Yeo & Rambaldi v Sandles
[2020] FCCA 988
•29 April 2020
FEDERAL CIRCUIT COURT OF AUSTRALIA
| YEO & RAMBALDI AS TRUSTEES OF THE BANKRUPT ESTATE OF SANDLES v SANDLES | [2020] FCCA 988 |
| Catchwords: BANKRUPTCY – Applicant seeking direction and orders as to whether they are acting reasonably in selling water rights attached to the bankrupt’s property – where there is a pending ATO audit – where the bankrupt owns a farm property – applicant fears criticism from Inspector General in Bankruptcy – finding that there was no failure by applicant to disclose relevant information – finding that the applicant is best placed to ascertain the best approach regarding the realisation of the bankrupt’s assets – parties to bear their own costs. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.19, 19AA, 30, 77, 145, 153A Federal Circuit Court Act 1999 (Cth), ss.15, 9-15 to Sch.2 |
| Cases cited: Coshott v Burke [2012] FCA 517 Gisborne v Gisborne [1877] 2 App Cas 300 Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 Re Allen-Meyrick’s Will Trusts [1966] 1WLR 499 Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 Re Driller (1972) 21 FLR 159 Re MF Global Ltd (in Liq)[2012] NSWSC 994; (2012) 267 FLR 27 Re Pilling; Ex parte Salaman [1906] 2 KB 644 Re Trusts of Will of Gilchrist (1867) 6 SCR (NSW) Eq 74 Re Trusts of Will of Osborne (1863) 2 SCR (NSW) Eq 89 Re Wong: Ex Parte Wong v Donnelly (1995) 63 FCR 426 |
| Applicant: | ANDREW REGINALD YEO AND GIUSEPPE MICHELE RAMBALDI AS TRUSTEES OF THE BANKRUPT ESTATE OF PETER ALAN SANDLES |
| Respondent: | PETER ALAN SANDLES |
| File Number: | MLG 1082 of 2019 |
| Judgment of: | Judge McNab |
| Hearing date: | 12 November 2019 |
| Date of Last Submission: | 31 October 2019 |
| Delivered at: | Melbourne |
| Delivered on: | 29 April 2020 |
ORDERS
The amended application filed 24 September 2019 be dismissed.
The applicant and the Inspector General in Bankruptcy each bear their own costs of the application.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1082 of 2019
| ANDREW REGINALD YEO AND GIUSEPPE MICHELE RAMBALDI AS TRUSTEES OF THE BANKRUPT ESTATE OF PETER ALAN SANDLES |
Applicant
And
| PETER ALAN SANDLES |
Respondent
REASONS FOR JUDGMENT
Introduction
By an amended application filed on 24 September 2019, the applicant (‘the trustees’) seeks directions and Orders pursuant to section 30 of the Bankruptcy Act 1966 (Cth) (‘the Act’), sections 90-15 to Schedule 2 of the Act and section 15 of the Federal Circuit Court Act 1999 (Cth) as follows:
A. Whether the Applicants, as Trustees of the bankrupt estate of the Respondent, are justified and therefore acting reasonably in:
1. Selling the water rights; or
2. Selling part of the water rights and the Invergordon Property; or
3. Not pursuing litigation against Brianna Barig.
B. How long should the Applicants, as Trustees of the bankrupt estate of the Respondent delay annulling the Respondent’s bankruptcy (ie. Signing a certificate under s 153A of the Bankruptcy Act 1966 (Cth)) in circumstances where the Australian Taxation Office may be conducting an audit of the Respondent’s taxation affairs.
C. The Trustees’ costs of and incidental to the application be costs in the bankruptcy administration.
D. Such further or other orders or directions as the court considers appropriate.
On 17 October 2019 and subsequently on 29 October 2019 the Court made Orders for the filing and service of submissions by the parties and by the Inspector General in Bankruptcy.
The application was supported by affidavit sworn by Mr Andrew Reginald Yeo, a trustee of the Bankrupt Estate of Peter Sandals (the respondent) and an applicant in this proceeding. These affidavits were sworn 11 April 2019, 12 September 2019 and 31 October 2019.
The application is opposed by the Inspector General in Bankruptcy.
Background
On 13 December 2018 the respondent became bankrupt pursuant to a sequestration order made by this Court.
