Ferella v Official Trustee in Bankruptcy

JUDGE: YATES J DATE: 14 JULY 2015 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The respondent is the trustee of the applicants' respective bankrupt estates. 2 I have ordered that an inquiry be conducted pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth) (the Act) in relation to limited questions: Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619 (my earlier reasons). 3 The questions, which I set out below, must be seen against the background of litigation conducted in the Supreme Court of New South Wales (the Supreme Court proceedings) in relation to, amongst other things, the respondent's claim to be entitled to be indemnified from the proceeds of sale of certain trust property, namely certain land at Point Piper (the Point Piper funds and the Point Piper land, respectively). 4 In their respective statements of affairs, the applicants stated that they were the trustees of the Cavallino Unit Trust and that the Point Piper land was a trust asset. However, in September 2006, a company associated with the applicants, Agusta Pty Limited (Agusta), commenced the Supreme Court proceedings claiming that it was the trustee of the Cavallino Unit Trust, the applicants (according to it) having retired from their positions as trustees on 19 April 2005, prior to the making of the sequestration orders against them. Much later, on 7 February 2008, Agusta contended that, on 19 April 2005, another company, Riva Pty Limited (Riva), was appointed as trustee of the Cavallino Unit Trust, in place of the applicants, and that, on 9 February 2006, it replaced Riva as the trustee of the trust. 5 On 6 February 2007, the respondent filed a cross-claim in the Supreme Court proceedings. Its original case was that the Point Piper land was not trust property, but was owned by the applicants beneficially. In the course of the proceedings, the respondent's position changed. It acknowledged that the Point Piper land was trust property. However, it contended that, contrary to Agusta's claim, the applicants remained as trustees of the Cavallino Unit Trust. The respondent claimed that it was entitled to a lien over, and thus entitled to be indemnified from, the Point Piper funds in respect of debts and liabilities provable against the applicants in their capacity as trustees of the Cavallino Unit Trust. 6 The background to, and course of, the Supreme Court proceedings are set out at [55]-[152] of my earlier reasons. It is necessary for me to repeat some of my earlier findings in order to provide the context for the questions raised in this inquiry and to explain the evidence given at the inquiry. The following parts of these reasons are based, in large measure, but not exclusively, on findings made in my earlier reasons.

The Supreme Court proceedings 7 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. On the first day of the hearing, Agusta filed an amended summons joining the applicants and Riva as additional plaintiffs. 8 On 6 May 2008, when the Supreme Court proceedings were part heard before Nicholas J, Mr Madden (the respondent's representative who was responsible for the day-to-day management of the applicants' bankrupt estates) wrote to the Australian Taxation Office (the ATO) concerning the possible liability of the applicants for capital gains tax in relation to the sale of the Point Piper land. The relevant text of the letter is quoted at [124] of my earlier reasons. The question of capital gains tax had been raised with the applicants by Mr Madden on 5 February 2008. 9 On 7 May 2008, the ATO wrote to Mr Madden stating that, on the basis of information held, it was considered that a capital gains tax liability had arisen in relation to the sale of the Point Piper land and that the liability was assessable in the hands of the applicants. The letter requested that an amount of $1,052,972.00 be withheld to reflect assessments which, it was said, would issue in the near future. The relevant text of this letter is quoted at [125] of my earlier reasons. 10 At the resumed hearing on 4 June 2008, the respondent applied to reopen its case in order to tender the ATO's letter of 7 May 2008. That application was opposed by the plaintiffs in that proceeding (the plaintiffs), and was refused. 11 On 8 July 2008, Nicholas J gave judgment: 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 (first reasons). His Honour 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 the trust. His Honour concluded that Riva had been 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 it, as required by the terms of the trust deed. Thus, the assets of the trust, including at that time the Point Piper land, remained vested in the applicants at the time of their bankruptcies. His Honour noted that the plaintiffs had 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. 12 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 over those funds. These debts came to be referred to as "the bankruptcy litigation costs" and "the cross-claim costs". 13 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 made (at [64] of his first reasons) the following finding: [64] 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 ... 14 The primary judge added: [65] As a matter of reality and commonsense, the Ferellas are well placed, no doubt in co-operation with the defendant, to proceed promptly to have any liability for taxation determined. The right to indemnification is commensurate with the liability in respect of this and the other claims considered above. Once issues of liability and quantum have been ascertained the defendant would be bound to release the balance of the fund presently held and cause it to vest in its successor under cl 15(d) trust deed. 15 After the publication of the first 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 assessments mentioned will now not issue. 16 The respondent did not bring this communication (the ATO letter) to the attention of the Supreme Court or the applicants. The reason for this will become apparent when I discuss the evidence given at the inquiry. 17 On 24 July 2008, Nicholas J made certain declarations and orders. His Honour made a declaration that the respondent had a lien over the assets of the Cavallino Unit Trust in respect of certain debts, claims and liabilities, which included "a contingent liability for capital gains tax which may have arisen as a result of the sale of the property" (Declaration 5(l)). 18 Another debt or liability related to a contingent liability in respect of certain unassessed legal costs (Declaration 5(i)). I mention that matter only incidentally so as to provide context for some other matters to which I will refer. 19 By Order 6, his Honour directed the respondent to pay into court the net proceeds of sale of the Point Piper land. 20 By Order 7, his Honour ordered the plaintiffs to pay the respondent's costs, including reserved costs. 21 By Order 8, his Honour granted liberty to the parties to apply, in respect of their various rights and obligations in relation to the balance of the net proceeds. 22 By September 2008, the bulk of the applicants' creditors had been paid by the respondent. On 3 December 2008, the applicants were discharged from bankruptcy by operation of law: see s 149(4) of the Act. 23 On 8 October 2008, the plaintiffs filed a notice of appeal from the orders made by Nicholas J. The notice of appeal challenged his Honour'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 Act). 24 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. 25 The appeal and cross-appeal were heard by the Court of Appeal on 7 May 2009. During the course of the hearing, the respondent abandoned its cross-appeal. 26 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 a number of orders made by Nicholas J (including Declaration 5(l)) should be set aside. 27 In relation to Declaration 5(i) and Declaration 5(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. 28 It is clear that, on the issues as then raised by the applicants and their co-appellants, the respondent conceded that the legal basis for making Declaration 5(i) and Declaration 5(l) could not be supported. However, the applicants point to a more fundamental reason why the respondent should not have supported the making of Declaration 5(l) in any event: the ATO letter had made clear that the request to withhold funds on account of a capital gains tax liability had been withdrawn on the basis that an assessment for capital gains tax would not issue. The respondent had not disclosed this information to the applicants. The respondent had permitted the question of capital gains tax liability to proceed to appeal on the basis of Nicholas J's finding, based on Mr Madden's evidence, that there was a real possibility that a claim for capital gains tax would be made for which the respondent may become liable. 29 In light of the way the appeal had been argued, the question of costs of the trial was remitted to Nicholas J for redetermination. 30 On 28 August 2009, his Honour ordered the respondent to pay 80 per cent of the plaintiffs' costs of the first instance hearing. In his second reasons (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 (unreported, Sup Ct, NSW, Nicholas J, 28 August 2009)), 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.

The questions for determination in the inquiry 31 The inquiry is limited to the following questions: (a) In the course of administering the applicants' bankrupt estates, was the respondent justified in not disclosing [the ATO letter] or its contents … 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 ATO 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 Act]?

The evidence at the inquiry 32 Mr Madden gave evidence at the inquiry. He said that he did not know that the ATO letter had been received by the respondent until 22 October 2008, when he was preparing for a conference with the respondent's solicitors and counsel in relation to the appeal in the Court of Appeal, which had been commenced on 8 October 2008. The letter had been placed on file without his knowledge. The evidence shows that Mr Madden was on leave in the period 14 to 22 July 2008. The evidence shows that Mr Madden was also absent for other periods in August and September 2008. 33 Mr Madden said that, although having made inquiries, he was unable to ascertain how, and by whom, the letter came to be placed on the file. He said that, had the ATO letter come to his attention before 24 July 2008 (when Nicholas J made orders following the giving of judgment on 8 July 2008), Declaration 5(l) - which was not in fact opposed by the plaintiffs - would not have been made. 34 It should be noted in this connection that the respondent's solicitors subsequently wrote to the ATO on 11 August 2008 and on 7 October 2008. In the first letter, the respondent's solicitors sent the ATO a copy of the orders made on 24 July 2008, and noted that, as Riva was found to be trustee of the Cavallino Unit Trust, it would be Riva's responsibility to prepare and lodge tax returns. In the second letter, the respondent's solicitors said: As you know the judgment in this matter has been delivered in the Supreme Court. The Official Trustee in Bankruptcy holds the amount for the capital gains tax. Can you please advise the current status with respect to the income tax assessments so that the quantum payable for these amounts are certain and a further application can be made to the Court for an order for payment out. 35 No response was received to these letters. They had obviously been written on the understanding that, as previously informed, assessments for capital gains tax would issue. 36 Mr Madden said that he took the ATO letter to the conference on 22 October 2008. It is implicit in his evidence that the ATO letter was discussed. I am satisfied that the respondent's solicitors and counsel only became aware of the ATO letter at this time. 37 On the evening of 22 October 2008, the respondent's solicitors received an email from counsel who was then briefed for the respondent. The email stated that counsel had discussed the ATO letter with "a senior member on [his] floor". The email contemplated that a letter would be sent to the, by then, appellants' solicitors. The email recorded the following advice: The receipt of the ATO letter did not oblige the respondent to disclose the information in it to the appellants or the Supreme Court either before 24 July 2008 or at that time. The orders made on 24 July 2008 did not provide for any amount to be retained by the respondent on account of any capital gains tax liability. When advising the appellants of the amount to be paid into court, it was necessary to do no more than inform them of that amount, the amounts that had already been paid, and the amounts that were still retained by the respondent. There was no need to inform the appellants of the ATO letter or to make reference to "the existence or non-existence of any claim by the ATO". However, the letter should not be misleading in this regard. The appellants should be advised, if it be the case, that the respondent's instructions were that it would make no objection to any application made by Riva for payment out of the court-held funds. 38 This advice was forwarded to Mr Madden. However, there is no evidence before me that the respondent's solicitors did in fact send any communication to the appellants advising them that the respondent would make no objection to any application by Riva for payment out of the court-held funds or informing them of the other information foreshadowed in the advice. 39 Mr Madden said that he regarded the issue in the appeal to be whether Agusta or Riva was the trustee of the Cavallino Unit Trust. I observe here that, while that might have been Mr Madden's understanding, the notice of appeal, notice of cross-appeal, notice of contention and the parties' written submissions filed in the Court of Appeal show that a number of other issues had been raised in the appeal including whether the respondent's lien extended to contingent liabilities and, in that connection, whether Declaration 5(l) amongst other declarations and orders, should have been made. 40 In this connection, the applicants and their co-appellants sought to have Declaration 5(l) set aside. They submitted that this was not a potential liability which had been incurred by the applicants or any other person "in the Ferella camp" prior to the applicants' bankruptcies. It was only a liability incurred upon or after the sale of the Point Piper land in 2006, if incurred at all. Further, the appellants submitted that, even if it were right that the respondent should hold trust money in respect of a potential liability, there had to be proof by the respondent of "some sufficient potentiality" for that liability. The appellants submitted that this was lacking on the evidence before the primary judge. 41 The respondent's written submissions in the Court of Appeal explained that its resistance to handing over the Point Piper funds "was at the heart of the dispute before the trial judge". The respondent identified the estimated sum of $1,000,025.00 to be a potential tax liability arising from the sale of the Point Piper land. The respondent submitted that the appellants' argument concerning post-sequestration liabilities had not been put at trial. The respondent submitted that the argument at trial had been that the claim for indemnity in respect of the potential capital gains tax liability should be denied because, at the date of trial, no assessment for any such liability had issued and the possibility of any assessment being raised in the future was to be viewed as so unlikely or speculative that no right of indemnity could be found to exist. 42 Continuing in this vein, the respondent's submissions stated: It was common ground that as at the date of the trial no tax assessment for the period ending June 2006 (which would have encompassed the time when the sale of the property had occurred) had issued to the trust. The evidence was that those who claimed to be the replacement trustees had not caused any return for that period to be lodged and had not otherwise notified the Tax Office of the fact of any sale of the property. The argument on behalf of the Official Trustee was that nevertheless there was an existing right of indemnity supported by a lien or charge over the whole of the trust estate because there was either an existing contingent debt or liability in respect of tax for which the bankrupts might become liable or there was at least a real possibility of such a liability being suffered. (Footnotes omitted.) 43 After citing certain authorities for the proposition that a trustee's right of indemnity, and a supporting charge or lien, can arise even though a liability is not certain, the respondent's submissions continued: As to the tax liability, the trial judge found at [64] of the judgment that there was "a real possibility that a claim for capital gains tax would be made and for which the Defendant may become liable". That finding of fact was open to the trial judge based upon the evidence given by Mr Madden. No evidence contradicting Mr Madden's claims was led by the Plaintiffs. It was not irrelevant to the trial judge's consideration of this issue that the Ferellas were well able, by causing the necessary return to be lodged, to have the question of whether there was or was not a tax liability determined by the Commissioner. Given the trial judge's finding of fact that there was a real possibility that an assessment of tax would be received and for which the Defendant might be liable, that potential or contingent liability was one for which the right of indemnity existed in accordance with the cases discussed by the trial judge at [60]-[62] of the judgment and those which are referred to in paragraph [29] above. Again, there was no real issue between the parties, at the trial, that if the tax liability was found to be "contingent" that the right of indemnity would arise. The argument at the trial was whether that tax liability was so speculative or fanciful or uncertain that it could not be described as possible or contingent and, for that reason, no right of indemnity existed. (Footnotes omitted.) 44 The respondent's submissions concluded in this regard: By the time these proceedings were commenced and certainly by the time the case was heard, each of the bankruptcy costs, the Cross Claim costs and the tax liability were liabilities which had either been incurred or were sufficiently certain or "likely" as to have caused the right of indemnity to have arisen and, along with the related charge, that right had passed to the Official Trustee. 45 These submissions (dated 24 April 2009) quite correctly focus on the evidence before Nicholas J as the trial judge. However, it is difficult to see how those submissions could have been advanced without informing the applicants - and, indeed, the other appellants - of the changed circumstances represented by the ATO letter, even though it was not in evidence before Nicholas J. I shall return to discuss that question. It is sufficient to note at this juncture that, at the hearing of the appeal, the question of a "sufficient potentiality" of the capital gains tax liability was never reached because of the respondent's concessions recorded at [35] of the Court of Appeal's reasons, quoted at [27] above. These concessions led to the respondent's further concession (recorded at [36] of the Court of Appeal's reasons) that Declaration 5(l) should be set aside. 46 In the course of his cross-examination at the inquiry, Mr Madden said that, based on the advice to which I have referred at [37], a decision had been made within the respondent's office that it was not necessary to disclose the ATO letter to the applicants or their co-appellants. Nevertheless, Mr Madden accepted, without hesitation, that had he known of the ATO letter before Nicholas J had given judgment, he would have made arrangements to draw the letter to his Honour's attention. He also accepted that the ATO letter was central to his Honour's consideration of whether the respondent was entitled to the lien it had asserted. This evidence plainly illustrates that the respondent fully appreciated the significance of the ATO letter, regardless of the legal advice that had been given. 47 Mr Madden was cross-examined on the internal procedures in the respondent's office for handling inbound correspondence. He accepted that had he or his superiors seen the ATO letter "something would have been done about it". At the time that the ATO letter came to his attention, Mr Madden asked his immediate superior - Ms Choo, the relevant Business Manager - whether she knew about the letter, in particular if she knew who had placed it on the file and whether the letter had been referred to the respondent's legal advisers. Mr Madden said that Ms Choo told him that she did not know where the letter had come from. Mr Madden also made inquiries of one of his then subordinates who, according to Mr Madden, replied that he or she (it is not clear on the evidence) had not placed the letter on the file. Mr Madden also said that the ATO letter did not bear the notations that would show that it had passed through the usual procedures for inbound correspondence received at the respondent's office. He accepted that the system had "broken down".

The applicants' position 48 The applicants submitted that Mr Madden clearly understood that, before and after the hearing of the Supreme Court proceedings, the issue of capital gains tax and the respondent's assertion of a lien over the Point Piper funds were closely intertwined. The applicant submitted that Mr Madden's explanation as to what happened to the ATO letter between 16 July and 22 October 2008 was unconvincing and unsatisfactory. The applicants also submitted that Mr Madden's justification for the respondent's non-disclosure of the ATO letter was unsatisfactory. The applicants contrasted this justification with Mr Madden's ready acceptance that, had he known of the ATO letter before Nicholas J gave judgment, the letter would have been drawn to his Honour's attention, as well as Mr Madden's acceptance that, had he been aware of the ATO letter after Nicholas J gave judgment, he would have made arrangements to have had the letter drawn to his Honour's attention. 49 I should interpolate, however, that this evidence must be seen in the context that, in all likelihood, Mr Madden would have sought legal advice on that matter, as he in fact did on 22 October 2008 shortly after the ATO letter came to his attention. His evidence, in this regard, should be viewed as evidence given without the benefit of legal advice on that question. However, as I have noted, this evidence shows that the respondent fully appreciated the significance of the ATO letter on the question of the possible capital gains tax liability. 50 The applicants submitted that, both before Nicholas J and the Court of Appeal, the respondent asserted a lien on the false basis that such a lien extended to any capital gains tax liability arising out of the sale of the Point Piper land. The applicants submitted that, having received the ATO letter, the respondent must have known that such a liability did not exist. Thus, the applicants submitted, "the matter" - by which I understand the applicants to mean a lien in respect of the possible capital gains tax liability - would never have been agitated in the Court of Appeal, if the ATO letter had been made available to Nicholas J or the plaintiffs before his Honour made final orders on 24 July 2008. 51 The applicants submitted that the respondent's general law duties as a trustee, and the responsibilities imposed on it as a model litigant, required it to draw the ATO letter to Nicholas J's attention either upon its receipt or when the proceedings came before his Honour on 24 July 2008 for the making of final orders. The applicants also submitted that the respondent had a clear duty to draw the ATO letter to the attention of the plaintiffs/appellants as soon as it became aware of it. 52 The applicants then submitted that "a finding is open" that the ATO letter was improperly concealed within the respondent's office in the period 16 July to 22 October 2008. They submitted that, at the very least, a finding should be made that there was "culpable negligence" in not bringing the ATO letter to Mr Madden's attention before 22 October 2008. 53 The applicants further submitted that, after 22 October 2008, the only possible finding is that the non-disclosure of the ATO letter was deliberate. 54 The applicants then submitted that "the inescapable inference" should be drawn that the non-disclosure of the ATO letter can only be explained by an illegitimate purpose, which the applicants suggested was: avoiding embarrassment, judicial and other criticism and exposure to adverse costs orders; and/or providing an additional source of funding of the respondent's expenses. 55 As to the legal advice itself, the applicant submitted that the advice was wrong because it involved wilfully concealing from Nicholas J and the Court of Appeal "a factual matter which bore directly upon an issue in question". In this connection, the applicants submitted that the advice "fell short of the ethical duty not to mislead a court as well as falling short of the duty of a model litigant to act fairly and honourably in the course of litigation". 56 The applicants submitted that this a case where the respondent had lost sight of its overriding duty as a trustee and of its duty as a model litigant to conduct litigation with scrupulous honesty and fairness. 57 The applicants further submitted that a finding should be made that the respondent was not justified in not disclosing the ATO letter to the plaintiffs in the Supreme Court proceeding and the appellants in the appeal proceeding. The applicants submitted that the Court should find that the respondent had breached its duty as a trustee by reason of its non-disclosure. 58 Based on these submissions, the applicants submitted that it must follow that the respondent is not entitled to charge the applicants' bankrupt estates with the following legal costs: the costs ordered to be paid to the plaintiffs in the Supreme Court proceedings before Nicholas J; the legal costs of the respondent in the Supreme Court proceedings; the legal costs ordered to be paid by the respondent to the appellants in the Court of Appeal; the legal costs of the respondent in the Court of Appeal proceedings; any costs which might be ordered to be paid by the respondent in connection with this inquiry; any legal costs of the respondent in connection with this inquiry; and all other expenses of the respondent in and about the Supreme Court proceedings, the appeal to the Court of Appeal and this inquiry. 59 Further in this regard, the applicants submitted that: The Official Trustee's remuneration in respect of the estates of Gustavo and Angelo Ferella should also be abated proportionately to the time and effort directed at each of the Supreme Court proceedings the Court of Appeal proceedings and this inquiry. 60 Finally, the applicant submitted that, until a final balance is calculated of what is due as between each of the applicants and the respondent, taking into account the disallowances they seek, the Court should order the respondent to discontinue or consent to a stay of proceedings against the second applicant and his wife (Nida Ferella) in relation to the appointment of trustees for the sale of certain properties, whose sale is sought to provide funds for the administration of the second applicant's bankrupt estate.

The respondent's position 61 The respondent's position is that it was justified in not disclosing the ATO letter but that, even if the Court should find otherwise, the non-disclosure had no consequences for the orderly administration of the applicants' bankrupt estates. Further, the respondent submitted that if the Court should find that the non-disclosure did have consequences, the relief granted should be confined to the costs incurred by reason of the conduct complained of. The respondent stressed the need to keep in mind the correct sequence of events in which the non-disclosure occurred, including how the issues between the plaintiffs and the respondent developed after the hearing before Nicholas J. 62 The respondent also referred to a number of important findings that had been made in my earlier reasons. The findings to which the respondent referred are: The respondent was justified in defending the Supreme Court proceedings in the way that it did and in prosecuting its claim to be indemnified from the Point Piper funds: [185] of my earlier reasons. The applicants had not shown any significant neglect or delay in the administration of the bankrupt estates: [196] of my earlier reasons. The respondent had made conscientious endeavours to fully pay creditors whose debts have been proved in the bankruptcies from the time the respondent received the Point Piper funds. Any delay in payment had been caused by the applicants' considerable resistance to use of those funds - the most appropriate and readily-available asset to be used for payment: [196] of my earlier reasons. 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: [205] of my earlier reasons. The respondent's concession in relation to the capital gains tax claim only emerged on the appeal. In the hearing before Nicholas J, the plaintiffs had pursued different points: [206] of my earlier reasons. The respondent's position before Nicholas J was that, after paying 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: [213] of my earlier reasons. 63 The respondent submitted that it was not aware of the ATO letter during the hearing before Nicholas J. It submitted that the evidence is not capable of sustaining the applicants' contention that the respondent improperly concealed the ATO letter in the period 16 July to 22 October 2008. Further, the respondent submitted that to the extent that the applicants' contention regarding "culpable negligence" involves some conscious wrongdoing, such a contention, equally, cannot be sustained on the evidence before the Court on this inquiry. 64 Further, the respondent submitted that it had behaved "entirely appropriately". Upon reading the ATO letter, Mr Madden drew it to the attention of his superior, Ms Choo and, on the same day, to the respondent's solicitors and counsel. The respondent then acted on the legal advice given. 65 As to the applicants' contention that the ATO letter had been deliberately concealed from the Court of Appeal, the respondent submitted that the letter was not determinative of the question relating to the capital gains tax liability, and that it is unlikely that the letter would have been received by the Court of Appeal. 66 With respect to the consequences of non-disclosure, the respondent submitted that the applicants' claimed relief was sought on the incorrect basis that the ATO letter was sufficient to dispose of the respondent's claim to a lien. The respondent submitted that, if it be accepted that the ATO letter was determinative of the question of capital gains tax liability, then the only consequence was that the issue of that liability before the Court of Appeal was otiose. However, the respondent submitted that the ATO letter was not determinative. It did no more than signify that assessments would not issue and that the ATO's request to withhold money was withdrawn. According to the respondent, this was not a release of any capital gains tax liability. 67 Finally, the respondent raised a number of arguments as to why the relief sought by the applicants was too wide and should not be granted.

Relevant legal principles 68 In my earlier reasons, I discussed a number of legal principles concerning s 179 inquiries, and the duties of trustees in bankruptcy: see [11]-[28] thereof. I noted (at [26]) that a trustee in bankruptcy is also governed by the general law relating to trustees, except where bankruptcy law modifies the general law. 69 A trustee in bankruptcy has a duty to administer the bankrupt estate in the interests of creditors and the bankrupt. Relevantly to the present case, and subject to the particular requirements of the Act, a trustee's administration of the bankrupt estate in the interests of the bankrupt is attended by the normal incidents of a trustee's duties and responsibilities as a fiduciary. Thus, subject to the Act, a trustee in bankruptcy should not place itself in a position where its own interests conflict with the bankrupt's interests or prefer its own interests over the bankrupt's interests when undertaking its administration. 70 In their submissions, the applicants refer to various passages in Adsett v Berlouis (1992) 37 FCR 201 concerning the duties of trustees in bankruptcy. They emphasised those passages in the judgment which refer to a trustee's duty to exercise judgment to save an estate unnecessary expenditure and to administer an estate in a way that maximises satisfaction of creditors' claims and any possible surplus with a bankrupt. They also referred to passages in Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 concerning the accountability of trustees for honest errors of judgment where a proper degree of prudence has not been exercised. 71 With respect to the costs of the litigation before Nicholas J and in the Court of Appeal, the applicants submitted that an adverse costs order suffered by a trustee in bankruptcy does not give rise to a right of recoupment out of the bankrupt estate: Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. They submitted that, in deciding whether a trustee has a right of reimbursement, regard must be had to whether the costs have been properly incurred in the sense of having been reasonably and honestly incurred. In this connection, the applicant submitted that even though a trustee might have acted honestly, he will not be entitled to reimbursement for costs in litigation where his legal advisers have been found to have acted unreasonably: In re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 558, 560 and 562; Adsett at 211. 72 The respondent did not dispute these principles, although it argued that a closer examination of them was warranted. 73 The applicants also referred to the duties of model litigants, which duties, they argued, were applicable to the respondent. They also referred to authorities on abuse of the Court's process where proceedings are conducted for an ulterior or collateral purpose. 74 I do not think that the cases on abuse of process are of assistance in the present case, particularly having regard to my earlier findings, including those noted at [62] above. Further, I do not think that it is necessary to resort to the principles applicable to model litigants. In my view, the answer to question (a) in this inquiry is to be found in a consideration of a trustee's duty to administer the bankrupt estate in the interests of, inter alios, the bankrupt, and the trustee's attendant duty as a fiduciary. One need go no further. 75 At this point I should note that question (a) is directed to whether the respondent was justified in not disclosing the ATO letter to the applicants in the proceedings before Nicholas J or in the Court of Appeal. I propose to confine myself to that question and not address some broader question as to whether the respondent was justified in not disclosing the ATO letter to the other plaintiffs/appellants, or to Nicholas J or the Court of Appeal. The concern of the present inquiry is the duty of the respondent to the applicants in the administration of their bankrupt estates.

