Porter v Smedley
[2014] FCCA 1257
•19 June 2014
FEDERAL CIRCUIT COURT OF AUSTRALIA
| PORTER & ANOR v SMEDLEY | [2014] FCCA 1257 |
| Catchwords: COSTS – Trustee’s application for costs and expenses incurred in administration of the estate from date of sequestration order until date of notification of Application for Review – sequestration Order not annulled – Trustee not protected by s.154 of the Bankruptcy Act 1966 (Cth) – relevant considerations. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.153B, 154 Federal Court of Australia Act 1976 (Cth), s.28 |
| ACM Group Ltd v Smedley [2014] FCCA 494 Austral Brick Co Pty Ltd v Daskalovski [1998] FCA 782 Demarco v Pascoe [2000] FCA 1771 Flint v Richard Busuttil & Co Pty Ltd (2013) 216 FCR 375 Kyriackou v Shield Mercantile Pty Ltd (No.2) [2004] FCA 1338 McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 87 Pattison v Hadjimouratis (2006) 155 FCR 226 Re Gollan; Ex parte Gollan (1992) 40 FCR 38 Symons v Bateman [1999] FCA 658 |
| Applicant: | JASON PORTER AND PAUL WESTON AS TRUSTEES OF THE BANKRUPT ESTATE OF GRAEME GILBERT SMEDLEY |
| Respondent: | GRAEME GILBERT SMEDLEY |
| File Number: | SYG 1867 of 2013 |
| Judgment of: | Judge Lloyd-Jones |
| Date of Last Submission: | 6 May 2014 |
| Delivered at: | Sydney |
| Delivered on: | 19 June 2014 |
REPRESENTATION
| Solicitors for the Applicant: | Ms I. Hoskinson of Jones King Lawyers |
| Counsel for the Respondent: | Mr D. Allen |
| Solicitors for the Respondent: | Mr Y. Chen of Juris Cor Legal |
ORDERS
Graeme Gilbert Smedley pay Jason Porter and Paul Weston as Trustees of the Bankrupt Estate of Graeme Gilbert Smedley (the “Trustees”) their reasonable costs and expenses incurred in the administration of the estate of Graeme Gilbert Smedley from the date of the sequestration order, being 29 November 2013, until the date of notification of the Application for Review, being 4 February 2014 to be taxed if not agreed.
Graeme Gilbert Smedley pay the Trustees their costs as intervener in the Application for Review filed on 20 December 2013 in these proceedings.
Graeme Gilbert Smedley pay the Trustees their costs of and incidental to this costs application.
The Creditor’s Petition filed on 9 August 2013 is dismissed.
The Trustees notify the Official Receiver of these orders within two days of today’s date.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1867 of 2013
| JASON PORTER AND PAUL WESTON AS TRUSTEES OF THE BANKRUPT ESTATE OF GRAEME GILBERT SMEDLEY |
Applicant
And
| GRAEME GILBERT SMEDLEY |
Respondent
REASONS FOR JUDGMENT
Background
The application before the Court is an application by Jason Porter and Paul Weston as Trustees of the Bankrupt Estate of Graeme Gilbert Smedley (the “Trustees”) against the Debtor/Bankrupt Respondent Graeme Gilbert Smedley seeking costs in relation to the administration of Mr Smedley’s estate who had had a sequestration order made against his estate on 29 November 2013 (the “Sequestration Order”). The Sequestration Order was then set aside pursuant to an Application for Review filed on 20 December 2013 (the “Application for Review”) on 17 March 2014, however, the Creditor’s Petition that had been brought against Mr Smedley (the “Petition”) by ACM Group Ltd (the “Petitioning Creditor”) remained extant.
The Court exercised its discretion on 17 March 2014 in favour of Mr Smedley by allowing him six weeks to obtain funds to pay the Petitioning Creditor, which has now taken place. The Petitioning Creditor has accepted an offer of payment of the debt including costs and did not pursue the Creditor’s Petition before the Court on 28 April 2014.
Submissions
Respondent’s Submissions
Mr Allen, appearing for Mr Smedley, argued that the Trustee advocated against the relief sought by Mr Smedley. It can be inferred that they did so in order to preserve their appointment as trustees because they wanted to benefit from remaining as Trustees. Mr Allen submits that as they actively opposed the relief sought by Mr Smedley they ought to pay costs from 3 February 2014.
Mr Allen submits it has been intimated that the trustees are seeking an order in relation to their remuneration. Mr Allen argues that the Court has no power to make an order in this respect: Austral Brick Co Pty Ltd v Daskalovski [1998] FCA 782; Symons v Bateman [1999] FCA 658; Kyriackou v Shield Mercantile Pty Ltd (No.2) [2004] FCA 1338 and Pattison v Hadjimouratis (2006) 155 FCR 226.
Trustees’ Submissions
Ms Hoskinson, appearing for the Trustees, submits that the Trustees ask that their costs and disbursements incurred in the administration of Mr Smedley’s Bankrupt Estate be paid by Mr Smedley.
Ms Hoskinson submits that the Trustees find themselves in a position where the Sequestration Order has been set aside and the Petition against Mr Smedley will most likely be dismissed. That leaves the Trustees in an unenviable position of having no statutory basis to recoup their remuneration for the work done in accordance with their statutory obligations. The Trustees’ application must thus be made to this Court.
Ms Hoskinson argues that the Trustees were validly appointed by the Court. The Trustees’ application is supported by this Court’s finding that there were no issues with the making of the Sequestration Order. It follows that there was no error in the Trustees’ appointment and that appointment was validly made by the Court.
In relation to the Trustees’ decision to actively take part in the present proceedings Ms Hoskinson refers the Court to McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 87. In that case the trustee was criticised for not joining the proceedings and its application for costs was accordingly not considered by the Court. In particular, the Full Court stated in McCracken (supra) at [54]:
The trustee in bankruptcy, if they wished to obtain orders of the Court, should have applied to become parties to the appeal proceedings so that they could have agitated for any orders that they seek.
Ms Hoskinson notes that the Trustees are asking the Court to exercise a difficult balance between the injustice done to Mr Smedley and the injustice done to the Court appointed trustees, in relation to leaving their fees unpaid.
While there is some authority where the Court exercised its discretion in favour of the Bankrupt: Kyriackou (supra), the greater weight of authority lies with the Full Federal Court in Flint v Richard Busuttil & Co Pty Ltd (2013) 216 FCR 375, which found in favour of the trustee.
In Kyriackou (supra) the Federal Court in its appellate jurisdiction found that the bankruptcy notice was defective and, therefore, there was no act of bankruptcy. This finding invalidated the whole process that followed. It is quite understandable that the Court felt that the appellant should not be required to pay the trustee’s costs in that case.
The Trustees submit that the present case is distinguishable from the factual scenario in Kyriackou (supra) as there was no challenge made either to the service or to the process during the presentation of the petition. Rather, it was the exercise of the Court’s discretion only that allowed the bankrupt to be able to pay the petitioning creditor’s debt during the adjournment period. The Bankruptcy Notice founding the Petition was not set aside in the present case.
The Trustees concede that in Austral Brick Co v Daskalovski (supra), the Court stated that there was no regime protecting the creditors when a court sets aside a sequestration order, but the distinguishing fact is that in Austral Brick Co v Daskalovski (supra) the creditor’s petition was not validly served. This allowed Emmett J to annul the bankruptcy. In deciding whether to set the sequestration order aside, Emmett J stated therein:
… [I]t seems to me inappropriate to make an order under that rule where the estate has already been administered in bankruptcy, as is the case here.
Ms Hoskinson notes that in the present case, the Petition was validly served. Further, it is submitted that one of the Trustees of, Jason Porter, swore an affidavit on 14 March 2014 which was filed on 23 April 2014 (the “Porter Affidavit”) which outlines the work carried out by the Trustees. Ms Hoskinson submits that having regard to the Porter Affidavit the Court should conclude that there were some significant steps made in the administration of Mr Smedley’s estate in this case as well, bringing the present case in line with Austral Brick Co v Daskalovski (supra).
In Symons v Bateman [1999] FCA 658, his Honour French J (as he was then) was unable to make a conclusion in relation to the trustee’s costs. His Honour stated at [12]:
… I would need to be persuaded that an order under O 35 r 7 would be appropriate where the estate has been administered. In the circumstances I propose to adjourn this matter to an early date to be fixed to enable the parties to consider their position and whether some other form or order, perhaps relying on s 153B, can be agreed.
Ms Hoskinson submits that Symons v Bateman (supra) is also distinguishable to the present case as the Court in this matter has the benefit of the Trustees’ sworn evidence to the expenses of administration of Mr Smedley’s estate.