The bankrupt operates a dairy farm in Invergordon, Victoria. The farm has water rights attached to it. The bankrupt has disclosed to the trustee’s staff that the value of these rights may be sufficient to enable the annulment of bankruptcy.[1]
[1] Mr Yeo’s affidavit filed11 April 2019 at [8].
The trustees have had the water rights valued and, when valued on the basis that they are permanent rights with high reliability, they may be worth between $580,300 and $664,400. The affidavit of Mr Yeo filed 11 April 2019 provides evidence of the extent of the respondent’s unsecured creditors which he estimated to be in the sum of $489,023 with secured creditors of about $29,000.
There are doubts about the extent of the respondent’s taxation liabilities and final figures for that have not been provided by the taxation office.
The trustees maintain that the best course is to sell the water rights in order to provide the best return to creditors and to preserve the respondent’s place of residence.[2]
[2]Mr Yeo’s affidavit filed 11 April 2019 at [45].
The affidavit of Mr Yeo filed 12 September 2019 outlines evidence of the trustees’ correspondence and communications with the Australian Taxation Office (‘ATO’) regarding the respondents taxation liabilities. The substance of these communications was that the ATO had not completed an examination of the respondent’s tax liabilities and there is no indication of when the audit or examination will be completed.
Mr Yeo gives evidence at [9] of his 12 September 2019 affidavit regarding a telephone conversation with an ATO officer which was conducted on 12 August 2019 as follows:
(The officer) concluded our telephone conversation by restating that the ATO would attempt to contact the respondent as we both agreed that the best outcome would be if the respondent were to lodge his outstanding taxation returns, and she would contact me further, depending on what occurred from the ATO’s attempts to make contact with the respondent as at the date of swearing this affidavit, I have not received further contact from the ATO, including from (the officer).
Mr Yeo’s 12 September 2019 affidavit also refers to a person Brianna Barig at [21]–[22]. The respondent has notified Mr Yeo that the respondent believes he is owed money by this person. The trustees have made some investigations of a claim that this person owes the respondent about $205,000. Mr Yeo notes in his affidavit that all the material suggests that Brianna Barig is a non-existent person and that the respondent has been a victim of an Internet scam and that it is most unlikely that any monies might be recovered.
Relevant legislative provisions
Section 19(1) of the Act provides that the duties of the trustees include:
(1) The duties of the trustee of the estate of a bankrupt include the following:
(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.
Section 77 of the Act provides:
(1) A bankrupt shall, unless excused by the trustee or prevented by illness or other sufficient cause:
…
(ba) give such information about any of the bankrupt’s conduct and examinable affairs as the trustee requires; and
…
(e) execute such instruments and generally do all such acts and things in relation to his or her property and its realization as are required by this Act or by the trustee or as are ordered by the Court upon the application of the trustee; and
…
(g) aid to the utmost of his or her power in the administration of his or her estate.
(emphasis added)
Section 153A of the Act provides:
153A Annulment on payment of debts
(1) If the trustee is satisfied that all the bankrupt’s debts have been paid in full, the bankruptcy is annulled, by force of this subsection, on the date on which the last such payment was made.
(1A) In determining whether there has been full payment of a debt that bears interest, the interest must be reckoned up to and including the date on which the debt (including interest) is paid.
(2) The trustee must, before the end of the period of 2 days beginning on that date, give to the Official Receiver a written certificate setting out the former bankrupt’s name and bankruptcy number and the date of the annulment.
Penalty: 5 penalty units.
Note: See also section 277B (about infringement notices).
Subsection (2) is an offence of strict liability.
Note: For strict liability, see section 6.1 of the Criminal Code.
(4) For the purposes of this section, if a debt has been proved by a creditor but the creditor cannot be found or cannot be identified, the debt may be paid to the Official Receiver and, if so paid, is taken for the purposes of this section to have been paid in full to the creditor.
(4A) Money received by the Official Receiver under subsection (4) is received on behalf of the Commonwealth.
(5) If money is paid to the Official Receiver under subsection (4), the provisions of subsections 254(3) and (4) apply in relation to that money as if it had been paid to the Commonwealth by a trustee under subsection 254(2).
(6) In this section:
bankrupt’s debts means all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee.
(emphasis added)
Insolvency Practice Schedule
Section 90-15 of the Insolvency Practice Schedule (Bankruptcy) provides:
90-15 Court may make orders in relation to estate administration
Court may make orders
(1) The Court may make such orders as it thinks fit in relation to the administration of a regulated debtor's estate.
Orders on own initiative or on application
(2) The Court may exercise the power under subsection (1)
(a) on its own initiative, during proceedings before the Court; or
(b) on application under section 90-20.
Examples of orders that may be made
(3) Without limiting subsection (1), those orders may include any one or more of the following:
(a) an order determining any question arising in the administration of the estate;
(b) an order that a person cease to be the trustee of the estate;
(c) an order that another person be appointed as the trustee of the estate;
(d) an order in relation to the costs of an action (including court action) taken by the trustee of the estate or another person in relation to the administration of the estate;
(e) an order in relation to any loss that the estate has sustained because of a breach of duty by the trustee;
(f) an order in relation to remuneration, including an order requiring a person to repay to the estate of a regulated debtor, or the creditors of a regulated debtor, remuneration paid to the person as trustee.
Matters that may be taken into account
(4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account:
(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.
Costs orders
(5) Without limiting subsection (1), an order mentioned in paragraph (3)(d) in relation to the costs of an action may include an order that:
Orders to make good loss sustained because of a breach of duty
(6) Without limiting subsection (1), an order mentioned in paragraph (3)(e) in relation to a loss may include an order that:
(a) the trustee is personally liable to make good some or all of the loss; and
(b) the trustee is not entitled to be reimbursed by the regulated debtor's estate or creditors in relation to the amount made good.
Section does not limit Court's powers
(7) This section does not limit the Court's powers under any other provision of this Act, or under any other law.
Inspector-General Practice Directions
Section 42‑135 of Inspector-General Practice Direction 9 (‘IGPD 9’) (Distribution of estate funds) provides:
A registered trustee must distribute estate 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
(c) the need to retain funds in the estate to meet existing or expected commitments.
(emphasis added)
Section 42-175 of IGPD 9 (Identifying assets for vesting of) provides:
A registered trustee must take appropriate steps to identify the assets of the estate of a regulated debtor that will vest in the trustee, including the following:
(a) obtaining and reviewing the statement of affairs of the regulated debtor;
(b) considering the size of the deficiency in the estate for the purpose of finding possible assets or determining whether an issue needs to be investigated […]
(emphasis added)
The trustees’ submissions
The trustees contend that they face a dilemma, do they:
a)sell the water rights now, pay creditors and certify that they are ‘satisfied that all the bankrupt's debts have been paid in full’ - in circumstances where there is a pending ATO audit and the sale of the property may become necessary (either to satisfy an additional liability to the ATO or for the bankrupt upon discharge to pay a Capital Gains Tax (‘CGT’) liability arising from the sale); or
b)wait an indeterminate period of time for the ATO to conduct its audit and then sell either the water rights and/or the property?
They point to an article published by the Australian Financial Security Authority (‘AFSA’) in 2009 (reproduced in 2018) which stated:
It is certainly preferable [for a bankrupt] to lodge all tax returns and for the ATO to be given an opportunity to lodge a proof of debt, but there is no legislative basis for delaying the annulment on this basis.
The article also referred to there being ‘some opportunity for the trustee to make limited enquiries with the ATO and with the bankrupt about the advantages of the ATO making a full and final claim in the estate’.
The trustees also submit that the policy evidenced by the AFSA article:
32. […] seeks to minimise the involvement of trustees in the tax affairs as between the ATO and taxpayer/bankrupt. It suggests that it is neither necessary nor appropriate for the trustee to pursue a bankrupt to ensure that they bring their tax affairs up to date - even if the result of lodging the returns will further the bankruptcy administration.
The trustees raise that that they are concerned that they may be criticised by the Inspector General in Bankruptcy or the bankrupt for:
a)delaying the finalisation of the administration by awaiting the outcome of an ATO audit that will take an unknown period of time;
b)selling all of the water rights and thereby creating a significant post- bankruptcy CGT liability for the bankrupt;
c)not selling the property so as to minimise:
i) the extent of water rights that are required to be sold; and hence
ii) the post-bankruptcy CGT liability of the bankrupt;
d)certifying that it is ‘satisfied that all the bankrupt's debts have been paid in full’ in circumstances where they have a reasonable basis for believing that there may be an additional liability to the ATO; and
e)not pursuing the claim against “Briana Barig”.
They contend on the basis of the terms of the AFSA article that the trustees would be at risk of criticism by the Inspector General in Bankruptcy or the bankrupt if they were to take steps to compel the bankrupt to lodge his tax returns; for example by enforcing the bankrupt’s obligation to ‘aid to the utmost of his or her power in the administration of his or her estate.’
The trustees raise as an issue whether they could achieve the requisite degree of ‘satisfaction’ for the purposes of section 153A of the Act, given that trustees have a reasonable belief that the ATO default assessments ‘are likely to be inaccurate’ and that there is likely to be an additional ATO liability. The dilemma they say they face is how long they should postpone the finalisation of the administration considering that they could wait until any audit process conducted by the ATO is complete
The trustees made reference to Re Wong: Ex Parte Wong v Donnelly (1995) 63 FCR 426 (‘Wong’) (per Sackville J) where it was held at [63] regarding section 153A that the trustees are entitled to address the question of whether the bankrupt's debts (as defined) have been paid in full on the basis that creditors should have an ‘appropriate opportunity’ to prove their debts according to the statutory regime.
The trustees acknowledge at [18] of their submissions that, in applying section 153A, a trustee can take into account not only proofs of debt likely to be lodged, but those that have that have been lodged but not finally determined in accordance with the Act.
The trustees also refer to the AFSA article and state that one of the article’s foundation’s is the view that the trustees can achieve the requisite ‘satisfaction’ for the purposes of section 153A of the Act despite there being a known potential tax liability:
In cases where all debts of the estate are paid in full (apart from a possible claim by the ATO) and the trustee determines that it is appropriate to grant an annulment under s 153A, the ATO can take action to recover the amount of any debt that would have been provable in the annulled bankruptcy, even after annulment.
The trustees also refer to Coshott v Burke [2012] FCA 517 (‘Coshott v Burke’) where Rares J stated at [52]:
[52] One of the objects of the Act is to ensure an equal division of the bankrupt’s available property among his or creditors. An annulment under s 153A(1) is intended to ensure that if the bankrupt seeks to be relieved of the burdens of bankruptcy, he or she must ensure that all creditors who have provable debts be paid in full, including interest to the time of the effecting of the annulment.
The issue that underlies this application, namely, to what extent and for how long should the trustees postpone finalisation of an administration, in circumstances where the bankrupt has failed to make lodgements with the ATO, is one that is not uncommon in bankruptcy administrations.
One course that has some attraction is for the trustees to wait until the ATO has completed its audit, then decide whether to sell the property or the water rights. In that way post-bankruptcy CGT may be minimised, for example if property’s sale becomes inevitable because it is required in order to achieve an annulment. However, this is likely to involve (potentially significant) delay of the type that the AFSA article cautions against.
The trustees seek to avoid criticism from the Inspector General in Bankruptcy or the bankrupt regarding the ‘inappropriate’ postponement of the finalisation of bankrupt estates where a bankrupt’s tax returns are not up to date.
The options open to the trustees include:
a)selling the property and/or the water rights immediately;
b)postponing the sale of the property and/or the water rights;
c)granting a certificate under section 153A of the Act before the ATO audit has been completed; or
d)awaiting the outcome of the ATO audit before:
i) selling the property and/or water rights; or
ii) granting a certificate of annulment.
The submissions of the Inspector General in Bankruptcy
Question 1
The Inspector General in Bankruptcy submits that Question 1 is answered by the plain terms of sections 153A(1), (2) and (6) of the Act.
If and when the trustees are satisfied that:
‘all debts that have been proved in the bankruptcy…and the costs, charges and expenses of the administration of the bankruptcy have been paid in full’ the bankruptcy is annulled ‘by the force of [s 153A(1)], on the date on which the last such payment was made’ and the trustees ‘must, before the end of the period of 2 days beginning on that date, give … a written certificate’.
It is submitted that section 153A of the Act affords the trustees no discretion ‘to delay annulling the respondent’s bankruptcy’ and that section 145(1) of the Act requires the trustees to avoid needlessly protracting the trusteeship.
I note that section 145 deals with the determination and distribution of the final dividend by the trustees after the assets of the bankrupt have been realised. Section 145 of the Act provides:
(1) Subject to this section, when the trustee of the estate of a bankrupt has realized all the property of the bankrupt, or so much of it as can, in his or her opinion, be realized without needlessly protracting the trusteeship, he or she shall declare and distribute a final dividend.
