Re Balnaves, P.J. Ex Parte Balnaves, C.J. & Ors v Balnaves, P.J.
[1990] FCA 767
•13 DECEMBER 1990
Re: PETER JOHN BALNAVES
Ex Parte: CHRISTINE JOAN BALNAVES; MORIDEN NOMINEES PTY. LTD. and P.B.
NOMINEES PTY. LTD.
And: PETER JOHN BALNAVES and KEVIN MICHAEL PIPKIN
No. 680 of 1987
FED No. 767
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
O'Loughlin J.(1)
CATCHWORDS
Bankruptcy - Application under sub-s.179(1) Bankruptcy Act 1966 (Cth) - Inquiry into conduct of Trustee - consideration of circumstances that justify the making of such an order.
Inquiry into Conduct of Trustee - (see above)
HEARING
ADELAIDE
#DATE 13:12:1990
Counsel for the Applicants : Mr. P. Heywood-Smith
Counsel for the Respondents : Mr. R. White
Solicitors for the Applicants : Johnston Withers
Solicitors for the Respondents: T.N. Cogan
ORDER
The application be dismissed.
The applicants pay the respondents' costs of and incidental to this application.
Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.
JUDGE1
Peter John Balnaves became bankrupt on 24 June 1987 upon the presentation of a debtor's petition pursuant to s.55 of the Bankruptcy Act 1966 (Cth) ("the Act"). The Official Trustee in Bankruptcy was, initially, the trustee of the estate. However, on 12 January 1988, the creditors of the bankrupt resolved that Kevin Michael Pipkin be appointed trustee (vide s.157 of the Act). I will refer to Mr. Balnaves as "the bankrupt" and to Mr. Pipkin as "the trustee".
There is now before the Court an application dated 24 May 1990 in which Christine Joan Balnaves, the former wife of the bankrupt and two companies that are controlled by her, Moriden Nominees Pty. Ltd., and P.B. Nominees Pty. Ltd., seek, in their capacities as creditors in the bankrupt estate, orders, including, inter alia, an order:-
"That pursuant to s.179(1) of the Act the Court enquire into the conduct of Kevin Michael Pipkin, the trustee of the bankrupt..."
When the application first came before the Court on 4 June 1990, the applicants were ordered to supply detailed particulars of the conduct of the trustee of which they complained. Subsequently, by letter dated 18 June 1990, the solicitors for the applicants wrote the trustee raising twelve discrete subject matters; these were identified either as subjects of complaint or subjects of enquiry. But in a later letter dated 4 September 1990, the applicants' solicitors advised the solicitor for the trustee that it was intended that only six of those matters would be pursued. In fact, upon the hearing of the application, only one of the original twelve matters, an issue that can be described as "the Neller transaction", was the subject of submissions. Even so, the information that was presented to the Court with respect to that transaction was quite perplexing; I have concluded, without difficulty, that there is a need to investigate the Neller transaction so that the nature and extent (if any) of the bankrupt's beneficial interest in that transaction can be determined - indeed, the trustee agreed that there was a need for such an investigation. But does this mean, without more, that there is a need to inquire into the conduct of the trustee?
In an application of this nature, which has proceeded on affidavit evidence and to which the bankrupt (although named as a respondent) was not a party, it would be inappropriate to make any findings of fact. Hence what is set out below is, in part, a statement of uncontentious material and, in part, a summary of the allegations that have been made by the applicants.
Mr. and Mrs. Balnaves were married in 1968; there are three children of the marriage, the eldest a son now aged 19 and two daughters aged 17 and 14. The parties separated when Mrs. Balnaves left the matrimonial home, with the children, in October 1985. She instituted proceedings in the Family Court within a few days, claiming custody of the children, orders for maintenance and a property settlement. It has been alleged that the bankrupt bitterly fought every step in the Family Court proceedings; indeed, it is suggested that, in petitioning for his bankruptcy, his dominant purpose was to use it as a means of defeating certain orders that the Family Court might otherwise have made in Mrs. Balnaves' favour. For example, Exhibit "CJB4" to Mrs. Balnaves' affidavit of 23 May 1990 was a copy of the judgment of Gun J. in the Family Court that was delivered on 3 November 1987. At p 84 of his judgment, his Honour said:-
"I realise that this judgment leaves many issues unresolved and that the wife will probably have to take further proceedings in another jurisdiction or jurisdictions and incur further expense. While I regret this fact, I believe that my powers to make appropriate orders in respect of the wife's claims have been, to a large extent, thwarted by the events which have occurred, not the least of which is the husband's bankruptcy."
