BC39 Pty Ltd v Rambaldi, in the matter of Wharington

REASONS FOR JUDGMENT 1 An examination under s 81 of the Bankruptcy Act 1966 (Cth) ("the Act") was scheduled to commence before a Registrar yesterday morning and continue for two more days. The examination relates to the affairs of the bankrupt estate of Mr Grant Wharington. Mr Wharington became bankrupt in May 2011 and Mr Gess Rambaldi and Mr Andrew Yeo were appointed joint and several trustees in his bankrupt estate. Summonses to attend for examination have been served on Marine Holdings Brisbane Pty Ltd ("MHB") and BC39 Pty Ltd ("BC39"). Mr David Price was the director of both companies. The summonses were issued on 17 September 2014. 2 On 24 September 2014 solicitors acting for MHB wrote to the solicitors acting for the trustees. The solicitors noted that Messrs Rambaldi and Yeo were both partners in the Melbourne partnership of Pitcher Partners. They advised that Pitcher Partners were the tax accountants for MHB and "its related entities". They further advised that MHB was involved in a major and confidential project on which Pitcher Partners had been engaged and continued to advise MHB. In so doing Pitcher Partners had been privy to MHB's financial affairs. In these circumstances the solicitors asserted that an untenable conflict of interest had arisen and sought immediate confirmation that the trustees would "immediately desist with any investigations into [MHB's] affairs, and those of its associated parties …". 3 The trustees' solicitors responded to the allegations and demand by letter dated 30 September 2014. That letter (formal parts omitted) read: "We act for Messrs Gess Rambaldi & Andrew Yeo, partners in the firm Pitcher Partners Melbourne. Our clients are the joint and several trustees of the bankrupt estate. You act for a number of parties associated with the bankrupt including Mr David Price, BC39 Pty Ltd (BC39) and Marine Holdings Brisbane Pty Ltd (MHB). Mr Price is a director of MHB and BC39. On 24 September 2014, you notified us that Pitcher Partners Brisbane were allegedly the tax agents for MHB and its related entities and were therefore privy to its financial affairs. Noting that our clients' current investigations in the bankrupt estate include the forthcoming public examination of Mr Price and the production of documents by MHB, you have asserted that our clients face a conflict of interest which requires them to resign their appointment as trustees of the bankrupt estate (Relevant Circumstances). You have referred to clause 6.18 of the ARITA Code of Practice (ARITA Code) to support your position. For the reasons set out below: a. Our clients do not believe that there is a conflict of interest which requires them to resign as trustees of the bankrupt estate; b. Safeguards have been implemented by our clients to ensure the integrity of the relevant relationships; c. Our clients have, or intend to take the steps identified herein in compliance with their professional obligations; d. Our clients do not intend to resign as trustee of the bankrupt estate, nor do they propose to take any further step forward to be removed as trustees. We are instructed as follows: Alleged Conflict 1. You assert that our clients have been or will be privy to your client's financial affairs. Inherent in this assertion are a number of presumptions concerning Pitcher Partners' structure and the management and use of information; namely that the insolvency department of Pitcher Partners Melbourne can (and does) access confidential, private and other sensitive information from a client file conducted by Pitcher Partners Brisbane. 2. Contrary to your assertions, our clients and their staff are not privy to any of your client's private or confidential information. 3. Pitcher Partners is a national association of independent firms, each of which operates as a separate independent business. The presumptions concerning access to information inferred in your letter of 24 September 2014 are incorrect, and such access has not occurred. 4. Policies, procedures and systems are in place for Pitcher Partners nationally to manage risk (including conflicts of interest) and to ensure that its legal, ethical and other professional responsibilities are monitored and complied with. It is Pitcher Partners' policy to: a. render professional services in relation to insolvency administrations in accordance with the provisions of the Corporations Act and Regulations, the Bankruptcy Act and Regulations and other relevant Statutes. b. conduct engagements in accordance with APES 110 Code of Ethics for Professional Accountants adopted by the Institute of Chartered Accountants in Australia (ICAA) and CPA Australia. c. apply APES 320 Quality and Control for Firms. d. apply APES 330 Insolvency Services. e. comply with the Australian Restructuring Insolvency & Turnaround Association (ARITA) Code of Professional Practice (ARITA Code). ARITA Code 5. As you note in your letter of 24 September 2014, the Relevant Circumstances have arisen inadvertently and subsequent to our clients' appointment as trustees of the bankrupt estate. The Relevant Circumstances would not have precluded our clients from having accepted their appointment. 6. Clause 6.18.1 of the Code authorises a Practitioner to continue with an administration where a Non-Precluded Relationship (as defined in the Code) is identified post appointment, subject to creditors being given an appropriately amended "Declaration of Independence, Relevant Relationships and Indemnities" (DIRRI). 7. An amended DIRRI was forwarded to creditors of the bankrupt estate on Friday 26 September 2014. 8. Notwithstanding that our clients believe that the Relevant Circumstances relate to a Non-Precluded Relationship, we note that even were they to relate to a Precluded Relationship, then provided the circumstances arose inadvertently, clause 6.18.2 of the Codes allows the Practitioner to apply to the Court for leave to continue and complete an otherwise substantially complete administration. APES 110 - Code of Ethics for Professional Accountants 9. Section 220 of APES 110, entitled 'Conflicts of Interest' provides that a Member in a Public Practice shall take reasonable steps to identify circumstances that could pose a conflict of interest; such circumstances potentially creating threats to compliance with the fundamental principles of the Standard. 10. Where identified, the Member is required to evaluate the significance of the threat and apply safeguards where necessary to eliminate the threats or reduce them to an 'Acceptable Level' (as defined by the Standard). 11. In this regard, and upon receipt of your letter of 24 September 2014, our clients immediately applied the following safeguards to the circumstances which might pose a threat to the confidentiality of your client's information: a. In relation to the Pitcher Partners Melbourne staff with the conduct of the file concerning the bankrupt estate, our clients notified each of them in writing that under no circumstances were they to seek to access any information held by Pitcher Partners Brisbane that might relate to MHB or its associated parties. b. Our clients concurrently notified the managing partner of Pitcher Partners Brisbane of the Relevant Circumstances concerning MHB. In addition to the normal client confidentiality requirements, and unless compelled to do so by law, they requested that the managing partner ensure that no information or documents in the possession of Pitcher Partners Brisbane relating to your client(s) be made available to Pitcher Partners Melbourne; being our clients, their partners and their staff. 12. The managing partner of Pitcher Partners Brisbane has acknowledged our clients' request and direction. In complying with our clients' request, the managing partner informed our clients that Pitcher Partners Brisbane are not, and have never been the appointed tax agents for Mr Price or MHB, nor have they ever produced financial statements for them. IG Practice Direction 14 - 'Proper Performance of Duties of a Bankruptcy Trustee' 13. Section 2.3 of Schedule 4A of the Bankruptcy Regulations 1996 entitled 'Performance Standards for Trustees' (Performance Standard) addresses a bankruptcy trustee's duties in relation to conflicts of interest. 14. It provides as follows: If, during an administration, it becomes apparent that the trustee has, an actual or potential conflict of interest in relation to the administration, the trustee must, as soon as possible after becoming aware of the conflict of interest: a. notify the creditors, a committee of inspection or the court, as appropriate, of the conflict of interest; and b. take appropriate steps to avoid the conflict of interest. 15. As to section 2.3(a) of the Performance Standard, notice was given to the creditors of the estate through the provision of the Amended DIRRI on Friday, 26 September 2014. As to section 2.3(b) of the Performance Standard, our clients believe that the safeguards referred to in paragraph 12 above are sufficient and appropriate. Conclusions 16. For the reasons set out above, our clients disagree with the assertions in your second letter of 24 September 2014. Accordingly, they do not intend to resign or otherwise seek to terminate their appointment as joint trustee of the bankrupt estate. We trust that this response satisfactorily addresses your clients' concerns." 4 Shortly after the examination was called on yesterday morning counsel appearing for MHB and BC39 advised the Registrar that these companies sought a declaration that Messrs Rambaldi and Yeo had a conflict of interest "in acting in respect of the estate of the bankrupt insofar as it relates to an investigation into alleged transactions between the bankrupt and [MHB and BC39]." They also sought an injunction restraining the trustees from continuing to act in that capacity in sofaras, in so doing, they were engaged in the investigation or the prosecution of any claims in respect of three transactions. These transactions were identified as: The acquisition of a property development at Aspendale Gardens by BC39; The acquisition of the racing yacht known as "Wild Thing" by BC39; and The lending of money by MHB and BC39 to the bankrupt's wife ("the Paradise Point transaction"). 5 The Registrar referred these applications to me as duty judge. 6 In the course of yesterday afternoon evidence was called from Ms Julie Cook on behalf of MHB and BC39 and from Mr Rambaldi on behalf of the trustees. 7 Ms Cook performs the duties of Chief Financial Officer of both MHB and BC39. She does so as an independent contractor. She took instructions in relation to the performance of her duties for both companies from Mr Price. In the latter part of 2012 she had engaged the Brisbane office of Pitcher Partners to provide advice to MHB and BC39 in respect to tax planning. This advice has been provided to the companies on an ongoing basis from then until the present time. In 2013 and 2014 the Brisbane office of Pitcher Partners provided MHB and BC39 with advice relating to each of the three transactions about which the trustees proposed to seek information in the course of the examination. Most of the advice provided by Pitcher Partners was given orally in the course of meetings at the Pitcher Partners offices in Brisbane. Some of this advice was confirmed in writing. There was no evidence as to whether any written advice was provided in relation to one or more of the three transactions or if the Pitcher Partners Brisbane office retained notes of advice given orally in respect of those transactions. 8 Under cross-examination Ms Cook displayed a limited knowledge of the affairs of MHB and BC39, of Mr Wharington's bankruptcy and of the appointment of Messrs Rambaldi and Yeo as trustees of his bankrupt estate. She did not think that she had become aware of the trustees' appointment until about April or May of 2013. 9 Mr Rambaldi gave evidence confirming the accuracy of the information contained in his solicitor's response to the demand made by MHB and BC39. He deposed that, prior to consenting to act, he had satisfied himself that no conflict existed. He had signed a declaration of independence. He conceded that, in determining that no relevant conflict existed and that he could act independently, he did not take into account the potential conflicts now alleged arising from the transactions involving MHB and BC39. This is hardly surprising given that, at that time, he had yet to enter on the administration of Mr Wharington's estate. Once he had done so both he and Mr Yeo and their support staff had devoted some 850 hours to the relevant work. 10 The allegation of conflict was first raised with him in the solicitor's letter of 24 September 2014. 11 Upon receiving the letter he examined the Australian Restructuring Insolvency and Turnaround Association's Code of Professional Practice (Third Edition), the Accounting Professional and Ethical Standards Board's Code of Ethics for Professional Accountants issued in December 2010 and Schedule 4A of the Bankruptcy Regulations 1996 (Cth). 12 On 26 September 2014 Messrs Rambaldi and Yeo forwarded a circular to creditors of the estate. In it they renewed their declaration of independence. They referred to the fact that, following their appointment, MHB had registered a mortgage on the title of property registered in the name of Mr Wharington's wife and raised the possibility of the estate having an interest in the property. They drew attention to the assertion that Pitcher Partners Brisbane office acted as "tax accountants" for MHB. The trustees then set out their reasons for considering that these matters had not and did not act as an impediment to or conflict with their duties as trustees. No creditor has raised any objection to the trustees continuing to perform their duties. 13 In his evidence Mr Rambaldi confirmed that neither he, nor his fellow trustee, nor members of their staff had had access to any documents held by Pitcher Partners Brisbane office relating to either MHB or BC39. They have put in place a regime which is designed to ensure that they not be able to obtain such access save in accordance with legal process. It was not therefore, their intention to deploy any such documents in the course of the s 81 examination or, more generally, in the course of their future administration of the estate. 14 Although the original demand that the trustees should not investigate the affairs of MHB and related interests was made on the basis of an alleged untenable conflict of interest, the companies sought to support their present applications on the ground that there existed a reasonable apprehension of bias on the part of the trustees. Nothing turns on the distinction given the close association of the two concepts. As Spigelman CJ said in McGovern v Ku-ring-gai Council (2008) 72 NSWLR 504 at 510: When "a relevant conflict of interest is established the reasonable apprehension follows almost as of course." 15 The companies placed particular reliance on the decision of the Full Court in Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85. In that case the Australian Securities and Investments Commission had sought the removal of liquidators on the ground that there existed a reasonable apprehension that they lacked independence and impartiality in the discharge of their functions. The liquidators had acted as administrators of two companies and became liquidators of those companies upon decisions being made that they should be wound up. The work associated with the administration and liquidation of the companies had been referred to the liquidators by a business advisory group. The group had made other referrals to the liquidators and the liquidators had derived significant sums (of the order of some three quarters of a million dollars) in the two preceding financial years from work done following such referrals. It was also suggested that the liquidators might be required to investigate entities associated with the group. White J (with whom Jessup and Robertson JJ agreed) concluded (at [124] and [125]) that: "… I consider that there is a conflict which is more than theoretical between the interest of [the liquidator] in not jeopardising the prospect of further remunerative referrals from the … Group, on the one hand, and the proper discharge of their duties as liquidators of [the two companies], on the other. The reasonable fair-minded observer would perceive this conflict. I also think that a reasonable fair-minded observer might reasonably apprehend that, because of the respondents' interest in not jeopardising future income, they might not discharge their duties with independence and impartiality." 16 In reaching this conclusion his Honour had regard to a range of authorities which dealt with the removal of liquidators on the ground of apprehended bias. At [58] his Honour said that: "The guiding principle is that a liquidator must be independent and be seen to be independent: Re Queensland Stations Pty Ltd (in liq) (1991) 9 ACLC 1,341 at 1,344; Re National Safety Council of Australia [1990] VR 29 at 34; Advance Housing at 233-4. In Re Chevron Furnishers Pty Ltd (in liq) (No 2) [1995] 1 Qd R 125 at 130, Fitzgerald P, Pincus JA and Williams J said: The liquidator must have had no prior or other involvement either with the company in liquidation, its directors and major shareholders, or one of its creditors so that he could not fairly and impartially carry out his duties as liquidator requiring him, in broad terms, to act in the bests interests of the general body of creditors. However, as Santow J observed in Advance Housing at 234, some previous involvement by the liquidator may be permissible: In my judgment, the correct balance is struck by permitting a liquidator to act as such even if there be a prior involvement with the company in liquidation, provided that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of the creditor that the liquidator might be so impeded or inhibited. In short the question should be whether there would be a reasonable apprehension by any creditor or lack of impartiality on the liquidator's part in the circumstances, by reason of prior association with the company or those associated with it, including creditors, or indeed any other circumstance." 17 At [61] his Honour said that "[l]iquidators are officers of the court and are, accordingly, expected to conduct themselves with independence, impartiality and integrity." That standard would not be met if "a fair-minded lay observer might reasonably apprehend that the [liquidator] might not bring an impartial mind to the resolution of the question [he] is required to decide": cf Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at 344. When applying this test, his Honour said (at [85]) that "[i]t is necessary to keep firmly in mind that there must be a real, and not merely theoretical, possibility of conflict of duty or interest." 18 MHB and BC39 did not seek to contend that the independence of the trustees was in any way compromised by financial interests of the kind considered in Walton Constructions. Rather, the relevant conflict was said to arise from the fact that the two companies had retained Pitcher Partners' Brisbane firm to provide advice in relation to the three transactions which the trustees were seeking to investigate and that it may be necessary, at some future time, for the trustees to obtain evidence, both documentary and oral, from the partners at the Brisbane office who had provided that advice. 19 The companies did not seek the removal of the trustees. As already noted, they seek only to restrain the trustees from investigating the three transactions between Mr Wharington and MHB and BC39. 20 Trustees, appointed under the Act, are officers of the Court who have responsibility for the orderly administration of a bankrupt's estate. The duties imposed on them and the powers granted to them are to be exercised in the interests of the creditors. 21 The evidence before me does not support the claim that the trustees are in any way compromised in the performance of their duties by reason of the fact that the Brisbane office of Pitcher Partners has acted for MHB and BC39 in relation to taxation and other matters. The Melbourne partnership, of which the trustees are members, operates independently of the Brisbane firm which has been providing advice for the two companies. No information relating to any of the dealings between the companies and the Brisbane office have been disclosed to the trustees. The trustees have put in place arrangements to ensure that no information relating to the companies and their affairs is provided to them or their staff. No such material has been or will be deployed by the trustees in the course of the s 81 examination. There is and can be no basis for a suggestion that the trustees will not, in the course of the s 81 examination and, more generally, act otherwise than impartially in the interests of all creditors. Despite being advised of the alleged conflict of interest, no creditor has raised any concern in this regard. 22 Not all interactions between trustees and potential examinees give rise to disabling conflicts of interest. The only association relied on in support of the present application is the tenuous link between the trustees and the retention, by MHB and BC39 of the independent Brisbane firm which operates under the same Pitcher Partner's umbrella as does the Melbourne office. The companies did not engage Pitcher Partners to provide them with advice until well after the appointment of the trustees. Ms Cook who retained the services of the Brisbane firm did so at a time when she had little detailed knowledge of Mr Wharington's bankruptcy and was not aware of the identity of the trustees. She was not aware that those trustees were members of the Melbourne partnership. 23 As Walton Constructions makes clear, a relevant apprehension of bias will not arise merely because a theoretical possibility of conflict of duty or interest exists. There must be "a real" conflict before the reasonable observer might harbour the necessary apprehension. Any impugned association must be shown to be likely to impede or inhibit the trustees from acting impartially in the interests of all creditors: cf Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 234 (Santow J). 24 It is also necessary to have regard to the circumstances in which any relevant conflict is said to have arisen. In this context it may be relevant to have regard to when the conflict arose, how it arose and whether any conduct on the part of the trustees gave rise to the conflict. In the present case the alleged conflict occurred when, unbeknown to the trustees, MHB and BC39 sought advice from the separate Brisbane entity of Pitcher Partners in relation to the three transactions. This did not occur for more than two years after the appointment of the trustees. The authorities recognise that events of this kind do not necessarily give rise to an apprehension of bias. 25 Professional standards anticipate the possibility of the appearance of conflict arising because of events occurring in the course of an administration. They contemplate that there will be circumstances in which the trustees may continue to perform their duties notwithstanding such events especially when the events were beyond their control. Remedial steps may be taken to obviate the ongoing appearance of partiality. This approach is also evident in s 2.3 of Schedule 4A of the Bankruptcy Regulations. 26 In my view there is nothing that has occurred thus far in the administration of the bankrupt's estate which might lead a fair-minded lay observer to apprehend that the trustees have acted or might not, in the future, act impartially in the performance of their duties. If, at a later stage, the trustees take or propose to take any steps which the companies consider might create a conflict they will have the opportunity of raising the issue with the Court. 27 I can discern no basis for concluding that any disabling conflict exists which would warrant the making of the declaratory and injunctive orders being sought. Even had I been persuaded otherwise there would have been strong discretionary factors which would have tended against granting the orders. These include the considerable amount of time already devoted by the trustees to the performance of their duties, the absence of any objection by creditors and the fact that there is no realistic prospect of any of the information relating to the interests of the companies or Mr Price which is in the hands of the Brisbane firm being relied on or tendered in the course of the s 81 examination. 28 Paragraphs 3 and 4 of the amended interim application will be dismissed with costs. I will order that the further consideration of paragraphs 1 and 2 be remitted to the Registrar conducting the s 81 examination. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tracey.