Stephens v Pattison & Anor and Pattison v Stephens
[2014] FCCA 62
•28 January 2014
FEDERAL CIRCUIT COURT OF AUSTRALIA
| STEPHENS v PATTISON & ANOR and PATTISON v STEPHENS | [2014] FCCA 62 |
| Catchwords: BANKRUPTCY – Application for annulment of bankruptcy – applicant clearly solvent where sequestration order made – gross overcharging by former trustee – applicant seeking to circumvent s.154 Bankruptcy Act – overarching merit of applicant’s claim – Court lacking power to make orders sought. |
| Legislation: Bankruptcy Act 1966, ss.153B, 154 178 Federal Circuit Court Act 1999, s.79(2) |
| CFA v Stephens and Stephens v Pattison and Pattison v Stephens (No.2) [2011] FMCA 905 Clark v Furnari [2007] FMCA 513 Sandel v Porter (1966) 115 CLR 666 Maxwell‑Smith v S & E Hall Pty Ltd [2004] FCA 840 Brake v Townsend [2006] FCA 1156 Young, In the matter of Macryannis [2011] FCA 1272 |
| Applicant: | KENNETH LYLE STEPHENS |
| First Respondent: | PAUL ANTHONY PATTISON (AS FORMER TRUSTEE OF THE BANKRUPT ESTATE OF KENNETH LYLE STEPHENS, A BANKRUPT) |
| Second Respondent: | OFFICIAL TRUSTEE IN BANKRUPTCY (AS TRUSTEE OF THE BANKRUPT ESTATE OF KENNETH LYLE STEPHENS, A BANKRUPT) |
| File Number: | MLG 1025 of 2010 |
AND
| Applicant: | PAUL ANTHONY PATTISON (AS TRUSTEE OF THE PROPERTY OF KENNETH LYLE STEPHENS, A BANKRUPT) |
| Respondent: | KENNETH LYLE STEPHENS |
| File Number: | MLG 82 of 2010 |
| Judgment of: | Judge Burchardt |
| Hearing date: | 25 October 2013 |
| Date of Last Submission: | 25 October 2013 |
| Delivered at: | Melbourne |
| Delivered on: | 28 January 2014 |
REPRESENTATION
MLG 1025 of 2010
| Counsel for the Applicant: | Ms Knights |
| Solicitors for the Applicant: | Littleton Hackford & D’Alessandro |
| The First Respondent: | In person |
| Counsel for the Second Respondent: | Ms Poulakis |
MLG 82 of 2010
| The Applicant: | In person |
| Counsel for the First Respondent: | Ms Knights |
| Solicitors for the First Respondent: | Littleton Hackford & D’Alessandro |
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1025 of 2010
| KENNETH LYLE STEPHENS |
Applicant
And
| PAUL ANTHONY PATTISON (AS FORMER TRUSTEE OF THE BANKRUPT ESTATE OF KENNETH LYLE STEPHENS, A BANKRUPT) |
First Respondent
OFFICIAL TRUSTEE IN BANKRUPTCY (AS TRUSTEE OF THE BANKRUPT ESTATE OF KENNETH LYLE STEPHENS, A BANKRUPT)
Second Respondent
MLG 82 of 2010
PAUL ANTHONY PATTISON (AS TRUSTEE OF THE PROPERTY OF KENNETH LYLE STEPHENS, A BANKRUPT)
Applicant
And
KENNETH LYLE STEPHENS
Respondent
REASONS FOR JUDGMENT
Introductory
By an amended application filed on 22 September 2011 Kenneth Lyle Stephens has applied for the annulment of his bankruptcy pursuant to s.153B of the Bankruptcy Act 1966 (“the Bankruptcy Act”). His amended application further seeks that the remuneration of his former trustee Mr Pattison be limited in the manner indicated in the application and that Mr Pattison pay not only his costs but also those of the second respondent, the Official Trustee.
For the reasons that follow I am going to annul Mr Stephens’ bankruptcy but I do not have, I fear, the power to make the cost orders that he seeks, which I should say I otherwise would be strongly minded to make.
Background
As long ago as November 2005 Mr Stephens had the misfortune to be involved in a car accident. The other car was owned by the Country Fire Authority (“CFA”). As Mr Stephens deposed in his affidavit filed on 13 July 2010 he was sued by the CFA and did not defend the proceeding. He did not do so because he had insurance with Allianz Australia Insurance Ltd (“Allianz”) and was hopeful that they would pay.
Such payment did not occur, at least in the short term, and Mr Stephens was personally served with a creditor’s petition in or about August or September 2007 with a hearing date of 4 October 2007. Mr Stephens did not attend Court because of two reasons, namely his health and because of long running discussions with Allianz, whom he hoped would pay on his behalf.
Following his bankruptcy on 4 October 2007 and what appear to be some brief discussions with representatives of Mr Pattison, Mr Stephens pressed Allianz and in due course, on or about 16 April 2008, $7,701.72 was paid directly to the CFA’s lawyers by Allianz on Mr Stephens’ behalf, thus, as I understand it, discharging that debt.
Following this outcome Mr Stephens sought again to have his bankruptcy annulled or discharged and received a letter dated 24 April 2008, which is annexure KLS 2 to the 13 July 2010 affidavit. In annexure KLS 2 Mr Pattison informed Mr Stephens that to discharge his bankruptcy he would have to file his Statement of Affairs, complete an Annual Statement of Income and tax returns, and noted that:
“Finally, I note your advices that you may be in a position to provide funds for the annulment of your bankruptcy. To clarify the amount required for this purpose, you are required to complete and file your Statement of Affairs as a matter of urgency, or, as a minimum, you should provide details (in writing) regarding all creditors …”
The letter went on to say that the trustee would require payment to him of his own remuneration which, up to 31 March 2008, was some $30,865.58, together with posited further remuneration and disbursements providing a likely final total in excess of $46,000. Scarcely surprisingly in the circumstances Mr Stephens was somewhat overwhelmed by this figure and as his affidavit says at paragraph 6, “For some months I was paralysed from taking any further action by the enormity of the costs claim.” That is an assertion I both accept and can readily understand.
In November 2008 Mr Stephens’ then solicitors wrote to Mr Pattison requesting details of the trustee’s remuneration (KLS 3). Mr Pattison’s response, dated 24 November 2008 (KLS 4) indicated a total owing as at that date of approximately $58,523.67 but gave no indication as to the breakdown of those figures. The unsecured creditors known up to that time were identified as being the Country Fire Authority (who had in fact already been paid), the City of Latrobe $1,300 and Messrs Tyler, Tipping & Woods $1,300 and Latrobe Valley Court $700 (this last figure was asserted not to be a provable debt).
Mr Stephens’ affidavit set out his financial position as at the date he was made bankrupt. It should be noted that at that time he was employed by Australian Paper and earning $85,000 gross per annum. He had substantial equity in his home and on any view he had net equity in his property of some $40,000 plus. It should be noted that at no stage has any of the interests opposed to Mr Stephens sought to cross‑examine him as to his assertions as to his financial position.
Attempts by Judge Connolly (at that time a Federal Magistrate) to bring the various applications the parties had filed on for hearing in 2010 were unproductive, as was a mediation ordered between the parties. The annulment application was eventually ordered to be heard together with Country Fire Authority v Kenneth Lyle Stephens MLG1128 of 2007 and Mr Pattison’s application in effect for vacant possession of Mr Stephens’ home (MLG82 of 2010)..
I gave reasons for judgment (CFA v Stephens and Stephens v Pattison and Pattison v Stephens (No.2) [2011] FMCA 905) in the three matters on 2 December 2011. I noted (paragraph two) that it was common cause that MLG82 of 2010 could not proceed until the other two matters were determined. I further noted the position of the Official Trustee, who had taken over the role of trustee in June 2011 from Mr Pattison, who submitted that neither of the annulment or the possession applications could proceed until Mr Pattison’s costs were taxed, a process which was then understood to be underway. I further noted that the amended application in the annulment proceeding was expressly abandoned by counsel for Mr Stephens before the Court at the hearing on 26 September 2011 (paragraph 14).
The first issue I had to determine was wether I should extend time for Mr Stephens to review the decision of Registrar Luxton to make a sequestration order and if so should the sequestration order be set aside.
I do not propose to repeat everything I said in those reasons for judgment but this judgment should be read in conjunction with it. In the ultimate I came to the view that Mr Stephens’ failure to conduct his affairs properly was such that notwithstanding the various matters that stood very much in his favour it was not appropriate to set aside the bankruptcy. I observed at paragraph 31:
“Nonetheless, people who fail to conduct their affairs properly do get themselves into precisely this sort of difficulty and, in my view, the prejudice that would be visited upon Mr Pattison in the event that he were not to receive the protection of the Bankruptcy Act in the event that a setting aside order was made outweighs the prejudice to Mr Stephens.”
I then addressed the question as to whether the bankruptcy should be annulled. At paragraph 32 I said:
“Here in my opinion the annulment application should await the taxation of Mr Pattison’s costs. The submissions filed by the Official Trustee in Bankruptcy are in my view compelling. The decisions of the Federal Court in the matter of Pattison v Bellin [2000] FCA 1167 and Brake v Townsend [2006] FCA 1156 in my respectful view make it clear that this Court has no power to fix Mr Pattison’s remuneration. Rather, his remuneration can only be fixed in the circumstances extant in this case by a scrutiny pursuant to the regulations (s.162(4) of the Act) or alternatively, pursuant to a review initiated by Mr Stephens pursuant to reg.8.12E of the Bankruptcy Regulations 1996.”
By consent of the parties I had made an order extending the time for taxation of Mr Pattison’s remuneration on 10 October 2011. I deferred final consideration as to whether the bankruptcy should be annulled. The taxation of Mr Pattison’s costs took quite some time and the matter was adjourned by consent on a number of occasions. It should be noted that the Official Trustee was joined as the second respondent by consent by orders on 29 January 2013.
Once a final hearing date was set the parties bestirred themselves to put on further material.
The more recently filed material
On 19 August 2013 Katerina Poulakis, solicitor for the Official Trustee, filed an affidavit. Relevantly she deposed to the fact that the Official Trustee had been joined to the proceeding following the dismissal of an application issued by Mr Pattison against the Official Trustee pursuant to s.178 of the Bankruptcy Act because of a sequestration order made against Mr Pattison during late December 2012 and a confirmation from his trustee that the trustee did not wish to pursue the s.178 application.
The affidavit went on to identify and annexe (KP-1) a copy of a Certificate of Taxation dated 1 February 2013 which identified that $39,781.35 had been allowed as remuneration and disbursements to Mr Pattison for the period of his bankruptcy from 4 October 2007 until 6 July 2011 when Mr Pattison was removed.
The affidavit went on to annexe correspondence between Harris Carlson Lawyers (“HCL”) on behalf of the Official Trustee and Mr Stephens’ solicitors. The terms of some of the correspondence are both important and illuminating. Annexure KP-2 is a letter from HCL to Mr D’Alessandro, the solicitor acting for Mr Stephens. It advises that the amount required to pay out to annul Mr Stephens’ bankruptcy is $65,909.62.
Of that figure $18,336.77 was (as it turned out) the amount still owing in respect of Mr Pattison’s taxed fees. $10,000 was asserted to be legal fees incurred by Mr Pattison in the administration of the estate. $26,227.61 was said to be legal fees incurred by the Official Trustee. $8,445.22 was said to be in respect of remuneration fees payable to the Official Trustee and $2,900.02 in respect of realisation charges payable to the Official Trustee. All of the fees other than Mr Pattison’s are of course untaxed.
Subsequent correspondence on 28 March 2013 elaborated what these figures were about. It would appear that the figure of $10,000 to Mr Pattison’s former lawyers was a figure for which “they are willing to settle” and one would infer that the total bill would have been greater.
Annexure KP 3 is a letter from Mr D’Alessandro to HCL dated 13 August 2013. It notes relevantly:
“1. On 29th January 2013 His Honour Federal Circuit Judge Burchardt ordered that the Official Trustee be added as a Respondent to Proceedings No: MLG 1025 of 2010. This was on the basis that the Orders sought by the Applicant limiting the Respondent’s remuneration prior to 24th April 2008 or prior to 10th November 2008 potentially adversely affected the Official Trustee’s remuneration.
2. On the 9th May 2013 we gave notice to Harris Carlson that our client would not be pursuing the orders limiting the Respondent’s remuneration prior to the 24th April 2008 or prior to 10th November 2008.
3. Given that our client will not be pursuing the orders limiting the Respondent’s remuneration prior to the 24th April 2008 or prior to the 10th November 2008, we consider that the Official Trustee is not affected by and accordingly ought not to be a party to the proceeding.
4. The attached proposed Amended Application reflects the addition and deletion of the Official Trustee as a party and deletes the orders limiting the Respondent’s remuneration to 24th April 2008 or prior to 10th November 2008.
We seek your consent to the filing and service of the attached proposed Amended Application. If you do consent to same then such an order could be made at the mention hearing on Monday the 19th of August 2013. If you do not consent to same then it will be necessary for us to make an application for leave to file and serve the proposed Amended Application. Obviously we prefer to avoid the additional costs of doing so. We would be grateful for your response to the proposed Amended Application as soon as possible.”
Exhibit KP 4 is a letter to Mr D’Alessandro from HCL, also dated 13 August 2013. It does not appear (on balance) to have been written after receipt of the letter of the same date from Mr D’Alessandro and it can be inferred from its terms that the Official Trustee desired to continue to be on party to the proceeding. I note that in the ultimate the Official Trustee was not removed as a party to the proceeding.
On 19 August 2013 when the matter came before the Court I granted the applicant leave to file and serve the amended application but reserved to trial whether the applicant be permitted to rely upon the same. It should be noted that in fact this aspect of the dispute was not, so far as I can recall, ultimately directly agitated before the Court.
The amended application filed at Court on 26 August 2013 seeks that the bankruptcy be annulled and Mr Pattison pay the costs of both Mr Stephens and the Official Trustee. The grounds of the application are:
“A. The Applicant did at all times of the bankruptcy indicate a desire to annul or discharge the bankruptcy but was thwarted from doing so by the First Respondent’s conduct in claiming excessive remuneration and refusing to give proper details of his fees upon request that he do so, including by letter dated 10 November 2008 from the Applicant’s former solicitors to the Respondent.
B. The applicant can pay all of his creditors and is solvent at this time.”
The affidavit of Mr D’Alessandro filed 23 September 2013
Mr D’Alessandro’s affidavit annexes inter alia the comprehensive details of spreadsheets showing the amounts of money Mr Pattison claimed from time to time and the amounts allowed. There is a very serious discrepancy between them. Mr Pattison claimed in total $85,761.41 and was allowed $39,781.35.
Extensive correspondence between Mr D’Alessandro and HCL is annexed. This can fairly be paraphrased by the proposition that at all times Mr D’Alessandro was pointing out that the real issue between the parties was the scope of Mr Pattison’s fees, with the Official Trustee countering that the additional costs of the administration of the estate and the conduct of the proceedings after removal of Mr Pattison would require attention.
The affidavit of Mr Stephens filed 25 September 2013
Mr Stephens’ affidavit, so to speak, brings his affairs up to date. He deposed that he had been dismissed by Australian Paper in September 2010 at which time he received a termination payment in excess of $17,000, all of which was paid to Mr Pattison. Mr Stephens deposed that mortgage insurance had continued to be paid on his properties since his dismissal and that he now owes approximately $114,950. He annexed a valuation of his property in excess of $200,000.
Put shortly, he deposed that he is presently solvent. Mr Stephens went on to depose that if he had known in April 2008 that Mr Pattison’s remuneration and disbursements were in the order of $14,000 he could have and would have paid that sum to annul his bankruptcy. He deposed that he was at that time earning about $60,000 per annum plus overtime and could have paid the relevant sums.
He went on to depose that if he had been discharged from bankruptcy by April 2008 the Official Trustee would never have been appointed to conduct his affairs and he would therefore not owe that party any money.
The affidavit of Mr Pattison filed 15 October 2013
Mr Pattison’s affidavit sets out the history of his involvement as Trustee of Mr Stephens. He referred to an earlier affidavit in which he had set out in some detail the history of the difficulties he had had with Mr Stephens’ estate. In paragraph 9 of his affidavit he set out a number of failures on the part of Mr Stephens properly to conduct himself including a failure to file his Statement of Affairs with the Official Receiver until 30 September 2008 (by which time prosecution proceedings had been commenced by the Official Receiver), a failure by Mr Stephens to complete his Annual Statement of Income for each year of his bankruptcy in a timely manner and other matters.
The affidavit notes that the applicant had paid his creditors directly which had hindered the administration of the estate. Mr Pattison pointed out it had taken the applicant until 19 April 2011 to complete his payments to the CFA and until 15 September 2011 to pay Tyler Tipping & Woods. The affidavit went on to point out that the applicant was discharged from his bankruptcy on 1 October 2011 (a matter not in dispute).
Mr Pattison also put in issue the quantum of the fees allowed on taxation and foreshadowed that he might give some thought to appealing the decision of the taxing officer. It should be noted that nothing has been asserted since 15 October 2013 to suggest that Mr Pattison has indeed lodged any such appeal. Mr Pattison put the solvency of the applicant in issue.
I pass over, without further comment, two further short affidavits filed by Mr Stephens and Mr Pattison. In my view they take the matter little further forward. I note that Mr Pattison purports to have received a claim against the estate of Mr Stephens in the sum of $4,500 for barrister’s fees. In the circumstances this has all the appearance of something that Mr Pattison has gone to some effort to dredge up in circumstances where the barrister has merely identified $4,500 for fees in a matter not even actually identified by his email.
The affidavit of Andrew Dean Harris filed 7 October 2013
Much of this affidavit is essentially facultative, putting in the history of the matter and annexing various decisions and documents created from time to time. In paragraph 35 and following Mr Harris sets out a response to Mr Stephens’ affidavit material. He puts in issue Mr Stephens’ capacity to have paid out his bankruptcy earlier on and inter alia refers to the terms of s.154 of the Bankruptcy Act 1966 (“the Bankruptcy Act”). Some of the affidavit is clearly legal argument and not evidence.
The submissions of the parties
The applicant’s written and oral submissions were essentially to the same effect. The applicant submitted that the Court should be satisfied the sequestration order ought not to have been made (s.153B of the Bankruptcy Act). Reliance was placed on the decision of Federal Magistrate McInnis of Clark v Furnari [2007] FMCA 513 where, at [16], his Honour said:
“[16] I accept that the principles governing the application of s 153B appear in the joint judgment of Carr, Finn and Sundberg JJ in Heinrich v Commonwealth Bank of Australia [2003] FCAFC 315 as follows:
20. The Court must first consider whether the sequestration order ought not to have been made. If it so finds, then the Court must consider whether, in the exercise of its discretion, the bankruptcy should be annulled: Re Deriu (1970) 16 FLR 420. Later evidence of previously unknown facts may disclose matters which show that the sequestration order ought not to have been made. That is, the Court is entitled to consider not only the case as disclosed at the time when the sequestration order was made, but also those facts now known then to have existed. The Court excludes those facts which have occurred since the order was made. …”
Federal Magistrate McInnis also observed in Clark v Furnari that, “as a matter of law if the Bankrupt was clearly solvent then ordinarily a Court would dismiss the petition even if the Bankrupt appeared to be unwilling to pay debts” (Clark at [18]).
The applicant then submitted that as at 4 October 2007 Mr Stephens was indeed solvent. The written submissions went on to explain the various delays and deficiencies in Mr Stephens’ conduct, insofar as it related to Mr Pattison, and relied upon the matters in Mr Stephens’ affidavits (which can fairly be paraphrased as referring to the overwhelming paralysis brought on by the scale of Mr Pattison’s charges).
The submissions then continue to assert that this Court has power pursuant to s.79(2) of the Federal Circuit Court Act 1999 (“the Federal Circuit Court Act”) to award costs in all proceedings and that it was appropriate in the circumstances to order Mr Pattison to pay the costs of both Mr Stephens and the Official Trustee. Reference was made to the inordinate overcharging by Mr Pattison.
I note that the applicant’s written submissions accept Mr Stephens’ liability for the Official Trustee’s remuneration of $12,520.58 and realisation charges of $4,116.09. Mr Pattison’s outstanding fees of $18,336.77 are indicated to be challenged on the basis of a set-off in the event that Mr Pattison was ordered to pay costs in this proceeding. The fees owed to Messrs Mendelsons are challenged on the basis that Mendelsons agreed to act on a speculative basis and the Official Trustee’s costs and expenses of $42,602.89 are challenged on the basis that Mr Pattison may be ordered to pay the same.
It should be noted that none of the submissions put in issue the actual quantum of those fees themselves.
Mr Pattison also filed written submissions. He asserted that the affidavit, exhibit PAP 1 to his trial affidavit, is the affidavit drafted by Mr Moffatt and for which the sum of $4,500 was owing. Essentially the position put by Mr Pattison was that the application was seeking to evade the operation of s.154 of the Bankruptcy Act and that this was not a proper course of conduct. He sought that a charge be put on the applicant’s property and repeated his criticisms of the taxation process.