Ms Hoskinson referred the Court to Flint (supra) which she argues the authority lies with the recent decision of the Full Federal Court. In that matter the Full Court noted that the exposure of the Trustee to the position of “no statutory basis for any remuneration” would be a “gross injustice” at [49]. The Full Court then considered whether to annul the bankruptcy instead of setting aside the sequestration order and dismissing the creditor’s petition. The particular circumstances of that case were such that the Court decided against the annulment. However, the Court found that it had power to deal with the consequential orders in respect of costs and remuneration of the trustee. The Court specifically addressed costs of the trustee within the 21 day appeal period, but found that the Trustee’s actions were “either reasonable or required by law” at [58], and thus costs were included in the orders awarding the Trustee’s remuneration. The orders made were in terms of the “fair and reasonable remuneration and costs of the [trustee] in the administration of the estate of the appellant” for the period running from the appointment of the trustee until the date of the appeal, be paid, subject to the application of Div. 2 of Pt VIII of the Bankruptcy Act 1966 (Cth) (the “Bankruptcy Act”) (dealing with the review of claims for remuneration and costs).
Ms Hoskinson argued that from the view of the Trustees, the exercise of the Court’s discretion depends to a large extent on the particular factual circumstances of the case. It is also submitted that the case law indicates that Mr Smedley’s conduct should play a part in the Court’s decision on review. For example, in Demarco v Pascoe [2000] FCA 1771, his Honour Emmett J refused an annulment application because of the bankrupt’s unsatisfactory conduct (at [9] and [16]). However, in Pattison (supra) the evidence before the Court was that the bankrupt notified the Trustee of his decision to set aside the sequestration order two weeks after it was made. Thus his Honour followed Kyriackou (supra). Ms Hoskinson argues that this is not the circumstance in the current matter.
In support of the Trustees’ application, it is submitted that their conduct was beyond reproach, that the work done was both necessary and appropriate, and they exercised appropriate caution as the circumstances of the matter permitted. Ms Hoskinson notes that the judicial pronouncements in cases such as Kyriackou and Pattison where the trustee is urged to exercise caution once they are on notice in relation to the sequestration order being contested. It is argued that the Trustees in this instance acted wholly in accordance with those pronouncements.
Ms Hoskinson submits with respect to Mr Smedley’s conduct, in contravention of Part 7 of the Federal Court (Bankruptcy) Rules 2005 (Cth), Mr Smedley did not advise the Trustees of his intention to review the Sequestration Order until after the Application for Review was filed. Thus, the Trustees incurred additional fees that they would otherwise not have incurred. There was a significant delay in notifying the Trustees. In fact, the Trustees were put on notice of this application only after the Petitioning Creditor forwarded the review application to them on 4 February 2014, approximately one and a half months after the Application for Review was filed in the Court.
The Porter Affidavit outlines the work undertaken by the Trustees. From this, Ms Hoskinson argues the Court can infer the Trustees diligently performed their duties and incurred professional fees and disbursements in doing so.
It is submitted that in part those expenses were contributed to not only by Mr Smedley’s delay in notifying Trustees as outlined above, but also as a result of Mr Smedley’s conduct. In respect of his conduct, Ms Hoskinson refers to Mr Smedley’s application to the Financial Ombudsman and Mr Smedley’s solicitor’s request that the Trustees prepare and provide information for the proposed annulment. The annulment application was never made by Mr Smedley despite this information being provided to the Trustees. Ms Hoskinson submits that this could not be ascertained by the Trustees and it was not at all clear from Mr Smedley’s behaviour he had since decided to pursue the Application for Review, or that he was solvent at the time his bankruptcy commenced. Mr Smedley had explored other avenues first to improve his position
Ms Hoskinson submits that the Trustees should be entitled to recoup the costs incurred in performing their statutory duties and by dealing with Mr Smedley’s particular circumstances, including his conduct in relation to his bankruptcy.
Respondent’s Submissions in Reply
Mr Allen submits that the Trustees’ reliance on Flint is misplaced. In that case there was no issue between the parties that the Full Federal Court exercising appellant jurisdiction had power to make orders for the Trustee’s remuneration. The Full Court did not consider the common position between the parties beyond observing that power to make an order resided in s.28 of the Federal Court of AustraliaAct (Cth) 1976 at [55]. That section provides what orders the Federal Court in its appellant jurisdiction may make.
Mr Allen submits case law reveals that:
a)The Court has no power to make an order from the remuneration of the trustee when a review of a sequestration order made by a Registrar succeeds;
b)This does not mean the trustee cannot recover his remuneration, it just means that the Court cannot as a consequential order to setting aside a sequestration make the order for remuneration; and
c)A Court hearing a review application may, instead of setting aside the sequestration order, in its discretion annul the bankruptcy, and if the Court annuls the bankruptcy, s.154 of the Bankruptcy Act operates so that the trustee’s remuneration is paid.
Mr Allen submits there was no submission made that Mr Smedley’s bankruptcy ought to be annulled. Mr Allen also argues that the Trustees make no submissions against them being ordered to pay Mr Smedley’s costs.
Consideration
I accept the submission of Ms Hoskinson that the Trustees have taken an active part to intervene and participate in these proceedings. The Trustees filed in Court on 17 February 2014 a notice of appearance being the date that the matter was transferred from the Registrar to my docket and detailed orders were made for the further case management of the proceedings. The Court is referred to the Full Federal Court decision in McCracken (supra) per Lander, Siopis and Gilmour JJ where their Honours stated at [54]-[56]:
54. …The trustees in bankruptcy, if they wished to obtain orders of the Court, should have applied to become parties to the appeal proceeding so that they could have agitated for any orders that they seek.
55. Even now they do not seek to become parties to obtain the orders sought, but merely ask for the Court to make those orders.
56. That is most unsatisfactory. If a person wishes to have the Court make an order, the person must either bring a proceeding or seek to be joined in a proceeding to have the orders made. It is not permissible for a non-party (except perhaps an intervener who, of course, would still need to be joined as an intervener) to ask a Court to make orders.
As indicated in the Court’s earlier decision in these proceedings ACM Group Ltd v Smedley [2014] FCCA 494, the Petition was filed on 9 August 2013 and came before a Registrar of this Court on two separate occasions at which Mr Smedley appeared, but the Petition was adjourned for various reasons. On the third occasion when the Petition came before a Registrar on 29 November 2013 there was no appearance by or on behalf of Mr Smedley. ACM Group Ltd moved on the Petition and a Sequestration Order was made against Mr Smedley’s estate. On 20 December 2013 Mr Smedley filed the Application for Review seeking to have the Sequestration Order set aside. The Application for Review came before a Registrar on 17 February 2014 when the matter was referred to this Court and a date for hearing was allocated on 26 February 2014.
It is noted by the Court the Application for Review was filed within 21 days of the Sequestration Order. However, the Trustees were not put on notice of the Application for Review until 4 February 2014, one and a half months after it was filed in the Court. Mr Smedley’s conduct, in respect of this notification, was in clear contravention of Part 7 of the Federal Court (Bankruptcy) Rules 2005 (Cth). The chronology of dates set out above is significant in the light of judicial announcements such as Kyriackou (supra) and Pattison (supra) where trustees are urged to exercise caution in respect to the administration of an estate in circumstances where they have received notice that a review application for a sequestration order has been filed.
The Application for Review is hand written on a standard approved form and is signed by Mr Smedley on 20 December 2013 as the applicant and has ticked the box indicating that the Application for Review was prepared by him. It is noticed that the section of the form identified as “solicitor for the applicant(s)” contains the name of Sally Nash & Co, Pitt Street, Sydney, together with a phone number. The Court notes that there is no Notice of Appearance for that firm of solicitors on the Court file. Mariya Thieviasingham of Leonard Legal completed the appearance slip indicating that she appeared for Mr Smedley on the first two directions hearings when the Petition was before a Registrar, but there was no appearance on 29 November 2013 when the order was made. In section D of the Application for Review “Order(s) Sought” contained the notation “see attached affidavit”. The Affidavit of Graeme Gilbert Smedley, sworn 20 December 2013 contains a notation that it was prepared by Sally Nash & Co and contained a detailed account of the reason why he failed to attend the scheduled hearing on 29 November 2013 and makes the following request:
I request that the Court set aside the sequestration order to allow me to oppose the creditor’s petition.
The balance of the affidavit then proceeds with the assertions that Mr Smedley was solvent and the issues that he had in regards to the debt.
At the hearing, Mr Allen appearing for Mr Smedley moved on the Application for Review and made the following acknowledgments:
a)The Registrar was satisfied that all formal requirements for the Sequestration Order had been satisfied;
b)There is no challenge upon the basis that the pre-requisites were not met;
c)The basis of the Application for Review is that Mr Smedley can pay his debts;
d)There are some other reasons why the sequestration order ought not to have been made; and
e)Service is admitted of both the Bankruptcy Notice and of the Petition.
Ms Van Munster, appearing for ACM Group Ltd, objected to the Application for Review on the basis that the sequestration order was made in circumstances where there was no stay of the Local Court’s Judgment entered on 23 August 2011 in favour of ACM Group Ltd (founding the Bankruptcy Notice and Petition) and the Court was still of the view that all of the formal requirements were satisfied.
Ms Hoskinson, appearing for the Trustees, made various submissions with the statement that are significant in respect to the issue of costs as follows:
There were no arrangements made for the Trustees fee to be paid and the Trustees were not approached in that regard.
Significantly, neither Ms Hoskinson nor the representatives of the other parties made any submissions during the review hearing on 26 February 2014 seeking the Court to exercise its discretion to make an additional order pursuant to s.153B of the Bankruptcy Act annulling the bankruptcy.
