Re Simersall
[1992] FCA 310
•21 MAY 1992
Re: RAYMOND GERALD SIMERSALL and DAVID ERNEST WILLIS BLACKWELL
And: JOHN ANTHONY BRAY
No. NB859 of 1989
FED No. 310
Bankruptcy
(1992) 108 ALR 375
COURT
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
Gummow J.(1)
CATCHWORDS
Bankruptcy - application by trustee in bankruptcy under s. 77A of Bankruptcy Act 1966 for production of documents - respondent acted as trustee of associated entity of bankrupt - whether trust account records were "books of" that associated entity.
Trusts - rights of beneficiary to inspect trust documents - whether these rights proprietary in nature.
Bankruptcy Act 1966
Bankruptcy Amendment Act 1987
Walker v Corboy (1990) 19 NSWLR 382
In re Londonderry's Settlement (1965) Ch 918
Spellson v George (1987) 11 NSWLR 300
O'Rourke v Darbishire (1920) AC 581
Re Fairbairn, deceased (1967) VR 633
Wentworth v de Montfort (1988) 15 NSWLR 348
Re Huybrechts; Ex parte Huybrechts (1991) 31 FCR 394
Re Hepburn; Ex parte Deputy Commissioner of Taxation (Hill J., 10 July 1989, unrep)
King v Goussetis (1986) 5 NSWLR 89
Reed v Madon (1989) 2 All ER 431
HEARING
SYDNEY
#DATE 21:5:1992
Solicitors for Mr G.E.F. Hughes of
the applicant: Cutler Hughes and Harris.
Solicitors for Mr S.D. Westgarth of
the respondent: Corrs Chambers Westgarth.
ORDER
THE COURT:
1. Declares that the respondent is obliged to produce to the applicant those of the following records:
(i) bank deposit books or slips and cheque butts;
(ii) until October 1989, a handwritten cash book showing receipts and payments on behalf of the clients of Bray and Co.;
(iii) from October 1989, a computerised set of trust account
records which contain records of receipts and payments on behalf of the clients of Bray and Co.; and
(iv) trust account bank statements which relate to the sale of containers identified under the heading "Authorities or Appointments" in the respondent's letter to thesolicitor for the applicant, which is dated 10 January 1992 and is Exhibit "DB52" to the applicant's affidavit sworn herein 18 February 1992.
2. Orders that:
(a) the respondent produce to the applicant within 14 days those of the following records:
(i) bank deposit books or slips and cheque butts;
(ii) until October 1989, a handwritten cash book showing receipts and payments on behalf of the clients of Bray and Co.;
(iii) from October 1989, a computerised set of trust account records which contain records of receipts and payments on behalf of the clients of Bray and Co.; and
(iv) trust account bank statements which relate to the sale of containers identified under the heading "Authorities or Appointments" in the letter to the solicitor for the applicant, which is dated 10 January 1992 and is Exhibit "DB52" to the applicant's affidavit sworn here in 18 February 1992.
(b) the respondent pay the costs of the applicant of the application filed 19 February 1992.
Note: Settlement and entry of orders is dealt with in Order 124 of the Bankruptcy Rules.
JUDGE1
On 5 June 1989, the applicant was appointed by this Court Trustee of the estate of Raymond Gerald Simersall ("the bankrupt"). On 30 December 1991, the applicant's solicitor served upon the respondent a notice signed by the applicant on 27 December 1991. The respondent carries on practice as an accountant in Sydney. His firm is Bray and Co. The notice was expressed as having been issued pursuant to powers conferred upon the applicant by s. 77A of the Bankruptcy Act 1966 ("the Act"). It required the respondent to produce certain records, said to be "books" within the meaning of sub-s. 5 (1) of the Act. The books were identified as those of Barroile Pty Limited ("Barroile"), an "associated entity" of the bankrupt. Section 77A was inserted in the Act by s. 35 of the Bankruptcy Amendment Act 1987 ("the 1987 Act").
The present application, filed 19 February 1992, seeks an order from this Court requiring compliance by the respondent with that notice.
It now appears, although there was some dispute about it before me, that the respondent has produced all records called for by the s. 77A notice save for one category of documents. These are certain trust account records of Bray and Co. The answer to the question whether there is any obligation of the respondent to produce those records depends upon the proper construction of s. 77A.