Counsel for the Official Trustee pointed out that the Trustee had been appointed on 8 July 2011 and was under an obligation to administer the estate and had appointed HCL to advise and appear for them. Counsel went through the lengthy history of the litigation and by and large repeated Mr Pattison’s submissions in respect to the operation of s.154. Counsel submitted that the applicant was required to pay all the expenses of his bankruptcy and since this had not occurred there could not be an annulment.
Consideration: should the bankruptcy be annulled?
Section 153B(1) of the Bankruptcy Act reads:
“ If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.”
Section 154(1) and (2) relevantly read:
“(1) If the bankruptcy of a person (in this section called the former bankrupt ) is annulled under this Division:
(a) all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment are taken to have been validly made or done; and
(b) the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and
(c) subject to subsections (3), (6) and (7), the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt.
(2) If the property of the former bankrupt referred to in paragraph (1)(b) is insufficient to meet the costs, charges and expenses referred to in that paragraph, the amount of the deficiency is a debt due by the former bankrupt to the trustee and is recoverable by the trustee by action against the former bankrupt in a court of competent jurisdiction.”
The first thing to be said is that I accept the submission of the applicant that the Bankruptcy Act expressly contemplates circumstances where not all of the charges and costs arising out of the bankruptcy are paid and an annulment is still occurring. So much seems to me to be clear beyond doubt from the provisions of s.154.
The second thing is that the Court unquestionably has power to order an annulment if it is satisfied that the sequestration order should not have been made.
It is clear on the materials that Mr Stephens was solvent when he was made bankrupt in 2007. He had an income of about $80,000 a year. He had a debt to the CFA of under $10,000 in respect of which he had insurance. He had otherwise trivial debts in several thousands of dollars only which he would have been well able to meet out of his then savings and shares, leaving aside his income. The fact that it took him a long time to pay his debts is neither here nor there for these purposes. The sequestration order ought not to have been made.
The question then becomes should the bankruptcy be annulled?
In 2011 I declined to grant Mr Stephens the time he sought to extend his Application for Review of the Registrar’s decision to seek to set the bankruptcy aside. I refer to what I said then. The various criticisms made of Mr Stephens’ conduct do not need to be repeated. They are set out in the materials filed by Mr Pattison and the Official Trustee in any event. They are, to all effects, acknowledged by the submissions made on behalf of the applicant.
There has however been a material change in circumstances since I made my earlier criticisms of Mr Stephens. The underlying facts which give rise to those criticisms have not changed but what has changed is that the taxation of Mr Pattison’s bills is now complete and the outrageous and egregious nature of his overcharging is now clear. In fact, at the time that Mr Stephens first sought to set his bankruptcy aside he only properly owed Mr Pattison about $14,000. It is clear, in the light of Mr Stephens’ financial circumstances at the time, that he could readily have done so by drawing down further on the equity of his property, an action which was well within the contemplation of the test in Sandel v Porter (1966) 115 CLR 666.
It is by no means clear however that Mr Stephens would have done so. His assertions to this effect in his more recent affidavit material necessarily suffer from hindsight and reconstruction. The reality is that Mr Stephens did not get to be bankrupt without a fair amount of effort. Although he has referred (and was not cross‑examined) to health difficulties in 2005, the fact is that on any view he allowed his proceeding with the CFA to go through to judgment. He effectively ignored the bankruptcy notice and ultimately a creditor’s petition leading to a sequestration order.
There are a number of balancing issues in this matter and I refer to those to which I referred in my earlier judgment in 2011.
Looking at all the materials now, and in particular the outrageous overcharging by Mr Pattison, it would seem clear that in the ordinary way of things I should grant the annulment that Mr Stephens seeks. He has been complaining since a very early stage of the overcharging of Mr Pattison, and much of the costs that the Official Trustee has built up have derived from a failure by the Official Trustee to put matters on hold in an effective way pending the taxation of Mr Pattison’s fees.
Given that Mr Stephens paid out his various creditors, albeit tardily, it is difficult to see that the Trustee has acted reasonably in continually demanding huge sums for the administration of such a small series of debts. True it is that Mr Stephens has also acted inadequately, but in the end he had no alternative but to pursue this litigation if he wanted to do anything other than pay an enormous amount of money arising out of a totally trivial debt.
The position contended for in principle by both Mr Pattison and the Trustee is that Mr Stephens should be sold out of his home in which by this stage the equity is perhaps only marginal (because of the extent of the various claims advanced by the Trustee) because of a failure to pay substantive debts for a period of time of approximately $10,000. It is not an attractive outcome and not one that does any credit to the Official Trustee.
Nonetheless matters are not as simple as this. At present Mr Pattison is the registered owner of Mr Stephens’ home. If I make the annulment order that the applicant seeks the Trustee can presumably apply to be substituted for Mr Pattison as the registered owner and deal with the property pursuant to s.154.
Since, if I understand the matter correctly, there is not now any challenge to the actual quantum of the monies claimed by the Trustee the issue that really arises is whether this Court has the power to make the orders that Mr Stephens seeks that Mr Pattison effectively pay the costs of the proceeding.
The practical utility of such an order is of no significance because Mr Pattison is bankrupt. It is clear that what is sought in effect is that the Official Trustee’s costs are effectively set aside, to be borne by the Official Trustee. Mr Pattison will not be able to pay, one would assume, any monies pursuant to any orders that I might make against him.
This brings the Court to consideration of the law. In Maxwell‑Smith v S & E Hall Pty Ltd [2004] FCA 840 Moore J said, at [27]:
“In this application, the applicants appear to challenge collaterally the costs, charges and expenses of the Trustee, including his remuneration. However, s 154(1)(b) creates a statutory entitlement or charge enforceable by the Trustee which I have no power to modify or alter. That section relevantly provides:
(text omitted).
It may possibly be that, as a matter of construction, the reference to costs, charges and expenses as well as remuneration should be treated as amounts reasonably incurred in the administration of the estate. Such a construction might be apt because, arguably, the section is not intended to confer on the Trustee a right to apply the former bankrupt's property for costs, charges and expenses arising from activities the Trustee should not have engaged in as part of the proper administration of the bankrupt's estate. In the present case, having regard to the material before me, I am not satisfied that any aspect of the administration of the bankrupts' estates could be characterised as conduct the Trustee should not have engaged in, including appearing in these proceedings represented by counsel. It will, of course, be open to the applicants to discuss with the Trustee, a scheme of the type raised by the Trustee's counsel at the hearing, namely the creation of some type of security over their home to enable the satisfaction of amounts due to the Trustee. Consistent with authority, the Trustee is entitled to his costs of this application: Re Gollan: Ex parte Gollan (1992) 40 FCR 38.”
The matter was revisited further in Brake v Townsend [2006] FCA 1156 where Greenwood J considered an order made by a Federal Magistrate fixing the remuneration of the Trustee in circumstances where the Federal Magistrate annulled the bankruptcy pursuant to s.153B. At [94]-[96] his Honour Justice Greenwood said:
“[94] His Honour relied upon s 153B in making an order annulling the bankruptcy and setting aside the sequestration order based upon a finding that Ms Townsend was at the date of the sequestration order solvent and at all material times remained solvent. Section 154(1)(a) provides that all acts done by the trustee or any person acting under the authority of the trustee before the annulment, are taken to have been validly made or done (subject to considerations of breach of duty) and s 154(1)(b) provides that the trustee may ‘apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee’. His Honour made a further order fixing the remuneration of the trustee and concluded that the court certainly had power to ‘fix a sum in relation to the costs in respect of the administration of the estate’ [8] although the source of that power was not identified. Whatever the source of the power may be, the foundation for the exercise of the power was that the trustee ought to have concluded the administration on or about 10 February 2004 and that having regard to that circumstance, the costs ought to have been $15,000.00.
[95] No such foundation existed and the exercise of the power therefore failed.
[96] As to the source of the power, it cannot be found in s 153B or any provision of Div 5 of Pt VII of the Act. …”
At [98] his Honour continued:
“Because his Honour failed to have regard to the evidence, no proper foundation subsisted for the exercise of a power to fix costs. The discretion has miscarried but to the extent that the source of the power might need to be identified, it seems to me that s 178(1) may well confer a power to determine or fix the quantum of the costs (both expenses and remuneration) in respect of an administration. In addition, s 30(1)(b) of the Act confers a power upon the court to make such orders as the court considers ‘necessary for the purposes of carrying out or giving effect to the Act in any case or matter’. The intersection, however, between the exercise of such powers directed to the subject matter of the trustee’s remuneration and the proper application of s 162 of the Act which specifically addresses the mechanisms by which the trustee’s remuneration is to be determined, must be carefully considered in any particular case. The trustee’s remuneration might be determined by resolution of the creditors or, by a committee of inspection. Where the remuneration of the trustee is not so determined, the trustee is to be remunerated as prescribed by the regulations (s 162(4)). The making of an order to fix or otherwise determine the remuneration of the trustee in the exercise of a power which properly comprehends such subject matter, notwithstanding the preparation of an itemised Bill of Costs and the taxation of those costs, could only arise out of an exposed process of reasoning identifying a proper basis for recourse to such power. There is no such process of exposed reasoning identified.”
