Nielsen v Offermans - [2008] FMCA 624

FEDERAL MAGISTRATES COURT OF AUSTRALIA

NIELSEN v OFFERMANS

[2008] FMCA 624

BANKRUPTCY – Conduct of an enquiry of the respondent as trustee – trustee cannot be satisfied that all the bankrupt’s debts have been paid in full – question of whether or not the bankrupt has been difficult – whether the bankrupt has refused to provide information – whether the bankrupt threatened violence to the trustee’s staff – costs – costs have inflated because of the ongoing debate between the trustee and the bankrupt’s solicitors.

Bankruptcy Act 1966 (Cth)

Re Wong: Ex Parte Wong v Donnelly (1995) 63 FCR 426

Applicant:

KARL NIELSEN

Respondent:

DENNIS OFFERMANS AS TRUSTEE OF THE BANKRUPT ESTATE OF KARL NIELSEN

File Number:

BRG 482 of 2007

Judgment of:

Burnett FM

Hearing date:

17 April 2008

Date of Last Submission:

17 April 2008

Delivered at:

Brisbane

Delivered on:

17 April 2008

REPRESENTATION

The Applicant appeared on his own behalf

Counsel for the Respondent:

Mr Pedan

Solicitors for the Respondent:

Gadens Lawyers

ORDERS

That the application filed 14 June 2007 be dismissed;
That the Applicant pay the Respondent’s costs to be assessed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BRG 482 of 2007

KARL NIELSEN

Applicant

And

DENNIS OFFERMANS IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF KARL NIELSEN

Respondent

REASONS FOR JUDGMENT

In this application the applicant bankrupt seeks a review of two decisions made by his trustee in bankruptcy. The first being a decision made on 31 March 2006, which was an earlier decision in respect of an alleged determination by the trustee in respect of a sum which was to be paid in order to discharge and result in an annulment of the bankruptcy; and the second being a decision made on 10 April 2007 being a decision contained in a letter of that date requiring or estimating an amount of $42,267.02 to be paid in order to discharge or annul his bankruptcy. The third limb of the application is one which seeks orders pursuant to s.179 for the conduct of an enquiry of the respondent as trustee.

If I can deal with the first two limbs of the application. In submissions that were provided by counsel who appeared for the respondent he identifies that there is a fundamental misconception in the application such that, notwithstanding a favourable finding on the facts, the applicant is entitled to the relief which he seeks.
Section 153A(1) of the Bankruptcy Act deals with annulments of bankruptcy. Relevantly it provides that:
“if the trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled by force of this subsection on the date on which the last such payment was made.”
In this case however despite evidence of payments having being made in the course of the conduct of the affairs of the bankrupt, by reason of matters which will be developed shortly, it is apparent that in fact there has been no such discharge. In part that is premised upon a misunderstanding or ignorance on the part of the bankrupt in respect of the basis on which the sums paid were applied by the trustee.
At this stage, the trustee cannot be satisfied that all the bankrupt's debts have been paid in full. Principally that is because the trustee's own accounts remain outstanding, they being a first charge on the estate. It follows that the account payable to the only creditor who remains to be paid in the estate, that being Boral, has not been discharged. Accordingly the application in respect of the first two parts of the orders sought by the applicant must fail.
The third limb of the application concerns the conduct of an enquiry pursuant to s.179 of the Act. S.179 relevantly provides:
“The Court may on an application of - - -“
(in this case)
“- - -the bankrupt enquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:
Remove the trustee from office and make such order as it thinks proper.”
In order to understand the applicant's application it is necessary to deal with some of the background facts. The bankrupt was made bankrupt by reason of a sequestration order made on 22 July 2005 in respect of a sum due to Boral of $7500. The statement of affairs of the bankrupt which was filed shortly after that time reveals that the bankrupt in fact holds considerable equity in real state and there is no question that he has the capacity to discharge the indebtedness.
So much in fact is apparent from the correspondence from a very early time. Following the receipt of the initial statement of affairs the trustee entered into negotiations with solicitors who were then acting for the bankrupt.
The first letter in a series of correspondence which I will deal with is dated 16 November 2005. It is quite apparent from the terms of the correspondence that what was anticipated was that the bankrupt would pay a sum in order to discharge the debt and consequently result in the annulment of his bankruptcy. That, in part, involved some element of speculation as to the fees that would be incurred in bringing his bankrupt affairs to a conclusion. To that end sums that were spoken of in correspondence between the parties involved projections in anticipation of those matters being the debt and anticipated fees.
On 16 November 2005 the broad projection was for a sum of $13,464 and there was a request that that sum be paid. Obviously over the intervening two weeks further matters came to the attention of the trustee and that figure was revised to $16,722.67. It is worth noting that despite the revised figure, that revised figure did not come about by reason of any amendment or change to the projected fees of the trustee but rather because a further creditor, being the Deputy Commissioner of Taxation, had been identified and also initially there had been an omission to include the realisation charge which applies.
Again on that occasion there was a request for the bankrupt to pay that sum to the office of the trustee in order to enable matters to progress. It seems at about this time or shortly thereafter there were some oral communications between an officer of the trustee and the bankrupt himself which appears to have occasioned some misunderstanding.
For his part, in an affidavit sworn by Mr Higgins who was the officer administering the estate on behalf of the trustee, he recalls having a telephone conversation with the bankrupt on 20 December 2005. He stated he informed the bankrupt that the amount required for annulment was on the assumption that there were no other creditors of the estate and that he the bankrupt had provided the trustee with all other information that was required. There is a slight difference between the expression in the affidavits but in cross-examination the bankrupt conceded that that in fact was the statement made to him.
At this time it should also be noted that there was some evidence that the bankrupt was informed that "if he paid a sum of $14,600 that should be the end of it". This was not challenged. The $14,600 was a figure which did not take into account the sum payable to the Deputy Commissioner of Taxation. That sum had otherwise been paid by the bankrupt himself directly to the ATO and in the ordinary course it is highly likely that save for certain later events, that payment of $14,600 by the bankrupt may have resulted in the conclusion of this matter.
Unfortunately however, further enquiries revealed that although the bankrupt had discharged the indebtedness to the Australian Tax Office, he had not lodged tax returns for a number of years, being the years 2002 and 2005. Accordingly the Commissioner was unable to afford the trustee a clear certificate, for want of a better description, in relation to the prospects of there being any indebtedness due to it by the bankrupt.
It appears that on 30 January 2006 the trustee became aware of the difficulty with the bankrupt's taxation affairs and the following series of events then unravelled.
On 31 March 2006 the trustee wrote to the bankrupt noting previous correspondence of 29 November and observed that he had incurred further costs in the preparation of the annulment for the bankruptcy, that costs had been incurred in respect of his dealings with the debt to the ATO which had not been originally disclosed and which revealed, in particular, the need to liaise with the ATO for the lodgement of the outstanding income tax returns for 2002 and 2005 financial years.
A further amended schedule of costs was then attached and a request for a cheque for $5354.29. This being a sum in addition to the earlier sum paid by the bankrupt to the trustee.
At this stage it seems that confusion commenced to appear insofar as the issue of costs was concerned. In the intervening period there had been a meeting of creditors on 6 February 2006 and there had been a resolution to approve fees from 22 July 2005 to the conclusion of the administration to a sum of $11,000 inclusive of GST. Ordinarily that may have been adequate save for the events that followed.
In response to the letter of 31 March, the bankrupt who had by then engaged new solicitors, caused them to write on 27 April 2006 noting the demand for the sum of $5354.29 and had them enquire as to its effect, in the sense that on their instructions their client believed that on the payment of the $14,600 on 8 January was to be in full and final satisfaction of the indebtedness. They noted:
“We have some difficulty in explaining to our client the reasonableness of the fees claimed as additional trustee's remuneration up to 24 March 2006 in the sum of $2175.07 when one has regard to the fact that the indebtedness to the Australian Tax Office was satisfied directly by our client in December 2005.”
They continued:
“It is difficult for us on the documents provided to date to reconcile precisely what fees are being claimed and what receipts are acknowledged. Furthermore we wish to ensure that our client is not being charged twice for the same work or the same statutory charges.”
That letter elicited a response and further discussion between the parties directed to the issue of costs. Subsequently on 1 June 2006 the bankrupt's solicitors again wrote:
“We are of the view that you have not adequately answered the enquiry that we made so as to enable us to give our client proper advice with respect to the amount which is now being claimed. We wish to make it clear that our instructions are that once the correct amount is verified our client will attend to payment of such amount to enable the annulment of the bankruptcy to proceed. On that basis our client does not at this point in time propose to provide the details requested in your correspondence dated 23 May 2006.”
On 5 June 2006 the trustee replied:
“I note that your client does not at this point in time propose to provide the details requested in my correspondence dated 23 May 2006 and threatening to note the matter in the event that the information was not received.”
Despite that very clear request for further information the bankrupt's solicitors appears to have been distracted by the matter of costs. In their correspondence in reply of 7 June 2006 they stated:
“I note that our client does not intend to be unreasonable in his actions with respect to the position of information to you. We have made it clear to you that our client is intending on paying whatever reasonable amount that is substantiated in respect of the amounts claimed.”
On 9 June it was followed by a further letter where they say:
“We consider that all the matters contained in our correspondence dated 7 June 2006 amount to a sufficient cause to entitle our client to refuse to provide the information requested.”
And they continued:
“Our client does not accept that the information is reasonably required by the trustee in circumstances where our client sought particularisation of the amount claimed by the trustee so as to facilitate annulment of our client's bankruptcy and you have correspondence from us confirming that once the amount due is properly determined, then that amount will be paid by our client.”
It seems to me that at this point the costs issue was the issue which was referred to by the bankrupt's solicitors and clearly in that instance their focus upon that matter was misconceived.
In response to that correspondence the trustee replied on 20 June 2006 that he noted their concerns in relation to an additional amount of $3300 costs for future remuneration and the possible duplication of realisation charges and they provided advice which on reading should have resolved the difficulties between the parties.
Unfortunately it did not. Further exchanges occurred between the trustee and the solicitors for the bankrupt. They were principally telephonic and that resulted in a letter of 24 July 2006 which enclosed a schedule of receipts and payments. Again, despite the enclosure of that document, it did not seem to resolve the difficulty.
There appears, at least from the next correspondence received from the bankrupt's solicitors, to have been a fixation with figures without an appreciation of how the figures were made up. That is demonstrated by their letter of 14 August 2006 where they made the observation:
“We note that the closing balance now stands at $2259.80 representing the amount which we understand your client to be paid in respect of the annulment of the bankruptcy.”
Again, on analysis, it is quite clear that that figure could not be correct, particularly having regard to the earlier demands. It suggests to me that the solicitors simply did not understand what was being conveyed to them in the earlier communications forwarded by the trustee.
Matters did not improve. On 17 August, perhaps unfortunately, the trustee responded saying:
“I note your understanding that I am seeking to be paid $2259.80 in order to annul Mr Nielson's bankruptcy. In this respect please provide details of your calculations in support of your assertion.”
Frankly I think the letter was probably unhelpful. On 28 August 2006 in response to that correspondence and subsequent correspondence enclosing a questionnaire, the solicitors for the bankrupt again appear to have largely missed the point. I note that aside from the question of seeking an extension of time in relation to the questionnaire they say:
“In the meantime we note that we had erroneously interpreted your previous documentation to suggest that the payment that was going to be sought with respect to the annulment of the bankruptcy was $2259.80. With respect, we are having increasing difficulty in understanding what it is you are trying to justify with respect to the calculation of your fees. The document which you have now provided to us regarding your fees still appears not to correlate to any of the other calculations which you have previously done. That document which was enclosed with your correspondence dated 24 July 2006 which was entitled "Schedule of Receipts and Payments" nominates the trustee's remuneration to be precisely $11,000. The two ledger printouts that you have provided, one being a work-in-progress ledger and the other an activity slip, if added together come to a total in excess of $11,000. We are concerned that there is a duplication between those two lists. We wish to make it clear to you again that all we are trying to do is work out exactly what fees it is that have been incurred and how they are calculated. The fact that it has proved to be such a difficult exercise to get an answer to such a simple question is a matter which is of further concern to our client.”
It is unfortunate, as I say, that the solicitors for the bankrupt at this stage perhaps did not seek some assistance because, quite clearly, they were not comprehending the matters forwarded to them by the trustee.
On 28 August 2006 an email was forwarded by Mr Higgins to Mr Barr listing perhaps more clearly in this instance, the sum which remained payable. This time however it had now risen to $14,107.50.
On 21 September 2006, unsurprisingly, there was a further review of the account payable. By this time it had grown to $17,269.31. Obviously in the meantime the issue concerning the way in which the fees had been calculated had not been resolved.
On 31 October 2006 there was again evidence of a clear lack of understanding by the bankrupt's solicitors of this issue. In their correspondence of that date where they note:
“Your last correspondence states that the estimated costs of annulment which our client as at 21 September 2006 was required to pay to the trustee was $17,296.31. That represents the current trustee's costs and fees, future costs and fees, future solicitor's fees and payment of the only creditor in the sum of $7500.”
The letter then contained a long and detailed history of the matter from the perspective of the bankrupt although clearly written by the solicitors and one expects, having regard to the obvious intellectual capacity of the bankrupt, to be more reflective of their views than of their client's.
On 18 December 2006 the trustee again wrote to the bankrupt's solicitors identifying on the second page:
“Remuneration of $11,000 including GST has been billed. Further, as at 8 December 2006 unbilled fees and disbursements total $10,867.53.”
It should have been plain from that point forward at least that the sum on account of costs had now escalated to a sum of $21,867.53 and of course that made no allowance for the payment of the creditor; by then, all up, having regard to the sum due to the creditor, the total sum payable to the estate to achieve an annulment would have been something approaching $28,000.
On 10 April 2007 the trustee again wrote noting that the estimated amount required to annul the bankruptcy had grown to a sum of $42,267.02 and of course it is from that point that the bankrupt now seeks to have the matter enquired into.
So far as the Court's powers under s.179 are concerned the power is a discretionary power. It is stated in McDonald Henry & Meek at paragraph 179.1.05:
“The power to order an enquiry is a discretionary one which is not ordinarily exercised. A clear case must be made out to warrant an enquiry, see Maxwell Smith & Donnelly. The Court has a broad discretion in deciding whether to order an enquiry. In my opinion it is not required to order an enquiry unless it is satisfied that sufficient grounds have been made out. For instance the Court should be loathe to order an enquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. If the Court considered that an enquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved. It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example, an action for breach of trust or in this case perhaps a taxation of costs.”
In his outline Mr Pedan has identified the following factors as relevant.
The question of whether or not the bankrupt has been difficult: Complaint was made that he has been difficult and refused and failed to provide any income statement. I do not accept that. I should say in passing that I had the opportunity to view the bankrupt when he gave evidence today.
He is a gentleman who is clearly challenged by these matters. He is semi-literate, as was apparent; when he was unable to read sections of his affidavit. Furthermore it was quite clear to me by reason of the manner in which he presented evidence and addressed the Court from the Bar table that he is certainly not a well educated person and I would think would have difficulty grappling with the concepts related to process concerning the sequestration of his estate.
He understands that he owes money, he understands that he wants to pay the money back and he understands that he doesn't understand how the costs have escalated in the way in which they have to date. However, those matters aside, he has acted at all times on the advice of his solicitors and I think to that end, whilst it might be interpreted that he has been difficult, I believe the conduct to be more a feature of the conduct of his solicitors rather than the instructions that have necessarily been provided by him.