Pattison (supra) was an appeal by a trustee of a bankrupt estate to the Full Federal Court consisting of their Honours Nicholson, Jacobson and Lander JJ from an order of a Federal Magistrate setting aside a sequestration order made by a Registrar. The hearing before the Federal Magistrate proceeded with a review pursuant to s.104(2) of the Federal Magistrates Act 1999 (Cth) and the question was whether the Federal Magistrate should have made an additional order pursuant to s.153B of the Bankruptcy Act annulling the bankruptcy. The point of appeal was whether upon setting aside a sequestration order an annulment order should also be made to allow a trustee in bankruptcy to recover his remuneration and expenses. The Court held that the Federal Magistrate had a discretion to make an order annulling the bankrupt’s bankruptcy in addition to setting aside the sequestration order. However, no error was shown in the exercise of the Federal Magistrate’s refusal to make an order for annulment.
In Pattison (supra) the Court shared the view that both the appeal and the cross-appeal should be dismissed. However, the Court differed in the formulation of their reasons of whether it was open to the Federal Magistrate on a review to make an annulment order. The significance of that issue is that, in the absence of such an order, a Trustee who has acted in the annulled bankruptcy does not have the benefit of the statutory protection provided in s.154(1) of the Bankruptcy Act for their costs, charges and expenses of the administration, including the remuneration and expenses of the Trustee and must rely on the general law for recovery of them. His Honour Nicholson J made the following observations in Pattison (supra) at [18]-[20]:
18. The reasoning in Kyriackou reflects the position that it is open for a Federal Magistrate on determination of a review to consider the making of an order for annulment of the bankruptcy in question rather than the setting aside of the sequestration order. If the former course is taken, the consequent operation of s 154 will bring statutory protection to the trustee’s costs, charges and expenses of the administration. However, where the circumstances are such that the sequestration order should be set aside the discretion cannot also be exercised judicially in favour of annulment. Annulment cannot accompany dismissal of a petition and setting aside of a sequestration order. That is because once the petition is set aside there is no juridical condition of bankruptcy to attract an order of annulment.
…
20. On the issue which is differently dealt with by the other members of the court in this appeal, I summarise my understanding of the law as follows. A Federal Magistrates Court sitting on a review of the making of a sequestration order, being vested by statute with the power “to make any order or orders it thinks in relation to the matter in respect of which the power was exercised”, is not confined to setting aside a sequestration order but may consider whether annulment is a preferable course in all the relevant circumstances. In doing so it will be a relevant consideration to the exercise of the discretion on remedy whether the circumstances of the trustee’s conduct in the administration are such that the trustee should receive the protection for his or her costs, charges and expenses in the administration which would flow from an order of annulment as a consequence of s 153B of the Bankruptcy Act. Where the circumstances at issue in a review are such that the sequestration order ought not to have been made and it is set aside, the trustee will not have the benefit of the protection associated with annulment.
His Honour Jacobson J indicated that he disagreed with his Honour Lander J as to the reasons why the appeal must fail and made the following observations in Pattison (supra) at [29]-[30]:
29. It seems to me clear upon the proper construction of the relevant statutory provisions, the Federal Magistrates Court has a discretion, upon a review of the order of the registrar, to annul the bankruptcy if the Federal Magistrate is of the view that the sequestration order should not have been made.
30. The Federal Magistrate proceeded on the basis that he had a discretion whether or not to make an annulment order. He declined to exercise his discretion. I can see no error in this.
His Honour Lander J, who set out the factual circumstances from the statutory provisions and authorities relevant to the appeal, made the following observations in Pattison (supra) at [156] and [176]:
The difference between a s 104(2) review and discharge and annulment
156. An application under s 104(2) of the FMA and the FMCR is not an application to be discharged from bankruptcy. It is not such an application because it is a rehearing to determine whether or not a sequestration order should be made on the evidence before the Federal Magistrate. Nor is it an application of the kind contemplated in s 153B of the Bankruptcy Act which provides for annulment of a bankruptcy. Nor is the procedure in the nature of an appeal, even an appeal de novo. The Federal Magistrate who is hearing an application for review of a sequestration order made by a registrar must approach the task as if the application for the sequestration order was being heard for the first time. It is procedure sui generis.