In Young, In the matter of Macryannis [2011] FCA 1272, Stone J said at [165]:
“In re Walker (2005) 221 ALR 320 at 6, Barrett J, sighting among others, the Full Court decision in Doolan v Dare, held that the position of a liquidator in any winding up is, as to remuneration, the same as that of a trustee in bankruptcy. His Honour, at [20]-[31], referred to a number of Federal Court decisions, including Jefferson, as authority for the broad proposition:
that where the prescribed statutory mechanism for deciding quantum proves unworkable in practice, the court’s general power (also statutory) to determine any question arising in a particular administration extends to deciding the question of quantification.”
At [166] her Honour referred to the passages in the judgment of Greenwood J in Brake v Townsend set out above and said at [167]:
“In this case I see no reason why the Court should have resort to general powers such as are provided in s 30(1)(b) or to s 178(1). While I do not exclude the possibility that there may be circumstances in which those powers might be used, in my view the structure of the legislation that applies to the present claim contemplates that the Trustee will follow the procedures laid down in the Act and regulations. It is not for the Court to adopt some other procedure when the statutory procedure is open to the Trustee.”
Conclusion
If one takes a look at this case overall it seems clear to me that:
a)Mr Stephens failed to deal with his affairs properly following his car accident and was made bankrupt on proper application based upon a judgment debt arising in a case where he had failed to defend it;
b)at the time the sequestration order was made it is clear beyond doubt that Mr Stephens was solvent;
c)although it is not quite so clear it seems more probable than otherwise to me that Mr Stephens has had at all material times since an excess of assets over liabilities although it is not so clear that he is prepared to sell his property and thus bring himself within the meaning of the extended definition of being able to pay his debts described in Sandel v Porter;
d)the real source of Mr Stephens’ difficulties, setting aside the matters in (a), has essentially been the rapacity of Mr Pattison’s outrageous fee demands.
So far as I am concerned Mr Stephens’ failure to conduct his affairs in a more timely manner following the first indication (and subsequent indication in November 2008) of the scale of Mr Pattison’s asserted fees was entirely reasonable. Mr Stephens’ response was very much that one would expect of a normal person unaccustomed to these kinds of travails.
Nonetheless it is equally clear that the monies sought by the Trustee, which I note are not the subject of changes to quantum, were all ones that would fall within the observations of Moore J in Maxwell‑Smith. None of these were activities that would seem to me to fall outside the proper conduct of the Trustee’s obligations.
It seems to me that while various Judges of the Federal Court have hinted, in the case of Greenwood and Stone JJ perhaps strongly hinted, that a court may in appropriate circumstances have some capacity to fix a Trustee’s charges, the circumstances of this case do not go far enough for me to be able to invoke such a procedure.
What I am minded to do is to adopt the procedure indicated in Maxwell-Smith, and order that a charge be placed over Mr Stephens’ home. That will have the effect of enabling the Trustee to pursue the realisation of the property presently registered in Mr Pattison’s name (albeit that he is himself bankrupt) and thus give effect to the terms of s.154 of the Bankruptcy Act.
I should make it clear that this is not an outcome that I regard as just and equitable at all. There has been a pigheadedness about the Official Trustee’s behaviour which has only compounded the rapacity of Mr Pattison. If I had power under the Court’s general powers to award costs against Mr Pattison I would undoubtedly use it. Nonetheless, this general power plainly cannot be invoked in circumstances designed to defeat the operation of s.154. The observations of Moore J in Maxwell‑Smith are plainly binding on me.
This has been an extremely messy set of proceedings at every step and in the circumstances I will simply publish these reasons for judgment and give the parties an opportunity to consider them before taking submissions as to what orders should be made to give effect to my conclusions.
I certify that the preceding seventy-one (71) paragraphs are a true copy of the reasons for judgment of Judge Burchardt
Associate:
Date: 28 January 2014
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