Re Lamb; Ex parte Registrar in Bankruptcy
[1984] FCA 123
•17 MAY 1984
Re: LAMB; Ex parte REGISTRAR IN BANKRUPTCY (1984) 1 FCR 391
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Sweeney J.(1)
CATCHWORDS
Bankruptcy - Registered Trustee becoming an employee rather than a principal of a firm - Application for removal - Whether status as employee fatal to his continuance as trustee - Bankruptcy Act 1966 (Cth), ss 69, 81, 102, 104, 149(3)(c), 150(3), 154(1)(b), 155, 156A, 188, 190, 196, 198, 204, 222 and 231 - Bankruptcy Rules 1968, r. 57(3) - Bankruptcy Act 1914 (Imp.), ss 19, 95(2)(d).
HEADNOTE
Upon an application by the Registrar in Bankruptcy for the removal of the respondent as a registered trustee by reason of his change of status from principal to employee.
Held, that the status of employee is fatal to the continued registration of a trustee.
Re Robson unreported (Supreme Court of Western Australia, Wickham J., 11 November 1980); Re Totterdell, unreported (Supreme Court of Western Australia, Burt C.J., 14 June 1983), not followed.
Re Dawes (1934) 7 ABC 190; Re Hickman (1943) 13 ABC 138, followed.
Observations concerning duties and essential attributes of a trustee.
Van Reesema v. Official Receiver unreported (Federal Court of Australia, Full Court, 26 August 1983); Re Hetherington unreported (Federal Court of Australia, Sweeney J., 14 December 1982); Re Partridge unreported (Federal Court of Australia, Lockhart J., 22 September 1982); Re Beale; Ex parte Board of Trade (1939) 1 Ch 761; Re Lamb; Ex parte Board of Trade (1894) 2 QB 805; Re Mardon (1896) 1 QB 140; Re Allebart Pty. Ltd. (in Liq.) and The Companies Act (1971) 1 NSWLR 24; Re Stewden Nominees No. 4 Pty. Ltd. (1975) 1 ACLR 185; Re Photo Holdings Pty. Ltd; Ex parte Ramsay and Warhurst (1976) 2 ACLR 117; Re Intercontinental Properties Pty. Ltd. (in Liq.) (1977) 2 ACLR 488, referred to.
HEARING
1984, March 19, 23; May 17. #DATE 17:5:1984
APPLICATION.
Application for orders that the registration of the respondent as a trustee be cancelled.
B. Braun, for the applicant.
G. Rees-Jones, for the respondent.
Cur. adv. vult.
Solicitors for the applicant: Strongman & Crouch.
Solicitors for the respondent: M. Mandelert & Co.
G.F.V.
JUDGE1
17 May 1984
SWEENEY J. By application filed 27 January 1984 the Registrar in Bankruptcy for the Bankruptcy District of the State of Victoria (the Registrar) sought the following orders and declarations:
1. An order that the registration of Kenneth Wayne Lamb (the respondent) as a person qualified to act as a trustee pursuant to Pt VIII of the Bankruptcy Act 1966 (Cth) (the Act) be cancelled in exercise of the power contained in s. 155(5) of the Act.
2. A declaration that the respondent is no longer qualified to be a person registered pursuant to Pt VIII of the Act.
3. An order that the respondent pay the taxed costs of the Registrar of and incidental to the application.
Part VIII of the Act is headed "Trustees" and s. 155 provides:
"(1) Each Registrar shall keep, as prescribed, a register in which shall be entered the names and such other particulars as are prescribed of persons whom the Court directs to be registered under this section as qualified to act as trustees and who have given security in the prescribed amount and manner.
(2) A person may apply to the Court to be registered as qualified to act as a trustee and, subject to this section, the Court may, if it thinks fit, by order direct that he be so registered upon his entering into a bond in the prescribed amount and manner with such surety or sureties as the Registrar approves.
(3) A person who is registered under this section is entitled, upon request, and upon payment of the prescribed fee, to be issued with a certificate of his registration.
(4) Nothing in this section authorizes the registration as a trustee of a company, partnership, corporation or association.
(5) The Court may, at any time, cancel the registration of a person under this section.
(6) A person, not being the Official Trustee or a person registered under this section, who acts as a trustee of the estate or affairs of an insolvent person or a bankrupt is liable, on conviction by the Court or by a court of summary jurisdiction, to a fine not exceeding $20 for each day on which he has so acted, not being a day on which his acting as a trustee was confined to taking such steps as were necessary for the protection of the property of the insolvent person or bankrupt.
(7) It is a defence to proceedings brought against a person under subsection (6) in respect of his having acted as a trustee of the estate or affairs of an insolvent person if he proves that his acting as a trustee was confined to taking such steps as were necessary for the protection of the property of the insolvent person pending the taking of proceedings under this Act."
In Re Dawes (1934) 7 ABC 190 the managing clerk to a country solicitor applied under s. 126 of the Bankruptcy Act 1924 (Cth) (the 1924 Act) for registration as a person qualified to act as a trustee. Lukin J. refused the application and said at pp.191-192:
"There is, however, the further objection that he is not an independent person able to exercise his own independent and uninfluenced judgment. His duty as trustee may, and will be likely to, come into conflict with his duty as managing clerk for his employer, e.g., when acting under s. 105(j), and otherwise. Section 153(2) of the Act indicates the legislature's opinion as to the necessity for having a trustee free from any influence that may 'make it difficult for him to act with impartiality in the interests of the creditors generally'."
Section 105(j) and s. 153(2) of the 1924 Act provided as follows:
"105. Subject to this Act, the trustee may do all or any of the following things:-
(j) Employ a barrister, solicitor, attorney or other agent to take any proceedings or to take part in any examinations or to do any business or in respect of conveyancing matters.
153(2). If the Court is of opinion -
(a) that the trustee appointed by the creditors is guilty of misconduct, or fails to perform his duties or is, by reason of lunacy, or continued sickness, or absence, incapable of performing his duties, or
(b) that his trusteeship is being needlessly protracted without any probable advantage to the creditors, or
(c) that his connexion with or relation to the bankrupt, or his estate, or any particular creditor, might make it difficult for him to act with impartiality in the interests of the creditors generally,
or if in any other matter he has been removed from office on the ground of misconduct, the Court may remove him from his office of trustee."
In Re Hickman (1943) 13 ABC 138, also an application under s. 126 of the 1924 Act for registration as a person qualified to act as a trustee, Clyne J. said (at pp 138-139):
"In my opinion, however, a person desirous of becoming registered as a trustee should be independent in the sense that he can carry out his duties as a trustee whenever required to do so and free from any such control as may debar him from giving his time and attention to the duties and responsibilities of a trustee. If he has not that independence and as an employee is subject to the control of another, there is always the risk of a conflict of duties, and in particular, the risk
that his duties as an employee might be prejudicial to his duties as a trustee.
Moreover, it is not satisfactory or expedient that an officer of the Court should be under the more or less continuous control of an employer.
The applicant at the present time has not that independence, which is, I think, an essential qualification for any person who desires to become registered as a trustee. He is at present employed as a managing clerk, and, although he has a right of private practice, and, although his employer is apparently willing to grant him unusual liberty, his employer nevertheless has the right, whenever he desires to exercise it, to direct what work should be done by him, the manner in which and when such work should be done.
I consider, therefore, that the applicant ought not to be permitted to be registered as a trustee under the Act."
It appears that no challenge to these cases has been made until the recent decisions in Re Robson unreported (Federal Court of Australia, Wickham J., 11 November 1980) and in Re Totterdell unreported (Federal Court of Australia, Burt C.J., 14 June 1983), exercising federal jurisdiction in bankruptcy.
In Robson's case Wickham J. acceded to an application made pursuant to s. 155(2) of the Act that an applicant be registered as qualified to act as a trustee. The applicant was an employee of a firm of chartered accountants. Each of the partners in the firm was registered as qualified to act as a trustee, and it was proposed that the applicant would eventually join them in partnership. The applicant had formerly been employed for twelve years with the Commonwealth Attorney-General's Department in the bankruptcy branch. In that employment, he had wide experience in the administration of bankrupt estates, had worked closely with the present and also a former Official Receiver in Bankruptcy for that bankruptcy district, and had held the position of Assistant Official Receiver. The application was supported by the Official Receiver who said to his Honour, at p.5 of the transcript:
"As far as his abilities and so-forth are concerned, I think I have expressed in my report to you that in 20 years of reporting upon applicants for admittance as registered trustees, Mr Robson, without doubt, is the most experienced person upon whom I have been called to report, and I can only say that I could not support more wholeheartedly this application which he is making today."
His Honour then said:
"Yes; thank you Mr Smith; well it would appear, gentlemen, I would be doing the public a dis-service if I did not accede to this application, and it is acceded to."
Earlier in the transcript his Honour had expressed some concern with the fact that the applicant was an employee of and not a principal in the firm. However, the point was not argued at any length, the judgments in Dawes' case and Hickman's case were not referred to or read to his Honour, and there was no opposition to the application. It was submitted on the applicant's behalf and also by the Official Receiver that the character and experience of the applicant was such that he would not permit any conflict arising out of his status as an employee to divert him from his duty as a trustee.
Totterdell's case was also an application to be registered as qualified to act as a trustee pursuant to s. 155(2) of the Act. Again there was no opposition to the application, the applicant had previously worked in the office of the Official Receiver, and the Official Receiver strongly supported the application. His Honour was informed at the outset that the only real problem with the application was that the applicant was an employee and not a partner in a firm of chartered accountants. His Honour referred to the judgment of Clyne J. in Hickman's case. His Honour heard ver brief argument on the point on behalf of the applicant. In an affidavit filed in support of the application a partner in the firm which employed the applicant deposed that there would be no interference by the firm with the applicant in the performance of his duties were he to be registered as a person qualified to act as a trustee.
His Honour said (at p.5 of the transcript):
"Well this is an application which I intend to grant. The only point that might lead me to the contrary arises out of the decision of Mr Justice Clyne, in re Hickman, which was decided in 1943, and in that case His Honour appears to have held that a public accountant, who is employed by another public accountant - the relationship between them being, as appears from the reasons, that of employer and managing clerk - was not thought to be a satisfactory person to be appointed to this position, or office, because it may well be that he could not, while being so employed, bring to his job, an independent judgment, and that he might be subject to the control of his employer, which would not enable him properly to carry out his duties. Well that in the end really is a question of fact, I think, that is decided in each particular case. It is not a matter which arises directly out of the Statute. I think perhaps in 1983 where firms of accountants have become far larger, and it may be, in certain cases, incorporated for all I know, that the relationship between the so-called employer - I can't say he is the legal employer - and the person who may be said, and in fact is, a servant, is not one out of which there is any real possibility of the employer exerting any degree of control over the employee in the carrying out by that employee, of his duties. He is employed as a professional man, and he has a status which enables him, in the carrying out of his professional work, to exercise an unfettered professional judgment, in the same way, I expect, as a - I mentioned a surgeon might exercise his judgment, although technically he is employed by either a layman or a board - hospital board. This particular applicant appears to be in every respect a very competent, experienced, professional man, well trained to carry out the duties of the appointment which he is seeking, and I think the application should be granted."
In the present case the respondent was registered under s. 155 of the Act as a person qualified to act as a trustee on 18 March 1983 pursuant to an order made by the court on 9 February 1983. At that time the respondent was carrying on practice as a public accountant in partnership with a Mr Scott under the style of "Scott & Lamb".
It appears that this partnership was eventually dissolved, but in any event the respondent joined the firm of chartered accountants, Duesburys, as an employee on 6 June 1983. He was employed by the firm on the basis that he would be responsible for and retain clients which he introduced to the firm. The firm intended to consider the possibility of admitting the respondent into partnership once he obtained membership of the Institute of Chartered Accountants.
In July 1983 a Deputy Registrar in Bankruptcy informed the respondent of the decisions in Dawes' case and Hickman's case and his consequent concern with the respondent's status as an employee. By letter dated 26 July 1983 the respondent assured the Deputy Registrar that he would not accept any appointment as a trustee under the Act nor sign any consent pursuant to s. 156A of the Act until the matter was resolved. This assurance was confirmed in a letter from the respondent's solicitors to the solicitors for the Registrar dated 19 December 1983.
In an affidavit sworn on behalf of the respondent in these proceedings the senior insolvency partner of Duesburys said:
"3. . . . During his employment, the Trustee - (the respondent) has complete independence in respect of the administrations in which he acts as trustee or as liquidator. I am able to assure the Court on behalf of my partners that they do not interfere or do they intend to interfere or direct the Trustee in the conduct of those administrations.
4. That my partners and I, some of whome (sic) are also Trustees in Bankruptcy and Registered Or Liquidators, are very much aware of the need for independence of trustees in this regard."
Many important powers and discretions are vested in a trustee by the Act. In the course of his administration of an estate, whether in bankruptcy or under Pt X, a trustee must decide whether to exercise discretions which may be in the interests of creditors and the bankrupt but which may be time consuming and relatively unrewarding to the trustee and to his employers.
For example, a trustee must decide whether to apply for a public examination of the bankrupt (see s. 69) or for the examination of other parties under s. 81 of the Act. He must also decide whether to challenge antecedent transactions of the bankrupt pursuant to Div. 3 of Pt VI of the Act.
These decisions in some cases will involve many hours of preliminary investigation, preparation and detailed attention. The examinations or legal proceedings themselves may then be of considerable length, and in the end prove not to be fruitful.
Similar circumstances may arise in relation to decisions whether to admit or reject a proof of debt (see s. 102) when it is apparent that rejection may lead to an appeal to the court (see s. 104).
The trustee has the power, pursuant to s. 149(3)(c), to enter an objection to the discharge of a bankrupt by force of that section, the importance of which was set out in Van Reesema v. The Official Trustee in Bankruptcy unreported (Federal Court of Australia, Full Court, 26 August 1983).
On an application for discharge by a bankrupt the trustee is required to make a report concerning the bankrupt, (s. 150(3)). In some cases, this report will allege matters adverse to the bankrupt (s. 150(6)) which may be challenged by the bankrupt, and the trustee may oppose the application for discharge. The preparation of such reports and participation by the trustee in an opposed application for discharge again may make considerable calls upon the time of the trustee. The trustee is required to prepare a similar report on certain applications for annulment of a bankruptcy. (See s. 154(1)(b) and r. 57(3).)
A trustee plays an equally important role under Pt X of the Act. When a debtor signs an authority in favour of a trustee (s. 188), the trustee shall proceed to call a meeting of the debtor's creditors (s. 190). The trustee in practice is frequently elected as chairman to preside at the meeting (s. 196). As chairman he becomes responsible for the conduct of the meeting and has the power to decide questions such as the entitlement of creditors to vote at the meeting (s. 198). He would also be called on to explain to the creditors the choice of special resolutions which they are able to pass at such a meeting pursuant to s. 204 of the Act.
As trustee of a deed of assignment, deed of arrangement or composition a trustee again exercises important powers and discretions in the administration of the estate of the debtor. He has the power to apply to the court to have the deed or composition declared void (see s. 222) and must make decisions such as whether to admit or reject a proof of debt. In the case of a deed of assignment the trustee must decide whether to attack antecedent transactions (see s. 231).
The examples given are not to be regarded as exhaustive. Suffice it to say that a trustee plays a central role in the administration of estates under the Act and is under a general duty to exercise the powers committed to him in such a fashion that the objects of the Act, including those of equality between creditors and fairness to bankrupts and debtors, are served. The objects of the Act are of public importance and it is of great importance to the community that the role given by the legislature to a trustee, is fulfilled only by persons who are, and who are seen to be, completely independent.
In carrying out an administration whether in bankruptcy or under Pt X, including the examples to which I have referred, a trustee who is a sole practitioner or a partner has unfettered power to decide for himself such questions as, whether he will pursue a particular course in relation to an administration, the allocation of his own time, including the decision whether to travel away from his office where he thinks it desirable, the allocation of particular tasks to members of his staff, and the priority to be given by those members to those tasks.
The same cannot be said of a trustee who is an employee and subject to the control of his employer who has the right to direct what work should be done by him, the manner in which it should be done, when it should be done, the time within which it should be completed and the staff which he may use to do it.
There is also the risk that an employee may be tempted, or thought to be tempted, in circumstances where an administration involves time consuming work for little apparent reward, to allow the diligent performance of his duties as a trustee to be influenced by his desire to be more productively employed in the eyes of his employers so as to enhance his prospects of promotion or admission to the partnership.
In my opinion, the respondent does not have either the reality or the appearance of independence which is enjoyed by a trustee who is not an employee. It is of great importance to the administration of estates, whether in bankruptcy or under Pt X of the Act, that a trustee be independent and be seen to be independent. In Re Hetherington unreported (Federal Court of Australia, Sweeney J., 14 December 1982), I said of a trustee (at pp 37-38):
"He should earnestly consider whether by becoming controlling trustee he may be exposing himself to a conflict between interest and duty, or to any conflict between any existing duties flowing from any relationship with a debtor or a creditor, or any duties attaching to any office or post already held by him, and the duties involved in the proposed office of controlling trustee. He should not rely upon what he conceives to be his own ability to reconcile any such conflict but should rather ensure that the conflict does not arise. A controlling trustee should not be in a position where it may reasonably appear to those who are entitled to the benefit of his impartial discharge of the duties of his office that such a conflict exists. As the office is a statutory one, there is also a public interest that the holder of it should not be, or reasonably appear to be subject to a conflict."
In Re Partridge unreported (Federal Court of Australia, Lockhart J., 22 September 1982), Lockhart J. said of a trustee at p 3:
"He must be scrupulously careful to ensure that he never allows himself to be placed in a position of conflict between various duties or between duty and interest; nor must he ever allow the situation to arise where he may be seen to be in that position of conflict or potential conflict. A registered trustee must not only be impartial; he must be seen to be impartial."
A similar requirement can be found in the English equivalent to the Act, the Bankruptcy Act 1914, s. 19 of which provides:
"19. (1) Where a debtor is adjudged bankrupt, or the creditors have resolved that he be adjudged bankrupt, the creditors may by ordinary
resolution appoint some fit person, whether a creditor or not, to fill the office of trustee of the property of the bankrupt; or they may resolve to leave his appointment to the committee of inspection hereinafter mentioned.
A person shall be deemed not fit to act as trustee of the property of a bankrupt where he has been previously removed from the office of trustee of a bankrupt's property for misconduct or neglect of duty.
(2) The person so appointed shall give security in manner prescribed to the satisfaction of the Board of Trade and the Board, if satisfied with the security, shall certify that his appointment has been duly made, unless they object to the appointment on the ground that it has not been made in good faith by a majority in value of the creditors voting, or that the person appointed is not fit to act as trustee, or that his connection with or relation to the bankrupt or his estate or any particular creditor makes it difficult for him to act with impartiality in the interests of the creditors generally. (Emphasis added.)
(3) Provided that, where the Board make any such objection they shall, if so requested by a majority in value of the creditors, notify the objection to the High Court, and thereupon the High Court may decide on its validity.
. . . ."
Section 95(2)(d) of the Bankruptcy Act 1914 gives the Board of Trade the power to remove the trustee from his office if they are of opinion
"that his connection with or relation to the bankrupt, or his estate, or any particular creditor might make it difficult for him to act with impartiality in the interest of the creditors generally".
These provisions emphasise the requirement that a trustee not be placed in a position where it is difficult for him to act with impartiality, regardless of whether he would in fact act with impartiality. The provisions illustrate a concern for a trustee to be seen to be independent and not in a position of potential conflict.
Farwell J. in Re Beale; Ex parte Board of Trade (1939) 1 Ch 761 at 764 said:
"It may be that, if he were permitted to continue as trustee, he would in fact be quite impartial. That is not what I have to decide. I have to determine whether it would be difficult for him to act with impartiality."