Sub-sections (2) and (3) of s. 77A apply where there is an investigation being conducted under s. 19AA; sub-s. 77A (1) so states. Section 19AA provides that where a person becomes a bankrupt the trustee shall, to the extent that the trustee having regard to all the circumstances of the case considers it desirable to do so, investigate so much of the bankrupt's conduct and examinable affairs, and the books, accounts and records kept by the bankrupt, as is relevant for the bankruptcy. At all material times, the applicant has been conducting such an investigation. In those circumstances, sub-ss. (2), (3) and (4) of s. 77A provide:
"77A (2) For the purposes of the investigation, the investigator may by writing require a person to produce:
(a) to a specified person, being the investigator or another person; and
(b) at a specified place, and within a specified period or at a specified time on a specified day, being a place, and a period or a time and day, that are reasonable in the circumstances; specified books, or specified classes of books, that:
(c) are books of an associated entity of the bankrupt;
(d) are in the possession of the person of whom the requirement is made; and
(e) in the investigator's opinion, are relevant to the investigation.
(3) Where the investigator requires a person (in this subsection called the 'relevant person') under this section to produce books to a specified person, the investigator or the specified person:
(a) if the books are so produced:
(i) may make copies of, or take extracts from, the books; and
(ii) may require the relevant person, or any other person who was a party to the compilation of the books, to explain to the best of his or her knowledge and belief any matter about the compilation of the books or to which the books relate; or
(b) in any other case - may require the relevant person to state, to the best of his or her knowledge or belief:
(i) where the books may be found; and
(ii) who last had possession, custody or control of the books and where that person may be found.
(4) The production of books under this section does not prejudice a lien that a person has on the books." (Emphasis supplied).
The dispute between the applicant and the respondent which was argued before me centred upon the question whether the trust account records of Bray and Co. which the applicant seeks "are books of an associated entity of the bankrupt".
The term "books" is defined in sub-s. 5 (1) as including any account, deed, paper, writing or document and any record of information however compiled, recorded or stored, whether in writing on microfilm, by electronic process or otherwise. A company that is or has been "associated" with a person at a time when the company is or was, as the case may, a private company is, in relation to that person, an "associated entity". This follows from the definition of that phrase in sub-s. 5 (1). A company is "associated" with a person if, inter alia that person is an officer of the company or is otherwise concerned in, or takes part in the management of the company. This follows from para. (a) of s. 5B. Before he became bankrupt on 5 June 1989, the bankrupt was a director of Barroile. It follows that Barroile is an associated entity of the bankrupt, within the meaning of s. 77A. The relevant trust account records are undoubtedly "books" within the meaning of para. (c) of sub-s. 77A (2), and in the applicant's opinion are relevant to his investigation under s. 19AA.
The immediate question is whether those trust account records are books "of" Barroile. The solicitor for the respondent submits that where "an associated entity of a bankrupt" is beneficiary of a trust, the books of the trustee are not the books "of" that associated entity, within the meaning of s. 77A. It is necessary first to turn to some factual matters before dealing with this issue of construction.
The applicant wishes to find out what happened to the proceeds of sale of 626 sea cargo containers. It appears that they were sold between October 1988 and February 1991 by the respondent for the sum, after credits, of $785,776.24. The respondent wrote to the solicitors for the applicant on 10 January 1992 a letter part of which read:
"Bray and Co. was appointed agent by Barroile Pty Limited and Costello Investments Pty Limited to sell containers owned by Castle Containers Limited and hold the proceeds in a deposit account with the ANZ Banking Group George and Margaret Streets Branch or as I was instructed."
The respondent has in his possession, but has not produced in response to the s. 77A notice, the trust account records of Bray and Co. being:
(i) until October 1989, a handwritten cash book showing receipts and payments on behalf of clients of Bray and Co.; and
(ii) from October 1989, a computerised set of trust account records which contain records of receipts and payments on behalf of the clients of Bray and Co.; and
(iii) bank deposit books or slips and cheque butts; and
(iv) trust account bank statements.
The respondent contends that none of these are books "of" Barroile.
In written submissions, the respondent accepted that between 1 August 1988 and 31 January 1990 he had sold shipping containers on the joint authority of Barroile Pty Limited and another company. That company was stated to be "Associated Marine Consult Ltd" rather than "Castle Containers Limited", the company referred to in the respondent's earlier letter of 10 January 1992, to which I have made reference above. In the written submissions, the respondent submits that even if he acted as agent (which despite the terms of the letter of 10 January 1992 he says is not now conceded) the trust account records maintained by Bray and Co. do not constitute records of Barroile because Barroile "does not own Mr Bray's trust account records and could not call for them". The respondent also submits that the fact that the trust account records in question contain records of transactions undertaken by Bray and Co. for entities other than Barroile supports the view that the trust account records are not records "of" Barroile, even if Barroile had the right to inspect the trust account records or a right to call for an accounting.
As the evidence before me stands, I accept that the respondent's firm was appointed agent by Barroile and another company to sell containers and hold the proceeds in a particular deposit account or as he was instructed. The evidence (in particular the documents comprising Exhibit "DB52") also supports the conclusion that in relation to those proceeds the respondent from time to time did act upon the instruction of Barroile. The segregation of these dealings by use of the trust account records of Bray and Co. supports the conclusion that Bray and Co. was acting as trustee, inter alia, for Barroile in relation to the dealings with the containers; see Walker v Corboy (1990) 19 NSWLR 382 at 397-8.
In that setting, it is appropriate first to consider the position at general law of trustee and beneficiary as regards trust account records.
The following statement appears in "Scott on Trusts", 4th ed., 1987, section 173 under the heading "Duty to Furnish Information":
"The trustee is under a duty to the beneficiaries to give them on their request at reasonable times complete and accurate information as to the administration of the trust. The beneficiaries are entitled to know what the trust property is and how the trustee has dealt with it. They are entitled to examine the trust property and the accounts and vouchers and other documents relating to the trust and its administration. Where a trust is created for several beneficiaries, each of them is entitled to information as to the trust. Where the trust is created in favour of successive beneficiaries, a beneficiary who has a future interest under the trust, as well as a beneficiary who is presently entitled to receive income, is entitled to such information, whether his interest is vested or contingent." (Emphasis supplied).
English and United States authority is cited for these propositions. It will be noted that the fact that there is a plurality of beneficiaries does not mean that each of them is not distinctly entitled to the relevant rights against the trustee. There has been, in some of the authorities, difficulty with identifying what is comprised within the class of "trust documents" for the purpose of the exercise of the rights described above. And, despite what is stated by Scott in the above passage, there has also been some uncertainty as to the position of parties claiming under a discretionary trust rather than a trust of a simpler or more traditional type.
Thus, in In re Londonderry's Settlement (1965) Ch 918, the Court of Appeal dealt with a settlement whereunder the trustees were given a power of distribution among members of a specified class in such shares as they should determine, and it was held that a member of that class was not entitled to the production of correspondence and minutes of the meetings of trustees relating to a distribution. On the other hand, in Spellson v George (1987) 11 NSWLR 300, Powell J. held that a person who is one of the potential objects of the exercise of a discretionary power of appointment in respect of a trust fund, has the right to seek and obtain from the trustee of that trust fund information concerning the trustee's management of that trust fund, and that the exercise of that right does not depend upon an allegation that the trustee has in the course of the management been guilty of fraud or other breach of trust. It is unnecessary to express any concluded view upon these matters, but as is apparent from the extract from Scott, there is weighty support for Powell J.'s conclusions.
In the present case, as is apparent from the statement in Scott, the trust accounts, the production of which is sought by the applicant, are indubitably "trust documents" within the meaning of the general law. Further, the trust in question is one of a familiar type whereby the trustee was charged with selling property as an agent and receiving proceeds on trust to be held, inter alia, for Barroile or as otherwise instructed.
That being so, what was said by Lord Wrenbury in O'Rourke v Darbishire (1920) AC 581 at 626 is in point:
"If the plaintiff is right in saying that he is a beneficiary, and if the documents are documents belonging to the executors as executors, he has a right to access to the documents which he desires to inspect upon what has been called in the judgments in this case a proprietary right. The beneficiary is entitled to see all trust documents because they are trust documents and because he is a beneficiary. They are in this sense his own. Action or no action, he is entitled to access to them."
His Lordship's remarks were accepted in In re Londonderry's Settlement, supra at 932-3, 935, 937. As I have indicated, the debate in that case was as to the content of the expression "trust documents" where what was sought was the reasons for the exercise of discretionary powers. The continuing importance in Australia of Lord Wrenbury's statement of principle was emphasised by Gillard J. in Re Fairbairn, deceased (1967) VR 633 at 637-40.
One of the essential elements of a private trust is that the trustee is subject to a personal obligation to hold and deal with the trust property for the benefit of the beneficiaries, and a necessary incident of that obligation is the liability of the trustee to account to the beneficiaries for his stewardship of the trust property. That being so, a further necessary incident of the control of the trust property by the trustee is the trustee's obligation to keep proper accounts and to allow inspection of them by the cestui que trust: see Spellson v George, supra at 315-6. Hence, the description of Lord Wrenbury of the right of inspection as "proprietary" in character, annexed as it is to the beneficial interest of the beneficiary in the trust property.
In my opinion, no departure from these principles, which are well settled, was intended by certain passages to which I was referred in the judgment of Hope J.A. in Wentworth v de Montfort (1988) 15 NSWLR 348 at 356. His Honour there said:
"A trustee must keep proper financial records and in a real sense, as well as keeping them for his own benefit, he keeps them for the benefit of the beneficiary, to whom he must be ready to render accounts when required. However, while he is trustee, they are his records and he has the legal title to them. The beneficiary is entitled to inspect them, and to have information about them, but they are not the beneficiary's property: Re Londonderry's Settlement; Peat v Walsh (1964) Ch 594. Normally, when a trustee ceases to hold office, either on appointment of a new trustee or the determination of the trust, he would be required to hand over all trust property, including documents and financial records, to the new trustee, or to the sole beneficiary or all the beneficiaries if more than one, if required to do so. In Re Cowin (1886) 33 Ch D 179 at 185, North J quoted with approval the following passage in Lewin on Trusts, 8th ed (1885) at 975: 'All documents held by the trustee in that character must be produced by him to the cestuis que trust, who in equity are the true owners'. This position would generally apply to a trustee who is a solicitor, but there are important qualifications in some cases. If he is solicitor for the client as well as trustee, he is required by law (as I shall describe later) to maintain and to retain proper financial records. He is entitled to retain these records, some of which may refer to other clients as well as the trust, but the beneficiary should be provided with copies if asked for. Other records which he makes as solicitor and not as trustee are subject to the same principles as would apply if he were not a trustee."
(Emphasis supplied).
In that case, the plaintiff sought a declaration that certain documents, including records relating to moneys which had been held for her by what were now her former solicitors, were owned by her and an order that the solicitors deliver the documents to her. It was held that the records in question "belonged to" the solicitors, but that the plaintiff was entitled to inspect them and to be given information about them.
In the passage set out above, Hope J.A. accepted the propositions that the legal title to such records held by a trustee was in the trustee, but that whilst the trust remained on foot they would not the beneficiary's property in the sense that the trustee was obliged to hand them over to any beneficiary. In that sense, his Honour was correct in saying that the records were not the beneficiary's property. But, as I have indicated, and as was accepted in the decision of the Court of Appeal referred to by his Honour, Re Londonderry's Settlement, the rights of the beneficiary in relation to the documents before the trust is wound up and whilst it is current, are such as properly to be described as proprietary in nature. This is so although those rights fall short of a full beneficial interest with the right to call for immediate delivery of the records into the permanent possession of the beneficiary.
It follows, in my view, that as a matter of general law, in relation to the documents of Bray and Co. here in question, Barroile has a right of access for inspection. That access, in Lord Wrenbury's phrase, is "upon a proprietary right" because, in a sense, the documents are those "of" Barroile.
Against this background, are the records those "of" Barroile, for the purposes of s. 77A, Barroile being an associated entity of the bankrupt?
Section 77A contemplates that various persons may have interests in or claims upon books which are liable to production upon an investigation. The section is not drawn so as to limit the class of persons of whom production of documents may be required to associated entities of the bankrupt. What is required is that the books are "in the possession of" the person of whom the requirement is made. Where the requirement is made of a person having such possession with enjoyment of a lien over the books, the production of the books in compliance with the requirement will not prejudice the lien of that person, if, for example, the lien is held against the performance of an obligation owed by an associated entity of the bankrupt; see sub-s. 77A (4).
Assistance in construing s. 77A is supplied by a consideration of s. 81 and ancillary provisions. A summons under sub-s. 81 (1) may require an "examinable person" to produce at the examination books, including books of an "associated entity" of the bankrupt ("the relevant person"), that are in the possession of the examinable person and which relate to the bankrupt or any of the bankrupt's examinable affairs. This follows from sub-s. 81 (1B). Sub-section 81 (1B) was inserted by the 1987 Act, which also, as I have indicated, introduced s. 77A. The evident purpose of s. 77A is to enable a trustee of a bankrupt estate to inspect "books" in the circumstances described in the section without having to incur the time and expense of recourse to a s. 81 examination; cf. Re Huybrechts; Ex parte Huybrechts (1991) 31 FCR 394 at 396.
The 1987 Act inserted in sub-s. 5 (1) definitions of "examinable person" and "associated entity" and also inserted s. 5C. The phrase "books of an associated entity" appears not only in s. 77A but also in para. (e) of the definition of "examinable person", a definition which, as I have indicated, has an important function in s. 81.
Section 5C states:
"5C For the purposes of this Act, a natural person (in this section called the 'associate') is associated with another person if, and only if, the other person:
(a) . . .
(b) is a trustee of a trust under which the associate is capable of benefiting;
(c) . . .
(d) acts as agent for the associate in any transaction or dealing;
(e) is an attorney of the associate under a power of attorney;
(f) . . .
(g) gives professional advice to the associate; or
(h) is given professional advice by the associate." (Emphasis supplied).
The term "examinable person" is defined in sub-s. 5 (1) as follows:
"'examinable person', in relation to a person (in this definition called the 'relevant person'), means:
(a) . . .
(b) . . .
(c) . . .
(d) if a person, including:
(i) a person who is an associated entity of the relevant person; or
(ii) a person with whom an associated entity of the relevant person is or has been associated; may be able to give information about the relevant person or any of the relevant person's examinable affairs - that person; or
(e) if books (including books of an associated entity of the relevant person):
(i) are in the possession of a person, including a person of a kind referred to in subparagraph (d) (i) or (ii); and
(ii) may relate to the relevant person or any of the relevant person's examinable affairs; that person;"
Finally, there is a definition in sub-s. 5 (1) of "associated entity":
"'associated entity', in relation to a person, means:
(a) an entity (other than a company) that is, or has been, associated with the person; or
(b) a company that is, or has been, associated with the person at a time when the company is, or was, as the case may be, a private company."
The result is that if books of an associated entity of the bankrupt are in the possession of a person ("X") with whom an associated entity of the bankrupt is or has been associated (by, for example, X being trustee of a trust under which the associated entity is capable of benefiting), and the books may relate to the bankrupt or any of the bankrupt's examinable affairs, X is an examinable person for the purposes of s. 81 and production of the books may be required. It would be a curious result of the scheme introduced by the 1987 Act if the existence of the trust, whilst in terms sufficient to attract s. 81, fell short of what was necessary to attract the operation of s. 77A. In my view, there is no such disconformity.
Books may be those "of" an associated entity, within the meaning of s. 77A if the associated entity claims under a trust for which the relevant books are "trust documents" within the general law doctrine which I have described. The term "of" in para. 77A (2) (c) is apt to embrace a connection or association falling short of absolute ownership.
The applicant has made out its case for relief. Sub-section 30 (1) of the Act empowers the Court to grant declaratory and injunctive relief in a case such as the present if considered by the Court necessary to carry out or give effect to s. 77A. Relief will be "necessary" if it is in the interests of justice, having regard to the purposes of the Act, as disclosed by the scheme evinced by the 1987 Act which introduced s. 77A and amended s. 81; see Re Hepburn; Ex parte Deputy Commissioner of Taxation (Hill J., 10 July 1989, unrep.). It may be added that, as a matter of inherent equitable jurisdiction, statutory rights such as those given by s. 77A to investigators acting under s. 19AA, have been supplemented by standing to seek injunctive relief; see, for example, King v Goussetis (1986) 5 NSWLR 89 at 93; Reed v Madon (1989) 2 All ER 431 at 436-7. The inherent jurisdiction to protect or enforce rights given by statute was attracted in those cases, although the statute itself created no equitable remedy; these cases involved statutes which, as a matter of construction, conferred private rights to the enforcement of the obligations the statutes imposed. Their significance for present purposes is that they illustrate how it may be in the interests of justice, having regard to the purposes of the Act, for the remedies provided for in s. 30 to be available in a case such as the present.
The Court will declare that the respondent is obliged to produce to the applicant those of the following records:
(i) bank deposit books or slips and cheque butts;
(ii) until October 1989, a handwritten cash book showing receipts and payments on behalf of the clients of Bray and Co.;
(iii) from October 1989, a computerised set of trust account records which contain records of receipts and payments on behalf of the clients of Bray and Co.;
(iv) trust account bank statements
which relate to the sale of containers identified under the heading "Authorities or Appointments" in the respondent's letter to the solicitor for the applicant, which is dated 10 January 1992 and is Exhibit "DB52" to the applicant's affidavit sworn herein 18 February 1992.
The applicant also should have in his favour an order that the respondent perform within 14 days the obligation the subject of the declaration.
There was some discussion before me as to disclosure of details recording the affairs of other persons who had had dealings with the respondent, details of which are set down in continuous records. The matter can be dealt with by appropriate masking of records when produced to the applicant.
The respondent should pay the costs of the applicant of the application filed 19 February 1992.
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