…
The s 104(2) procedure
176. An application for review of a sequestration order made by a registrar, however, under s 104(2) of the FMA is not an application which, if granted, will bring the bankruptcy to an end either by way of discharge or annulment or in any other way. It will mean that the petitioning creditor’s petition under s 43(1) of the Bankruptcy Act will be dismissed, either because the petitioning creditor cannot prove that which the petitioning creditor is bound to prove under s 52(1) of the Bankruptcy Act, or the court is satisfied that the debtor is able to pay his or her debts, or that for some other sufficient cause a sequestration order ought not to be made: s 52(2) of the Bankruptcy Act. Section 104(2) and (3) of the FMCR do not provide that the Federal Magistrate on review make an order setting aside the registrar’s order in addition to any order dismissing the petitioning creditor’s petition. However, s 104(3) of the FMA does allow a Federal Magistrate to make any order he or she thinks fit in relation to the matter in respect of which the power was exercised.
His Honour Lander J then went on to consider whether it was appropriate to annul the bankruptcy in addition to making an order setting aside the Registrar’s sequestration order. The argument advanced before his Honour was that if the Court concluded that an order for annulment was not made the trustee would not be able to recoup their remuneration and expenses incurred in the administration of the debtor’s estate. It was submitted that it would be contrary to the scheme of the Bankruptcy Act to allow that to occur. It was put that the trustee was an officer of the Court and should enjoy the Court’s protection in this regard and that s.154 of the Bankruptcy Act supported that proposition. Lander J made the following observations in Pattison (supra) at [212]-[219]:
212. Order 35 rule 7 contemplates that a Court may set aside an order regularly made for any of the reasons in the rule itself. Clearly, if an order is made under O 35 r 7, the effect of the order is to set aside the sequestration order. It is right, as both Emmett J and French J have observed, that unless an order for an annulment is made at the same time, or instead of an order under O 35 r 7, the trustee will not be entitled to recover his or her remuneration and expenses. However, that procedure is quite different to the procedure which involves a review de novo of a Registrar’s order.
213. As I have already explained, where the Court is reviewing a sequestration order made by the Registrar the petitioning creditor is bound to establish that the order should be made. If, in fact, on the rehearing of the creditor’s petition the Court is not satisfied with the proof of any of the matters required under the Bankruptcy Act or if satisfied by the debtor that he or she is able to pay his or her debts, the Court may dismiss the petition.
214. Of course, the Court would have to make an order setting aside the order made by the Registrar but, because the Court is exercising its power by way of rehearing, the Court is, in my opinion, not obliged to make an order under s 153B of the Bankruptcy Act because the Court has dismissed the petition and there is no sequestration order. The Court is not obliged to make an order under s 153B of the Bankruptcy Act rather than an order under s 52(2) of the Bankruptcy Act dismissing the petitioning creditor’s petition, because to do so would recognise that there has been a valid sequestration order made in circumstances where the Court would not make the order. The point is not only one of procedure. The purpose of s 104(2) of the FMA is to ensure that the delegated power to the Registrar is subject to the fullest review on an application to review a sequestration order made by a Registrar. If the Court made an order under s 153B of the Bankruptcy Act annulling the bankruptcy, it would be a recognition by the Court that the Registrar’s order had been properly made in circumstances where the Court was proceeding upon the basis that no sequestration order should be made.
215. In Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490; (2004) 138 FCR 324, Weinberg J considered an appeal from a Federal Magistrate’s order in circumstances where the Federal Magistrate was sitting on a review of a sequestration order made by a Registrar. The Federal Magistrate dismissed the application for a review. On appeal, the debtor argued that the Federal Magistrate was wrong in holding that the bankruptcy notice in that case was valid.
216. Weinberg J determined that the Federal Magistrate had erred in rejecting a challenge to the validity of a bankruptcy notice and held that the bankruptcy notice was invalid and ought to have been set aside, however, he refrained from making any final orders until submissions were made as to the form of the orders which should follow the reasons for judgment.
217. The appellant debtor, who was successful on appeal, did not seek to have the bankruptcy annulled and, indeed, argued that that was the inappropriate course: Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338. On the other hand, the Official Trustee argued that the Court should not set aside the sequestration order and dismiss the petition without also ordering that the bankruptcy be annulled pursuant to s 153B of the Bankruptcy Act.
218. Weinberg J’s attention was drawn to the decisions in Austral Brick and Symons mentioned above. He said at [43]:
‘In this case, a balance must be struck between the rights of the appellant, who should never have been made bankrupt in the first place, and the Official Trustee, who has simply done what the Act requires him to do. In my view the particular circumstances of this case require that that balance tilt in favour of the appellant. It follows that the Official Trustee must bear his own costs and expenses of the administration unless he elects to institute the proceedings to recover them: see generally Wenkart v Pantzer [2003] FCAFC 210; (2003) 132 FCR 204at 207. That is a matter for the Official Trustee. It does not fall within the ambit of any costs order than can properly be made in relation to this appeal.’
219. The Court, in that case, approached the problem on the basis that the Court had a discretion whether to make the one order or the two orders. Whilst I agree with the result in that case, I do not agree that the question of making an annulment order at the same time as dismissing the petition was one that involved balancing the interests of the party. In my opinion, if the Magistrate on review had reached the conclusion that the petition should be dismissed, there would have been no valid sequestration order and no order to annul.
The parties have drawn the Court’s attention to a number of authorities in which a discretion was exercised in the favour of the trustee to obtain a costs order in circumstances where the bankruptcy was not annulled under the provisions of s.153B of the Bankruptcy Act. A recent Full Federal Court decision that found in favour of the trustee in relation to costs was Flint (supra) per Allsop CJ, Katzmann and Perry JJ. Their Honours addressed the issue of the trustee’s circumstances where a sequestration order was being sought to be set aside on the basis that the creditor’s petition had lapsed without an order extending life of the petition prior to the sequestration order being made. The position of the trustee was addressed as follows by the Court at [48]-[55] where their Honours stated:
48. It follows that the appeal should be allowed. Ms Flint applied for an order setting aside the sequestration order. The trustee asked to be heard on the question.
49. The trustee was given leave to intervene as a party to protect his position. He submitted that an order annulling the bankruptcy should be made under s 153B of the Bankruptcy Act in order that his costs and remuneration be protected in accordance with s 154. If the sequestration order were set aside, the creditor’s petition dismissed and no order annulling the bankruptcy made, the authorities reveal that the trustee would have no statutory basis for any remuneration and his action (and the consequences thereof) would be left to the general law: see the discussions in Austral Brick Company Pty Ltd v Daskalovski [1998] FCA 782, Symons v Bateman [1999] FCA 658, Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 (“Kyriackou”) and Pattison v Hadjimouratis (2006) 155 FCR 226 (“Pattison”). The exposure of the trustee to that position in this case would be a gross injustice, as we later explain.
50. An order for annulment would provide a simple means of enabling the trustee to recover his costs and remuneration in the administration of the bankruptcy. Ms Flint opposed the making of such an order on the ground that it is not possible to annul an order which was made without power.
51. Still, in Pattison the Full Court (by majority) held that it was open to the court to make orders both setting aside a sequestration order and annulling the bankruptcy. No party in this appeal contended that Pattison was wrongly decided and the course it sanctioned appears to be within the terms of s 153B.
52. The difficulty with adopting this course in the present case, however, is that it would place the totality of the burden of the trustee’s costs and remuneration on Ms Flint. For the reasons that follow this would be an unjust outcome.
53. On the one hand, Ms Flint is not without blame. Her completed statement of affairs lodged on 31 July 2013 reveals that she is solvent. Yet, she has steadfastly and without apparent justification refused to discharge the judgment debt that gave rise to the creditor’s petition and she failed to prove solvency at the hearing. Furthermore, she did not appeal within the 21 day period provided by the Federal Court Rules and required an extension of time to bring the appeal. In the meantime the trustee was undertaking work in the administration of the bankrupt estate.
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55. In these circumstances, the preferable course is to set aside the sequestration order and dismiss the petition, but to make consequential orders dealing with the costs and remuneration of the trustee. No party submitted that such orders were either inappropriate or beyond power. Irrespective of the position under the Bankruptcy Act, all the parties accepted that the Court had power to make them under s 28 of the Federal Court of Australia Act 1976 (Cth).
The Full Court in Flint then specifically addressed the issue concerning the Trustee’s costs at [57]-[58]:
57. There is one remaining question. That is whether the trustee should recover his expenses and remuneration for the 21 day period after the making of the sequestration order within which Ms Flint could have instituted an appeal.
58. In general, a trustee should act with caution when incurring expenses before the expiry of the 21 day period within which to challenge the sequestration order; during this period the status of the bankruptcy remains uncertain: Kyriackou at [42] per Weinberg J. It is apparent, however, that in the circumstances of this case no criticism could be made of the trustee’s conduct in expending time and money during that period. This is not a case where the trustee should be limited to recovering its costs incurred after the appeal period expired. The work he undertook immediately after his appointment concerned the settlement of a contract for sale of land that had been entered into by Ms Flint and her brother. Not only was the sale for her apparent benefit, but her brother made it clear to the trustee that he would be held responsible if the sale did not go ahead. Other steps taken by the trustee during this time, as afterwards, were either reasonable or required by law. In those circumstances, it would be manifestly unjust to deprive the trustee of his costs and remuneration for any part of the period between the making of the sequestration order and the setting aside of that order. The trustee should therefore have his costs and remuneration for the whole of the period after the sequestration order was made, although an avenue for their review should be available. The trustee’s costs should include the costs of intervening in these proceedings.
