Ferella v Official Trustee in Bankruptcy

AND: OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATES OF ANGELO FERELLA AND GUSTAVO FERELLA

introduction 1 On 14 October 2005 sequestration orders were made in the Federal Magistrates Court of Australia (the Federal Magistrates Court) against the applicants, Angelo Ferella and his father Gustavo Ferella. The respondent, the Official Trustee in Bankruptcy, is the trustee of the bankrupt estates. 2 The applicants were discharged from bankruptcy by operation of law on 3 December 2008. There are matters that remain to be finalised in each estate. 3 The applicants seek an inquiry into the conduct of the respondent in relation to each bankruptcy with a view to certain orders being made, including an order that the respondent be removed as the trustee of each estate: see s 179(1) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). They make a substantial number of complaints about the respondent's administration of the estates. 4 The applicants' overarching contention is that, at the time each bankruptcy commenced, the value of the assets in each estate substantially exceeded the value of provable debts and that the administration of the estates was a relatively simple matter that could have been, and should have been, undertaken expeditiously. They complain that this did not happen. They contend that creditors were paid much later (they say two years later) than they should have been paid. 5 They also complain that the respondent participated unnecessarily in litigation in the Supreme Court of New South Wales in relation to its claimed entitlement to funds that had been received from the sale of land at Point Piper in Sydney (the Point Piper land) by a mortgagee, which the respondent had paid into the Common Investment Fund established pursuant to s 20B of the Bankruptcy Act (the Supreme Court proceedings). The Supreme Court proceedings were, in fact, commenced by a company associated with the applicants, called Agusta Pty Limited (Agusta), which claimed to be the trustee of a trust called the Cavallino Unit Trust. The proceedings involved the determination of whether the funds from the sale of the land were an asset of the Cavallino Unit Trust (rather than an asset to which the applicants were beneficially entitled) and, if so, whether the respondent was entitled to a charge or right of lien over those funds, to the extent that it was entitled to exercise a right of indemnity in respect of debts that had been incurred by the applicants as trustees of the trust and proved in the bankruptcies. 6 A related aspect of the applicants' complaint is that there were, in any event, other assets in each estate that were available to the respondent to meet the claims of all creditors as well as to meet the respondent's remuneration and costs as trustee in bankruptcy. They contend that the determination of the Supreme Court proceedings could not stand as a valid reason why the bankrupt estates could not have been administered "with alacrity". 7 As a consequence of these matters, the applicants contend that the administration of the bankrupt estates has been unnecessarily delayed and that the estates have been exposed to the burden of additional costs and expenses which they should not bear. 8 On 3 September 2010 I ordered that there be a separate hearing to determine whether the Court should conduct an inquiry into the respondent's conduct and, if so, what the scope of that inquiry should be: see, in that regard, Ferella v Official Trustee in Bankruptcy (2010) 188 FCR 68 at [75]. The applicants propound 11 questions which raise issues concerning the respondent's administration of the bankrupt estates. I will refer to these questions later. At this juncture I simply note that they raise a number of overlapping issues covering almost the entire administration of the estates. 9 The evidence that has been adduced in support of the present application is essentially documentary in nature. It is detailed and complex. The applicants did not give evidence themselves, although their solicitor, Mr Perkins, did give evidence and was cross-examined. 10 I do not think that it is necessary in these reasons to descend to every aspect of the evidence. A significant part of it deals with the toings and froings of the applicants (or members of their families) and the respondent's representatives in respect of the administration of each estate. It is necessary, however, for me to record a number of matters which relate to the more significant events of those administrations, as revealed by the documents. Before doing this, it is convenient to summarise the principles which inform the question of whether an inquiry should be ordered.

relevant principles 11 Section 179 of the Bankruptcy Act provides: (1) 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. (2) The Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt's estate or affairs. 12 Trustees in bankruptcy are properly to be regarded as officers of the Court and are subject to the general control of the Court: Adsett v Berlouis (1992) 37 FCR 201 at 208; Wilson v Commonwealth of Australia [1999] FCA 219 at [44]. Section 179 of the Bankruptcy Act is a specific provision that reflects that position. It is a "supervisory" provision (among other supervisory provisions such as s 178) in aid of the Court's general supervision of trustees who are its officers and "provides what is in substance a power to review acts, omissions or decisions of the trustee": Macchia v Nilant (2001) 110 FCR 101 at [46]; see also at [50]. Its terms are "wide and general" (Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 at 267) and involve the exercise of a "broad discretion as to whether or not there are sufficient grounds to make an inquiry appropriate": Macchia at [49]; see also Turner v Official Trustee in Bankruptcy [1998] FCA 1558. This is reflected in the width of the relief that may be granted: the Court may remove the trustee from office or make such order "as it thinks proper". 13 Notwithstanding this, it is recognised that the discretion to order an inquiry is tempered by a number of considerations. 14 First, the discretion "must be exercised in the interests of the orderly administration of the bankrupt's estate": Re Challen (a Bankrupt); Ex parte Brown v Bendeich (unreported, Federal Court of Australia, Beaumont J, 23 April 1996); Macchia at [50]. 15 Secondly, the person seeking the inquiry should normally be required to establish "substantial grounds for believing that the trustee erred in the administration" or has engaged in "misconduct": Re Gault; Gault v Law (1981) 57 FLR 165 at 173; Wilson at [44]. In this connection "(t)rustees acting honestly, with ordinary prudence and within the limits of their trust, are not liable for mere errors of judgment": In re Chapman; Cocks v Chapman [1896] 2 Ch 763 at 776; see also at 778; Alafaci at 285. 16 Thirdly, before exercising the discretion, the Court should be mindful of the "well-established policy in bankruptcy legislation that the court should not unduly interfere with the day-to-day administration of a bankrupt's estate by a trustee": Re Tyndall (1977) 30 FLR 6 at 9; Turner at 3. Although Re Tyndall was a case dealing with s 178 of the Bankruptcy Act, the following observations of Deane J (when in this Court) are equally applicable to s 179. His Honour (at 10) said: … 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 were shown that the trustee's decision was perverse or clearly wrong, it would be inappropriate and unjust for the court to interfere. Again, under the present legislation, the trustee will ordinarily be the official receiver and the court must be conscious of the fact that the official receiver will be made responsible for the administration of an extraordinarily large number of estates. In such circumstances, the administration of the Bankruptcy Act demands that the court take into account, in exercising its functions under the provisions of s 178 of the Act, the opinion of the official receiver, as trustee, as to what is expedient in the interests of the prompt and efficient administration of a particular bankrupt estate. That is, however, a completely different thing to saying that the court can only interfere with an act, omission or decision of the official receiver, as such trustee, when it is of the view that the official receiver has acted unreasonably, absurdly or in bad faith in so acting or failing to act or in reaching that decision. 17 Fourthly, the discretionary considerations to be taken into account when considering whether an inquiry should be ordered include the likely utility to be derived from an inquiry. In this connection, the ultimate question to be kept in mind is whether there is a likelihood that "the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way": Macchia at [50]. This does not mean, however, that it is necessary that there be "a financial aspect" to the complaint that is brought forward as justifying an inquiry: Maxwell-Smith v Donnelly [2006] FCAFC 150 at [63]. 18 Fifthly, s 179 is not a vehicle for pressing general law claims (such as claims for damages in tort) even though conduct invoking the remedial objectives of the provision may be based upon the breach of general law rights and obligations: Macchia at [44] and [50]. 19 Sixthly, the availability of general law causes of action and remedies at the suit of the person seeking the inquiry may be a sound discretionary reason why an inquiry should not be ordered under s 179: Gault at 173. 20 In Alafaci, Riley J (at 268) gave practical guidance about the procedure to be followed in relation to an inquiry pursuant to s 179: … I do not wish to be taken as presuming to lay down any rule as to the procedure to be followed in, or the approach to be made by the court to, a case of this sort; but it seems to me that in such a case there is a preliminary question to be decided by the court - namely on the grounds and facts before it, has a case been made for inquiry into the trustee's conduct? If the answer to that question is "yes", the next question is - what is to be the scope of the inquiry? It may be that the material already before the court sufficiently defines the scope of the inquiry; on the other hand, the court may find it necessary to define the subjects for inquiry - eg in the form: "Did the trustee do (or fail to do) so and so?" - and to give directions before proceeding to inquire. In any event, the court will seek to inquire into specific matters, and to ensure that the trustee is given proper opportunity to prepare and present his case on those matters. If in the course of inquiry into those matters it emerges that there are other aspects of the trustee's conduct in relation to the bankruptcy into which the court, as the authority having control over trustees, should inquire, the court will safeguard the interests of the trustee as may be necessary by such means as the granting of adjournments and the giving of directions. It will act similarly as may be necessary when the inquiry is completed and the question then arises of what order or orders, if any, should be made under s 179(1)(a) and (b). 21 It is also convenient at this stage to say something about the duties of trustees in bankruptcy. 22 A trustee in bankruptcy is bound to administer the bankrupt estate in accordance with the applicable bankruptcy legislation: Adsett at 208. 23 Section 19 of the Bankruptcy Act sets out a number of duties of a trustee in bankruptcy. It is clear from the section itself that its enumeration is not exhaustive. Among the listed duties are the duty to administer the bankrupt estate as efficiently as possible by avoiding unnecessary expense, and the duty to exercise powers and to perform functions in a commercially sound way: see s 19(1)(j) and (k). 24 Section 140(1) speaks of the trustee's duty to declare and distribute dividends amongst the creditors who have proved their debts, with all convenient speed. 25 In submissions, the applicants also referred to the "performance standards" set out in Schedule 4A of the Bankruptcy Regulations 1996 (Cth) (the Regulations). Although the Regulations do not apply these standards to the respondent, the applicants point to the respondent's own published statement that the performance standards will be used by it in its own administrations in the same manner as they apply to registered and controlling trustees: see Insolvency and Trustee Service Australia, Inspector-General Practice Direction 9 (Insolvency and Trustee Service Australia, December 2004). The Regulations refer to these as the "minimum level of acceptable conduct and performance" of trustees. My attention was drawn to the duty of a trustee to act honestly and impartially in relation to each administration (reg 2.2); the duty to avoid conflicts of interest (reg 2.3); the duty to undertake preliminary inquires and actions (reg 2.6); the duty to realise only those assets that will give a cost-effective return to creditors or that contribute to the payment of the costs of the administration (reg 2.8); the duty to incur only those costs that are necessary and reasonable (reg 2.13); and the duty to take appropriate steps to identify the assets of the estate of a bankrupt that will vest in the trustee (reg 4.2). 26 These matters may be seen as exemplifications, in the context of bankrupt estates, of the general duties of a trustee. In this connection a trustee in bankruptcy is also governed by the general law relating to trustees, except where bankruptcy legislation modifies the general law: Adsett at 209; Re Ladyman (1981) 55 FLR 383 at 397. 27 In Adsett the Full Court adopted the following observations of Smithers J in Mannigel v Aitken (1983) 77 FLR 406 at 408-409 as a correct statement of the duty, and proper manner of performance, of a trustee in bankruptcy: In the case of bankruptcy the Trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the Trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the Trustee. It was said by Rogerson J in Re Ladyman (1981) 55 FLR 383 at 394-396 that the standard of conduct required of the Trustee will ordinarily be the standard required of a professional man and perhaps higher. The learned judge referred to "the high standard of conduct required of trustees". In Re Brogden [1888] All ER 927 Lord Justice Fry said at p 935: "A Trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion is never an absolute one. It is always limited by - the dominant duty - the guiding duty of recovering, securing and duly applying the trust fund; and no Trustee can claim any right of discretion which does not agree with that paramount obligation." Where an order is sought that the Trustee be removed and to make good the losses suffered by the estate, it must be established that the Trustee has been guilty of a breach of duty to act "diligently and prudently in regard to the business of the Trust". See Riley J in Re Alafaci (supra) at 285. According to Halsbury's Laws of England (3rd ed) Vol 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. The Trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs. But beyond this he is not bound to adopt further precautions. It was said by their Honours Dixon CJ, McTiernan and Windeyer JJ in Elder's Trustee and Executor Co Ltd v Higgins (1963) 113 CLR 426 that: "We are not to judge what the Trustee then did or failed to do by the light of later events…The duty of the Trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator's estate…The argument that the Trustee having, it was said, exercised a discretion, its conduct is now unchallengeable is sufficiently answered by a passage from the judgment of Fry LJ in Re Brogden (supra)…Whether or not one calls [the trustee's action] an exercise of discretion, the question remains was it the act of a prudent Trustee." It is not the role of the court to decide whether the path chosen by the Trustee led to the realisation of the greatest value for the assets of the estate. The court is in a different position from that of the Trustee. The court can examine the facts with hindsight and with the benefit of the evidence on oath of the relevant debtors and creditors and witnesses called in their support. The Trustee is required to act diligently and prudently in the exercise of his discretion in deciding matters as they arise in the course of administration of the estate. He may be constrained to act by reference to the knowledge which he has of the circumstances balancing the benefit of further inquiry against further delay and the further expense to the estate, to the creditors and possibly to the debtor if there is a surplus in the estate. 28 With these principles in mind I now turn to consider the facts revealed by the evidence.

Early litigation in relation to the bankruptcies 29 The sequestration orders in respect of the applicants were made by a Registrar of the Federal Magistrates Court. On 17 October 2005 each of the applicants filed an application for review in the Federal Magistrates Court seeking to have his sequestration order set aside. On 1 December 2005 each of the applicants also filed an application seeking an order annulling his bankruptcy. 30 In the meantime, on 25 October 2005, each of the applicants sought a stay of proceedings under his sequestration order. The stay applications were heard on 1 November 2005 and refused on 11 November 2005: Otvosi & Anor v Gustavo Ferella [2005] FMCA 1631; Otvosi & Anor v Angelo Ferella [2005] FMCA 1632. 31 When the applicants' applications for review and applications for annulment came on for hearing on 14 December 2005, the applications for annulment were withdrawn. On 10 March 2006 the applications for review were dismissed: Angelo Ferella v Otvosi & Anor [2006] FMCA 231; G. Ferella v Otvosi & Ors [2006] FMCA 334.

