Mina v Condon
[2015] FCCA 799
•27 March 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| MINA & ANOR v CONDON | [2015] FCCA 799 |
| Catchwords: BANKRUPTCY – Adequacy of disclosure – whether the trustee erred in its administration of the estate – no sufficient grounds for inquiry – application dismissed. |
| Legislation: Bankruptcy Act 1966 ss.27, 30, 104, 178, 179 |
| Ferella v Official Trustee in Bankruptcy [2013] FCAFC 43 Kelly v Mina [2014] NSWCA 9. |
| First Applicant: | AKIS GEORGE MINA |
| Second Applicant: | BAYBRIDGE LAWYERS PTY LTD |
| Respondent: | SCHON G CONDON AS TRUSTEE IN THE BANKRUPT ESTATE OF KAREN ELIZABETH KELLY NO. NSW3126/14/6 |
| File Number: | SYG 149 of 2015 |
| Judgment of: | Judge Street |
| Hearing date: | 27 March 2015 |
| Date of Last Submission: | 27 March 2015 |
| Delivered at: | Sydney |
| Delivered on: | 27 March 2015 |
REPRESENTATION
| Counsel for the Applicant: | Mr Palmer |
| Solicitors for the Applicant: | Baybridge Lawyers |
| Counsel for the Respondent: | Mr Eardley |
ORDERS
The application be dismissed.
The Applicants pay the Respondent’s costs on a party-party basis.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 149 of 2015
| AKIS GEORGE MINA |
First Applicant
| BAYBRIDGE LAWYERS PTY LTD |
Second Applicant
And
| SCHON G CONDON AS TRUSTEE IN THE BANKRUPT ESTATE OF KAREN ELIZABETH KELLY NO. NSW3126/14/6 |
Respondent
REASONS FOR JUDGMENT
This is a matter within the Court’s jurisdiction under s.27 of the Bankruptcy Act 1966, being an application under s.179 of the Bankruptcy Act 1966 for the removal of the trustee in bankruptcy of the estate of Karen Elizabeth Kelly. The application identifies that the matter has been set down for a time and place as stated below, and relevantly that the application may be dealt with and judgment may be given:
The Court may hear and determine all interlocutory or final issues, or may give directions for the future conduct of the proceeding.
The matter was returnable before the Court on 26 March 2015 and the Court indicated to the parties that, having looked at the matter, the Court was concerned as to whether or not this was a matter where there were substantial grounds for believing the trustee erred in his administration sufficient to warrant an inquiry under s.179 and specifically the adequacy of the disclosure made in the affidavit in support of the application.
The Court identified a concern as to the adequacy of the identification of the interests of the applicants, particularly in light of a report to creditors from the trustee dated 6 May 2014. Relevantly, para.2(f) of section F provided as follows:
Mrs Kelly obtained alternate advice from Baybridge Lawyers who advised her that Messrs Dub Lawyers had made a number of errors in their handling of the matter including incorrectly identifying the parties in the proceedings.
In lieu of correct the errors and completing the proposed settlement, Mrs Kelly represented by Baybridge Lawyers, unsuccessfully defended Mr Mina’s claim against her. Ultimately, the legal costs payable by Mrs Kelly significantly exceeded the proposed settlement amount.
It was in light of those observations the matter was stood over to resume the hearing today at 10.15am. No affidavit or other explanation was advanced in response to the Court’s expressed concern. The applicants indicated that the applicants desired an adjournment until next week. The Court indicated that the matter would be stood down for one hour. The Court provided further time and has been informed by counsel for the applicants the matter has not resolved.
