Baral v Official Trustee in Bankruptcy

Federal Court of Australia|1998-03-03|Before: Windeyer J, Lehane J

Background 1 The second respondent, Mr Steinberg, became bankrupt when, on 15 April 1992, a sequestration order was made against his estate. He was discharged from bankruptcy, by force of s 149 of the Bankruptcy Act 1966 (Cth), on 9 May 1995. 2 On 27 August 1997, Mr Steinberg commenced proceedings in the Equity Division of the Supreme Court of New South Wales against five defendants, two of whom are the applicants in this proceeding. In the Equity Division proceedings Mr Steinberg claims an interest in certain property principally on the basis that it was property of a partnership of which he was a member. That claim (I shall refer to it, and to the alleged entitlement on which it is based, as the "partnership claim") is one which he had when he became a bankrupt; consequently, it vested in the first respondent, the Official Trustee, and, of course, continued to vest in the Official Trustee despite Mr Steinberg's discharge from bankruptcy. Mr Steinberg had not disclosed it to the Official Trustee; nor had he disclosed that, at the time he became bankrupt, money was payable to him under a mediated agreement relating to the partnership. 3 In a letter to the Official Trustee dated 24 September 1997 Mr Steinberg's solicitors disclosed the partnership claim in the following terms: "The cause of action arises out of an oral partnership agreement. Our client alleges that he was a partner. The partnership acquired certain land in Brisbane for retail development. The property was purchased in the names of two companies rather than in the names of the individual partners. Subsequently some of the other partners declined to recognise our client's interest in the development. It is likely that our client failed to disclose his interest in the development in his statement of assets and liabilities that he gave to the Official Trustee. However he did disclose that he was a developer who was working on various projects." 4 Mr Steinberg's solicitors suggested that "the action has a value of upwards of $500,000.00 if our client fully succeeds". They suggested various courses of action to the Official Trustee, one of which was that the Official Trustee should sell the partnership claim to Mr Steinberg. Ultimately it was agreed that that would be done, and by a deed of assignment dated 31 October 1997 the Official Trustee assigned the partnership claim to Mr Steinberg in consideration of an immediate payment of $750 together with "15% of the net proceeds of any judgment or settlement of the chose in action such amount being the proceeds of judgment [or] settlement less reasonable legal costs and disbursements recovered from all or one or any of the Defendants". 5 At the time when that deed of assignment was executed s 134(1)(a) of the Bankruptcy Act empowered the Official Trustee to sell all or any part of the property of the bankrupt and s 135(1)(b) empowered the Official Trustee to: "… accept, without terms or conditions, or subject to terms and conditions, a sum of money payable at a future time as the consideration or part of the consideration for the sale of any property of the bankrupt; …" 6 Section 135 of the Bankruptcy Act had, however, been amended by the Bankruptcy Legislation Amendment Act 1996. The amendment took effect on 16 December 1996: that is, after Mr Steinberg's discharge from bankruptcy but before the execution of the deed of assignment. Before the amendment, s 135(1) provided: "135.(1) The trustee may, with the permission of the creditors granted by resolution passed at a meeting of the creditors, with the permission of the committee of inspection or with the leave of the Court, do all or any of the following things: (a) sell, by private contract, any property of the bankrupt having a net value exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134; (b) accept, without terms or conditions, or subject to terms and conditions, a sum of money payable at a future time as the consideration or part of the consideration for the sale of any property of the bankrupt; …" 7 Thus, the assignment to Mr Steinberg, if s 135(1) applied in its earlier form, required the permission of creditors or of the committee of inspection or the leave of the Court (no prior permission or leave was obtained). If the section applied in its amended form, no permission or leave was required. By virtue of Item 459 in Schedule 1 to the Bankruptcy Legislation Amendment Act, the amendment of s 135(1) applied: "… to all bankruptcies current on or after the commencement of this Schedule." 8 If Mr Steinberg's bankruptcy was "current" on 16 December 1996, the amended provision applied; if it was not then current, the section applied in its unamended form. 9 In those circumstances, Windeyer J heard argument on a separate question arising in the Equity Division proceedings, on which his Honour gave judgment on 3 March 1998. The separate question was: "Whether the plaintiff's bankruptcy, which commenced on 15 April 1992, was a bankruptcy "current on or after the commencement" of the Schedule to the Bankruptcy Legislation Amendment Act 1996 which amended s 135 of the Bankruptcy Act 1966 …". 10 His Honour answered the separate question "No", on the basis that by "current" bankruptcies the amending legislation was meant to refer to bankruptcies of persons not the administration of bankrupt estates. Consequently, because Mr Steinberg had been discharged from bankruptcy before the date of the deed of assignment, his bankruptcy was not "current" when the Official Trustee purported to assign the partnership claim. 11 That answer gave rise to a further set of separate questions, as follows: "1. Does s 135(1) of the Bankruptcy Act 1966, as applicable at the time of the assignment, apply to the assignment? 2. If the answer to question 1 is yes, then: (a) was the assignment for valuable consideration; (b) was the plaintiff a person who, with regard to the assignment, acted in good faith and without notice of the failure to obtain the permission or leave as required by s 135(1) of the Bankruptcy Act? 3. If the answer to either 2(a) or 2(b) above is no, do the defendants have standing to challenge the validity of the assignment? 4. If the answer to 3 is yes, is the assignment valid?" 12 The second question concerned subs (4) of s 135; that subsection also was repealed by the amending legislation, so far as it affected bankruptcies "current" on 16 December 1996. It provided: "(4) The failure by a trustee to obtain the permission or leave required by subsection (1) in relation to a transaction by the trustee does not affect the validity of the transaction if: (a) the transaction was for valuable consideration; and (b) the person with whom it took place acted in good faith and without notice of the failure to obtain the permission or leave." 13 His Honour, in a judgment given on 28 May 1998, answered the further set of separate questions as follows: "1. Yes 2. (a) Yes (b) No 3. Yes 4. No" 14 The questions were, of course, directed to the standing of Mr Steinberg to bring the Equity Division proceedings and the effect of the answer to question 4 was that he had no standing. At the conclusion of his judgment, however, his Honour said this (at 9): "While the answer to question 4 would ordinarily bring the proceedings to an end I do not think that they should be dismissed at this stage as the plaintiff may wish to apply for retrospective leave [or] perhaps retrospective consent of the creditors." 15 The Official Trustee is not party to the Equity Division proceedings and did not take part in the argument on the separate questions. It was, however, informed that the separate questions were to be heard. The Official Trustee takes the view, and maintains it despite the judgments of Windeyer J, that "current", in the present context, refers to a current administration not current status. I shall return to the basis of that belief; there is no doubt, however, that it coloured the Official Trustee's attitude to later events. The Official Trustee is not, of course, bound in any formal sense by the answers to the separate questions, but the judgments of Windeyer J are authority on important issues concerning legislation in the administration of which the Official Trustee has an important role to play. 16 On the day after judgment answering the second set of separate questions was given, the applicants offered to purchase, for $20,000, the claim pursued in the Equity Division proceedings or to settle those proceedings for that sum. The sum was calculated as an amount sufficient to provide a small surplus after satisfying the claim (about $13,000) of the only remaining creditor who had proved in the bankruptcy, the Deputy Commissioner of Taxation. The Official Trustee took the view that, having assigned the claim to Mr Steinberg, he was not free to accept the applicant's offer; and Mr Steinberg threatened the possibility of legal action against the Official Trustee on the footing that the assignment, for which he had given consideration, was ineffective. Accordingly, the Official Trustee on 20 July 1998 called a meeting of creditors to be held on 7 August 1998 for the purpose of giving retrospective approval to the assignment to Mr Steinberg. The meeting was held. It was attended by a representative of the Deputy Commissioner of Taxation, as the sole proved creditor, representatives of the Official Trustee and Mr Steinberg and his solicitor. The following motion was passed: "That creditors approve and ratify the prior sale to Walter Steinberg, a discharged bankrupt, by the Official Trustee in Bankruptcy as trustee of his bankrupt estate, of the chose in action referred to, and on the terms specified in the Deed of Assignment …". 17 It will be necessary later to consider some of those events in greater detail.

Nature of proceedings: application and cross claim 18 This proceeding was commenced on 20 August 1998. By their amended application, the applicants, invoking the court's jurisdiction under s 178 of the Bankruptcy Act,seek a declaration that the resolution of the meeting of creditors "is void and is of no effect for the purposes of section 135 of the Bankruptcy Act 1966, as it applied immediately prior to 15 December 1996" and an order setting the resolution aside. The claim for those two orders is pressed. In the amended application the applicants also sought orders granting leave to the Official Trustee to assign the "chose in action" to the applicants for $20,000 and an order requiring the Official Trustee to do all things necessary to effect that assignment. That relief, however, is no longer sought, nor is an alternative claim for an order that the Official Trustee be removed as trustee of the estate. 19 By a cross claim filed on 15 November 1998 Mr Steinberg seeks a declaration that the resolution of the meeting of creditors is valid, binding and effective as a ratification of the assignment to Mr Steinberg or, in the alternative, a declaration that the assignment itself was valid and binding. Alternatively, Mr Steinberg seeks an order granting retrospective leave to the Official Trustee to effect the assignment to Mr Steinberg. In argument, counsel for the Official Trustee submitted that the Court should grant that leave. The Official Trustee has not itself lodged a cross claim, nor did it lead any evidence. It took part, however, in argument in opposition to the claims of the applicants and in support of the alternative relief sought by Mr Steinberg. 20 Those of the claims and cross claims which are pursued give rise to three questions. First, is the assignment to Mr Steinberg valid? Secondly, if permission or leave was required for an effective assignment, might that permission or leave be given retrospectively? Thirdly, if so, was the resolution of the meeting of creditors validly passed, and should it be allowed to stand?

Is the assignment valid? 21 After some hesitation, during the hearing I formed the view, urged on me by counsel for the applicants and to which, in the end, the respondents did not demur, that the question as to what is meant, for present purposes, by a "current" bankruptcy was not an easy question; that the view taken by Windeyer J was clearly open; and that in the circumstances I should accept his Honour's decision as correct and proceed to deal with the other issues on that footing. That seemed appropriate particularly in circumstances where his Honour's judgments, though interlocutory, were given in proceedings to which the applicant and Mr Steinberg are parties and in which it can be expected that, in due course, final orders will be made reflecting the views expressed in the judgments. In those circumstances, though some argument on the question took place before me, that argument was not as extensive as it might otherwise have been. 22 Nevertheless, the Official Trustee is not a party to the Equity Division proceedings. It takes, and has acted upon, a view contrary to that taken by Windeyer J. The question may well be a significant one in the administration of a number of bankrupt estates; and there are matters, which I think may have some significance, which seem not to have been brought to his Honour's attention. Additionally, as will appear, I do not think I can reach a decision as to the appropriateness of particular relief sought in the application and cross claim without giving some independent consideration to what is meant by "current". In those circumstances I think I must, at least tentatively, state the views which I have formed and the reasoning on which I base them. 23 No help is given by the definition of "bankruptcy" in s 5(1) of the Bankruptcy Act: the word is defined only "in relation to jurisdiction or proceedings" as meaning "any jurisdiction or proceedings under or by virtue of this Act". There is, of course, no definition of "current". I respectfully agree with the view expressed by Windeyer J in his earlier judgment, at 6, that "current" in its ordinary meaning should be taken to refer to a bankruptcy on foot at the relevant date. I agree also that an appropriate starting point is s 43(2) of the Bankruptcy Act: "Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until: (a) he or she is discharged by force of subsection 149(1) or in accordance with Division 3 of Part VII; or (b) his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B." 24 His Honour draws attention to the similarity between that provision and the corresponding section of the English Insolvency Act 1986: "278. The bankruptcy of an individual against whom a bankruptcy order has been made - (a) commences with the day on which the order is made, and (b) continues until the individual is discharged under the following provisions of this Chapter." 25 But the reference, in the Australian provision, to annulment may not be without significance. Certainly it may be accepted (Quinn v Official Trustee in Bankruptcy (1996) 63 FCR 136) that in many contexts (though not all: Official Receiver v Todd (1986) 14 FCR 177, and see below) "bankrupt", where used in the Bankruptcy Act, does not include a discharged bankrupt. Nevertheless, when a bankrupt is discharged from bankruptcy the property which, upon the making of the sequestration order, vested in the trustee remains vested and the administration of that property by the trustee continues substantially unaffected by the discharge. It is not inaccurate to describe the continuing administration of that property as administration in bankruptcy. Property which vests in the trustee on sequestration reverts to the bankrupt only if the bankruptcy is annulled. As s 43(2) says, a bankruptcy may be annulled under ss 74(5), 153A(1) or 153B. Annulment under s 74(5) is possible (Quinn) only before the bankrupt is discharged; but, if "all the bankrupt's debts" (a defined expression: see s 153A(6)) are paid in full after discharge, "the bankruptcy is annulled" by force of s 153A(1) as it would have been if the payment had been made for discharge: Re Oates; ex parte Deputy Commissioner of Taxation (1987) 17 FLR 402; Oates v Commissioner of Taxation (1990) 27 FCR 289; Quinn at 139. Those authorities also support the proposition that the Court may make an order "annulling the bankruptcy" under s 153B after, as well as before, discharge, though no doubt the occasions when it will be appropriate to do so are likely to be rare indeed. If that is right, for this purpose at least there remains, after discharge, a "bankruptcy" which can be "annulled". 26 Perhaps more importantly, the word "bankruptcy" is used consistently in Pt VI of the Bankruptcy Act, dealing with the administration of the property in the bankrupt estate, in a way which clearly refers to the administration of the estate, both before and after discharge; and, it may be added, the word "bankrupt" is used in contexts where it is clearly intended to include a discharged bankrupt: see, as perhaps the most plain example, s 145(1). So, for example, the payments to be made first, in the order of priority prescribed by s 109(1), are: "… in the order prescribed by the regulations, … the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee …" 27 The "administration of the bankruptcy" in that context does not cease upon discharge of the bankrupt. Similarly, dividends may be declared successively during the administration, and both before and after discharge; and the trustee is required, before declaring any dividend, to invite persons claiming to be creditors, who have not yet lodged proofs of debt, to do so (s 140(5)); a person who responds to such an invitation is undoubtedly "a creditor who desires to prove a debt in the bankruptcy" (s 84(1)). In other words, for a number of purposes there is taken to be a bankruptcy which remains on foot for so long as the administration of the bankrupt estate continues; and generally, for those purposes, the discharge of the bankrupt is of little significance. 28 The particular provisions in question here, s 134 and s 135, are in Pt VI of the Bankruptcy Act and have to do with powers exercisable by the trustee in the administration of the estate, whether before or after the bankrupt's discharge. The powers are exercisable in respect of property in which, it may be said without material inaccuracy, the bankrupt has an interest which does not change on discharge: in particular, the bankrupt is entitled to any surplus if all proved debts and interest, and the expenses of the administration, are paid in full so that the bankruptcy is annulled under s 153A. Though I agree with Windeyer J that it is a pity that the legislature did not use unambiguous words, in this context a "current" bankruptcy seems to me, with respect, more naturally to refer to the administration of a bankrupt estate which remains on foot rather than the status of a person against whose estate a sequestration order has been made but who has not been discharged from bankruptcy. To put the matter in a different way, there is no obvious reason why the legislature, in deciding (as undoubtedly it did) to apply the amended provisions to administrations already in progress should have drawn a line - and an artificial one - at the date of discharge. 29 The Official Trustee relied, in his dealings with the other parties, on what the explanatory memorandum accompanying the amending legislation said about the changes to s 135: "92.5 Section 135 as proposed to be amended would apply in relation to all bankruptcies occurring after the commencement of the amendments, and all existing bankruptcies in which a final dividend has not been paid." 30 As is the way with such memoranda, I doubt that this helps much. It begs the question, what is meant by a "bankruptcy". At least, however, it is not inconsistent with the proposition that, for these purposes, "bankruptcy" refers to administration rather than status. 31 There are set out in the earlier of the judgments of Windeyer J a list of those amendments which, by reason of the transitional provisions in the amending legislation, applied from 16 December 1996 to bankruptcies "current on or after the commencement of the schedule". I have considered each of them; they seem to have been carefully chosen and none of them, in my view, suggests any difficulty in consistently applying the approach which I favour. Windeyer J specifically refers to two provisions, s 139K and s 81(1). The definition of "contribution assessment period" in s 139K is, in my view, neutral, given the final termination point provided in par (b). The words in s 81(1), "whether before or after the end of the bankruptcy", may, I think, be explained as a somewhat unhappy attempt to eliminate any lingering doubt following the "sharp difference of opinion" in Todd (Quinn at 139). 32 Senior counsel for the applicants is recorded as having submitted to Windeyer J that a bankruptcy cannot on any basis be "current" if the file has been closed by the Official Trustee, that is, if the Official Trustee has decided that there is nothing further to recover and nothing to administer or distribute, so that, no further action being required, the file may be administratively "closed". Such a submission, in my view, could not be accepted. If, despite all expectations (as has happened here), property is found which vested in the trustee, the trustee must get it in and administer it in accordance with the Bankruptcy Act. If the file has been closed, it must be reopened. 33 If effect were to be given to the view I have formed, the result would be that the Official Trustee's assignment to Mr Steinberg is valid. In circumstances where the Supreme Court has reached a contrary conclusion on that question, however, in proceedings between among others the applicants and the second respondents, and where the argument I heard on the question was less than complete, I do not think it would be appropriate for me to decide this case, now, on that basis. I shall therefore consider the other issues which were raised. 34 Before doing so, however, I must refer to a submission by counsel for the Official Trustee that the second of the judgments in the Equity Division proceedings was given without jurisdiction. The submission relied on s 27(1) of the Bankruptcy Act: "The Federal Court has jurisdiction in bankruptcy, and that jurisdiction is exclusive of the jurisdiction of all courts other than the jurisdiction of the High Court under section 75 of the Constitution." 35 The submission must be rejected. A sufficient reason - there may well be others - is that the Supreme Court did not purport to exercise bankruptcy jurisdiction. It decided a question of standing arising in proceedings before it and, in doing so, applied the provisions of the Bankruptcy Act as part of the relevant law.

Retrospective leave or consent? 36 In Wilde v Spratt (1986) 13 FCR 284 Lockhart J said, at 296, 297: "The effect of a trustee's failure to obtain permission or leave under s 135(1) is expressed by s 135(4) as not affecting the validity of the transaction if it was for valuable consideration and the person with whom it took place acted in good faith and without notice of the failure to obtain the permission or leave. But the section is silent as to the particular effect upon validity that results if the subsection is inapplicable. Whether the failure of the trustee to obtain permission or leave renders the transaction invalid, void or voidable is a matter of some nicety which need not be decided in this case, especially since it was not argued before us. I sound a cautionary note about the trial judge's finding: "As there was no permission or leave granted (or applied for), the compromise must be held invalid unless it is saved by s 135(4) …." Sections comparable to s 135 of the Act have existed for many years in bankruptcy legislation in this country, the United Kingdom and elsewhere, and they find their counterparts in comparable provisions of legislation relating to the winding up of companies where the approval of creditors or the committee of inspection or the leave of the court is necessary for the liquidator to exercise certain of his powers. Different views have been expressed on this question in the field of winding up and are discussed in B H McPherson, The Law of Company Liquidation (2nd ed, 1980), pp 219 and 220. It should also be noted that the courts, in their control over companies in liquidation, may give retrospective sanction in a proper case to action taken without the requisite approval first being obtained: In re Associated Travel Leisure and Services Ltd (In Liquidation) [1978] 1 WLR 547; and see McPherson, The Law of Company Liquidation (supra, at p 219). I mention these matters because it would be wrong to assume that, because a person cannot bring himself within s 134(4), the relevant transaction is necessarily bad in law or unable to be sanctioned retrospectively. As s 134(4) does apply in this case these further questions do not arise." 37 Fisher J, at 284, agreed with the conclusion and reasons of Lockhart J; Spender J, at 297, expressed his entire agreement with those reasons. 38 In England it seems to be established that a failure to obtain an approval under broadly comparable provisions renders actions by a trustee voidable, rather than void: Weddell v J A Pearce & Major [1988] Ch 26; but those provisions do not include a counterpart of s 135(4). That subsection assumes that if the conditions in par (a) and par (b) are not satisfied "validity" may be "affected" where permission is not obtained from a meeting of creditors or a committee of inspection and the leave of the Court is not given. 39 As the passage in Wilde makes clear, however, it does not follow that permission or leave may not be given retrospectively, giving a transaction validity as from its date. Whether or not that is possible is to be decided, in my view, by construing the provision having regard to its evident purpose. For that reason authorities concerning the effect of other provisions, operating in quite different contexts, are by no means determinative. Nor, I think, is much help to be gained from authorities concerning ultra vires acts or the ratification, by a competent principal, of an act done by an agent for which the agent had no prior authority: that, particularly, is a quite different field of discourse. 40 The requirement that the trustee obtain permission or leave to enter into transactions of particular kinds must be taken to have been incorporated, primarily at least, for the protection or benefit of creditors. Thus, in Re Cirillo; Ex parte Official Trustee in Bankruptcy (1996) 65 FCR 576 at 591 Branson J expressed the view that a question whether leave should be granted under s 135(1) should be answered "[having] regard to the interests of the creditors as a whole of the two bankrupt estates involved, and to the legitimate interests of the bankrupts". In Re A Debtor [1984] 3 All ER 995 at 997, Scott J described the purpose of corresponding English legislation as follows: "The purpose of s 56 is to protect the bankrupt's estate. A trustee who does one or other of the acts for which permission is required under s 56 without first obtaining the requisite sanction cannot (subject to the question of a retrospective sanction, to which I will return later in this judgment) cast on the estate his costs incurred in so doing. The purpose of the section is not, however, to protect third parties … " 41 It may be noted that Scott J held that he had power to grant leave retrospectively. Not only is the requirement of permission or leave not intended for the benefit of third parties dealing with a trustee: it seems highly likely that subs (4) was incorporated because of a fear that the requirement that permission or leave be obtained might, in circumstances where it was not obtained, operate to the prejudice of third parties dealing with a trustee. 42 Once that is seen, it becomes evident, I think, that the purpose of the provision does not indicate a construction which requires permission or leave to be obtained in advance; indeed the purpose is more completely served if the provision is construed so that retrospective permission or leave is sufficient. Undoubtedly Wilde leaves it open to me so to hold (it may even be thought to provide some encouragement), and I do so. 43 The decision of the High Court in Emanuele v Australian Securities Commission (1997) 188 CLR 114 was cited in argument. In my view, the approach which I have taken is consistent with the reasons given in that case.

Should relief be granted under s 178 or s 179? 44 For the purpose of dealing with this question, I shall assume without deciding that the Court has power, under s 178 or s 179, to make the orders which the applicants seek. 45 The applicants' complaints may be summarised as follows. The Official Trustee took, and obstinately maintained despite the decisions in the Equity Division proceedings, a position contrary to the answers to the separate questions given in those proceedings. The report to creditors for the purposes of the meeting on 7 August proceeded on that basis. Particularly, the Official Trustee did not permit creditors to vote on the alternative proposal of the applicants, both because of its incorrect view of the law and because of a fear of legal action by Mr Steinberg. That threat placed the Official Trustee in a position of conflict of duty and interest; and in dealing with the creditor it preferred its interest in protecting itself against legal action. Thus, among other things, the Official Trustee failed to make adequate disclosure of findings of dishonesty made by Windeyer J in relation to certain evidence and conduct of Mr Steinberg. Nor did the Official Trustee see fit to offer any evidence on the application. 46 For obvious reasons, I do not think that the Official Trustee is to be criticised for forming the view which it took as to the effect of the transitional provisions in the amending legislation. Certainly, however, it might have been appropriate for the Official Trustee, following the decisions in the Equity Division proceedings, to give rather greater weight than it did to the possibility that it might have been wrong. The report to creditors stoutly maintained the Official Trustee's view of the law made no mention of the offer made by the applicants and did not refer (as a matter relevant to an assessment of the value of the partnership claim) to the findings made by Windeyer J on matters relevant to Mr Steinberg's credit. Particularly, his Honour found that aspects of the letter in which the partnership claim was disclosed to the Official Trustee, in order to seek an assignment, were in part dissembling and in part false. His Honour also held that Mr Steinberg had not made, as he should have made, full and open disclosure concerning the money payable to Mr Steinberg - amounting to $90,000 - under the mediated agreement. It is evident that his Honour was quite unimpressed by evidence which Mr Steinberg gave on those, and possibly other, topics. 47 It is important to recall that there was only one creditor, the Deputy Commissioner of Taxation, and that that creditor was represented at the meeting. The Deputy Commissioner had refused to discuss matters with the applicants or their solicitors, but had said to the solicitors that he was likely to follow the Official Trustee's advice. In addition, the Deputy Commissioner had been informed by the Official Trustee that the Official Trustee would be prepared to accept the offer from the applicants only if the Deputy Commissioner agreed to indemnify the Official Trustee against any claim by Mr Steinberg. That was a further aspect of the conduct of the Official Trustee criticised by the applicants. Finally - and this was criticised by the applicants as well - the Official Trustee did not permit the applicants or their solicitors to attend the meeting of creditors. 48 Against that background it is necessary to consider what happened at the meeting. Following vigorous prompting by Mr Steinberg's solicitors, considerably more was disclosed than the Deputy Commissioner might have gleaned from the report. Extensive minutes of the meeting are in evidence and the parties accept that I should treat them as stating accurately what happened (though, of course, the applicants suffered under the disadvantage that they were not present). 49 It was made clear to the creditor, by the representative of the Official Trustee, that the meeting was necessary "to ratify the assignment of a chose in action … to the discharged bankrupt". The view of the transitional provision taken by the Official Trustee was explained, as was the decision to the contrary in the Equity Division proceedings. The "President" (that is the representative of the Official Trustee) then tabled the letter by which the applicants offered to settle or purchase the partnership claim for $20,000. The minutes proceed to record this: "The letter was read by Ms Randell [the Deputy Commissioner's Representative]. The President advised that the offer was still open but the Official Trustee was not in a position to accept the offer for the following reasons: The Official Trustee considered that the cause of action had been validly assigned - there had been agreement reached to assign the chose in action and the Official Trustee was consequently not open to further offers[.] If the Deputy Commissioner of Taxation is the only creditor in the estate and the cause of action has a value greatly in excess of the $20,000 offered, the Official Trustee could be selling an asset vastly under its true value. In circumstances in which there are assets in the estate of potential value in excess of the amount required to annul the bankruptcy, Official Trustee must (on equity grounds) be especially aware of the interests of the bankrupt as well as creditors. This being the case, even if the Official Trustee was in a position to accept the offer, an indemnity would be required from the Deputy Commissioner of Taxation in recognition of the potential claim that might be made against the Official Trustee by the bankrupt. The President explained that the value of the cause of action was an unknown factor but what was known was that the credibility of Mr Steinberg had been called into question by his failure to declare to the Official Trustee in his statement of affairs or otherwise, the existence of the cause of action and other matter." 50 It will be recalled that the value of the claim in the Equity Division proceedings had been assessed, in correspondence with the Official Trustee, as "upwards of $500,000." 51 The minutes then record questioning of Mr Steinberg, both by the President and by Ms Randall. He was questioned about dealings leading to the payments that he had received under the mediated agreement. He was questioned also about his tax affairs and about other matters concerning his property and his liabilities. After this had continued for some time, the President offered a summary: "The President summarised the situation: that there was an asset that the Official Trustee had sold. A judge of the Supreme Court had held that the sale of the asset required the approval of creditors and consequently the meeting had been convened to do just that." 52 Following that summary Ms Randall moved that the assignment to Mr Steinberg be approved and ratified. She, representing the sole creditor, proceeded to vote in favour of the motion. Accordingly, it was carried. 53 It may be that aspects of the conduct of the Official Trustee before the meeting are open to criticism. But there was one creditor only, and that creditor was one well able to look after its interests. The creditor, when it came to vote, knew of the existence of the alternative offer and its terms. It knew what the Supreme Court had decided. It knew the views of the Official Trustee. It knew that, in the Equity Division proceedings, Mr Steinberg had been criticised concerning matters relevant to his credit and it had participated, through its representative, in what seems to have been vigorous questioning of Mr Steinberg eliciting, the minutes strongly suggest, answers which would have reinforced what had been said about the criticism of Mr Steinberg. 54 It is true that the minutes do not record any explicit disclosure of an actual threat of litigation made by Mr Steinberg. However, the request for an indemnity is put on the footing that there might be a potential claim should the Official Trustee sell an asset for less than its proper value in circumstances where there was a real prospect that, if the asset realised anything approaching its full value, the creditor would be paid in full and there would be a very substantial surplus to which Mr Steinberg would be entitled. If the Official Trustee was entitled to form that view of the circumstances - and on the evidence that view was clearly open - then it was not improper to seek an indemnity. 55 I was referred to a number of authorities about the duty of insolvency administrators to act impartially and to avoid situations leading to a reasonable apprehension that the administrator might be biased or inhibited from taking action at the interests of all creditors. Particularly, I was referred to Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230, Commonwealth of Australia v Irving (1996) 65 FCR 291 and Ungar v Haddonstone Pty Ltd (Hamilton J, Supreme Court of New South Wales, 22 December 1998, unreported). Accepting fully the principles for which those authorities stand, I do not think, having regard to the whole of the evidence, that any conduct of the Official Trustee vitiated the resolution adopted by the sole creditor at the meeting of 7 August. The Official Trustee had an obligation to inform the creditor but did not, in my view, have an obligation to permit the applicants to be present at the meeting to argue in opposition to the Official Trustee's views. In my view the creditor was in a position to make an informed decision. It was the beneficiary of the statutory requirement that permission be obtained. It decided this permission should be given; and there is no evidence that it is dissatisfied with its decision.

Conclusion 56 The result is that the application fails and will be dismissed. Given the views which I have expressed in these reasons, it would not be appropriate, in my view, to make any of the orders sought in the cross claim. I should not declare the assignment to Mr Steinberg to be valid in circumstances where, in proceedings to which he and the applicants are parties, the Supreme Court has held that it was not. On the other hand, in the light of the views which I have expressed, I think it is not appropriate that I declare the resolution to have been efficacious, still less that I grant retrospective leave to assign the partnership claim. In the unusual circumstances, in my view the appropriate orders are that both the application and the cross claim are dismissed. But the substance of the matter is that the respondents have been wholly successful and the applicants should pay their costs of the proceeding. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lehane.

Counsel for the Applicants: Mr D J Hammerschlag

Solicitor for the Applicants: Morgan Lewis Alter

Counsel for the First Respondent: Mr B J Skinner

Solicitor for the First Respondent: Shaw McDonald

Counsel for the Second Respondent: Mr G M McGrath

Solicitor for the Second Respondent: Packer & Austin

Date of Hearing: 1 February 1999

Date of Judgment: 11 February 1999

Bankruptcy Legislation Amendment Act 1996(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (14 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (8)

Cited By (1)