Scott (Trustee), in the matter of Cannon (Bankrupt) v Cannon
[2024] FedCFamC2G 7
•12 January 2024
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Scott (Trustee), in the matter of Cannon (Bankrupt) v Cannon [2024] FedCFamC2G 7
File number(s): MLG 1514 of 2021 Judgment of: JUDGE SYMONS Date of judgment: 12 January 2024 Catchwords: BANKRUPTCY – application for stay or discharge of orders authorising trustee in bankruptcy to exercise power of sale of properties co-owned by the second respondent – alleged breach by trustee of duties owed under s 19 of the Bankruptcy Act 1966 (Cth) – whether trustee authorised unnecessary demolition and improvement works to the properties in purported compliance with power of sale – whether trustee’s failure to accept offers of settlement made by the second respondent and failure to make enquiries concerning the capital gains tax consequences of the sale of the properties engaged the supervisory jurisdiction of the Court – where failure of the trustee to make capital gains tax enquiries had stultifying effect on the ability of the trustee to administer the bankrupt estate - where parties invited to make submissions as to form of appropriate orders having regard to reasons for judgment Legislation: Bankruptcy Act 1966 (Cth) ss 4A, 19, 134, sch 2 (Insolvency Practice Schedule (Bankruptcy)) ss 5-5, 5-15, 5-16, 5-20, 45-1, 90-15
Income Tax Assessment Act 1936 (Cth), s 254
Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth), rr 17.05, 25.05
Inspector-General Practice Directions s 42-135
Cases cited: Frost v Shehan [2009] FCAFC 20
Hacker v Weston [2015] FCA 363
Sandhu v Minister for Immigration and Border Protection (No. 2) [2015] FCA 1429
Division: Division 2 General Federal Law Number of paragraphs: 117 Date of last submissions: 26 October 2022 Date of hearing: 26 October 2022 Place: Melbourne Counsel for the Applicant: Mr P Fary SC Solicitor for the Applicant: Mills Oakley Solicitor for the First Respondent: The First Respondent did not participate in the proceeding. Solicitor for the Second Respondent: Diamonds Solicitors ORDERS
MLG 1514 of 2021 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
IN THE MATTER OF JOHN GEORGE CANNON, BANKRUPT)
BETWEEN: ANDREW JOHN SCOTT AS TRUSTEE OF THE BANKRUPT ESTATE OF JOHN GEORGE CANNON
Applicant
AND: JOHN GEORGE CANNON
First Respondent
LYNETTE CANNON
Second Respondent
ORDER MADE BY:
JUDGE SYMONS
DATE OF ORDER:
12 JANUARY 2024
THE COURT ORDERS THAT:
1. On or before 9 February 2024 the parties:
(a)File and serve a joint form of draft orders, including as to costs, to give effect to the conclusions reached in the reasons for judgment published today; or
(b)In default of agreement, file and serve marked up draft orders (including as to costs), supplemented by written submissions limited to ten pages in support of their respective contentions.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE SYMONS:
INTRODUCTION
By an application in a proceeding filed on 20 September 2022, the second respondent to the substantive proceeding (Mrs Cannon) seeks relief directed at orders made on 16 November 2021 by Judge McNab (as his Honour then was) (the Orders).
The Orders were made on the application of the applicant trustee in bankruptcy of the estate of the first respondent (the Trustee). They authorised the Trustee to sell the following three properties jointly owned by Mrs Cannon and her husband, the first respondent:
(a)Unit 5, 2 Skinner Street, Hastings, Victoria (the Hastings Property);
(b)7 Parklands Avenue, Somers, Victoria (the Somers Property); and
(c)75 Wappa Falls Road, Yandina, Queensland (the Yandina Property)
(collectively, the Properties).
The first respondent to the substantive proceeding (Mr Cannon) became a bankrupt when a sequestration order was made by this Court on 30 March 2017. Mr Cannon has not participated in these proceedings.
Mrs Cannon’s application involves the central allegation that the Trustee “has engaged in a course of conduct which is well short of the minimum standards of proper care and good faith expected of a trustee and officer of the Court”. In her affidavit sworn on 19 September 2022, Mrs Cannon identified this conduct as involving or being constituted by:
(a)the unnecessary and unauthorised demolition of buildings and improvements on properties the Trustee has obtained possession of;
(b)the Trustee’s refusal to properly consider practical commercial offers of settlement made by or on behalf of, Mrs Cannon;
(c)the failure of the Trustee to even consider, let alone inform himself about the capital gains tax consequences of his actions before selling the Somers Property, or considering Mrs Cannon’s offers of settlement prior to the sale of that property;
(d)the payment by the Trustee to BankWest from the proceeds of the sale of the Somers Property, without Mrs Cannon’s authorisation and despite such payment not being required by the Bank, of her debt secured against the Yandina property; and
(e)the failure of the Trustee to either apply on Mrs Cannon’s behalf (as authorised by the Orders), or request Mrs Cannon to obtain, an ATO Clearance Certificate resulting in the payment from the proceeds of sale of the sum of $125,000 to the Australian Tax Office on the basis that Mrs Cannon might be a foreign resident.
By her application, Mrs Cannon seeks a range of orders, including that the Orders be discharged or stayed and an order, which she identified as the primary focus of her application, that the Trustee transfer to her his interest in the Hastings Property and the Yandina Property on terms which are “just and equitable”. Mrs Cannon explained that the other orders sought by her were designed to facilitate a determination of the terms of such transfer. They included an order that there be an account by the Trustee of the expenditure incurred by him in connection with the Orders and the apportionment of such expenditure as between the Trustee and Mrs Cannon and that directions be made for the determination of the quantum of Mrs Cannon’s entitlement to the Hastings and the Yandina Properties.
The hearing of Mrs Cannon’s application took place on 26 October 2022. On that date the Trustee was represented by Mr Fary SC and Mrs Cannon was represented by solicitor advocate, Mr McNab.
The matter proceeded by way of submissions only and there was no challenge to the admissibility of the Cannon affidavit, or the affidavit of the Trustee sworn on 6 October 2022. I treated both affidavits as having been read.
THE BACKGROUND TO THE MAKING OF THE ORDERS AND THE POSSESSION OF THE PROPERTIES
On 2 July 2021, the Trustee filed an application seeking vacant possession and sale of the Properties and on 30 July 2021, the possession application was served on Mrs Cannon and the first respondent. On 4 August 2021, a notice of address for service was filed by the first respondent.
On 13 August 2021, Judge McNab (as he then was) made orders for the filing of pleadings. The Trustee filed a statement of claim on 26 August 2021, but no defence was filed by or on behalf of Mrs Cannon or the first respondent.
On 16 November 2021, the Orders were made.
On 7 December 2021, the Trustee sent letters to the respondents in which he requested details of who was residing in the Properties, a copy of the rental agreement if the property was tenanted, and delivery of the keys for the Properties as required by the Orders.
On 25 January 2022 and in circumstances where the respondents had not delivered up vacant possession or the keys as required by the Orders, a warrant for possession was issued.
THE PARTIES’ SUBMISSIONS
Mrs Cannon’s submissions
Mrs Cannon’s submissions were framed around the duty of the Trustee, found in ss 19(1)(j) and 19(1)(k) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) to administer the estate as efficiently as possible by avoiding unnecessary expense and to exercise powers and perform functions in a commercially sound way.
Mrs Cannon submitted that these duties created obligations on the Trustee to administer the estate of the first respondent in the same manner as “an ordinary prudent businessperson” and that he had failed to do so having regard to the five matters identified at [4] above.
Mrs Cannon submitted that it was not necessary for the Court to make a positive finding that the Trustee had breached any of these duties but rather the Court could, in the exercise of its supervisory jurisdiction, direct the Trustee to effect a transfer to Mrs Cannon of the Hastings Property and the Yandina Property so as to achieve an outcome that was the “usual” outcome in cases where jointly owned properties fell into the hands of a trustee.
As to her specific complaints, Mrs Cannon submitted as follows:
Unnecessary and unauthorised demolition of buildings and improvement on properties
Mrs Cannon’s affidavit contained the assertion that “[h]aving obtained possession of the Somers Property and the Yandina Property, the Applicant set about destroying the improvements at those properties without my consent or authorisation”.[1] Mrs Cannon submitted that these actions were neither contemplated nor authorised by the Orders and that the amount of $55,125.95 paid in carrying out the demolition works was unreasonable and paid to a contractor (Aster Alliance) that had both advised that the demolition works should be undertaken and then performed the work.
[1] At [8] of the affidavit of Lynette Cannon filed on 19 September 2022 (“the Cannon affidavit”); CB 6.
Mrs Cannon referred the Court to correspondence on this issue appearing in her affidavit. The first of this correspondence was an email sent on Mrs Cannon’s behalf by her lawyer, Mr McNab, on 31 March 2022. In that email[2] Mr McNab referred to the demolition of an above ground pool and surrounding decking at the Yandina property and the demolition of a building at the Somers Property. The demolition work at the Yandina Property was described (by Mr McNab) as involving actions that “seem to be a deliberate and perhaps vindictive attempt to diminish the value of the property”.
[2] Reproduced at CB 128-130.
The affidavit of Mrs Cannon also annexed a responsive email sent by Craddock Murray Neumann Lawyers on behalf of the Trustee dated 6 April 2022.[3] The email defended the work at the Yandina Property and the Somers Property. In particular, at [3]-[4] it stated:
[3] Reproduced at CB 128-130.
3. We are instructed as follows:
(a)the Trustee is preparing the Qld Property and the Somers Property (collectively, the Properties) for sale and the only works that have been completed have been to maximise the sale price;
(b)the Trustee has engaged an independent advisor to assist in getting the Properties listed for sale, namely Adam Makki of Aster Alliance (Aster);
(c)in respect of the Qld Property, Aster advised the Trustee to undertake the following works to maximise the sale price;
(i)remove the pool structure at the Qld Property because it did not comply with Queensland government pool and safety regulations;
(ii) replace two broken glass windows at the Qld Property;
(iii) remove rubbish left at the Qld Property; and
(iv) undertake a detailed clean.
(d)in respect of the Somers Property, Aster and the real estate agent engaged by the Trustee to sell the Somers Property (William Lilkendey of YPA Real Estate) (YPA) have advised the Trustee to undertake the following works to maximise the sale price:
(i)remove the brick shed/structure which had no roof because it posed a public liability risk;
(ii)remove a significant quantity of dumped building material including concrete blocks, reo trench mesh, steel, an old septic tank, asbestos material, a gas cylinder and overgrown vegetation to mitigate any public liability risk; and
(iii) undertake a detailed clean of the block.
4.All the works that have been performed to date have been done on the advice of Aster and YPA, with a view to obtaining the best possible sale price. We enclose for your reference photographs of the Properties before the works were carried out and after the works were completed. It is clear from those photographs that works were both necessary and desirable to ensure the best price is achieved on the sale of the Properties.
Trustee’s refusal to properly consider offers of settlement made by or on behalf of, Mrs Cannon
Like the challenge concerning demolition, the challenge directed at the Trustee’s treatment of settlement offers made by or on Mrs Cannon’s behalf did not receive significant attention at the hearing (although it was, to some degree, related to the capital gains tax issue) and the argument was instead largely to be found in Mrs Cannon’s affidavit.
Mrs Cannon deposed that on 21 April 2022 a written offer was made to the real estate agent acting for the Trustee that [she] purchase the Somers Property and the Hastings Property. Mrs Cannon described the offer as being in accordance with valuations that had previously been obtained by the Trustee. She noted that the liquidator of the petitioning creditor, Statewide Secured Investments Pty Ltd (Statewide), confirmed that he had no objection to the offer being accepted. The offer was rejected on 22 April 2022 and the auction of the Somers Property went ahead the following day.[4]
[4] At [11] of the Cannon affidavit and CB 122-127.
Mrs Cannon further deposed that on 10 May 2022, following the sale of the Somers Property, she made an offer to acquire the Trustee’s one-half interest in the Hastings Property and the Yandina Property.[5] The offer was described as being for “a fair price” and included an offer to indemnify the Trustee with respect to his capital gains tax liability. Mrs Cannon submitted that acceptance of the offer at the time would have enabled a prompt finalisation of matters. She noted that (like with the Sorrento Property) the liquidator of Statewide was content with the proposed arrangements. Despite this, the Trustee has not accepted the offer.
[5] At [12] of the Cannon affidavit.
The Capital Gains Tax issue
Mrs Cannon submitted that the Trustee did not undertake any enquiry concerning the capital gains tax (CGT) status of any of the Properties prior to obtaining the Orders and prior to the sale of the Somers Property and that this failure involved a dereliction of the Trustee’s fiduciary and statutory duties.
As noted above at [22], the offer to purchase the Hastings Property and the Yandina Property contained an offer of a CGT indemnity. Mrs Cannon invited the Court to find that it was only after his receipt of this offer that the Trustee was alerted to “the CGT issue” and that this indicated both that the Trustee had been “working blindly” with respect to the expected returns from the sale of the Sorrento Property and cast significant doubt over the decision of the Trustee to reject Mrs Cannon’s offer to purchase that property.
Mrs Cannon referred in her affidavit to advice received from an accountant, Mr Stephen Mooney, which she deposed was to the effect that if the Trustee was to pay CGT on the sale of the Somers Property, rather than accept her indemnity, there would be negative equity available to the bankrupt estate of the first respondent.[6]
[6] At [14] of the Cannon affidavit and CB 95-99.
Mrs Cannon submitted that it would be open to the Trustee – and consistent with his obligations – to accept her offer of a CGT indemnity and to allow her taxation advisors to deal with the ATO concerning any liability. This would avoid the further need and expense of the Trustee to obtain further advice from Price Waterhouse Coopers (PWC) which advice to date, was in any case, inconclusive and suggested only that the issue would not be resolved in the short-term.
Payment of BankWest secured debt
Mrs Cannon challenged what she described as “the election” on the part of the Trustee to use part of the proceeds of the sale of the Somers Property to repay other debt owing by her to BankWest which was fully secured against the Yandina Property. Mrs Cannon contended that the decision to apply the funds in this manner did not reflect any direction or requirement of BankWest and that it was not authorised by her. The consequence of this decision was to significantly diminish the amount of funds that would be available, including to Mrs Cannon, from the distribution of the proceeds from the sale of the Somers Property. This was said to be especially egregious in circumstances where Mrs Cannon had serviced the mortgage throughout the period of her husband’s bankruptcy and having regard to Mrs Cannon’s age, her poor personal health, and her precarious financial situation. In this last regard, Mr McNab told the Court that whereas Mrs Cannon previously had bank finance, which he described as “ongoing”, she would “now probably be in the hands of the second-tier lenders” and subject to the risks inherent in this kind of lending.
ATO Clearance Certificate
Mrs Cannon deposed that upon receipt of a letter from PWC on 23 August 2020 regarding the sale of the Somers Property,[7] she became aware that a payment of $125,000 had been made to the ATO on account of foreign resident’s withholding tax and that an equivalent amount had been deducted from her share of the proceeds of sale of the Somers Property.
[7] CB 35-42.
It was Mrs Cannon’s unchallenged evidence that she was not asked by the Trustee or his lawyers to apply for a Clearance Certificate despite (according to Mrs Cannon) this being something that could easily have been done. Mrs Cannon deposed that the ATO had appropriated the payment of $125,000 against a liability of a company of which Mrs Cannon is a director. Mrs Cannon submitted that this would not otherwise have occurred and that instead “the company’s tax affairs would have been managed in the ordinary course”.
The submission was made that it was apparent from the Trustee’s affidavit that he had become aware of the need for the Certificate on the day of settlement of the Somers Property. According to Mrs Cannon, had the Trustee acted consistently with the standards of a prudent businessman, he would have put the settlement off for a day to obtain the Certificate.
Mrs Cannon submitted that because of the Trustee’s failure to obtain a Clearance Certificate, as well as his failure to ascertain the true CGT position prior to the sale of the Somers Property, her share of the proceeds of this sale had been substantially reduced.
This submission reflected Mrs Cannon’s expectation (upon advice) that she would be eligible for the primary or main residence CGT exemption.
The Trustee’s submissions
The Trustee took the Court to the procedural history that led to the making of the Orders in support of a submission that the Court should be reluctant to exercise its power under r 17.05(2)(a) of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) (the Rules) to set aside what the Trustee characterised as the (final) Orders.
The Trustee referred the Court to the decision of Kenny J in Sandhu v Minister for Immigration and Border Protection (No. 2) [2015] FCA 1429 in which her Honour identified the considerations which ordinarily inform a decision to set aside orders for default of appearance under the Federal Court’s analogous rule. These were described as whether the absent party had provided an acceptable explanation for his or her absence and the strength of his or her case.
The Trustee submitted that the Court should consider these two factors in the context of the application that had given rise to the Orders. It was said that it had been open to Mrs Cannon, as co-owner of the Properties, to file a defence in which she sought (as she did now) orders for the sale of the Properties on just terms. Instead, in the absence of any defence and articulation of a contrary proposal, the Orders were made which included (as a component) that the Trustee exercise a power of sale of the Properties. The Trustee submitted that Mrs Cannon was seeking in effect to reopen and set aside the Orders without providing any explanation for her absence in the substantive proceeding and without addressing the merits of her case.
I interpolate to note that while the Trustee might take issue with the adequacy of the explanation provided by Mrs Cannon she did in fact offer an explanation of sorts when, in her affidavit, she deposed that although she was aware of the application made by the Trustee in these proceedings in respect of the Properties she did not actively participate because she believed at the time that her interest in the Properties was protected and that the applicant as a registered Trustee and officer of the Court would act as a fiduciary and discharge his duty to use proper care and act in good faith.[8]
[8] At [4] of the Cannon affidavit; CB 5.
As far as Mrs Cannon sought a stay of the Orders, the Trustee submitted that although the Court was empowered to grant a stay (referring to r 25.05 of the Rules), such an application would generally require the identification of cogent matters. The Trustee submitted that Mrs Cannon had failed to satisfy this requirement.
In this respect, the Trustee characterised Mrs Cannon’s argument as involving broad complaints about the Trustee’s conduct insofar as it impinged upon her rights as co-owner. It was said that the argument distilled to an attempt by Mrs Cannon to achieve a better outcome for herself in this capacity.
The Trustee acknowledged his duty to maximise the sale price for Mrs Cannon’s half interest in the Properties but submitted that the proposal put forward by Mrs Cannon for the purchase of the Hastings Property and the Yandina Property was “unworkable”. This was so (according to the Trustee) because it operated on a number of premises that were “plainly wrong”, including that Mrs Cannon would have available to her funds that had been appropriated by the ATO to a company debt and that Mrs Cannon could take advantage of the main residence CGT exemption.
As far as Mrs Cannon’s specific complaints were concerned, the Trustee’s affidavit addressed each of these by providing a comprehensive description of and explanation for, the many steps taken following the making of the Orders to achieve a sale of the Somers Property on the open market.
While it is not necessary to identify each one of these, a clear picture emerged that following the making of the Orders, the Trustee had:
(a)engaged an independent real estate advisor to assist with obtaining possession of the Somers Property, to obtain (three) sale proposals from real estate agents and to advise in relation to any remediation and/or improvement work;
(b)engaged a different contractor to undertake the identified remediation/improvement work;
(c)communicated with Mr McNab in relation to a proposal that a Mr Wilson Halim purchase the Somers Property and the Hastings Property for a combined amount of $2 million, representing an offer of $1,400,000 for the purchase of the Somers Property and $600,000 for the Hastings Property (the purchase offer);
(d)considered but ultimately rejected the purchase offer in circumstances where he had received advice about the level of interest in the Somers property and the sale price expected to be achieved at the 23 April 2022 auction, where the reserve price for the auction of the Somers Property had been set at $1,550,000 and where he expected that the sale price for the Somers Property would exceed the purchase offer;
(e)given instructions to sell the Somers Property at public auction on 23 April 2022 on which occasion it was sold for $2,020,000.
The Trustee explained in relation to the CGT issue that he first became aware on 10 May 2022 that Mrs Cannon (and her husband, the first respondent) considered the Somers Property to be their primary residence. The Trustee deposed that he had not previously entertained this as a possibility given that the Somers Property had been uninhabitable vacant land since prior to his appointment as bankruptcy trustee.
On 19 May 2022, the Trustee sought and received initial verbal advice in relation to the impact of CGT on the Somers Property from the tax team at PWC and more broadly in relation to the interaction between s 254 of the Income Tax Assessment Act 1936 (Cth) and the CGT provisions of the Income Tax Assessment Act 1997 (Cth).
Between 24 May 2022 and 21 June 2022, the Trustee (or those acting for him) communicated with Mr McNab regarding the provision of further information to assist in the ascertainment of the CGT position. In the last exchange on 21 June 2022, the Trustee informed Mr McNab that on the information received to date, the CGT liability was estimated to be between $481,250 and $961,295 and that no information had been provided to suggest that the Somers Property could be classified as the primary residence of Mr and Mrs Cannon.
The Trustee submitted that in any case, it was difficult to see how the obtainment of CGT advice would ultimately bear on Mrs Cannon’s application; either tax would be payable, or it would not. In circumstances where each of the Properties would need to be sold because of the Statewide debt, there would need to be a capital gain realised, even if there was a sale to the co-owner, Mrs Cannon. Had Mrs Cannon been concerned about the order in which the Properties were to be sold then she could have attended the hearing in November 2021 and sought orders that the other two properties (Hastings and Yandina) be sold first so as to avoid a scenario where her available funds were diminished due to the realisation of a capital gain on the Somers Property.
The Trustee explained in relation to the BankWest securities that on settlement of the sale of the Somers Property, which occurred on 22 June 2022, the mortgages registered on the Somers Property and on the Hastings Property were discharged. This was in circumstances where the two loans over each of the Hastings Property and the Somers Property were cross-collateralised and reflecting this, the Trustee had received confirmation from BankWest that the four loans needed to be repaid at settlement of the Somers Property. The loan secured against the Yandina Property was not repaid.
On the topic of the ATO Clearance Certificate, the evidence of the Trustee (reproduced in full) was as follows:
49.On 22 June 2022, on settlement, as the final CGT position relating to the sale of the Somers Property was unresolved, I am aware that:
(a)Foreign resident capital gains withholding rules (FRCGW) applies to vendors disposing of certain taxable property under contracts entered into from 1 July 2016;
(b)The FRCGW tax rate is 12.5%;
(c)The FRCGW applies to real property disposals where the contract price is $750,000 or more;
(d)Despite being called ‘Foreign Resident’ Capital Gains Withholding rules, these rules apply to everyone regardless of whether they are a ‘Foreign Resident’;
(e)Australian Resident vendors can avoid the requirement of the purchaser to withhold the 12.5% by providing a clearance certificate obtained from the Australian Taxation Office (ATO) prior settlement;
(f)Pursuant to ATO guidelines, there is an exception to the FRCGW rules where the transaction arises from the administration of a bankrupt estate (per paragraph 14-215(1)(g) of Schedule 1 of the Taxation Administration Act 1953 (Cth)). As such, the purchaser was not required to withhold an amount (or require a clearance certificate be provided by me) with respect to the sale of the bankrupt’s share of the Somers Property.
50.I refer to paragraph 6(e) of the Cannon Affidavit and say that Mrs Cannon was provided with a copy of the contract for sale of the Somers Property on 9 May 2022 by CMN as attested to at paragraph 39 above, and she was therefore aware that the date proposed for settlement was 22 June 2022. Given that she was a vendor, she was obligated as an Australian resident vendor to complete and lodge a clearance certificate application form. At no time prior to 22 June 2022 did Mrs Cannon provide me with a clearance certificate or the information necessary to obtain one on her behalf. As identified above there is a specific exemption from the requirement to provide a clearance certificate by the Trustee in respect of the Trustee’s interest in the Somers Property. I had not become aware of the Purchaser’s requirement to provide a clearance certificate on behalf of Mrs Cannon until the day of settlement. The Purchaser of the Somers Property exercised her right to withhold 12.5% of Mrs Cannon’s share of the proceeds from the Somers Property (which equals $126,500) and this amount was remitted directly by the Purchaser to the ATO at settlement. At pages 588 to 590 of Exhibit AJS-2 is a copy of the ATO email confirming receipt of these funds.
51.In the event that there is not a CGT liability from the sale of the Property, Mrs Cannon will be entitled to seek a refund from the ATO.
The Trustee submitted that the reality of the situation was that the ATO had withheld money and seemingly had applied it to other debt owed by Mrs Cannon to the ATO. It was difficult to see in this scenario how this could result in any breach of duty by the Trustee.
THE LEGISLATIVE FRAMEWORK
As noted earlier, Mrs Cannon’s application relies primarily on alleged breaches by the Trustee of ss 19(1)(j) and (k) of the Bankruptcy Act. However, it is the case, as the Trustee properly acknowledges, that the Trustee’s conduct is to be evaluated against a more extensive framework of duties owed (largely, to creditors), that include the following:
Section 19 of the Bankruptcy Act
Section 19(1) of the Bankruptcy Act provides that the duties of the trustee relevantly include:
1)…
…
(f) taking appropriate steps to recover property for the benefit of the estate;
(g) taking whatever action is practicable to try to ensure that the bankrupt discharges all of the bankrupt’s duties under this Act;
(h) considering whether the bankrupt has committed an offence against this Act;
(i) referring to the Inspector-General or to relevant law enforcement authorities any evidence of an offence by the bankrupt against this Act;
(j) administering the estate as efficiently as possible by avoiding unnecessary expense;
(k) exercising powers and performing functions in a commercially sound way;
(l) the duties imposed on the trustee under Schedule 2.
Insolvency Practice Schedule (Bankruptcy)
The reference to Schedule 2 is a reference to the Insolvency Practice Schedule (Bankruptcy) which has effect by s 4A of the Bankruptcy Act.
Within Sch 2, Div 45 addresses Court oversight of registered trustees and by s 45-1(1), authorises the Court to make such orders as it thinks fit in relation to a registered trustee. Within Div 90 of Part 3, s 90-15(1) also authorises the Court to make such orders as it thinks fit in relation to the administration of a regulated debtor’s estate. For the purposes of Sch 2, s 5-5 contains a Dictionary in which the terms “regulated debtor" and “regulated debtor’s estate” bear the meanings given by ss 5-15 and 5-16 respectively and include a bankrupt, and the estate of a bankrupt. Furthermore, s 5-20 defines the meaning of the term, “trustee of a regulated debtor’s estate” and includes a trustee.
For the purpose of making orders under s 90-15(1) of Sch 2, the Court may take into account the following, non-exhaustive, matters (s 90-15(4)):
(a)whether the trustee has faithfully performed, or is faithfully performing, the trustee’s duties; and
(b)whether an action or failure to act by the trustee is in compliance with this Act and the Insolvency Practice Rules; and
(c) whether an action or failure to act by the trustee is in compliance with an order of the Court; and
(d)whether the regulated debtor’s estate or any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the trustee; and
(e)the seriousness of the consequences of any action or failure to act by the trustee, including the effect of that action or failure to act on public confidence in registered trustees as a group.
Section 5 of the Bankruptcy Act defines a “breach of duty” as meaning “malfeasance, misfeasance, negligence, wilful default or breach of trust”.
Section 42-135 of the Inspector-General Practice Directions (IGPD 9) (Distribution of estate funds) provides:
A registered trustee must distribute funds in a timely manner, having regard to:
(a) the complexity of the administration and the claims of creditors; and
(b) the amount of funds available for distribution; and
…
THE DUTIES OF A TRUSTEE IN THE ADMINISTRATION OF AN ESTATE
The duties of a trustee in the administration of an estate were comprehensively summarised by Flick J in Hacker v Weston [2015] FCA 363 at [10]-[14]:
10.A trustee has a duty to administer the estate of a bankrupt in accordance with law and to exercise such statutory powers as are conferred. In doing so, a trustee is exposed to duties imposed by both the general law and the bankruptcy legislation enacted by the Commonwealth legislature.
11.The fact that a trustee is exposed to both sources of duty cannot be questioned: Adsett v Berlouis (1992) 37 FCR 201 at 208. Northrop, Wilcox and Cooper JJ there summarised the functions of a trustee as follows:
A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt’s estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules 1968 (Cth). The trustee has a dual function: first, to administer the estate in the interests of creditors and the bankrupt; secondly, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act…
Their Honours went on to describe the duties of a trustee, when discharging these functions, as follows:
A trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee…The trustee is required to bring reasonable skill to the performance of his or her duties…
A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money…A trustee in bankruptcy is in no different position. The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee’s obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditor’s claims and any possible surplus for the bankrupt. We adopt, as a correct statement of the duty of a trustee and the proper manner of its performance, the words of Smithers J in Mannigel v Aitken [1983] FCA 183; (1983) 77 FLR 406 at 408-9:
“In the case of bankruptcy the trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the trustee. It was said by Rogerson J in Re Ladyman (1981) 55 FLR 383 at 394-396 that the standard of conduct required of the trustee will ordinarily be the standard required of a professional man and perhaps higher. The learned judge referred to ‘the high standard of conduct required of trustees’”.
In Re Brogden; Billing v Brogden [1888] 38 Ch D 546 Lord Justice Fry said (at 571):
“A trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion is never an absolute one. It is always limited by – the dominant duty – the guiding duty of recovering, securing and duly applying the trust fund; and no trustee can claim any right of discretion which does not agree with that paramount obligation.”
Where an order is sought that the trustee be removed and to make good the losses suffered by the estate, it must be established that the trustee has been guilty of a breach of duty to act ‘diligently and prudently in regard to the business of the Trust’: see Riley J in Re Alafaci; Registrar in Bankruptcy v Hardwick (1979) 9 ALR 262 at 285.
According to Halsbury’s Laws of England (3rd ed), Vol 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. The trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs. But beyond this he is not bound to adopt further precautions. It was said by theirs Honours Dixon CJ, McTiernan and Windeyer JJ in Elder’s Trustee and Executor Co Ltd v Commissioner of Taxation (Cth) (Higgins’ Case) (1963) 113 CLR 42 that:
“We are not to judge what the trustee then did or failed to do by the light of later events…The duty of the trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator’s estate…The argument that the trustee having, it was said, exercised a discretion, its conduct is now unchallengeable is sufficiently answered by a passage from the judgment of Fry LJ in Re Brogden…Whether or not one calls [the trustee’s action] an exercise of discretion, the question remains was it the act of a prudent trustee.”
…
A trustee in bankruptcy is thus subject to the duties which govern trustees generally, except to the extent that those duties have been modified by the Bankruptcy Act. [citations omitted]
…
In Frost v Shehan [2009] FCAFC 20 at [8], Ryan, Mansfield and Jagot JJ accepted that in exercising its powers under (the now repealed) s 178 of the Bankruptcy Act (considered an analogue of s 90-15):
The Court will be slow to make orders which will have the effect of interfering in the day-to-day administration of a bankrupt’s estate and, in cases involving an exercise of business or commercial judgment, will place considerable weight on the trustee’s decision. Further, a Court will not intervene under s 178 simply because the Judge forms a different view from that of the trustee.
These are the principal statutory and general law provisions against which the administration by the Trustee of the bankrupt estate of the first respondent must be gauged.
I am also reminded that while this is a case that directs attention to the actions and inactions taken by the Trustee leading up to and following the sale of the Somers property, antecedent events including especially that the sale of each of the Properties was authorised by an order of this Court obtained in default of the participation and appearance of the first respondent and Mrs Cannon, cannot be entirely ignored.
I turn now to consider each of the criticisms levelled by Mrs Cannon against the Trustee, including for the purpose of evaluating whether there is merit in any one or more of them or whether they expose conduct by the Trustee of a kind that engages the Court’s supervisory jurisdiction.
CONSIDERATION
Demolition and improvement work performed, at the Trustee’s direction, at the Somers and the Yandina properties
As noted earlier, Mrs Cannon characterises the improvement and rectification work performed at the Somers property and the Yandina property as “unnecessary and unauthorised”.
As to whether the works were unauthorised, I am not persuaded that the Orders that, amongst other things, provided that the Trustee could exercise a power of sale pursuant to s 134(1)(a) of the Bankruptcy Act, should be construed so as to inhibit works in relation to the Properties of the kind about which Mrs Cannon now complains.
Instead, the better view is that the Orders authorise, as an incident of the power of sale and/or as an incident of the injunction contained in paragraph 3(f) that the respondents remove all personal property including rubbish and chattels from the Properties within 45 days, the performance of works that are designed to enhance the marketability of the subject property and ultimately, to maximise the returns from the first respondent’s bankrupt estate.
As to whether the works performed on the Somers property and the Yandina property were necessary, I make the following observations of matters recorded in the evidence before the Court:
First, in correspondence sent on 5 August 2021 by the lawyer acting at the time for the first respondent to the Trustee, it was stated that “…the Somers property is vacant, but the land contains the remnants of an old building which is contaminated with asbestos. Our client estimates that any prospective purchasers would need to spend at least $50,000 to clean the site”.[9] Further, the valuation obtained by the Cannons at this time contained an acknowledgement that appropriate presentation for sale of the Somers property would require “removal of all building rubble and dead vegetation”.[10]
[9] Exhibit “AJS-2” to affidavit of Andrew Scott sworn on 6 October 2022 (“Scott affidavit”); CB 197.
[10] Exhibit “AJS-2” to the Scott affidavit; CB 203.
Second, the marketing proposal prepared for the Trustee by YPA Estate Agents, Rye on 12 February 2022 for the Somers property, identified the following “Recommended Repairs” - removal of remainder of old shed, rubbish, concrete blocks and miscellaneous items etc from the land. This was to assist with the presentation of the property during the campaign, but also “to mitigate any risk associated with public liability due to said rubbish”.[11]
[11] Exhibit “AJS-2” to the Scott affidavit; CB 364
Third, the marketing proposal for the Somers property prepared by Hocking Stuart/Belle Property for the Trustee on 12 February 2022, contained a recommendation for the removal of asbestos if buyers were going to be permitted onto the property. The same proposal noted (under the heading “Property Description”) that “[T]here are remnants of an old dwelling and large amounts of scrap and old building materials on site including some asbestos”.[12]
[12] Exhibit “AJS-2” to the Scott affidavit; CB 388.
Fourth, the marketing proposal for the Somers property prepared by O’Brien Real Estate for the Trustee on 12 February 2022 recommended “a general tidy of the block”.[13]
[13] Exhibit “AJS-2” to the Scott affidavit; CB 410.
Fifth, Aster Group provided the following advice to the Trustee about the identification of property risks with the Somers property: “It was very important to clear the block of land at 7 Parklands Avenue. Some major reasons include: The public liability risk associated with all the rubbish on the block, the shed that was present was not stable. The removal of rubbish, shed and items left around the block makes the land more accessible/desirable and safe to prospective buyers; potentially pushing the final price up”.[14]
[14] Exhibit “AJS-2” to the Scott affidavit; CB 1125.
Sixth, based on these recommendations, Aster Group obtained three quotations for a site clean up of the Somers property.[15] The cheaper of the three quotes was accepted by the Trustee[16] and the total cost of the work performed came in at $28,501.[17]
[15] Exhibit “AJS-2” to the Scott affidavit; CB 418.
[16] Exhibit “AJS-2” to the Scott affidavit; CB 428.
[17] Exhibit “AJS-2” to the Scott affidavit; CB 429.
Seventh, Aster Group obtained marketing appraisals from two agents for the Yandina property which involved an inspection and evaluation of the site. Both agents recommended a range of repairs and maintenance including the removal of the pool structure.[18]
[18] Exhibit “AJS-2” to the Scott affidavit; CB 1018.
I am not persuaded having regard to the matters documented above as well as to the explanation provided by the Trustee’s lawyer to Mrs Cannon’s lawyer on 6 April 2022 (reproduced in part at [19] above) that there is any substance to the claim that the repairs and remedial work carried out at the Somers property and the Yandina property were unnecessary. There is evidence of a clear business case that the works performed were expected to improve the re-sale value of both properties. While this might not create “necessity” in the ordinary sense of the word, when regard is had to the standard required of the Trustee that he handle assets with a view to achieving the maximum return, then the evaluation of “necessity” takes on a different complexion. Provided that the expenditure is not shown to be out of all proportion to the gains projected to be realised (and there is no evidence of this occurring in this case) then no criticism can be made of the decision taken by the Trustee to direct that the works be performed and funded from the sale price yielded by the sale of the related property.
The majority of the repairs and remedial work appears to have been necessary for the additional and significant reason that it was performed to reduce or eliminate identified health and safety risks, compliance issues and exposure to claims of public liability.
The Trustee’s refusal to properly consider practical commercial offers of settlement made by or on behalf of, Mrs Cannon
Mrs Cannon is critical of what she contends to be the refusal on the part of the Trustee to properly consider two offers of settlement that were made by or on her behalf.
The first offer in time was the offer to purchase the Somers and Hastings properties. As noted earlier, the offer was communicated to the Trustee on 21 April 2022 and its rejection was communicated by the Trustee to Mrs Cannon on 22 April 2022. The Somers property was sold at public auction on 23 April 2022.
These dates do not determine the issue, but it is at least contextually significant that the Trustee was prevailed upon to consider a settlement offer just two days prior to the date on which the public auction of the Somers property was scheduled to proceed.
As noted earlier, the Trustee justified his decision to reject the offer made on Mrs Cannon’s behalf for the reason that the amounts offered in respect of both the Somers property and the Hastings property (recalling that it was a combined offer) were lower than those expected to be obtained if the properties were placed on the open market.
As far as the Somers property was concerned, the Trustee had the following information concerning its forthcoming auction:
(a)Advice from Aster Alliance that as of 19 April 2022 there were “at least 5 bidders. There are also 2-4 that have shown strong interest but not indicated that they will bid and keeping their cards close to their chest”.[19]
(b)Advice from Aster Alliance received on 19 April 2022 that a reserve be set at $1,500,000 to $1,550,000.[20]
[19] Exhibit “AJS-2” to the Scott affidavit; CB 486.
[20] Exhibit “AJS-2” to the Scott affidavit; CB 486.
The offer made by Mr Halim was based on a value of $1,400,000 being assigned to the Somers Property. If price obtained at public auction is accepted as being the only or predominant metric by which to evaluate the decision-making of the Trustee, then I accept that there was a proper basis for the Trustee to reject the offer made by Mr Halim in circumstances where the reserve for the Somers property was ultimately set at $1,550,000 and where the decision was vindicated when the Somers property was sold for $2,020,000 on orthodox terms that included a 60 day settlement. The offer made by Mr Halim did not contain terms that were otherwise more favourable or which I consider should have compelled the Trustee to accept that offer in preference to the course, which by this stage was well advanced, of offering the Somers Property for sale at public auction.
I acknowledge Mrs Cannon’s criticism of the Trustee that he should have informed himself of the CGT consequences of his actions before selling the Somers property and that he could not have responsibly considered the offer to purchase the Somers (and Hastings) property without a full appreciation of these matters. Mrs Cannon suggests, based on advice provided by her accountant, Mr Stephen Mooney, that, but for the primary (or main) residence exemption being available in relation to the Somers property (a matter about which the Trustee was unaware), there would have been no return to the bankrupt estate of her husband from the realisation of jointly owned properties.
The merits more broadly of this argument are discussed below. To the extent that they engage with the specific proposal for the purchase of the Somers and Hastings properties, the difficulty as I see it is that the offer made by Mr Halim would not have overcome any issue concerning CGT; if it was to be levied (assuming that the main residence exemption was not available) Mrs Cannon would have still been liable to account for CGT as the proposed sale was to a third party. Likewise, the Trustee’s obligations, if any, on an application of s 254 of the Income Tax Assessment Act 1936 (Cth) to collect and remit CGT arising from the sale of that part of the Somers property that had vested in the bankrupt estate of the first respondent, would have been the same irrespective of whether the property had been sold to Mr Hamlin or to a different purchaser.
The Trustee’s failure to consider and inform himself about the capital gains tax consequences of the sale of the Properties
The criticism directed at the Trustee is brought into sharper relief when it comes to an evaluation of the approach taken by the Trustee to the subsequent offer made by Mrs Cannon to purchase the Hastings and the Yandina Properties.
The offer, which was communicated in writing to the Trustee’s legal representative on 10 May 2022,[21] involved a proposed payment by Mrs Cannon of $204,000 in respect of the Trustee’s 50% interest in the Hastings and Yandina Properties. The amount was calculated as follows (adopting the methodology set out in the letter of offer):
[21] Annexure “LC-1” to the Cannon affidavit; CB 120-121.
Hastings Property: $635,000
Yandina Property: $525,000
Total: $1,160,000
Less
Payout of mortgages: $592,000
Selling expenses (say): $40,000
CGT payable (estimate): $120,000
Total: $725,000
Available equity $1,160,000 less $725,000 = $408,000.
Trustee’s share: $204,000
The offer contained the following statement:
In addition to payment of this sum, my client will indemnify the trustee with respect to his CGT liability. This should assist in the prompt finalisation of Mr Cannon’s bankruptcy by allowing the trustee to avoid the CGT consequences under section 254 of the Income Tax Assessment Act 1936 which would otherwise apply.
The offer also noted that Mrs Cannon wished to fund the purchase from her proceeds of the sale of the Somers Property which, on a “back of the envelope” calculation was projected to be in the approximate amount of $685,000.
The affidavit of the Trustee contains what Mrs Cannon submits and which I accept, amounts to an acknowledgement that it was only after receipt of this offer and, I infer, the specific reference in the offer to the CGT consequences of the sale of the Properties, that the Trustee first turned his mind to the CGT consequences of a sale of any of the Properties.
This conclusion follows inescapably from what is recorded at paragraphs [40] and [41] of the Trustee’s affidavit which state:
40.On 10 May 2022, CMN received an email from Bruce McNab enclosing a letter with an offer to purchase the Yandina Property and Hastings Property. It wasn’t until this time that I became aware that the Bankrupt or Mrs Cannon considered the Somers Property their primary residence given the Somers Property was uninhabitable vacant land since prior to my appointment as Bankruptcy Trustee….
41.On 19 May 2022, my staff sought and received an initial verbal advice in relation to the impact of CGT on the Somers Property from the tax team at PwC and more broadly the uncertainty regarding the interaction between section 254 of the ITAA 1936 and the CGT provisions of the ITAA 1997, including how they apply in relation to:
(a) The calculation of the capital gain (if any) resulting from the disposal of the Somers Property;
(b)Whether I need to take into account the tax attributes of the Bankrupt and Mrs Cannon;
(c)The availability of any tax exemptions, such as the main residence exemption;
(d)The extent of personal liability with respect to the tax payable on the income, profits or gains derived from the disposal of the Somers Property.
The conclusion is also supported by the actions taken and deferred by the Trustee following the receipt of the offer made on Mrs Cannon’s behalf on 10 May 2022. In this regard, it is clear from the material relied upon by both parties that two matters of consequence occurred when it became evident to the Trustee (and those who act for him) that CGT liability and quantum was a live and potentially significant issue.
The first consequence was that the Trustee was prevented from calculating on a final and certain basis and therefore reconciling, disbursing, and applying, the proceeds of the sale of the Somers Property. For example, in an email sent on behalf of the Trustee to the respondents’ accountant, Mr Mooney on 8 June 2022, Mr Dobson, PWC director, addressing the topic of “Finalisation of the Bankrupt Estate”, acknowledged that “[g]iven the potential for there to be a significant CGT liability”, the Trustee would wait for further updates from the Australian Restructuring Insolvency and Turnaround Association (ARITA), the ATO, as well as its own internal advice, prior to distributing all of the funds from the sale.[22]
[22] Annexure “LC-1” to the Cannon affidavit; CB 112.
The position had not altered substantially by the time that the matter came before me for hearing. In a letter sent on behalf of the Trustee to Mrs Cannon and the first respondent on 23 August 2022,[23] the Trustee provided a provisional accounting of the settlement proceeds of the sale of the Somers Property. I say “provisional” because although the summary identified the funds available for distribution after payment of mortgages, sales costs and other known “priority” costs related to the Properties, it otherwise recorded a contingent position regarding the payment of CGT.
[23] Annexure “LC-1” to the Cannon affidavit; CB 37 - 44; Exhibit “AJS-2” to the Scott affidavit; CB 797-804.
The rationale for this approach was recorded in the following Note 13 to the summary which stated:
As previously advised to you, your lawyer and to the Bankrupt at various stages, I have been awaiting taxation advice in relation to the amount (if any) of CGT payable from the sale. I understand that a face-to-face meeting was held been Mr Simon McKenna and the Australian Taxation Office to discuss this matter on 22 August 2022. Whilst I am still awaiting details of the outcome of that meeting and the CGT advice, I have decided to issue this letter in the interim as I continue to receive correspondences from your lawyer and the Bankrupt.
Until I receive the tax advice noted above, I am withholding $425,375.00 from the net sale proceeds as a contingency for any CGT payable. This amount is conservatively calculated as follows:
CGT calculation $ Capital proceeds 2,020,000 Cost Base 95,000 Capital Gain 1,925,000 50% CGT Discount 962,500 47% income tax rate (top tax bracket) 452,375
A further note (Note 14) to the summary recorded that “at this stage there is currently $292,004.98 to be split between you (Mrs Cannon) and the Bankrupt Estate ($146,002.49 each)”. As will be discussed later, this amount was further reduced, as it applied to Mrs Cannon, to account for the FRCGW deduction of $126,250. The Trustee’s summary identified the funds available to Mrs Cannon “at this stage” as $19,752.49.
On 26 September 2022, PWC provided a “high-level assessment” of the Trustee’s potential tax obligations with respect to the sale of the Somers Property.[24] The tax advice operated on assumptions including that on 20 February 1998 the first respondent and Mrs Cannon acquired the Somers Property as joint proprietors for $95,000.[25]
[24] Exhibit “AJS-2” to the Scott affidavit; CB 912-920.
[25] See letter of engagement for provision of tax services dated 10 June 2022 reproduced as part of Exhibit “AJS-2” to the Scott affidavit; CB 896-906.
The tax advice – under the heading “CGT Assessment” – included the following paragraphs:[26]
[26] CB 916-917.
We advise that the ATO may consider that section 254 applies to you both in your representative capacity as Trustee of the bankrupt estate of John George Cannon and as recipient of the proceeds of sale on behalf of Lynette Cannon pursuant to the Court Order. Therefore, the ATO may expect that:
•You should be answerable as the individual taxpayer with respect to any capital gain or loss derived by you in your representative capacity from the disposal of the Somers Property;
•You should be required to retain an amount from the income, profits or gains received from the sale of the Somers Property sufficient to pay any tax liability upon being issued a notice of assessment; and
•Upon the issue of a notice of assessment, you should become personally liable for any tax liability owing with respect to any capital gain made by the sale of the Somers Property.
Practically, in order to calculate the sufficient amount to be retained you would be required to quantify the amount of the capital gain (if any) made on the sale of the Somers Property. This exercise is likely to involve a number of considerations regarding the interaction of section 254 and the broader income tax law, including:
•Whether the tax attributes of John George Cannon and Lynette Cannon should be taken into account notwithstanding that they are separate taxpayers to you;
•Whether the marginal tax rate to be applied to calculate any tax liability are those of John George Cannon and Lynette Cannon respectively, or your own;
•Whether you may rely on the tax-free threshold;
•Whether the CGT discount can be applied to reduce any net capital gain; and
•Whether you are entitled to claim the MRE (Main Residence Exemption)…
As there exists a risk that you will be held personally liable for the tax payable in respect of the income, profits or gains that should be retained under section 254, we recommend that you seek certainty regarding your tax obligations.
On the question of the Main Residence Exemption, the tax advice recorded that it was not clear whether the Trustee was entitled to rely on the MRE in calculating the capital gain or loss (if any) in his representative capacity.
The tax advice made the following recommendations as to the courses of action available to the Trustee:
1.Withhold the income, profits of (sic) gains derived from the sale of the Somers Property until a notice of assessment is issued by the Commissioner which will determine your tax liability and quantify the sufficient amount to be retained under section 254 (if any);
2.Apply to the ATO for a private ruling to seek clarity about how the ATO intends section 254 to apply to you in your representative capacity; or
3.Commence proceedings in the Federal Circuit and Family Court of Australia pursuant to the Court Order and join the ATO in these proceedings to obtain a declaration regarding your obligations under section 254.
The Trustee’s actions to date have been consistent with the first proposed course of action identified in the tax advice.
The second consequence (in part related to the first) was that the Trustee was prevented from making a fully informed (and timely) assessment of the need to sell either of the Yandina or Hastings Properties, as well as from properly evaluating the terms of any proposed sale, or offer of purchase, including that made by Mrs Cannon.
The Trustee, in his affidavit, acknowledged that because the offer received from Mrs Cannon was reliant on using the proceeds she expected to receive from the sale of the Somers Property, he needed to finalise calculating the potential CGT liability with respect to the sale of the Somers Property in order to give that offer proper consideration.[27] However, I did not understand the Trustee to submit or accept that this situation was indicative of any failing or dereliction of duty on his part. The Trustee’s glib response in written submissions to the suggestion that he had failed to consider and inform himself about the capital gains tax consequences of his action before selling the Somers Property or considering offers of settlement prior to that sale was simply that: “The Trustee has explained the advice that he has received in regard to the capital gains tax consequences of selling the Somers Property and his consideration of that advice”.[28]
[27] At [86] of the Scott affidavit; CB 154.
[28] See [24] of the Trustee’s written submissions filed 19 October 2022.
However, what the Trustee has failed to do in this proceeding is offer any explanation as to why the CGT consequences of selling the Somers Property, or indeed any of the Properties, was not considered prior to the sale of the Somers Property. The failure to take this advice prior to embarking down this path demanded an explanation having regard to the following circumstances.
First, the Trustee had sought and ultimately been granted by this Court a suite of orders that permitted him to exercise a power of sale of the Properties. The Orders, by paragraph 7(e) provided that the Trustee be empowered to, after the sale of the Properties at auction or by private treaty, deduct from the proceeds of sale any taxes relating to the sale of the Properties, including but not limited to Capital Gains Tax, Land Tax, and Goods and Services Tax.
Second, the Trustee should have been aware that there was likely to be a significant capital gain associated with the sale of the Somers Property. This was because the Trustee had authorised a reserve sale price at public auction of $1,550,000 and would have known that the respondents had acquired the Somers Property in February 1998 as joint proprietors for the amount of $95,000.
Third (although of less significance), the Trustee had ready access to a team of expert (PWC) tax consultants from whom advice on the CGT consequences of the sale of any of the Properties could have been obtained at any time.
Fourth, while it is not the role of the Court to second-guess how earlier made inquiries might have precisely informed the decisions made by the Trustee, including as to the order in which the Trustee’s power of sale of the Properties was to be exercised, it is clear that had even cursory inquiries been made it would have revealed that the issue of CGT on the sale of the Properties was complex, fact dependent and had the potential to produce material commercial and regulatory consequences for the administration of the bankrupt’s estate. As events transpired, the failure to make these inquiries had a stultifying effect on the ability of the Trustee to deal with the Properties and produced the two consequences identified above.
I consider that in these circumstances the supervisory jurisdiction of the Court is engaged. The failure of the Trustee to seek CGT advice prior to the sale of the Somers Property involved, in my view, conduct that offended against or fell short of:
(a)The duty contained in s 19(1)(k) of the Bankruptcy Act to exercise powers and perform functions in a commercially sound way;
(b)The injunction contained in s 42-135 of IGPD 9 to distribute funds in a timely manner; and
(c)The general law requirement of the Trustee to execute the bankrupt estate with diligence and to a standard assimilated to that of an ordinary prudent businessperson.
The recording of such findings does not involve an incursion into the territory of discretion and judgment and neither does it reflect matters that gain significance with the benefit of hindsight and/or by reference to later events. The simple point remains that the Trustee failed to take timely advice on the CGT consequences of sale when it was incumbent on him to do so. While this failure had repercussions for Mrs Cannon and her ability to raise funds to purchase the Yandina and Hastings Properties (a matter about which the Court’s supervisory jurisdiction is not directly concerned), it had the potential to trespass more generally on the obligation of the Trustee to administer the first respondent’s estate in such a manner as to maximise the return from estate assets, and to thereby maximise satisfaction of the creditor’s claims and any possible surplus for the bankrupt. For example, there are obvious cost savings to the estate associated with a sale to Mrs Cannon rather than a public sale occurring at the end of a marketing campaign. As noted earlier, the Trustee, through his failure to take earlier advice on the CGT consequences, was unable to meaningfully interrogate the offer made by Mrs Cannon.
Other complaints
I am not persuaded that there is any merit in the other two complaints identified by Mrs Cannon. As far as the complaint regarding the discharge of the mortgage securing the Hastings Property is concerned, the Trustee has produced evidence that BankWest required that upon settlement of the sale of the Somers Property, the four loans that were secured by real property mortgages over the Somers Property and the Hastings Property be discharged. [29] There was no serious challenge to this evidence, or the proposition that underscored it, namely, that BankWest adopted this approach because the Hastings Property and the Somers Property were cross-collateralised. The orders made by the Court on 16 November 2021 authorised the Trustee to apply the proceeds of sale in this fashion.[30]
[29] Exhibit “AJS-2” to the Scott affidavit; CB 814
[30] See paragraphs 7(f) and 8.
Further, while it is regrettable that the need for a Clearance Certificate was not apparently raised with Mrs Cannon (or those who act for her) by the Trustee prior to the settlement of the sale of the Somers Property, this is not a matter that engages the supervisory jurisdiction of the Court. I accept instead the submission of the Trustee that in circumstances where Mrs Cannon was provided with a copy of the contract of the sale of the Somers Property on 9 May 2022, this being more than one month prior to the settlement of the sale of the Somers Property, that responsibility for the failure to produce the Clearance Certificate cannot properly be attributed to the Trustee. Likewise, the Trustee cannot be held responsible for the administrative decision taken by the ATO to apply funds withheld on account of FRCGW to other taxation debts owed by Mrs Cannon.
WHAT ORDERS SHOULD FOLLOW?
In circumstances where I have found that the Court’s supervisory jurisdiction has been engaged, it is not entirely apt to conceive of the application made by Mrs Cannon as one directed at seeking to stay or set aside orders made in default of her appearance and participation in the principal proceeding. Accordingly, the question of whether Mrs Cannon has supplied an adequate reason for her failure to participate in the earlier proceeding does not assume the significance for which the Trustee would contend. However, it does not automatically follow that the precise orders sought by Mrs Cannon should be made.
As noted earlier, the principal relief sought by Mrs Cannon is that the Trustee transfer to Mrs Cannon his interest in the Hastings and the Yandina Properties on terms which are “just and equitable”. It would however be an exercise in futility to make orders in these abstract terms, not least because Mrs Cannon, at the time of hearing, acknowledged that she would have difficulty in obtaining the finances required to fund the purchase of the Trustee’s interest in both of these properties.
There remains a need however to place some parameters around the future exercise by the Trustee of the power of sale authorised by the Orders to promote the expedient finalisation of the administration of the first respondent’s estate and to recognise that the ability of Mrs Cannon, as co-owner of the Properties, to make commercial offers concerning their disposition was compromised in part because of the lackadaisical approach taken by the Trustee to the issue of CGT liability.
Mrs Cannon has already had the benefit of an informal stay during which time it is hoped that matters that were once uncertain have now become less so. I therefore have in mind making orders the effect of which would be to allow the application made by Mrs Cannon in part and to vary the Orders to the extent necessary to accommodate the following events occurring within a reasonable period but not exceeding ten weeks from the date of order:
First, that the Trustee provide the second respondent (if this has not already occurred) with a final accounting (including as to CGT liability) of the settlement proceeds of the sale of the Somers Property.
Second, that the Trustee inform the second respondent as to whether he proposes to exercise the power of sale with respect to the Yandina and the Hastings Properties and in which order (if relevant) he proposes to do so.
Third, in the event that the Trustee proposes to exercise his power of sale in respect of one or both of the Yandina and the Hastings Properties, the second respondent will have a right of first refusal to purchase the Trustee’s 50% interest in one or both of these properties (as applicable) for fair market value based on an updated valuation obtained by and at the Trustee’s expense.
In circumstances where, at the time of hearing there was uncertainty surrounding the CGT consequences of the sale of the Properties and where, regrettably, some significant time has since passed prior to delivery of this judgment, I consider it appropriate that the parties have the opportunity to reflect upon the orders proposed and to, within four weeks:
(a)Provide a joint form of orders, including as to costs, that gives effect to the conclusions reached; or
(b)Failing agreement, provide marked up draft orders (including as to costs), supplemented by written submissions not exceeding ten pages.
On either eventuality, the Court will finalise the orders on the papers unless, by 16 February 2024, either party notifies the chambers of Judge Symons that it wishes to supplement written argument with oral submissions.
I certify that the preceding one hundred and seventeen (117) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Symons . Associate:
Dated: 12 January 2024
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