CTHFCA

Borg v de Vries

[2018] FCA 2116

Federal Court of Australia|2018-12-21|Before: Mr J, White J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2018-12-21

Before

Mr J, White J

Source

Original judgment source is linked above.

Judgment (15 paragraphs)

[1]

Pursuant to s 90-15 of the Insolvency Practice Schedule (Bankruptcy) to the Bankruptcy Act 1966 (Cth): (a) the Respondent cease to be the trustee of bankrupt estate of David Morton Bertram; and (b) Robert William Naudi be appointed trustee of bankrupt estate of David Morton Bertram. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

[2]

WHITE J: 1 On 21 December 2018, I made orders that the respondents cease to be the trustees of the bankrupt estate of David Morton Bertram and that Robert William Naudi be appointed in their place. I said that I would provide reasons for these orders later. The following are my reasons. 2 On 16 December 2017, David Morton Bertram was made bankrupt. The two respondents, Mr de Vries and Mr Solomons, were appointed as the joint and several trustees of his bankrupt estate. 3 The applicants are each creditors of Mr Bertram and have filed proofs of debt in the bankruptcy totalling $2,764,994. 4 By an application filed on 5 October 2018, the applicants seek orders that Mr de Vries and Mr Solomons be removed as trustees and that Robert William Naudi, a registered trustee in bankruptcy, be appointed in their place. 5 Mr Solomons, who has the day-to-day conduct of the trusteeship, has filed an affidavit in which he said that he would be filing a submitting appearance on the application, save as to costs. No such submitting appearance has been filed and Mr Solomons did not attend the hearing. Nevertheless, I considered it appropriate to proceed on the basis that the respondents' attitude to the application is that they will abide by the event, save as to costs. 6 Mr Solomons' affidavit is substantial and he deposed to having made it in order "to assist the Court in its deliberation". 7 The Interlocutory Application indicated that the applicants also sought review of the respondents' decision to admit the proof of debt of Darisha Holdings Pty Limited in the sum of $9,260,249.96 for the purpose of voting at the meeting of creditors held on 26 July 2018, and an extension of time in which to make that application. On 31 October 2018, the Court granted leave, pursuant to r 9.12 of the Federal Court Rules 2011 (Cth) (the FCR), to Darisha Holdings to intervene in the proceeding for the purpose only of assisting in the Court's determination of the application concerning the admission of its debt. 8 However, on 12 December 2018, the applicants informed Darisha Holdings and the Court that they did not press that part of their application concerning the admission of the proof of debt of Darisha Holdings. The Court then made orders dismissing paras [3] and [4] of the Interlocutory Application (which contained the application for the review and the extension of time) and reserved the question of costs with respect to that application. 9 Accordingly, this judgment concerns only the application for the replacement of the trustees.

Borg v de Vries - [2018] FCA 2116 - FCA 2018 case summary — Zoe

[3]

Background to the application 10 On 30 May 2018, the present applicants requested the respondents to transfer the administration of the bankrupt estate to Mr Naudi. At the same time, the applicants provided the respondents with a "Trustee Consent to Act Declaration" form signed by Mr Naudi indicating his willingness to administer the estate together with a Declaration of Independence, Relevant Relationships and Indemnities completed by Mr Naudi. 11 Following that request, in their second report to creditors of 21 June 2018, the respondents proposed that Mr Naudi become the trustee of the bankrupt estate on 5 July 2018. The report indicated that the respondents made the proposal pursuant to s 181A(3) of the Bankruptcy Act 1966 (Cth). At the same time, the respondents indicated that, if any creditor indicated objection to the appointment of Mr Naudi, a meeting of creditors would be held to consider his nomination as trustee. 12 In the balance of the report, Mr Solomons reported on the administration of the bankrupt estate, noting in some instances that no further investigations would be taken and, in other instances identifying matters which could be the subject of further consideration by Mr Naudi, should he be appointed as trustee. 13 Darisha Holdings objected to Mr Naudi replacing the respondents as trustees. 14 At the subsequent meeting of creditors on 26 July 2018, a representative of the applicants put forward a motion that, pursuant to s 90-35(1)(a) of the Insolvency Practice Schedule (Bankruptcy) (the Bankruptcy Schedule) "[the respondents] be removed as the trustees for the bankrupt estate of [Mr Bertram]". The motion was defeated by the votes cast in opposition by Darisha Holdings and other creditors related to the bankrupt. The affidavit of the applicants' solicitors indicates that Mr Solomons had said, at the conclusion of the voting, that all of those who voted in opposition to the motion were related to the bankrupt. 15 Following that lack of success, the applicants brought the present application.

[4]

The Court's powers 16 The power of the Court to remove and replace a trustee in bankruptcy is contained in s 90-15(1) and (3) of the Bankruptcy Schedule which is Sch 2 to the Bankruptcy Act. That Schedule is given effect by s 4A of the Bankruptcy Act. 17 Section 90-15(1) provides: Court may make orders (1) The Court may make such orders as it thinks fit in relation to the administration of a regulated debtor's estate. 18 Section 90-15(3) provides (relevantly): Examples of orders that may be made (3) Without limiting subsection (1), those orders may include any one or more of the following: … (b) an order that a person cease to be the trustee of the estate; (c) an order that another person be appointed as the trustee of the estate; … 19 The applicants have standing to make the application (s 90-20(1)). 20 Section 90-15(4) identifies, in a non-exhaustive way, matters which the Court may take into account when considering an application for removal of a trustee. (4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account: (a) whether the trustee has faithfully performed, or is faithfully performing, the trustee's duties; and (b) whether an action or failure to act by the trustee is in compliance with this Act and the Insolvency Practice Rules; and (c) whether an action or failure to act by the trustee is in compliance with an order of the Court; and (d) whether the regulated debtor's estate or any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the trustee; and (e) the seriousness of the consequences of any action or failure to act by the trustee, including the effect of that action or failure to act on public confidence in registered trustees as a group. 21 The powers of the Court under s 90-15 with respect to the removal and replacement of a trustee are different in significant ways from those in its predecessor. Section 179(1) of Bankruptcy Act, which was in force until 28 February 2017, provided: The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following: (a) remove the trustee from office; and (b) make such order as it thinks proper. 22 As noted by French J in Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101 at [49]-[50], s 179(1) required a two stage consideration: first, whether the Court should inquire into the conduct of the trustee and, secondly, if an inquiry is undertaken, whether the trustee should be removed from office and/or any other order made. In the first stage, the Court was required to consider whether, on the grounds and facts before it, a case had been made out for an inquiry: Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 at 268. Generally speaking, the Court did not order an inquiry under s 179(1) unless it considered on the evidence that there were substantial grounds for believing that the trustee had erred in his or her administration: Re Gault; Gault v Law (1981) 57 FLR 165 at 173. The Court took the view that it should not order an inquiry and put the trustee, and possibly the creditors, to the expense and trouble involved unless it thought it likely that the inquiry would reveal misconduct: Ibid. 23 The Court also generally took the view that it should not interfere unduly with the day-to-day administration of a bankrupt's estate by a trustee. Deane J stated the position in this respect in Re Tyndall; ex parte Official Receiver (1977) 17 ALR 182 at 186: The trustee is made responsible for the administration of the bankrupt estate under the general provisions of the Act. He must, in the course of that administration, make a variety of decisions aimed at enabling the administration to be carried out with promptness and efficiency. Some of these decisions will be business or commercial decisions in which the business or commercial experience of the trustee would itself provide a basis for arguing that, unless it was shown that the trustee's decision was perverse or clearly wrong, it will be inappropriate and unjust for the court to interfere. See also Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619 at [11]-[20]; Moore v Macks [2007] FCA 10, (2007) 4 ABC 639 at [30]. 24 In contrast with the former s 179(1), s 90-15 does not require a two stage consideration. An applicant seeking the removal of a trustee does not have to establish proper grounds for an inquiry. The power to remove and replace is not made subject to conditions such as proof of error, misfeasance, negligence or other poor conduct by a trustee. 25 Section 90-15 was introduced into the Bankruptcy Act by the Insolvency Law Reform Act 2016 (Cth) (the Law Reform Act). The effect of the Law Reform Act was, amongst other things, to create common rules applicable to personal and corporate insolvencies. It did so by inserting into the Corporations Act 2001 (Cth) and the Bankruptcy Act schedules with substantially common provisions. In the Bankruptcy Act, it is the Bankruptcy Schedule and in the Corporations Act, it is the Insolvency Practice Schedule (Corporations) (the Corporations Schedule). Section 90-15 in the Corporations Schedule is in common form with s 90-15 of the Bankruptcy Schedule. 26 One effect of the change is to align the provisions for the removal of a trustee in bankruptcy more closely with those for the removal of a liquidator. This is evident from the legislative history. 27 By s 165 of Sch 2 to the Law Reform Act, ss 502-505 of the Corporations Act were repealed. Section 503, which concerned the removal of liquidators, had provided: The Court may, on cause shown, remove a liquidator and appoint another liquidator. 28 Section 90-15 in the respective Insolvency Practice Schedules does not replicate exactly the former s 503 but it does, in substance, contemplate a liquidator or trustee, as the case may be, being removed "on cause shown". That being so, some assistance as to the application of the powers of removal and replacement of a trustee in bankruptcy may be derived from the authorities concerning s 503 and its predecessors. Those authorities indicated that the power to remove and replace a liquidator was not confined to circumstances of demonstrated error or shortcomings by a liquidator. Instead the power was exercised by reference to the interests of the liquidation. 29 In Re Adam Eyton Ltd; ex parte Charlesworth (1887) 36 Ch D 299, Cotton LJ said, at 303-4: [I]t is not necessary, in order to justify the Court under this section in removing the liquidator, that there should be anything against the individual. In my opinion, although of course unfitness discovered in a particular person would be a ground for removing him, yet the power of removal is not confined to that, … [I]f the Court is satisfied on the evidence before them that it is against the interest of the liquidation, by which I mean all those who are interested in the company being liquidated, that a particular person should be made liquidator, then the Court has power to remove the present liquidator, and of course then to appoint some other person in his place. 30 To like effect, Bowen LJ said at 306: In many cases … unfitness of the liquidator will be the general form which the cause will take upon which the Court in this class of case acts, but that is not the definition of due cause shewn. In order to define "due cause shewn" you must look wider afield, and see what is the purpose for which the liquidator is appointed. To my mind the Lord Justice has correctly intimated that the due cause is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed. Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation. 31 Austin J applied the approach of Bowen LJ in Re Adam Eyton in Domino Hire Pty Ltd v Pioneer Park Pty Ltd (in liq) [2003] NSWSC 496; (2003) 21 ACLC 1330: [58] The words "cause shown" indicate that a liquidator is not to be removed unless there is some ground for removal, and the ground must be established by evidence. However, "cause shown" is not a narrow concept. It is open to the applicant for removal to point to any conduct or inactivity on the liquidator's part that provides a basis for the conclusion that he or she should be removed, ranging from moral turpitude, to bias or partiality, lack of independence, incompetence or other unfitness for office. But the concept of "cause shown" is not limited to matters relating to the unfitness of the liquidator to hold office. In Re Adam Eyton Ltd; ex parte Charlesworth (1887) 36 Ch D 299, speaking of a statutory formulation where the words used were "due cause shown" rather than "cause shown", Bowen LJ said (at 306) … [see the passage just quoted]: [59] In Network Exchange Pty Ltd v MIG Communications Pty Ltd (1994) 13 ACSR 544, Hayne J applied this test to an application for removal of an administrator, even though the statutory provision authorising the Court to remove an administrator (s 449B) does not contain the words "on cause shown". His Honour concluded that the absence of those words did not produce any marked difference, and he described the position as follows (at 550): "In my view, however, it must be accepted that an order for removal should be made only if it is demonstrated that such an order would be for the better conduct of the administration. It is not to be contemplated that the power under s 449B is to be exercised save in circumstances that justify or require its exercise and those, speaking generally, would appear to be circumstances in which the order would conduce to the better conduct of the administration concerned." [60] In cases where the applicant relies on misconduct by the liquidator, the words "cause shown" do not require the Court to work through each of the particulars of misconduct relied upon, and determine one by one whether they are made out. Young J (as the Chief Judge in Equity then was) rejected such an approach in Re Biposo Pty Ltd (1995) 17 ACSR 730. His Honour said (at 734): "The question is not whether in adversarial litigation there has been proof of a case according to the heads particularised, … but rather whether in the interests of the public the removal of the liquidator would be for the general advantage of persons interested in the winding up". 32 In Australian Securities and Investments Commission v Franklin [2014] FCAFC 85; (2014) 223 FCR 204 at [55], this Court applied the approach of Austin J in Domino Hire. 33 I conclude that the approach in the corporations cases to s 503 and its predecessors is apposite in relation to the removal and replacement of the trustee in bankruptcy under ss 90-15 and 90-20 of the Bankruptcy Schedule. The Court should exercise the power to remove and replace a trustee in bankruptcy in a manner which best advances the interests of the bankruptcy, having regard to the objects of the Bankruptcy Act. Having regard to s 1-1(2)(b) of the Bankruptcy Schedule, the proper interests of the creditors of the bankrupt will be an important consideration.

[8]

The bankrupt's exclusion from his father's will 39 Counsel referred first to the fact that the bankrupt's father (William Bertram) had altered his will during 2016 in a way which had the effect (apparently) of excluding the bankrupt from receiving an amount as a beneficiary during the currency of any bankruptcy. I have used the word "apparently" because the will of the bankrupt's father was not in evidence and the applicants relied on secondary evidence. Some documents referred to the bankrupt's father as "William Bertram" and some as "Michal Bertram". It was not suggested that anything turned (for present purposes) on this discrepancy. 40 It appears that the will established a discretionary Testamentary Trust, one of the terms of which identified an "excluded person" as person "who is not entitled to any distribution from the Testamentary Trust". Such a person is defined to be "any person who commits an act of bankruptcy and who as a consequence of that act has been made bankrupt and remains undischarged from being a bankrupt in accordance with the Bankruptcy Act" (emphasised added). The bankrupt is within this definition. 41 In relation to this term, the respondents had reported in the first report to creditors that "William Bertram (and/or his legal advisers) was aware of his son's failed property development in Adelaide and consequently included the specific provision in his will in June 2016". 42 The applicants also relied on a paragraph in a letter signed by the bankrupt on 26 July 2017 apparently addressed to Darisha Holdings containing an acknowledgement of the indebtedness on which Darisha Holdings relied: I acknowledge, all previous loan agreements between me and Darisha Holdings, as well as all the amounts above. I agree to repay all loans no later than June 30th, 2017. Should I fail to pay these loans back I, as one of the trustees of the David Bertram Testamentary Trust, established by my late Father Michal Bertram, agree and give full permission that funds from the David Bertram Testamentary Trust will be used to pay back all the loans listed above or any other sources of assets or income I have. 43 Counsel submitted that, considered neutrally, this paragraph gave rise to a line of inquiry concerning access to the assets of the David Bertram Testamentary Trust, and the bankrupt's control of those assets, and that that line of inquiry had not yet been pursued.