I agree with the submissions made by Ms Hoskinson that in Flint (supra) the trustee’s fair and reasonable costs in the administration of the estate of the applicant from their appointment to the date of the appeal were entitled to be paid to it. The extent of the exercise of the Court’s discretion will depend upon the particular factual circumstances of each individual case on the part of the trustee and the bankrupt. I acknowledge and agree with the submissions set out above at [17]-[22].
As mentioned elsewhere in this decision, the Trustees were approached by the Bankrupt or his representative to prepare a report in accordance with Part 7, Division 7.1- Annulment of Bankruptcy of the Federal Court (Bankruptcy) Rules 2005 (Cth) (r.7.04). That report may have been requested by Ms Thieviasingham of Leonard Legal who had been retained by Mr Smedley in the early stages of these proceedings. However, despite that report being prepared by the Trustees in accordance with instructions received, it was not relied upon in the Application for Review filed by Mr Smedley on 20 December 2013. Also, as pointed out elsewhere in this judgment, it is unclear who was representing Mr Smedley at the time of the Application for Review and up to the appearance of Mr Allen at the hearing on 26 February 2014. Ultimately, the Trustees’ report was not filed in these proceedings and was not used which resulted in the incurring of unnecessary expense by the Trustees. In addition the delays in Mr Smedley’s notification of the Trustees that the Application for Review had been filed resulted in the occurring of ongoing administrative costs which were ultimately of no use and could have been avoided if the recognised procedures had been followed. There are numerous authorities which support this view and it is clearly expressed in the passages of the decision in Flint (supra), extracted above at [41].
Ms Hoskinson sought an order in the form made by his Honour Spender J in Re Gollan; Ex parte Gollan (1992) 40 FCR 38 which was an application made for the rescission of a sequestration order made by a Registrar where the sequestration order ought not to have been made. His Honour summarised the issues at 42 where he stated:
It seems to me that I ought to exercise the review powers under s 14(5) and order that the order for the sequestration of the estate of Darryl Gollan made by District Registrar Ramsey on 11 November 1992 be set aside and in lieu thereof the petition be dismissed. I should indicate that if I were not minded to make those orders, I would have dispensed with compliance with requirements of r 57 in relation to service on the creditors and the requirement for a report by the trustee and made an order pursuant to s 153b annulling the bankruptcy of Mr Gollan.
However, it is preferable to proceed on the basis that, had the material relating to solvency been before the District Registrar, the appropriate course would have been to dismiss the petition and on the summary review, provided by s 14(5), it seems to me that I ought to make orders setting aside the order sequestrating the estate of Mr Gollan on 11 November 1992 and in lieu thereof, dismiss the petition.
Spender J then made the following orders:
I order that Mr Gollan pay the costs of the petitioning creditor of and incidental to the petition, including all reserved costs, to be taxed if not agreed. I order the applicant on this application to pay the costs of the petitioning creditors and of the Official Trustee, to be taxed if not agreed, and I order that Mr Gollan pay the reasonable costs of the administration undertaken by the Official Trustee of his estate to be taxed, if not agreed.
Ms Hoskinson also referred to orders made by his Honour Federal Magistrate Driver (as he was then) in the matter of Wayne R Browne v Lion Finance Pty Ltd (SYG2343/2012) made by consent of the parties on 6 March 2013 in the following form:
1. On condition that the reasonable costs and expenses of the review applicant’s trustees in bankruptcy are paid by the review applicant without prejudice to his rights to have those costs and expenses taxed or assessed under the Bankruptcy Act 1966 (Cth), order 1 and order 2 made by Registrar Morgan on 21 November 2012 are set aside.
I believe that the Trustees should have their costs and disbursements incurred in the administration of Mr Smedley’s estate be paid by Mr Smedley. As indicated in my earlier decision I exercised my discretion in favour of Mr Smedley by allowing him a period of six weeks to organise his affairs in order to pay the Petitioning Creditor which took place within. The Petitioning Creditor has accepted an offer of payment of the debt including costs and did not pursue the Petition at the scheduled hearing on 28 April 2014. Consequently, I believe that the Trustee should receive reasonable costs and expenses incurred in the administration of the Estate from the date of the sequestration order made against Mr Smedley until notification of the Application for Review received on or about 4 February 2014, together with costs incurred as interveners in the initial proceedings and this costs application.
I certify that the preceding forty-seven (47) paragraphs are a true copy of the reasons for judgment of Judge Lloyd Jones
Associate:
Date: 19 June 2014
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