Adsett v Berlouis

1. The applicants' costs of the proceeding are proper costs in the bankruptcy of the first, second and third respondents.
2. Otherwise, there be no order as to costs of the proceeding. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

MOSHINSKY J: 1 On 18 July 2016, I heard and determined the applicants' application for directions pursuant to s 134(4) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act): Quin (Trustee), in the matter of Rowe (Bankrupt) [2016] FCA 823. These reasons should be read together with those reasons. 2 These reasons deal with the costs of the proceeding. The parties have filed written submissions and were content for this issue to be dealt with on the papers. 3 The application brought by the applicants (the Trustees) was unsuccessful. I concluded that it would not be appropriate for the Court to give the directions sought by the Trustees. I said that it was not clear that the Court has the power under s 134(4) to give the directions sought by the Trustees. But even if the Court does have the power to give directions of the type sought, in circumstances where there was an actual or apparent conflict of interests, the better course was for a new trustee or new trustees to be appointed to the estates of Adrian Stuart Rowe (Adrian) and Amanda Jane Rowe (Amanda). 4 Adrian and Amanda, who were jointly represented by counsel and solicitors at the hearing before me, and who opposed the orders sought, did not seek an order for costs in their favour. They informed the Court that counsel and solicitors had been acting pro bono and that there were no disbursements. In these circumstances, no costs had been incurred. 5 The Trustees seek an order that their costs are proper costs in the bankruptcy of Cheryle Margaret Rowe (Cheryle), Adrian and Amanda. They say that this order is sought out of an abundance of caution in circumstances where a new trustee is to be appointed to the estates of Adrian and Amanda. On the other hand, Adrian and Amanda seek an order that the Trustees' professional fees and disbursements, including legal fees, incurred in the conduct of the proceeding not be borne by the estates of Adrian and Amanda. 6 There was no dispute as to the applicable principles, which may be briefly stated as follows. The Court has a broad power under s 30 of the Bankruptcy Act to make orders depriving a trustee in bankruptcy of the right to be indemnified out of the bankrupt estate for payment of his or her remuneration and expenses. Ordinarily, a trustee who is involved in litigation that relates to the administration of a trust is entitled to be indemnified out of the trust estate, unless guilty of acting improperly or unreasonably: Miller v Cameron (1946) 54 CLR 572 at 578-579 per Latham CJ. In In re Beddoe; Downes v Cottam [1893] 1 Ch 547, Bowen LJ said (at 562): The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust - a proposition in which the word "properly" means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him. If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred. 7 The above passage was approved by the Full Court of this Court in Adsett v Berlouis (1992) 37 FCR 201 at 211 per Northrop, Wilcox and Cooper JJ. The Full Court said (at 211) that the principle enunciated by Bowen LJ in Beddoe applies to the administration of bankrupt estates and said (at 211-212): The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout. It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper. Nor is it profitable to attempt a detailed rule covering all circumstances. But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Beddoe, which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not "properly incurred". The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment. 8 The Trustees submit that, by their application, the Trustees approached the Court for directions in order to resolve a potential conflict of interest; no criticism was made of the Trustees for bringing such an application notwithstanding that the Court did query whether it had the power to make directions of the type contemplated by the Trustees; while the relief sought by the Trustees was not granted, the underlying issue of the conflict of interest was resolved; the application was neither unreasonable nor unnecessary. 9 Adrian and Amanda submit that, at all times during the proceeding, the Trustees admitted that they were conflicted; there is no principle of law by which a conflicted trustee may continue to act for separate estates in dispute, even if under the supervision of the Court; the relief sought by the Trustees was therefore unreasonable and misconceived. It is further submitted that the Trustees were aware of the facts giving rise to the s 120 claim at the time of their appointment as trustees (on 6 November 2014) or within a short period after being appointed; the proceeding was not filed until 21 December 2015, constituting a delay of about one year; it is contrary to the duty in clause 2.2 of Sch 4A to the Bankruptcy Regulations 1996 (Cth) to continue to act under a conflict for about one year, to delay for about one year taking any step to avoid the conflict, and to apply for directions from the Court seeking to act, notwithstanding the conflict. Lastly, it is submitted that Adrian and Amanda successfully opposed the directions sought, and the order they seek is consistent with that outcome. 10 In my view, although the Trustees' application was unsuccessful, the costs incurred by the Trustees in connection with the proceeding were properly incurred in the administration of the bankrupt estates of Cheryle, Adrian and Amanda. The Trustees correctly identified that they had a conflict of interest in relation to the proposed claim and the proposed resolution of that claim. They honestly considered that the proposed resolution was in the best interests of all the relevant estates and this position was supported by the primary creditor of those estates. It was also supported by an independent report. The commencement of a proceeding seeking directions under s 134(4) was the mechanism the Trustees considered appropriate to address the conflict. Although the application was unsuccessful, it did bring the conflict of interest issue to a head and led to a resolution of the conflict issue in a way that the Court considered appropriate. 11 I do not think any delay in bringing the proceeding bears upon this issue. While it may be accepted that the Trustees were aware of the facts relevant to the proposed claim from about the time of their appointment, it does not appear that they actually did anything which involved them acting in a conflict of interest situation. Specifically, they did not bring the proposed claim but rather approached the Court in relation to it. 12 For these reasons, I will make an order that the Trustees' costs of the proceeding are proper costs in the bankruptcy of Cheryle, Adrian and Amanda. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky.