Re Nader, T. v Ex parte Official Trustee in Bankruptcy

[1991] FCA 394

Re: TEDROS NADER
Ex parte: OFFICIAL TRUSTEE IN BANKRUPTCY and GEORGE WAKIM
No. N B963 of 1985
FED No. 394
Bankruptcy - Costs

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
Einfeld J.(1)

CATCHWORDS

Bankruptcy - application by trustee under section 109(10) - erroneous application requiring amendment - voluntary appearance of major creditor to protect own interests - application by creditor that his costs and those of trustee be paid by trustee personally - if trustee's costs paid out of estate major creditor receives less - trustee acted bona fide and without recklessness - creditor not a necessary party but entered proceedings voluntarily and by own choice - inappropriate to penalise trustee through costs

Costs - circumstances where Official Receiver required to pay costs personally

Bankruptcy Act Sections 109(10), 176, 179

Pattison v Graham (1854) 65 ER 367

Ex parte Angerstein; Re Angerstein (1874) LR 9 Ch 479

In Pitts v La Fontaine (1880) 6 AC 482 at 486

Ex parte Strawbridge; Re Hickman (1884) 49 LR 638

In re Glanville, Ex parte the trustee (1885) 2 Mor 71

Fraser v The Province of Brescia Steam Tramways Co (1887) 56 LT 771

In re Bryant, Ex parte Gordon (1889) 6 Mor 262

In re Lock, Ex parte Poppleton (1891) 8 Mor 51

In re Neil Mackenzie, Ex parte The Sheriff of Hertfordshire (1899) 2 QB 566

HEARING

SYDNEY

#DATE 12:7:1991

Counsel and solicitors Mr B.J. Skinner instructed
for the Official by Lobban McNally and Harney
Trustee in Bankruptcy:

Counsel and solicitors Mr M. Hadley instructed by
for George Wakim: Remington and Co

ORDER

1. Cross applicant's costs may be paid out of the bankrupt estate.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

On 16 July 1985 George Wakim obtained a verdict against Tedros Nader in the Supreme Court of New South Wales for $786,801.45 for damages for personal injuries sustained while employed at Mr Nader's service station on 26 March 1980. Mr Wakim also sued Ebsworth and Ebsworth Solicitors and Mrs Nader in connection with the same matter but both proceedings were settled without any additional payment to Mr Wakim. On 18 October 1985 Mr Nader went bankrupt on his own petition and the Official Trustee in Bankruptcy became the trustee of the estate. Mr Wakim was the principal creditor of the estate by virtue of his award of damages.

1. Partly on counsel's advice, the Official Trustee determined that two of Mr Nader's transactions occurring before his bankruptcy which were adverse to the creditors, were capable of being attacked. An indemnity was therefore sought by the Official Trustee from Mr Nader's creditors to bring the necessary proceedings. On 22 June 1987 Mr Wakim gave this indemnity. After taking the actions and administering the estate, the Official Trustee brought an application under subsection (10) of section 109 of the Bankruptcy Act, inter alia, to pay certain moneys to Mr Wakim. That subsection says:
   

Where in any bankruptcy -

(a) property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or

(b) expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered,

the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.

1. Mr Wakim filed a cross-application which challenged significant aspects of the Official Trustee's administration of the estate. In the event, all but one of these matters were either refused or abandoned.

2. Mr Wakim now seeks all or most of his costs of the Official Trustee's application under section 109(10). Mr Wakim asks that costs be paid personally by the Official Receiver (appearing for the Official Trustee) and that the Official Trustee's costs likewise not be paid out of the estate. Obviously any costs so paid will limit the eventual dividend paid to Mr Wakim.

3. The original application as filed by the Official Trustee sought a number of orders for the deduction of sums from the amount payable to Mr Wakim including what turned out to be a double deduction of an amount of $21,177. I was advised that this was first pointed out to the representatives of the Official Trustee by Mr Wakim's solicitor on 8 March 1991 before the hearing of the application but his arguments appear to have been set to one side. The same argument, together with other matters, was raised before me when the application was first listed for hearing on 13 March 1991. One of the other matters discussed then was the fact that another deduction sought was of some legal costs incurred by the Official Trustee, the amount of which had not been ascertained because they had not yet been taxed. I raised the possible need for an amended application and invited the parties to hold further discussions on the matters separating them including the disputed $21,177. The case was then adjourned and some directions given.

4. When the hearing resumed on 25 March 1991, an amended application was before the Court. It was significantly different both in form and substance, and appeared to acknowledge that the earlier claim in respect of the $21,177 was erroneous. It was apparently only served on Mr Wakim's solicitor in the late afternoon of the last working day prior to the resumed hearing which Mr Wakim says was too late for him to receive advice and give instructions before the hearing. Thus the matter was again adjourned to permit further discussions on and consideration of the amended application.

5. The case returned to the list on 24 April 1991 when consent orders were made on all matters except costs, as to which I directed that the parties provide written submissions. This judgment addresses that issue and those submissions.

6. Mr Wakim's argument is that the Official Trustee's conduct of the proceedings was unreasonable and reckless because he persisted in pursuing an application, deliberately and with gross incompetence, which was inappropriate and clearly wrong. He suggests that the amended application was a manifest concession that the original application sought incorrect orders. It is submitted that Mr Wakim had standing to appear in the Official Trustee's application and that his involvement was rendered essential by the Trustee's refusal to correct the overcharge, or erroneous deduction, of the $21,177. Mr Wakim concedes that the Trustee's own costs up to the first hearing were rendered necessary by the deed of indemnity but that the costs of both parties after that date were caused by unnecessary and incorrect decisions or attitudes and should be borne by the Official Receiver personally.

