Nelson and Perry and Anor - [2011] FMCAfam 239

FEDERAL MAGISTRATES COURT OF AUSTRALIA

NELSON & PERRY & ANOR

[2011] FMCAfam 239

FAMILY LAW – Property – bankrupt spouse – application by wife to have returned to the asset pool the costs of the Trustee.

BANKRUPTCY – Inquiry pursuant to s.179 of the Bankruptcy Act 1966 (Cth) into the conduct of Trustee – exercise of discretion to allow inquiry – whether work undertaken by Trustee was reasonable – costs already paid out to the Trustee pursuant to s.109 of the Bankruptcy Act 1966 (Cth).

Bankruptcy Act 1966 (Cth), ss.58, 109, 167, 178, 179
Family Law Act 1975 (Cth), ss.44, 75, 79

In Marriage of Hickey (2003) 30 Fam LR 355
In the matter of International Art Holdings Pty Ltd (admin apptd); International Art Holdings Pty Ltd (admin apptd) & ors v Adams & ors [2011] NSWSC 164
Wilson v Commonwealth of Australia [1999] FCA 219

Applicant:

MS NELSON

First Respondent:

MR PERRY

Second Respondent:

MR MARINO

File Number:

MLC 2677 of 2008

Judgment of:

Hartnett FM

Hearing dates:

28 February, 1 & 2 March 2011

Delivered at:

Melbourne

Delivered on:

28 March 2011

REPRESENTATION

Counsel for the Applicant:

Mr Testart

Solicitors for the Applicant:

Schetzer Constantinou

Counsel for the First Respondent:

Mr Indovino

Solicitors for the First Respondent:

Meltzer Green Lawyers

The Second Respondent:

No appearance

ORDERS

That all of the net sale proceeds of the real property situate at and known as Property F in the State of Victoria currently held in the trust account of the solicitors for the wife, including interest, be paid to the wife forthwith.
That the wife be indemnified with respect to any costs incurred by the first respondent of whatsoever nature or kind with respect to:
(a) these proceedings; and/or
(b) any costs of whatsoever nature or kind incurred in the administration of the bankrupt estate of the second respondent.
That otherwise each party pay their own costs of this proceeding.
That in the event any sum is recovered by the bankrupt spouse and/or the wife on a taxation of the Trustee’s costs then such sum is to be paid by the Trustee into an account nominated by the solicitor for the wife being an interest-bearing account and held on trust on behalf of the wife and the bankrupt estate of the husband pending further judicial determination by Hartnett FM as to whether that sum should be paid out to either or both of the wife and the estate of the bankrupt for payment out to the creditors.
That otherwise all extant applications are dismissed.

IT IS NOTED that publication of this judgment under the pseudonym Nelson & Perry & Anor is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT MELBOURNE

MLC 2677 of 2008

MS NELSON

Applicant

And

MR PERRY

First Respondent

MR MARINO

Second Respondent

REASONS FOR JUDGMENT

On 23 December 2009, the wife filed an initiating application. This application was to be amended by her in an amended initiating application filed 29 November 2010. The wife in the proceedings relied upon an affidavit sworn by her on 30 November 2010 and a financial statement sworn 30 November 2010. The wife’s initiating application was filed out of time. The response to her application filed by the first‑named respondent Mr Perry, Trustee of the bankrupt estate of Mr Marino (Mr Marino being the ex‑husband of the applicant wife and the second-named respondent) was filed on 17 August 2010.
In opening, counsel for Mr Perry indicated to the Court that the first-named respondent did not consent to the wife being granted leave pursuant to section 44 of the Family Law Act 1975 (Cth) (‘the Family Law Act’) to issue her application out of time. The divorce order had taken effect on 9 June 2008 and thus the wife was approximately six months out of time when filing her initiating application. Under cross‑examination and on the third day of the hearing Mr Perry gave evidence that he consented to the wife’s application to issue her application out of time and accordingly, an order was made with the consent of the wife and the Trustee and undefended by the husband to that effect on 2 March 2011.
The wife sought in the proceedings the following:
a)That all of the net sale proceeds of the real property situate at and known as Property F in the state of Victoria currently held in the trust account of the solicitors for the wife, including interest, be paid to the wife forthwith.
b)That pursuant to s.106B of the Family Law Act the transfer of moneys to the first respondent and/or the first respondent’s solicitors, being Meltzer Green, from the proceeds of sale of the real property at Property E, [R] be set aside and specifically:
(i)the payment to Meltzer Green; and
(ii)the payment to the first respondent;
and pursuant to s.78 of the Family Law Act there be a declaration that such sums are held as the sale proceeds of [R] property and on trust for the wife and the husband.
c)That for the purposes of giving effect to the preceding paragraph, the first respondent and his agents forthwith pay into a trust account held by the wife’s solicitors the moneys referred to in the preceding paragraph.
d)That pursuant to s.79 of the Family Law Act the wife be paid 80 per cent of the net asset pool of the marriage, such amount to comprise of:
(i)all the net sale proceeds (including interest) of the [R] property;
(ii)the balance from the sale proceeds of the [F] property;
and any balance thereafter be paid to the husband and/or the first respondent.
e)That the first and/or second-named respondents pay the wife’s costs of these proceedings.
f)That the wife be indemnified with respect to any costs incurred by the first respondent of whatsoever nature or kind with respect to:
(i)these proceedings; and/or
(ii)any costs of whatsoever nature or kind incurred in the administration of the bankrupt estate of the second respondent.
The first-named respondent, in his response filed 17 August 2010 sought the following order:
a)That the net proceeds of the sale of the real property situate at and known as Property F, [F], being the whole of the land more particularly described in Certificate of Title Volume [omitted] (‘the [F] property’) and the net proceeds of the sale of the real property situate at and known as Property K, being the whole of the land more particularly described in Certificates of Title Volume [omitted] (‘the [K] property’) be applied by the first-named respondent in payment of the first-named respondent’s costs associated with the administration of the bankrupt estate of the second-named respondent and the balance thereof be applied to the unsecured creditors of the bankrupt estate of the second-named respondent.
At trial, the Trustee sought a sum representing 20% of the sale proceeds.
The Trustee of the husband’s bankrupt estate relied upon an affidavit sworn by him on 10 December 2010. Mr Marino filed a response to the wife’s initiating application on 12 April 2010. The orders sought were fairly chaotic and in handwritten form. The affidavit in support filed the same date was incomprehensible and exceedingly brief. Mr Marino did not appear at the hearing of this matter and failed to participate to any real extent in the proceedings. He did file a financial statement sworn 12 April 2010 wherein he indicated that his weekly income was zero dollars and his personal expenditure nil. Counsel for his Trustee in bankruptcy submitted to the Court that Mr Marino still is not in receipt of income, save unemployment benefits.
Statements of fact in these reasons are to be taken as findings of fact on the balance of probabilities.

History

The husband was born [in] 1966 and is now aged 44 years. The wife was born [in] 1969 and is now aged 41 years. The parties married [in] 1989 and separated on 2 October 2006 after a cohabitation period of approximately 17 years.
There are three children of the parties’ marriage, the eldest of whom is over the age of 18 and financially independent. He resides with his grandparents. The children are: [X] born [in] 1992; [Y] born [in] 1999; and [Z] born [in] 2000. The younger two children reside in the full-time care of their mother and she is solely responsible for their financial support. She has not been assisted in that regard by the husband since separation in 2006 and she does not anticipate that she will be assisted by the husband in the years to come. At best she may receive some part of his social security benefits.
Otherwise, there is no evidence before the Court to find that Mr Marino will in the future make any provision of financial support to the wife for the support of the parties’ children. Final parenting orders were made with respect to the children on 21 August 2009, such orders providing for the children to live with their mother and spend time with their father by agreement. The father did not participate in those proceedings.
At the commencement of the parties’ cohabitation, neither of them had assets of any significance. Their marriage was throughout made difficult by the various business activities undertaken by the husband which caused the family unit to undergo considerable financial stress. All of the husband’s business ventures were unsuccessful.
In 1988, the husband purchased a [business] in Property B. That purchase was made by way of a fully financed bank loan of $77,500 which was secured over the husband’s father’s property. At that time the parties were not married. The wife was the husband’s girlfriend and she was studying. The wife abandoned her studies to help in the running of the [business]. Ultimately, the husband’s father sold the property in order to discharge the bank loan that was secured over it.
Thereafter and in 1992, the parties having married in 1989, the husband established a further business in [B] which again was relatively unsuccessful with no wages being paid to either the husband or wife, notwithstanding that both were working in the business. That business was eventually sold by the husband for the sum of $5000, but the money was never received by the parties. In 1993 the husband opened another [business] in [omitted] with business partners, however, the partnership was dissolved within three months.
In or around 1994, the husband started work for [J]. He also at that time established a further business called [A] which was an [omitted] business. That business venture lasted only six months. The husband nevertheless, continued his employment with [J] and the wife gave evidence that it was the only stable employment engaged in by the husband during the period of the marriage.
In or around 1998, the husband and his brother-in-law established a further business known as [V], but again troubles surfaced in the operation of the business and ultimately the husband left it being paid either $10,000 or $20,000 to walk away.
The wife worked throughout the relationship having minimal periods of time off around the birth of each of the parties’ children and all of her income was applied to the family’s living expenses.
The wife worked variously in the [omitted] businesses of the husband but because of a lack of regular income completed a [omitted] course in or around 1996 to enable her to obtain employment as a [omitted] on a full-time basis. She commenced in this occupation in September 1996. She also, in 1999, commenced to work for [V] attending to the general business administration of that business for the period the husband remained in the business. She continued to receive income from her [omitted] work and both sources of income were applied by her toward the family’s living expenses and later toward improvements and construction of a home on real property in [F] with mortgage repayments in particular being met by her solely following separation.
From the date of the parties’ marriage in 1989 until about 1991, the parties lived in a property owned by the husband’s parents. They did not pay rent but in lieu made the mortgage repayments on that property. In 1992, the parties moved in with the husband’s parents for about one year and in 1993, the parties moved in with the wife’s parents. From 1994 until 1998, the parties lived in a property that was owned by the wife’s father. They lived free of rent or expenses, although they did replace the carpet, bought and installed new venetian blinds and generally maintained the property. Their occupation of this property was a significant financial contribution by the wife’s father.
In 1996, the wife’s father gifted to his daughter the [F] property. This was a further significant financial contribution by him. The property was placed in the joint names of the husband and wife. In or around 1997, the husband and wife borrowed approximately $135,000 by way of a mortgage secured over the [F] property for the purposes of building a house on the land. Mortgage repayments were made through the wife’s earnings as a [omitted] and from the income generated by both parties through the business [V].
In 1999, the parties and their children moved into the property and during their occupation borrowed further sums secured against the property to place cash injections into the business [V]. In or around 2000, the mortgage amount was approximately $185,000. In 2003, the wife took up another job as a [omitted] to provide further financial support to the family whilst continuing with her [omitted] work which she continued until 2005. Throughout all of this period the wife had the primary responsibility for the care of the parties’ three children.
In 2003, the wife was diagnosed as suffering from depression. This was largely due to the overwhelming financial stress that the family was under. The wife ceased employment for a period of nearly six months, was prescribed antidepressants and did not return to her [omitted] job until around late 2003. Sometime thereafter the wife was promoted to the position of [omitted] and her income increased accordingly. It continued to be applied to the mortgage repayments on the [F] property and the family’s living expenses.
In 2004, the husband commenced to work for a [business omitted] on commission and he generated only nominal income. Both the husband’s parents and the wife’s parents assisted the parties in caring for their children, especially at times when the parties were engaged in employment. After work each day the wife resumed the responsibility for the care of the children and the running of the household.
Sometime in late 2003, the husband and wife purchased property situate at Property E, [R] for the sum of $240,000. The wife’s father loaned the parties the sum of $30,000 to assist in purchasing the [R] property. That sum was used to pay the deposit and costs of purchase. It was agreed that the wife’s father would be repaid the sum of $30,000 once the first proposed townhouse on the development was sold. The loan to the wife’s father remains outstanding. It remains again a significant direct financial contribution on the wife’s side of the ledger. The [R] property was registered in the husband’s sole name, however the wife was a joint mortgagor with him in relation to the acquisition of that property.
In 2004, the husband and wife subdivided the land situate at Property E, [R] creating several properties – [1], [2], & [3] Property S, [R] with the existing [business] still at Property E, [R]. The subdivided blocks were all to have townhouses built on them which the parties intended to sell once they were completed. In 2004, the husband consulted a Mr N, in relation to the development of the [R] properties. The relationship with Mr N broke down and he ultimately commenced proceedings in the Supreme Court of Victoria against the husband. In 2004, the husband sold the Property S blocks to a Mr V, and likewise his relationship with the husband subsequently broke down and he instigated Supreme Court proceedings naming the husband as a defendant. The wife did not know why the proceedings were instigated and she was not a party to the proceedings nor privy to them.
The wife and husband finally separated on 2 October 2006, and following such separation the wife remained living in the [F] property with the three children of the marriage for whom she had sole responsibility. The wife continued to meet the mortgage repayments on the [F] property until it was sold in June 2010. Until settlement of the sale on 13 August 2010, she was responsible for and met all the costs and expenses associated with the property. The wife calculated that the actual payments made by her since separation totalled $69,641.
In early 2007, the husband and wife reached an agreement as to the division of their property arising out of the breakdown of the marriage. They agreed the husband would retain the [R] property and refinance the mortgage into his sole name and that the wife would retain the [F] property and refinance the mortgage with respect to it into her sole name. The wife did not consider such settlement fair but she was however, anxious to ensure that the children and her had somewhere to live. She wished to avoid litigation and move on with her life and so accepted the agreement struck with her husband.
In March 2007, the husband signed a transfer of land transferring the [F] property to the wife. The consideration for that transfer was love and affection and referred to as “breakdown of marriage”. The wife then sought to refinance the [F] mortgage into her sole name but upon making loan applications discovered that a judgment had been entered against her in 2005 when the husband had defaulted in payment of the [R] mortgage. She was not aware of the default and its effect on her credit rating until 2007 and could not refinance the [F] mortgage because of that impact. She therefore could not lodge the transfer that the second respondent had signed in 2007 with respect to the [F] property. Notwithstanding this, she continued to occupy the property and it was her understanding and intention that she would retain the [F] property and be responsible for the mortgage secured over it. It was also her understanding and intention that the husband would retain the [R] property and be responsible for the mortgage over that property.
Communication between the husband and wife broke down in around 2007 with the husband’s behaviour becoming increasingly threatening and problematic. By August 2009, the wife had obtained an intervention order against the husband. By August 2009, she also obtained final parenting orders with respect to the children. She did not at that time seek to legally formalise the parties’ agreed property settlement as referred to in the preceding paragraphs. By that time she had become aware of the husband’s bankruptcy and was endeavouring to negotiate with the Trustee.

Bankruptcy

Section 58 of the Bankruptcy Act 1966 (Cth) (‘the Bankruptcy Act’) provides:
58. Vesting of property upon bankruptcy – general rule
(1)Subject to this Act, where a debtor becomes a bankrupt:
(a)the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b)after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
Note 1: This subsection has a limited application if there are orders in force under the proceeds of crime law: see section 58A.
Note 2: Even if property has vested under this section, it may, under the Proceeds of Crime Act 2002:
(a)become subject to a restraining order; and
(b)be taken into account in making a pecuniary penalty order; and
(c) become subject to a charge to secure the payment of an amount under a pecuniary penalty order, if it is subject to a restraining order; and
(d) be dealt with by the Official Trustee, if it is subject to a restraining order and a court has directed the Official Trustee to pay the Commonwealth an amount under a pecuniary penalty order out of property subject to the restraining order.
(2)Where a law of the Commonwealth or of a State or Territory of the Commonwealth requires the transmission of property to be registered and enables the trustee of the estate of a bankrupt to be registered as the owner of any such property that is part of the property of the bankrupt, that property, notwithstanding that it vests in equity in the trustee by virtue of this section, does not so vest at law until the requirements of that law have been complied with.
(3)Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a)to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b)except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
(4)After a debtor has become a bankrupt, distress for rent shall not be levied or proceeded with against the property of the bankrupt, whether or not the bankrupt is a tenant of the landlord by whom the distress is sought to be levied.
(5)Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his or her security.
(5A)Nothing in this section shall be taken to prevent a creditor from enforcing any remedy against a bankrupt, or against any property of a bankrupt that is not vested in the trustee of the bankrupt, in respect of any liability of the bankrupt under:
(a)a maintenance agreement; or
(b)a maintenance order;
whether entered into or made, as the case may be, before or after the commencement of this subsection.
(6)In this section, after-acquired property, in relation to a bankrupt, means property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt.

The sequestration order made against the husband on the creditor’s petition presented by the Deputy Commissioner of Taxation was made on 8 April 2008. The wife knew nothing of the husband’s taxation obligations nor benefited from any income or other moneys that the husband had earned or received since their separation in October 2006. Mr Perry was appointed as Trustee of the bankrupt estate of the husband and in accordance with s.58 of the Bankruptcy Act the husband’s property vested in him upon that appointment. On or about 1 October 2008, the husband filed his statement of affairs in respect of his bankruptcy and the Trustee prepared and forwarded a report to creditors on 23 December 2008. Such report was forwarded to the wife as a creditor, having been named by the husband as an unsecured creditor of his estate, although Mr Perry gave evidence in the proceedings that he came to the view that the wife was not a creditor of the estate. That report detailed the joint proprietorship of the wife of the [F] property, and the sole proprietorship of the husband in the remaining real properties.
At the time of his appointment as Trustee of the husband’s bankrupt estate, or shortly thereafter, there were two Supreme Court proceedings commenced against the husband or Mr Perry as the Trustee of the husband’s bankrupt estate, one by Mr N and the other by Mr V. Mr N and Mr V were secured creditors in respect of the [R] properties. In July 2008, the Trustee instructed his solicitors, Meltzer Green, to act on his behalf in respect of the Supreme Court proceedings and such proceedings continued until their settlement in May 2009. The proceedings in both matters had been consolidated.
The [R] properties were registered in the husband’s sole name. Neither the wife nor her father lodged any claim over any of the real properties in the bankrupt estate. There were lengthy negotiations and numerous court appearances in respect of the Supreme Court proceedings until agreement was reached between the parties in principle at a mediation attended by them and conducted on or about 23 December 2008.
A further complication meant that the terms of settlement in regard to the proceedings could not be finally entered into until May 2009. The work undertaken by the Trustee’s solicitors in respect of those proceedings were detailed in two tax invoices to him dated 3 October 2008 and
14 December 2009. The costs totalled $46,212.98. On 7 July 2010, and in response to a request from the wife’s solicitors, copies of the Supreme Court tax invoices were forwarded to the wife’s solicitors. Those tax invoices related solely to the legal costs and disbursements incurred in the Supreme Court proceedings.
On 29 December 2008, the wife had written to the first respondent notifying him that she had sole ownership of the [F] property and that as such it was not part of the bankrupt estate of the husband. At the time, that property remained registered in the names of the husband and wife. On 12 January 2009, Mr Perry’s solicitors wrote to the wife advising her that the Trustee did not accept that the [F] property belonged to her. That correspondence set out why it was that the Trustee did not accept the wife’s claim. That correspondence is set out in Annexure B to the wife’s affidavit sworn 30 November 2010. As to it:
a)the Trustee essentially noted the wife’s claim that the transfer of property from the husband to herself solely occurred on 29 March 2007 for the consideration of “breakdown of marriage”. The Trustee noted that that transfer of land document had not been lodged with the Land Titles Office. The Trustee advised the wife that he would claim the transaction to be void against him as the Trustee of the husband’s bankrupt estate pursuant to s.120(1) of the Bankruptcy Act as breakdown of marriage was not a sufficient consideration for the transfer of the property under that Act. He noted that he would proceed to claim the bankrupt estate’s interest in the property, as he was required to do pursuant to the provisions of the Bankruptcy Act and, in particular, s.19 of that Act;
b)the Trustee further advised the wife that it was necessary for him to realise the husband’s interest in the [F] property for the benefit of unsecured creditors and advised the wife of the two methods by which he could do so. They were, “One, you can join with me in offering the property for sale and we share the net return according to the bankrupt estate’s interest or, two, you may make me an offer to purchase the estate’s interest in the property on the basis of a valuation by a recognised and qualified valuer.” The Trustee noted that if the parties failed to reach agreement then he might apply to the Court for a sale of the property in lieu of partition;
c)finally, the Trustee noted that if the wife had any further information to support her claim that she should provide it to his office as soon as possible. Accordingly, and in the same month, the wife engaged solicitors to act on her behalf seeking to protect her claim with respect to the matrimonial assets of the parties and in doing so she sought to engage in negotiations with the first respondent in an attempt to avoid litigation under the Family Law Act. Negotiations commenced in February 2009 with those negotiations occurring over a period of time and ultimately being unsuccessful. Thus the wife instituted proceedings in December 2009.
In December 2009, the wife had become aware that the first respondent had listed the [R] property at Property E for sale. On 11 December 2009, the solicitors for the wife wrote to the first respondent’s solicitors seeking details with respect to the proposed sale and an undertaking from the first respondent that after payment of the costs of sale and discharge of the mortgage secured over the property to the Commonwealth Bank of Australia the net sale proceeds would be held in trust pending resolution of her claim under the Family Law Act (which I note at that time had not been instituted and was out of time). No such undertaking was given by the Trustee. Further, the Trustee was under no legal obligation to provide such undertaking.
On 3 March 2010, the wife’s solicitors received from the first respondent’s solicitors details as to the status of the husband’s bankrupt estate as at that date which included the provision of a settlement statement with respect to the Property E, [R] property and a schedule of the expenses and charges claimed by the first respondent with respect to the administration of the bankrupt estate of the husband. That settlement statement disclosed a sale price in relation to the property at Property E, [R] of $280,000 plus GST. The net figure received by the Trustee was $113,806.90.
Included in that settlement statement was notification of a payment to Meltzer Green, the Trustee’s solicitors, for costs in the sum of $41,854.11. The expenses and charges of the estate as at 2 March 2010, as provided to the wife also included an amount of $110,887.01 in Trustee’s fees. These monies had been paid out to the Trustee in accordance with s.109 of the Bankruptcy Act. S.109 is as follows:
109. Priority payments
(1)Subject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following order:
(a)first, in the order prescribed by the regulations, in payment of the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee and the costs of any audit carried out under section 175;
(b)second, if the bankrupt had signed an authority under section 188 before the date of the bankruptcy, in payment of:
(i)the remuneration of the controlling trustee (as defined in section 187); and
(ii)the costs, charges and expenses properly and reasonably incurred by the controlling trustee while the authority was in force (including any debts incurred by the controlling trustee that are provable in the bankruptcy);
(c)third, in the case of a bankruptcy that occurs within 2 months after a personal insolvency agreement executed by the bankrupt, or a composition or scheme of arrangement accepted by the bankrupt’s creditors, has (including at a time before the commencement of this paragraph) been set aside
(d)fourth, in the case of the estate of a deceased debtor whose estate is being administered under Part XI, in payment of proper funeral and testamentary expenses;
(e)fifth, in payment of amounts (including amounts payable by way of allowance or reimbursement under a contract of employment or under an industrial instrument, but not including amounts in respect of long service leave, extended leave, annual leave, recreation leave or sick leave), not exceeding in the case of any one employee $1,500 or such greater amount as is prescribed by the regulations for the purposes of this paragraph, due to or in respect of any employee of the bankrupt, whether remunerated by salary, wages, commission or otherwise, in respect of services rendered to or for the bankrupt before the date of the bankruptcy;
(f)sixth, in payment of all amounts due in respect of compensation payable under any law of the Commonwealth or of a State or Territory relating to workers compensation, being compensation the liability for which accrued before the date of the bankruptcy;
(g)seventh, in payment of all amounts due to or in respect of any employee of the bankrupt, whether remunerated by salary, wages, commission or otherwise, in respect of long service leave, extended leave, annual leave, recreation leave or sick leave in respect of a period before the date of the bankruptcy;
(h)eighth, in payment of any sum payable under section 113;
(j)ninth, in payment of:
(i)such preferences, priorities or advantages in favour of any creditor or group of creditors as regards any other creditor or group of creditors; and
(ii)such costs, charges and expenses incurred in the interests of creditors before the date of the bankruptcy;
as a meeting of the creditors, by special resolution, resolves.
(1A)Subsection (1) has effect subject to:
(a)section 50 of the Child Support (Registration and Collection) Act 1988; and
(b)former subsections 221YHJ(3), (4) and (5) and 221YHZD(3), (4) and (5) and former section 221YU of the Income Tax Assessment Act 1936.
Note:The provisions of the Income Tax Assessment Act 1936 referred to do not apply to liabilities arising after 30 June 1993.
(1B)The reference in paragraph (1)(e) to amounts due in respect of an employee of the bankrupt includes a reference to amounts due as contributions to a fund for the purposes of making provision for, or obtaining, superannuation benefits for the employee, or for dependents of the employee.
(1C)The reference in paragraph (1)(e) to amounts due to or in respect of any employee of the bankrupt also includes a reference to amounts due as superannuation guarantee charge (within the meaning of the Superannuation Guarantee (Administration) Act 1992), or general interest charge in respect of non-payment of the superannuation guarantee charge.
(2)Subject to subsection (3), where a payment has been made by the bankrupt of an amount referred to in paragraph (1)(e) or (g) and the payment was made out of moneys advanced by a person for the purpose of enabling the payment, or such a payment, to be made, the person by whom the moneys were advanced has the same right of priority in respect of the moneys so advanced as the person who received the payment would have had if the payment had not been made.
(3)The right of priority conferred by subsection (2) in respect of moneys advanced for the purpose referred to in that subsection does not extend to so much of the money so advanced as exceeds the amount by which the amount in respect of which the person who received the payment would have been entitled to priority has been diminished by reason of the payment.
(5)Paragraph (1)(f) does not apply to the extent to which the bankrupt is indemnified under a contract of insurance against the liability referred to in that paragraph.
(6)Where, under a law of the Commonwealth or of a State or Territory that provides for workers compensation, a bankrupt is liable to make a payment to a body or fund by way of reimbursing the body or fund in respect of compensation paid or payable by the body or out of the fund under that law, paragraph (1)(f) does not apply to the amount so payable by the bankrupt.
(6A)Where compensation payable under a law relating to workers compensation is payable by way of periodical payments, the amount of that compensation shall, for the purposes of paragraph (1)(f), be taken to be the lump sum for which those periodical payments could, if redeemable, be redeemed under the law under which those periodical payments are made.
(7)A special resolution shall not be deemed to have been duly passed for the purposes of paragraph (1)(j) unless the notice convening the meeting at which it was passed contained a copy of the proposed resolution.
(8)A payment must not be made under paragraph (1)(j) until 28 days after the day on which the special resolution referred to in that paragraph was passed.
(9)The bankrupt or a creditor may, before the expiration of the period referred to in subsection (8), apply to the Court to reverse or vary the decision of the creditors and the Court may, upon the application, make such order as it thinks proper.
(10)Where in any bankruptcy:
(a)property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or
(b)expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;
the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.
(11)Except as provided in paragraph (1)(a), the debts in each of the classes specified in subsection (1) rank equally between themselves and shall be paid in full unless the proceeds of the property of the bankrupt are insufficient to meet them, in which case they shall be paid proportionately.
(12)In subsection (11), debts includes liabilities, remuneration, commitments and expenses specified in subsection (1).
At trial the wife acknowledged the payment out of legal costs and disbursements to Meltzer Green and withdrew from that part of her application seeking orders against them and as contained in the orders sought by her as referred to in paragraph 3 of these reasons. She accepted the quantum of their costs and disbursements and need for them to be paid.
The wife took no issue in the proceedings with the settlement arrived at by the Trustee of the Supreme Court proceedings in which the husband was named as a defendant. She did not allege that those proceedings were handled by the Trustee in any way other than properly and accepted that the Trustee needed to take the action he did to generate funds for the estate, was legally obliged to do so, and that he appropriately compromised the matter.
However the wife claims that the moneys paid out to the Trustee in the sum of $110,887.01 should not have been paid out to him and by him but should have been kept in trust pending the outcome of these family law proceedings. She concedes that pursuant to s.109 of the Bankruptcy Act the Trustee was entitled to be paid his fees as a priority. However, she says he should not have done so knowing that her property application was pending or actual. However, the wife could have at any time before her institution of these proceedings or during, sought a review of the Trustee’s costs pursuant to the statutory regime set out in the Bankruptcy Act and contained in s.167. She could still do so. This is an important point to note because the wife, in the main, objects to the quantum of the Trustee’s costs.
The wife could also have sought some injunctive remedy on the filing of her application in December 2009 or at any time before or thereafter. The wife could also have pursued proceedings under the Bankruptcy Act and pursuant to s.178 in relation to the Trustee’s conduct during the administration of the estate at a far earlier time than this hearing had she chosen to. The wife’s evidence is that she was traumatised by the break up of herself and her husband; that her husband was intimidatory and exceedingly difficult to deal with (which seems to be common ground for all who come in contact with him in relation to these various proceedings) and that she had the care and support of her three children and was simply not able to either financially or emotionally engage in legal proceedings at any relevant time before now.
The wife thus seeks in the running of these proceedings that the moneys which have been taken by the Trustee in accordance with the Bankruptcy Act and by way of his remuneration and expenses be somehow reimbursed to the estate or be repaid by the Trustee back into the asset pool of the parties.
In the opening of the case, Counsel for the wife alleged that the wife was bringing a claim against the Trustee pursuant to s.179 of the Bankruptcy Act and making complaint about the conduct of the Trustee such that the Court should make an order that the Trustee be required to place all or some part of the funds received by him in the payment of his fees on the Supreme Court proceedings back into the asset pool of assets. No particulars were provided and the Court made a request of Counsel to provide same and afford procedural fairness to the Trustee as to the allegation of conduct as described in s.179 of the Act. It was not sought however that the Trustee be removed from office.
Ss.178 and 179 of the Bankruptcy Act are as follows:
178. 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.
179. Control of trustees by the Court
(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 order as it thinks proper.
(2)The Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs.
These sections’ roles are part of the Court’s power of supervision and control of trustees and they are different. As was said by Branson J in Wilson v Commonwealth of Australia [1999] FCA 219 at [43] and [44]:
[43]S.178 of the Act is thus a section which allows the bankrupt, a creditor or any other person affected by conduct of the trustee in the course of the administration of a bankrupt estate, to challenge that conduct by seeking review by the Court of the relevant act, omission or decision of the trustee.
[44] S.179 of the Act serves a different purpose. It reflects the position that trustees are subject to the general control of the Court. It authorises the Court, on the application of the Registrar, the Inspector-General, a creditor or the bankrupt, to inquire into the conduct of a trustee. 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 (Re Alafaci; Registrar in Bankruptcy v Hardwick at 268 per riley J; see also Re Gault; Gault v Law (1981) 57 FLR 165 at 173 per Ellicott J; Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 at 233 per Beaumont J). There will ordinarily be a proper case for inquiry where there is 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; Gault v Law 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.”
I permitted an inquiry pursuant to s.179 of the Bankruptcy Act in the circumstances of these proceedings given the evidence before the Court as contained in the allegations of the wife and the fact that the parties were already before the Court and at trial. Further, Mr Perry had at some earlier point in time included the wife in his communications as a creditor of the estate. However, the matters which Counsel for the wife sought to agitate in the cross-examination of the Trustee were matters of the quantum of his costs, its calculation and the work done including that which needed to be done. It is fair to say that the wife’s position was that the remuneration and costs of the Trustee was excessive and that this issue was at the core of her allegations of misconduct.

I had earlier indicated however, that the hearing was not legitimately a taxation of the Trustee’s costs. It became clear there was no prima facie evidence before me that the Trustee had acted improperly or unethically in the work carried out by him. There is in place a statutory regime as set out under the Bankruptcy Act and contained in s.167 of the Act which could have, and should have been pursued by the wife (and still could be) in the event that she had a complaint. The Trustee indicated in the running of the matter that the bankrupt had, in fact, made such complaint and that the hearing of the bankrupt’s complaint as to his fees was pending. The wife declined to seek an adjournment until a time after the resolution of that application or, indeed, any application that she may wish to bring which might have produced an increase in the asset pool. Thus those claims which went to, in effect, a taxation of the Trustee’s fees the Court declined to allow cross-examination in relation to. That is, questions as to the manner of calculation of the Trustee’s remuneration, the actual work done by him, the actual moneys charged by him, duplication of events and/or charges and/or double and triple handling of matters as alleged.
The conduct complained of in the particulars provided alleged failure of the Trustee to give any adequate information to the wife in a timely manner in response to her inquiries and further, failure to give any, or any adequate consideration to the merit and extent of the wife’s claim as the wife of the bankrupt or an unsecured creditor of the bankrupts’ estate and further, failing to anticipate any of the wife’s claims and/or taking action likely to defeat the same by (a) refusing or neglecting to give an undertaking or provide the net proceeds of the [R] properties, alternatively, (b) purporting to appropriate $100,000 or thereabouts by way of his remuneration without accounting to the wife thereof. I have addressed some of these particulars earlier in these reasons and find no misconduct on the part of the Trustee.
As to the remaining matters complained of by the wife, in December 2009, the wife proposed to the Trustee that the [F] property be tenanted so that rental income could be applied toward the mortgage over the [F] property. The Trustee declined the wife’s proposal, his evidence being that a tenant would create difficulties in the orderly sale of the property, and thus the wife proposed the property be sold. The parties agreed, with the wife’s solicitors having the conduct of the sale and the sale proceeds being held in her solicitors’ trust account pending the resolution of these proceedings. Those net proceeds are in the sum of $139,518.90 and were deposited into the wife’s solicitors’ trust account on 13 August 2010. Interest has accrued on that sum.
The wife is critical of the Trustee’s conduct in respect of his dealings with the [F] property. There was nothing unusual in the Trustee indicating to the wife that he did not accept her claim of sole proprietorship in relation to that property on the basis of the transfer document as presented to him and the lack of registration at the Land Titles Office. Thereafter, the Trustee took no action to remove the wife from the home but rather, she and the children continued in occupation, meeting all outgoings, including mortgage payments, until such time as the wife proposed that the property be leased whereupon the Trustee, for reasons which appear reasonable and accord with his obligations under the Bankruptcy Act, declined to entertain the proposal of the wife.
Thereafter, the Trustee and the wife agreed that the property be sold and the Trustee consented to the wife’s solicitors having conduct of the sale and retaining the funds in a trust account until the outcome of these proceedings was known. There is nothing in the steps taken by the Trustee with respect to this property which is evidence of any improper conduct on his behalf.
Subsequent to separation, the husband acquired a further real property in [K]. Such property was affected by the bushfires in 2009 and has been on the market for sale for approximately 12 months. The position of the Trustee in respect of that property is that unless Westpac return to the estate the sum of approximately $60,000, being an amount redrawn by the husband in respect of the mortgage over the [K] property, without approval from the Trustee, then there will be little or no equity in the [K] property. The Trustee’s evidence is that if Westpac are not prepared to credit the [K] mortgage redraw off the balance due under the Westpac mortgage, then he does not have sufficient funds in the husband’s estate in which to commence legal proceedings against Westpac to enforce any claim. The wife made no claim with respect to this property. There is no evidence of misconduct.
The husband has made numerous applications to this Court in its bankruptcy jurisdiction seeking various orders in respect of his bankruptcy including annulling his bankruptcy, having a new Trustee appointed in his bankrupt estate, restraining the Trustee from auctioning the Property E property and various other issues. He has been unsuccessful on each and every occasion. Costs orders have been awarded in favour of the Trustee to be paid out of the husband’s bankrupt estate. It is highly improbable that such costs will ever be recovered by the Trustee. They are considerable.

Property

In property proceedings the Court is required to undertake a four step process as set out in In Marriage of Hickey (2003) 30 Fam LR 355 at [34]-[43]:
“(a)first, the Court is required to identify the net assets or property available for distribution as at the date of hearing.
(b)second, the Court must assess the contributions of the parties to the acquisition, conservation or improvement of the property as provided in s.79(4)(a), (b) and (c) of the Act. Contributions include both financial and non-financial contributions, direct and indirect contributions and contributions made to the welfare of the family in the capacity of homemaker or parent.
(c)third, the Court must consider the matters set out in the remaining subsections of s.79(4) which incorporate s.75(2) of the Act. These matters broadly require a consideration of the financial position and resources of the parties, their age and state of health, their necessary commitments in supporting themselves or any other person, issues of child support, the effect of the marriage on the earning capacity of either party, the effect of any proposed order on the earning capacity of either party.
(d)fourth, the Court is required to determine, in light of the findings arising from the first three steps, what order is just and equitable in the particular circumstances of the matter.”

Asset Pool

The current asset pool is as follows:
a)The net proceeds of sale of the [F] property of $139,518.90, together with interest;
b)The wife’s superannuation entitlements of approximately $11,000.
The wife has legal fees in respect of these proceedings. The Trustee has legal fees in respect of these proceedings. The trustee has already received the sum of $110,000 by way of payment of his costs in relation to the involvement of the bankrupt in proceedings in the Supreme Court of Victoria.
S.79(1)(b) of the Family Law Act provides:
79. Alteration of property interests
(1)In property settlement proceedings, the court may make such order as it considers appropriate:
(b) in the case of proceedings with respect to the vested bankruptcy property in relation to a bankrupt party to the marriage – altering the interests of the bankruptcy trustee in the vested bankruptcy property;
In these proceedings the costs of the Trustee, which have priority pursuant to s.109 of the Bankruptcy Act, exceed in considerable sum the debt due to the creditors. Furthermore the Trustee’s costs and remuneration in part have been received and applied by him.
The Trustee seeks 20% of the proceeds of sale of the [F] property which in reality will be applied by him to his costs and expenses leaving nothing for the benefit of creditors of the bankrupt’s estate.
The contributions of the wife both direct and indirect, both financial and non-financial to the acquisition of the parties’ assets, and to the maintenance of those assets together with her contribution to the welfare and financial support of the family are overwhelming. The husband’s contribution was minimal and will continue to be so in respect of the children in the years to come. For this the wife should receive a substantial percentage adjustment.
Looking to the matters required to be considered in s.75(2) of the Family Law Act the Court finds the wife to work on a full-time basis as an account manager earning approximately $1,200 per week gross. The wife continues to have the sole responsibility of the children of the marriage and meet all expenses associated with their care. The husband makes no meaningful contribution to the support of the children and remains on unemployment benefits. The wife has re‑partnered and lives with her partner, [name omitted]. She has done so since September 2009. This arrangement has provided some measure of financial and emotional support to her but the ongoing financial and emotional dependency of her children upon her cannot be underestimated. The husband’s indebtedness to the Australian Taxation Office is not large but cannot be met out of the estate given the remuneration and costs quantum owed to the Trustee. The wife had no knowledge of nor gained any benefit from the husband’s non payment of taxation. The Trustee has already received the sum of $110,000 approximately and the wife’s entitlement outweighs any claim of a further payment to the bankrupt estate.
Thus the wife requires an adjustment of the asset pool on the basis of contributions and future needs in total measure such that she should receive 100% of what remains as assets of the parties and which represents a relatively small pool.

The funds already taken by the Trustee

The 2005 amendments to bankruptcy and family laws removed the priority previously enjoyed by unsecured creditors of the bankrupt spouse over the non-bankrupt spouse’s claim in a s.79 of the Family Law Act application, leaving the conflicting rights to be determined by an exercise of this Court’s discretion. But pursuant to s.109 of the Bankruptcy Act priority in the payment of the Trustee’s costs and remuneration remains over the payment of other debts in the distribution of funds in the estate.
I have gained some assistance in my consideration of this matter in the judgment of Ward J in In the matter of International Art Holdings Pty Ltd (admin apptd); International Art Holdings Pty Ltd (admin apptd) & ors v Adams & ors [2011] NSWSC 164 where judicial advice and directions was sought under the Corporations Act 2001 (Cth). In that judgment, Ward J noted the following:
a)“When an administrator is appointed, he or she can usually look to the assets of the company in administration in order to meet his or her proper remuneration and liabilities properly incurred. Section 443D of the Corporations Act gives an administrator an entitlement to be indemnified out of the ‘company’s property’ for his work and this indemnity is secured (pursuant to s 443F) by way of a ‘statutory lien’ over the ‘company's property’. Thus the administrator has a statutory indemnity over the assets of the company and as such is entitled to a lien. The lien covers not only remuneration, but also the administrator’s costs and expenses properly incurred (Re Application of Central Commodities Services Pty Ltd [1984] 1 NSWLR 25 at [27] per Needham J). This principle may also apply to a privately appointed receiver (Austin & Black’s Annotations to the Corporations Act at [5.425])”(at paragraph 62)
b)If the definition of the “company's property” for the purposes of a statutory lien is not satisfied a claim for an equitable lien can exist. (Commonwealth Bank v Butterell (1994) 35 NSWLR 64 at 71; Weston v Carling Constructions Pty Ltd (2000) 35 ACSR 100 at [18]; Lockwood v White (2005) 11 VR 402 at [34]; and Coad v Wellness Pursuit Pty Ltd [2009] WASCA 68 at [60] to [64].)” (at paragraph 73)
c)“It has been said that an equitable lien “makes the administrator a secured creditor” and, to the extent that it attaches, gives the administrator priority over the secured creditors referred to in s 556 of the Corporations Act (Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd [2007] NSWSC 10; (2007) 61 ACSR 82 at [26]; Shirlaw v Taylor (1991) 31 FCR 222; Weston v Carling Constructions Pty Ltd (2000) 35 ACSR 100)” (at paragraph 76)
d)In the case of In the matter of International Art Holdings Pty Ltd (admin apptd); International Art Holdings Pty Ltd (admin apptd) & ors v Adams & ors [2011] NSWSC 164, “the equitable lien sought was of the kind described in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 by Dixon J, namely, a lien to which an official who has incurred expenses in assembling a fund for the benefit of creditors is entitled, in relation to the fund, to priority over a secured creditor who derives benefit from the assembling of the fund. As Barrett J stated in Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd at [18]: “[t]he lien arises from the principle that the fund itself must bear the costs of realisations and other actions involved in its creation, with those costs being satisfied out of the fund before striking the balance available to the secured creditor and thereafter to creditors generally.” (at paragraph 78)
e)“Similarly, in Re Application of Central Commodities Services Pty Ltd Needham J noted that the powers of the court to impose an equitable lien in this context are derived from the general equitable principle that such an administrator or receiver, as an officer of the court, working for the benefit of all who have legitimate interests in the assets, is entitled to look to the assets of the company of which he is an administrator to meet his remuneration and his liabilities and outgoings (see also, for example, Moodemere Pty Ltd (in liq) v Waters [1988] VR 215 at [229–30] per Tadgell J and Clark Equipment Credit of Australia Ltd v Como Factors Pty Ltd (1988) 14 NSWLR 552 at [568] per Powell J). Sir John Romilly MR in Bertrand v Davies (1862) 54 ER 1204 at [1207] similarly said:
Where a receiver or manager is appointed by the court, in a suit properly constituted, such manager is to be considered as appointed on behalf of all persons interested in the property, and he is entitled to his ordinary commission and allowance, and also to a lien on the estate, as against all persons interested in it, for the balance, whatever it may be, that shall be found due to him on taking his accounts.”
(at paragraph 79)
f)“In Shirlaw v Taylor, Sheppard, Burchett and Gummow JJ observed at [560] that, in addition to the anxiety of the court to protect the position of its officer (particularly lest there be in the future an absence of persons willing to take such appointments), the claims of the officer under a court appointed administration may be seen as in the nature of “salvage”:“The principle is that those taking benefit of the administration should not escape bearing the burden of the proper cost of it.” (see also, for example, Matter of Tharp (1852) 65 ER 533)” (at paragraph 80)
It seems to me that the reasoning referred to in the preceding paragraphs is of some assistance in this case where there can be an application of the same principles to the Trustee’s performance of his work. The wife’s counsel submitted that the amount of work undertaken by the Trustee was unnecessary and not performed effectively. However on the evidence I do not accept that the Trustee engaged in procedures not open to him nor not required of him. Indeed the wife has no issue with respect to his conduct of the Supreme Court proceedings rather her concern is related to the quantum of his fees and the means of its calculation. Why should the Trustee, in these circumstances, be deprived of monetary compensation for the work done by him? He has a significant responsibility and is required to be careful. The whole of the evidence before the Court establishes that the Trustee was reasonable in his actions in his administration of the husband’s bankrupt estate. If the taxation proceedings instigated by the husband produce a further sum to be added to the asset pool then argument can be had as to its division. As to the cost of these proceedings there is nothing to alter the position that each party should bear their own costs. That is a just and equitable order.

I certify that the preceding sixty-two (62) paragraphs are a true copy of the reasons for judgment of Hartnett FM

Associate:

Date: 28 March 2011