Re Swain, John Philip Commissioner of Taxation v Andrew, William Edward
[1995] FCA 1001
•15 NOVEMBER 1995
C A T C H W O R D S
BANKRUPTCY - Litigation involving trustee - Whether trustee entitled to indemnity for costs out of estate - Whether the litigation was undertaken by the trustee on his own behalf or on behalf of estate.
RE JOHN PHILIP SWAIN; COMMISSIONER OF TAXATION v WILLIAM EDWARD ANDREW as Trustee of the Estate of John Philip Swain and ANGUS BARTLEY, CAMERON THORBURN
NO. NX 247 of 1988
CORAM: WILCOX J
PLACE: SYDNEY
DATE: 15 NOVEMBER 1995
IN THE FEDERAL COURT OF AUSTRALIA)
NEW SOUTH WALES DISTRICT REGISTRY) No. NX 247 of 1988
GENERAL DIVISION )
RE: JOHN PHILIP SWAIN
COMMISSIONER OF TAXATION
Applicant
WILLIAM EDWARD ANDREW as Trustee of the Estate of John Philip Swain
First Respondent
and
ANGUS BARTLEY
CAMERON THORBURN
Second Respondent
CORAM: WILCOX J
PLACE: SYDNEY
DATE: 15 NOVEMBER 1995
MINUTES OF ORDER
THE COURT DECLARES THAT:
The costs as set out in the Certificate of Taxation dated 16 May 1995 be the personal liability of the first respondent and not an expense of the estate.
That the trustee shall not be entitled to additional remuneration in the amount of $11,180 for work done from 13 October 1992 to date.
AND ORDERS THAT:
That the first respondent be ordered to repay all amounts disbursed from the fund presently held by him for the benefit of creditors of the estate of John Philip Swain which were not approved by a meeting of creditors.
That the first respondent be ordered not to deduct the solicitor client costs as set out in Certificate of Taxation dated 16 May 1995 from the fund presently held by him for the benefit of creditors of the estate of John Philip Swain.
That the first respondent be ordered to pay the applicant's costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. [See also Order 37 rule 2(3)].
IN THE FEDERAL COURT OF AUSTRALIA)
NEW SOUTH WALES DISTRICT REGISTRY) No. NX 247 of 1988
GENERAL DIVISION )
RE: JOHN PHILIP SWAIN
COMMISSIONER OF TAXATION
Applicant
WILLIAM EDWARD ANDREW as Trustee of the Estate of John Philip Swain
First Respondent
and
ANGUS BARTLEY
CAMERON THORBURN
Second Respondent
CORAM: WILCOX J
PLACE: SYDNEY
DATE: 15 NOVEMBER 1995
EXTEMPORE REASONS FOR JUDGMENT
WILCOX J: This application is an aftermath to litigation heard by Olney J in respect of which his Honour gave judgment on 7 October 1994. I do not think it is necessary for me to set out the history of the administration of the debtor's estate. The relevant material is contained in his Honour's judgment. The question before the Court is whether the trustee of the estate, William Edward Andrew, should be authorised to pay the costs incurred by him in connection with that litigation from the funds of the estate and to receive
remuneration for work done by him in connection with that litigation.
A question has arisen during this hearing as to whether Olney J intended to deal with the matter of the trustee's entitlement to receive costs by way of indemnity. His Honour declined to make an order for costs. It is not clear whether his Honour had in mind the matter of indemnity when he disposed of the case. The subject was mentioned towards the end of the first of the two hearing days by Mr Gageler of counsel, who then appeared for the Commissioner of Taxation, the main creditor of the estate. He suggested that any claim for indemnity would be unfair. But it was not then clear whether a claim would be made. I am not aware whether a claim was made on the second day of the hearing. Mr Skinner, who appeared at that time, has frankly said that he cannot recall. It may be, therefore, that his Honour did not address his mind to the matter of the indemnity.
I propose to consider the present application on that basis. It seems to me that this is the most favourable way of viewing the matter, from the point of view of the present applicant. If his Honour did have in mind the matter of indemnity, then his concluding statement "the justice of the case dictates that no order for costs be made" would convey a determination that there ought to be no indemnity in favour of the trustee. However, as I have said, the position is not clear. I therefore approach the matter on the basis that his Honour refused to make any interparties costs order but did not address the question of the trustee's entitlement to indemnity.
The history of the matter has been examined in argument. Reference has been made to the decision of the Full Court in Adsett v Berlouis (1992) 37 FCR 201; and particularly to 211-212 where the Court indicated that the test of a trustee's entitlement to be indemnified in respect of costs incurred by him in connection with litigation was "whether the expenditure was reasonably as well as honestly incurred". The submission is put by Mr Skinner, on behalf of Mr Andrew, that it was reasonable for him to incur costs in respect of the litigation determined by Olney J. He rightly says: "There is no issue regarding the quantum of the costs. The costs have been taxed by an officer of the court".
I do not doubt that, from Mr Andrew's point of view, it was reasonable for him to become involved in litigation in respect of his administration of the estate. However, it is another question whether, in doing that, he was acting on behalf of the estate or on behalf of himself. Put very shortly, the background is that a deed of assignment under Part X of the Bankruptcy Act 1966 was made on 20 July 1988 whereby the debtor, Dr John Philip Swain, assigned his half interest in a home at St Ives to Mr Andrew as trustee. The other half interest in the home was held by the debtor's wife. A deed was made on 24 May 1989 between the debtor and his wife, Mr Andrew, as trustee, and the Commissioner of Taxation, the major creditor of the estate. The deed envisaged the sale of the house at a figure of not less than $585,000 and distribution of the proceeds. Without going into detail, it is clear that, if the house had been sold at that price, there would have been ample funds for the trustee to pay out the creditors in full. Unfortunately, the sale did not proceed and the market value dropped.
Subsequently, Dr Swain died. Shortly after his death, Mr Andrew made an arrangement with the debtor's wife whereby she would pay to him the sum of $225,000 for his one-half interest in the property. Given the drop in market value, this was probably a reasonable deal, from the point of view of the estate. Olney J was not prepared to criticise it. Neither am I.
However, Mr Andrew neglected to obtain the approval of the creditors or of the Court, as is required by the Act. Perhaps because of the considerable difference between the amount received for the one-half interest and the previously envisaged price for the whole interest in the house, the residuary beneficiary of Dr Swain's estate, Mrs Kendall, complained. The Inspector-General of Bankruptcy became involved and noted that the sale of the half-interest was in breach of the Bankruptcy Act.
Apparently as a result of the Inspector-General's interest in the matter, Mr Andrew filed an application on 2 March 1993 seeking a declaration that his action in selling the half-interest did not require a resolution of creditors or the leave of the Court and directions in connection with the distribution of moneys from the sale. The Inspector-General filed a cross-application alleging that Mr Andrew, as trustee of the estate, had been guilty of breaches of duty and seeking an order that Mr Andrew pay to the estate the sum of $77,378. Mr Andrew subsequently amended his claim so as to seek revocation of the approval of the Family Court to a maintenance agreement made on 24 May 1989 and other relief. Later that year, he filed an application in the Family Court, which was transferred to this Court, being an application for relief in connection with the maintenance agreement filed in the Family Court.
Olney J held, in effect, that the action of Mr Andrew in selling the one-half interest without obtaining a resolution of the creditors or the leave of the Court was a breach of the Act but that, in the circumstances, no loss to the estate had been established. He held that the Inspector-General's cross-application was misconceived and, for that reason, ordered him to pay Mrs Kendall's costs. Otherwise he made no order for costs.
It seems to me apparent that his Honour took the view that Mr Andrew had created the problem by his own breach of the Act; thus bringing upon himself the attention of the Inspector-General which caused him - Mr Andrew - to make his initial application, and which was followed shortly afterwards by the Inspector-General's application. It is to be noted that Olney J did not think the creditors were involved in the matter. Although the Commissioner of Taxation was represented on the first day, his Honour commented in his reasons:
"Although it was proper that the creditors be served with the application they have had no real interest in the outcome. Their interests as creditors have not been at risk and in any event it is unquestionable that they acquiesced in all the trustee did concerning the sale to Mrs Arthur Lennox, that is, the former wife of the debtor. There will be no order for costs in favour of the creditors."
It seems to me that the litigation heard by Olney J was not litigation undertaken by Mr Andrew on behalf of the estate. It is true that it is litigation that would not have occurred but for the fact that he was the trustee of the estate. It would not have occurred but for the fact that, as trustee, he entered into the agreement for sale of the house for $585,000. But it also would not have occurred but for his breach of the Act in selling the half-interest without obtaining a resolution of the creditors or the leave of the Court. It was that unlawful act that brought upon him the complaint of Mrs Kendall and the action of the Inspector-General. The Inspector-General sought a declaration that he was guilty of a breach of the Act and payment by Mr Andrew of $77,378 to the estate. In defending those claims, Mr Andrew was defending his personal position. He was not acting on behalf of the estate.
As I have said, it was quite reasonable for him to defend his personal position. But there is no reason whatever why the estate should bear the cost of him doing so.
It seems to me that the position is much like the situation of a solicitor whose handling of a matter is the subject of a complaint to the Law Society, as a result of which action is taken against him by a disciplinary committee. It is no doubt reasonable for the solicitor to incur costs in answering the complaint; but it would hardly be proper for him to return to his office and send an account to his client for the costs thereby incurred. In my view, Mr Andrew is not entitled to indemnity in respect of the costs incurred in this litigation or to remuneration for the work done by him in connection therewith.
I make declarations 5 and 6 sought in the application filed on 8 June 1995 on behalf of the Commissioner of Taxation. I make orders 2, 3 and 4 as sought in that application.
I certify that this and the preceding six (6) pages are
a true copy of the Reasons for Judgment
of his Honour Justice Wilcox.
Associate:
Dated: 15 November 1995
APPEARANCES
Counsel for the Applicant: S W Gibb
Solicitor for the Applicant: Australian Government Solicitor
Counsel for the Respondent: B Skinner
Solicitor for the Respondent: Gye Perkes & Stone Lawyers
Date of hearing: 15 November 1995
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