(2) The trustee shall distribute as the final dividend all moneys realized and not previously distributed and shall distribute the final dividend without regard to any debt that had not been proved at the time when he or she declared the final dividend.
(3) The trustee shall, before declaring the final dividend, give notice, in the manner prescribed by the regulations, to each person who to his or her knowledge, claims to be, or might claim to be, a creditor but has not proved his or her debt that, if the person does not prove his or her debt within the period specified in the notice, the trustee will proceed to declare a final dividend without regard to his or her claim.
(4) The trustee shall, in a notice sent to a person in pursuance of subsection (3), allow a reasonable period within which the person may prove his or her debt.
(5) The Court may, on the application of a person claiming to be a creditor, extend the period within which the person may prove his or her debt.
(6) Where the trustee has sent a notice in pursuance of subsection (3) in relation to the declaration of the final dividend, the trustee shall not declare the dividend until after the expiration of 21 days after the expiration of the period specified in the notice or, if the Court, under subsection (5), extends the period within which a person may prove his or her debt, until after the expiration of 21 days after the expiration of that extended period.
The Inspector General in Bankruptcy submits that that if Question 1 were taken as seeking directions as to how to deal with the potential claim(s) of any person who might claim to be a creditor but has not proved his or her debt (or all of it), it would be answered by the plain terms of section 145 of the Act.
It is said that the proper course is for the trustees to advertise pursuant to section 145(3) of the Act for the lodgement of proofs of debt. An example of that was referred to in Coshott v Burke, in which Rares J said at [54]:
The purpose for which the trustee advertised for lodgment of proofs of debt pursuant to s 145 … was to seek to ensure that all creditors with debts provable in the bankruptcy would prove and thus they could be ascertained so that he could be satisfied for the purposes of s 153A of the Act that the arrangements that the bankrupt proposed would ensure that all of his provable debts would be paid in full.
It is said that because section 145 sets out a pathway for the trustees, it is not necessary for the trustees to seek a direction as such direction is not proper, appropriate or necessary for the protection of the trustees.
The Inspector General in Bankruptcy submitted that the trustees ‘have not made full and fair disclosure to the Court of all material facts’, in particular, the trustees have not disclosed to the Court:
a)the proof of debt apparently lodged by the Deputy Commissioner of Taxation (‘DCT’) which was referred to in the affidavit of Mr Yeo sworn 12 September 20219 at [5]; or
b)whether the DCT has evinced any present intention to lodge an amended proof of debt nor, if so, by when.
Question 2
It is submitted that:
a)until the trustees have ascertained the ‘bankrupt’s debts’ (as defined in section 153A(6) of the Act) it is unnecessary to decide finally which assets in the estate ought to be sold to realise sufficient proceeds with which to pay them;
b)the trustees are in no genuine doubt about the propriety of their contemplated course of action given that [14] of Mr Yeo’s affidavit dated 12 September 2019, records that the trustees have:
14. […] determined, having regard to both the interests of creditors and the respondent, that the realisation of the water rights is the most cost effective asset to realise and should be preferred to other assets of the bankrupt estate […],
c)no issue of power or propriety arises and none has been suggested;
d)the statutory directions power does not permit an applicant to come to the court ‘whenever he feels some unease about a situation and wishes to obtain some sort of insurance against the possibility of error, as well as assurance that he is on the right track’[3]; and
e)it is not proper, appropriate or necessary for Question 2 to be answered (now) for the protection of the trustees.
[3] Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, 116 (Young J) cited with approval in Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409, 424
Trustees’ submissions in reply
The trustees filed submissions in reply which were to the effect that:
a)there had been no failure on the part of the trustees to disclose relevant information;
b)the Inspector General in Bankruptcy had failed to acknowledge the dilemma faced by the trustees created by the tension between whether they should be satisfied in terms of section 153A (as the authorities such as Wong and Coshott v Burke direct them to be), or whether they follow the approach set out in AFSA policy regarding bankrupt estates where there are outstanding tax returns;
c)the trustees’ discretion to investigate the bankrupt’s affairs are wide in their nature and scope however, if circumstances call for an investigation (such circumstances would include a fraud on the revenue), the trustees must investigate as per section 19AA of the Act; and
d)there is a pressing need for directions because:
i) the trustees could delay finalisation of the administration by not selling the water rights immediately and awaiting the outcome of an ATO audit - but this would be at odds with the Inspector General of Bankruptcy’s usual practice that such matters not delay finalisation of an administration;
ii) the trustees could immediately sell all of the water rights, but this would create a significant post-bankruptcy CGT liability for the bankrupt - one which is greater than the post-bankruptcy CGT liability that would arise if the trustees were to sell only some of those rights;
iii) selling all of the water rights might not be necessary in the event that a sale of the property were to become inevitable (because of an additional tax liability generated by an audit);
iv) the trustees could only justify selling the water rights now (with a view to immediately annulling the bankruptcy) if they anticipated that they would thereafter immediately be in a position to be ‘satisfied that all the bankrupt's debts have been paid in full’; and
v) the trustees’ preference is not to immediately sell the bankrupt’s home if there is a possibility that this may not be necessary.