It has been said that he refused to provide information. Again, he has at all times from my observation and from the material, acted on the advice of his solicitors. The illustration was made, for instance, that he had failed to fully complete the statement of affairs form and update it as was requested by the trustee. I have already made the observation that I formed the view that he is semi-literate and I would think he would have had some difficulty completing the income questionnaire without the assistance of his solicitor. Whilst it can be said that his solicitor perhaps has not understood his obligations, I do not attribute the same level of miscreance to the bankrupt himself.
It was further alleged that there were threats of violence to the trustee's staff. With respect, again, having regard to the reality of this situation, I would no doubt expect that Mr Nielsen may have presented as a somewhat frustrating person to any of the trustee's staff. From my assessment of him, I do not believe Mr Nielsen is the sort of person who would have set out to be intentionally frustrating but rather his responses reflected in his own simple way a failure to appreciate what was requested of him.
As I made the observation in the course of debate with Mr Pedan, I do not form the view that Mr Nielsen is a Christopher Skase, nor does he even fall something close to the category of Wong in Wong v Donnelly[1]. Rather, he is just a simple man who just did not understand what was happening and no doubt his inability to understand perhaps has led to frustration on both sides. Indeed, it seems to me that this is a case that has as its hallmark very poor levels of communication at all levels.
[1] (1955) 63 FCR 426.
It is said that he made irate telephone calls to the trustee's staff. Again, while I am inclined to accept that perhaps a degree of irritation may have developed between the parties in the course of telephone conversations, I do not think that in this instance they are necessarily to give rise to adverse inference against the bankrupt.
It is said that he engaged in mischievous and self-serving correspondence, for example, the various letters that have been addressed. Again, while obviously accepting that correspondence addressed by solicitors to the trustee in this instance should notionally have been premised upon instructions, even if instructions were obtained (and I have no reason to doubt that Mr Barr sought instructions on each occasion), I formed a view that Mr Nielsen really would not have had any insight into the significance of the instructions that he was providing on the advice of his solicitors. In my view, he relied wholly upon the advice he received from his solicitors in relation to the manner in which the matter was progressed.
Then there is the final submission that his refusal to accept his continuing stubbornness, is what is causing the ongoing expense. That there is no doubt the bankruptcy annulment could have been quickly achieved if he had provided for the payment of the debt and the trustee's costs and expenses and I urged that course upon the bankrupt this afternoon.
However, I do not accept that it is occasioned by any stubbornness. I really do accept in this instance that it is occasioned by a lack of insight and capacity by the bankrupt to understand the issues in this case because of his limited capacity to understand these matters, rather than because of any mischievousness or stubbornness on his part. He has at all times engaged solicitors believing them to act competently for him. Whether or not they have done so is a matter for somebody else to determine but undoubtedly he has been let down in the sense that he is here today when quite clearly this matter should have been resolved long ago.
To look at it then from the other side of the ledger in terms of whether the trustee has engaged in any misconduct, at first blush, it might seem that there has been overcharging on the part of the trustee. I am not in any position to conclusively determine that matter as I am not provided with any evidence which assists me either way. I have of course the evidence of both Mr Duus and Mr Cunningham.
Mr Duus from his assessment forms the view that the bankrupt administration has been conducted in an appropriate manner by the trustee and his staff across different levels of experience. There has not been a disproportionate amount of time charged for the bankrupt administration by the trustee or by other senior practitioners and from his cursory review of the documents the amount charged does not appear to be excessive.
The only observations that Mr Cunningham makes that could be seen to be relevant to the application today are that there has been and there is some criticism of the poor projections in relation to the matter on which costs were estimated at the outset but there does not appear to be any complaint of overcharging. The observations that Mr Cunningham makes mirror those concerns that I initially had when I first reviewed the material quickly this morning. It seemed incongruent that as at May 2006 the total of work-in-progress to that time would have worked out at about $6000, whereas there had been an allowance by the creditors for up to $11,000 in expenses as at February 2006. It was initially difficult to understand the basis for the disparity.
But in any event what is apparent to me, having reviewed the correspondence, as I have done in the course of these reasons, is that the real reason that costs in this instance have inflated in the manner in which they have, is because of the ongoing debate between the trustee and the bankrupt's solicitors concerning the very matter of the costs themselves.
The issue of costs in this case has proved to be as difficult as the mythical Greek God of Hydra, the moment you cut one head off, two heads subsequently appear in its place. The costs in this case seem to have developed the same pattern of growth. The issue of costs having been disposed of in one instance, in itself has generated further costs in the disposition of the initial problem.
In fact if anything, unfortunately for the bankrupt it is the conduct of his solicitors rather than of the trustee who has principally been responsible for the escalation of the costs in this case. If the solicitors did not understand the issue of costs as it seems to me they did not, and did not understand the manner in which the trustee was accounting them, which again it seems they did not, then perhaps they should have sought the advice of third parties to assist them in resolving those difficulties.
However, embarking upon sterile debates in correspondence, as in this case, has simply achieved nothing to assist the bankrupt, except to see that the costs have escalated beyond what would seem to be reasonably proportional, having regard to the debt and the complexity of the estate in this instance. In making that observation I cast no aspersions upon the trustee I accept the trustee has acted properly and has not acted in a way which has sought to inflate the costs unnecessarily. It has simply been merely a product of the manner in which the debate has ensured.
In the circumstances I am not satisfied that there are substantial grounds for believing that the trustee has erred in his administration. I do not consider that an enquiry is warranted or that sufficient grounds for it have been made out and in those circumstances I will dismiss that part of the application.
The application will be dismissed.
There is, in my view, no reason why the applicant having been unsuccessful should not pay the costs of the application. I propose to assess the costs this afternoon.
I will order that the costs be assessed then.

I certify that the preceding sixty-one (61) paragraphs are a true copy of the reasons for judgment of Burnett FM

Associate: Beverley Schmidt

Date: 12 June 2008