The statements of affairs 32 On 2 December 2005 the applicants filed their respective statements of affairs. 33 In his statement of affairs, Gustavo Ferella indicated that he had received no income in the last 12 months and that he did not expect to receive any income in the next 12 months. He disclosed his assets to be $140,000 in cash that was held in a joint bank account, and a number of properties that he jointly owned with his wife, Nida Ferella. These properties were each said to be unencumbered, with an estimated combined resale value of $4.8 million. He also disclosed that he was owed $140,000 by Riva Industries Pty Ltd (Riva). This company eventually came to play a significant role in the Supreme Court proceedings. 34 As to his liabilities, he disclosed two unsecured creditors: the petitioning creditors (Ervin Otvosi and Keiko Otvosi (the Otvosis)) and Woollahra Council. Both debts were said to relate to court costs but were claimed to have been "satisfied". The amount of the debts was not disclosed. No other creditors were disclosed. 35 He also disclosed that he and Angelo Ferella were trustees of the Cavallino Unit Trust. The assets of the trust were listed as land at Kings Park in Sydney and the Point Piper land. These properties were disclosed as having an estimated resale value of $2.2 million and $9 million, respectively. He also disclosed that he was owed "several hundred thousand" dollars as a beneficiary of the trust. 36 The statement of affairs was purportedly signed by Gustavo Ferella but prepared with the assistance of Angelo Ferella, whose signature also appears on the document. The statement of affairs records that this assistance was required for health reasons. There is reason to suspect that Angelo Ferella prepared the statement of affairs without Gustavo Ferella's knowledge or input. In an affidavit sworn on 10 November 2008 Angelo Ferella said that, prior to 10 December 2005, he had not informed his father that he (Gustavo Ferella) was bankrupt. The evidence of Gustavo Ferella's first awareness of his bankruptcy is a statement acknowledging that fact, which was purportedly signed by him apparently after being informed by Angelo Ferella of his bankruptcy. 37 In his statement of affairs, Angelo Ferella also indicated that he had received no income in the last 12 months and that he did not expect to receive any income in the next 12 months. He disclosed his assets to be $15,000 in cash. He stated that he had no real estate or other assets. Like his father, he stated that his only creditors were the petitioning creditors and Woollahra Council, and that these debts had been "satisfied". He stated that he had been a director and secretary of Riva and that he had resigned from those offices on 24 November 2004. He stated that a liquidator, receiver or administrator had been appointed to Riva, and that the company owed him $140,000 in relation to "G & N Ferella." He made disclosures in relation to the Cavallino Unit Trust in similar terms to those made by Gustavo Ferella. He said that he was a beneficiary of the Cavallino Unit Trust and was entitled to "undistributed funds". He was unable to quantify the amount of those funds. 38 The evidence shows that the statements of affairs were deficient and inaccurate. The following matters should be noted at the present time. 39 First, at least one of the debts to the two identified unsecured creditors had not been "satisfied", as represented. I will return to this matter in more detail. 40 Secondly, the evidence shows that the applicants had incurred a significant number of other debts. Most debts appear to have been jointly incurred by them as trustees of the Cavallino Unit Trust. It seems that, at the time of preparing the statements of affairs, Angelo Ferella had taken the view that these were "trust debts" and of no concern to the respondent. He was mistaken in that view. Nevertheless it was a view that he steadfastly, and at times defiantly, maintained. 41 A number of proofs of debt were lodged in each bankruptcy throughout 2006. Some of these were disputed by Angelo Ferella. From time to time the respondent sought legal advice as to whether the disputed proofs of debt should be admitted. Some were admitted; some were rejected. Two proofs of debt were the subject of legal proceedings. One proceeding (brought by the applicants) was discontinued with costs against them in July 2006 and the other proceeding (brought by a creditor) was settled in June 2007. 42 Save as to any interest to which they may be entitled, the bulk of creditors in each estate were paid in September 2008. This followed the making of orders in the Supreme Court proceedings. The applicants' position, undoubtedly aided by hindsight, is that, by 31 August 2006, the estates could have been administered in respect of all but one of these creditors and that, by 21 December 2007, the respondent was "in a position to administer all of the creditors ultimately paid". Whether this is a correct statement of the position as it appeared at those times depends, apart from anything else, on whether the respondent, at those times, had funds in hand to make the payments that were in fact made in September 2008 and was free to make those payments from those funds. It will be necessary for me to return to these matters. In any event, the evidence shows that, even as at 21 December 2007, two proofs of debt lodged in Angelo Ferella's estate remained under consideration and had not yet been admitted or rejected, although one proof of debt had been disputed by him. 43 Thirdly, although the applicants had represented in the statements of affairs that they were the trustees of the Cavallino Unit Trust, and that the Point Piper land was an asset of that trust, Angelo Ferella later claimed, in March 2006, that he and his father had not been trustees of that trust "for almost two years". No explanation has been given by the applicants as to why, in that case, they represented in their statements of affairs that, as at 2 December 2005, they were trustees of the Cavallino Unit Trust. In fact, other evidence shows that the claim made in March 2006 that Angelo Ferella and Gustavo Ferella had not been trustees "for almost two years" was also incorrect. This is but one aspect of the ownership of the Point Piper land that has bedevilled the administration of the bankrupt estates. I will return to this matter in more detail.

The sum of $323,977.54 paid to the respondent 44 In March 2006 the respondent received a number of payments totalling $323,977.54. In the following paragraphs I summarise the circumstances in which these payments came to be received. 45 There had been extensive litigation in the Supreme Court of New South Wales between the Otvosis and the applicants, relating to the development of the Point Piper land. The Otvosis owned neighbouring land. On 27 April 2005 the Otvosis obtained a judgment for costs against the applicants in the sum of $74,656.00. The bankruptcy notices and subsequent creditors' petitions served on the applicants were based on the existence of this judgment debt. 46 On 8 March 2006 the sum of $74,656.00 was received by the respondent and deposited into Angelo Ferella's estate account. The immediate provenance of these funds appears to have been a bank cheque in favour of the Otvosis that had been sent to their solicitors by Angelo Ferella in purported payment of the judgment debt for the same amount. Apparently, the Otvosis' solicitors, obviously knowing of the applicants' bankruptcies, then forwarded the funds to the respondent. This attempted payment by Angelo Ferella obviously related to the debt to the Otvosis which was referred to in the statements of affairs as having been "satisfied". No explanation has been given by the applicants as to why they had represented in their statements of affairs that this debt had been "satisfied" when, plainly, it had not been "satisfied". 47 On 13 March 2006 Angelo Ferella attended the office of the respondent in Sydney and handed four bank cheques to Philip Madden. Mr Madden is the respondent's representative who is responsible for the day-to-day management of the applicants' bankrupt estates. Mr Madden has been the object of a number of Angelo Ferella's complaints and of complaints by other Ferella family members. The total amount of the bank cheques was $249,321.54. The amount was deposited by the respondent into Angelo Ferella's estate account. 48 The respondent says that, at the time Angelo Ferella gave these cheques to Mr Madden, he said: "That should settle the matter". According to Angelo Ferella, he said: "These third party funds are being provided solely for the purpose of annulling my bankruptcy and that of my father". In order to understand the significance for the present application of these two versions of what Angelo Ferella said at that time, it is necessary to recount earlier events in relation to the administrations of the bankruptcies. I now turn to those earlier events. 49 In January 2006 Mr Madden was contacted by Schon Condon, the liquidator of Riva. Mr Condon informed Mr Madden that Gustavo Ferella was in the process of selling a Ferrari motor vehicle. Mr Madden made inquiries. He was informed in writing by Tony Graziani, a representative of Italian Automobiles Group Pty Ltd (trading as Italia Motori), that his company had acted for Gustavo Ferella on the sale of a Ferrari motor vehicle on 24 November 2005 (that is, after the making of the sequestration order against Gustavo Ferella). The purchase price was $250,000.00 and had been paid by cheque in favour of Gustavo Ferella. At the time of the sale, Gustavo Ferella had represented in writing to Italia Motori that the motor vehicle was "owned outright" by him. Neither the ownership of the motor vehicle nor the existence of these funds had been disclosed in Gustavo Ferella's statement of affairs. In early March 2006 Angelo Ferella told Mr Madden (contrary to the information provided to and by Mr Graziani) that the vehicle was owned by Nida Ferella and that the cheque for the purchase price was made out to Gustavo Ferella only because he had delivered the vehicle for sale. It is plain that in early March 2006 there was a substantial question concerning the ownership of the Ferrari motor vehicle and whether the proceeds of its sale formed part of Gustavo Ferella's bankrupt estate. 50 On 8 March 2006 the respondent obtained an order from the Federal Magistrates Court that Gustavo Ferella furnish the respondent with a verified detailed account between 1 November 2005 and 8 March 2006 of his receipt of the sum of $250,000.00, together with copies of available bank statements relating to the bank account into which the proceeds from the sale of the Ferrari motor vehicle had been deposited. 51 Also on 8 March 2006 a barrister acting for the applicants, Christopher Stomo, told Mr Madden that the applicants were seeking to refinance the Point Piper land with a view to obtaining funds that would be sufficient to pay the applicants' debts in full, so as to obtain an annulment of the bankruptcies: see s 153A of the Bankruptcy Act. In light of the proofs of debt that had been lodged by that date, Mr Madden wrote to Mr Stomo on the same day, advising that an amount of approximately $323,977.54 was required to satisfy the then claims of creditors and the fees and costs of the bankruptcy administrations in full. For this purpose, and for convenience, Mr Madden dealt with the applicants' estates jointly. In his letter, Mr Madden noted that the sum of $74,656.00 had been received by the respondent earlier that day, so that the amount required to annul the bankruptcies would be $249,321.54. This amount included a provision for post-sequestration interest, should it be claimed. Mr Madden made it clear that this sum was an estimate only and could increase should further undisclosed creditors lodge proofs of debt or should the respondent incur further legal costs. As I will later record, Mr Stomo wrote to Mr Madden on 9 March 2006 informing the respondent that the sum of $249,321.54 could not be paid without refinancing the Point Piper land. 52 In these circumstances, the respondent (through Mr Madden) thought that the payment of the sum of $249,321.54 on 13 March 2006 by Angelo Ferella related to the proceeds from the sale of the Ferrari motor vehicle. The respondent subsequently discontinued its application for an account and the order made by the Federal Magistrates Court on 8 March 2006 was discharged by consent. On the other hand, the applicants say that the payment was not referable to the sale of the Ferarri motor vehicle but had been made to annul the bankruptcies, even though Mr Stomo had advised that it would be necessary, for that purpose, to refinance the Point Piper land. 53 Regardless of the reason why the sum of $249,321.54 was paid, it was clear that that sum, together with the sum of $74,656.00 earlier received by the respondent, was not sufficient to achieve annulments of the bankruptcies as at 13 March 2006 because, later that day, two further proofs of debt (totalling $92,772.37) were lodged. On being informed of this, Angelo Ferella told Mr Madden that the two proofs of debt were "disputed" and that "no further funds will be provided". After 13 March 2006 further proofs of debt were lodged. A number of these proofs of debt were subsequently admitted. 54 As this summary of events reveals, the making of these payments took place against the background of other events concerning the Point Piper land. I now turn to those events.

