Borg v de Vries

Federal Court of Australia|2023-04-19|Before: Jackson J

Pursuant to s 90-15 of the Insolvency Practice Schedule (Bankruptcy) to the Bankruptcy Act 1966 (Cth): (a) the applicants cease to be trustees of the bankrupt estate of Russell Harold Moran; and (b) Max Christopher Donnelly is appointed trustee of the bankrupt estate. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

JACKSON J: 1 The applicants are Jimmy Trpcevski and David Ashley Norman Hurt who are the joint and several trustees of the bankrupt estate of Russell Harold Moran. They seek orders that they cease to be trustees and that Max Christopher Donnelly be appointed as trustee in their stead. 2 The reason why the applicants are willing to be replaced as trustees appears from an affidavit of Mr Trpcevski sworn in support of the application. Essentially: the applicants have identified further investigations into Mr Moran's affairs which they believe are worth undertaking; but the administration is unfunded and the applicants are not willing to undertake the investigations without funding and have no obligation to do so; the creditor of the estate who is by far owed the most money, Argonaut Equity Partners, may be prepared to fund further investigations; but Argonaut will only be willing to consider doing so if Mr Donnelly becomes trustee in place of the applicants. 3 Mr Moran opposes the application. Argonaut supports it. No other creditor has appeared. For the following reasons, the orders sought will be made.

The evidence 4 Mr Trpcevski's first affidavit filed with the application says little other than to annex some documents which I am about to describe. The following facts appear from that affidavit, including the annexures. 5 The applicants were appointed joint and several trustees of the bankrupt estate when this Court made a sequestration order on 31 January 2022. Argonaut was the petitioning creditor. It has a judgment debt in excess of $120 million, apparently resulting from an advance of $6 million to Mr Moran in 2014, plus interest and costs. As at the time of the first Report to Creditors, dated 7 April 2022, the next largest creditor was the Australian Taxation Office, at approximately $3.2 million. Other creditors are lawyers, accountants and consultants who are owed fees totalling about $300,000. There are related party creditors who claim about $550,000 in total. So the debt to Argonaut represents approximately 97% of the total debts of the bankrupt estate. 6 The trustees have identified negligible assets of the bankrupt estate. As at the time of the first Report to Creditors, however, a previous controlling trustee had identified amounts of at least $226,000 withdrawn from a bank account, which was thought worthy of investigation. Argonaut had also requested specific investigations into how the funds it loaned to Mr Moran had been used, into movements in certain shares, and into the possibility that there had been transfers of assets with intent to defeat creditors. The Report to Creditors also contained a summary of Mr Moran's dealings with a large number of related entities, although it is not clear from the summary whether any of those dealings are worthy of investigation or might lead to recovery of funds. 7 Mr Trpcevski's affidavit also annexes correspondence between the trustees and Argonaut throughout 2022. It is not necessary to describe it in detail; the tenor of it is that the trustees would from time to time report to Argonaut as to the investigations they had undertaken and other activities. That included (as at 7 April 2022) the potential determination of the date on which Mr Moran became insolvent and any antecedent transactions that might be able to be recovered. It also included the matters raised by Argonaut in relation to its request for specific investigations. 8 In an email dated 17 August 2022, the trustees told Argonaut that they had 'identified numerous transactions which warrant further investigations', and listed various such matters out, albeit described at a high level of generality. These included matters mentioned above as well as certain shares held by related parties. 9 On 8 December 2022 the trustees emailed Argonaut saying that they would need to review about 800 pages of bank statements to trace transactions and to identify lines of questioning for Mr Moran (presumably in any public examination). They reminded Argonaut that they were unfunded and said that consideration needed to be given to funding them. They pointed out that other costs that would be incurred to 'progress this matter more aggressively' (apparently Argonaut's phrase) would include solicitors' costs, which would be 'not insignificant'. They said that they did not have any obligation to incur further costs without creditor approval and prospects of getting paid and asked for clarification of Argonaut's position in relation to funding. 10 From an email from Argonaut dated 14 December 2022 it appears that this prompted a discussion in which Argonaut indicated it wanted to change the trustee. Argonaut's email confirmed that wish and said that the solicitor who is now on the record for the applicants would contact the trustees. According to Mr Trpcevski, Argonaut is meeting the costs of this application. 11 Mr Donnelly signed a consent to act as trustee of Mr Moran's estate on 19 December 2022. The current application was filed on 8 February 2023. 12 That was the substantive evidentiary position when the matter first came on for hearing on 22 March 2023. There are also affidavits going to various procedural requirements, including the necessary notice to creditors of the application and the hearing date. At the hearing, I expressed concern about the lack of evidence as to Argonaut's intentions about funding any work to be done by the proposed new trustee, Mr Donnelly, and no evidence from him as to his intentions as to further investigations. 13 With the leave of the Court, further affidavits and further written submissions were filed after the hearing on the basis that the matter would then be determined on the papers. Those further affidavits can be summarised as follows: (1) There is a further affidavit from Mr Trpcevski saying that he and Mr Hurt have not resigned but that (on information and belief) he understands that Argonaut will not fund them in relation to further investigations, and would seek to appoint another trustee in their stead. (2) There is an affidavit from Nicholas McDonough, the General Manager of Argonaut, which confirms that he has told a staff member of the current trustees that Argonaut would not be prepared to indemnify them and would prefer to see another trustee appointed. Mr McDonough also gives evidence of a discussion with Martin Jones, a partner of Mr Donnelly at KPMG, asking whether Mr Donnelly would be prepared to act as trustee on the basis that Argonaut 'would seriously consider providing an indemnity should [Mr Donnelly] as a result of his investigations be able to justify seeking indemnity from Argonaut for further investigations or in relation to proceedings to recover assets…'. Mr Jones told Mr McDonough that Mr Donnelly would be prepared to accept the appointment on that basis. As to Argonaut's intentions concerning funding Mr Donnelly, Mr McDonough's evidence is: Argonaut would, if [Mr Donnelly] can bring a persuasive reason to provide an indemnity to continue investigations or take proceedings to recover assets give serious consideration [to] doing so … based upon whatever terms and conditions are considered reasonable at the time. Unfortunately, I cannot be more precise on the part of Argonaut until [Mr Donnelly] is in a position to put a proposal before Argonaut. (3) There is an affidavit from Mr Donnelly saying that if he were to form the view that extensive investigations were necessary, including for example public examinations, he would discuss with creditors whether they were willing to indemnify him. Mr Donnelly also says that he 'will not charge … to get up to speed with what has been done to date'. (4) There is an affidavit from Bruce Grubb, the lawyer for Mr Moran, confirming Mr Moran's liability to pay an amount to the bankrupt estate under s 139W of the Bankruptcy Act 1966 (Cth) because his income for the year ending 30 January 2023 exceeded a certain threshold.

The parties' cases on the application 14 The applicants submitted that: (a) the 'majority creditor', Argonaut, supports replacing the trustee; (b) the applicants have determined there might be a need for further investigations; (c) the applicants are without funds to conduct further investigations; (d) Argonaut is not prepared to fund the applicants but may be prepared to fund the replacement trustee; and (e) the applicants themselves wish to be removed, and support the proposed replacement by Mr Donnelly. 15 Before the hearing of 22 March 2023, Mr Moran filed lengthy written submissions in opposition to the application. Much of their length is attributable to the fact that the originating application was expressed as seeking an order under s 180 of the Bankruptcy Act, which authorises the Court to accept the resignation of trustees, and the submissions raised various matters in relation to that. But in the end the orders were sought under s 90-15 of the Insolvency Practice Schedule (Bankruptcy) at Schedule 2 of the Bankruptcy Act (Bankruptcy Schedule), so it is only necessary to address the submissions made in relation to that provision. In summary, they were that the application should be dismissed because: the application had not been served on the Official Trustee; there had been no meeting seeking the views of creditors; there was no evidence that the current trustees were not investigating 'expeditiously and appropriately'; there was no evidence of further investigations or steps that Mr Donnelly was willing to undertake; and there was no evidence that creditors were willing to fund any further investigations or of how much they would cost. The submissions also put some emphasis on the lack of any suggestion that the applicants, the present trustees, had not acted in a manner that best advanced the interests of the bankruptcy. 16 Those submissions were filed before the hearing and so before the further affidavits described above had been filed. After receipt of those affidavits, Mr Moran filed further written submissions in which he maintained his opposition on the basis that the evidentiary deficiencies identified had not been sufficiently addressed. He also complained that Mr McDonough's affidavit refers to the appointment of 'Max Prentice' as a new trustee, when there is no consent to act from that person, however I infer that this is an error in Mr McDonough's affidavit and the intention has always been to appoint Max Donnelly. 17 Mr Moran also submitted that there is no evidence that Argonaut will pay the applicant's accrued time costs in relation to the bankrupt estate, in the sum of approximately $47,000, and that this means that the present application is an abuse of process.

Consideration 18 Section 90-15 of the Bankruptcy Schedule empowers the Court to make such orders as it thinks fit in relation to the administration of the estate of a 'regulated debtor', in this case, a bankrupt. Sections 90-15(3)(b) and (c) specifically authorise orders that a person cease to be the trustee of an estate and that another person be appointed as the trustee of the estate. 19 In Borg v de Vries (Trustee), in the matter of the Bankrupt Estate of David Morton Bertram [2018] FCA 2116, White J helpfully examined this statutory power, and did so in the context of a fact situation similar but not identical to the present circumstances. Two points of particular relevance that emerge from his Honour's judgment are: (1) In contrast to its statutory predecessor, s 90-15 does not require a two stage consideration in which an applicant seeking the removal of a trustee must 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': Borg v de Vries at [24]. (2) After reviewing analogous statements of principle in connection with company liquidations and administrations, his Honour concluded at [33]: 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. 20 The appropriateness of removing and replacing a trustee in bankruptcy will always depend on the particular facts. Nevertheless, White J's reasons for doing so in Borg v de Vries are instructive in the present case. They are encapsulated at [54]: The circumstances described above, taken in combination, satisfy me that an order for the removal and replacement of the trustees is appropriate. That is not because I am satisfied of any misfeasance, neglect or other error in the conduct of the administration of the estate by the respondents. It is instead because I am satisfied that it appears that the respondents consider that no further investigations are warranted or practical; that despite that, there do appear to be some matters which may warrant further investigations; that the first applicant [a creditor] is prepared to fund [the proposed new trustee] Mr Naudi to undertake those investigations, but not the respondents [the present trustees]; because the respondents do not themselves oppose the order; and because no other party opposes the order. In short, I am satisfied that the replacement of the trustees by Mr Naudi would advance the purposes of the Bankruptcy Act in the administration of the estate. 21 The evidence in the present case amounts to the following: (a) the present trustees, the applicants, are unfunded; (b) they think that there are some matters worth investigating; (c) they will not investigate those matters if they remain unfunded; (d) they asked Argonaut, by far the largest creditor, for funding; (e) Argonaut will not fund them, and supports Mr Donnelly becoming the trustee; and (f) if Mr Donnelly can provide a persuasive reason to seek indemnity from Argonaut to conduct investigations or to take proceedings to recover assets, Argonaut will give serious consideration to indemnifying him on reasonable terms and conditions. 22 So unlike in Borg v de Vries, the main creditor in this case has not indicated a willingness to fund the new trustee, only a willingness to seriously consider doing so if a persuasive case is made. 23 Also, unlike in Borg v de Vries, the present application is opposed. It is true that it is opposed by the bankrupt, not a creditor. The applicants submit that he is not in a position to object, given that it is the best interests of the creditors that are under consideration, not the interests of the bankrupt. The applicants say that the bankrupt can hardly be said to be objective. 24 While I accept that the bankrupt is not objective and may not be acting in the interests of creditors as a whole, it does not follow that his submissions should not be taken into account. The principal matter which the Court must consider is the interests of the bankruptcy as a whole. The interests of creditors are of primary concern in that regard, but they are not the only interests that are relevant. The interests of the bankrupt as a person likely to be affected by the bankruptcy administration may also be taken into account. Whether he is objective is not really to the point, at least where there is no evidence from him which needs to be assessed. It is not for the Court in the present circumstances to embark on speculation about his motives for opposing the application. Mr Moran has standing to oppose the application and his submissions have been taken into account on their merits. 25 Nevertheless, I have decided that the application should be allowed and that orders should be made replacing the applicants with Mr Donnelly. The present applicants have identified matters worthy of further investigation, including a potentially expensive review of documents preparatory to public examinations. But they do not have the funding to undertake those investigations. It can be inferred that the only real possibility of obtaining that funding is to obtain it from Argonaut. The inference arises because there is no evidence that any other creditors would be interested in funding the applicants, and it is inherently unlikely that they would be, since approximately 97% of any dividend paid out to non-priority unsecured creditors will go to Argonaut. But Argonaut will only fund further investigations if Mr Donnelly is the trustee in bankruptcy who undertakes them. 26 I am keenly aware that Argonaut has not given anything close to a commitment to provide that funding. Also, Mr Donnelly appears not to have done any work in relation to the bankrupt estate that would put him in a position where he could express an opinion on the likelihood that he will investigate further, conduct public examinations or take proceedings to recover assets. But he has said that he will not charge creditors for his time in becoming acquainted with the affairs of the bankrupt estate, so there appears to be little downside to changing trustees at this point. Presumably he will have the benefit of the investigative work that the applicants have done to date. 27 That being so, I am satisfied that it is in the best interests of the bankruptcy, and in particular of the creditors of the bankruptcy, to make orders that allow at least for a real prospect that investigations will be conducted and legal proceedings will be brought in order to recover assets for the benefit of the creditors. That there is such a prospect can be inferred from the views expressed by the applicants to Argonaut about the specific matters that are worthy of further investigation, and from the fact that Argonaut has gone to the trouble and expense of funding the present application so that the applicants will be replaced with Mr Donnelly. It is unlikely that it would have taken that step if it had no real intention of funding further investigations. Although the prospect that it will provide funding is an uncertain one, it is still better for creditors to have that prospect than to have the certainty that there will be no further investigations and no recoveries if the applicants remain as trustees. I am also influenced by the fact that the majority creditor by far, Argonaut, supports the application and that all other creditors have been served with the application and have expressed no opposition to it. 28 I do not consider that the arguments Mr Moran has put in opposition to the application require any different conclusion. What has been said above deals with his points about evidentiary deficiencies, including the lack of any evidence that the present trustees have not been discharging their duties adequately. It is clear that error, misfeasance, negligence or other poor conduct by the present trustees is not necessary to be shown. 29 Mr Moran also complains that the application has not been served on the Official Receiver. He relies on a statement in Nixon, in the matter of Nixon [2022] FCA 211 at [9], that an application of this nature is ordinarily required to be served on the Official Receiver and others. However Mr Moran has identified no rule or other statutory provision which requires such service, and in fact r 8.01 of the Federal Court (Bankruptcy) Rules 2016 (Cth) only requires service of the application on the trustee and creditors, with a copy of the order being required to be served on the Official Receiver if made. Nor has Mr Moran pointed to any substantive reason why the Official Receiver would have any interest in the application and why failure to serve it should lead to the application being dismissed. 30 Mr Moran also complains that there has been no meeting of creditors seeking their views or proposing a resolution to change the trustees. But again, that is not a statutory requirement, there is no reason to suppose that it would have been cheaper or quicker to proceed that way, and, again, all creditors are on notice of the application and have not opposed it. 31 As for the argument about abuse of process, Mr Moran's argument, as put in his second written submissions, is that: … The Court should not countenance applications from disgruntled creditors who: initially appoint their own trustees; do not pay them; and then (absent grounds) seek leave from the Court to appoint further trustees while the original debt to the Estate remains due and owing … The non-payment of the debt should neither be to the liability of the other creditors of the Estate, nor otherwise in diminution of the Interested Person's yearly contribution assessments which are being made by the Bankrupt above the current income threshold (and would otherwise be made fully available to the creditors, without deduction or application of the debt). 32 These points are misconceived. While it appears that the applicants were appointed on the application of Argonaut as petitioning creditor, it does not follow that they are 'Argonaut's' trustees or that Argonaut had any liability to pay them (unless it undertook to indemnify them voluntarily). It is elementary that once appointed, the applicants were trustees with duties to act in the interests of the bankruptcy as a whole. It is not clear what is meant by 'the original debt to the Estate'; the bankrupt estate has a liability to the applicants for their properly incurred remuneration and expenses. If that remuneration and those expenses are appropriate then they will form a proper claim on the estate. That is not changed by the fact that the petitioning creditor is not willing to indemnify the applicants to conduct further work, but may be willing to indemnify another trustee. So there is no abuse of process inherent in the fact that the applicants may, if assets are recovered, be able to claim their proper remuneration and expenses for work they have done to date. The fact that Mr Moran as bankrupt is contributing to the estate because of a statutory entitlement to do so gives him no right to complain about how those funds may end up being disbursed. They will be disbursed to creditors of the estate, perhaps including the applicants, in the appropriate priorities according to law. 33 Orders under s 90-15 of the Bankruptcy Schedule will be made to the effect that the applicants will cease to be the trustees of Mr Moran's bankrupt estate and that Mr Donnelly will be appointed trustee in bankruptcy in their place.

Costs 34 Appropriately, the applicants have made no application for any order in their favour in relation to the costs of the application. But Mr Moran seeks his costs. This is essentially because, he says, the application was not 'competent … at first instance', it was adjourned on two occasions so that evidentiary deficiencies in it could be remedied even though he (Mr Moran) had put the applicants on notice of the deficiencies in his submissions, and significant further evidentiary deficiencies have arisen. 35 I accept that the application as it stood as at the time of the hearing was deficient: notably lacking was any evidence about Argonaut's intentions regarding funding. But it does not follow that an award of costs should be made in favour of Mr Moran. I am not persuaded that his opposition depended on the deficiencies; he raised a number of other (unmeritorious) grounds of opposition to the appointment of the new trustees, and persisted in his opposition even after evidence which I have found to be sufficient was filed. I am also not persuaded that the fact that the evidence was insufficient at first has substantially increased overall costs; a hearing was probably always going to be necessary and the fact that the evidence has arrived in several different stages has probably not added to anyone's costs other than Argonaut's. At most a brief additional written submission was required. The application has ultimately been successful, despite Mr Moran's opposition. It is appropriate that there be no order as to costs. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson.

Bankruptcy Act 1966(Cth)ss 139W, 180, Schedule

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