Adsett v Berlouis

Consideration of the course of events relevant to the issue of indemnity of the trustee 3 The relevant principles are not in dispute between the parties. The position was explained by the Full Court in Adsett v Berlouis (1992) 37 FCR 201 (Adsett) as follows (at 210): The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate: see Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation. 4 A trustee in bankruptcy is ordinarily entitled to indemnity out of the trust estate against all the expenses properly incurred in connection with the administration of the estate: Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 558. Elaborating on this principle, the Full Court in Adsett said (at 212): 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. 5 The summons to Mr Moran was issued by his former trustee in bankruptcy on 1 May 2024. Mr Moran applied for the summons to be set aside on 23 May 2024. The present trustee was appointed on 27 May 2024. 6 Given that the costs in issue are the costs that were incurred by Mr Moran in prosecuting his application to set aside the summons issued to him, and given that the former trustee was not heard and is not a party to the proceedings, I consider that it is appropriate to focus upon the conduct of the current trustee only. 7 In my judgment of 31 October 2024, I held that the summons issued to Mr Moran was defective and was not authorised by s 81 of the Bankruptcy Act 1966 (Cth) for several reasons. I found that each of the paragraphs of the summons was affected by one or more defects. I accept that some of the defects were, or ought to have been, immediately apparent on the face of the summons having regard to well-established principles. Most obviously, with the exception of one category of documents, the summons to Mr Moran did not limit the documents sought to documents that were in the possession of Mr Moran. That defect was ultimately conceded by the trustee, but it was not formally and openly conceded until the filing of her written submissions (in response to written submissions from Mr Moran) on 9 September 2024. However, some of the other objections relied upon by Mr Moran were less obviously meritorious, and not all were successful. 8 Mr Moran submitted that the following considerations supported the conclusion that the trustee had acted unreasonably in failing to withdraw the summons and issue a valid summons in its place, or to apply immediately to amend the summons to bring it within power: (1) Mr Moran's application to discharge the summons raised issues that went to the validity of the summons and did so with reference to well-established principles. (2) It must have been immediately apparent to the trustee and her advisors upon receipt of Mr Moran's application, if it was not before, that the summons was patently invalid. Despite that, the trustee persisted in contesting the application, rather than seeking to reissue the summons. (3) Although an application for amendment was eventually made by the trustee in her submissions of 9 September 2024, that was done at the latest possible stage, and no explanation has been provided for the delay. (4) In leaving the application to amend to the written submissions, the trustee caused Mr Moran unnecessarily to incur significant legal costs. (5) The trustee's conduct caused significant delay in the administration of Mr Moran's bankrupt estate, which could have been avoided had the trustee elected not to rely upon the summons and instead issued a fresh summons after the defects were identified. (6) The additional costs of issuing a further summons would have been modest compared with the costs of the contested hearing that occurred. (7) Although offers of compromise were made by the trustee, they were not reasonable because the trustee did not concede that the summons was deficient or invalid, and did not offer to pay Mr Moran's costs. 9 The trustee relied upon the following course of events in support of her contention that she had not acted unreasonably in her defence of Mr Moran's application to set aside the summons. (1) By email on 2 July 2024, the trustee's solicitor wrote to Mr Moran's solicitor, seeking to confer regarding the summons and Mr Moran's application to set it aside. (2) By email on 18 August 2024, Mr Moran's solicitor responded to the trustee's solicitor, asking that, if the trustee proposed to apply to amend the summons, she provide a minute of the amendments she proposed. (3) By email on 29 August 2024, the trustee's solicitor provided to Mr Moran's solicitor a proposed amended summons that would have addressed some of the deficiencies raised by Mr Moran in his application. The amended summons was provided on the basis that the trustee did not concede that the summons was invalid, but the terms of the email also inquired whether Mr Moran "consents to the amendments to reduce the scope of the dispute before the court". The amendments proposed by the trustee would have limited the summons so as to avoid the most obvious defect (by limiting the documents sought by the summons to documents in Mr Moran's possession) and would have imposed temporal limitations on some other categories of documents sought. (4) On 2 September 2024, Mr Moran's solicitor communicated Mr Moran's rejection of the trustee's offer to consent to the amendment of the summons, and offered to conclude the dispute on the basis that the trustee would consent to the discharge of the summons in its entirety. (5) Also on 2 September 2024, Mr Moran filed his written submissions in support of the application. The submissions raised further bases for objection to particular categories of documents sought by the summons, which had not been apparent from the application or supporting affidavit. (6) On 9 September 2024, the trustee filed her written submissions, which contained a concession that the summons was defective insofar as it failed to confine the classes of documents sought to documents in the possession of Mr Moran, and invited the Court to amend the summons in one of the ways earlier foreshadowed by the trustee's solicitor. 10 Although I ultimately concluded that the summons to Mr Moran was defective in relation to each of the categories of documents sought, and for several distinct reasons, I do not consider that the trustee acted unreasonably in maintaining her argument that the summons should be amended, rather than discharged. Even though, in this case, I considered that discretionary considerations favoured setting aside the summons rather than amending it, the course of amending a defective summons is one which the Court has previously taken: Re Osenton; Ex parte Osenton v Worrell (Unreported, Federal Court of Australia, 3 March 1995, BC9507765, Cooper J) at 38; Roufeil v Fiore, in the matter of the Bankrupt Estate of Peter Andrew Fiore (No 2) [2019] FCA 916 at [78]. The Court in those cases considered that it was appropriate to amend the summonses in question. It was not unreasonable for the trustee to maintain the position that the Court's discretion should be exercised in the same way in this case. 11 It is true that costs could potentially have been avoided had the trustee, soon after her appointment, withdrawn the summons and issued a fresh summons which addressed some or all of the alleged defects relied upon by Mr Moran. With the benefit of hindsight, it can be seen that it would have been more efficient and cost-effective for the trustee to have issued a fresh summons to Mr Moran which avoided those defects that I ultimately found to exist. 12 However, acting reasonably, the trustee was not required to accept without contest every argument advanced by Mr Moran, or even every argument on which he ultimately succeeded. She could not know for sure which of Mr Moran's arguments would be successful and therefore which (if any) further amendments would be required to the summons. In the event, some of Mr Moran's arguments succeeded and some did not. Had the trustee issued a new summons to Mr Moran which addressed some but not all of the alleged defects, that could potentially have given rise to a further application to set aside the new summons, resulting in further delay and cost. It was not unreasonable for the trustee to argue at least some of the issues she did, and it was apparent from the correspondence between the parties that anything less than a complete capitulation on the part of the trustee would not have resolved the issues in dispute. 13 I accept that the trustee made genuine attempts to settle Mr Moran's application, as well as offering to narrow the remaining issues in dispute. Although the trustee did not clearly and unconditionally concede that the summons was defective in failing expressly to confine the documents sought to documents in Mr Moran's possession prior to the filing of her written submissions, it was apparent from the correspondence that she would have been willing to do so if that would resolve the dispute. In all the circumstances, I do not consider that it should be concluded that the conduct of the trustee was such that the costs of defending Mr Moran's application were not costs properly incurred in the course of administering his bankrupt estate.

Conclusion 14 I decline to make an order that the trustee be disentitled to indemnity out of the bankrupt estate for the costs payable by her to Mr Moran in respect of Mr Moran's application for the discharge of the summons issued to him. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McDonald.

SCHEDULE OF PARTIES WAD 47 of 2024 Interested Parties Fourth Interested Person: NICHOLAS JOHN MANN Fifth Interested Person: GINO D'ANNA