Lord Esher, M.R. in Re Lamb; Ex parte Board of Trade (1894) 2 QB 805 at 815 said:
"The question is not, Would he or would he not, in fact, act with impartiality? One may have a strong belief that he would, if he is a gentleman of high character, act with impartiality, notwithstanding the difficulty in doing so. But the question is, treating him as an ordinary man, whether it would be 'difficult for him to act with impartiality'?"
(See also Re Mardon (1896) 1 QB 140.)
Some assistance may be gained by looking at the position of a liquidator in the winding up of a company. In Re Allebart Pty. Ltd. (in Liq.) and The Companies Act (1971) 1 NSWLR 24 at 28, Street J. (as he then was) said:
"A liquidator is bound to be on guard lest he compromise his position of independence and impartiality in all respects in the discharge of his functions as an officer of the Court administering the winding up of a company. Not only is it his prerogative to decide what steps should be taken, but it is his duty to exercise himself, according to the dictates of his own opinions, what should and what should not be done in the course of any given winding up. It is for him to decide what steps are to be taken, and when, how and by what means such steps are to be taken. Where he draws upon financial assistance from a creditor, it is incumbent upon him to ensure that he does not place in jeopardy his independence in the discharge of his duties. It is indispensable that in point of substance the liquidator's independence should be preserved; and it is undesirable that a liquidator should permit a situation to develop in which it might appear that he has yielded up in any deegree whatever his exclusive independent control in the decision-making processes and administration of a winding up."
Later on his Honour said at p. 30:
"It is essential that the independence and impartiality of a liquidator should at all times exist in point of substance, and be manifestly seen to exist."
Bowen C.J. in Equity (as he then was) in Re Stewden Nominees No. 4 Pty. Ltd. (1975) 1 ACLR 185 at 187 cited Re Allebart as authority for the principle that "it is important that a liquidator should be independent, and should be seen to be independent". (See also Re Photo Holdings Pty. Ltd; Ex parte Ramsay and Warhurst (1976) 2 ACLR 117.)
In Re Intercontinental Properties Pty. Ltd. (in Liq.) (1977) 2 ACLR 488 Needham J. said at pp 491-492:
"In performing his important functions, the liquidator must both be and appear to be independent and impartial. It is wrong for him, for example, to appear to be acting as the mouthpiece of a particular creditor - Re Allebart Pty. Ltd. (in liq.) (1971) 1 NSWLR 24 esp. at 28 and 30-1. It is for this reason that the court will not normally appoint as a liquidator a person who, by such appointment, may be placed in a position where his interest and his duty may conflict - cf. Bray v. Ford (1896) AC 44 at 51-52. If a position of potential conflict did not appear at the time of the appointment of the liquidator but emerged subsequently, the court could in a proper case, remove him. . . ."
The status of the respondent as an employee is in my opinion fatal to his continued registration as a person qualified to act as a trustee. A diligent employee, even with understanding employers who are sensitive to his obligations as a trustee, does not have the freedom which a self-employed trustee enjoys. A trustee should be master of his own time free to decide for himself in relation to any estate where he goes, what he does and when he does it, free from any possible direction by employers and free from any thought that he may be prejudicing his chances of advancement or of a partnership by devoting time to carrying out his duty as a trustee. He must enjoy that freedom and must be seen by the court, by creditors, and by debtors and bankrupts, to enjoy it.
If the question were arising for the first time, I would be of opinion that the respondent should not retain his registration as a person qualified to act as a trustee. I am strengthened in that opinion by the authorities cited. To the extent that the more recent decisions in Robson's case and Totterdell's case differ from those authorities, I would respectfully disagree with them.
When this case was argued I indicated to counsel, without then pronouncing any order, that I was disposed to grant the application with costs. I further indicated that I would publish my reasons in due course but would not pronounce any order until the respondent had had an opportunity to consider those reasons and decide whether he preferred to apply himself to have his name removed from the register. It was agreed that twenty-one days would be an appropriate period to allow the respondent for these purposes. Accordingly I will not now pronounce an order but will reserve liberty to apply generally, so that the matter may be brought back before me within twenty-one days from today's date.
Nothing in these reasons is intended in any way to reflect upon the character or competence of the respondent or of his employers.
ORDER
Application dismissed.
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