Lane v McDONALD

[2003] FMCA 391

FEDERAL MAGISTRATES COURT OF AUSTRALIA

LANE & ANOR v McDONALD [2003] FMCA 391

BANKRUPTCY – COSTS – Whether the Trustee under an annulled Scheme of Arrangement can exercise a lien over funds held – whether the funds held represent property of the Bankrupt under vests on sequestration.

Applicants: MORGAN GERARD JAMES LANE and MICHAEL RICHARD PELDAN, Trustees of the estate of ROGER DESMOND TWIN

Respondent: GEOFFREY DAVID McDONALD

File No: BZ 93 of 2003

Delivered on: 16 September 2003

Delivered at: Brisbane

Hearing Date: 8 April 2003

Judgment of: Baumann FM

REPRESENTATION

Solicitors for the Applicant: Mr R.T. Cowen of Tucker Cowen

Counsel for the Respondent: Mr P.J. Davis

Solicitors for the Respondent: Russell & Company

ORDERS

1. Any monies held by the Respondent in respect of Roger Desmond Twin (a Bankrupt) (“the Bankrupt”) in the trust account maintained by the Respondent (or by his firm, Hall Chadwick) is property vested in the Applicants pursuant to section 58(1)(a) of the Act.

2. The Respondent forthwith pay to the Applicants all monies held in the Respondent’s trust account that is property of the Bankrupt and vested in the Applicants

3. That the Respondent shall, within 14 days, file written submissions as to the Applicants’ claim for costs on an indemnity basis or otherwise.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BZ93 of 2003

MORGAN LANE and MICHAEL PELDON,
Trustees of the Estate of ROGER DESMOND TWIN

Applicants

And

GEOFFREY DAVID McDONALD

Respondent

REASONS FOR JUDGMENT

Introduction

1. The issue for determination by me this matter is whether the Respondent GEOFFREY DAVID McDONALD has an exercisable lien over funds in his possession

2. I am told by the parties through their legal representatives, that there is no previous Authority on this issue, within the context of the Bankruptcy Act 1966 (“the Act”)

History

1. After a failed attempt to enter into an arrangement under PART X of the Act, Roger Desmond Twin (“the Bankrupt”) filed a debtors petition on 28 June 2001, and the Respondent was appointed Trustee of his Estate in Bankruptcy.

2. Pursuant to s.73 of the Act, and with the support of two of the seven creditors of the Bankrupt, a creditors meeting was held on 5 February 2002 and the attending creditors voted in favour of the scheme of arrangement, with the Respondent becoming the Trustee of the Scheme of Arrangement.

3. The terms of the Scheme of Arrangement, as is usual, provided for the manner in which the Trustee would be remunerated (see Clause 5 and Item 6 of the Schedule)

4. On 29 October 2002, on the application of a creditor (the Deputy Commissioner of Taxation), Federal Magistrate Rimmer

   a)Set aside the Scheme of Arrangement

   b)Made a sequestration order against the Bankrupt

   c)Appointed the Applicant’s MORGAN GERARD JAMES LANE and MICHAEL RICHARD PELDAN, as Trustees of the Estate of the Bankrupt

5. The Respondent alleges that between the time of the approval of the Scheme of Arrangement and the order of Rimmer FM, he did considerable work in the administration, including making a distribution to creditors pursuant to the Scheme of Arrangement. The sum of $16,745.95 has been retained by the Respondent, and the Respondent asserts a lien over those funds for the sum of $16,524.25 being:-

   Balance of fee set by Item 6  $5,000.00

   Further claim for fees  $14,022.05

   $19,022.05

   Plus GST    $1,902.20

   $20,924.25

   Less received on 28.05.02    $4,400.00

   $16,524.25

Application

1. The Application filed 24 February 2003 seeks the following relief:-

   a)a declaration that any monies held by the Respondent in respect of Roger Desmond Twin (“the Bankrupt”) is property vested in the Applicant’s pursuant to s.58 (1)(a) of the Act;

   b)an order that the Respondent pay to the Applicants all monies held in the Respondent’s Trust Account that is property of the Bankrupt and vested in the Applicants;

   c)costs.

Applicant’s submissions

1. The Applicant submits that:-

   a)the funds held by the Respondents at the time of sequestration  were property of the bankrupt;

   b)pursuant to s.58 of the Act, upon sequestration the property of the Bankrupt vests in the Applicants as Trustees;

   c)any claim for remuneration by the Respondents is to be dealt with by s.162(1) and of the Act;

   d)the Respondent has not filed any Application seeking orders relating to his remuneration;

   e)in any event, remuneration of a Trustee is prescribed by PART VIII Division 2 of the Act, which provides that the remuneration may be fixed either by resolution of the creditors by the committee of inspection or as prescribed by the regulations. The Court does no have power pursuant to s30 of the Act to make orders fixing the remuneration of Trustees (see Jefferson & Stevenson v Official Trustee in Bankruptcy, in the matter of Dunwoody (2000) FCA 990);

   f)the Respondent has no equitable lien over the funds retained in respect of unpaid remuneration;

   g)as the Bankruptcy occurred within two months of the annulment of the Scheme of Arrangement, pursuant to s.109(1) of the Act, the liabilities, commitments, expenses and remuneration provable in the Bankruptcy (pursuant to s.114), rank third in priority of payment.

Respondent’s submission

1. The Respondent submits that:-

   a)

   the Applicant Trustees get no better title to the funds than the Bankrupt, and the Trustee’s title is subject to all equities to which the property is subject before the bankruptcy (see s.5(1) and s.116(1)(a) of the Act; Sonenco (No.77) Pty Ltd v Silvia (1989)

   
   

   24 FCR 105 @ 112 and Bagshaw v Scott (202) FCAFC 363);

   b)the Respondent as Trustee under the annulled scheme has a right of indemnity from the Trust Fund for his costs that have been properly and reasonably incurred;

   c)s.164 of the Act does no expressly extinguish the lien claimed by the Respondent;

   d)the real point taken by the Applicants is that they should deprive the respondent of his lien for changes for work already done to secure the Applicants’ fees, by way of priority, for work yet to be done.

Conclusions

1. At the time the debtor (as he then was) paid the sum of $30,000 to the Respondent, those funds were impressed by the trusts created by the Deed – not only to pay the agreed remuneration but importantly to permit performance of the obligations under the Deed for the benefit of the creditors in accordance with PART X of the Act.

2. The annulment of the Deed extinguishes, at that time, in my view any contractual or equitable interest by the Trustee in the funds held under the Deed at that time.

3. The subsequent order for sequestration effects a vesting of the property into the hands of the new Trustee (the Applicants) immediately. In this regard, the position of a secured creditor is somewhat different.

4. A secured creditor (as the Respondent claims to be), means:-

   “a person holding a mortgage charge or lien on property of the debtor as a security for a debt due to him or her from the debtor” (see s.5 of the Act).

   My view is that, until this time of the annulment of the Deed, the funds paid by the debtor were held by the Trustee under the Trusts created by the Deed approved by the creditors. The Debtor, by paying the funds to the Trustee, was merely complying with the obligations under the Deed.

5. In the absence of any indemnity provided to the Trustee for hi Costs and outlays, and whilst he may have remedies against a number of persons in contract, quasi-contract, quantum meruit or even tort, he cannot, after annulment, exercise a lien over the funds of the Debtor, which then became available to the Trustee in Bankruptcy.

6. It would be unjust, I agree, if a Trustee, operating properly in accordance with its obligations, was unable to seek to recover fees and expenses properly and reasonable incurred. However, in the absence of an indemnity they expose themselves to the usual commercial risks of recovery.

7. The Act is a code of practice for personal insolvency. A number of rights are provided to enable interested persons as described to seek the assistance of the Court to determine issues in dispute or to review the Trustees decisions on exercise of powers granted by the legislation.

8. I am satisfied that the Respondent’s right to be further remunerated is not a matter for quantification by me in these proceedings. The dispute before me, in my view, is properly provided for in the Act by a combination of:-

   ·Section 114(1)(b) in relation to payments of liabilities etc. incurred under an annulled Deed being provable in the Bankruptcy;

   ·Section 109(1)(c) which provides the ranking of priority for such payments;

   ·Section 164 which relates to a situation where 2 or more Trustees act “in succession”.

9. The learned authors of the text Australian Bankruptcy Law and Practice, Fifth Edition (Law Book Company) say at paragraph 4295 when referring to s.114(1)(c) that:-

   “Under s133(3) of the 1924 Act it was held that a Trustee of a Deed of Arrangement under PART XII of the 1924 Act followed, on a sequestration order subsequently being made, by a Trustee of the same debtors bankrupt estate, constitutes “two trustees acting in succession” RE: BRODERICK (1930) 2 ABC 222.”

10. For these reasons, I am persuaded that the Applicant is correct in its primary submission that the property held by the Respondent (which represents the corpus of the previous trust), vested in the Applicants pursuant to s.58 of the Act.

11. I will order as per paragraph 1 and 2 of the Application.

12. I did not receive any submissions from the Respondent as to the claim for the Respondent to pay the Applicant costs on an indemnity basis.

13. I hold a preliminary view that costs should follow the event. I believe it would be procedurally fair to allow the Respondent a period of 14 days to make a written submission in respect of costs, unless the parties can otherwise agree on the quantum of costs arising from these proceedings.

I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Baumann FM

Associate: 

Date: