Maxwell-Smith v Donnelly

Case [2006] FCAFC 150

FEDERAL COURT OF AUSTRALIA

Maxwell-Smith v Donnelly [2006] FCAFC 150

BANKRUPTCY – appeal from decision not to order an inquiry under s 179(1) of the Bankruptcy Act 1966 (Cth) – threshold requirement before ordering an inquiry

PRACTICE AND PROCEDURE – appeal from exercise of discretionary power

Bankruptcy Act 1966 (Cth) s 179(1)

Maxwell-Smith v S & E Hall, in the matter of Maxwell-Smith [2004] FCA 840 referred to
Maxwell-Smith v S & E Hall Pty Ltd [2003] FCA 953 referred to
Maxwell-Smith v Donnelly [2005] FCA 332 reversed
Adsett v Berlouis (1992) 37 FCR 201 referred to
Moore v Macks [2006] FMCA 594 referred to
House v King (1936) 55 CLR 499 referred to
Re Tyndall; Ex parte Official Receiver (1977) 17 ALR 182 referred to
ReAlafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 referred to

EUGENE MAXWELL-SMITH AND INGE MAXWELL-SMITH v MAX CHRISTOPHER DONNELLY
NSD 733 OF 2005

MOORE, NICHOLSON AND CONTI JJ
27 OCTOBER 2006
SYDNEY


IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 733 OF 2005

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

EUGENE MAXWELL-SMITH
INGE MAXWELL-SMITH
APPELLANTS

AND:

MAX CHRISTOPHER DONNELLY
RESPONDENT

JUDGES:

MOORE, NICHOLSON AND CONTI JJ

DATE OF ORDER:

27 OCTOBER 2006

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

  1. The appeal be allowed in part.
  2. The orders of the primary judge be set aside.
  3. An inquiry be conducted under s 179 of the Bankruptcy Act 1966 (Cth) into the refusal of the trustee to give permission to the second appellant, Mrs Maxwell-Smith to travel outside Australia on or about 20 May 2004.
  4. The application filed 2 December 2004 otherwise be dismissed.
  5. The appeal otherwise be dismissed. 
  6. There be no order as to costs of the appeal.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.


IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 733 OF 2005

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

EUGENE MAXWELL-SMITH
INGE MAXWELL-SMITH
APPELLANTS

AND:

MAX CHRISTOPHER DONNELLY
RESPONDENT

JUDGES:

MOORE, NICHOLSON AND CONTI JJ

DATE:

27 OCTOBER 2006

PLACE:

SYDNEY

REASONS FOR JUDGMENT

THE COURT:

  1. This is an appeal from a judgment of Wilcox J of 21 March 2005 dismissing an application by the appellants, Mr and Mrs Maxwell-Smith, under s 179(1) of the Bankruptcy Act 1966 (Cth) ("the Act"). The appellants are former bankrupts whose bankruptcies were annulled in 2004. The trustee of their estates was Mr Donnelly. The appellants sought an order for an inquiry into the trustee's administration of their estates, having regard to his conduct (or that of his employees) and that of his legal representatives. The history of the matter is set out in some detail in two earlier judgments (Maxwell-Smith v S & E Hall, in the matter of Maxwell-Smith [2004] FCA 840; Maxwell-Smith v S & E Hall Pty Ltd [2003] FCA 953). The judgment of Wilcox J is Maxwell-Smith…

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AGLC
Maxwell-Smith v Donnelly [2006] FCAFC 150
Case
[2006] FCAFC 150
Decision Date

CaseChat Overview and Summary

In Maxwell-Smith v Donnelly, the appellants sought to have their bankruptcies annulled on the basis that they were unaware there would be no mediation and that the Registrar had made sequestration orders without procedural fairness. The applicants also sought compensation for the trustee's actions and an inquiry into the trustee's conduct. The court was required to determine whether the appellants' procedural fairness had been breached, whether an inquiry into the trustee's conduct was warranted, and whether compensation should be awarded.

The court examined the threshold for ordering an inquiry into a trustee's conduct under s 179 of the Bankruptcy Act 1966 (Cth). It noted that the court has a broad discretion and should not order an inquiry unless sufficient grounds have been demonstrated. The court considered the appellants' claims and determined that while there were issues regarding the trustee's conduct, they did not warrant an inquiry into the entire administration. However, the court found that an inquiry was necessary into the trustee's refusal to grant permission for Mrs Maxwell-Smith to travel outside Australia.

The court allowed the appeal in part, setting aside the primary judge's orders and ordering an inquiry into the trustee's refusal to grant travel permission. The court dismissed the application for compensation and the remainder of the appeal, with no order as to costs.

Orders

Orders of the court

1. The appeal be allowed in part.

2. The orders of the primary judge be set aside.

3. An inquiry be conducted under s 179 of the Bankruptcy Act 1966 (Cth) into the refusal of the trustee to give permission to the second appellant, Mrs Maxwell-Smith to travel outside Australia on or about 20 May 2004.

4. The application filed 2 December 2004 otherwise be dismissed.

5. The appeal otherwise be dismissed.

6. There be no order as to costs of the appeal.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

MOORE, NICHOLSON AND CONTI JJ
The appellants later applied to have the bankruptcies annulled. The Registrar who made the sequestration orders was unaware that the appellants did not know that there would be no mediation, and believed nothing of substance would happen at the hearing because mediation was still a prospect. The appellants were denied procedural fairness and the sequestration orders ought not to have been made. For that reason, orders annulling the bankruptcies were made on 2 July 2004. The judgment below On 2 December 2004 the appellants filed an amended application in this Court in the following terms:1.The Respondent M.C. Donnelly did not avoid unnecessary expenses while acting as the trustee in our estate caused in the Creditor's petition N-7192 of 2003. (Section 19 of the Act)2.The Respondent M.C. Donnelly abused his power as the trustee to examine vexatiously and oppressive [sic] and also refused to give his approval for a reasonable request made by the Federal Police on behalf of the Applicant Inge Maxwell-Smith to make a coastal cruise with her sick grandchild. (Section 81 of the Act)3.M.C. Donnelly's legal representatives distorted relevant information during the Court proceeding in the Application for Annulment (N-198 of 2004)4.The Applicant Inge Maxwell-Smith claims compensation for $300,000.00 for aggravated damages caused by the actions of M.C. Donnelly to her and to her family. Wilcox J heard this application as an application under s 179(1) of the Act, which provides:(1) The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:(a)remove the trustee from office; and(b)make such other order as it thinks proper. In his reasons, his Honour noted the annulment of the bankruptcies had no effect on the appellants' liability to pay the costs of the administration, provided they were properly incurred (s 154(1)(b) of the Act). The total amount claimed by the trustee exceeded $92,000, which his Honour noted was an amount greater than claimed by the petitioning creditor. His Honour also noted that the sum was large given the bankruptcies had subsisted for only 10 months but that due to a lack of good communication between the trustee and the appellants the administration had probably been unusually difficult. At the hearing, Wilcox J invited Mrs Maxwell-Smith on behalf of the appellants, to identify conduct of the trustee which could be said to enliven the power conferred by s 179(1) to order an inquiry. In his reasons, his Honour described six categories of conduct. The first was that the trustee had unnecessarily incurred expense by taking steps to seek out creditors other than the petitioning creditor in circumstances where the appellants had deposed that the builder was their only creditor. In concluding this criticism was unfair, his Honour noted that experience indicated that often, the information given to a trustee by a bankrupt was inadequate or incorrect.

Ratio Decidendi

Legal Principle Established

Established by: MOORE, NICHOLSON AND CONTI JJ

The appellants submitted that the trustee did not address the claim that he had acted unconscionably beyond denying it. The appellants submitted that the trustee's response failed to address equitable principles at all and that "once the statute law is seen to be overlayed with the principles of equity", the appropriateness of an inquiry becomes apparent.Consideration The authorities concerning the exercise of the power to order an inquiry have recently been conveniently gathered together in Moore v Macks [2006] FMCA 594. The learned Federal Magistrate described what he called the threshold requirement before an inquiry could be ordered under s 179 (at [13] to [18]):The threshold requirementIn Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 Riley J observed in relation to a request by the Registrar in Bankruptcy for an inquiry in relation to the conduct of a trustee at p 268:Before the application is heard, therefore, the trustee will know the grounds on which the court will be asked, inter alia, to inquire into his conduct and the facts on which the Registrar proposes to rely in supply of his application that the court do so inquire. I do not wish to be taken as presuming to lay down any rule as to the procedure to be followed in, or the approach to be made by the court to, a case of this sort; but it seems to me that in such a case there is a preliminary question to be decided by the court -- namely on the grounds and facts before it, has a case been made for inquiry into the trustee's conduct? If the answer to that question is 'yes', the next question is -- what is to be the scope of the inquiry? It may be that the material already before the court sufficiently defines the scope of the inquiry; on the other hand, the court may find it necessary to define the subjects for inquiry -- eg in the form: 'Did the trustee do (or fail to do) so and so?' -- and to give directions before proceeding to inquire.In Re Gault; Gault v Law (1982) 57 FLR 165 the Federal Court was asked to conduct an inquiry in relation to the trustee of the bankrupt's estate. In fact, the case involves the second such request for an inquiry made many years after the first request had been made and refused. Ellicott J referred to Re Alafachi (above) at p 173 and said:It was with his Honour's comments in mind that I required the applicant to give particulars of the misconduct he relied on to found his application. The court has a broad discretion in deciding whether to order an inquiry. In my opinion it is not required to order an inquiry unless it is satisfied that sufficient grounds had been made out.For instance, the court should be loathe to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. If the court considers that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved. It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example in an action for breach of trust.In Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 Beaumont J was considering an application by the Registrar in Bankruptcy for a s 179 inquiry. His Honour referred to the passages from Re Alafachi and Gault (above) and said at p 233:In my opinion, the balance of convenience in this case indicates that a preliminary inquiry of the type urged by the respondent was the appropriate course to be adopted provided that, in the event that the matter goes forward to an inquiry on a final hearing, the evidence taken and submissions made in the preliminary inquiry are to be regarded as evidence and submissions in the final inquiry: in other words, the preliminary inquiry should be treated as part of the final inquiry. It is as if the respondent were to move for the dismissal of the proceedings as an abuse of process and then to fail in that application, in which event the material before the court in the summary application is to be treated as part of the material before the court upon the final hearing of the proceeding.Finally, in Wilson & Anor v The Commonwealth of Australia & Anor [1999] FCA 219 Branson J discusses the nature of proceedings pursuant to s 179 of the Act in addition to proceedings under s 178 of the Act. At [44] Her Honour summarises the law in relation to s 179 as follows:Although it is not a rule of universal application, the court will not ordinarily initiate an inquiry under s 179 unless it is satisfied that a proper case for an inquiry has been demonstrated ... There will ordinarily be a proper case or an inquiry where there is a reasonable cause to believe that a trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the General law. However, as Ellicott J pointed out in Re Gault at 173: The court has a broad discretion in deciding whether to order an inquiry. In my opinion it is not required to order an inquiry unless it is satisfied that sufficient grounds have been made out.Section 178 of the Act provides: