Staunton-Smith v Secretary, Department of Social Security

[1991] FCA 513

Re: JOHN CECIL CLUNIES-ROSS
Ex parte: GEOFFREY FRANK TOTTERDELL
No. 263 of 1986
FED No. 513
Bankruptcy
(1991) 31 FCR 143

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
French J.(1)

CATCHWORDS

Bankruptcy - expenses of administration - trustee's remuneration - legal expenses - costs of selling asset - delays in payment of fees and remuneration attributable to litigation relating to vesting of principal asset - principal asset property in external territory - special difficulties attached to realisation of property - resolutions of creditors authorising payment of interest on unpaid legal costs and trustee's fees - resolution approving proposal by real estate agent for marketing of property - questioned by Registrar in Bankruptcy - whether resolutions valid.

Bankruptcy Act 1966 s.134, s.135, s.162, s.165, s.167

Supreme Court Act 1935 (WA) s.32

HEARING

PERTH

#DATE 26:8:1991

Counsel for the Applicant: Ms J.E. Bartlett

Solicitors for the Applicant: Jackson McDonald

ORDER

It is hereby declared that the resolution of the meeting of creditors held on 20 May 1991 that the payment of accrued interest calculated at the rate of 2% above the normal overdraft rate applicable to Price Waterhouse, Chartered Accountants, on unpaid trustee's fees previously approved for payment on 19 April 1990 totalling $10,746.80 plus out-of-pocket expenses be made from the funds in the estate, is lawful.

The special resolution of the meeting of creditors held on 20 May 1991 that payment of the selling costs of the bankrupt's property at Cocos (Keeling) Islands financed by Debenham Tewson International from the realisation of the property be given priority pursuant to s.109(1)(a) of the Bankruptcy Act together with payment of interest on the selling costs at the rate of 2% above Debenham Tewson International's overdraft rate with the National Australia Bank for the period such costs incurred by Debenham Tewson International remain due and owing to Debenham Tewson International by the bankrupt's estate is lawful.

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

JUDGE1

This is an application by the trustee of the bankrupt estate of John Cecil Clunies-Ross for declarations as to the validity of certain resolutions passed at a meeting of creditors held on 20 May 1991. The resolutions authorised, inter alia, the payment of interest on unpaid legal accounts and the trustee's remuneration pending the disposition of land owned by the bankrupt in the Cocos (Keeling) Islands Territory. The resolutions also approved a proposal by a firm of real estate agents for the marketing and sale of the property. The Registrar in Bankruptcy has questioned the validity of certain of the resolutions and the trustee seeks declaratory relief from the Court.

Factual Background

1. John Cecil Clunies-Ross became a bankrupt on his own petition on 12 May 1986 and on that day Geoffrey Frank Totterdell became the trustee of his estate. The statement of affairs shown by Mr Clunies-Ross on 8 May 1986 disclosed assets of $26,000 and liabilities of $1,036,359. Upon inquiry, however, the trustee ascertained that he was the successor in title to 4.876 hectares of land together with a substantial residence known as "Oceania House" located in the Cocos (Keeling) Islands Territory. Following protracted litigation in this Court and the Supreme Court of the Cocos (Keeling) Islands Territory, an order was made by the Supreme Court of the Territory of the Cocos (Keeling) Islands on 15 March 1990 vesting the property in the trustee.

2. On 19 April 1990, a meeting of creditors passed resolutions in which they approved the trustee's fees of administering the estate to that date in the sum of $10,746.80 and also approved the payment of legal fees totalling $44,139.05. The estate has not had sufficient funds with which to pay these fees nor will it have until the Cocos Island property is sold.

3. Mr Totterdell commissioned a valuation of the property on 20 November 1990 from Baillieu Knight which suggested a current market value of $3 million. An independent valuation obtained by the Department of Arts, Environment and Territories was evidently lower, although he has not seen it. As a result of his inquiries and discussions with prospective purchasers, the trustee formed the opinion that the Island land would be unlikely to attract offers much higher than $1.5 million. He attempted unsuccessfully to negotiate with parties who might be interested in conducting joint ventures with Mr Clunies-Ross. Towards the end of 1990 he began seeking expressions of interest from licensed estate agents with a view to offering the property for sale by tender.

4. On 20 December 1990, he received a proposal from Debenham Tewson (WA) Pty Ltd, a real estate agent that carries on business under the name Debenham Tewson International. The terms of the proposal outlined in the letter were not expressed with unambiguous clarity, but in essence they seem to have included the following:
   

1. If appointed as exclusive and sole agents for the sale of the Cocos Island property, Debenham Tewson International would carry marketing costs including travel, accommodation, out-of-pocket expenses and an hourly allowance for travel and inspections with interest to be charged on a monthly compound rate fixed at 2% above the overdraft rate charged to Debenham Tewson International

(WA) Pty Ltd by the National Australia Bank from time to time.

2. The selling fee would be the maximum provided under the Real Estate Institute of WA Scale of Charges, including a provision for a fee payable if the property were to be withdrawn from sale. In the event of a withdrawal from sale the fee payable should be calculated on a notional valuation of $3 million, being that set out in the Baillieu Knight Frank valuation.

3. Debenham Tewson International would require a guarantee that if the property were withdrawn from sale, or did not sell, all fees and costs due as outlined in their letter would be paid.

1. Mr Totterdell responded on 21 February 1991 indicating that upon reaching agreement on selling costs he would apply for an order from the Federal Court that they be paid as a priority pursuant to s.109 of the Bankruptcy Act 1966 with funds derived from the sale of the property. In the meantime he sought more specific advice relating to the hourly fee to be charged to cover costs associated with travel and accommodation in connection with inspections of the property at Cocos Island. As to the fee payable in the event that the property were withdrawn from sale, he said that $1.5 million was the likely selling price and that it might be better that Debenham Tewson International contemplate a lump sum or a lower notional market value upon which a withdrawal fee could be calculated.

2. On 27 February 1991, Debenham Tewson International responded by letter. On the assumption of a minimum of 8 days involved in a round trip to the Islands for the purposes of inspection with a prospective purchaser and applying a professional hourly rate of $60 per hour while travelling and a balance of $90 per hour in relation to the inspection and assuming 8 hour days, a total of $3,840 for each inspection trip was indicated. The firm accepted that a figure of about $1.5 million should be taken as the basis for calculating a withdrawal fee.

3. On 20 May 1991, a meeting of creditors was held at which a number of resolutions relating to unpaid legal fees, the trustee's fees and the Debenham Tewson International proposal were passed. The resolutions were as follows:
   

"1. The payment of accrued interest calculated at 2% above the normal bank overdraft rate on unpaid legal fees previously approved for payment on 19 April 1990 totalling $44,139.05 be made from funds in the estate.

2. Trustee's fees of $32,128.70 plus out of pocket expenses for the period 1 April 1990 to 15 April 1991 be approved and paid from the estate.

3. The payment of accrued interest calculated at a rate of 2% above the normal overdraft rates applicable to Price Waterhouse, Chartered Accountants on unpaid trustee's fees previously approved on 19 April 1990 totalling $10,746.80, plus out-of-pocket expenses, be made from funds in the estate.

4. The proposal by Debenham Tewson International for the marketing and sale of the property at Cocos Islands be approved as follows:

Payment for the selling costs financed by Debenham Tewson International from the realisation of the property be given priority pursuant to s.109(1)(a) of the Bankruptcy Act 1966, together with payment of interest on the above selling costs at a rate of 2% above Debenham Tewson International's overdraft rate with the National Australia Bank for the period that such costs incurred by Debenham Tewson International remain due and owing to Debenham Tewson International by the Bankrupt's Estate."

On 7 June 1991, the Registrar in Bankruptcy wrote to the trustee in the following terms:

"I refer to the resolutions passed at the meeting of creditors held on 20 May 1991. In particular, I am concerned with the various approvals to pay interest on accounts at a rate of 2% above overdraft rates.

Would you please advise on what basis the meeting believed it had the authority to approve such payments."

The trustee's solicitors responded by a letter dated 10 July 1991 which, in so far as it contained assertions of fact, was verified on affidavit by the trustee. It indicated that he had made inquiries about the commercial viability and competitiveness of the Debenham Tewson International proposal and had found that the overdraft interest rate was commercially acceptable. The additional 2% was considered justifiable after taking into account the risks and delays in payment as well as various bank charges and government duties. The letter pointed out that the major unsecured creditor had been asked by the trustee whether it was prepared to finance selling costs of the property. It had only been prepared to do so on condition that accrued interest would be paid to it on the amount financed and that it would receive all surplus funds from the sale of the property after payment of unsecured creditors and the costs of the administration. At the time of writing the letter some $44,000 of legal fees, largely due to the trustee's solicitors, and about $42,000 of trustee's fees together with out of pocket expenses had been approved by creditors' meetings for payment but remained outstanding due to lack of funds in the estate. The lawyers' fees and $10,746.80 of the trustee's fees had been outstanding for nearly 18 months.

1. A further exchange of correspondence occurred when the Registrar replied to the solicitors on 30 July 1991 and was sent a letter by the trustee on 31 July 1991. In his letter the trustee pointed out that in respect of the Debenham Tewson International proposal, interest would not apply to the selling commission but only to selling costs of advertising and out-of-pocket expenditure. Those expenses are usually a direct cost to the client exclusive of the standard commission arrangement. The commission would be paid in the usual way according to the sale price achieved at settlement and without interest. This contention was verified by a further affidavit sworn by the trustee on 8 August 1991. He went on to point out that when the solicitors were initially instructed in 1987 the estate had sufficient assets to meet their reasonably anticipated fees and disbursements. It was only by reason of the appeal and protracted litigation in relation to the vesting of the Cocos Island property that the estate became unable to pay the legal fees it had incurred as and when they became due and payable. The trustee took the position that following approval by creditors of the payment of legal fees in April 1990, the solicitors had an immediate entitlement to sue to recover their fees and it was in consideration of their forbearance to sue, that he suggested to the meeting of creditors that interest be paid on the outstanding fees and disbursements. In relation to interest allowed on his own fees, he confirmed that in addition to those of $10,746.80 approved in April 1990, out-of-pocket expenses had been borne by his firm in the sum of $2,107.50 for travel expenses associated with bringing the property to a position where it could properly be marketed and for communications expenses in the sum of $121.85. The trustee proposed that interest in the case of Debenham Tewson International's expenses of sale would commence from the time those expenses were incurred and that interest on his fees and the legal fees would run from 19 April 1990, being the date upon which they were approved for payment by the creditors.

2. The Registrar's position as expressed in his letter of 31 July was that the creditors had no basis to approve payment of interest on unpaid legal fees. The power to approve such fees, he suggested, does not include a power to levy interest without prior agreement. It would be questionable whether it was appropriate for the trustee to have concluded such an agreement. The Registrar also contended that it is not the practice, nor appropriate for the trustee to charge interest on unpaid remuneration. The Registrar expressed the "firm view" that it would be stretching the meaning of remuneration to include interest. He also contended that the position was not covered by s.135(1)(h) which authorises a trustee, with the approval of creditors or the court, to compromise claims. Levying of interest, it was suggested, was not a compromise. "If anything" it was said "it smacks of a penalty".
   Trustee's Submission

3. The trustee submits that it was clearly in the interests of the creditors that he seek a vesting order in relation to the Cocos (Keeling) Islands Territory property. It would not be in their interest to have the administration terminated before the sale of that property. Section 134(1)(i) of the Act authorises the trustee to obtain such advice and assistance as he considers desirable relating to the administration of the estate. It does not, he argues, prescribe or limit the remuneration of the person providing advice or assistance. Had the solicitors obtained, as they were entitled to after April 1990, a judgment for the amount of their fees and disbursements, they would have been entitled also to claim interest on the sum from the date the debt arose until the date of judgment - Supreme Court Act 1935 (WA) s.32. And although that remedy is discretionary, it is generally exercised in favour of the applicant. Post-judgment interest would have accrued at 14% per annum until 28 June 1991 and thereafter at a rate of 12%. It was because the solicitors forbore from enforcing their immediate right of recovery that the trustee recommended that payment of interest be approved. By virtue of s.167 the creditors had dispensed with the requirement that the solicitor's bill be taxed. Approval of the payment of interest could be seen as an exercise of power under s.135(1)(h). So far as the trustee's remuneration is concerned, it was said that this was fixed under s.162(1) which does not prescribe or limit the remuneration which may be so determined. Section 134 was relied upon to support the payment of interest to Debenham Tewson International.
   The Application

4. The present application brought by the trustee seeks orders in the following terms:
   

"1. A declaration that the special resolution of the meeting of creditors held on 20 May 1991 that the payment of accrued interest calculated at the rate of 2% above the normal bank overdraft rate on unpaid legal fees previously approved for payment on 19 April 1990 totalling $44,139.05 be made from funds in the estate is valid and effective.

2. A declaration that the resolution of the meeting of creditors held on 20 May 1991 that the payment of accrued interest calculated at the rate of 2% above the normal overdraft rate applicable to Price Waterhouse, Chartered Accountants, on unpaid trustee's fees previously approved for payment on 19 April 1990 totalling $10,746.80 plus out-of-pocket expenses, be made from the funds in the estate is valid and effective.

3. A declaration that the special resolution of the meeting of creditors held on 20 May 1991 that payment of the selling costs of the bankrupt's property at Cocos Island financed by Debenham Tewson International from the realisation of the property be given priority pursuant to section 109(1)(a) of the Bankruptcy Act, together with payment of interest on the selling costs at the rate of 2% above Debenham Tewson International's overdraft rate with the National Australia Bank for the period such costs incurred by Debenham Tewson International remain due and owing to the Debenham Tewson International by the bankrupt's estate is valid and effective."

Statutory Framework

1. Division 4 of the Bankruptcy Act 1966 (ss.129-139H) makes provision for realisation of the bankrupt's property and confers various powers upon the trustee in aid of that process. Section 134 is a grant of powers whose exercise is not qualified by any requirement of approval on the part of creditors. It provides, in the relevant parts:
   

"134.(1) Subject to this Act, the trustees may do all or any of the following things:-

(a) sell all or any part of the property of the bankrupt;

(g) make a compromise in respect of any claim not exceeding the prescribed amount arising out of the administration of the estate of the bankrupt, whether the claim is made by or against the trustee;

(i) obtain such advice or assistance as he considers desirable relating to the administration of the estate or to the conduct or affairs of the bankrupt;

(j) bring, institute or defend any action or other legal proceeding relating to the administration of the estate;

(2) Paragraph (1)(a) does not authorize the trustee to sell by private contract any property having a net value exceeding the prescribed amount.

(2A) A reference in sub-s. (1) or (2) to the prescribed amount is a reference to $20,000 or, if a greater amount is prescribed for the purposes of this section to that greater amount.

(3) Subject to this Act, the trustee may use his own discretion in the administration of the estate.

(4) The trustee may at any time apply to the Court for directions in respect of a matter arising in connexion with the administration of the estate."

Section 135 sets out powers which may be exercised by the trustee with the permission of the creditors:

"135. (1) The trustee may, with the permission of the creditors granted by resolution passed at a meeting of the creditors, with the permission of the committee of inspection or with the leave of the Court, do all or any of the following things:-

(a) sell, by private contract, any property of the bankrupt having a net value exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134;

(h) make a compromise in respect of any claim exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134 arising out of the administration of the estate of the bankrupt, whether the claim is made by or against the trustee;

(3) Permission or leave given for the purposes of sub-section (1) shall not be general permission or leave to do all or any of the things referred to in that sub-section, but shall be permission or leave to do only the particular things for which permission or leave is sought in a specified case."

The remuneration of the trustee is dealt with in s.162 of the Act:

"162. (1) The remuneration of the trustee of the estate of a bankrupt may be fixed, from time to time, by resolution of the creditors or, if the creditors so resolve, by the committee of inspection.

(5) The Registrar may, on the application of a creditor or the trustee or of his own motion, review the amount of the trustee's remuneration and may confirm, reduce or increase the remuneration."

The benefit the trustee is permitted to receive is limited to the remuneration fixed under the Act:

"165. (1) A trustee of the estate of a bankrupt shall not-

(a) make an arrangement for receiving, or accept, from the bankrupt or any other person, in connexion with the bankruptcy, any gift, remuneration or pecuniary or other consideration or benefit beyond the remuneration fixed in accordance with this Act;

(2) A trustee who contravenes sub-section (1) is guilty of contempt of court."

Costs of solicitors engaged by the trustee are covered by s.167:

"167. (1) Subject to sub-section (2) all bills of costs of a solicitor and bills of charges of an accountant, auctioneer, manager or other person (not being a trustee or a person exclusively employed by a trustee) rendered in respect of the estate of a bankrupt shall be taxed by a taxing officer and no payments in respect of such costs or charges shall be allowed in the trustee's accounts unless they have been so taxed.

(2) Sub-section (1) does not require a bill of costs or a bill of charges to be taxed if -

(a) the bill is for an amount less than $300 or such greater amount as is prescribed for the purposes of this paragraph;

(b) the bill is for services in respect of which a maximum charge is prescribed by the rules and is for an amount that does not exceed the charge so prescribed;

(c) the bill has been taxed by an officer of any court; or

(d) the creditors have, by special resolution, authorized payment of the bill."

Sub-sections (3) to (9) are not relevant for present purposes.

The Validity of the Resolutions

1. Dealing first with the question of payment on outstanding legal fees, it is apparent that the legal fees approved by resolution of the creditors on 19 April 1990 were not taxed in accordance with sub-s.167(1) of the Act. The approval of those fees by the creditors on 19 April 1990 could only have authorised payment of the bill if passed by a special resolution. There is no evidence before me that the resolution passed on that occasion was a special resolution. If and only if it were such a resolution could it be said that the solicitors had a claim on the estate from that date. Assuming that there were a special resolution passed in April 1990, that passed on 21 May 1991 does not, in the terms of s.135(1)(h), authorise the trustee to "make a compromise" in respect of the claim. In terms the resolution simply authorised the payment of interest on the unpaid account. No compromise as such appears from its terms. The payment of interest is not expressed to be conditional upon any forbearance on the part of the solicitors. In my opinion a resolution passed pursuant to s.135(1)(h) of the Act must identify the compromise which the trustee is authorised to make. That requires a reference at least to its principal terms. A resolution properly framed could, in my opinion, lawfully authorise a trustee to compromise a claim for legal fees by agreeing to pay interest on the amount of costs outstanding in consideration of the solicitors "forbearing to pursue" any remedies they might have in relation to that claim, at least until the realisation of the principal asset in the bankrupt estate. It would also be necessary in this case to demonstrate that the costs claimed were approved by special resolution. For these reasons I am unable to make the declaration sought in relation to interest on the legal fees.

2. The resolution relating to the proposed sale through Debenham Tewson International may not have been strictly necessary at the time it was passed. The trustee is authorised under s.134(1)(i) to obtain any such advice or assistance as he considers desirable relating to the administration of the estate. The resolution in question was a special resolution and thus the requirement to tax the costs under s.167(1) was avoided. There is no other reason apparent from the statute or otherwise that would prevent the proposed agreement with Debenham Tewson International being implemented. In my opinion, the creditors' resolution on this issue was lawful. The expenses involved in the proposal are clearly charges and expenses of the administration of the bankruptcy and attract priority under s.109(1)(a).

3. So far as the trustee's remuneration is concerned, the resolution authorising payment of interest on his fees relates only to those which were approved on 19 April 1990, being $10,746.80 plus out-of-pocket expenses. The resolution of 20 May 1991 amounts, in substance, to an amendment to the earlier resolution fixing the trustee's remuneration up to April 1990. In my opinion, the section which allows the remuneration of the trustee to be fixed "from time to time" by resolution of the creditors, allows for the possibility that remuneration initially fixed may be amended. Absent any suggestion of impropriety it is, in my opinion, within the power of the creditors to agree to pay interest on the remuneration of a trustee particularly where the administration of the estate has been protracted and the recovery of those fees delayed for reasons not attributable to the trustee. Notwithstanding that such a resolution may be valid, it is open to the Registrar of his own motion to review the amount of the remuneration and reduce it under s.162(5). I leave open the question whether the Registrar should do so in this case. So far as the validity of the resolution is concerned, I am satisfied that it was within the power of the creditors and was valid. I should make clear in so doing, that I read the resolution as fixing the date from which interest is payable as the date upon which the fees were approved, namely 19 April 1990. The interest resolution does not apply to fees subsequently approved in May 1991.