It is in these circumstances that the Court comes to consider the first issue which arises in relation to the very broad discretion conferred on the Court under s.179 of the Bankruptcy Act 1966 as to whether there are sufficient grounds to make an inquiry appropriate. In that regard the Court notes what was said in Ferella v Official Trustee in Bankruptcy [2013] FCAFC 43, relevantly at paras.39-40:
39 The cases concerning s 179 were summarized by French J (as his Honour then was) in Macchia v Nilant (2001) 110 FCR 101 at [49]7ndash;[50] as follows:
49. As appears from the language of s 179 it invites first a consideration, albeit upon application by a person with standing, of whether the court should inquire into the conduct of the trustee. If inquiry is undertaken, the next question is whether the trustee should be removed from office and/or any other order made. The first question requires the court to consider whether on the grounds and facts before it, a case has been made for an inquiry … . The application of s 179 to that first step involves a broad discretion as to whether or not there is sufficient grounds to make an inquiry appropriate: Turner v Official Trustee in Bankruptcy (unreported, Federal Court, Full Court, No 8 of 1998, 27 November 1998). The Full Court there quoted with approval the observation of Ellicott J in Re Gault that (at 173):
… the court should be loath 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.
The policy consideration referred to by Deane J in Re Tyndall that “the court should not unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee” applies also to the operation of s 179: Turner at 2–3.
50. Section 179 operates in aid of the court’s supervision of trustees who are its officers. That operation, however, is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry. Like s 178, it may be invoked by a bankrupt after discharge and in part for the same reason, namely that the trustee’s powers continue in the various ways referred to by Merkel J at first instance in Cheesman. It may also be the case that the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way. As is the case with s 178, it is not a vehicle for pressing claims for common law damages under the general law. That is a matter for a court of appropriate jurisdiction. In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes. For “although the court is given a broad discretion under s 179 of the Act, that discretion must be exercised in the interests of the orderly administration of a bankrupt’s estate”: Re Challon (A Bankrupt); Ex parte Brown v Bendeich (unreported, Federal Court, Beaumont J, No QB 1548 of 1993, 23 April 1996) cited with approval by Merkel J in Cheesman at first instance, at p 114.
40. As the decision is discretionary any appeal must be dealt with in the way prescribed by the High Court in House v R (1936) 55 CLR 499 at 504–505 as follows:
But the judgment complained of, namely, sentence to a term of imprisonment, depends upon the exercise of a judicial discretion by the court imposing it. The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the Judges composing the appellate court consider that, if they had been in the position of the primary Judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the Judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary Judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law opposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.
It is clear from the nature of the power conferred under s.179 of the Bankruptcy Act 1966 that the first consideration as to whether there are sufficient grounds to make an inquiry is itself a discretionary consideration. This first consideration is partly informed by the Court’s desire to avoid interfering unduly with the day-to-day administration of a bankrupt estate and partly to ensure that unnecessary cost and expense is not incurred by the trustee in relation to an inquiry that lacks sufficient grounds to make the inquiry appropriate.
The power conferred by s.179 of the Bankruptcy Act 1966 is of considerable importance, together with s.30 and s.178, to ensure appropriate supervision of the important duties performed by the trustee of an estate in bankruptcy. The trustee, in performing that role, is treated as an officer of the Court. The important nature of those duties and their scope is touched on in Young, Re; Macryannis (2011) 124 ALD 28; [2011] FCA 1272 at paras.[26] – [31]:
26. The duties of a trustee of the estate of a bankrupt include the steps in the administration of the bankrupt estate that are set out in s 19(1) of the Act. By force of s 248(3)(f) the nominated duties apply equally to the trustee of the estate of a deceased person in respect of whose estate an order for administration under Pt XI has been made. The duties include, “determining whether the estate includes property that can be realised to pay a dividend to creditors”, “taking appropriate steps to recover property for the benefit of the estate” and “exercising powers and performing functions in a commercially sound way”: ss 19(1)(b), (f) and (k) respectively.
27. The principles governing the performance of those duties were summarised by the Full Federal Court in Adsett v Berlouis (1992) 37 FCR 201 at 208–9 (authorities omitted):
A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt’s estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules 1968 (Cth). The trustee has a dual function: first, to administer the estate in the interests of creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed under the Act. The conduct of the trustee is subject to the supervision of the court (eg Div 4 of Pt VIII of the Act) and a trustee in bankruptcy has historically been regarded as an officer of the relevant court. A trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee. The trustee is required to bring reasonable skill to the performance of his or her duties.
A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money. A trustee in bankruptcy is in no different position. The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee’s obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors’ claims and any possible surplus for the bankrupt. We adopt, as a correct statement of the duty of a trustee and the property manner of its performance, the words of Smithers J in Mannigel v Aitken (1983) 77 FLR 408-409:
In the case of bankruptcy the trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the Trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the Trustee.
28. The Full Court, at 209, also referred with approval to the statements in Halsbury’s Laws of England (3rd ed), Vol 38, p 967, that “a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss”: see also Freeman v National Australia Bank Ltd [2003] FCA 1233 at [22] where Spender J commented that:
The duty of the trustee in bankruptcy is to exercise judgment so as to save the estate unnecessary expenditure of money. Further it is to discharge the public duty imposed by the Act conformably with his obligation to administer the estate in such a manner as to maximise the return from estate assets, thereby maximising satisfaction of the creditors’ claims and any possible surplus for the bankrupt.
29. Sections 178 and 179 combine to give the court a high degree of supervision and control over the conduct of trustees however the roles of these two sections are different: Wilson v Commonwealth [1999] FCA 219 at [38]–[44]. The former section focuses on a particular “act, omission or decision of the trustee”; the scope of the latter is wider, being concerned with “the conduct of a trustee in relation to a bankruptcy”. Section 178 is an important element in the context in which s 179 must be construed. In Re Tyndall; Ex parte Official Receiver (1977) 30 FLR 6 at 9–10, Deane J described s 178 as conferring “the widest possible discretion as to the appropriate order which should be made in the particular case” albeit that the court should not “unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee”. His Honour’s views were approved by the Full Court in Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 at 485 and in McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547 at 552–553.
30. In Macchia v Nilant (2001) 110 FCR 101 at [38] French J, as the Chief Justice then was, emphasised the importance of s 178 “in providing for wide ranging supervision by the Court of trustees who are appointed to administer the interests of bankrupts in the interests of creditors and, in so doing, to have regard also to the interests of the bankrupts”. Section 179 has been regarded as of similarly wide application and analogous to s 178: Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262; Official Receiver in Bankruptcy v Todd (1986) 70 ALR 119 at 122 per Fisher J; Macchia v Nilant at [43]–[46]. In that context the role of s 179 in providing for the court to exercise that supervisory role, not just in respect of a specific act or omission but in relation to the trustee’s conduct as a whole should not be construed in the narrow sense advocated by the Trustee.
31. It can be seen from provisions of the Act and from statements in the authorities that the duties of a trustee in getting in and distributing the divisible property are comprehensive. Where, in the course of his administration of the estate a trustee also gets in some property which is not available for distribution to the creditors either because it was not, prior to the bankruptcy, the property of the bankrupt or is exempt under the provisions of the Act the assets in question have fallen into the hands of the trustee because of his or her status as trustee. In my view this fact would be sufficient to establish the appropriate and relevant connection between the impugned conduct of the Trustee and the bankruptcy and to give Mrs Young standing to make an application under s 179 for an enquiry into the Trustee’s dealing with the exempt assets.
In understanding the full scope of s.179 of the Bankruptcy Act 1966 it is also appropriate to distinguish the provisions of s.104 which provides a right of appeal against the decision of a trustee in respect of a proof of debt. Section 179 of the Bankruptcy Act 1966 is a provision that ensures the capacity of the Court, where appropriate, to inquire into “the conduct of the trustee” and that it is a power of broad scope. An application under s.179 can be made by the Inspector-General, a creditor or the bankrupt and it relevantly permits, under paragraph (a) remove a trustee from office, and in (b) make such orders as it thinks appropriate.
