Nguyen v Pattison
[2004] FMCA 517
•20 August 2004
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| NGUYEN v PATTISON | [2004] FMCA 517 |
| BANKRUPTCY – Discharge – objection by trustee to discharge bankrupt – refusal of trustee to withdraw objection – relevant considerations in determining whether objection to discharge should be withdrawn. |
Bankruptcy Act1966 (Cth), ss.149a, 149j, 149k, 149n, 178
Ansett, Re [1995] FCA unrep7408
Inspector-General in Bankruptcy v Nelson (1998) 168 ALR 340
Macchia v Nilat [2001] FCA 7
Plant and Insolvency and Trustee Service Australia [2004] AATA 407
Thomas; Thomas v Donnelly (No. 2) [1997] FCA 1142
Wharton v Official Receiver in Bankruptcy [2001] FCA 96
| Applicant: | THAN SON NGUYEN |
| Respondent: | PAUL A PATTISON Trustee of Bankrupt Estate of THAN SON NGUYEN |
| File No: | MZ 696 of 2004 |
| Delivered on: | 20 August 2004 |
| Delivered at: | Melbourne |
| Hearing date: | 16 August 2004 |
| Judgment of: | Riethmuller FM |
REPRESENTATION
| Counsel for the Applicant: | Mr Irlicht |
| Solicitors for the Applicant: | Irlicht & Broberg |
| Counsel for the Respondent: | Mr Agardy |
| Solicitors for the Respondent: | Harwood Andrews |
ORDERS
The application be dismissed
The respondent pay the applicant’s costs thrown away, fixed in the sum of $300.00 and that otherwise there be no order as to costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MZ 696 of 2004
| THAN SON NGUYEN |
Applicant
And
| PAUL A PATTISON Trustee of Bankrupt Estate of THAN SON NGUYEN |
Respondent
REASONS FOR JUDGMENT
The applicant seeks a review of the decision of the Trustee of Bankruptcy (“the trustee”) pursuant to section 178 of the Bankruptcy Act. Section 178 of the Bankruptcy Act is in the following terms:
(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.
The decision that the applicant seeks to review is a decision of the trustee contained in a letter dated 20 May 2004. That decision is a decision of the trustee not to withdraw his earlier objection to the applicant’s discharge from bankruptcy, a course that is open to the trustee pursuant to section 149j of the Bankruptcy Act.
Background
In order to understand the nature of the dispute between the parties in this application it is necessary to provide a brief outline of the factual background.
The applicant became bankrupt on 25 July 2000. The applicant filed a statement of affairs on 17 October 2000, which thereby becomes the date of the commencement of his bankruptcy.
On 15 March 2001 the trustee received from the applicant a completed statement of annual income, and based upon that statement issued a contribution assessment notice for $4,595.00. A copy of that assessment was attached to the affidavit of the trustee as exhibit PP4. That notice was issued on 10 April 2001 and required the contribution with respect to the year 25 July 2000 to 24 July 2001.
Thereafter the trustee continued to issue notices to the applicant requesting information in the form of an annual statement of income from the applicant. The applicant did not respond to those notices until April of this year when his current solicitors returned completed questionnaires with respect to all past years and forwarded the applicant’s cheque (on 17 May 2004) finally satisfying the earlier notice of contribution.
As a result of the applicant’s failure to complete the annual statements of affairs, the trustee objected to the applicant’s discharge from bankruptcy on 2 September 2003. The trustee also objected to the applicant’s discharge on alternative grounds, which objection was not upheld and which are largely irrelevant for the purposes of this application.
On 11 February 2004 the Inspector-General upheld the trustee’s objection to the discharge on the grounds that the bankrupt had not completed annual statements of affairs.
It is conceded by the applicant that he failed to provide the appropriate information, pursuant to section 149A the objection of the trustee was a proper objection which resulted in the extension of his period of bankruptcy to a period of eight years.
The applicant explains in his material that the reason for his failure to provide the appropriate information to the trustee was that he did not receive the letters from the trustee. In this regard he states that he had requested his previous solicitors to notify the trustee of his change of address, and that it appears that his solicitors failed to do so. In a letter from his previous solicitors they do not confirm or deny the allegation, simply stating that they would have to request the file to determine whether or not such a request was made of them and whether or not they had passed that onto the trustee. I accept the applicant’s evidence in this regard. However, despite hearing nothing from the trustee, the applicant did not pay all of his initially assessed contributions, nor take any steps to enquire as to why he had heard nothing from either his solicitor or the trustee.
The applicant conceded that ultimately he must accept responsibility for the failure to notify the trustee and does not seek to challenge the trustee’s decision pursuant to 149a, at least not before me.
The applicant relies upon the fact that in recent times he, with the assistance of his current solicitors, has supplied all of the information requested by the trustee and made payment to the trustee of the contribution amount that has been assessed.
As a result the case for the applicant is that whilst he was in default of his obligations under the Bankruptcy Act with respect to the trustee he has now remedied or ameliorated these defaults and ‘put his house in order’, so to speak.
As a consequence the applicant sought to have the trustee withdraw his notice of objection, thereby allowing the period of bankruptcy to come to an end. The trustee, it is agreed by the parties, has the power to withdraw the objection pursuant to section 149J of the Bankruptcy Act.
The trustee declined to withdraw the objection pursuant to section 149J, providing the applicant with written reasons for his decision to do so in the following terms:
The fact that the bankrupt has since lodged the requested annual statement of income questionnaires and paid the income contribution owing does not change the fact that my objection was valid and reasonably based.
The applicant now seeks that the Court make orders directing the trustee to withdraw his objection pursuant to his powers set out in section 149J and relies upon section 178 to show that the Court has power to make such orders.
The discretion under section 149J
It is clear that the Court has a very broad supervisory power. The nature of the power provided to the Court under section 178 was discussed in some detail by French J in Macchia v Nilat (2001) FCA 7. In that case his Honour examined the statutory framework for the control of trustees in bankruptcy and discussed in some detail the powers of the Court pursuant to section 178 in order to control the trustees conduct (see paragraphs 30 to 42). It is accepted that there is power pursuant to section 178 for the Court to direct the trustee to withdraw a notice of objection.
The only decision in which an application has been made pursuant to section 178, with respect to a trustee’s discretion under section 149J, that I have been referred to is the decision in the matter of Thomas; Thomas v Donnelly (No. 2) [1997] FCA 1142.
In that case, Emmett J stated:
A trustee is of course an officer of the Court and, in the exercise of his powers and functions, he is required to take into account not only the interest of creditors but also the interest of the bankrupt and the community generally. In exercising his powers the trustee should have in mind the object of enforcing careful and moral conduct on the part of the debtor and to uphold the commercial morality of the community. Whilst section 177 of the Bankruptcy Act requires the trustee to have regard to any lawful directions given by resolution of the creditors it is open to a trustee to decline to follow a direction of the creditors if in circumstances he regards it as inappropriate to comply with the directions.
Later in the Judgment his Honour states that he proposes remitting the particular matter back to the trustee to make a decision according to law having concluded that the trustee had decided that a resolution of creditors was decisive, and that as a matter of law such a resolution should not be seen as decisive but given appropriate weight based upon the reasons for such a resolution.
The primary basis for opposing the orders sought by the applicant that was relied upon by the trustee, was that the proper decision was made at the time that the notice of objection was lodged, and that the subsequent events should not impact upon that. It appears to me that a proper reading of the relevant part of the Bankruptcy Act shows that section 149J has a purpose of providing a mechanism whereby a decision under section 149A, which may have been clearly appropriate at the time, can be reversed if it is subsequently concluded that it is appropriate to bring the period of bankruptcy to an end.
The scheme of the legislation
The primary purpose of the Bankruptcy Act is to provide a mechanism whereby a debtor’s property can be taken and used to pay creditors, to the extent that there is a shortfall to allow the debtor to be freed from the burden of accumulated debts. The scheme is not intended to be punitive, although there must necessarily be punitive aspects to the legislation in order to provide appropriate incentives for bankrupts to comply with their obligations under the Act.
Division 2, Sub-division A of Part 7 of the Bankruptcy Act deals with discharge of bankruptcy after certain periods. Section 149 of the Act provides for automatic discharge after a period of 3 years. Sections 149A to 149Q provide a process or system for extending the period of bankruptcy. Pursuant to 149A a period of bankruptcy is extended to a period of 5 or 8 years (depending upon the type of circumstance) when a trustee makes an objection on a ground set out in the sections. In this case the objection was one of the grounds set out in section 149D of the Act.
Section 149K of the Act provides a review mechanism before the Inspector-General. Section 149N provides for the grounds upon which an objection may be reviewed.
Some history of the operation of sections 149A through 149N is important in order to understand the operation of the provisions. Earlier versions of these provisions were considered by the Full Court of the Federal Court in Inspector-General in Bankruptcy v Nelson (1998) 168 ALR 340. Under the earlier version of the objections provisions the court concluded that the trustee was required to consider whether there was any reason to object, beyond the mere fulfilment of one of the grounds (at page 352 to 353).
In Wharton v Official Receiver in Bankruptcy [2001] FCA 96, Weinberg J considered the relevant subdivision (on its former wording) and said:
80.Section 149A is an important provision. It provides a strong incentive to bankrupts to co-operate with their trustees during the administration of their estates. In some circumstances, an incentive of that type is plainly necessary. However, unless the section is construed in a sensible manner, it is capable of operating oppressively. It is reasonable to assume that trustees who make requests for information from bankrupts, including those concerning their income, will make due allowance for what might be regarded as the ordinary exigencies of life. Requests for information are often not met in as timely a manner as they ought to be. Some delays may be regarded as excusable while others will properly give rise to the filing of notices of objection. A bankrupt cannot ignore requests from his or her trustee. A particularly lengthy delay in responding to a request may trigger a notice of objection to discharge which is entirely justifiable. A relatively short delay in answering a request may be a different matter. Section 149D(1)(d) must be construed in the light of the requirement in s 149B(2)(b) that the trustee must believe that the filing of a notice of objection is the only way to induce the bankrupt to discharge his duties under the Act. It is plainly a course of last resort.
81.The fact that the trustee may cease to object or withdraw an objection prior to the expiry of that eight year period offers scant comfort to a bankrupt who may be involved in a bitter and protracted dispute with the trustee about a host of matters connected with his bankruptcy. The proper approach to the construction of s 149A is to ensure that the grounds upon which a notice of objection is filed are sufficient to justify taking that course.
In Re Ansett [1995] FCA unrep7408 (similarly with respect to the former wording) Olney J said:
9. The legislative policy seems to be clear enough. Section 149D(1) sets out some 14 grounds upon which an objection may be based. The mere existence of an available ground does not automatically give rise to an extension of the bankruptcy. To achieve that end the trustee must give notice setting out the ground he relies upon, the evidence which establishes that ground and the reason why he objects to the discharge on that ground. The latter requirement suggests that the trustee must address the relevance of the bankrupt's conduct in relation to the ground of objection in the context of the administration of the estate and to make a judgment as to whether that conduct provides a basis or reason for the bankruptcy to be extended. Further, the trustee is required to expose his reasoning in the notice.
The current versions of these provisions were enacted in 2002. The amendments create a special category of grounds of objection: ‘special grounds’. Under the amendments ‘special grounds’ will be upheld even without any other evidence as to the relevance of the bankrupt’s conduct or the basis or reason for continuing the bankruptcy.
The purpose of the provisions as currently enacted was discussed in an article Costello, “Bankruptcy Reforms Package” (2001) 11 New Directions in Bankruptcy (at page 17). The author states:
In practice, trustees often have found it difficult to maintain objections. Frequently, objections have been cancelled on review by the Inspector-General, the AAT of the Federal Court. The reasons for cancellation vary. Some trustees have found it difficult to differentiate clearly the ground(s) of an objection and the reason for filing the objection. Moreover, on occasions, the AAT has upheld a bankrupt’s challenge to an objection simply because, either during an AAT hearing or just before it occurs, the bankrupt eventually has provided information long sought by the trustee and the non-supply of which information was the ground of the trustee’s objection. Such decisions undermine a prime purpose of the objection regime which is to induce a bankrupt to co-operate, promptly, with the trustee of the bankrupt estate.
The author goes on to state:
The Full Federal Court decision in Inspector-General in Bankruptcy v Nelson (1998) 168 ALR 340 establishes that a sufficient reason for filing an objection under the current provisions is that doing so will advance the trustee’s administration of the bankrupt estate. However, conversely, punishment of the bankrupt for failure to cooperate was found to be an impermissible reason for filing an objection.
To address these deficiencies in the present law which have hampered a trustee’s capacity to elicit co-operation from some bankrupts, and to strengthen the trustee’s hand, the draft Bill proposes a tougher objection-to-discharge regime under which it is expected that more objections will withstand the review process.
Similar comments were set out by Hogan-Doran, “Bankrupty: Tightening up on Bankruptcy — no more easy outs” (2003) 41 Law Society Journal 58.
In the Explanatory Memorandum by the then Attorney-General, the Honourable Daryl Williams AM QC MP, it was stated that one of the objects of the bill was to:
Strengthen the objection-to-discharge provisions of the Bankruptcy Act 1966 (the Act) by making it easier for trustees to lodge objections to a person’s discharge from bankruptcy and harder for bankrupts to sustain challenges to objections. (at paragraph 3(c))
The memorandum goes on to state:
Objections to discharge – Background
163 The objection-to-discharge provisions of the Act allow a trustee to file an objection to the bankrupt's discharge from bankruptcy. A successful objection extends the standard period of bankruptcy by either 2 years or 5 years, depending on the grounds of the objection. The grounds are specified in the Act. They relate to various means by which a bankrupt's non-cooperation with the trustee can frustrate the trustee's efforts to administer the bankruptcy.
164 When filing an objection, the trustee must set out the ground of objection, the facts relied on to support the ground and the reasons for filing an objection. Case law establishes that punishing the bankrupt, of itself, is not a lawful reason. The only valid reason for filing an objection has been held to be to advance the trustee's administration of the bankruptcy. This approach does not encourage bankrupts to cooperate with trustees.
Special grounds of objection
165 The amendments propose to address this weakness in the present law by identifying some existing grounds, and adding some new grounds, as "special grounds". In these special ground cases, the trustee will not need to show that filing the objection will advance the administration, only that the special ground existed. Therefore, if the grounds of objection include a special ground, only the facts supporting that special ground need to be established…
Bankrupt's conduct after ground commenced to exist must be ignored on review of objection
174 Trustees understandably are disconcerted when an objection filed by them has been cancelled by the AAT or the Court because, for example, immediately prior to a review hearing, the bankrupt has provided information long sought by the trustee. By proposed new subsection 149N(1B), no notice is to be taken by a review tribunal or the Court when applying proposed new subsection 149N(1A), of any conduct of the bankrupt after the time when the ground concerned first commenced to exist.
175 However, as a bankrupt may fail, for reasons beyond the bankrupt's control, to comply with a duty imposed under the Act, the proposed amendment permits the Inspector-General to cancel an objection made on a special ground if the bankrupt establishes that there was a `reasonable excuse' for the conduct or failure that constituted a special ground.
Since these changes the Administrative Appeals Tribunal, in Plant and Insolvency and Trustee Service Australia [2004] AATA 407 determined a recent application to review a trustee’s objection on the basis set out in Wharton (supra). However, that case did not involve one of the ‘special grounds’ under section 149N(1A). There appears to be no reported case on a ‘special ground’.
Despite the establishment of the ‘special grounds’, section 149J remains a feature of the Act in the following terms:
(1)If at any time before a bankrupt is discharged the trustee withdraws the objection, the trustee must give the Official Receiver a notice of the withdrawal of the objection and give the bankrupt a copy of the notice.
(2)[Subs (2) rep Act No 132, 2002, s 3 and Sch 1]
(3)The withdrawal takes effect at the beginning of the day when details of a notice under subsection (1) are entered in the National Personal Insolvency Index.
It appears clear that the legislature intended that establishing a ‘special ground’ for giving a notice objecting to a bankrupt’s discharge is now intended to be sufficient evidence to demonstrate that it is appropriate to continue a bankruptcy beyond 3 years. It appears that the intention of the amendments is to deem a ‘special ground’ sufficient evidence of the basis for continuing a bankruptcy, without reference to the considerations discussed in Wharton and Nelson (supra). Whilst section 149J was said to offer scant comfort (see Wharton, supra), it now remains the only comfort for a bankrupt the subject of an objection on a ‘special ground’, such as the applicant.
Relevant considerations under section 149J
The relevant considerations for the exercise of the discretion provided for under section 149J must necessarily flow from a consideration of the scheme of the legislation and the purpose of the recent amendments to the scheme.
Ultimately, the question remains as to whether or not there is some proper purpose to be achieved in continuing a person’s bankruptcy rather than discharging them. However, due weight must be given to the purpose of making some grounds of objection ‘special grounds’, lest section 149J simply becomes a method of circumventing the ‘special grounds’ scheme.
Appropriate considerations under section 149J must be based upon considerations relevant to the achievement of a purpose of the law of bankruptcy. This will usually require (although not necessarily be limited to) consideration of the following:
a)the utility of continuing the administration of the estate for the purpose of recovering or potentially recovering assets or funds for the creditors;
b)the importance of continuing the administration of the estate for a sufficient period of time to allow for appropriate inquiry to be made in the circumstances of the particular case (having regard to the circumstances of the case and the conduct of the bankrupt);
c)maintaining public confidence by ensuring that adequate time is provided to allow for careful scrutiny of the bankrupt’s conduct and enforcement of his or her obligations; and
d)the interests of the bankrupt in being released from bankruptcy in a timely manner.
Exercising the discretion in this case
The trustee in his decision of 20 May 2004 erred in the exercise of his discretion. The trustee appears to have considered the past conduct of the bankrupt, without reference to his subsequent remediation by providing information and payment of funds. This is not the only relevant factor under section 149J (or consequently section 178).
I must now determine whether or not to require the trustee to make a particular decision or simply remit the matter for the consideration of the trustee.
The evidence before me is that the bankrupt has now provided all of the information that the trustee has requested, including his most recent statement of affairs covering the year ended 25 July 2004. These statements show no significant income (in fact an income less than $27,000.00 per annum), and no significant assets or interests which are likely to lead to the recovery of funds or assets for the benefit of the creditors.
It appears that the circumstances of the bankrupt’s failure to initially comply with the requests of the trustee are significant, as is demonstrated by the objection ground being a ‘special ground’ under the Act. However, this conduct is now ameliorated by compliance. The information provided on compliance doesn’t, on its face, give rise to the need for any particular enquiries. The non-compliance has caused an extension of the bankruptcy for a significant period already, creating an effective punishment on the applicant for his conduct.
The bankruptcy in this case involved a large sum: debts in excess of $1.44 million.
The trustee, in his affidavit, has set out no evidence upon which it could be concluded that there is any purpose in continuing the bankruptcy. Indeed he does not even allege that there are extant avenues of inquiry. In the affidavit material it appears that the trustee was relying upon the argument that as the bankrupt did not initially comply with his obligations under the Act (and that this non compliance continued for two and a half years) that there is sufficient public interest in not discharging the bankrupt, even in the absence of a consideration of any of the other factors. There was no evidence that the trustee had taken any steps to pursue the applicant since his non-compliance. When considering exercising the power under section 149j such a limited enquiry is not appropriate, once a reasonable time has passed for the trustee to properly consider the information provided.
During the course of argument I indicated my views to Counsel for the trustee and requested him to advise the Court of what steps the trustee proposed to take as it appeared that the trustee had done little to date.
I was advised from the bar table that the trustee would seek to examine the applicant. As a result, with the consent from both parties, an examination of the applicant pursuant to section 81 of the Act was set down for the following day in order to allow the trustee to make his examination of the applicant. It was also agreed by both parties that the evidence of the examination would be evidence in this application.
