Re Relf, A.T. v Ex parte Relf, A.T

Re: ALLAN THOMAS RELF (A Bankrupt)
Ex Parte: ALLAN THOMAS RELF
No. NSW 1171 of 1988
FED No. 291
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DIVISION OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY

CATCHWORDS

Bankruptcy - bankrupt a solicitor - Trustee in bankruptcy employing bankrupt to carry on practice - Proposal by bankrupt for composition with creditors - Acceptance by creditors - Doubt whether proposal put to creditors truly reflected terms of composition Court asked to approve - Failure to notify creditors of time appointed for hearing by the Court - Direction that terms of composition be reduced to writing and submitted to further meeting of creditors - Effect of failure of bankrupt and trustee to refer to disciplinary proceedings against bankrupt under Legal Profession Act 1987 (NSW) - Composition approved and bankruptcy annulled.

Bankruptcy Act 1966 (Cth), s.74(1)

Legal Profession Act 1987 (NSW), s.35(2)

HEARING

CANBERRA

#DATE 9:6:1989

Counsel for the applicant : Mr N. Headland

Solicitors for the applicant : Wood Fussel & Co.

ORDER

Approves the deed of composition executed by Allan Thomas Relf ("the bankrupt") and Barry Anthony Taylor ("the trustee") being annexure "A" to the affidavit of the trustee sworn on 29 May 1989.

Orders that the bankruptcy be annulled.

Orders that, notwithstanding Order 2, the property of the bankrupt which was vested in the trustee immediately prior to Order 2 coming into force (other than the property described in the schedule to the said deed) remain vested in the trustee and that that property (or its proceeds) together with such other moneys as the trustee shall receive under the terms of the said deed be dealt with by the trustee in the same manner as if Allan Thomas Relf remained a bankrupt and the trustee were the trustee in his bankruptcy with the qualification that Mrs Colleen Relf is not to be treated as a creditor.

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

JUDGE1

On 2 June 1989, the Court completed the hearing of an application under s.74(1) of the Bankruptcy Act 1966 (Cth) by Allan Thomas Relf, a bankrupt, for the approval of a composition with his creditors and for the annulment of his bankruptcy. At the conclusion of the hearing, the Court -

1. Approved the deed of composition executed by the bankrupt and Barry Anthony Taylor ("the trustee") being annexure "A" to the affidavit of the trustee sworn on 29 May 1989.

2. Ordered that the bankruptcy be annulled.

3. Ordered that, notwithstanding Order 2, the property of the bankrupt which was vested in the trustee immediately prior to Order 2 coming into force (other than the property described in the schedule to the said deed) remain vested in the trustee and that that property (or its proceeds) together with such other moneys as the trustee shall receive under the terms of the said deed be dealt with by the trustee in the same manner as if Allan Thomas Relf remained a bankrupt and the trustee were the trustee in his bankruptcy with the qualification that Mrs Colleen Relf is not to be treated as a creditor.

The Court then said it would publish reasons for its decision. What follows are those reasons.

A sequestration order was made against the estate of the bankrupt on 29 July 1988 on the petition of the Deputy Commissioner of Taxation. Barry Anthony Taylor, a registered trustee, became the trustee of the bankrupt's estate. At the time of the making of the sequestration order, the bankrupt was carrying on, on his own account and as a sole practitioner, the practice of a solicitor at Eden on the south coast of the State of New South Wales. The bankrupt had also carried on practice at Bega and Cooma but the offices at those towns had been closed prior to the date of his bankruptcy. The bankrupt held an unrestricted practising certificate under the Legal Profession Act 1987 (NSW). That certificate had taken effect on 1 July 1988 and, subject to the provisions of that Act, was to remain in force for 12 months from that date.
Section 35(3) of the Legal Profession Act provides that the Council of the Law Society of New South Wales may refuse to issue, may cancel, or may by order suspend, a practising certificate applied for, or held by, a solicitor if the solicitor -

(a) is bankrupt, applies to take the benefit of any law for the relief of bankrupt or insolvent debtors, compounds with his creditors or makes an assignment of his remuneration for their benefit; and

(b) in the conduct of his affairs as a solicitor did anything that, in the opinion of the Council, contributed to the situation referred to in par.(a) and amounted to conduct unbecoming a solicitor.

No action was taken by the Council, following the making of the sequestration order, to cancel or suspend the bankrupt's practising certificate.

Section 134(1)(m) of the Bankruptcy Act provides, inter alia, that, subject to the Act, the trustee of a bankrupt estate may, until the end of two months beginning on the date of the bankruptcy, employ the bankrupt himself to carry on the bankrupt's trade or business for the benefit of the bankrupt's creditors and, in consideration of the bankrupt's services, make such allowance to the bankrupt out of the estate as the trustee considers reasonable. Section 135(1)(k) provides, inter alia, that the trustee may, with the permission of the creditors granted by resolution passed at a meeting of the creditors or with the leave of the Court, after the end of two months beginning on the date of the bankruptcy employ the bankrupt as mentioned in s.134(1)(m) and, in consideration of the bankrupt's services, make such allowance to the bankrupt out of the estate as the trustee considers reasonable.
After the making of the sequestration order, the trustee made arrangements with the bankrupt and his wife, Colleen Relf, with a view "to the continuation of the law practice of the bankrupt for the time being". The arrangements were recorded in a letter dated 8 August 1988 addressed by the trustee to Mr and Mrs Relf. The letter provided for the bankrupt "to be retained for the purpose of attending to the legal requirements of the clients of the practice" and for the bankrupt to receive an allowance of $130 per week (subsequently increased to $180 per week). The letter also provided for Mrs Relf to be appointed manager of the law practice on a weekly wage with responsibility for the day to day administration of the practice subject to the trustee's overall control. She was to maintain the office records, keep debtors' records, pay wages and other operating expenses and receive and transfer monies. Provision was made for Mrs Relf to operate an imprest account for the payment of the proper operating expenses of the legal practice. Arrangements were also made by the trustee to continue the employment of the staff employed in the practice. It was recognised, however, that the monies standing to the credit of the solicitor's trust account operated by the bankrupt did not vest in the trustee and the bankrupt continued to have responsibility for the operation of that account.
Meetings of creditors of the bankrupt were held on 30 September 1988, 29 November 1988, 31 January 1989, 9 February 1989 and 31 March 1989. At each of those meetings, other than that held on 31 January 1989, a resolution was passed authorising the trustee "to continue trading the bankrupt's business" for a further period of two months and to make such allowance to the bankrupt out of the estate as the trustee considered reasonable. It may be noted that the period specified in the resolution passed on 9 February 1989 was the period of two months commencing on 31 January 1989 and ending on 31 March 1989. The resolution passed on 31 March 1989 specified the period of two months commencing on 1 April 1989 and ending on 1 June 1989.
In accordance with the arrangements made by the trustee, the solicitor's practice continued to operate resulting in the trustee receiving monies in excess of the operating expenses incurred. There was some discussion during the hearing of the application whether it was permissible in New South Wales for a trustee who is not a legal practitioner holding a practising certificate to carry on the practice of a bankrupt solicitor. However, as the matter was not fully debated and, in the event, it is unnecessary to express an opinion on the matter, I do not propose to discuss the subject. I should, however, say that it is a question which might usefully be considered by those charged with the administration of the Bankruptcy Act for the purpose of giving guidance to trustees placed in a similar situation to the trustee of Mr Relf's estate.
The bankrupt addressed a letter dated 29 November 1988 to Messrs Hamilton Taylor & Brien, Chartered Accountants, the firm of which the trustee was then a member. The letter read as follows:

"I note that you still have not received a valuation of the legal practice A. Relf & Co. I hereby offer to repurchase my legal practice and my mining interest for the sum of $45,000.00, such sum being payable to you within 8 months of the date of acceptance of my offer on the following bases:-

(a) recommendation of this offer and a meeting be convened to consider the offer before 16/1/1989

(b) if the offer is accepted then you apply to the court as soon thereafter as possible for a discharge of my bankruptcy order and I be discharged

(c) my wife Colleen Monica Relf whose consent appears below will withdraw her debt of $35,000 and not prove in my estate

(d) this offer will be deemed withdrawn if my practising certificate is cancelled in the meantime or I am struck off the Roll as a solicitor. Please let me have your early reply."

The date 16 January 1989 referred to in par.(a) was subsequently amended to 31 January 1989. Endorsed on the letter was a minute signed by Mrs Relf reading as follows:

"I Colleen Monica Relf a creditor in the estate of Allan Thomas Relf hereby consent to the offer set out above and on the preceding page. I acknowledge that I will withdraw my claim for the debt of $35,000.00 and not prove that amount in my husband's estate if this offer is accepted."

At the meeting of creditors of the bankrupt held on 31 January 1989, a special resolution was passed in the following terms:

"That the offer of the Bankrupt be accepted pursuant to the provisions of Section 73 of the Bankruptcy Act, 1966, (as amended) ('the Act'), a copy of which is attached, in consideration of the release of his debts to enable a subsequent application to the Court for the annulment of his Bankruptcy."

What was attached was a copy of the bankrupt's letter dated 29 November 1988 with the minute signed by Mrs Relf endorsed thereon.

Although the trustee, on 15 February 1989, filed an affidavit sworn by him on 14 February 1989 referring, inter alia, to the bankrupt's proposal and the meeting of creditors on 31 January 1989, no proceedings to seek the Court's approval to what had been agreed at that meeting were taken until 21 March 1989. On that date, the bankrupt filed an application for approval, pursuant to s.74 of the Bankruptcy Act, of what was referred to as the scheme of arrangement accepted by his creditors at the meeting on 31 January 1989. That application was supported by an affidavit sworn by the bankrupt on 27 February 1989.
The application came before the Court on 31 March 1989 when the matter was adjourned until 28 April 1989. One of the grounds for the adjournment was that the trustee had not given notice to the creditors who had not assented to the bankrupt's proposal, either by so voting at the meeting on 31 January 1989 or otherwise, of the time appointed for the hearing of the application for the Court's approval (see s.74(2)). A further ground for the adjournment was that the trustee's report on the bankrupt's proposal which had been forwarded to the creditors prior to the meeting on 31 January 1989 and the affidavits of the trustee and the bankrupt sworn respectively on 14 and 27 February 1989 referred to aspects of the proposal which appeared either to differ from, or not to be set out in, the bankrupt's letter dated 29 November 1988 yet it was the proposal as set out in that letter which the creditors had accepted.
At the further hearing on 28 April 1989, the bankrupt relied on an affidavit sworn by him on that date and a further affidavit of the trustee sworn on 26 April 1989. In his affidavit, the bankrupt referred to his current practising certificate dated 20 June 1988, a copy of which was annexed, and stated that he was not aware of any reason why he would not be issued with "a full practising certificate" in the future. As will appear, the bankrupt was less than frank with the Court in making that assertion. A letter dated 18 April 1989 addressed to the bankrupt by the Law Society of New South Wales, which was annexed to the affidavit, referred to a decision of the Disciplinary Tribunal made on that date imposing certain conditions upon the bankrupt's right to practise as a solicitor. No reference was made by the bankrupt either in his affidavit or in the oral evidence which he proferred to the Court on the hearing on 28 April 1989 to the fact that disciplinary proceedings had been taken against him. It does not appear when the trustee became aware of those disciplinary proceedings but he did not refer to them in any of the material placed before the Court.
The trustee's affidavit sworn on 26 April 1989 stated that creditors of the bankrupt who did not attend the meeting on 31 January 1989 had been furnished with a copy of a report by the trustee dated 7 April 1989 which informed those creditors, inter alia, that the application would be further heard on 28 April 1989 and had been requested to notify the trustee whether the creditor assented to the bankrupt's offer. The trustee further stated that, as at the date of swearing his affidavit, one creditor, to whom the bankrupt was indebted in the sum of $400, had objected to the proposal. In his oral evidence given on 28 April 1989, the trustee confirmed that to be the position as at the date of hearing. Neither the creditor referred to, nor any other, appeared before the Court to oppose the bankrupt's application.
The trustee's affidavit of 26 April 1989 set out his understanding of the proposal which the bankrupt had made to his creditors and he supplemented what was stated in the affidavit in the course of giving oral evidence on 28 April 1989. The bankrupt also gave oral evidence on that occasion concerning his understanding of the proposed arrangements.
It became abundantly clear from the evidence given by affidavit and orally that the bankrupt's letter dated 29 November 1988 did not truly reflect what the trustee and the bankrupt understood to be the effect of the proposed composition. There was also considerable doubt whether the terms of the composition as understood by the trustee and the bankrupt had been explained adequately or at all to the creditors of the bankrupt who attended the meeting on 31 January 1989. I, therefore, directed that, in order to clarify the situation, a document be prepared and submitted to the Court setting out with precision the terms of the compromise which the Court was being asked to approve. I also indicated to counsel for the bankrupt that steps should be taken to place before the Court the auditor's report upon the solicitor's trust account operated by the bankrupt, being the report to which the bankrupt had referred in his oral evidence, and the report made by the Disciplinary Tribunal referred to in the letter dated 18 April 1989 addressed to the bankrupt by the Law Society of New South Wales.
The application again came before the Court on 1 and 5 May 1989. On the latter date, further oral evidence was given by the bankrupt in the course of which certain documents were received into evidence. Those documents included the auditor's report dated 29 August, 1988 being the report previously referred to, the transcript of proceedings on 6 and 7 December 1988 and 19 January 1989 before the Disciplinary Tribunal established under the Legal Profession Act 1987 (NSW), the determination and order of the Disciplinary Tribunal dated 18 April 1989 and a draft deed of composition.
The Disciplinary Tribunal was concerned with events which took place prior to the date of the making of the sequestration order against the bankrupt's estate. The Tribunal found the bankrupt guilty of unsatisfactory professional conduct and made orders under s.149(2) of the Legal Profession Act, including an order reprimanding the bankrupt, and orders relating to the future conduct of his practice. In particular, orders were made that the bankrupt cease to accept instructions in relation to certain types of legal work. The bankrupt was also ordered to pay the costs of the Law Society of the proceedings. The bankrupt gave evidence that arrangements had been made for the payment of those costs over an extended period.
The draft deed of composition was referred to in some detail. I made a number of comments upon it, suggesting that its language might require clarification or refinement in order to express with precision the terms of the composition which the Court was being asked to approve. I drew attention to the provision in clause 9 that the trustee pay an amount to the Law Society of New South Wales to enable the bankrupt to renew his practising certificate in respect of the year commencing on 1 July 1989, the bankrupt undertaking to repay that sum within ten months after the annulment of his bankruptcy. As it was clear that the letter of 29 November 1988 which had been placed before the creditors on 31 January 1989 included no similar provision, I questioned whether the creditors had agreed to the trustee making such a payment from what were, in effect, their funds.
At the conclusion of the hearing on 5 May 1989 I formally reserved my decision upon the application while indicating to counsel for the bankrupt that I would require, before giving a decision thereon, to receive a copy of the deed of composition as executed by the bankrupt and the trustee and information whether it was proposed, in accordance with my strong suggestion to that effect, that a further meeting of creditors be convened to consider the terms of the deed as so executed.
On 30 May 1989, the trustee filed an affidavit sworn by him on the preceding day. Annexed to that affidavit was a deed of composition executed by the bankrupt and the trustee but undated. The affidavit stated that a meeting of creditors of the bankrupt had been held on 17 May 1989 and that, at that meeting, a special resolution had been passed approving the deed of composition. The deed of composition was in substantially different form from the draft deed which had been previously tendered in evidence. At the request of the District Registrar of the Court, the trustee made available, late on the afternoon of 30 May 1989, a copy of the minutes of the meeting of creditors held on 17 May 1989.
Paragraph 6 of the trustee's affidavit referred to the resolution passed by the creditors at the meeting held on 31 March 1989 permitting the trustee to continue trading the bankrupt's business for a period of two months commencing on 1 April 1989 and ending on 1 June 1989 and requested that the Court deal with the bankrupt's application as a matter of urgency. The affidavit gave no hint of the drastic and precipitate action which the trustee was about to take.