The conduct of an inquiry is a matter which will, if the Court considers there are substantial grounds for believing that the trustee erred in his administration, puts the trustee potentially to considerable personal cost and expense. It is in part for that reason that the Court must be satisfied that there are substantial grounds for believing that the trustee has erred in the administration before embarking on the inquiry.
The discretionary nature of the power conferred by s.179 of the Bankruptcy Act 1966 and the broad scope of the power to conduct an inquiry means that an application under s.179 is one in which the Court expects the relevant moving party in the application to make an adequate and sufficiently candid disclosure so as to permit the Court to consider whether there are substantial grounds for believing that the trustee has erred in his or her administration and that, as a matter of discretion, an inquiry is warranted.
It would ordinarily by necessary in that regard to identify the basis of the standing of an applicant as well as an adequate and sufficiently candid disclosure of any obvious matter known to the applicant that would inform the discretion as to whether the inquiry is one that should be conducted into the conduct of the trustee.
In the present case the affidavit filed on behalf of the applicants by a director of Baybridge Lawyers Pty Limited identifies the following alleged matters as grounds warranting a belief that the trustees erred in administration, relevantly:
Failure to disclose a relationship between the respondent and Mrs Kelly
…
Failure to investigate the admissibility to Mr Barry Kelly’s death
…
Failure to conduct an investigation into Mr Kelly’s estate includes property that can be realised to pay a dividend to the creditors
…
Failure to conduct investigation over Ms Kelly’s shareholding and her accounting practice to be utilised to pay a dividend to the creditors
…
Failure to convene a creditors meeting.
Having looked at the supporting material, the Court is not satisfied that there are substantial grounds for believing that the trustee erred in his administration. It is the case that the deponent did annex the report to creditors dated 6 May 2014 and it is unfortunate that there was not a more fulsome explanation in relation to the standing and whether there was any matter arising out of the report dated 6 May 2014 that was an obvious matter that should inform the discretion in respect of the power of s.179. I note in that regard that this is a small estate in which there are substantial unsecured creditors.
The applicants are identified as Akis George Mina and Baybridge Lawyers Pty Limited. The second applicants are solicitors who have acted for the trustee in litigation that went to the Court of Appeal in Kelly v Mina [2014] NSWCA 9. In those proceedings, the second applicant acted for the bankrupt against the first applicant, Akis George Mina, in respect of a partnership dispute concerning alleged liability arising out of a settlement agreement in respect of that partnership dispute. That partnership dispute, relevantly related in part to the bankrupt’s accounting practice. That accounting practice is part of the very subject-matter raised by both applicants for alleged inquiry into the conduct of the trustee in circumstances where the second applicant would be constrained by principles of legal professional privilege owed to the bankrupt arising out of the proceedings in which they acted for the bankrupt against the first applicant.
It suffices to say that the legal costs incurred in those proceedings including the pursuit of the appeal in which the second applicant was acting for the bankrupt where matters that were of legitimate concern in the report of the trustee to the creditors dated 6 May 2014. The contention by the second applicant of the wrong parties being joined to the proceedings by the bankrupt against the first applicant and the pursuit of the appeal appear open to serious question on the terms of the agreement disclosed in the reasons of the Court of Appeal which was marked as an exhibit.
This background of the applicants was matter should have been identified with at least some explanation in the affidavit supporting the application under s.179 of the Bankruptcy Act 1966. That said, it is the position that creditors are entitled to bring an application under s.179 and, for the purpose of this application, I have assumed that the applicants are both in that position.
The absence of the explanation and full disclosure in the present case is not a matter that ultimately impacts on the determination of this application. The Court is clearly satisfied that the evidence does not support that the trustee has erred in his administration and in those circumstances, there are not sufficient grounds to make an inquiry appropriate. The discretionary considerations that may impact including the want of a candid and sufficient disclosure by the applicants is not material to the disposition of this application as none of the alleged grounds make out a case for inquiry. In the circumstances, the Court dismisses the application.
I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of Judge Street
Associate:
Date: 7 April 2015
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