The trustees also submit that ‘if the formulation of the direction sought is unattractive, the Court would not hesitate to formulate an appropriate direction to assist their dilemma’.
Consideration
Allegation by the Inspector General of Bankruptcy of the trustees’ failure to disclose relevant information to the Court
In the present case there has been no failure on the part of the trustees to disclose relevant information or evidence to the Court. As the Inspector General in Bankruptcy’s submissions make plain, the information about the DCT’s proof of debt was disclosed in the affidavit of Mr Yeo of 12 September 2019.
Further, the affidavit of Mr Yeo of 11 April 2019 at [33] sets out a table of the proof of debts (including that of the DCT) in the sum of $350,273 and by footnote includes a reference that amounts exclude unlodged tax returns from Financial Year 2016 -2018.
As to a failure to provide evidence of the ‘present intention’ of the ATO, the affidavit of Mr Yeo of 12 September 2019 sets out the discussions between the trustees and the ATO’s relevant personnel.
Given that the Inspector General in Bankruptcy was prepared to unnecessarily make this accusation in submissions, the Court understands why the trustees may be cautious in relation to its conduct so as to attempt to avoid opprobrium and criticism of their conduct.
Question 1
In considering the provisions as they relate to a liquidator seeking directions, in Re MF Global Ltd (in Liq)[2012] NSWSC 994; (2012) 267 FLR 27, Black J stated (at [7], omitting citations):
Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator’s application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation ... The Court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision [...]
The Inspector General in Bankruptcy also referred to examples where the courts have refused to give directions as to how a trustee should exercise its powers and discretion where no issue of power or propriety arises: Re Trusts of Will of Osborne (1863) 2 SCR (NSW) Eq 89 at [91]; Re Trusts of Will of Gilchrist (1867) 6 SCR (NSW) Eq 74 at [78]; Gisborne v Gisborne [1877] 2 App Cas 300 at [307]; Re Pilling; Ex parte Salaman [1906] 2 KB 644 at [647]-[648]; Re Allen-Meyrick’s Will Trusts [1966] 1WLR 499 at [503]; Re Driller [1972] 21 FLR 159 at [173] and [175]; Hartigan Nominees PtyLtd v Rydge (1992) 29 NSWLR 405 at [441].
The Court was also referred to Re Ansett Australia Ltd ( No 3) (2002) 115 FCR 409 where an application for directions was dismissed and Goldberg J said at [67]:
I am satisfied that I should not accede to the application … because to do so would be doing no more than giving the Court’s imprimatur to a business decision made by the [applicants] in circumstances where no issue as to power, propriety, reasonableness, or requiring the exercise of judgment on a legal issue arises.
In relation to the response to each of the questions raised by the application, there is no question of power or propriety raised by the applicant such as would warrant an application to the Court for directions.
The issues posed by the trustees as to the proper approach to the sale of water rights is one that the trustees are best able to answer given that they are in a position to ascertain the likely value of water rights, the ability to sell the whole or part of the water rights and the impact of that decision on Mr Sandles.
The trustees are plainly sensitive to the fact that it appears that Mr Sandles operates a small dairy farm. He is almost 60 years old and he wishes to retain his farm as a place to live. His taxable income in 2015 was assessed at $51,492. He has had access to revenue as the result of the sale of portions of water rights since 2012. If he was to retain the farm he may be in a position to continue to derive an income.
At [45] of the affidavit of 11 April 2019 Mr Yeo expresses the view that:
[…]having regard to both the interests of creditors and the respondent, that the realisation of the water rights and all allocations should be preferred to other assets of the bankrupt estate in order to provide both a return to creditors together with payment of the costs and fees of the administration, sufficient to affect an annulment of the bankruptcy within a relatively short period of time, and at the same time preserving both the respondent’s principal place of residence and his established income.
Regarding the water rights, it is plain that the trustees have considered the options and fixed on a course as expressed above and at [14] of the affidavit of Mr Yeo sworn 12 September 2020. The Inspector General in Bankruptcy has not criticised that approach and the material filed by the trustees is not suggestive of somebody who has not considered the options or ignored the statutory provisions that govern his conduct.
The trustees are in the best position to make enquiries to ascertain the best approach to take regarding the realisation of the bankrupt’s assets. If the Court was to review the question and seek evidence, it would have to seek evidence from an agronomist or some other qualified person. This would have to occur in the context of a Court hearing with all the attendant costs and expenses.
It also strikes the Court that these questions are ones for the trustees to investigate and answer and if the question is complex, that goes some of the way to explaining why trustees and their staff charge very substantial hourly rates - they are paid to answer difficult questions.
The trustees have answered Question 1 and there is no suggestion that if the trustees were to adopt the course that they consider appropriate after investigating Mr Sandles’ affairs, that they would be acting without regard to the interests of creditors or Mr Sandles.
The question as to whether the trustees are acting reasonably in not pursuing Brianna Barig has similarly already been considered and answered by the trustees. It is plain that pursuing that person, if he or she exists, is very likely to be a waste of time. The trustees’ view that the respondent has been the victim of a scam is also more than likely to be correct. It was not necessary to approach the Court for direction in response to that question.
Question 2
I agree that the tension referred to by the trustees as to the proper approach to satisfaction of whether all the bankrupt’s debts are paid in full as required by s. 153A of the Act prior to the annulment is best answered by the trustees looking to the provisions of section 145 of the Act. The Inspector General in Bankruptcy has not raised that it would initiate any action against the trustees as a result.
As Rares J made plain in Coshott v Burkeat [54], section 145(3) provides a mechanism by which the trustees may ascertain whether all of the bankrupt’s debts have been proved, including debt owed to the ATO, prior to annulling the bankruptcy.
The trustees have placed considerable evidence of their dealings with the ATO in order to ascertain whether quantum of the tax liabilities have been fixed. If it is still the case that there is no final response from the ATO, then, as submitted, the appropriate course is to follow the legislative pathway outlined in section 145 of the Act.
As to whether there is a delay in the annulment depends on the response by the ATO to the notice sent by the trustees in accordance with the Act. The question of what is a reasonable time for the response to the notice is a matter for the trustees.
Costs
The applicant seeks that this application’s costs be costs in the bankruptcy administration. The Inspector General in Bankruptcy seeks an order that the applicant pay its costs. Both parties have retained Senior Counsel to draft submissions (submissions in reply on the part of the Applicant). Clearly the trustees wish to act so as not to delay the facilitation of this bankruptcy.
The Court has declined to make the directions sought by the applicant. The applicant has also had to contend with an allegation made in written submissions by the Inspector General in Bankruptcy that it has failed to disclose relevant information to the Court in making this application. That allegation was unwarranted and if that is the customary approach taken by the Inspector General in Bankruptcy then the applicant is warranted in being cautious and concerned that its approach may be the subject of criticism by the regulator. The trustee’s action in bringing this application is explicable.
I do not think that the estate of the bankrupt should bear the costs of this application, particularly given the modest estate and the real chance that there may be surplus funds to enable the bankrupt to maintain the farm and an income after all the debts have been paid.
One does wonder if the application could have been avoided by an exchange of correspondence or a meeting between the trustees and the Inspector General in Bankruptcy prior to approaching the Court.
The Inspector General in Bankruptcy should bear its own costs of the application. It was not appropriate to raise the allegation of a failure on the part of trustees to disclose relevant information to the Court on the basis of the material that had been filed. The trustees were required to respond to a serious allegation levelled against them. In my view the trustees placed such information and evidence as was available to them at the time the application was made and the affidavits in support were filed. There could be no suggestion that the trustees were trying to keep relevant information from the Court before seeking the directions.
Conclusion
The Court will make Orders that:
a)the amended application filed 24 September 2019 be dismissed; and
b)the applicant and the Inspector General in Bankruptcy each bear their own costs of the application.
I certify that the preceding seventy (70) paragraphs are a true copy of the reasons for judgment of Judge McNab
Associate:
Date: 29 April 2020
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