THE HEARING BEFORE THE PRIMARY JUDGE
26 The hearing before the primary judge took place on 25 and 26 May 2011. The evidence relied upon by Barlaw included two affidavits made by Mr Barrak and two affidavits made by Mr Crouch. Mr Barrak and Mr Crouch were both cross-examined. Other evidence before the primary judge consisted of hundreds of pages of documentary material produced on subpoena which was tendered by Barlaw, much of which evidence has been reproduced in the appeal books.
27 Counsel for each party provided the primary judge with written submissions, and also addressed his Honour orally. It is necessary to examine closely the way in which Barlaw's case was presented to the primary judge by Barlaw's counsel.
28 Some weeks before the hearing commenced, Barlaw provided the primary judge with a written submission. Barlaw's written submission to the primary judge, in explaining why an order for Mr Crouch's removal as Mr Bartolo's trustee was required, stated (at para 5):
The essential ground is that Mr Crouch has shown undue partiality to the Bankrupt and alleged creditors closely related to him, to the disadvantage of the other creditors, of whom the applicant is the largest unsecured creditor.
29 After referring to various parts of the affidavit evidence that had been filed, most of which was from Mr Barrak, the written submission concluded (at para 21):
The appropriate order is for Mr Crouch's removal, with an order that his remuneration as Controlling Trustee and Trustee not be payable from the bankrupt estate, nor his costs of this litigation. Failing this, the Court should give directions for the proper administration of the estate.
30 In his opening submissions to the primary judge, counsel for Barlaw made some observations concerning the first of the declarations sought by his client. Counsel said:
There has been a concession in evidence on the part of the respondent trustee that the demand was not justified and that therefore the demand will not be pressed against the applicant. To settle the matter for good and all, I would seek that a declaration be made in terms of paragraph 1 in any case so that the matter is settled for the future administration of the estate regardless of by whom that administration occurs.
31 Counsel also stated that his client wished to press for an order removing Mr Crouch from his position as trustee of Mr Bartolo's estate. Counsel said (T 11):
If the court were favourable to that and were to make such an order the greater part of the other particular concerns of the applicant would be met in that there would be a fresh consideration by the new trustee of the gravamen of the case which is the related party claims of the estate, their validity and so forth. So that paragraphs 2 and 3 would probably become a non-event in the event of an order in terms of paragraph 4 being made.
32 He then turned to order 5 as claimed in the originating process whereby Barlaw sought an order for an inquiry pursuant to s 179 of the Act. As to this counsel said (T 11) "[a]s regards paragraph 5, this is in fact the inquiry because all the material circumstances are before the court on affidavit." Thus, the order for any inquiry sought by Barlaw in its application (order 5) as an alternative to an order for Mr Crouch's removal (order 4) was never pressed by Barlaw.
33 After counsel for Barlaw opened the case, the primary judge made the following observations which were directed at counsel for Barlaw in particular (T 9):
… there might be benefit in just giving you a short time to take instructions. My position is that if Mr Crouch wishes to tender his resignation to the court I would be minded to accept it, given the unfortunate history of dealings between him in his administration and a major creditor. It's obvious to me that that rift cannot be healed and I think the best interests of creditors would probably be served by having a new registered trustee take over the administration. The issues then are one of the trustee's costs and anything incidental. So if you wish to take instructions on that I will give you a short opportunity to do so.
34 The matter was then adjourned for a short time. Shortly afterwards the hearing resumed and counsel for Barlaw informed his Honour that the matter would proceed. The parties then began indicating what evidence they proposed to rely upon. Counsel for Mr Crouch indicated that he had objections to some of Barlaw's evidence. His Honour proposed that the evidence be "presented provisionally subject to submissions". Counsel for both parties agreed to this course. His Honour never came to rule upon any of Mr Crouch's objections to evidence presumably because nothing more was said concerning admissibility in final submissions.
35 Mr Barrak gave evidence, and was cross-examined for about three hours. On the second day of the hearing Mr Crouch gave evidence. In his evidence-in-chief Mr Crouch corrected a number of paragraphs in his affidavits (I mention this because it is a matter raised in Barlaw's grounds of appeal). Mr Crouch was then cross-examined for approximately two hours.
36 Evidence was also given by Mr O'Brien, an inspector with the Insolvency and Trustee Service Australia (ITSA) for the Inspector General in Bankruptcy, who was called by Mr Crouch. Mr O'Brien was present during the creditors' meeting held on 19 November 2010 at Mr Crouch's offices. His recollection was that his superior at ITSA, Mr Findlay, asked him to attend the meeting at Mr Barrak's request. I will say a little more about Mr O'Brien's evidence later in these reasons.
37 After Mr O'Brien's evidence was completed counsel commenced submissions. Counsel for Barlaw began and the following exchange took place before the primary judge (T 167-168):
COUNSEL: … Your Honour, the first, and practically speaking, the only cab off the rank is whether the court having in effect conducted its enquiry into the conduct of the respondent, Mr Crouch, removes him or not. If it were sufficient for the purpose of the making of an order to remove that there had been an irretrievable breakdown of relations between the trustee and a creditor, then the case would be unquestionably made and I would hardly need to speak further.
HIS HONOUR: Yes but I think there's a difference between what might be a desirable outcome and what justifies enforced removal.
COUNSEL: Yes, well, it is an entirely discretionary decision of course under section 179.
HIS HONOUR: Yes.
COUNSEL: And the respondent is a trustee and is obliged to exercise its fiduciary duties according to the high standards that apply to trustees; the trustee in bankruptcy being no different from any other trustee in general principle but although, albeit, that he has procedures that are to be followed.
HIS HONOUR: But the authorities as I understand it indicate that the available grounds for removal tend to be incidents of impropriety or partiality.
COUNSEL: Yes, well, in the present case, I will deal with impropriety first. I don't go so far as to say as that there has been dishonest conduct on the part of Mr Crouch. I do go so far as to say that he has shown from since before his appointment as trustee in bankruptcy, indeed from as far as appears from the evidence from the moment on at which he was first requested by the debtor's representatives to consider appointment as a controlling trustee, a distinct partiality shown by himself towards the debtor, and it really amounts to the same thing in this case, what can be called the related party creditors. To sum up there are some remarkable features of this case. Putting on one side the $1 million mortgage on Schofields property, the largest creditors and the largest group of creditors are these related party creditors; they being the parents, the brother and the wife of the debtor and certain others who are closely connected with him.
From the outset, and certainly from the time of the creditors meeting convened under part 10, all of those persons have proceeded together in the matter as far as appears, and the appointment by all of them of Miss Tracey Bartolo as proxy at that creditors meeting is the chief evidence of that. It is quite evident that there is, in my submission, that there is an attitude of manoeuvre and tactics discernible in the attitude taken by the related party creditors to this insolvency as soon - from the date that it commenced. If it is the case that the parents and wife and brother are genuinely owed these very substantial debts, and the parents being the chief players there, and that moreover that those debts are secured as is asserted, it is extraordinary that they have represented their interests throughout in the way that they have. On the face of it the parents are owed on their final statement of claim before the creditors meeting over $600,000 secured by their son, the greater part of which has been owing, the principal at least, ever since 1992.
38 Counsel for Barlaw went on to submit (T 171) that Mr Crouch should not have accepted appointment as Mr Bartolo's trustee in bankruptcy. Counsel submitted that apart from "inviting a big argument with Mr Barrak" it was also an unacceptable decision because to that point Mr Crouch had displayed partiality towards one camp over another and continued to do so.
39 During the course of closing submissions, the Federal Magistrate observed that Mr Crouch had not yet called for proofs of debt. Counsel for Barlaw, who accepted this, stated (T 172):
No, he hasn't called for proof [sic] yet but it seems clear from, at the very least, the implication of his affidavits first and second that his opinion is that the resources of this small estate are not adequate to allow, in the interests of all creditors, a formal calling of proofs of debt and adjudication process because he has come to the conclusion that the ultimate equity available to him, after securities, is not going to be enough to pay any but a very small dividend to creditors. On the assumptions he has made that's probably a correct conclusion.
But it can't unfortunately allay the concern that the applicant has that Mr Crouch has, in effect, been manoeuvred to this situation by the very fact of these questionable related party debts that he, Mr Crouch, won't seriously investigate and question.
40 Counsel for Barlaw addressed the matter of the sale by Mr Crouch of Mr Bartolo's half share in the Quakers Hill property to Mrs Bartolo. Counsel submitted:
But further than that, that he, Mr Crouch, has been minded to accept as valid to the extent of treating them as the factor that causes him to enter into this contract of sale of the debtor's half interest in Quakers Hill to Ms Bartolo. Now, your Honour, the situation is this, is exhibit 8, it's exchanged on 13 May. We're told that it is a contract on foot. So what's done is done. My camp were not on notice that contracts had exchanged until yesterday.
41 Counsel then proceeded to explain why, in his submissions, orders should be made restraining Mr Crouch from proceeding with a sale of Mr Bartolo's half share in the Quakers Hill property to Mrs Bartolo. This was in spite of the fact that no such relief was sought in the application.
42 It will be necessary to return to the matter of the Quakers Hill property later in these reasons. However, the proposition that, in agreeing to sell Mr Bartolo's half share to Mrs Bartolo on the terms agreed, Mr Crouch was accepting that the claims of the related party creditors were valid is based upon a misconception: viz Mr Bartolo has, or at least had, substantially more than $100,000 worth of equity in the Quakers Hill property even if the related party claims are assumed to be invalid. This view of Mr Bartolo's equity position in relation to the Quakers Hill property is not supported by the evidence.