Coshott v Burke

REASONS FOR JUDGMENT 1 On 27 October 2009, Mr Coshott, then (as now) a bankrupt, commenced proceedings in this Court seeking to remove Mr Burke from his office as trustee of Mr Coshott's estate. That relief was sought under the Bankruptcy Act 1966 (Cth), s 179. A statement of claim was filed in the matter on 9 November 2009. An order had been made on 7 November 2008 sequestrating the estate of Mr Coshott. 2 The statement of claim as originally filed asserted formal defects in the appointment of Mr Burke as trustee, and, in the alternative, made serious allegations of misconduct by Mr Burke and by his then legal advisers, Ms Nash, a solicitor, and Mr Johnson of counsel. A failure to act honestly and impartially was asserted, as was a "conflict of interest" under cl 2.3 of the Sch 4A to the Bankruptcy Regulations 1996 (Cth). 3 The history of the matter is conveniently set out by Buchanan J in his reasons of 25 February 2013. I will summarise aspects of that short judgment to explain the nature of the application with which I am now dealing. 4 The hearing of an application for removal of Mr Burke as trustee commenced before Rares J in June 2010. Mr Coshott gave evidence and was cross-examined. Mr Burke gave evidence and his cross-examination had commenced. The proceedings were adjourned and did not resume before Rares J who recused himself at the request of Mr Coshott. The matter came into Buchanan J's docket. On 22 November 2012, Mr Burke's cross-examination recommenced. As Buchanan J indicates in his reasons, it became apparent during the course of Mr Burke's further cross-examination that Mr Coshott wished to rely upon a substantially different case. He sought leave to amend, which was granted. An amended statement of claim was filed on 14 December 2012. That amended statement of claim is before me. It asserted that Mr Burke had breached the performance standards for trustees set out in Sch 4A to the Bankruptcy Regulations and his duties under the Bankruptcy Act. The statement of claim complained of the fees being charged, and of an asserted failure to act in the interests of the estate. The statement of claim asserted that the trustee's solicitor and Counsel (Ms Nash and Mr Johnson) had, with Mr Burke's knowledge, been in a "conflict of interest". An aspect of this was that Ms Nash and Mr Johnson had acted for a creditor of the estate. 5 The matter came back before Buchanan J on 25 February 2013. Not long before the resumed hearing date on 25 February 2013, Mr Burke filed an interim application supported by an affidavit of 13 February 2013 seeking leave of the Court to resign as trustee of Mr Coshott's estate. In that affidavit Mr Burke outlined personal reasons why the resignation was sought. The resignation was not opposed. Buchanan J accepted the explanation of Mr Burke for seeking to resign. The resignation made the proceedings of no further utility. Buchanan J refused to appoint another trustee, suggestions having been made by both Mr Burke and Mr Coshott as to who that trustee should be. 6 Buchanan J noted that the Office of the Insolvency and Trustee Service Australia had provided a letter dated 20 February 2013 saying that the Inspector-General in Bankruptcy did not intend to participate in the proceedings and had no objection to Mr Burke resigning his office. 7 It should be noted that in para [11] of his reasons, Buchanan J said the following: I am not satisfied that Mr Burke acted improperly in any of the senses which are alleged against him in the proceedings, either as commenced or as most recently maintained. The proceedings did not reach a point where any finding, however tentative, could be made to that effect. I am obliged, in my view, to assume that Mr Burke acted properly as trustee as no sufficient case has been erected to make any assumption or tentative finding to the contrary. As a result, I should proceed upon the basis that his costs were properly incurred as trustee, there being no respectable alternative basis upon which to proceed. 8 The orders made by Buchanan J were as follows: 1. Upon the first respondent giving an undertaking to provide his files to the Official Trustee in Bankruptcy with respect to the estate of Robert Gilbert Coshott, a bankrupt, and otherwise cooperate with and assist the Official Trustee in Bankruptcy as reasonably required, pursuant to s 180 of the Bankruptcy Act 1966 (Cth) the Court accepts the resignation of the first respondent from the office of Trustee of the bankrupt estate of Robert Gilbert Coshott. 2. The cost of this application be a cost of the bankruptcy administration from 27 October 2009, when the claim was commenced, to 14 December 2012, when the amended statement of claim was filed. 3. These proceedings be otherwise dismissed. 9 The dismissal of the proceedings has not been the end of the matter. On 3 May 2013, Mr Coshott filed an interim application in the dismissed proceedings naming Mr Burke as a respondent and seeking four orders. 1. Order 2 made on 25th February 2013 is revoked. 2. John Christopher Burke to pay the costs of and incidental to these proceedings without recourse to or claim upon the bankrupt estate of Robert Gilbert Coshott. 3. The trustee of the bankrupt estate of Robert Gilbert Coshott shall not retain Sally Nash or James T Johnson to act for him in regard to the bankrupt estate of Robert Gilbert Coshott. 4. Costs. 10 By this time, Max William Prentice had been appointed to the office of trustee of the estate of Mr Coshott. 11 Listed for hearing in late June 2013 before Buchanan J is a nine-day hearing in which the wife and son of Mr Coshott seek to contend against Mr Prentice that a house and land at Bellevue Hill (of some considerable value) is held on trust for a family company and a superannuation fund outside the bankrupt estate of Mr Coshott. It is unnecessary to detail the claims and cross-claims between Mrs Coshott, Mr Coshott (the son), and Mr Prentice on behalf of the estate. It suffices to say that the case has been set down for nine days and there are contested issues about the history of the property. 12 Ms Nash and Mr Johnson are retained by Mr Prentice to act in the matter. They have considerable knowledge of the estate and its history. It seems clear, and it was barely contested, that if Mr Prentice were not to retain them to appear in the case, and if he were to be required to retain other lawyers, the dates in late June could not be kept. The matter is in Buchanan J's docket. 13 Buchanan J is on leave, and the matter was set down before me on 4 June to resolve any issue necessary to be resolved prior to the hearing of Mrs Coshott's matter in late June. 14 I heard the matter on Tuesday, 4 June 2013. Prior to having the matter called on, I examined the papers as best as I was able. It appeared that orders 1 and 2 were sought by reason of the asserted misleading of Buchanan J by Mr Burke, and, indirectly, by his legal representatives (Ms Nash and Mr Johnson). The gravamen of the allegation was that for some time prior to 2013 Mr Burke had been investigated by the Inspector-General and reports had been made on his practice which led the Inspector-General to have Mr Burke show cause why he should not be deregistered. 15 There were applications in the then Federal Magistrates Court concerning steps that had been taken by the Inspector-General against Mr Burke. Ms Nash and Mr Johnson had acted for Mr Burke in relation to these matters. 16 Mr Coshott's fundamental submission in relation to this was that Buchanan J was misled and, in all likelihood, would have made a different costs order had he known the true position. I indicated to the parties that it was not appropriate for me to hear this part of the interim application. It was, in substance, a re-opening of the matter before Buchanan J, and given that Buchanan J was the judicial officer said to have been misled, I should let the matter be dealt with by him. 17 No party disagreed with that, with one qualification: Mr Coshott sought to rely on much the same material in relation to order 3 as he relied on for orders 1 and 2. I indicated that I would review the question of whether I dealt with orders 1 and 2 after I had dealt with the matter identified in order 3. In my view, I am able to deal with order 3 without dealing fully and substantively with the serious allegations made in relation to orders 1 and 2. 18 The substance of order 3 was injunctive relief against the present trustee, to restrain the present trustee from retaining two legal practitioners. The current trustee was not a party to the interim application. For that reason, I made an order at the beginning of the hearing that Mr Coshott file by Wednesday, 5 June 2013 by 4 pm an originating application seeking the substance of relief in order 3 of the interim application against Mr Prentice as a party. The application proceeded on that basis. That application was filed as ordered and I now dismiss it as well as the claim for order 3 in the interim application. There was no reason or need for a hearing beyond that held on 4 June 2013 as the application filed was only to regularise the process. The limited purpose of the filing of a fresh application to regularise the disposition of the controversy was made clear by me in Court on 4 June. 19 No one argued that the Court did not have jurisdiction to entertain an application of this character. The Court's obligation is to be satisfied of its own jurisdiction. I am so satisfied. This matter involves a claim for an order for injunctive relief against a trustee in bankruptcy by reason of asserted failures of duty in relation to the bankrupt estate. What the Court is being called upon to do is to exercise supervisory powers over a trustee in bankruptcy through a species of injunction. 20 The circumstances in which a Court will restrain a party from retaining particular lawyers were helpfully discussed by Brereton J in Kallinicos v Hunt [2005] NSWSC 1181; 64 NSWLR 561. In particular, his Honour set out some principles at [76]. The step is rightly understood to be an exceptional one founded on proper grounds, ultimately having at their root the protection of the administration of justice. 21 There were two broad bases for Mr Coshott's claim to be entitled to the order. First, he submitted that Mr Johnson and Ms Nash had a conflict of interest, so-called. They had acted for creditors of the estate in the past (which was true); they had acted for Mr Burke in his capacity as trustee (which was true); they had acted for Mr Burke in his communications and dealings with the Inspector-General (which was true); and they were entitled to a large amount of fees from the bankrupt estate which they would only recover if the estate recovered available assets (which was true). Various aspects of detail surrounded these matters, however, this was the gist of this part of the complaint. 22 The second part of the complaint was that Ms Nash and Mr Johnson had, it was asserted, wrongly (indeed, dishonestly) participated in misleading the Court in February 2013 by the failure to disclose to Buchanan J the complaints of the Inspector-General against Mr Burke and the state and maturity of the application to deregister him. This showed a degree of lack of attendance to their duties and was a further reflection of their personal interest, it was asserted, in recovery of assets for the estate for their own remuneration. 23 It is accepted that Ms Nash and Mr Johnson have acted for creditors of the estate in the past. It is not suggested that Mr Prentice is unaware of this fact. 24 It is not contested that they are owed a considerable amount of money by Mr Burke and Mr Prentice, as having acted for the estate. There was in evidence before me a certificate of taxation by a respected member of the profession dated 13 February 2013 identifying costs up to April 2011 in the sum of over $600,000.00. There is also evidence that the sums currently owed are in the order of $1 million or more. There is no satisfactory basis to conclude that any of these fees were other than appropriately incurred. It has been, it would appear, a complex administration. 25 In his submissions, Mr Johnson characterised the acting by him and Ms Nash as on a speculative basis, by which I took him to mean that he and Ms Nash would not expect to be paid their fees unless there were assets in the estate. 26 There was no suggestion that Mr Prentice was unaware of these matters. He swore an affidavit in which he expressed his desire to continue to retain Ms Nash and Mr Johnson in the proceedings brought by Mrs Coshott and Mr Coshott's son. His participation in these proceedings indicates to me that he is aware of the assertions of Mr Coshott. 27 There is no retainer by Mr Prentice which cannot be terminated by him. He reserves the right to retain other lawyers and seek such advice as he thinks fit. He is an experienced practitioner, and is well able to look after the interests of the estate. 28 In my view, there is no basis to conclude that the fact that lawyers are owed sums of money in any way disentitles them from acting in proceedings if the client so wishes to retain them, which proceedings, if successful, will produce a fund of money for the client out of which legitimately incurred fees can be paid. 29 As to the circumstances of 25 February 2013, it is tolerably clear that the detail of the complaints made by the Inspector-General over the years about Mr Burke's practice was not disclosed to Buchanan J. Those matters were set out in documents that comprised Exhibit E before me (Exhibit RGC2 to Mr Coshott's affidavit of 27 May 2013). 30 Mr Burke gave evidence by affidavit sworn 31 May 2013. He swore that he did not consider that it was necessary or relevant for him to go into the substantive detail of matters between him and the Inspector-General. He was cross-examined by Mr Coshott on the evidence that he gave before Buchanan J, in particular in his affidavit of 13 February 2013. In that affidavit he had referred to the effect of his wife's health problems on his ability to manage his administrations. He was cross-examined about this and gave emotional evidence before me about the state of his wife's health. I do not propose to go into the detail of it. She has been ill for some time. He said that a worsening of her health between dates in January 2013 and February 2013 when he swore his two affidavits accounted for his personal reasons to wish to resign his office. 31 These are matters which will need to be considered by Buchanan J in relation to the claim for orders 1 and 2 in the interim application. I have looked at the material passing between the Inspector-General and Mr Burke, personally and through Ms Nash. There may be a real issue as to whether Buchanan J should have been told more in February and whether this would have impacted upon the cost order. I do not form any view about that. It will be a matter for Buchanan J. It should be noted, however, that none of the matters involving the concerns of the Inspector-General related to the conduct of the administration of the bankrupt estate of Mr Coshott. 32 I am not prepared to conclude on the evidence before me that there was any conscious impropriety on the part of Mr Burke, or on the part of Ms Nash or Mr Johnson. Whether or not, on a final view of the matter, Buchanan J takes any different approach will be a matter for him. Relevant for me for present purposes is whether the fact of the conduct of Ms Nash and Mr Johnson, in acting for Mr Burke in the way that the matter unfolded in February reflects on Mr Prentice's ability or entitlement to retain them. In my view, it does not. Both Mr Prentice and his assistant, Mr Cruickshanks, gave evidence by affidavit. Both have formed the view that the estate is best served by the litigation against Mrs Coshott and Mr Coshott's son proceeding with the current solicitor and counsel. Both are experienced insolvency practitioners. There is no reason to think that their decision to wish to retain Ms Nash and Mr Johnson is, in any way, affected by any conflict of duty and interest, or duty and duty, or would, in any way, be contrary to the Bankruptcy Act or Regulations. It is undoubted that the retention of new lawyers will add an additional cost burden to the trustee's running of the litigation. Mr Prentice should not be required to undertake that extra cost without good reason. 33 Even if it be the case that Ms Nash and Mr Johnson should have advised Mr Burke to disclose more fully what had passed between him and the Inspector-General, that matter would not bear upon the entitlement of Mr Prentice to retain them in the upcoming litigation. 34 There is no foundation, in my view, to conclude that the proceeding with the litigation or the proceeding with the litigation with Ms Nash and Mr Johnson retained would, in any way, affect detrimentally the interests of the creditors. It may be, as Mr Coshott suggested, that any success in the litigation will ultimately produce funds for the payment of fees in the bankruptcy. If, however, those fees have been properly incurred, there is no criticism of anyone in that. 35 It should be noted that there is no suggestion of the improper use of confidential information by Ms Nash or Mr Johnson. There is no suggestion that they, in any fashion, owed duties to Mr Coshott, Mrs Coshott, or Mr Coshott's son. 36 Mr Coshott's wife and son make no complaint about Ms Nash or Mr Johnson acting. 37 Mr Coshott relied on two authorities. The first was Doolan v Dare [2004] FCA 682. There, Spender J was dealing with a case in which the trustee had borrowed sums from her own partnership for the purpose of declaring a dividend to all unsecured creditors of the bankrupt in order that they would not have an entitlement to vote upon her removal as trustee. Spender J concluded that there was a clear conflict between the trustee's interests in having her remuneration paid and how she thought that might be achieved, on the one hand, and her duties as a fiduciary to the creditors and the bankrupt, on the other. The declaration of the dividend was made for an improper purpose. The case does not assist Mr Coshott's argument. I should say that care should be taken in taking at face value and for all purposes the statements set out in para [49] of Spender J's reasons. 38 In Horne (Trustee), in the matter of Pruzanski [2000] FCA 151, Marshall J, in an ex tempore judgment, restrained Freehill Hollingdale and Page from further acting on behalf of any trustee of several bankrupt estates. Freehills acted for the Australian and New Zealand Banking Limited (ANZ). It agreed (being the only creditor to do so) to indemnify the trustee unconditionally in respect of the legal costs of conducting an examination of the debtor. It was part of the interests of ANZ to defeat claims of other potential creditors. Thus, as Marshall J expressed it at para [10]: It is in ANZ's interest to defeat the claims for PMS and Stayglen to be accepted as creditors. Freehills has advanced the cause of the ANZ in the administration so far, while simultaneously acting for Mr Horne whose interest it was and continues to be, to impartially determine who should be accepted as a creditor. 39 Thus there arose the question - not so much whether there was a "conflict of interest" - but a conflict of duty and duty. 40 None of the facts as thrown up in this case reveal the basis for any conclusion that there is a conflict between any of the creditors and the trustee. Proofs have been admitted without objection, except in respect of one creditor. 41 In all the circumstances, I see no basis to restrain Mr Prentice from retaining Ms Nash and Mr Johnson, and I would dismiss order 3 in the interim application, and dismiss the application filed on Wednesday, 5 June 2013. 42 There is no reason why Mr Coshott should not be ordered to pay the costs of that part of the interim application and the application, and I so order. 43 I should add that there should be no doubt that Mr Prentice should be entitled to recover the costs of dealing with the interim application and the fresh application out of the administration of the bankruptcy, should Mr Coshott not be able to pay them himself. 44 I am informed that yesterday Mr Coshott filed an affidavit in the Registry. He also sent an email to my associate seeking to rely on it. He had no leave to do either. Neither should have occurred. I have not read the affidavit. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop.