustee submits that in circumstances where:
(i) a Bankrupt has failed repeatedly to comply with his obligations under the Act, leading to the real prospect that assets that would have been available to the estate are lost;
(ii) those failures remain uncorrected at the time of the hearing; and
(iii) no error on the part of the Trustee is shown,
a Court would not be serving justice and equity to reverse the Trustee’s decision.
Reasoning
The legal framework
The parties’ legal submissions usefully traverse the legislative provisions and the general principles of the application of s.178. Section 77 of the Bankruptcy Act creates obligations on the part of the bankrupt in the following terms:
(1) A bankrupt shall, unless excused by the trustee or prevented by illness or other sufficient cause:
(a) forthwith after becoming a bankrupt, give to the trustee:
(i) all books (including books of an associated entity of the bankrupt) that are in the possession of the bankrupt and relate to any of his or her examinable affairs; and
(ii) the bankrupt's passport, if any; and
(b) attend the trustee whenever the trustee reasonably requires; and
(ba) give such information about any of the bankrupt's conduct and examinable affairs as the trustee requires; and
(bb) as soon as practicable after becoming a bankrupt, advise the trustee of any material change that occurred between the time the bankrupt lodged his or her statement of affairs and the time the bankrupt became a bankrupt; and
(bc)if a material change occurred later, advise the trustee of that change as soon as practicable after the change occurs; and
(c)attend a meeting of creditors whenever the trustee requires; and
(d) at each meeting of creditors at which the bankrupt is present, give such information about any of the bankrupt's conduct and examinable affairs as the meeting requires; and
(e) execute such instruments and generally do all such acts and things in relation to his or her property and its realization as are required by this Act or by the trustee or as are ordered by the Court upon the application of the trustee; and
(f) disclose to the trustee, as soon as practicable, property that is acquired by him or her, or devolves on him or her, before his or her discharge, being property divisible amongst his or her creditors; and
(g) aid to the utmost of his or her power in the administration of his or her estate.
(2) In this section:
"material change" means a change in the particulars contained in the bankrupt's statement of affairs, where the change could reasonably be expected to be relevant to the administration of the bankrupt's estate.
Section 149B is in the following terms:
Objection to discharge
(1) Subject to the following provisions of this Subdivision, at any time before a bankrupt is discharged from bankruptcy under section 149, the trustee may file with the Official Receiver a written notice of objection to the discharge.
(2) The trustee of a bankrupt's estate must file a notice of objection to the discharge if the trustee believes:
(a) that doing so will help make the bankrupt discharge a duty that the bankrupt has not discharged; and
(b) that there is no other way for the trustee to induce the bankrupt to discharge any duties that the bankrupt has not discharged.
Section 149C is in the following terms:
Form of notice of objection
(1) A notice of objection must:
(a) set out the ground or each of the grounds of objection, being a ground or grounds set out in subsection 149D(1) but not being a ground or grounds of a previous objection to the discharge that was cancelled; and
(b) refer to the evidence or other material that, in the opinion of the trustee, establishes that ground or each of those grounds; and
(c) state the reasons of the trustee for objecting to the discharge on that ground or those grounds.
(1A)Paragraph (1)(c) does not apply to a ground specified in paragraph 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (k) or (ma).
(2) A notice of objection is not invalid merely because it does not state the ground or grounds of objection precisely as set out in subsection 149D(1) provided that the ground or grounds can reasonably be identified from the terms of the notice.
Section 149D is in the following terms:
Grounds of objection
(1) The grounds of objection that may be set out in a notice of objection are as follows:
(a) …
(aa) …
(ab)…
(ac)…
(ad) …
(b) …
(c) …
(d) the bankrupt, when requested in writing by the trustee to provide written information about the bankrupt's property, income or expected income, failed to comply with the request;
(da) after the date of the bankruptcy, the bankrupt intentionally provided false or misleading information to the trustee;
(e) the bankrupt failed to disclose any particulars of income or expected income as required by a provision of this Act referred to in subsection 6A(1) or by section 139U;
(f) …
(g)…
(h) …
(ha) the bankrupt intentionally failed to disclose to the trustee a liability of the bankrupt that existed at the date of the bankruptcy;
(i) the bankrupt has failed, whether intentionally or not, to disclose to the trustee a liability of the bankrupt that existed at the date of the bankruptcy;
(j) …
(k) …
(l) …
(m) …
(ma)the bankrupt intentionally failed to disclose to the trustee the bankrupt's beneficial interest in any property;
(n) the bankrupt failed, whether intentionally or not, to disclose to the trustee the bankrupt's beneficial interest in any property.
(2) This section has effect subject to section 304A.
Section 178 is in the following terms:
Appeal to Court against trustee’s decision etc
(1) If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.
(2) The application must be made not later than 60 days after the day on which the person became aware of the trustee's act, omission or decision.
Section 149K provides for a limited review by the Inspector General of a decision of the trustee to file a notice of objection but in the case of an objection on a special ground[2] that review is confined to whether there is sufficient evidence to support the existence of at least one special ground and whether the bankrupt had a reasonable excuse for the conduct or failure that constituted the special ground. Absent those circumstances the Inspector General is not permitted to cancel the objection (s.149N). That procedure has not been followed in the present case. It is an alternative procedure and does not affect the operation of s.178[3]. Thus the applicant moves under s.178.
[2] That is a ground specified in paragraph 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (k) or (ma)
[3] McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547, Frost v Sheahan [2008] FCA 1073, confirmed on appeal [2009] FCAFC 20; Macchia v Nilant [2001] FCA 7
Section 149C requires the trustee in the Notice of Objection to set out each ground of objection under subsection 149D(1) and refer to the evidence or other material that in the opinion of the trustee establishes that ground. However, if the ground is a “special” ground, e.g. under s.149D(1)(ma), the trustee need not state his reasons for objecting to the discharge.
In the respondent trustee’s Notice of Objection to Discharge dated 13 February 2009, only one ground of objection is specified, namely that under subsection 149D(1)(ma), in the following terms:
Pursuant to Section 149D(1)(ma) the bankrupt has intentionally failed to disclose to the trustee the bankrupt’s beneficial interest in property.
The Notice of Objection then contains nine paragraphs under the heading “Evidence Establishing Ground”. Whilst the objection is based on only s.149D(1)(ma), the other special grounds set out above are, the trustee submits, illuminating in the context of the facts of this case.
General principles concerning s.178
The purpose of s.178 of the Bankruptcy Act is to empower the Court to exercise a supervisory role over the trustee of a bankrupt estate[4]. In Healey v Prentice (No 2) [2000] FCA 1598 (2 November 2000), Madgwick J said in relation to that section[5]:
The Court is given a very broad supervisory role. The only constraint is that it must be made to appear to the Court that it is just and equitable to make some proposed order. While, for historical reasons, its is well settled that such a broad review jurisdiction in insolvency matters falls within the judicial power of the Commonwealth, in truth, the Court's role has aspects not unlike those more commonly found in administrative reviews. The Court is, after all, reviewing administrative actions of a trustee.
It would be enough to excite the court to intervene if it be shown that the impugned conduct of the trustee was incorrect or that other conduct was, or on the material before the Court would be, preferable and that justice and equity require the Court's intervention. An applicant no doubt carries the onus of establishing this. It is plain that the Court should not be too ready to intervene for fear of making the role and work of a trustee unmanageable. That the judge who hears a review application might have acted differently from the way a trustee did is not to the point. The question is whether it is just and equitable that the Court should afterwards intervene in some fashion.
[4] Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 133
[5] At [20]-[21]
Section 178 allows a bankrupt to seek the Court’s assistance judicially to review acts of the trustee in carrying out of the administration. The power exercised by the Court must be judicial. That does not, however, mean that the Court puts itself in the position of the trustee and assumes the task of the trustee in making administrative decisions[6]. Rather, it empowers the Court to judicially review the trustee’s administrative decision. The Court is given the widest discretion to review any act, omission or decision of a trustee. The only bounds to the exercise of that discretion are that the Court must act judicially and be satisfied that it is just and equitable to make the order sought[7].
[6] Re Wheeler; ex parte Wheeler v Halse (1994) 54 FCR 166 at 169
[7] Frost v Sheahan [2005] FCA 1014
Although the Court has a wide discretion, the Court is hesitant to make orders which have the effect of interfering in the day to day administration of a bankrupt’s estate or in cases involving an exercise of business or commercial judgment. In any event, considerable weight is to be placed on the trustee’s decision and the Court will not intervene under s.178 simply because the judge forms a different view to that of the trustee (see Frost v Sheahan [2008] FCA 1073).
The applicant is obliged to establish that there are grounds for reviewing the decision of the trustee and, if those grounds can be established, that it is just and equitable for the trustee to be directed to withdraw the objection (Re Wheeler).
Further, the conduct of the applicant may be taken into account in determining what is just and equitable: Health Insurance Commission v Trustee in Bankruptcy of the Estate of Ioakim Alekozoglou [2003] FCA 848 (13 August 2003).
In considering whether it would be appropriate to withdraw an objection where the objection has been attended to by the bankrupt and thereby bringing administration to an end, the trustee must have regard to the interests of creditors, the interests of the bankrupt and the wider public interest in maintaining confidence in the system of administration of bankrupts’ estates generally (Macchia v Nilant).
The Court should only interfere with the trustee’s exercise of a discretion if it is shown that the impugned conduct of the trustee was incorrect or that other conduct was, or would be, preferable and that justice and equity require the Court’s intervention[8].
[8] Healey v Prentice (No 2) [2000] FCA 1598 at [21]
Principles re Objection
In Frost v Sheahan[9] Besanko J identified a number of basic principles pertaining to operation of the objection provisions in the Bankruptcy Act:
[9] [2008] FCA 1073 at [35]
1. The power to prevent a discharge from bankruptcy by operation of law by filing a notice of objection is "a great power": Van Reesema v Official Trustee in Bankruptcy (1983) 69 FLR 424 at 430-431; 50 ALR 253 at 260; Prentice v Wood [2002] FCAFC 48; (2002) 119 FCR 296 at 300 [19]- [21].
2. In Inspector-General in Bankruptcy v Nelson (1998) 86 FCR 67 the Court referred to s 149C as it then was and concluded that to make an objection a trustee would need to have reasons directed to the purposes and objects of the Act and that the existence of a permissible ground supported by sufficient evidence was a threshold and that there must also be reasons justifying the making of the objections in the particular case. Section 149C has since been amended to insert subs (1A) which excludes the sub-group of ten grounds to which I have previously referred from the operation of s 149C(1)(c) (see [21] above). It is not necessary for me to consider whether this amendment might affect the question of whether all the reasoning in Nelson should be applied to the amended provisions because there is no challenge in this case to the respondent’s decision to make the objections or the notices of objections themselves.
3. Unlike this case, in Wharton v Official Receiver in Bankruptcy [2001] FCA 96; (2001) 107 FCR 28 there was a challenge to a trustee’s decision to file a notice of objection and at the time relevant to Weinberg J’s decision there were fourteen, not twenty-one, grounds of objection in s 149D(1). Nevertheless, with respect, his Honour’s observations at 41 [77] give an insight into the objection procedure:
Section 149A is an important provision. It provides a strong incentive to bankrupts to cooperate with their trustees during the administration of their estates. In some circumstances, an incentive of that type is plainly necessary. However, unless the section is construed in a sensible manner, it is capable of operating oppressively. It is reasonable to assume that trustees who make requests for information from bankrupts, including those concerning their income, will make due allowance for what might be regarded as the ordinary exigencies of life. Requests for information are often not met in as timely a manner as they ought to be. Some delays may be regarded as excusable while others will properly give rise to the filing of notices of objection. A bankrupt cannot ignore requests from his or her trustee. A particularly lengthy delay in responding to a request may trigger a notice of objection to discharge which is entirely justifiable. A relatively short delay in answering a request may be a different matter. Section 149D(1)(d) must be construed in the light of the requirement in s 149B(2)(b) that the trustee must believe that the filing of a notice of objection is the only way to induce the bankrupt to discharge his duties under the Act. It is plainly a course of last resort.
4. In Thomas v Donnelly [1997] FCA 1142, Emmett J considered the trustee’s discretionary power under s 149J to consider and make a decision as to whether, in particular circumstances, he should withdraw an objection which he has lodged. His Honour made the point that a trustee is an officer of the Court and that in exercising his powers and functions, he is required to take into account not only the interest of creditors but also the interest of the bankrupt and of the community generally. His Honour also said:
In exercising his powers, the trustee should have in mind the object of enforcing careful and moral conduct on the part of the debtor and to uphold the commercial morality of the community.
In Macchia, French J cited with approval authority to the effect that trustees are appointed to administer the estates of bankrupts in the interests of creditors and, in so doing, to have regard also to the interests of bankrupts (at 116 [38]).
5. In a case such as the present one where there has been a failure to provide information or material and to pay money and there is no challenge to the decision to make objections on those grounds, a trustee, on being asked to consider a withdrawal of objections, will consider the following:
(1) Whether the obligation has now been complied with or, at least, substantially complied with. Literal compliance may not in fact be possible. The ground in s 149D(1)(e) provides an example. The twenty-one day period referred to in s139U(1) is likely to have expired long ago. I will refer to substantial compliance as embracing the concept of compliance in a practical sense with the relevant obligation. It is difficult to see how a trustee could be criticised for refusing to withdraw an objection that had not been substantially complied with.
(2) Even if an objection has been substantially complied with, the trustee has a discretion not to withdraw it. That discretion must be exercised having regard to the interests of the bankrupt’s creditors and the interest of the bankrupt and the community generally. The discretion should not be exercised to punish the bankrupt. Despite legislative amendments since Nelson the principle that a notice of objection should not be filed to penalise a bankrupt (at 82) remains valid and in the same way a trustee should not refuse to withdraw an objection for the purpose of penalising a bankrupt.
The most important consideration in the exercise of the discretion whether to withdraw an objection will be whether there is utility in the administration of the estate continuing. If there is utility in the administration of the estate continuing, then even though a properly based objection has been substantially complied with it may be appropriate for the trustee to refuse to withdraw the objection. In exercising the discretion it is likely that it will be appropriate for a trustee to consider a range of matters. It is not possible to state those matters exhaustively. Some of the matters which seem to me to be relevant are the nature and extent of the benefit which may accrue to the estate if the administration continues, any connection between the ground of objection and delay in the timely administration of the estate, delay by the trustee in the timely administration of the estate for reasons unrelated to the ground of objection and any connection between the ground of objection and a need by the trustee to conduct further inquiries and investigations. It would also be appropriate for the trustee to have regard to the interests of the bankrupt and the overall period of the bankruptcy. In a proper case, it will also be appropriate for the trustee to take into account the fact that he retains certain powers, or is owed certain obligations by a bankrupt, even after the bankrupt’s discharge from bankruptcy. Examples are the power to examine and require the production of books in s 81, and the obligation in s 152 of the Act. Section 152 is in the following terms:
s 152 A discharged bankrupt must, even though discharged, give such assistance as the trustee reasonably requires in the realization and distribution of such of his or her property as is vested in the trustee. Penalty: Imprisonment for 6 months.
One factor which the respondent advanced as a factor he could rely on to support his decision not to withdraw the objections was the fact that, if not discharged, there will be a further CAP and it was said that that might produce a contribution for the benefit of creditors. The CAPs cease at the end of bankruptcy although an assessment may be made at any time: s 139WA. The discharge of a bankrupt from a bankruptcy does not release the bankrupt from liability to pay an amount to the trustee under s 139ZG(1). In my opinion, the fact that there will be a further CAP is not a factor to be taken into account. It is a consequence of an administration continuing, but not a reason to continue it. I do not think the Full Court of this Court said anything to the contrary in Prentice v Wood [2002] FCAFC 48; (2002) 119 FCR 296.
Earlier in Frost v Sheahan[10], Lander J had stated:
The purpose of the objection procedure is to provide the trustee with a power by which he can induce the bankrupt to act in accordance with the bankrupt’s obligations.
The trustee should not use the power for the purpose of punishing the bankrupt for acts taken by the bankrupt which cannot be rectified. Rather, the power should be used for the purpose of persuading the bankrupt to discharge the bankrupt’s duties under the Act.
It is a power, however, which must be used sparingly and for the purpose of protecting the interests of creditors and in generally advancing the administration of the estate of the bankrupt.
In a sense, it is a power of last resort when no other form of persuasion will assist to remind the bankrupt of the bankrupt’s obligations.
[10] [2005] FCA 1014 at [46]-[49]
In Re Ansett; ex parte Ansett v Pattison[11], Onley J said:
S149D(1) sets out some 14 grounds upon which an objection may be based. The mere existence of an available ground does not automatically give rise to an extension of the bankruptcy. To achieve that end the trustee must give notice setting out the ground he relies upon, the evidence which establishes that ground and the reason why he objects to the discharge on that ground. The latter requirement suggests that the trustee must address the relevance of the bankrupt's conduct in relation to the ground of objection in the context of the administration of the estate and to make a judgment as to whether that conduct provides a basis or reason for the bankruptcy to be extended.
[11] (1995) 56 FCR 526 at 6
In Nguyen v Pattison[12], Weinberg J in upholding the decision of the Federal Magistrate at first instance approved the following considerations under s.149J:
[12] [2005] FCA 650 at [39]
a) the utility of continuing the administration of the estate for the purpose of recovering or potentially recovering assets or funds for the creditors;
b) the importance of continuing the administration of the estate for a sufficient period of time to allow for appropriate inquiry to be made in the circumstances of the particular case (having regard to the circumstances of the case and the conduct of the bankrupt);
c) maintaining public confidence by ensuring that adequate time is provided to allow for careful scrutiny of the bankrupt’s conduct and enforcement of his or her obligations; and
d) the interests of the bankrupt in being released from bankruptcy in a timely manner.
In Broadley v Inspector General in Bankruptcy[13], Lucev FM referred to the special nature of s.149D(1)(d) of the Bankruptcy Act:
It is a special ground of objection.[14] Special grounds of objection “are directed at deliberate actions by the bankrupt to defeat creditors or to hinder the trustee’s administration.”[15]
In that case Lucev FM found that, having regard to the legislative intention behind s.149(1)(d) being a special ground, the facts as found could not give rise to a failure on the part of the bankrupt to comply with the trustee’ request, because the actions of the bankrupt were not deliberate. In my view, the same principles apply to subsection 149D(1)(ma), namely that there must be a deliberate action by the bankrupt to defeat creditors or to hinder the trustee’s administration.
[13] [2007] FMCA 1714 at [25]
[14] Bankruptcy Act, s.149C(1A).
[15] Bankruptcy Law Amendment Bill 2002, Explanatory Memorandum, para 51.
Consideration of the evidence
I agree generally with the trustee’s submissions on the evidence. The bankrupt’s position in cross-examination was that between filling out his first statement of affairs and furnishing his second statement of affairs he spoke to his brother Rodney and showed him a copy that he had kept of the statement of affairs and apparently as a result became aware of errors (T46.25-T47.36). The trustee submits, and I agree, that, for reasons which appear below, the bankrupt’s evidence should not be accepted.
On 15 November 2006 the bankrupt signed an application as a director of Merrag, permitting the lodgement of an application by a proposed tenant of the Company to fit out a shop located within a development at Dee Why. When it was put to him that he must have been at the locations where Merrag did business, his evidence was that rather than being on the site he was down at the beach most of the time (T58.8). He had no explanation as to why it was that he might have been asked to sign the document by his brother who had the capacity to do so himself (T61.8).
Apparently in November 2006 the bankrupt was also engaged in remedying defects or fixing things up on the site (T53.45).
The bankrupt is unable to shed any great light on how he came to notice the omissions in his first statement of affairs. The inference is that the references to Merrag in the trustee’s report to creditors, which was sent to both his mother and his brother were brought to his attention following which he thought it appropriate to amend his statement of affairs.
The next time that Merrag came to the bankrupt’s attention was in November 2006. On 8 November 2006 the bankrupt was examined. Once again he sought to minimise his association with the Company. He told the trustee that he was then unemployed (Pascoe 1 98.22) and that he had been unemployed for eight or nine months[16] (Pascoe 1 99.25), having ceased working for Merrag at that time (Pascoe 1 99). He also told the trustee that he signed papers to cease to be a director of Merrag in September 2005 (Pascoe 1 124.15) which was not correct. He was asked some questions in relation to the shops on the ground floor and whether they were occupied. He told his trustee that they were empty and that he wasn’t aware of whether any had been sold (Pascoe 1 130.15-22).
[16] Contrast this with his statement in cross-examination that he was engaged remedying defects or fixing things on Merrag’s site (T53.45)
That evidence must be seen in light of the fact that on 15 November 2006 Milan Vlasic completed an application for a complying development certificate in relation to shop 2 of the building built by Merrag. That application required the owner’s consent before the works which were described as “change of use and fit out of the shop” (Pascoe 1 83) were carried out. In the space provided for the signatures of the owners of the land, the bankrupt had signed. That application was received by the council on 28 November 2006. It follows that Mr Khoury must have signed it at some time between 15 and 28 November 2006.
In his second affidavit at paragraph 6, the bankrupt said:
I signed the DA application as a delegate of Merrag…I assisted my brothers in finalising the DA application
In cross-examination, the bankrupt was unable to shed any further light on why he signed the documents (T58.5) but seemed to think it was because his brother had asked him to (T58.12) and that the shops had been sold prior to the construction of the building on the proviso that the building was actually constructed (T60.12)[17].
[17] Contrast this with his answer when cross-examined referred to at paragraph 20 above
It is not to the point to say (as apparently the bankrupt does) that the share in Merrag is of no value now. The bankrupt deprived the trustee of the opportunity to convert that share into a return to creditors in September 2006. The administrator was not appointed until 30 October 2007. There could be many reasons why the other two shareholders might have been willing to pay the trustee value for that share in order to remove him from the register. It also may be that what might have happened to the Company after September 2006 may not reflect the value of the share at the time when the trustee should have acquired it. In any event, the liquidator appears to have uncovered at least one transaction that may bring value back for the creditors/members (see Merrag Pty Ltd v Khoury [2008] NSWSC 1286 (4 December 2008)).
In relation to the CTTT proceedings, the sequestration order had been made two weeks before the bankrupt commenced the second set of proceedings. In his second affidavit the bankrupt said:
At the time of bringing the Second Application I understood that I was bankrupt and that any money received by me as a result of the Second Application would need to be paid to Mr Pascoe, which it was always my intention to do.
In his second affidavit the bankrupt deposed to having made a conscious decision not to include the second application in his statement of affairs as:
I believe given its lack of merit, the costs involved[18] and my belief that I was running it as a matter of principle Mr Pascoe would probably refuse to pursue it therefore depriving me of my chance to prosecute my grievances against the Sorbaras.
[18] Again, the bankrupt does not tell the Court what were the costs involved and how he met them if he did so.
The trustee submits, and I agree, that that paragraph is sufficient to satisfy the Court that the bankrupt’s failure to disclose was deliberate. That is so notwithstanding that the bankrupt did not adhere to that evidence in the witness box (after several attempts) saying rather that the question of whether to tell his trustee never went through his head (T75.13).
Apparently A & Khoury and Company were prepared to guarantee the costs in the proceedings and indeed on 30 October 2008 advised the trustee that they were willing to pay $10,000 for the full rights to the proceedings. Clearly that company thought that for whatever reason it was worth paying $10,000 for the rights in the previously undisclosed proceedings.
One of the reasons the bankrupt gave for not including any mention of the proceedings in his statement of affairs was that it was a claim and not an asset (T65.26) the figure was not something he had given careful thought to: rather it was something he put down to scare the owner (T64.38) and that he didn’t need to tell his trustee because he was never going to receive the money (T66.21). None of those reasons really relate to whether there was an asset there that the trustee might want to pursue.
Conclusions and outcome
The difficulty in this matter is that the financial affairs of the bankrupt are opaque. He had, at least until the hearing in the present proceedings, paid scant regard to his obligations under the Bankruptcy Act. Both his first and his second statements of affairs were manifestly defective, both in relation to his interest in Merrag and his CTTT proceedings. Further, the bankrupt has not been forthcoming in terms of his income. His evidence in the witness box was characterised by uncertainty, claimed loss of memory and outright evasiveness. It is apparent that he receives support from family and friends of various kinds and he has been reluctant to detail the full extent of that support.
It is probably the case that the CTTT proceedings ultimately terminated by the trustee are of no value. It does not necessarily follow, however, that the chose in action underlying those proceedings has no value. Merrag was prepared to pay $10,000 for it less than a year ago. The bankrupt’s assertions that he pursued those proceedings on a point of principle and that he intended to pass any benefit he obtained to his trustee lacks credibility. I think it more likely that the bankrupt anticipated that he might recover some money for himself.
The bankrupt’s evidence supports the trustee’s submission that the bankrupt failed to disclose the CTTT proceedings intentionally. The bankrupt stated that he was concerned that the trustee would terminate those proceedings. That is what ultimately occurred. The proceedings were a wholly inappropriate vehicle in order to obtain the benefit the bankrupt sought but there was a potential asset of value to creditors which the bankrupt failed to disclose. He did so deliberately because he wanted that asset for himself. I find that the ground advanced in the trustee’s notice of objection is supported by the evidence.
I also find that the bankrupt has failed to establish sufficient cause for the trustee’s objection to discharge to be disturbed on review. These proceedings have stimulated the bankrupt to provide further information to the trustee concerning his affairs, in an apparent effort to show that he was meeting or had met his obligations. The applicant sincerely wishes to be discharged from bankruptcy and it is a reasonable hypothesis that the extension of the term of the bankruptcy would be a stimulus for him to further co-operate with his trustee.
In addition, it is not beyond the bounds of possibility that further assets may be recovered, with the co-operation of the bankrupt, for the benefit of creditors. The trustee’s attention should be focussed on the bankrupt’s share in Merrag and the possibility of money being recovered by the liquidator of that company under the Corporations Act 2001 (Cth). Further, there is some, albeit slight, possibility of some value being obtained from the chose in action arising from the settlement of the CTTT proceedings between the bankrupt and the Sorbaras.
The benefit to creditors from a continuation of the bankruptcy, although uncertain, is more than illusory. Although an objection to discharge should not be used simply to punish an unco-operative bankrupt where there will be no benefit to creditors, the possibility of a benefit flowing to creditors, however slight, may support a trustee’s objection, and the position in these proceedings points clearly to a link between the degree of co-operation shown by the bankrupt and the possibility of discharge from bankruptcy.
In all the circumstances, I conclude that the application under s.178 of the Bankruptcy Act should be dismissed.
The trustee’s costs of the proceedings should be treated as costs in the administration of the estate.
I certify that the preceding eighty-three (83) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 10 September 2009
0
18
3