At the examination of the bankrupt under section 81 evidence of the following emerged:
a)the applicant has been working for a company owned and controlled by his de facto spouse;
b)the applicant has been paid a very low wage;
c)the applicant has been involved in assisting his de facto in the operation of the company, including attendances upon professional advisors;
d)the applicant has been buying fruit and vegetables for the company (which operates a grocery shop) at the markets;
e)the wages paid to the applicant, being less than $27,000.00 per annum, may well be less than appropriate remuneration for the tasks he has been undertaking;
f)the applicant was offered a loan of $50,000.00 by a business associate to enable him to attempt to negotiate a discharge from bankruptcy so that he could work with the associate in the operation of a shopping centre he had a 30% share in before bankruptcy; and
g)the applicant has operated businesses importing goods from Vietnam before his bankruptcy.
As a result of the information flowing from the section 81 examination, and in light of the previous conduct of the bankrupt, the trustee seeks time to pursue the applicant with respect to the applicant’s income and his income and earning capacity.
The trustee also argues that he has lost around two and a half years in which to pursue the applicant as a result of the failure of the applicant to comply with requests. However, the applicant was never summonsed to attend an examination by the trustee during this period. It appears clear that the trustee has taken more steps to pursue the Applicant in the course of the hearing of this application than in the administration of the estate over the last few years. There is a temptation to develop a rule of thumb that the time of non-compliance should be added onto the initial three years. Whilst it has a superficial sense of poetic justice it is not what is required to properly exercise the discretion required under the Act.
If one analyses this case in terms of the factors identified above the results are as follows:
a)The utility of continuing the administration: There appears to be prima facie evidence that the applicant has a greater income and earning capacity than presently being exercised. It is not possible to determine definitively if there is in fact utility in continuing the administration of the estate;
b)Sufficient time to allow for appropriate inquiry: Whilst the trustee has had significant time to make enquires, there is now evidence which would warrant further inquiry; at least another few months would be needed in this regard. It is difficult to see why a trustee should have more than 9 to 12 months after a bankrupt has complied, if the trustee is not actively pursuing the administration of the estate;
c)Maintaining public confidence: There has been a significant period of bankruptcy, in excess of the minimum 3 years. The applicant has suffered a significant lengthening of his period of bankruptcy due to his default. The lack of interest in the applicant by the trustee to date would do little to maintain public confidence, although the fault in this regard lies with both applicant and trustee. However, to discharge the applicant without ensuring that a reasonable opportunity is provided to follow up the matters arising from the applicant’s section 81 examination would not be likely to maintain public confidence.
d)The interests of the Bankrupt: The applicant has a strong interest in discharge from bankruptcy. He is entitled to expect that the trustee would act in a timely fashion if the trustee wishes to pursue him further. However, his failure to maintain any contact with the trustee has also contributed to the current circumstances.
It was submitted by both parties that I could make orders requiring the trustee to withdraw the objection (and effectively discharge the applicant), but stay the operation of those orders until the end of the year to allow the trustee to pursue the applicant over the next few months. It was argued that the trustee could then apply to have my orders discharged if the trustee could establish further grounds for continuing the bankruptcy. That would really amount to a provisional or conditional judgment. I am not satisfied that I have power to make such orders, nor that it would be appropriate to do so in the context of this case.
On balance I am not satisfied that it would be just and equitable to make orders under section 178 requiring the trustee to exercise his power to withdraw the objection under section 149J (effectively discharging the applicant from bankruptcy). However, the trustee ought to actively pursue the administration of this estate, and if he does not do so, it is difficult to see why he ought not exercise his discretion under section 149J in the near future.
I therefore dismiss the application.
Costs
I am of the view that whilst the applicant has failed in the application it is only on the basis of evidence elicited during the application, which could have been obtained by the trustee before the applicant was put to the costs of the proceedings. The initial reasons given by the trustee were such that it was reasonable for the applicant to bring the application. Therefore I do not propose to make any orders for the costs of the application, other than the costs thrown away by an earlier adjournment (agreed by the parties to be in the sum of $300.00 and payable by the respondent to the applicant).
I certify that the preceding fifty-four (54) paragraphs are a true copy of the Reasons for Judgment of Riethmuller FM
Associate:
Date:
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