7. The Official Receiver's arguments were:
   1. The original application was a voluntary gratuitous act seeking
   

orders to give an advantage to Mr Wakim, as indemnifying creditor, over other creditors.

2. As the Official Trustee had no duty to bring the application, it

cannot be accused of breach of duty under section 176(1) of the Act.

3. The intervention of Mr Wakim was irrelevant and unhelpful to the

outcome of the application. Because the application sought an exercise of the Court's discretion, even the double deduction of the $21,177 would have been detected by the Court in any event.

4. The crux of the application was not mathematical but whether Mr

Wakim ought to be afforded priority over other creditors and if so, how any priority was to be calculated. Amongst other things, the need for a taxation of costs before the final distribution of funds to Mr Wakim could be determined was made clear in the original application and supporting affidavit. Thus the ultimate amount to be paid was an administrative matter.

5. The application referred to in section 109(10) envisaged, even

presupposed, matters of the kind involved here. Their presentation cannot be characterised as mala fide, reckless or frivolous.

1. The law as to the circumstances when costs will be awarded against a trustee personally has been variously stated. Basically, the trustee is not in any different position to any other litigant: In re Glanville, Ex parte the trustee (1885) 2 Mor 71, and costs will be awarded on the normal principles applying to unsuccessful litigants. If the trustee fails in an application, brings an unfounded claim or ought not to have brought the action, he or she must pay the costs: Pattison v Graham (1854) 65 ER 367; Ex parte Strawbridge; Re Hickman (1884) 49 LR 638; Ex parte Angerstein; Re Angerstein (1874) LR 9 Ch 479.

2. If the actions have been taken pursuant to a duty to commence and continue the litigation, the trustee will be entitled, on the basis of equitable principles, to an indemnity out of the trust fund. On the other hand, if the costs are improperly incurred, the trustee is not entitled to an indemnity: Fraser v The Province of Brescia Steam Tramways Co (1887) 56 LT 771. In Pitts v La Fontaine (1880) 6 AC 482 at 486 it was said that a trustee in bankruptcy can be made personally liable for the costs of a suit in which he is a party, subject to the Court of Bankruptcy allowing him to recoup himself out of the bankrupt estate if his conduct has been bona fide. Of course if the estate is insufficient for payment of costs, the trustee must bear them personally but this is not the situation here.

3. In In re Bryant, Ex parte Gordon (1889) 6 Mor 262, Cave J. held at 266:
   

Where the trustee has shown such carelessness and want of sense in a case in which, if he had exercised common sense, it would probably have saved litigation, I shall certainly make him pay the costs out of his own pocket.

1. In In re Lock, Ex parte Poppleton (1891) 8 Mor 51 at 57 the same Judge similarly held that where an action brought by a trustee is idle and frivolous, the trustee had to show cause why he should not pay the costs personally.

2. Thus it can be seen that there is no positive general rule which applies to this issue. Instead the Court must consider what is the trustee's right in each particular case: In re Neil Mackenzie, Ex parte The Sheriff of Hertfordshire (1899) 2 QB 566. Certainly there is no inflexible rule of court that a trustee should not be personally ordered to pay costs.

3. To this brief review of the authorities should be added sections 176 and 179 of the Bankruptcy Act. These provide:
   

176. (1) Where, on application by the Inspector-General or by a creditor who has or had a debt provable in the bankruptcy, the Court is satisfied that a person who is or has been a trustee of a bankrupt's estate has been guilty (whether before or after the commencement of this section) of breach of duty in relation to the bankrupt's estate or affairs, subsection (2) applies.

(2) The Court may make any one or more of the following orders:

(a) an order directing the person to make good any loss that the bankrupt's estate has sustained because of the person's breach of duty;

(b) if the person is registered under section 155 - an order suspending for a specific period, or cancelling, the person's registration under that section;

(c) any other order that the Court considers just and equitable in the circumstances.

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.

(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.

1. Two questions must therefore be asked. First, should costs be awarded against the trustee as applicant in these proceedings? If so, is the trustee entitled to an indemnity out of the trust funds because he acted in accordance with his duties?

2. I can see no reason to order costs against the Official Trustee. The Official Trustee has not been unsuccessful in the application, even if some of the orders originally sought were not proceeded with. It is true that some of what was originally sought was misconceived and this no doubt caused some costs to be incurred by Mr Wakim that would not otherwise have been incurred. But Mr Wakim entered these proceedings by his own choice. It is likely that the matters he raised would have been detected sooner or later, either in the administrative process or in the legal proceedings. They could have been pursued by correspondence and continuing representations to the Official Receiver's solicitor. Although in the result some or most of the changes made in the amended application and the final consent orders seem to have come about through the activism of Mr Wakim's solicitor, I do not think that the circumstances point to the appropriateness of imposing what would amount to a penalty against the Trustee by an order that Mr Wakim's costs be paid by the Official Receiver personally.

3. It is therefore only necessary to consider the second question insofar as it concerns the Official Trustee's own costs. As I see the evidence, although under no duty to bring the application, the Trustee acted responsibly and bona fide in bringing the application and it was disposed of, eventually, by consent orders arising from a proper consideration of the relevant material by the Trustee. Mr Wakim as cross applicant had some success in maximising and crystallising the amount to be paid to him but I cannot see that this warrants a special order regarding the costs of the Official Trustee. Any costs wasted in this regard would have been minimal. For what it is worth, Mr Wakim should have an order for the payment of his costs from the estate.