Dealings with the Point Piper land 55 Searches carried out by the respondent shortly after the sequestration orders had been made revealed that the Point Piper land was registered in the names of the applicants. The searches also disclosed that the land was subject to a registered mortgage to Key Nominees Pty Limited (Key Nominees). The searches did not disclose that the land was held by the applicants as trustees (although see the provisions of s 82 of the Real Property Act 1900 (NSW)). On 28 October 2005 the respondent lodged a caveat on the title to the land. 56 On 15 November 2005 the solicitors for Key Nominees advised the respondent that proceedings had been commenced in the Supreme Court of New South Wales for an order of possession with respect to the land. 57 Although the statements of affairs had represented that the Point Piper land was held by the applicants as trustees of the Cavallino Unit Trust, in December 2005 and during the first half of 2006 the respondent came into possession of other information that indicated the real possibility that the land was held beneficially by the applicants, and not as trustees. I will refer to this information in later paragraphs. 58 The original caveat on the title lapsed. On 3 March 2006 the respondent lodged a further caveat. Angelo Ferella complained about this action. He said that, by lodging the caveat, the respondent had prejudiced attempts that were being made to refinance the Point Piper land. 59 On 4 March 2006 Angelo Ferella (on behalf of the Cavallino Unit Trust) sent a facsimile communication to Mr Madden in which he said: ITSA is formerly put on notice that the Cavallino Unit Trust has been prejudiced in regards to the actions taken by your department in regards to the rights of the Trust to re-finance the property known as 1 Wingadal Place, Point Piper. ITSA has been aware from Affidavits and of cross-examination at the hearings before Magistrate Barnes, being the stay application and the application for review in the Federal Magistrates Court that there are properties owned pursuant to a Trust, my father and I have not been the Trustees of the Trust for almost 2 years. The actions of ITSA has delayed the re-finance in regards to paying out the current mortgagee the date being 3 March 2006, the damages are calculated at $1,329.20 per day or $41,208.33 per month and are ongoing and charged to our account. Further to that the Trust is now paying further damages in regards to the new mortgagee Provident Capital Limited which approved the re-finance for the subject property, the loan was to settle at 2.30 pm 3 March 2006, the loan did not settle because of the actions of ITSA by placing once again a caveat on the Point Piper property after a lapsing notice was lodged with the Department of Lands in which the Trust is now liable to pay interest on a loan it has not settled from 3 March 2006, the amount of damages is calculated at $1,710.00 per day and is ongoing until settlement occurs. The Trust requests without further delay that the caveat be lifted by end of the business day 6 March 2006, to avoid any further damages and costs as the dead line to pay out the Mortgagee is close of business 7 March 2006 or the mortgagee will exercise possession of the property in which will take effect immediately. If the Trust ultimately looses the property because of actions taken the Trust will be seeking damages in regards to the loss of the property which is valued at almost $9 million dollars. The evidence provided is overwhelmingly that the Point Piper property is owned pursuant to a Trust and can be resolved immediately by your office, the contract for sale of land speaks for itself. Total dismay to say the least that ITSA has taken this step when there are sum $14.5 million dollars in assets with a total equity in the properties totalling some $9.950 million dollars over a debt of sum $74,000.00 which has been paid this is incredible. A response is required urgently in regards to what actions ITSA intend to take to resole this matter by end of day 6 March 2006 as time is of the essence. [Errors in original] 60 Angelo Ferella gave a number of documents to Mr Madden to show that the Point Piper land was a trust asset. Mr Madden sent those documents to the respondent's solicitors on 6 March 2006 for advice. The documents make reference to various trusts and present a confusing picture. The documents included: A letter from the Commonwealth Bank of Australia dated 3 October 2000 and addressed to the applicants as "Trustee for the Ferella Unit Trust". The letter concerns the approval of a loan facility in the amount of $3.6 million for the purchase of the Point Piper land. A contract for the sale of the Point Piper land dated 7 October 2000. The contract indicates that the applicants purchased the property as trustees for a trust called the Modena Unit Trust. A letter from Suncorp-Metway Ltd to Angelo Ferella dated 4 June 2003. The letter sets out the terms of an offer of a development facility in the amount of $6.3 million for the stated purpose of assisting with the refinance of the Point Piper land and the development of two luxury villas on that property. The borrower is listed as "Angelo Ferella and Gustavo Ferella as trustees for the Cavallino Unit Trust". A deed of trust for the Ferella Unit Trust dated 10 January 1995. The applicants are identified as trustees of the Ferella Unit Trust. Financial reports for the years ended 30 June 2001 and 30 June 2005 for the Cavallino Unit Trust. The reports record the existence of fixed assets comprising land, but do not otherwise identify the land. It appears that no documents explaining the relationship, if any, between the Ferella Unit Trust, the Modena Unit Trust and the Cavallino Unit Trust were provided to Mr Madden or to the respondent's solicitors at that time. 61 It was in that state of affairs that the applicants' barrister, Mr Stomo, informed Mr Madden on 8 March 2006 that the applicants were seeking to refinance the Point Piper land with a view to obtaining funds that would be sufficient to pay the applicants' debts in full and to annul their bankruptcies. I have already referred to Mr Madden's written response on that day advising that, as an estimate, $249,321.54 would be required to obtain the annulments. 62 In a letter addressed to Mr Madden dated 9 March 2006, Mr Stomo said: As you are aware Mr Ferella has organised refinancing of the Point Piper property. Settlement of that transaction is hampered by the caveat on title. Mr Ferella would not have sufficient funds to make the payment to the trustee in the sum of $249,321.54 until the finance goes through. What is proposed is that any balance in the short fall of $249,321.54 be made payable to the trustee by bank cheque from the proceeds of the refinancing. This will necessitate the trustee handing over a discharge of caveat that the settlement of the matter. Would you kindly advise whether this would be an acceptable method to seek the funds. [Errors in original] 63 Mr Madden responded to Mr Stomo's proposal in a letter dated the same day. He said: In order to facilitate the refinancing of the property at Point Piper the Official Trustee has agreed to provide a Withdrawal of Caveat with respect to this property upon the payment of the sum of $249,321.54. I note your latter advice that your clients have insufficient funds to satisfy this amount in full and are seeking advice from the trustee as to whether any shortfall of this amount [may] be paid by bank cheque from the proceeds of refinancing. The Official Trustee has also agreed to this proposal upon the production of a suitable undertaking. 64 As I have already recorded, on 13 March 2006 Angelo Ferella delivered the bank cheques totalling $249,321.54 to Mr Madden. However, for the reasons I have indicated, that sum, regardless of its source and regardless of the reason why it had been paid, was not sufficient to achieve annulments of the bankruptcies at that time. 65 Correspondence continued to pass between Mr Madden and Mr Stomo about the possible annulments of the bankruptcies. In a letter dated 13 March 2006 Mr Stomo advised that, for the purpose of seeking the annulments, the applicants had instructed him that they would accept the correctness of all proofs of debt that had been lodged in the bankruptcies. It can thus be seen that, at this time, when there was a prospect of refinancing the Point Piper land, the applicants were willing for the Point Piper land to be used in connection with the payment of the applicants' creditors. Indeed, they were seeking the respondent's assistance to achieve that outcome. As will be seen, this position changed. 66 On 27 March 2006 Mr Stomo again wrote to Mr Madden concerning the refinancing of the Point Piper land. Relevantly, that letter stated: I refer to my telephone conversation of last Friday and confirm my advice is to you that the loan to refinance the property at Point Piper will be in the name of Agusta Pty Ltd. In order for the incoming mortgagee to be able to register its mortgage it will require the alteration of the first schedule of the certificate of title (i.e. the registered proprietor) to reflect that as being Agusta Pty Ltd. Agusta Pty Ltd is the new trustee for the Cavallino Unit Trust under which the property is held. I note that the Official Trustee has a caveat on title and is willing to withdraw the caveat to allow the registration of the incoming mortgage upon the terms and conditions which we have discussed. I also note that there is an issue between the parties in relation to the existence of otherwise of the trust and that the Official Trustee has lodged a caveat in order to protect its interest in this regard. Whilst the Official Trustee has agreed to withdraw the caveat to allow the refinancing there is a concern of losing protection of its interest by the further lodgement of a caveat following the refinancing … [Errors in original] 67 Mr Stomo's letter makes clear that, as at 27 March 2006, the applicants understood that the ownership of the Point Piper land remained in question so far as the respondent was concerned. 68 On about 5 April 2006 Mr Madden sent an email to Mr Stomo stating that the respondent would consent to Agusta being registered as proprietor of the Point Piper land. However, this position quickly changed. On 7 April 2006 Mr Madden wrote to the solicitors acting for the intended incoming mortgagee, Provident Capital Limited (Provident). Mr Madden said: The Official Trustee in Bankruptcy, having considered the position of the first mortgagee and its sale and the position of Mr and Mrs Otvosi and the vesting of the property under s 58 Bankruptcy Act does not consent to a change of registered proprietor and will maintain the status quo as currently registered at the Land Titles Office until agreement of all affected parties. 69 As events turned out, the decision not to consent to Agusta being registered as proprietor of the Point Piper land was both a correct and a prudent one. In circumstances which I will come to describe, Agusta was not the trustee of the Cavallino Unit Trust, as the applicants had claimed, and was not entitled to be registered as proprietor of the Point Piper land. 70 At about this time, the ownership of the Point Piper land was also a matter of dispute between Key Nominees and Provident. Key Nominees was of the view that the land was owned by the applicants beneficially. Provident, on the other hand, sought to rely on Agusta's assertion that the land was an asset of the Cavallino Unit Trust, of which it was trustee. This dispute arose in the context of Provident asserting an entitlement to a fee for offering finance to Agusta. 71 In a letter dated 4 May 2006, the solicitor acting for Provident wrote to Key Nominees' solicitors, saying: I confirm my verbal advice that [Agusta] asserts it held the property on trust for the Cavallino Unit trust and that the current registered proprietors, Angello Ferella and Gustavo Ferella, purchased the property as trustees for the Modena Unit Trust, which then changed its name to the Ferella Unit Trust and which changed its name again to the Cavallino Unit Trust, prior to Messrs Ferella retiring as trustees of the trust in favour of [Riva], which subsequently retired as trustee of the Trust in favour of Augusta. [Errors and capitalisation in original] 72 On 5 May 2006 Key Nominees' solicitors replied, saying: We firstly note that we do not accept that Angelo Ferella and Gustavo Ferella held the property as Trustees of the Cavallino Unit Trust. The loan application form completed by the borrowers specifically asked the question as to whether the property was held in trust to which the answer was given as "no". Secondly, requisitions on title were issued to Ferella's [sic] solicitor and the replies to requisitions again provided a denial in respect of a trust. 73 This information was known by the respondent. 74 The refinancing of the Point Piper land did not eventuate. In May 2006 the land was sold by Key Nominees for the sum of approximately $7.95 million. 75 Thereafter, on 31 May 2006, the applicants resiled from their acceptance of the proofs of debt that had been lodged. On that day they commenced proceedings in the Federal Magistrates Court challenging a proof of debt that had been lodged by AMT Engineers Pty Limited on 17 February 2006 and admitted by the respondent for $140,397.78. The applicants subsequently sought leave to discontinue the objection proceedings on 31 July 2006. An order for costs was made against them. The applicants subsequently required these costs to be taxed. 76 By the end of June 2006 the respondent had received $1,788,532.00 from the sale of the Point Piper land (the Point Piper funds). These funds were deposited into the applicants' estate accounts in equal shares. 77 By letter dated 26 July 2006, the respondent's solicitors wrote to Mr Stomo advising that the respondent intended to pay a dividend from the Point Piper funds. Relevantly, the letter stated: … we are instructed that you have spoken to Philip Madden, our client's Manager of each of the bankrupt estates and advised that in your opinion the net proceeds of sale of 1 Wingadal Place, Point Piper was trust money and did not vest in the Official Trustee in Bankruptcy. Other than advising of this fact orally, there does not appear to be any documentation to support this fact and, as we understand it, in the Equity proceedings with Mr and Mrs Otvosi there was no mention made of the alleged trust. Further, as we understand it, the Common Law Duty Judge found in an application for stay of the possession proceedings by Key Nominees Pty Ltd that there was no trust. We have also read the 3 reported judgments between Otvosi and the bankrupts being:- (a) Hamilton J 23 September 2005; (b) Gzell J 31 March 2004; and (c) Hamilton J 5 July 2005 There is no mention of a trust in those judgments. If there is or if it is in any Affidavit filed in any of those proceedings please let us know and provide to us a copy. This letter is to serve as notice of the Official Trustee's intention to make distributions from the monies held by it in each bankrupt estate. 78 In the course of submissions the applicants criticised this letter for stating that there did not appear to be any documentation to support the fact that the Point Piper funds were a trust asset. It is true that the letter of 26 July 2006 overstates the position in that regard. Some documentation seeking to establish that the Point Piper land was a trust asset had been handed to Mr Madden by Angelo Ferella in March 2006, and forwarded by Mr Madden to the respondent's solicitors for review. However, as I have stated, that documentation presented a confusing picture. This was even more so in circumstances where the applicants had provided plainly contradictory information relating to the identity of the trustee or trustees of the trust they were asserting. Moreover, as I have noted, there was other information available to the respondent at the time which would cause it to doubt, on reasonable grounds, that the Point Piper land was a trust asset. The 26 July 2006 letter made clear the respondent's then view that, unless further information was forthcoming, it proposed to treat the Point Piper funds as divisible property in the bankrupt estates and to pay dividends from those funds. 79 On 16 August 2006 the respondent advised the applicants that, unless an application was made by the applicants to "the Court" within 14 days to determine whether the Point Piper funds were trust funds or divisible property in the applicants' estates, it was the respondent's intention to distribute an interim dividend to those creditors whose proofs of debt had been admitted. Apparently Angelo Ferella responded by facsimile transmission on 29 August 2006, saying that the applicants would be making another "annulment application" and that the respondent would be served with documents "within the next few days". 80 On 11 September 2006 Agusta commenced the Supreme Court proceedings. The summons commencing the proceedings was signed by Nida Ferella. The summons also named Tiziana Ferella (Angelo Ferella's sister) as an authorised person. 81 Agusta sought declarations in the Supreme Court proceedings that it was the trustee of the Cavallino Unit Trust; that the Point Piper land was held pursuant to the Cavallino Unit Trust; that the Point Piper funds were held on trust for the Cavallino Unit Trust; and that "all funds held by the defendant are held on trust for the Cavallino Unit Trust". Agusta also sought injunctive relief to restrain the respondent from disbursing "the funds held by the defendant in the account[s] of Angelo Ferella and Gustavo Ferella" to any person other than Agusta and to compel the respondent "to forthwith forward [to] the plaintiff all funds held in the account[s] of Angelo Ferella and Gustavo Ferella". It was clear that, if granted, this relief would extend not only to the Point Piper funds but also to all other funds in the estate accounts, including such amounts as remained from the $323,977.54 paid to the respondent in March 2006. 82 In the meantime, on 31 July 2006, Angelo Ferella wrote a letter of complaint to ITSA, expressing his concern about how his and Gustavo Ferella's estates were being administered. Mr Ferella said: Our matter is not your typical bankruptcy, we are not bankrupt we have only committed a act of bankruptcy we are worth millions of dollars the potential exposer is only some $100,000.00 ITSA is holding at the moment to the tune of about $2.4 million dollars in cash not counting the bricks and mortar assets which are in the several millions of dollars in which ITSA has placed caveats on all the properties. [Errors in original] 83 In his letter Mr Ferella went on to complain about certain proofs of debt being lodged "out of time" or being admitted, and about what he considered to be the respondent's delay in administering the bankrupt estates. He complained of what he perceived to be a delay in obtaining the annulments that had been sought. He accused Mr Madden of being "one sided in our affairs". 84 The Bankruptcy Regulation Branch of ITSA (Bankruptcy Regulation) undertook an investigation of Mr Ferella's complaints. As part of that investigation it required a report to be produced detailing the status of the administration of the estates. A detailed report was produced by Mr Madden on 31 August 2006 dealing with the statements of affairs that had been filed by the applicants; the lodging of proofs of debt in each estate and the consideration of those claims; the various proceedings brought by the applicants in relation to their bankruptcies; and the sale of the Point Piper land. The report concluded as follows: On 16 August 2006, both bankrupts were advised that unless an application was made to the court within 14 days its was the Official Trustee's intention to distribute a [sic] interim dividend to AMT Engineers Pty Limited, Ervin Lloyd & Keiko Otvosi, Deputy Commissioner of Taxation and JEC Air Conditioning Services Pty Limited with the remaining proofs of debt being excluded pending decision as [to] whether the claims should be admitted. In his facsimile transmission of 29 August 2006, however, Angelo Ferella advised that they will be serving documents within the next few days with respect to a further annulment application. 85 On 19 September 2006 Bankruptcy Regulation wrote to Angelo Ferella, reporting on the outcome of its investigation. Bankruptcy Regulation acknowledged that the adjudication of creditors' claims had been protracted but, after conducting a review of the relevant files and considering Mr Madden's report, concluded that there was no evidence that the adjudication of creditors' claims was unnecessarily or unreasonably delayed. Bankruptcy Regulation attributed the cause of any delay to a combination of circumstances involving the applicants' incomplete and inaccurate disclosure of creditors; the applicants' unsuccessful challenge in the Federal Magistrates Court to the proof of debt lodged by AMT Engineers Pty Limited; and the complexity of some of the claims, which necessitated legal advice being sought from counsel as to whether those claims should be admitted. Bankruptcy Regulation observed that the first two matters did not result from the respondent's conduct and that the last matter was a step that was necessary to be taken in the proper administration of the estates. 86 Bankruptcy Regulation also referred to the delays caused by the applicants' unsuccessful applications to stay proceedings under the sequestration orders and to review the making of the sequestration orders, including the fact that the applicants had sought taxation of the costs ordered in the unsuccessful review proceedings. Bankruptcy Regulation referred to the fact that the applicants' claim that the Point Piper funds were a trust asset would further protract the obtaining of the annulments that they were seeking. Bankruptcy Regulation concluded by saying that it could find no evidence of bias on the part of Mr Madden. 87 Although, in this proceeding, the applicants maintain the general allegation that the respondent has been dilatory in its administration of their bankrupt estates, no challenge (whether by evidence or in submissions) was made by the applicants to the accuracy of any part of Bankruptcy Regulation's response to Angelo Ferella or to any part of Mr Madden's report. 88 On 29 September 2006 Mr Madden swore an affidavit in the Supreme Court proceedings in which he deposed to the fact that the respondent was holding the sum of $889,856.44 in Gustavo Ferella's estate and $1,176,899.53 in Angelo Ferella's estate. Mr Madden deposed to the fact that the Supreme Court proceedings were delaying the administration of the estates and preventing the respondent from making a final distribution to unsecured creditors in each bankruptcy. By that time the respondent had determined that the approximate amounts of $184,335.32 and $365,551.17 were required to satisfy the claims of creditors and the costs of administration of Gustavo Ferella's estate and Angelo Ferella's estate, respectively. This determination was subject to the qualification that additional funds would be required to satisfy the legal costs incurred by AMT Engineering Pty Limited as ordered by the Federal Magistrates Court in the discontinued review proceeding. 89 On 4 October 2006 the respondent wrote again to Angelo Ferella on the question of paying creditors from the Point Piper funds. The letter referred to the proceedings that had been commenced by Agusta. The letter stated that, should the relief sought by Agusta not be granted, the respondent intended to distribute an interim dividend of 100 cents in the dollar to certain creditors whose proofs of debt had been admitted. A similar letter was sent to Gustavo Ferella. 90 Angelo Ferella responded to this letter on 11 October 2006. His written response included the following statements: The actions you suggest that will be taken by ITSA in regards to paying a dividend from money which does not belong to Angelo Ferella or Gustavo Ferella are quite ridiculous and quite childish I might say it would be the case you will be met with the full force of the law and we would hit you with a injunction so fast you would not no what hit you, as you well know the property was owned by the Trust as per the evidence provided to you on 3 March 2006. I now know you have taken this entire matter quite personal, and have been one sided in this whole ordeal from day 1. ITSA is supposed to be neutral in all applications, we will also be lodging a application with the courts and seeking orders that ITSA be excused from continuing to act in this matter because of the continuing bias. Furthermore I can say with confidence you will not see one red cent of the money you are holding, the money will be going to the rightful owner being Cavallino Unit Trust as you are well aware the Trust is the rightful owner of those funds. I further note you will be served shortly with a annulment application for my father Gustavo Ferella. [Errors in original] 91 Further correspondence passed between the respondent and Angelo Ferella relating to the respondent's desire and intention to use the Point Piper funds to pay the applicants' creditors. In letters to Agusta's solicitors (who also acted for the applicants in the present proceeding) and to Mr Stomo, the respondent's solicitors stated that, in all of their dealings with Mr Stomo, he had represented that the Point Piper funds were available to pay the applicants' creditors. 92 On 27 October 2006 Mr Madden wrote to Gustavo Ferella's wife, Nida Ferella. He was no doubt prompted to do so because of the applicants' objection to the respondent's use of the Point Piper funds to pay creditors. The letter made reference to a number of properties that Gustavo Ferella had disclosed in his statement of affairs as being jointly owned with Nida Ferella. The letter stated that, upon Gustavo Ferella's bankruptcy, the joint tenancies in those properties had been severed and that Gustavo Ferella's share had vested in the respondent. The letter went on to state that the respondent intended to look to the realisation of its interests in the properties to satisfy the claims of creditors and to pay the fees and costs of the administration. The letter invited Nida Ferella, as a co-proprietor of the properties, to either make an offer to acquire the respondent's interest in the properties or to join with the respondent in their sale. The evidence does not disclose that Nida Ferella made any response to this proposal. It is clear, however, that, if Agusta was successful in the Supreme Court proceedings, it would be necessary for the respondent to look to realising other assets to pay the applicants' unsecured creditors whose debts had been proved in the bankruptcies.

The progress of the Supreme Court proceedings in 2006-2007 and other events 93 In November 2006 the respondent sought to have the Supreme Court proceedings summarily dismissed on a number of different grounds, including the fact that Agusta had named the wrong defendant (namely, ITSA rather than the respondent). 94 Another ground which the respondent relied on was Agusta's lack of standing. It is to be noted that, by this time, Agusta had filed affidavit evidence in support of its claim to be the trustee of the Cavallino Unit Trust. The extent of that evidence is not clear from the material before me. However, it appears that, by that time, Agusta's claim was that it had been appointed as trustee of the Cavallino Unit Trust in place of Riva and that Riva had been appointed as trustee in place of the applicants in April 2005. It also appears that Agusta was contending that the Cavallino Unit Trust was the same as the Ferella Unit Trust and the Modena Unit Trust. In its application for summary dismissal the respondent contended that these appointments were not valid under the deed put forward as constituting the trust. 95 Another ground which the respondent relied on was that there was no triable issue because even if Agusta could establish that it was a successor trustee to the applicants, a court would not disturb a former trustee's possession of trust assets (here represented by the Point Piper funds) over which there was a lien to support an indemnity, until all liabilities incurred by the former trustee in the business of the trust (represented by the debts proved in the applicants' bankruptcies) had been identified and discharged. 96 The respondent's application for summary dismissal was refused. 97 On 15 December 2006 Agusta filed an amended summons. It correctly identified the respondent as the defendant in the proceedings and made an additional claim for relief, namely for damages. It maintained its entitlement to the other relief it had originally claimed. The basis of the claim for damages related to the respondent's withdrawal of its consent on about 7 April 2006 to permit Agusta to be registered as proprietor of the Point Piper land. 98 On 2 February 2007 Mr Madden wrote separately to the applicants, seeking to clarify their position as to whether debts to various creditors had been incurred in the course of business of the Cavallino Unit Trust. The letters set out the details of various proofs of debt that had been lodged. The applicants were asked: 1. Whether each of the above claims were incurred by you in the course of the business of the Cavallino Unit Trust. It appears that your liabilities were incurred in relation to the Wingadal Place, Point Piper real estate. 2. If each of the above claims was not incurred in the business of the Cavallino Unit Trust then I will assume it is a personal liability belonging to you and not in relation to the trust, unless I am satisfied by the creditor that it does in fact relate to the business of the Cavallino Unit Trust. 3. Please confirm that you do not require the Official Trustee in Bankruptcy to seek to establish that the Wingadal Place, Point Piper real estate was owned by you and Angelo Ferella beneficially or as Trustee of the Cavallino Unit Trust. 4. The Official Trustee in Bankruptcy seeks your confirmation with you that the funds currently held by it, so far as they relate to trust liabilities, should be used by the Official Trustee in Bankruptcy to discharge those trust liabilities and that the surplus should be paid to Agusta Pty Ltd. 99 It does not appear from the evidence that the applicants provided any response to these letters. It is clear, however, that the respondent was seeking to bring about a situation where, by consensus, debts incurred by the applicants in relation to the Point Piper land could be paid from the Point Piper funds. That consensus was not forthcoming. 100 On 6 February 2007 the respondent filed a cross-claim in the Supreme Court proceedings. The relief claimed was as follows: 1. A declaration that the Cross-Claimant is entitled to be indemnified from the proceeds of sale of the property at 1 Wingadal Place, Point Piper in respect to Proof of Debts or claims which are due by either/or/and Gustavo Ferella and Angelo Ferella… 2. A declaration that the Defendant is entitled to be indemnified from the proceeds of sale of the property at 1 Wingadal Place, Point Piper in respect of its proper remuneration calculated in accordance with the provisions of the Bankruptcy Act together with all expenses incurred as Trustee. 3. A declaration that the rights of indemnity referred to in paragraphs 1 and 2 are secured by a charge over the fund of money currently held by the Official Trustee from the proceeds of sale of 1 Wingadal Place, Point Piper. 4. A declaration that the Official Trustee is not required to pay any part of the proceeds of sale of the property at 1 Wingadal Place, Point Piper to the Plaintiff until the debts and claims referred to in paragraph 1 together with the costs, expenses and remuneration referred to in paragraph 2, including the Official Trustee's costs of these proceedings, have been paid in full. Alternatively 5. That the net proceeds of sale of 1 Wingadal Place, Point Piper be distributed as follows: - a. 50% to the Official Trustee in Bankruptcy and Nida Ferella; and b. 50% to the Ferell Staff Superannuation Fund. 6. With respect to the 50% to be paid to the Official Trustee in Bankruptcy and Nida Ferella, that this sum be paid as follows:- a. 33.34% to the Official Trustee in Bankruptcy as Trustee of the property of Angelo Ferella; and b. 33.33% to the Official trustee in Bankruptcy as Trustee of the property of Gustavo Ferella; and c. 33.33% to Nida Ferella. 7. That this Court give directions to the Official Trustee in Bankruptcy as to how to distribute the proceeds of sale of 1 Wingadal Place, Point Piper. 8. Such further or other orders as the Court deems fit. 9. That the remuneration, costs and expenses of the Official Trustee in Bankruptcy be paid on an indemnity basis from the proceeds of sale of the property at 1 Wingadal Place, Point Piper. 101 By way of explanation of the alternative relief claimed in the cross-claim, the material then before the respondent showed that the registered unit holders of the Cavallino Unit Trust were Gustavo, Nida and Angelo Ferella (with respect to A Class Units) and the Ferell Staff Superannuation Fund (with respect to B Class Units). The relief claimed was a matter of significance to the respondent because, upon the applicants' bankruptcies, it had become, in equity at least, a unit holder in the Cavallino Unit Trust in respect of the A Class Units. 102 On 7 May 2007 the respondent's solicitors wrote to Agusta's solicitors. The letter explored the prospect of settling the Supreme Court proceedings. Among the matters set out in that letter were the following: 1. Without admission the Official Trustee is prepared to acknowledge that each of the bankrupts acted as trustee in owning and selling the property at 1 Wingadal Place, Point Piper ("the property"). The property is the only asset of the trust and has been sold by the mortgagee. 2. For the purpose of the admission in paragraph 1 the Official Trustee asserts that the trust is liable to indemnify the creditors of the trust. This occurs by indemnity to the bankrupts in their capacity as the former trustees of the trust for liabilities incurred by each bankrupt in their trustee capacity. Both at common law and under the Trustee Act, 1925, a trustee is entitled to be indemnified out of the trust assets for any liability it incurs as trustee. 3. The Official Trustee in Bankruptcy holds the surplus from the sale of the property pursuant to a lien exercised by it for payment of the amounts due by way of indemnity to the bankrupts in their trustee capacity. The letter went on to propose a scheme for paying unsecured creditors as well as the costs and expenses relating to the administration of the bankruptcies, largely from the Point Piper funds, with the balance to be paid to Agusta. 103 The respondent's offer was rejected. On 21 May 2007, and again on 20 July 2007, the respondent's solicitors wrote to Agusta's solicitors, noting that, although their offer dated 7 May 2007 had been rejected, no formal response (and no counter-proposal) had been made. I am satisfied on the evidence that, in fact, the applicants made no response to this offer, beyond merely rejecting it. The respondent's solicitors' letter of 20 July 2007 stated: Our client is the Official Trustee in Bankruptcy and cannot understand why this matter cannot be resolved on the equitable principles that the trust fund indemnifies each bankrupt acting in their Trustee capacity for liabilities which they have incurred in their Trustee capacity. By way of example, it could not be contended by either of the bankrupts or the new Trustee that the following creditors were not in relation to the development of the property at 1 Wingadal Place, Point Piper and that the proceeds of sale of that trust property are to be used to indemnify the Trustees with respect to those liabilities. 104 In the course of these events Nida Ferella, on 7 June 2007, claimed to be entitled to the sum of $249,321.54 that had been paid by Angelo Ferella on 13 March 2006. The basis of her claim was that she had paid these funds to secure annulments of the applicants' bankruptcies and that, as the annulments had not been made, the sum should be repaid to her, with interest. She sent a facsimile transmission to the respondent (for Mr Madden's attention) in which she said that, if the money was not returned, she would commence recovery action. The respondent did not respond to this letter in a timely manner. Despite this, no recovery action was commenced. 105 On 29 July 2007 a facsimile transmission was sent to the Inspector-General in Bankruptcy by Tiziana Ferella. She stated that she was "concerned to say the least" about the way in which ITSA was handling the administration of the applicants' bankruptcies. She noted that a letter had been sent to Mr Madden on 15 May 2007 seeking a detailed account of all the funds ITSA was holding in trust regarding the applicants' bankruptcies, and no response had been received. She made a number of other complaints. Ensuing correspondence between Tiziana Ferella and Bankruptcy Regulation makes clear that Ms Ferella was particularly concerned to secure the repayment of the money claimed by Nida Ferella on 7 June 2007. 106 Bankruptcy Regulation responded formally to Tiziana Ferella's complaint by letter dated 19 October 2007. Although it found that Ms Ferella was justified in her complaint that the respondent failed to respond to the communications made on 15 May 2007 and 7 June 2007, it found her complaints to be otherwise unsubstantiated. With respect to the sum of $249,321.54, Bankruptcy Regulation advised that the respondent had taken the view that it was divisible property and would not be returned. Ms Ferella was informed, however, that the respondent's decision in that regard could be reviewed under s 178 of the Bankruptcy Act. 107 Ms Ferella was not satisfied with this response. She engaged in further correspondence with Bankruptcy Regulation. On 22 October 2007 she made a further complaint to the Inspector-General in Bankruptcy. The focus of her complaint was the failure of the respondent to return the sum of $249,321.54, although a number of her previous complaints were repeated. An investigation was conducted by a representative of Bankruptcy Regulation who, in a letter to the respondent dated 16 November 2007, noted that the respondent had still not provided a response to the communications dated 15 May 2007 and 7 June 2007. The respondent was instructed to provide a response without further delay. 108 On 19 November 2007 Mr Madden wrote to Nida Ferella, addressing the matters raised in the communications of 15 May 2007 and 7 June 2007. 109 Tiziana Ferella continued to correspond with representatives of Bankruptcy Regulation throughout the remainder of 2007 regarding her concerns about the administration of the bankruptcies. In December 2007 a representative of Bankruptcy Regulation prepared a detailed report on the administration of the applicants' estates. The report canvassed the history of the administrations up to that point, and made reference to many of the matters set out above, as well as to other matters. Once again, the applicants made no challenge (whether by evidence or in submissions) to the accuracy of any particular part of this report. 110 On 4 December 2007 Agusta's solicitors wrote to the respondent's solicitors. In their letter they raised two issues. The first related to the relief claimed in prayer 4 of the respondent's cross-claim. In the course of discussing the claim supporting that relief, they, in effect, invited the respondent to consider paying into court that part of the Point Piper funds that was surplus to the amount of the indemnity the respondent was seeking. This seems to have been the first occasion following the sale of the Point Piper land on which the applicants (through Agusta or otherwise) countenanced the idea that the respondent should retain any part of the Point Piper funds to pay debts that had been incurred by the applicants in relation to the Point Piper land. However, a dispute apparently remained as to whether the claimed debts were trust debts and whether the respondent was entitled to pay any costs and expenses from the Point Piper funds. 111 The second matter related to Agusta's claim for damages. Agusta's solicitors noted that the claim for damages related to the respondent's withdrawal of consent to permit Agusta to be registered as the proprietor of the Point Piper land. They also noted that this aspect of Agusta's claim was dependent on the outcome of its primary claim to be entitled (amongst other things) to the Point Piper funds. They requested that "this aspect be set to one side, pending the outcome of the primary claims". 112 On 24 December 2007 Mr Madden wrote to the applicants, requesting certain information. He stated that the respondent was generally satisfied as to the existence of (what he described as) the Ferella Unit Trust. However, he stated that there had been no evidence as to the change of trustee from the applicants to Agusta. He requested that the applicants provide documentary evidence of the change of trustee. He also requested that the applicants identify which creditors were creditors of the trust and which creditors related to the applicants in their personal capacities.

The conduct of the Supreme Court proceedings in 2008 113 In early 2008 a new issue arose in the administration of the bankruptcies, namely whether a liability for capital gains tax existed in relation to the sale of the Point Piper land, and the extent of any such liability. 114 On 5 February 2008 Mr Madden wrote to the applicants, stating: There is an issue with Agusta Pty Ltd concerning the change of its title but assuming that the trust is found to exist, we would appreciate it if you can identify: - (i) The proper amount for capital gains tax. Has a tax return been lodged for financial years 30 June 2008/30 June 2007 determining this amount. (ii) Identifying [sic] any other creditors or disputing [sic] any of the noted creditors [in an attached schedule]. 115 In his letter Mr Madden provided an estimate of $1,025,000 owing to the Deputy Commissioner of Taxation for capital gains tax arising from the sale of the Point Piper land. He later deposed to this calculation in an affidavit sworn on 12 February 2008 which was filed in the Supreme Court proceedings. 116 On 5 February 2008 the respondent's solicitors wrote to the Agusta's solicitors seeking the same information that Mr Madden had sought from the applicants in relation to capital gains tax and the identity of other creditors. In a separate letter to Agusta's solicitors (which responded to matters raised in their letter dated 4 December 2007), the respondent's solicitors said: The Official Trustee in Bankruptcy accepts that there does appear to be in existence a Trust but there is a very real issue as to whether or not the plaintiff has been properly appointed as the Trustee of that Trust or whether the Trustee remained the bankrupts. It is clear that the trust assets must pay the trust liabilities. The Official Trustee has sought directions in relation to the surplus in its cross-claim. 117 On 7 February 2008 Agusta's solicitors wrote to the respondent's solicitors. Agusta's solicitors stated their client's position to be as follows: The applicants purchased the Point Piper land as trustees on 7 October 2000 but ceased to be trustees on 19 April 2005, when the trusteeship "moved to" Riva by deed. By further deed the trusteeship "moved to" Agusta on 9 February 2006. Agusta was the owner of the Point Piper funds, subject to a proviso. The proviso was that Agusta acknowledged that any person who was a creditor of the trust may be subrogated to the trustee's right of indemnity or lien: Vacuum Oil Company Proprietary Limited v Wiltshire (1945) 72 CLR 319 at 335-356. 118 In context, Agusta's reference to this proviso sits oddly with the fact that, upon the applicants' bankruptcies, the rights of unsecured creditors in respect of debts incurred by the applicants personally or as trustees were converted into the right to prove in their bankruptcies and to be paid therefrom: s 58(3) of the Bankruptcy Act. 119 Agusta's solicitors said that their understanding of the respondent's position was as follows: Although the respondent did not concede that the Point Piper land was purchased on trust, it would not contend that the land was purchased and held by the applicants beneficially. Rather, it would be a matter for Agusta to establish that there was a trust. The respondent asserted a lien over the Point Piper funds to the extent of the liabilities incurred by the applicants as trustees and the costs and expenses of the administration of the estates. 120 Agusta's solicitors said that Agusta did not resile from its primary position that it was the duly appointed trustee of the trust. However, they advised that they had instructions to join "the other trustees" (namely, the applicants and Riva) as additional plaintiffs. 121 This seems to have been the first acknowledgement by Agusta that other persons may be the trustee or trustees of the trust it was propounding and, therefore, entitled to the Point Piper funds. 122 The Supreme Court proceedings came on for hearing before Nicholas J on 28 February 2008 and continued on 29 February, 7 March, 1 May and 4 June 2008. 123 On the first day of the hearing Agusta filed a further amended summons, joining the applicants and Riva as additional plaintiffs. The same relief was claimed by these plaintiffs as had, by then, been claimed by Agusta. 124 On 6 May 2008, when the Supreme Court proceedings were part-heard, Mr Madden wrote to a representative of the Australian Tax Office (ATO) concerning the issue of capital gains tax. Part of that communication is in evidence. After referring to his "recent telephone conversations" with the ATO representative and setting out some brief background to his inquiry, Mr Madden stated: The Official Trustee is the respondent in proceedings brought by Agusta Pty Limited as trustee for the Cavallino Unit Trust in the Supreme Court of New South Wales and the issue of capital gains tax been the subject of submissions being heard before Justice Nicholas. As mentioned, counsel for the plaintiff is arguing that as no assessment has been issued by the Australian Taxation Office, any such liability is a remote contingency and Nicholas J is also concerned that no documentation is before him to consider this possibility. This is despite the fact that no returns appear to have been filed with your office by the trustees. 125 On 7 May 2008 a representative of the ATO wrote to Mr Madden, stating as follows: The ATO has considered the issues and circumstances surrounding the purchase and sale of the property at 1 Wingadil [sic] Place Point Piper NSW held in the names of Messrs Angelo and Gustavo Ferella. On the basis of the information held it is considered that a Capital Gain has arisen in respect of the sale and accordingly a capital gain is assessable in the hands of Angelo and Gustavo Ferella. On this basis it is anticipated that Income Tax assessments to assess the capital gain in the financial year ended 30 June 2006 will issue in the near future. It is anticipated that the assessments will result in an amount of tax payable for each taxpayer of $526,486. On this basis it would be appreciated if you withhold an amount of $1,052,972 to reflect payment of these assessments… [Capitalisation in original] 126 At the resumed hearing before Nicholas J in the Supreme Court proceedings on 4 June 2008, counsel for the respondent (as defendant in the Supreme Court proceedings) applied to reopen its case in order to tender the ATO's letter of 7 May 2008. That application was opposed by the plaintiffs. The respondent's application was refused.

The Supreme Court judgment 127 Judgment was given in the Supreme Court proceedings on 8 July 2008: Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust v The Official Trustee in Bankruptcy as trustee of the bankrupt estates of Gustavo Ferella and Angelo Ferella [2008] NSWSC 685. 128 Justice Nicholas found that the Point Piper land was an asset of the Cavallino Unit Trust, and, accordingly, that the Point Piper funds must be regarded as an asset of that trust. His Honour noted that the essential questions for his determination were, first, the identity of the trustee and, secondly, whether the Point Piper funds were subject to a charge or lien in favour of the respondent as security for an indemnity in relation to the payment of certain claims and expenses. 129 At [23] of his reasons, his Honour made the following observation: Initially, the plaintiffs contended that the Ferellas had been replaced as trustees by Agusta, alternatively, by Riva. However, during the course of submissions the case for Agusta was not pressed and the preference for Riva was stated (T pp 175, 181 and 186). I was left with the impression that the plaintiffs accepted the indubitably correct situation that upon the bankruptcy of the Ferellas s 5 and s 58(1) of the Bankruptcy Act 1966 (Cth) operated to vest the rights and powers attached to their units in the defendant so that they became unable to vote for, or to otherwise approve, a change to Agusta under either cl 15(a) or cl 15(b) of the trust deed. (See Wood v W & G Dean Pty Ltd [1929] HCA 44; (1929) 43 CLR 77, per Isaacs J.) Accordingly, I have proceeded on the basis that it was Riva which the plaintiffs finally claimed to be the trustee at the relevant time… 130 His Honour then referred to conflicting evidence about whether a deed appointing Riva as trustee of the trust was executed on 19 April 2005 (as it purported to be), before the commencement of the applicants' bankruptcies. In the end his Honour concluded that Riva was appointed as trustee of the trust on 19 April 2005, but that the applicants had taken no steps to cause the property of the trust to be vested in Riva as required by the terms of the trust deed. Thus the assets of the trust, including the Point Piper land, remained vested in the applicants at the time of their bankruptcy. 131 His Honour then turned to consider whether the respondent was entitled to be indemnified from the Point Piper funds. In that connection his Honour noted that the plaintiffs accepted that the respondent was entitled to a lien over (and thus to be indemnified from) the Point Piper funds in respect of a number of debts for which proofs of debt had been lodged and admitted in the bankruptcies. In the context of the present proceeding, the fact and timing of this acceptance is of some importance. I should also note, however, that the respondent did not press its claims for indemnity in respect of two other debts. 132 His Honour then went on to consider the position of a number of disputed debts. His Honour found that, in relation to some debts, the respondent was entitled to be indemnified from the Point Piper funds and that this right of indemnity was supported by a lien in favour of the respondent over the Point Piper funds. These later came to be referred to as "the bankruptcy litigation costs" and "the cross-claim costs". 133 In relation to the issue of capital gains tax, his Honour noted that the real question between the parties was whether the prospect of a claim by the Deputy Commissioner of Taxation, albeit unquantified, was sufficient in the circumstances to justify the respondent holding the Point Piper funds until such time as the claim crystallised. In the result, his Honour (at [64]) made the following finding: In the circumstances of this case, I find that there is a real possibility that a claim for capital gains tax will be made for which the defendant may become liable. That is the effect of Mr Madden's evidence which I took to refer to a liability which at present is likely but uncertain. It follows, in my opinion, that the defendant is entitled to a lien over all of the fund in respect of this contingent liability until the liability has been ascertained and discharged, or is proved not to exist (Jennings, p 113). 134 His Honour directed the parties to bring in short minutes of order giving effect to his reasons. 135 After the publication of reasons, but before the making of orders, the ATO informed Mr Madden that its position regarding the applicants' capital gains tax liability had changed. By facsimile transmission dated 16 July 2008 the ATO said: Further to our letter of 7th May 2008 regarding the Bankrupt Estates of Messrs Angelo and Gustavo Ferella. You are now advised that the Australian Taxation Office now withdraws the request in that letter to withhold money as the assessment mentioned will now not issue. 136 It appears to be the case that no attempt was made by the respondent to bring the ATO's facsimile of 16 July 2008 to the attention of the Supreme Court or the applicants. 137 On 24 July 2008 Nicholas J made declarations and orders in the Supreme Court proceedings. Order 5 declared that the respondent had a lien over the assets of the Cavallino Unit Trust in respect of the following debts, claims and liabilities: a) The amount of $74,656.00 due to Mr Ervin Lloyd Otvosi and Mrs Keiko Otvosi, being a judgment obtained against the Messrs Ferella or either of them in their capacity as trustee of the Cavallino Unit Trust, on 27 April 2005. b) The amount of $22,564.14 due to Woollahra Municipal Council, being the sum of a judgment of $17,000.94 obtained on 30 May 2003 and a judgment of $5,562.20 obtained on 30 June 2005, both against the Messrs Ferella or either of them in their capacity as trustees of the Cavallino Unit Trust. c) The amount of $140,397.78 due to AMT Engineers Pty Ltd, being a judgment obtained on 10 October 2005 against the Messrs Ferella or either of them in their capacity as trustees of the Cavallino Unit Trust. d) The amount of $15,501.96 due from the Messrs Ferella or either of them in their capacity as trustees of the Cavallino Unit Trust, to Mr Peter Klimt trading as Klimt & Associates, being the sum of a bill dated 12 October 2005 for $12,610.00 and a bill dated 25 November 2005 for $2,891.96. e) The amount of $11,530.64 due to JEC Air Conditioning Services Pty Ltd, being a judgment obtained on 1 November 2004 against the Messrs Ferella or either of them in their capacity as trustees of the Cavallino Unit Trust. f) The amount of $2,354.60 due to Mr and Mrs Otvosi, being the costs incurred by them as petitioning creditors in the bankruptcies of the Messrs Ferella. g) The amount of $3,990.00 due to Mr and Mrs Otvosi, being the costs incurred by them in opposing the Messrs Ferella's applications for stays of their sequestration orders. h) The amount of $2,651.25 due to Mr and Mrs Otvosi, being the costs incurred by them in opposing applications by the Messrs Ferella for annulments of their bankruptcies. i) The amount of $114,258.61, representing a contingent liability in respect of the unassessed legal costs of Mr and Mrs Otvosi incurred by them in the hearing of a cross-claim in proceedings number 2583 of 2003 in this Court. j) An amount of $50,000.00, representing bills not yet assessed and issued by Sachs Gerace to the Messrs Ferella or either of them as trustees of the Cavallino Unit Trust (being (1) bill number 935 dated 8 December 2003 for $528.00; (2) bill number 936 dated 8 December 2003 for $242.00; (3) bill number 1125 dated 10 May 2004 for $5,192.18; (4) bill number 1124 dated 10 May 2004 for $1,302.10; (5) bill number 1159 dated 28 May 2004 for $25,488.47; and (6) bill number 1159 dated 28 May 2004 for $25,488.47). k) any amount of interest payable pursuant to the Civil Procedure Act or otherwise, on each of the sums referred to in sub-paragraphs (a)-(j); l) a contingent liability for capital gains tax which may have arisen as a result of the sale of the property m) a sum representing the defendant's reasonable estimate of its costs and expenses of administering the trust property to date, such estimate to be made in accordance with paragraph 67 of the Court's reasons published on 8 July 2008. n) The defendant's costs of these proceedings on the trustee basis. [Capitalisation in orders as made] 138 Orders 6 to 9 are also of present relevance: [6] The Court directs the defendant to pay into this Court the net proceeds together with any interest which has accrued pursuant to section 20J(4) of the Bankruptcy Act 1966 (Cth), but at the same time the Court: a) authorizes the defendant to withhold from that payment an amount representing the sum of the amounts referred to in paragraphs 5(a) to 5(h) and, from the funds so withheld, to pay those debts, claims and liabilities, b) authorises the defendant to withhold from that payment an amount representing its reasonable estimate of the sum required to discharge the debts, claims and liabilities referred to in paragraphs 5(i), (j), (k), (m) and (n),; c) authorises the defendant to pay, from any amount retained pursuant to paragraph 6(b), the amounts due on account of the debts, claims and liabilities referred to in paragraphs 5(i) and 5(j) upon the making of an order in favour of the Otvosis in proceedings 2583 of 2003 and thereafter upon production of a certificate of assessment issued pursuant to the Legal Profession Act in respect of those legal costs; d) authorises and directs the defendant to pay, from any amount retained pursuant to paragraph 6(b), the amounts due as to paragraph 5(m) upon the approval by a Registrar of this Court of the defendant's claim for remuneration, and as to paragraph 5(n) upon the production of a certificate of assessment issued pursuant to the Legal Profession Act in respect of the defendant's legal costs of these proceedings; e) authorises and directs the defendant to pay interest on the debts, claims and liabilities referred to in paragraphs 5(a)-(j) and (l) hereof provided such is ordered by this Court or is otherwise agreed by the Trustee for the time being of the Cavallino Unit Trust. [7] The Plaintiffs are to pay the Defendant's costs of these proceedings including reserved costs. [8] The Court grants liberty to the parties to apply, in respect of their various rights and obligations in relation to the balance of the net proceeds, or the implementation of these orders, on 7 days' notice. [9] These orders and declarations may be entered forthwith. [Spelling in orders as made] 139 By September 2008, the bulk of the applicants' creditors had been paid by the respondent. As I have recorded, on 3 December 2008 the applicants were discharged from bankruptcy by operation of law: see s 149(4) of the Bankruptcy Act.

Concurrent proceedings 140 Meanwhile, proceedings involving the parties were also on foot in the Federal Magistrates Court. On 14 June 2008 Gustavo Ferella filed an application which sought to set aside the orders made by the Federal Magistrates Court on 10 March 2006, which dismissed his application for a review of the sequestration order made against him, and sought to have another review conducted. The application also sought an extension of time to apply for a review. On 4 July 2008 the respondent filed a notice of opposition to the review application. The review application was ultimately dismissed on 25 March 2009 and Gustavo Ferella was ordered to pay the costs of the petitioning creditors and the respondent.

The appeal from the Supreme Court proceedings 141 On 8 October 2008 the plaintiffs filed a notice of appeal from the orders made in the Supreme Court proceedings. The notice of appeal challenged Nicholas J's findings that Agusta had not succeeded Riva as trustee of the Cavallino Unit Trust; that the trust property did not vest in Riva; that the respondent was entitled to assert a lien in respect of the disputed claims; that the respondent was, in any event, entitled to a possessory lien; and that the trustee of the Cavallino Unit Trust was not entitled to interest at court rates (as opposed to the rate of interest prescribed for the purposes of s 20J(4) of the Bankruptcy Act). 142 Shortly thereafter, the respondent filed a notice of cross-appeal and a notice of contention. The grounds of the cross-appeal were that Nicholas J had erred in finding that Riva became trustee of the Cavallino Unit Trust on 19 April 2005, and that his Honour ought to have found that the applicants had never been validly replaced as trustees of that trust. The notice of contention also took up the latter issue. 143 The appeal and cross-appeal were heard by the Court of Appeal of the Supreme Court of New South Wales on 7 May 2009. During the course of the hearing, the respondent abandoned its cross-appeal. 144 The Court of Appeal gave judgment on 3 June 2009 and allowed the appeal: Agusta Pty Ltd v Official Trustee in Bankruptcy as Trustee of Estates of Gustavo Ferella and Angelo Ferella [2009] NSWCA 129. In allowing the appeal, however, the Court of Appeal noted that the way in which the parties had approached the issues that had arisen on the appeal differed from the way in which they had approached those issues at trial. This was reflected in the Court of Appeal's conclusion that orders 5(i), (k), (l), (m) and (n) made by Nicholas J on 24 July 2008 should be set aside. 145 In relation to orders 5(i) and (l) the Court of Appeal said (at [34]-[36]): [34] At the commencement of the hearing of the appeal, senior counsel for the OT was called upon to explain the legal basis upon which it could be asserted that the OT had a right of indemnity with respect to the bankruptcy litigation costs, the cross-claim costs or the CGT claim given that each only arose after the date of the sequestration orders. Senior counsel was also asked whether he submitted that the OT would be personally liable for any of those costs or taxes so as to justify his claim to a right of indemnity with respect thereto and an equitable lien over the Fund to protect that right. [35] Quite properly and fairly, senior counsel for the OT conceded first, that the OT had no personal liability with respect to post-sequestration order costs or liabilities incurred in the administration, or arising out of the affairs, of the Trust; second, that no right of indemnity with respect to those costs or liabilities could arise until they became an actual or potential liability of the Trust; and third, that any such right of indemnity, arising after the date of the sequestration orders, was not after-acquired property within the meaning of the Act as a consequence whereof any such right, whenever it arose, would never vest in the OT as part of the bankrupt estates of the Ferellas. [36] In the foregoing circumstances it was properly conceded on behalf of the OT that his Honour's Declarations 5(i) and (l) should be set aside. 146 It is clear that, on the issues as then raised by the appellants (plaintiffs), the respondent conceded that the legal basis for making orders 5(i) and (l) could not be supported. However, the applicants in the present proceeding point to a more fundamental reason why order 5(l) should not have been supported in any event by the respondent: the ATO had advised the respondent on 16 July 2008 that an assessment for capital gains tax would not issue. The respondent did not disclose this fact in the appeal proceedings. The respondent had permitted the question of capital gains tax liability to proceed to appeal on the basis of Nicholas J's finding that there was a real possibility that a claim for capital gains tax would be made for which the respondent may become liable. 147 I would add that, as the bankruptcy litigation costs incurred by the Otvosis had already been paid from the Point Piper funds, the appellants (plaintiffs) accepted that it would be inappropriate and futile to press their appeal insofar as it concerned orders 5(f), (g) and (h). 148 As to order 5(k), Tobias JA (with whom Beazley JA and Macfarlan JA agreed) found the argument mounted by the appellants (plaintiffs) to support the granting of interest under s 100 of the Civil Procedure Act 2005 (NSW) on the amount of the Point Piper funds to be paid to the Cavallino Unit Trust to be "so convoluted as to require its rejection": see at [39]-[44]. 149 As to order 5(m), the parties accepted that Nicholas J had been inadvertently mistaken about their position. They accepted that the order should be set aside and that matter remitted to his Honour for determination. 150 As to order 5(n), the parties also acknowledged that, in light of how the appeal had been argued, the question of the costs of the trial should also be remitted to his Honour for re-determination. 151 When the matter came before Nicholas J, his Honour, by consent, made an order in lieu of order 5(m) in the following terms: [The defendant has a lien over the fund in respect of a] sum representing the defendant's costs and expenses of administering the trust property, being the costs of receiving and responding to claims by the abovenamed creditors in sub-paragraphs 5(a) to 5(e) and 5(j), and approving and paying those claims. 152 His Honour also heard argument on the question of costs. On 28 August 2009 his Honour ordered the respondent to pay 80 per cent of the plaintiffs' costs of the Supreme Court proceedings. In his reasons for judgment, his Honour said (at [18]-[20]): [18] Having regard to the reasons of the Court of Appeal, and to the submissions and analyses put together by the parties as to the outcome of the proceedings, it must be recognised that the plaintiffs succeeded in the proceedings overall. However, in my opinion, justice requires departure from the ordinary rule that costs follow the event. [19] The identification issue was one squarely raised by the plaintiffs, the determination of which was necessary for them to obtain an order that the defendant pay the funds it held to the trustee. The issue took up a not insignificant amount of time and, in my assessment, the defendant had a substantial measure of success. Allowance in the defendant's favour should be made for the Sachs Gerace claim, and for the claim to a lien in relation to remuneration for administration costs and expenses resolved by the order in terms of substituted par 5(m), eventually made by consent. I accept the defendant's submission that account should be taken of the situation that it was not until the hearing began that the plaintiffs modified their firm denial of entitlement to any claim for indemnity or lien. On the other hand, in my opinion, the consequential acceptance of some of the defendant's claims, and the abandonment by the defendant of others should be seen as simply incidental to the litigation. In my opinion evaluation of these factors supports the conclusion that there should be some departure from the ordinary rule. [20] My task is to make an order which, doing the best I can by way of overall assessment, is a fair one. In my opinion, the fair order to make is to order the defendant to pay 80 per cent of the plaintiffs' costs of the proceedings. I so order.

Matters remaining to be finalised in the administration of the bankruptcies 153 Throughout early 2009, Angelo Ferella continued to correspond with Bankruptcy Regulation about his complaints regarding the administration of his and Gustavo Ferella's bankruptcies. 154 At the present time there are a number of matters which remain to be finalised in the administration of the bankrupt estates of the applicants. These are the subject of agreement between the parties and can be summarised as follows: Payment of a costs order relating to the Supreme Court proceedings at first instance. In this connection, in a facsimile transmission dated 8 October 2010, Tiziana Ferella advised the respondent that the plaintiffs in the Supreme Court proceedings intend to seek a review of those costs as currently assessed; Finalisation of debts owed to Sachs Gerace, which may involve the realisation of assets, most likely units held by Angelo Ferella in the Cavallino Unit Trust. No other proofs of debt are known of or expected; Calculation of the quantum of the statutorily imposed realisation charge payable in both estates, and the realisation of assets (where available) to pay that charge; Determination of the proper quantum of the respondent's remuneration and expenses (including legal costs); Determination of the quantum of the post-sequestration interest claims of creditors.

the ISSUES on which the applicants seek an inquiry 155 The applicants seek an inquiry on the issues raised by the following 11 questions they have propounded: 1. From the commencement of the Supreme Court proceedings in [September] 2006 until [their] final resolution in August 2009, has the respondent engaged in litigation on a substantially misconceived basis and in a manner which was unnecessary and extravagant? 2. Has the respondent unduly delayed the administration of the two estates? 3. Has the respondent, contrary to section 140(1) of the [Bankruptcy] Act, failed to pay dividends with all convenient speed, despite there being large surpluses in the estates? 4. Has the respondent become preoccupied with and intermeddled with the affairs of the Ferella family trust [i.e. the Cavallino Unit Trust]? 5. Agusta Pty Ltd having commenced the proceedings as trustee of the trust to recover funds held by the respondent, was the respondent's defence inappropriate, in circumstances where it knew of the trust and was uncertain only as to the identity of the trustee, and in circumstances where it could have, at the least, interpleaded or sought judicial advice pursuant to section 134(4) of the [Bankruptcy] Act? 6. Did the respondent understand the nature and extent - and limit - of the bankrupt trustees' right of indemnity which had vested in it? 7. Why did the respondent take no steps to inform anyone, at any time, that the ATO on [16 July 2008] advised that assessments to the bankrupts for [capital gains tax] on the sale of the Point Piper [land] would not issue, and why did the respondents maintain that the ATO was a contingent creditor until pressed by the Court of Appeal on [8 May 2009]? 8. Why did the respondent ever assert a right over the funds held by it in relation to a debt allegedly owed by the trustee to the ATO? 9. Why did the respondent assert wrongly that the Ferella family trust funds held by it, did not bear interest? (Alternatively, why, on the assumption that the assertion was correct, did the respondent not take steps to ensure that the funds were put in an interest bearing account?) 10. Whether by reason of the foregoing matters: (a) the bankrupt estates remain unadministered; (b) interest has not yet been paid to creditors; and (c) the respondent has incurred unnecessary costs, expenses and remuneration, including its own costs in the Supreme Court and Court of Appeal and the costs of the Ferella family (including the applicants) that it was ordered to pay? 11. Whether the administration of the estates and the conduct of the Supreme Court proceedings and these proceedings, have been marked by unnecessary aggression and obstruction by the respondent? 156 I consider each of these questions in the following paragraphs and whether an inquiry is warranted.

Question 1: From the commencement of the Supreme Court proceedings in [September] 2006 until [their] final resolution in August 2009, has the respondent engaged in litigation on a substantially misconceived basis and in a manner which was unnecessary and extravagant? 157 The applicants' primary submission in this regard is that the respondent should not have engaged in adversarial litigation. Whilst they acknowledge that the Supreme Court proceedings can be considered to have been commenced by "the Ferella family", they submit that those proceedings were made necessary "only by the respondent's insistence that the Ferella family prove the provenance of the Point Piper [funds]". 158 In this connection the applicants submit that, when the respondent received and banked the Point Piper funds in June 2006, there were only three reasonable positions for it to adopt. First, if it was of the view that the Point Piper land had been beneficially owned by the applicants, the respondent was under a duty to administer the applicants' bankrupt estates "with alacrity", knowing that the undoubted surplus assets would bear interest for the Crown but not for the applicants: s 20J(1) of the Bankruptcy Act. Secondly, if the respondent was of the view that the Point Piper funds were a trust asset, with the respondent's only interest being a right of indemnity supported by a charge or right of lien over those funds, it should have retained a sum sufficient to cover the indemnity and paid the surplus to the trustee. Thirdly, if the respondent was of the view that the Point Piper funds were a trust asset, but was in doubt about the identity of the trustee, it should have paid the surplus into court or otherwise approached the Court for directions as to how to distribute the Point Piper funds. The applicants submit that the respondent did none of these things. 159 In aid of this submission the applicants point to various items of correspondence in which the respondent variously disputes the existence of a trust, concedes the possibility of a trust and, ultimately, accepts the existence of a trust (albeit that the identity of the trustee remained uncertain). They submit that this shows that the respondent was not acting competently. They submit that the respondent should have been more proactive in making inquiries to determine whether there was a trust. They submit that the respondent's final acceptance that there was a trust was a view that it could and should have taken at an early stage in the Supreme Court proceedings. 160 On this basis the applicants submit that the respondent should have retained a sufficient amount from the Point Piper funds to meet the indemnity it sought and immediately paid the surplus into court. The applicants submit that, had this been done, the issue of the identity of the trustee of the Cavallino Unit Trust and the issue of the potential liability for capital gains tax would have gone, and a fund would have been available to deal with all creditors in accordance with s 140(1) of the Bankruptcy Act. In this latter regard, as I have noted, the applicants point to the fact that, by 31 August 2006, the respondent was in a position to administer the estates in respect of all but one creditor, and that, by 21 December 2007, the respondent was in a position to administer the estates in respect of all creditors, who were ultimately paid in September 2008. 161 It is apparent that the applicants' submissions focus on the respondent's receipt of the Point Piper funds in June 2006 and what the respondent should then have done with those funds. In my view, it is necessary to have regard to the following matters to understand the position in which the respondent found itself in mid-2006. 162 First, at an early stage in the administration of their estates, the applicants were anxious to seek annulments of their bankruptcies. The evidence shows that, in order to achieve those annulments, the applicants wanted the Point Piper land to be used to refinance the existing mortgage held by Key Nominees. That was the basis on which Mr Stomo approached Mr Madden, and Mr Madden wrote to Mr Stomo, on 8 March 2006. The course of correspondence shows that the applicants accepted that the only way in which all the bankrupts' debts could be paid in full, and their bankruptcies annulled, was from funds derived from the refinancing transaction that was proposed. In that regard, the applicants accepted that all unsecured creditors, whose proofs of debt had been accepted by then, should be paid from the funds that would be available from the proposed refinancing transaction. I do not ignore the fact that, in March 2006, the respondent received a number of payments totalling $323,977.54. However, I am satisfied on the evidence before me that that sum was insufficient to achieve the annulments that the applicants were seeking. In any event, as I have recorded, Nida Ferella later made a claim on those moneys and sought to have them paid to her, with interest. 163 Secondly, when the refinancing transaction did not proceed and the Point Piper land was sold by Key Nominees as mortgagee, the applicants' position changed markedly. They were not prepared to accept that any of the Point Piper funds should be used to pay any creditors whose debts had been proved in their bankruptcies. The reason for adopting that position seems to have been the applicants' concern that the Point Piper funds were assets of the Cavallino Unit Trust and that, contrary to what they had stated in their statements of affairs, Agusta was now the trustee of that trust. It was their view that Agusta was entitled to all the Point Piper funds, without deduction. The applicants apparently did not know, or did not accept, that pre-bankruptcy debts incurred by them as trustees were provable in their bankruptcies, or that the respondent, as their trustee in bankruptcy, was entitled to exercise the right each had to be indemnified out of trust assets in respect of those debts and, to that end, to assert a charge or lien over those assets. 164 Thirdly, the respondent had conflicting evidence before it about whether the Point Piper funds were an asset of a trust. It also had conflicting evidence before it as to the identity of any such trust and of its trustee or trustees. The respondent could have no confidence in the correctness of what it had been told by the applicants in light of the deficient and inaccurate statements of affairs they had filed, and the confusing and contradictory information it had been given by them about the claimed trust and the identity of its trustee or trustees. 165 Fourthly, by July 2006 the respondent had formed the view, no doubt assisted by the legal advice it had obtained, that it was not satisfied that the Point Piper funds were an asset of a trust. The respondent's solicitors informed Mr Stomo of that fact and of the respondent's intention to pay dividends from the Point Piper funds (namely, the first option which the applicants say was a "reasonable position" to adopt). In August 2006 the respondent informed the applicants of its decision that, unless an application was made by them to the Court to determine whether the Point Piper funds were trust funds or divisible property in the applicants' estates, it would distribute an interim dividend to those creditors whose proofs of debt had been admitted, using the Point Piper funds. 166 In my view it was not unreasonable for the respondent to come to this view or to take this approach. It was a matter for the respondent to determine whether it was satisfied that the Point Piper funds were a trust asset, acting on legal advice and using prudent commercial judgment. Its determination that it could not be satisfied, at that time, that the Point Piper funds were a trust asset, was one that was reasonably open to it to make. The reasonableness of that conclusion is not gainsaid by the respondent's later acceptance, on the facts then known to it, including the evidentiary material that had been filed in the Supreme Court proceedings, that the funds were or were likely to be a trust asset, or by Nicholas J's finding to the effect that the Point Piper funds were a trust asset on the evidence adduced at the hearing of the Supreme Court proceedings. 167 The position the respondent adopted in August 2006, when it could not be satisfied that the Point Piper funds were a trust asset, was to place the onus on the applicants to make good their claim by way of judicial determination of that question. The applicants (or, indeed, any of the other plaintiffs in the Supreme Court proceedings) could have done this by proceedings commenced under s 178 of the Bankruptcy Act to challenge the respondent's decision. The Supreme Court proceedings were an alternative means of obtaining such a determination. It would also have been open to the applicants (or any of the other plaintiffs in the Supreme Court proceedings) or the respondent itself to invoke the jurisdiction conferred by s 27(1) of the Bankruptcy Act and to seek declarations and other appropriate relief in respect of the ownership of, or entitlement to use, the Point Piper funds: Scott v Bagshaw (2000) 99 FCR 573 at [17]-[22]; see also s 31(1)(f) of the Bankruptcy Act. The respondent could also have applied for directions pursuant to s 134(4) of the Bankruptcy Act. 168 There were, therefore, various means by which a judicial determination could have been sought on the question of the ownership of, or entitlement to use, the Point Piper funds. In the circumstances in which it found itself, it was not unreasonable for the respondent to place the onus on the applicants to take steps to vindicate the rights they claimed. 169 In this connection, there is no reason to think that, in light of the history of the Supreme Court proceedings, the issues that would have been raised in proceedings invoking these other modes of judicial determination would have differed in any substantial way from the issues raised in the Supreme Court proceedings, or to think that the other possible proceedings would have been heard and determined substantially more quickly than the Supreme Court proceedings, or with less expense. Indeed, as the moving party in the Supreme Court proceedings, Agusta had chosen its preferred forum for litigating its claims and was in a position to exert some measure of influence over when those proceedings were made ready for hearing. 170 It is also necessary in this connection to focus attention on the relief that was claimed in the Supreme Court proceedings at the time they were commenced in September 2006. Amongst other relief that was claimed, Agusta was claiming a declaration that all funds held by the respondent were held on trust for the Cavallino Unit Trust, and a mandatory injunction requiring the respondent to pay to Agusta, as trustee of the Cavallino Unit Trust, all funds held by the respondent in the estate accounts of the applicants. Also, in December 2006, Agusta amended its summons to claim damages against the respondent. 171 In these circumstances, should the respondent simply have retained from the Point Piper funds a sum sufficient to cover the indemnity it claimed and then paid the surplus into court, as the applicants now contend it should have done? Or was the respondent justified in contesting Agusta's claims in the way that it did? 172 For the reasons which follow, I am of the view that the respondent was justified in contesting Agusta's claims in the way that it did. As I will explain, the course which the applicants now contend the respondent should have taken, was not realistically open to the respondent in the circumstances, and is quite contrary to the position that the applicants (through Agusta) were advocating in the Supreme Court proceedings. 173 The respondent had a sound basis for concluding that Agusta was not the trustee of the Cavallino Unit Trust. This position was vindicated in the Supreme Court proceedings. The respondent also had a clear interest in defending its position in that regard. It had a very real interest in ensuring that the Point Piper funds, on the assumption they were a trust asset, were paid to the person properly entitled to be trustee, rather than being paid away to a stranger to the trust who was not bound by the terms of the trust. After all, the applicants' units in the Cavallino Unit Trust comprised part of their bankrupt estates. Also, Agusta had asserted a right to claim damages against the respondent. It is to be remembered in this connection that, at this time, no other person in the interests of the Ferella family was then claiming to be the trustee of the Cavallino Unit Trust. The respondent was entitled to defend itself and the bankrupt estates against that claim, when it had sound reason to believe that Agusta had no standing to bring such a claim. 174 But perhaps more importantly for present purposes, the respondent had a sound basis for claiming that, if the Point Piper land had been a trust asset, it was entitled to exercise a right to be indemnified out of the Point Piper funds and to assert a lien over those funds to secure that indemnity, whoever the trustee of any proven trust may have been. Once again, this conclusion was vindicated in the Supreme Court proceedings. The then plaintiffs in those proceedings ultimately came to accept, as a general proposition, that the respondent was entitled to be indemnified out of the Point Piper funds and to assert a lien over them in respect of debts proved in the bankruptcies that had been incurred by the applicants as trust debts. This was a significant change in position by the applicants and the entities associated with them. However, this change in position was adopted only shortly before the commencement of the hearing of the Supreme Court proceedings in February 2008. In fact, it was only during the course of the hearing of those proceedings that the plaintiffs came to accept that that entitlement existed in relation to a number of debts that had been proved in the bankruptcies. At all other times, the applicants had steadfastly maintained the position that Agusta alone was entitled to all the Point Piper funds and that none of the debts which had been proved in the applicants' bankruptcies should be paid from those funds. 175 I do not leave out of account the fact that, at the hearing, the plaintiffs disputed the respondent's entitlement to be indemnified in respect of certain potential or contingent liabilities. At first instance, Nicholas J found that the respondent was so entitled. On appeal, the respondent conceded that it could not support the legal basis for that entitlement. That concession, however, must be viewed in light of the fact that it came to be made in circumstances where, on appeal, the appellants challenged that claimed entitlement on a basis that differed from the basis that they, as plaintiffs, had advanced at trial. The point of present relevance is that, in the face of the case that the applicants (through Agusta) had been maintaining, effectively up to the point of trial, it was necessary for the respondent to mount a defence to Agusta's claims in the Supreme Court proceedings so as to maintain its entitlement to be indemnified out of the Point Piper funds, at least in respect of a substantial number of debts that had been proved in the bankruptcies and which the plaintiffs belatedly came to accept were subject to the lien that the respondent was asserting. 176 Further, there is more than a touch of unreality in the applicants' contention that the respondent should not have defended the Supreme Court proceedings but should simply have retained a sum from the Point Piper funds, sufficient to cover the right of indemnity it asserted, and then paid the surplus into court. In light of the case that Agusta was maintaining and the relief that it was seeking, and in light of the refusal of the respondent's application for summary dismissal of those proceedings - which signified that Agusta's case raised triable issues - the respondent would not have been acting appropriately or prudently in pre-emptively arrogating to itself the right to determine that it was entitled to some part of the Point Piper funds and then paying out that part as dividends to unsecured creditors. 177 Indeed, the applicants' submission that the respondent should have so acted, flies in the face of the case that they (through Agusta) were propounding up to the point of trial, which was that Agusta was entitled to, and should be paid, all of the Point Piper funds. The very conduct they now say the respondent should have engaged in (and criticise the respondent for not engaging in, thereby warranting an inquiry) is the very conduct they were seeking to prevent, and had effectively prevented, by Agusta's commencement of the Supreme Court proceedings. 178 Moreover, Angelo Ferella had threatened to obtain (presumably through Agusta) immediate injunctive relief against the respondent should it try to pay a dividend out of the Point Piper funds. I have no reason to doubt that the threat would have been carried out. I am satisfied, therefore, that it is highly likely that any attempt by the respondent to pay dividends from the Point Piper funds would have been met by an application for interlocutory injunctive relief against it, involving additional and unnecessary costs and expenses to the bankrupt estates. 179 The unreality of the applicants' contention is further highlighted by the fact that, by letter dated 2 February 2007, the respondent sought, unsuccessfully, to persuade the applicants to agree that it was unnecessary to determine whether the Point Piper land had been owned by the applicants as trustees or beneficially, and to agree that the Point Piper funds could be used to pay alleged trust debts, with the surplus being paid to Agusta. I am satisfied on the evidence that the applicants received, but made no response to, this proposal. 180 Later, by letter dated 7 May 2007, the respondent's solicitors advanced a settlement proposal which included a scheme for paying unsecured creditors and the costs and expenses relating to the administration of the bankruptcies, largely from the Point Piper funds, with the balance payable to Agusta. This proposal was rejected but, despite the respondent's solicitors' efforts on two subsequent occasions to get Agusta's solicitors to provide a formal response to the proposal, no such response was forthcoming. 181 In this proceeding the applicants made some criticisms of the respondent's solicitors' letter of 7 May 2007. These criticisms largely quibbled with the conceptual basis for some of the statements made in it. In my view these criticisms are of no moment or consequence, so far as the present proceeding is concerned. 182 The applicants also criticised the fact that the proposal did not mention the payment of interest on the surplus funds that would be paid to Agusta. They also criticised the fact that the proposal provided for a complete indemnity for the remuneration and expenses of the respondent. 183 These submissions simply divert attention from the fact that the respondent was seeking, in early 2007, to resolve the Supreme Court proceedings before further expense was incurred, including the expense to the respondent of preparing the affidavit evidence on which it proposed to rely. The respondent's settlement proposal involved using the Point Piper funds to pay creditors in relation to what were said to be trust debts. It is plain enough that the applicants (through Agusta) were not prepared to countenance a resolution of the Supreme Court proceedings along those lines and yet, in this proceeding, they contend that, nevertheless, the respondent should have paid those creditors from the Point Piper funds and paid the balance into court. The criticisms of the proposal made on 7 May 2007 articulated in this proceeding, if they be of any real substance, were not matters which the applicants were prepared to raise with the respondent to resolve the Supreme Court proceedings in any timely way. 184 In this connection the applicants do point to the fact that, on 4 December 2007, their solicitors (as solicitors for Agusta) wrote to the respondent's solicitors, suggesting that the respondent retain an amount from the Point Piper funds to cover the claimed indemnity and pay the surplus into court. However, as I have already noted, on the evidence before me, this seems to have been the first occasion on which the applicants (through Agusta) countenanced the idea that the respondent could or should retain any part of the Point Piper funds to pay trust creditors. This letter simply highlights the fact that, from the commencement of the Supreme Court proceedings until shortly before they came on for hearing in February 2008, the applicants adopted a quite contrary position to the one that they now advance in this proceeding to justify the inquiry they seek. In any event, as I have also noted, even at this time a dispute remained as to whether the claimed debts were trust debts and as to the respondent's entitlement to pay costs and expenses from those funds. 185 The evidence does not support the contention that, from the commencement of the Supreme Court proceedings in September 2006 until their final resolution in August 2009, the respondent engaged in litigation on a substantially misconceived basis, or in a manner which was unnecessary or extravagant. Quite to the contrary, I am satisfied that the respondent was justified in defending the Supreme Court proceedings in the way that it did and in prosecuting its claim to be entitled to be indemnified from the Point Piper funds. 186 I am not satisfied that there is any sound basis to order a general inquiry into the respondent's conduct of the Supreme Court proceedings on the basis advanced by the applicants. No other matter has come to my attention which would warrant such an inquiry.

Question 2: Has the respondent unduly delayed the administration of the two estates? 187 The applicants' primary submission in this regard is that, by 31 August 2006, the respondent had admitted all but one of the proofs of debt in respect of which dividends were paid by the respondent in September 2008. They point to the apparent "two year" delay from August 2006 to September 2008. As to the remaining proof of debt (the admission of which was subject to legal proceedings brought by the creditor involved (Sachs Gerace)), the applicants point to the fact that, although the proceedings were finally settled in June 2007, the creditor has still not been paid. The applicants submit that the delay in the payment of all these creditors speaks of the need for an inquiry into what they submit is the general delay by the respondent in administering the estates. It can be seen, therefore, that the applicants' submission focuses on the payment of creditors from 31 August 2006 onwards. 188 As at August 2006 the respondent was not in a practical position to pay out creditors in full in either estate. The funds totalling $323,977.54 that the respondent had received in March 2006 were not sufficient for that purpose. Creditors who had not been disclosed by the applicants in their statements of affairs lodged proofs of debt after these funds had been received. Further, at least some of these funds were applied to pay part of the costs and expenses of administering the estates. It is clear that the respondent had to look to other property in the applicants' estates to pay creditors. As at August 2006 the Point Piper funds represented the only other property that was readily available to the respondent to pay dividends. On 16 August 2006 the respondent advised the applicants of its intention to pay dividends from the Point Piper funds. However, the applicants objected to the respondent using the Point Piper funds for any purpose, on the basis that these were trust funds to which Agusta was wholly entitled. Agusta then commenced the Supreme Court proceedings. Had the applicants agreed to the Point Piper funds being used (as the respondent had then urged), most creditors would have been paid in full at that time. 189 The alternative in relation to Gustavo Ferella's estate was to seek to realise assets jointly owned with Nida Ferella. That was plainly an unattractive option when ready funds (represented by the Point Piper funds) were available. The respondent sought a proposal from Nida Ferella in relation to the jointly-owned assets but no proposal was forthcoming. Any such realisation would undoubtedly have subjected the estates to increased costs and expenses. It may also have been met with some resistance (and possibly legal action) by Nida Ferella. The evidence indicates that nearly every step taken by the respondent in the administration of the applicants' estates has met considerable resistance from the applicants or from other members of the Ferella family. There is no reason to believe that, looking at the position in August 2006, the respondent could predict with reasonable confidence that the realisation of the jointly-owned assets would have produced a fund for creditors in any shorter time frame than that which occurred. 190 There was also Gustavo Ferella's interest in units in the Cavallino Unit Trust. However, the realisation of that interest would have required those units to have been sold or the trust to have been wound up. In the latter event, the funds available to unit holders could not have been ascertained until the Supreme Court proceedings had been determined. It is not clear that, as at August 2006, the units in that trust could have been realised readily or that, even now, they can be realised readily. 191 The alternative in relation to Angelo Ferella's estate was a more limited one. Angelo Ferella's assets, as disclosed in his statement of affairs, were relatively meagre. Apart from cash (disclosed to be $15,000.00), there was his interest in units in the Cavallino Unit Trust, which had vested in the respondent. Once again, realisation would involve the units being sold or the trust being wound up, with the same attendant difficulties noted above. 192 Moreover, the respondent's obligation to distribute dividends with all convenient speed was subject to its obligation to retain such sums as were necessary to meet the costs of administration and otherwise give effect to the provisions of the Bankruptcy Act: see s 140(2); see also s 109(1). Thus, once Agusta engaged the respondent in proceedings in which it claimed damages as well as a claim for costs and interest, the respondent was effectively prevented, in any event, from making any distribution to creditors until it knew the likely extent of its liability under those proceedings. I have already referred to the fact that the applicants wanted the question of damages to be deferred, pending the outcome of what they said were "the primary claims" in the Supreme Court proceedings. 193 Thus, for practical purposes, finalisation of the estates as at August 2006 depended on the resolution of the Supreme Court proceedings. Indeed, this position became even clearer when, in June 2007, Nida Ferella made her claim upon the respondent for the "return" of the sum of $249,321.54 that Angelo Ferella had paid on 13 March 2006. 194 Once final orders were made in the Supreme Court proceedings on 24 July 2008, nearly all creditors were paid interim dividends relatively promptly. These interim dividends represented payment in full of those claims, save for interest in respect of the interest-bearing debts. The applicants have raised objection to this interest being paid. As I understand it, the resolution of that objection will depend on whether, assuming there to be an inquiry, it is found that the respondent has unduly delayed the payment of creditors in the administration of the applicants' estates. 195 The present position is that, except for the matter of interest, all creditors in Gustavo Ferella's estate have received payment in full of their principal entitlements. One creditor remains to be paid in Angelo Ferella's estate. The reason why the remaining creditor in Angelo Ferella's estate has not been paid is the lack of readily-available property in that estate. Unless Riva is prepared to acknowledge that the respondent is entitled to be indemnified from the trust assets it now holds in respect of that particular liability, and makes payment accordingly, it will be necessary for the respondent to attempt to realise its interest in respect of Angelo Ferella's units in the Cavallino Unit Trust. 196 In my view an inquiry is not warranted on the issues raised by this question. The applicants have not shown any significant neglect or delay on the respondent's part. The delay of which the applicants speak has resulted from the need to determine the applicants' objection to the respondent's entitlement to use the Point Piper funds to pay creditors. I am satisfied that the respondent has made conscientious endeavours to fully pay creditors whose debts have been proved in the bankruptcies, from the time it received the Point Piper funds. The delay in paying those creditors has been caused by the applicants' considerable resistance to the use of those funds - the most appropriate and readily-available asset to be used for the payment of creditors. I should add that no creditor appears to have complained of any neglect or delay on the respondent's part. 197 For completeness I note that, in the course of these administrations, the applicants and other members of the Ferella family have made other complaints of delay. These complaints, however, were dealt with by Bankruptcy Regulation, which found that the complaints were not justified, save for the respondent's failure to answer two letters, which have now been answered. The reports of those investigations and the conclusions that were reached are in evidence. Having considered those reports and the conclusions that were reached, I am not satisfied that there is any need for any further inquiry based on the matters that had been raised with Bankruptcy Regulation by the applicants or other members of the Ferella family in that regard. 198 I have noted that a number of other matters remain to be finalised in the applicants' estates. These require no particular comment other than to observe that payment of the costs of the Supreme Court proceedings is dependent upon a review, sought by the plaintiffs in those proceedings, of the costs that have already been assessed. I have already mentioned the position with respect to the payment of interest. Given my conclusion that no inquiry on this basis is warranted, it would seem that there is now no impediment to interest being paid (apart, perhaps, from the need to realise property for that purpose). The remaining steps to be taken to finalise the administration of the bankrupt estates depend on whether there is any other basis to hold an inquiry and whether the applicants are entitled to any relief as a result of any such inquiry.

Question 3: Has the respondent, contrary to section 140(1) of the [Bankruptcy] Act, failed to pay dividends with all convenient speed, despite there being large surpluses in the estates? 199 This question is a more specific iteration of the issues raised more generally by question 2. The applicants do not advance any additional matter in support of an inquiry under this heading. For the reasons I have given in relation to question 2, no inquiry is warranted.

Question 4: Has the respondent become preoccupied with and intermeddled with the affairs of the Ferella family trust [i.e. the Cavallino Unit Trust]? 200 The only possibly relevant issues (for s 179 purposes) raised by this question have been covered by my consideration of questions 1 and 2. The applicants do not advance any additional matter of substance in support of an inquiry under this heading. For the reasons I have given in relation to questions 1 and 2, no inquiry is warranted.

Question 5: Agusta Pty Ltd having commenced the proceedings as trustee of the trust to recover funds held by the respondent, was the respondent's defence inappropriate, in circumstances where it knew of the trust and was uncertain only as to the identity of the trustee, and in circumstances where it could have, at the least, interpleaded or sought judicial advice pursuant to section 134(4) of the [Bankruptcy] Act? 201 This question is a more specific iteration of the issues raised more generally by question 1. For the reasons I have given in relation to question 1, no inquiry is warranted.

Question 6: Did the respondent understand the nature and extent - and limit - of the bankrupt trustees' right of indemnity which had vested in it? 202 In support of an inquiry in relation to the issues raised by this question, the applicants point to the respondent's concession before the Court of Appeal that the legal basis for orders 5(i) and (l) made on 24 July 2008 in the Supreme Court proceedings could not be supported. This concession was in relation to the respondent's assertion at trial that it had a right of indemnity out of the Point Piper funds in respect of certain costs and in respect of the potential or contingent capital gains tax liability found by Nicholas J, arising from the sale of the Point Piper land. 203 In the appeal the respondent conceded that it had no personal liability with respect to post-sequestration order costs or liabilities incurred in the administration of, or arising out of the affairs of, the Cavallino Unit Trust; that no right of indemnity with respect to those costs or liabilities could arise until they became an actual or potential trust liability with respect to the trust; and that any such right of indemnity, arising after the date of the sequestration orders, was not after-acquired property within the meaning of the Bankruptcy Act and would never vest in the respondent as part of the applicants' bankrupt estates. 204 In light of this concession, and of the acceptance of its correctness by the Court of Appeal, it must be the case that the answer to the question that has been posed is: the respondent did not understand the nature and extent - and limit - of the right of indemnity that had vested in it in relation to these bankruptcies. However, this does not mean that there should be an inquiry in relation to that matter. 205 The applicants characterise the concession as one by the respondent "that its legal claim to hold the whole fund was wrong". This characterisation overstates the concession that was made. The only concession made by the respondent was that its claim to an indemnity in respect of what the Court of Appeal termed "the bankruptcy litigation costs, the cross-claim costs [and] the CGT claim" could not be supported. The respondent made no concession that its indemnity in respect of other debts that had been proved in the bankruptcies did not exist. It was undoubtedly the case that the respondent had a right to be indemnified out of the Point Piper funds in relation to other debts that had been proved in the bankruptcies. It was entitled to assert a charge or right of lien over the entirety of the Point Piper funds in relation to those debts: Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360 at 367. The respondent's concession must, therefore, be seen in its proper context in order to appreciate its significance. 206 Another contextual matter is that the particular point on which the respondent made its concession only appears to have emerged on appeal. In the hearing before Nicholas J, the plaintiffs pursued different points. The clearest examples of this are in relation to the bankruptcy litigation costs and the question of capital gains tax. In relation to the bankruptcy litigation costs, the plaintiffs argued that these were not incurred in the course of administering the Cavallino Unit Trust and that no right of indemnity against the Point Piper funds could be obtained. In relation to the question of capital gains tax, they argued that the possibility of an assessment for capital gains tax being issued was so unlikely or so speculative that no right of indemnity could be found to exist. These arguments were rejected by Nicholas J on the evidence before him. The Court of Appeal did not find that his Honour was in error in so doing. 207 The focus of the applicants' submission was the respondent's claim that it was entitled to assert a lien over the Point Piper funds in respect of the potential capital gains tax liability. The respondent submits that the question of the extent of its lien, and whether it did or did not exist in respect of any potential capital gains tax liability, was not a simple matter. It submits that the fact that it held a mistaken view, which was otherwise reasonably and honestly held, does not mean that it has engaged in misconduct or any other conduct that would warrant an inquiry under this head. The applicants, however, challenge both the honesty and reasonableness with which this claim was advanced. In this connection, the issues raised by this question overlap with the issues raised by question 8. 208 There are some matters relating to the claim to a lien over the Point Piper funds for potential capital gains tax liability that do raise issues of concern and which are covered by the breadth of the present question. I will address these issues when dealing with the next question. 209 Otherwise, it is sufficient for me to say at the present time that I am not satisfied that there should be any broadly-based inquiry dealing with the matters raised by this question. For completeness I would add that the respondent's claim to an indemnity out of and lien over the Point Piper finds in respect of the bankruptcy litigation costs and cross-claim costs appears to me to be (to use Nicholas J's expression) "simply incidental" to the litigation which I have found the respondent to be justified in conducting.

Question 7: Why did the respondent take no steps to inform anyone, at any time, that the ATO on [16 July 2008] advised that assessments to the bankrupts for [capital gains tax] on the sale of the Point Piper [land] would not issue, and why did the respondents maintain that the ATO was a contingent creditor until pressed by the Court of Appeal on [8 May 2009]? 210 As I have indicated, this question does raise issues of concern. On 7 May 2008, before the conclusion of the hearing before Nicholas J, the ATO had written to the respondent requesting that an amount of $1,052,972 be withheld, pending assessments being raised for capital gains tax against the applicants, each in the sum of $526,486. By letter dated 16 July 2008, the respondent was told by the ATO that its previous request to withhold funds was withdrawn, as no assessments would issue. The evidence does not disclose when this letter was received by the respondent. However, a presumption is available that the letter was received by the respondent before orders were made by Nicholas J on 24 July 2008: see ss 160 and 163 of the Evidence Act 1995 (Cth). The respondent did not disclose the contents of the letter of 16 July 2008 at any relevant time. 211 On 24 July 2008 Nicholas J made a declaration that the respondent had a lien over the assets of the Cavallino Unit Trust for "a contingent liability for capital gains tax which may have arisen as a result of the sale of" the Point Piper land. It is to be remembered that his Honour had found that, on the basis of Mr Madden's evidence, there was a real possibility that a claim for capital gains tax would be made, for which the respondent would be liable, and that the respondent was entitled to a lien until that liability had been ascertained, discharged or proved not to exist. The plaintiffs' appeal included a ground that Nicholas J had erred in holding that the respondent was entitled to a lien in respect of the disputed claims, which plainly included the claim with respect to potential capital gains tax. 212 The applicants submit that the respondent "was in possession of material which it knew or ought to have known would dissolve the essential point of the appeal, and failed to tell the trial judge, the plaintiffs, or the Court of Appeal". 213 For its part, the respondent submits that, having had its lien recognised by the Supreme Court by the orders made on 24 July 2008, the respondent did not seek to retain possession of any part of the Point Piper funds by reference to any possible capital gains tax liability. Prior to the orders being made, the respondent's position, reflected in written submissions (the date of which is not disclosed in the evidence before me) was that, after paying the creditors' claims, the surplus of the Point Piper funds should be paid into court, where any party with a proper interest in those funds could make an application in respect of them. The respondent submits that, once effect was given to the orders actually made, there was nothing to stop the trustee of the Cavallino Unit Trust making an application to have the surplus funds paid to it, provided it could overcome the claims of any other person with an interest in those funds. 214 The respondent also submits that the letter of 16 July 2008 did not constitute a release of any taxation liability. It submits that, without a formal release, the position as to whether there would be a claim for capital gains tax remained at large. It submits that the letter was of little probative value as to whether a liability for capital gains tax would actually crystallise. 215 Notwithstanding the respondent's submissions, I am satisfied that an inquiry should be held in relation to the issues raised by this question. Whether or not, as the applicants submit, the capital gains tax issue was "the essential point of the appeal" and whether or not disclosure of the contents of the letter of 16 July 2008 would have "dissolved" the appeal, are not matters that I can or should answer at the present time.

Question 8: Why did the respondent ever assert a right over the funds held by it in relation to a debt allegedly owed by the trustee to the ATO? 216 The applicants say that the first time the question of the potential capital gains tax liability was raised in the Supreme Court proceedings was on 5 February 2008, over two years after the making of the sequestration orders, over 18 months after the sale of the Point Piper land, and a little over three weeks before the hearing before Nicholas J. The applicants submit that one would be justified in concluding that "the only reason the respondent could conceivably be interested in the ATO for the alleged CGT is because it [had] absolutely no other justification for holding on to the bulk of the sale proceeds". 217 The thrust of this submission is that the respondent did not genuinely think that the applicants' estates might be subject to a liability for capital gains tax, and raised the matter in the Supreme Court proceedings only as a subterfuge to enable it to retain the Point Piper funds. I reject that submission. On the evidence before me, I have no reason to doubt that, until the respondent was advised otherwise by the ATO's letter of 16 July 2008, the respondent genuinely (albeit, it would seem, mistakenly) considered that the applicants' bankrupt estates might be subject to liability for capital gains tax arising upon the sale of the Point Piper land. Mr Madden was cross-examined on that matter in the Supreme Court proceedings. His evidence was that the matter was raised internally within the respondent when the Point Piper land was sold by Key Nominees. The respondent's concern was vindicated by the request it received in May 2008 to withhold an amount of $1,052,972 on the basis that assessments would issue against the applicants "in the near future". There was, however, a change brought about by the ATO's letter of 16 July 2008. 218 In my view the evidence does not warrant an inquiry into why the respondent raised the issue of capital gains tax liability in the Supreme Court proceedings.

Question 9: Why did the respondent assert wrongly that the Ferella family trust funds held by it, did not bear interest? (Alternatively, why, on the assumption that the assertion was correct, did the respondent not take steps to ensure that the funds were put in an interest bearing account?) 219 The foundation for an inquiry raised by this question apparently stems from the letter of 19 November 2007 that Mr Madden wrote to Nida Ferella. That letter was a belated response to Mrs Ferella's written request on 15 May 2007 for information for the purpose of considering an annulment of Gustavo Ferella's bankruptcy. In a facsimile transmission Mrs Ferella had asked for "a [sic] account of all the funds including all interest currently held on trust by ITSA regarding the matter before us …". In his response, Mr Madden pointed out that "(n)o interest, however, accrues on funds held on trust in the Common Investment Fund". 220 The applicants do not dispute the correctness of Mr Madden's proposition: see s 20J(1) of the Bankruptcy Act. They submit, however, that Mr Madden should have gone on to tell Mrs Ferella that, where it is established that moneys held by the respondent do not form part of the estate, then interest on those moneys is payable to the person to whom those moneys are payable out of the Common Investment Fund, at the prescribed rate: see s 20J(4) of the Bankruptcy Act. 221 Whether or not Mr Madden should have gone on to tell Mrs Ferella about the effect of s 20J(4) of the Bankruptcy Act (a matter which her specific request did not directly raise), is neither here nor there. I am not satisfied that this question raises any issue that would warrant an inquiry being held. The raising of this question is mere querulousness on the part of the applicants, and nothing more. 222 The fact is that the surplus of the Point Piper funds did bear interest under s 20J(4) of the Bankruptcy Act. The respondent's solicitors acknowledged this fact by letter dated 20 June 2008, before the making of orders in the Supreme Court proceedings. Moreover, the obligation to pay interest to the trustee of the Cavallino Unit Trust on moneys previously held in the Common Investment Fund has been discharged. That is the end of the matter. 223 In submissions, the applicants drew on some passages in the transcript of argument before Nicholas J as providing support for the holding of an inquiry in relation to the issue raised by the question. Those passages do not advance the matter so far as concerns any warrant for an inquiry.

Question 10: Whether by reason of the foregoing matters: (a) the bankrupt estates remain unadministered; (b) interest has not yet been paid to creditors; and (c) the respondent has incurred unnecessary costs, expenses and remuneration, including its own costs in the Supreme Court and Court of Appeal and the costs of the Ferella family (including the applicants) that it was ordered to pay? 224 The applicants raise this question as "a conclusion upon the other grounds each and together". I will treat the matter accordingly. The question calls for no separate response, other than to say that the issue of whether unnecessary costs were incurred in the Supreme Court and Court of Appeal proceedings, on and after 16 July 2008, in relation to the question of capital gains tax, is a matter that should be answered in the context of the inquiry I propose to order.

Question 11: Whether the administration of the estates and the conduct of the Supreme Court proceedings and these proceedings, have been marked by unnecessary aggression and obstruction by the respondent? 225 There is no basis whatsoever in the evidence before me to support the applicants' contention that the applicants' estates have been administered, or that the Supreme Court proceedings or this proceeding have been conducted, by the respondent, in any way that could be described as aggressive or obstructionist. Accordingly, there is no warrant for holding an inquiry on this basis.

disposition 226 The applicants have established a basis for an inquiry limited to the following matters: (a) In the course of administering the applicants' bankrupt estates, was the respondent justified in not disclosing the letter dated 16 July 2008 from the Australian Taxation Office (a copy of which is at page 380 of Exhibit B) or its contents (the letter) to the applicants in proceedings SC 4820/06 in the Supreme Court of New South Wales or in proceedings CA 40326/08 in the Court of Appeal of the Supreme Court of New South Wales? (b) If the respondent was not justified in not disclosing the letter to the applicants as aforesaid:- (i) what consequence, if any, did that non-disclosure have for the orderly administration of the applicants' bankrupt estates? (ii) what relief, if any, should be granted pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth)? 227 The applicants' application for any broader inquiry is refused. I certify that the preceding two hundred and twenty-seven (227) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.