Newman v Bain
[2012] FMCA 629
•5 July 2012
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| NEWMAN v BAIN | [2012] FMCA 629 |
| BANKRUPTCY – Application for extension of time for election by trustee pursuant to s.60(3) of the Bankruptcy Act – matters relevant to exercise of discretion. |
| Bankruptcy Act 1966 (Cth), ss.33 & 60 |
| Abeyratne v Trkulja and Ors (1998) 90 FCR 253 Vince v Sellers & Ors (2004) FMCA 564 |
| Applicant: | PHILIP NEWMAN AS TRUSTEE FOR THE BANKRUPT ESTATE OF JOHN FRANCIS DESMOND KEET |
| Respondent: | CLIVE STEWART BAIN |
| File Number: | PEG 87 of 2012 |
| Judgment of: | Lindsay FM |
| Hearing dates: | 8 June 2012 & 5 July 2012 |
| Date of Last Submission: | 5 July 2012 |
| Delivered at: | Perth |
| Delivered on: | 5 July 2012 |
REPRESENTATION
| Counsel for the Applicant: | Mr H.M. Reynoldson |
| Solicitors for the Applicant: | Corser & Corser |
| Counsel for the Respondent: | Mr R.F. Edwards |
| Solicitors for the Other Respondent: | DLA Piper Australia |
ORDERS
That the Application for an extension of time in which to make the election referred to in s.60(3) of the Bankruptcy Act 1966 constituted by the Application filed on 16 April 2012 is dismissed.
That the Application by the Respondent for an order for costs is refused.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG 87 of 2012
| PHILIP NEWMAN AS TRUSTEE FOR THE BANKRUPT ESTATE OF JOHN FRANCIS DESMOND KEET |
Applicant
And
| CLIVE STEWART BAIN |
Respondent
REASONS FOR JUDGMENT
This is an application by the trustee of the bankrupt estate of one John Francis Desmond Keet for an extension of time for the purposes of making an election pursuant to s.60(3) of the Bankruptcy Act 1966 (“the Act”). Section 60 of the Act deals with a miscellany of matters relating to stay of legal proceedings, but s.60(2) and (3) deals with the issue of whether or not a trustee is to continue to participate in legal proceedings to which the bankrupt to that point had been a party.
Section 60(2) says:
An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
Subsection (3) says:
If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.
In its terms the application puts up two dates as the proposed dates at which the election is made, and one of those dates is 14 February 2012 at which time the trustee’s solicitors sent a letter to the other party’s solicitor advising of his intention to prosecute the proceeding which the bankrupt had instituted in the Supreme Court against the other party. The other party, incidentally, is a third party and not a defendant to those proceedings.
The second date proposed in respect of which the extension of time should be made is 8 March 2012, which is the date upon which the trustee’s solicitors sent to the third party’s solicitors advice that the trustee intended to apply to this Court to make the application which he subsequently made.
The other relevant section of the Act is section 33 which says the Court may:
(c)extend before its expiration or, if this Act does not expressly provide to the contrary, after its expiration, any time limited by this Act or any time fixed by the Court or the Registrar under this Act (other than the time fixed for compliance with the requirements of the bankruptcy notice) for doing an act or thing or abridge any such time.
The sequestration order in relation to the bankrupt was made on 19 September 2011. The Official Trustee in bankruptcy became the trustee. The notice by the third party in the Supreme Court proceedings was given on 26 September 2011 and is to be found as an annexure to the affidavit of one Anderson in these proceedings. I am satisfied that the notice is in the form and contains the material which the subsection intended it to contain, that is, there is an identification of the proceedings; there is an identification of the parties and importantly the trustee is put upon notice that time is thereafter to run in relation to the question of his election.
I should say I have been assisted in determining this application by the very carefully prepared and detailed affidavit material which has been provided and which is able to shed light upon the sequence of events which explains – or at least purports to explain – the delays in relation to the giving of the notice.
The notice is sent on 26 September 2011. It is plain from a review of the affidavit material – and I will not descend to the description of specific paragraphs in the affidavit – but it is manifest that as far as the Official Trustee’s role in the proceedings is concerned, there was certainly no adequate system within the office of the Official Trustee to deal with these important matters of the observation of and adherence to the time limits that are disclosed in s.60.
We know that the matter ultimately ends up under the charge of Ms Anderson; that is on or about 5 October, but even as early as 28 September an officer or employee of the official trustee had noted on the file the receipt of the s.60(3) notice. We know also from the file and from Ms Anderson’s affidavit that on 5 October she had viewed the notice.
Neither of the persons noted as having had the notice brought to their attention instructed anyone else to do anything which constituted a proper or adequate response to the notice. One of the matters I am going to have to consider is the question as to whether there is any reasonable or acceptable explanation for the delay, and as I will indicate in a moment, this is a matter where the trustee was substituted, so I am looking at the conduct of two different trustees.
But in respect of this period of time when the Official Trustee is acting, there does not appear to me to be any adequate explanation. It is either a failure of the system or it is a failure of the individual officers of the Official Trustee to respond or respond adequately to the notice. It is not – and this perhaps should be emphasised in relation to this parcel of time – a question of a lack of awareness of the receipt of the notice or of the obligations on the trustee to respond within 28 days. It is a cognisance of those matters but then a failure to act upon them.
In any event, a decision is made to appoint a private trustee and a decision that is understandable given the relative complexity of the issues involved in the administration of the estate, and I say that because the subsequent trustee, Mr Newman, the present trustee, the applicant in these proceedings, has provided himself a very detailed affidavit which gives me a relatively clear picture of the tasks that confront him in relation to the estate, which is of a relatively high worth (but the debts are significant as well).
In any event, Newman consents to act as trustee on 20 October. At the time that he gives his consent there is still time, albeit not a great deal of time, for him to have given the appropriate response to the notice that has been given by third party. I should note in fairness to Mr Newman that formally his appointment runs from 31 October at which time the time would have expired, but by a relatively insignificant period.
In respect of his conduct of the matter, and again I am looking at this from the perspective of explanations for the delay, because it is one of a number of matters that go to the exercise of the discretion the Court has under s.33, first of all he provides an explanation in his affidavit material of the circumstance that one of the creditors of Keet objected to his appointment, apparently upon the basis of his being located interstate.
That was on 31 October but, as we know from Ms Anderson’s affidavit, by 2 November, though, after Mr Newman had made arrangements to use his firm’s Perth office, including the services of a registered trustee of that office, the creditor withdrew his objection to his appointment. So to the extent that that clouded his opportunity to get on with his tasks as trustee of Mr Keet’s estate, that is a very brief period of time.
Perhaps more importantly on 2 November Mr Keet decided to review the sequestration order that was made on 19 September, and that is not resolved until 6 December when the application is dismissed, so there is a period there of approximately one month where, in my view, Mr Newman does have a credible explanation for his inactivity.
I say that because with the review of the sequestration order having been lodged, it would have been imprudent of Mr Newman to go about incurring costs in relation to the management of the estate until such time as that matter was clarified. If the sequestration order was set aside on the review there would have been no estate to administer.
Not every trustee would necessarily have conducted himself as Mr Newman did in that period of time, given the time limit that is expressed in s.60. They may have gone about the business of satisfying themselves or appointing someone to provide information as to whether he should be satisfied that there are not time limits that are running.
But I do not think on balance a trustee should be criticised for inactivity during the period of time that it takes for the de novo review application of the sequestration order to be dealt with, and as I have indicated, on 6 December Mr Keet’s application for review is itself dismissed.
Mr Newman receives a letter on 9 December from Mr Bain’s solicitors telling him that they would be applying in the Supreme Court to dismiss Mr Keet’s proceeding. There is authority, and good authority, for the proposition that by force of law by the operation of s.60(2) and 60(3) the proceeding itself, the application against the third party, had already by that stage been determined. The authorities also recognise that there will be formalities that need to be attended to in terms of crystallising the position that the operation of s.60 has brought about.
On 9 December, leaving aside any other issues as to whether Mr Newman ought to have been aware of the existence of the letter of 26 September from his review of the file by that point, he knows from the letters from Bain’s solicitors that the time has run and that, indeed, there is about to be an application made in the Supreme Court to crystallise the position that the proceeding has been determined.
Mr Newman’s response to that is a curious one. He meets with Mr Keet’s solicitors and they ultimately become the solicitors representing him on this application. There is nothing curious about that, but on 15 December he writes to the third parties’ lawyers advising he is assessing the position with respect to the proceeding and would be likely to oppose Mr Bain’s application to dismiss it. My initial response to that is well, what would the point have been in relation to that; there is no utility in opposing the application to bring the proceedings to an end per se. What is required is the making of the application that is before me this afternoon.
Indeed, what would be required from a trustee prudently and conscientiously attending to his duties in respect of the administration of the bankrupt estate would have been an urgent application to the Court to have the time extended; even to have the time extended only for the purposes of giving him the opportunity to get the advice. It is not the case and the authorities make this clear, particularly in an age of relatively complex commercial litigation, that an application by a trustee recently appointed, who has recently had this issue brought to his attention, that there would be any expectation that an application for, as it were for a holding extension order, whilst the matter was reviewed would not in all likelihood have been made.
But Mr Newman does not do that. Mr Newman contents himself on 15 December to simply say that he is assessing his position and adumbrating not an application under s.33 of the Act to this Court, but an application that is in opposition to the application to dismiss in the Supreme Court; a response, it seems to me, that was without any kind of utility. Thereafter, nothing is done and in my view compounding the matter on 9 January he goes on annual leave, and goes on annual leave without putting into operation any remedial action in respect of what he now knows is a position where the trustee is out of time in respect of the election under s.60(2) of the Act.
On 12 January the third parties’ solicitors indeed make the application to the Supreme Court to dismiss the third party proceeding against them – and it may be that this is specifically addressed in the affidavit material that is before me and if I have missed it I apologise for that – but in any event I make the assumption that whenever that application was returnable before the Supreme Court, the application was adjourned or stayed to await the outcome of what I am assuming was foreshadowed proceedings in this Court which were relatively taken.
But not even that application elicits any election from Mr Newman. He may be on leave but I make the assumption that he is assisted – well, we know from how he responded to the creditor who made the objection, we know that there are other registered trustees in his firm who presumably could assume some responsibility for this matter in his absence – but even the application to the Supreme Court for the dismissal of the proceedings does not elicit the appropriate response. The appropriate response, the filing of an application seeking the extension of time is not, in fact, made until 16 April.
They are, in my view, the salient factual matters that arise from a review of the affidavit material that has been filed, and it is common ground between the parties that by the time that the election is made – and I leave to one side questions as to whether the election can be made until such time as the Court has authorised this time extension, leaving that to one side – the very earliest at which we can take the election to have been made is the notice that was given on 14 February of this year by Mr Newman’s solicitors that this application would be made, and it is made approximately two months later.
So with the 28 days running from 26 September 2011, the delay is something in the order of three months. Now, in terms of the matters relevant to the exercise of the discretion to extend the time, it seems plain from the authorities that the discretion is an unfettered one. That is a point that is made explicitly in the decision of North J in the Federal Court of Abeyratne v Trkulja and Ors (1998) 90 FCR 253. It was a completely different factual situation in that Court. It was, in fact, an application of this nature to extend the time for the election after a bankruptcy had expired.
So a radically different factual situation, but North J makes it plain that the discretion the Court has in respect of the extension of time is a broad discretionary power. The broad nature of the discretion is something that is emphasised at page 262, but his Honour then goes on to instance just how broad and unfettered the discretion is, because the matter that is clearly determinative of the matter of the application that was before him is the circumstance that if leave were granted – and he was told that if leave were granted the trustee would assign the action to the former bankrupt for prosecution – his Honour took into the account the circumstance that the revivified proceedings would be taking place upon the basis of his Honour having no confidence that the former bankrupt would be able to meet the costs of the defendant in those proceedings if he were unsuccessful in them.
I mention that because it highlights the unfettered nature of the discretion that is given to the Court under s.33 of the Act. It really is a discretion that is broad enough to take into account the doing of justice between not only the parties to the application, but to parties who will be affected by the order and for whom the order extending time will have consequences.
I have mentioned the question of the explanation for the delay and I have indicated that as far as the Official Trustee’s bailiwick is concerned, I find no adequate explanation for them not having – even though the period during which they acted as trustee is more or less co-extensive with the period of 28 days itself – responded in any adequate way to the notice that had been provided to them.
I have indicated that for a portion of Mr Newman’s conduct of the matter I am satisfied that there is an adequate explanation. It is the period when he elects not to undertake any work or incur any costs for the bankrupt estate whilst the sequestration was reviewed, but I have also indicated there are much more significant periods really taking in most of December and all of January when there is no adequate explanation, and indeed, simply to go on leave for a number of weeks being cognisant of the situation that it was, in my view, is manifestly an inadequate explanation for the delay for that period. So a portion at least of the period of time relating to the delay is explained and a portion is not.
Certainly, the impression one has from the period of time when Mr Newman is trustee is that he conducts himself as if he were unaware of the time limit or as if the time limit were meaningless or of no significance, or not requiring observation, and that is one of the curiosities of the matter. I say that because we know from Mr Newman’s affidavit material that this is an estate where the creditors exceed the assets. Using ball park figures, it looks as if the creditors are owed about three million dollars. It looks as if the estate is presently valued at about two million dollars. The Supreme Court action we are here dealing with is potentially one that is worth a million dollars. They are very rough figures, but even with those rough figures it can be seen that relative to the size of the estate the issue of the extension of time is an important one.
Whilst I am on the topic of the action itself I should indicate – and again, this is a matter that is often discussed in the authorities as a matter relevant to the exercise of the discretion – some assessment of prima facie or otherwise of the merit in the action itself.
Mr Keet ran some form of accountancy business. The Supreme Court proceedings were instituted by the trustees of an estate whose investments were defrauded by an employee of Mr Keet. Originally the National Bank was also named as a defendant to those proceedings. Mr Keet in turn joined as third parties Mr Bain and a partnership of which Mr Bain was formerly a member. The proceedings against Mr Keet have been determined. They have been determined essentially because he had, on the face of the material before me, a great deal of difficulty in observing his responsibilities as a litigant in terms of the observation of time limits for the filing of documents and of matters relating to disclosure, and he was unable or unwilling to take the necessary action in response to a series of springing orders. So that brought to an end the proceedings against him and as I understand it the proceedings against the National Bank who were his co-defendant have been compromised and concluded in some other way. That leaves only his third party proceeding against Mr Bain.
Mr Bain, being someone who provided an audit of the relevant accounts in Mr Keet’s accountancy practice at a period that was, as I understand the documents, very early in the series of fraudulent acts or conversions. In other words, the suggestion is that had the audit been carried out satisfactorily it would have been brought to the attention of Mr Keet by his auditor that one of his employees was up to no good, to use the vernacular, in relation to the administration of the assets of one of his clients.
Commercial litigation of this nature is complex and I just do not think there is any utility from the point of view of the exercise of my discretion in this proceeding making any kind of prima facie assessment of the merit of the claim. I note that there is no application in the Supreme Court for summary dismissal. Whether or not Mr Keet has the same problems relating to the observation of time limits and the like is another matter, but on its face it is an arguable claim and I think that is as far as I should go in according any weight to this issue in the exercise of my discretion.
More detailed scrutiny of the merits of the action it seems to me will be of no assistance in the exercise of my discretion. It is enough that I know it is an arguable claim. It is enough that I know – as far as this aspect of the exercise of the discretion is concerned – that if it is successful it is capable of providing a significantly greater dividend to creditors than is presently the case. I have mentioned the interest of creditors there. They are persons affected by the outcome of this application. It is necessary, indeed, for me to take their interests into account. I have been referred to the decision of McInnis FM in Vince v Sellers & Ors (2004) FMCA 564. It is difficult to determine what exactly is the rationale of that decision, but there is a recognition – I suppose that is the significance of the case – of the fact that the interests of creditors, the fact that this potential opportunity to provide them with a significantly greater dividend on their debt would be lost if the extension of time is not granted is a legitimate matter to take into account in the interests of justice and I do.
In my view, that is a significant matter requiring appropriate weight.
One of the matters that is also, I think, relevant to the exercise of my discretion are the circumstances relating to a letter of 5 October 2011, which was a letter sent by the trustees’ present solicitors, but at a time when they were acting for the bankrupt. It is a letter sent to Mr Bain’s solicitors, which notes the existence of s.60(2) of the Act; the effect of it; the fact that if notice has been given then the time period of 28 days is running, and then ends by inquiring whether Mr Bain has served a notice in accordance with s.60(3) of the Act. It is self evident why the letter would have been sent. The solicitors acting for Mr Keet in the Supreme Court proceedings would obviously be vitally interested to know whether the action is still going to be on foot or is still on foot.
So that letter is sent and in circumstances where the Official Trustee has been appointed, but as of 5 October the management of the estate is in transition to Mr Newman. It is understandable why and it is prudent for Mr Keet’s solicitors to have made that inquiry, so as to ensure that what, in fact, turned out to have happened did not happen, that is, that the notice was overlooked – perhaps that is not an accurate expression to use given the history of the matter – it was not overlooked at the Official Trustee, it was noted but that it did not lead to any action by him; and for a period of time throughout October and November, it was not acted upon by Mr Newman while the sequestration order was reviewed, but there was a valid reason for that in my view.
So it is understandable why the inquiry would be made. But there was no answer given to the letter. It simply was dealt with as if it had not been sent, and that part of the chronology having been brought to my attention I was interested to ascertain what the response of the recipient of the letter was, or what the explanation was as to why there was no answer, and I have the affidavit of Mr Edwards of 21 June 2012 before me in relation to that. He was not required for cross-examination. Paragraph 9 of the affidavit indicates that he and the other officers of the firm acting for Mr Bain took instructions from him and they were instructed not to respond to the letter.
There is then an attempt to explain why it is that Mr Bain may have given those instructions. The first is that the carriage of the proceedings has passed from Mr Keet to the trustee. But we know that and the author of the letter knew that; it accounts for the letter being sent. The Supreme Court proceeding was stayed pending an election being made by the trustee. That is, the operation of the law meant that the future conduct of the Supreme Court proceeding was a matter between Mr Bain and the trustee and therefore, it is said, that is why it is not necessary for the solicitors for Mr Keet to be given a response. That is, in my view, and there is no point in mincing words about that, a wholly inadequate explanation for what I regard as significant discourtesy being extended by one firm of legal practitioners to another firm of legal practitioners.
It is not part of my duty in this matter to take it further than that; to decide whether, in the circumstances, a decision to simply ignore a letter, to not respond to the letter as they have been invited to respond to it in some form, constitutes unprofessional conduct; it may well do. The response did not have to have any particular content. It obviously would have been perfectly appropriate for them to indicate that they were instructed not to provide the information or to say politely “find it out for yourself.” I mean, there is no issue relating to that, but to simply not respond is concerning and it is disappointing conduct by legal practitioners to say the least.
It is a matter I think I am entitled to take into account in the exercise of my discretion, principally because in terms of simple causation issues the proximity of this conduct to the problem that has arisen, means that it is a reasonable inference to draw that if the letter had been responded to and if the information had been provided – that is, that on 26 September time had begun to run because notice had been given to the Official Trustee by Mr Bain’s solicitors – that we would not be in the position we are; the appropriate remedial action in the form of an application for extension of time – depending on how quickly the response was made – may have been made. It is even possible that the election may have been given, within time. Indeed, it may well have been, but that did not happen.
Having said that, and an important qualification of the significance of this matter in terms of the exercise of the discretion, is another circumstance which I regard as equally self-evident as the discourtesy associated with the conduct of Mr Bain’s solicitors, and it is the fact that the bankrupt’s own solicitors could themselves have made the inquiry. They could have made the inquiry of the trustee (whether the Official Trustee or Mr Newman). It is a matter, nevertheless, that I take into account in the exercise of my discretion. The significance of it is, in my view, compounded by the inadequacy of the explanation for the non-response to the letter.
I should indicate there is another matter that it seems to me is important to take into account, and it is what I take to be the function of the time limit that is in the legislation. The reason it is there is surely because of the need to provide some degree of certainty for persons involved in litigation. Whether plaintiffs or defendants (or, as here, third parties) persons are entitled to know if they are dealing with another party who is a bankrupt, what their position as a litigant is. They need to know whether the litigation is going to continue or whether it is going to be deemed to have been abandoned, and it is in my view clear what the purpose of the provision is. It is that purpose of providing that certainty to which I have adverted.
The legislation says that a period of 28 days is enough for a trustee in these circumstances to make his election. The period of time is probably inadequate now and it is probably a matter that requires legislative attention. Litigation is much more complex than it used to be, commercial arrangements are much more complex than they used to be, and certainly in more relaxed days in terms of the conduct of litigation 28 days may have been enough. It is highly likely it is an inadequate period of time in modern conditions. But ameliorating that circumstance, of course, is the other matter to which I have adverted and that is that where trustees as here, need to get advice in relation to the prospective merits of the claim that they are inheriting, the opportunity is always available to trustees in those circumstances to come to the Court and seek an extension of time in the nature of a holding order whilst that advice is taken.
So, as with all of these matters, then it is a process as it were of instinctive synthesis of these competing matters that go into the exercise of the discretion.
Ultimately the matter I have regarded of the most significance is the length of the delay and the circumstance that a significant part of the period of that delay is one where the trustees have no adequate explanation for it, and I am not going to repeat what I have already said in relation to those periods of time, but there is the period of time when the Official Trustee inexcusably does nothing to respond to the notice, and there is the period of time when, in my view, Mr Newman inexcusably – especially the period relating to the taking of his leave – does nothing in a remedial nature in terms of the information that has been brought to his attention.
All of the other matters are matters I have tried to give appropriate and proportionate weight in the determination of the matter, but in my view having regard to the purposes of the imposition of the time limit, and having regard to the inadequacy of the explanations for the delay, in those two periods of time, the application ought to be refused and I so order.
I certify that the preceding fifty-two (52) paragraphs are a true copy of the reasons for judgment of Lindsay FM
Date: 19 July 2012
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