Upon receipt of the above material, the Court listed the matter for further hearing on 2 June 1989. It then transpired that by a letter dated 31 May 1989, addressed to the bankrupt, a letter which he received late in the afternoon of that day, the trustee had informed him that all necessary documents had been filed with the Court to enable a decision to be made upon the application under s.74 of the Bankruptcy Act and that "unless a decision is handed down today in favour of your application, trading will cease as of close of business today". Immediately thereafter the trustee took steps to close the practice.
The trustee gave no satisfactory explanation to the Court for his action. He simply referred to the resolution passed at the meeting of creditors held on 31 March 1989 and said that, in the light of that resolution, he had no authority to carry on the practice for any further period. He agreed that he had not raised the matter with the creditors at the meeting held on 17 May 1989 and that he had taken no other steps to have the creditors consider the matter or to seek the leave of the Court to carry on the practice for a further period while the Court gave consideration to the material filed by him on 30 May 1989. It is all the more surprising that the trustee should have acted as he did as he clearly was not so punctilious upon the expiry on 31 January 1989 of the period during which he then had permission to carry on the business. His carrying on of the business after that date was not authorised until the meeting held on 9 February 1989.
I can only regard the trustee's conduct in closing the practice in the circumstances mentioned, conduct which clearly disregarded the interests of the creditors who had accepted the composition on 17 May 1989, as irresponsible and deserving of censure.
It also appeared from the trustee's evidence that, notwithstanding the observations which the Court had made concerning the proposal that the trustee pay out of the moneys in his hands the fee for the renewal of the bankrupt's practising certificate as from 1 July 1989, that matter had not been raised with the creditors and the trustee had, in fact, paid the amount, $3,940, on 12 May 1989, that is to say prior to the holding of the meeting of creditors on 17 May 1989.
Faced with the situation which had resulted from the action taken by the trustee, the bankrupt elected to proceed with the application for the approval of the composition, making the commercial judgment that, if the practice could be re-opened forthwith, any damage caused by the closure could be minimised.
In considering whether to approve the composition and annul the bankruptcy, I gave due weight to the view implicit in the resolution passed at the meeting of creditors on 17 May 1989 - a meeting attended by the bankrupt's major creditors - that it was reasonable to expect that the practice could be conducted by the bankrupt in such a way as to generate sufficient surplus funds to meet the payments required under the composition and the bankrupt's other commitments. I also took into account the findings of the Disciplinary Tribunal in relation to the bankrupt's conduct of the practice prior to the date of his bankruptcy and to his lack of candour in bringing to the notice of the Court the proceedings before that Tribunal. I should interpolate that the circumstance that the trustee did not advert to those proceedings in any of his reports or affidavits raises the question whether an adequate investigation was made by the trustee into the bankrupt's trade dealings and affairs. I also had regard to the fact that to refuse an order for the annulment of the bankruptcy would not affect the bankrupt's right to continue in practice as a solicitor on his own account.
Taking those matters into consideration I reached the conclusion, on balance, that I should approve the deed of composition and annul the bankruptcy. I, therefore, made the orders set out at the beginning of these reasons.
Before parting with the matter I should comment briefly upon the concern expressed by the bankrupt on 2 June 1989 at the length of time which had elapsed between the date of the letter, 19 November 1988, in which he proposed an arrangement with his creditors and the final resolution of the matter. I only wish to say that the delay in having the matter finally resolved has been due, in very large measure, to the failure of the bankrupt and the trustee to ensure that the proposal to be put to the meeting of creditors on 31 January 1989 was clearly and precisely formulated and in their failure to take timely measures to cure the defects which soon became apparent once the matter came before the Court.
I also wish to record my appreciation for the interest taken in this matter by the Inspector-General in Bankruptcy and for the assistance given to the Court by Mr M. Zanker who attended the hearing and made submissions on behalf of the Inspector-General.

[1989] FCA 291

09 JUNE 1989