Through the efforts of the applicants and their solicitors there are before the Court copies of two agreements, each dated 11 May 1989. Each agreement deals with the purchase, by a company called Yalata Pty. Ltd., of ordinary shares in the capital of Neller Software Pty. Ltd. ("Neller") (see Ex. CJB25 to Mrs. Balnaves' affidavit sworn on 10 September 1990). The respective vendors of the shares are Knight Consultancy Services Pty. Ltd. ("Knight"), and Leeds Holdings Pty. Ltd. ("Leeds"); the latter company, it is said, is owned and controlled by the parents of the bankrupt's de facto wife and there is also a vague suggestion that there may be some connection or relationship between the bankrupt and Knight. Clause 14.01 of each agreement establishes that the two sales were interlinked in that it was contemplated that there would be contemporaneous settlements. Yet the sale price in the first agreement was $3.50 per share whilst the sale price stated in the second agreement, ostensibly for the same class of share, was only 30 cents per share. Under the second agreement Leeds sold 53,125 Neller shares to Yalata: why did Leeds apparently undersell its holding to the extent of $170,000 (53,125 x $3.20)?.
The applicants have brought the details of "the Neller transaction" before the Court because it is alleged that the bankrupt gave evidence in the Family Court proceedings to the effect that some, and perhaps even all the abovementioned 53,125 shares in Neller were beneficially owned by him; (other figures that appear in different passages of that evidence are first, a parcel of 16,250 shares - as to which see the letter of 7 July 1989 from the Trustee to the bankrupt to which reference is made below - and secondly, a parcel of 20,000 shares). The applicants' complaint is that their solicitors had written the solicitors for the trustee on 5 June 1989 warning "that Mr. Balnaves is presently to come into a substantial sum of money consequent upon the sale of shares in a company known as John Neller and Associates Pty. Ltd. (sic)". The amount suggested in the letter was $200,000 (see Ex. CJB26 to the affidavit of Mrs. Balnaves sworn on 10 September 1990). Subsequent to that letter, the trustee had some measure of involvement with the bankrupt with respect to the proceeds of the sale of some shares in the capital of Neller. This appears from the trustee's letter of 7 July 1989 to the bankrupt:-
"I refer to your letter of 6th July, 1989, with which you enclosed a Trust Account cheque in the amount of $4,875. In consideration of the amount of $4,875 paid to me by or on behalf of Leed Holdings Pty Ltd I agree that the estate has no further claim in respect of the 16,250 shares in Nella (sic) Software Pty Ltd registered in the name of Peter John Balnaves."
The trustee referred to this transaction in para. 8 of his affidavit of 27 July 1990:-
"(a)...
(b) At some time prior to the bankruptcy the bankrupt purchased 16,250 shares in Neller Software Pty Ltd.
(c) Also at some time prior to the bankruptcy the bankrupt was involved in the purchase of 20,000 shares in Neller Software Pty Ltd from Mrs Scott. A transfer of the said shares from Mrs Scott to Leeds Holdings Pty Ltd was stamped by the Commissioner of Stamps on December 1, 1988.
(d) A transfer of 16,250 shares in Neller Software Pty Ltd from the bankrupt to Leeds Holdings Pty Ltd dated June 1, 1987 for the consideration of $4,875.00 was stamped by the Commissioner of Stamps on December 1, 1988.
(e) On July 6, 1989 I spoke to Rhonda King of Johnsons, Solicitors, who informed me that her client, Yalata Pty Ltd, was buying from Leeds Holdings Pty Ltd 53,125 shares in Neller Software Pty Ltd for 30 cents per share. The total consideration was therefore $15,937.50. I subsequently accepted from Leeds Holdings Pty Ltd the sum of $4,875.00 in respect of the 16,250 shares in Neller Software Pty Ltd which had been transferred to Leeds Holdings Pty Ltd by the bankrupt.
(f) On May 28, 1990 I again spoke to the said Rhonda King who informed me that Yalata Pty Ltd was in no way associated with the bankrupt, any of his relations, or any company in which the bankrupt had an interest.
(g) ...."
Hence, independently of the solicitors letter of 5 June 1989, it would seem that the trustee became aware, at some unspecified date, that the bankrupt's estate was entitled to benefit from the Neller transaction. How he achieved this state of awareness and what inquiries he made before taking receipt of the amount of $4,875 have not been canvassed.
The information before the Court is sufficient, in my opinion, to suggest that the bankrupt was, at the time of his bankruptcy, the beneficial owner of, at least, 16,250 ordinary shares in the capital of Neller and that those shares might have been sold for a price which was $3.20 less than their true value. Having regard to some remarks of Gun J. in his judgment, there is even a probability that the bankrupt was the beneficial owner of more shares. His Honour said at p 12 of his judgment:-
"The 20,000 shares acquired from Mrs. Scott probably belong to the husband, as do the 16,000 (or 17,000) acquired after the separation."
The suggestion is that the reference by his Honour to a parcel of 16,000 or 17,000 shares was, in fact, a reference to the parcel of 16,250 shares to which I have already referred.
The question that is posed by this application and by the information that has been produced, is what action, if any, should now be taken? Both counsel for the applicants and counsel for the trustee acknowledge that there should be an investigation into the Neller transaction - I agree. However, counsel for the applicants argued that such an investigation should take place as an adjunct to any inquiry into the conduct of the trustee under s.179 of the Act. That section provides:-
"179(1) The Court may, on the application of the Registrar, the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:-
(a) remove the trustee from office; and
(b) make such order as it thinks proper. 179(2) The Registrar, the Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt's estate or affairs."
Before considering the circumstances under which a party may seek an order for inquiry under sub-s.179(1) of the Act, there are some further matters that should be mentioned; they go some of the way to explaining why this application was pursued. On 21 March 1989 proceedings were instituted in this Court in which Moriden Nominees Pty. Ltd. was named as applicant; in reality however those proceedings were pursued by Mrs. Balnaves who was seeking to obtain, from her former husband's bankrupt estate, control of certain assets upon the premise that they were assets of a family trust. The trustee had been instructed by the creditors, based on information given to them by the bankrupt, to defend those proceedings. Both parties prosecuted their cases with vigour and some acrimony until the proceedings were settled in May 1990. That acrimony, unfortunately, still seems to exist; Mrs. Balnaves claims that Mr. Pipkin is her husband's "dupe" and that he has "maintained a complacent attitude towards the trusteeship". For his part, Mr. Pipkin claims in his trustee's report that "creditors representing interests associated with the former wife and interests associated with the bankrupt" have sought to interfere in the administration of the estate. These allegations and counter-allegations are regrettable; their existence suggests that Mrs. Balnaves and Mr. Pipkin might be needlessly fighting each other instead of joining forces in pursuit of a common objective - to find out what happened in the Neller transaction. I have mentioned this background - not because I think that Mrs. Balnaves has acted out of spite - but because there is a possibility that her personal feelings about Mr. Pipkin might have inadvertently coloured her interpretation about his conduct.
There remains one final matter of fact to which reference should be made; it has not been alleged by Mrs. Balnaves, nor is there any evidence to suggest, that the trustee knew, at the time when he took receipt of $4,875 of the contemporaneous sale by Knight of shares in Neller at $3.50 each. In other words, the conclusions which I have reached in these reasons have evolved out of the assumption that the trustee was merely informed by the bankrupt - without more - that the estate included the sum of $4,875, the value of the bankrupt's beneficial interest in a parcel of 16,250 shares which were then registered in the name of a company called Leeds Holdings Pty. Ltd. One must be quick to recognise that such an assumption may turn out, upon a full investigation of the facts to be inaccurate - so be it. At this stage, it is, in my opinion, a reasonable assumption; in addition it is an assumption which, if correct, would go a long way towards explaining why a trustee might not have considered it necessary to take any further action. The reference to $200,000 in the solicitor's letter of 5 June 1989, might have been treated as incorrect information or, perhaps exaggeration.
If information is sought from a trustee and it is not readily forthcoming, the party seeking that information can call in aid the provisions of sub-s.179(2): it requires the trustee "to answer an inquiry in relation to the bankrupt's estate or affairs". If a formal request is made under sub-s.179(2) and it is not answered or not sufficiently answered, then the nature of the request coupled with the trustee's response (or lack of response) may be the foundation for an inquiry under sub-s.179(1) or an examination "about examinable matters" under s.179A: (previously the power to examine a trustee was contained in sub-s.179(3)). However in 1987 that sub-section was repealed and ss.179A et seq were inserted in its place).
Unlike the possible consequences of an inquiry (with its power to make orders, including the power to remove the trustee from office) there are no sanctions directly flowing from an examination of a trustee. Obviously therefore an examination is intended to be directed to matters of lesser consequence, reserving more serious allegations for an inquiry under sub-s.179(1). It seems to me therefore that the provisions of sub-s.179(1) are to be used when specific allegations of misconduct are made against a trustee whilst an examination under s.179A is to be used for more general purposes such as seeking information on a particular subject or transaction. If the bankrupt had, at the date of his bankruptcy, any interest in any shares in the capital of Neller, those shares were, at that time, according to the information presently before the Court, registered in the name of Leeds. Hence, those shares could have been dealt with by the registered holder without the knowledge of the trustee. It would be inappropriate therefore to suggest that there had been any failure on the part of the trustee to prevent the Neller transaction from taking place. At the most, one might be entitled to ask why it is that, subsequently, the trustee has taken no action to investigate the transaction:- after all, he received a letter telling him of the transaction and mentioning a figure of $200,000 as long ago as June 1989. Mr. Pipkin's answer is: lack of funds.
In his trustee's report which was dated and filed on 26 July 1990, the trustee canvassed at length the difficulties that he has encountered in the administration of this estate. He identified three subject matters each of which , he said, should be the subject of further investigations - the bankrupt's interest in a property at 313 Melbourne Street, North Adelaide, the accountancy practise that the bankrupt had operated until about a year prior to his bankruptcy and, of course, the Neller transaction. But in respect of each of these matters, the trustee has claimed that there are insufficient funds to take the necessary action. If this truly be the case I find it difficult to comprehend the need or the justification for an inquiry into the conduct of the trustee with respect to the Neller transaction.
In Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 Riley J. at p 268, speaking of an application under sub-s.179(1), said that there was a preliminary question to be decided by the Court - namely, on the grounds and facts before it, has a case been made for inquiry into the trustee's conduct? Only when that question is answered in the affirmative will the Court move to a consideration of the next question - the scope of the inquiry. The decision in Alafaci's case was followed by Smithers J. in Mannigel v Aitken (1983) 77 FLR 406. In my opinion, the approach to the first of those questions should be both cautious and restrained. The task of a trustee is often difficult and some of the remarks in the trustee's report suggest that this administration has been made the more difficult because of clashes of personality between the trustee and Mrs. Balnaves. As was pointed out in Re Ladyman (1981) 38 ALR 631 at p 642 -
"... the Court should not countenance the making of unnecessary or harassing applications for the examination of trustees..."
I agree with these remarks and respectfully add that they are even more appropriate when the Court is being asked to order an inquiry into the conduct of a trustee.
An objective assessment of the information that is presently before the Court does not give me that feeling of unease and concern that would need to be present to justify the ordering of an inquiry into Mr. Pipkin's conduct. That is not to say that I am wholly satisfied about the matter. I believe that the trustee could have made some effort to examine the Neller transaction. His accounts reveal that he has over $25,000 available to him. Over half of this is said to be subject to a charge in favour of the Inspector-General for funds earlier advanced and it is true that the Neller transaction is only one of several matters that the trustee says warrant investigation; but even so, funds of this size should have permitted some initial inquiries to be made. Furthermore, a trustee is always entitled to approach creditors for funds or for an indemnity; then there are the express provisions of s.305 of the Act which enable the Minister, in appropriate circumstances to direct that certain costs of proceedings or inquiries be paid by the Commonwealth.
Bearing in mind the history of this matter I would have thought that, by now, the trustee should have been in a position to report that he had - or had not - approached the creditors and/or the Minister and to report either the results of such approaches or the reasons why no such approach had been made. Despite his difficulties and shortage of funds I presently remain unsatisfied with the progress of the administration of this estate. But that lack of satisfaction is not to such a degree that an inquiry into the trustee's conduct is warranted; perhaps, if the applicants had lowered their sights and sought an examination, I might have been persuaded to make the appropriate order. After all, as counsel for the applicants pointed out, it could well be a matter of importance to know whether the trustee was aware of the nature of the evidence of the bankrupt in the Family Court proceedings; had the trustee, for example, read the judgment of Gun J. and, in particular, the reference to the 20,000 shares that had been acquired from Mrs. Scott? If indeed the trustee had read the judgment, when did he do so? However, the applicants chose to pursue their arguments that there was information before the Court that justified an inquiry. I disagree; those arguments are rejected. The application is therefore dismissed; the applicants are to pay the trustee's costs of and incidental to this application.
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