Consideration 76 I do not accept the applicants' submission that a finding is open that, in the period 16 July to 22 October 2008, the ATO letter was improperly concealed within the respondent's office or that there was "culpable negligence" involved in not bringing the letter to Mr Madden's attention before 22 October 2008. 77 I found Mr Madden to be an honest and candid witness. I have no hesitation in accepting that he did not become aware of the ATO letter until 22 October 2008. He acted properly in bringing the letter to the attention of his superior and then bringing it to the attention of the respondent's solicitors and counsel with a view to obtaining legal advice as to what should be done with it. 78 Mr Madden gave evidence that most files in the respondent's office that he was handling involved correspondence with the ATO concerning the taxation liability of the individual bankrupt. Mr Madden said that most of that correspondence was of a "menial" nature, by which I understood him to mean that the correspondence was of a lowly and uncontroversial status. 79 It is clear that, for whatever cause, the respondent's procedures in relation to the treatment of inbound correspondence was not observed for the ATO letter. I do not know how, precisely, the letter came to be placed on the relevant file. However, I am satisfied, on balance, that the ATO letter came to the attention of someone within the respondent's office, other than Mr Madden, his immediate superior Ms Choo or one of his immediate subordinates, who viewed the ATO letter as routine correspondence and simply placed it on file in Mr Madden's absence, without recognition of its possible significance in the proceedings before Nicholas J, where the capital gains tax consequences of the sale of the Point Piper land had been raised as an issue. There is no evidence that anyone within the respondent's office took steps to deliberately conceal the letter from Mr Madden or from any other person involved in the administration of the applicants' bankrupt estates. 80 It follows that, contrary to the thrust of the applicants' submissions, there was no attempt by the respondent to withhold the letter from Nicholas J's attention when the matter came before his Honour for the purpose of making final orders on 24 July 2008. The simple fact is that, at that time, Mr Madden was ignorant of the ATO letter's existence, as were the respondent's solicitors and counsel. As I have noted, the respondent's solicitors continued to correspond with the ATO on the basis of its letter of 7 May 2008 without any response that would disabuse them or the respondent that the ATO's intentions, as communicated in the letter of 7 May 2008, had changed. 81 However, the period following 22 October 2008 marked a change in circumstances. Mr Madden had actual knowledge of the ATO letter and appreciated that its contents related directly to the question of the respondent's entitlement to a lien over the Point Piper funds on account of a prospective liability for capital gains tax arising from the sale of the Point Piper land. I refer, in that connection, to Mr Madden's evidence summarised at [46] above. It was no doubt this realisation that prompted Mr Madden to take the letter to the conference on 22 October 2008 and to seek legal advice in relation to it. 82 It is useful at this point to draw attention to Nicholas J's finding at [55] of his Honour's first reasons, where he said: [55] There is no evidence that any tax return referable to the sale has been lodged with the Australian Taxation Office by any of the plaintiffs. As the property was sold on 11 April 2006, it was assumed that the proceeds would be brought to account in the trust's taxation return for the financial year ending 30 June 2006. It is common ground that no assessment of the amount, if any, of taxation payable, or any claim for same, has been made by the taxation authority. On behalf of the defendant, its accountant, Mr Philip Madden, guided by information on the website of the Australian Taxation Office, made a calculation which was based on the raw figures for the purchase and sale prices of the property, namely $3,850,000 and $7,950,000 respectively. On this basis he estimated the amount of capital gains tax to be $1,025,000. The defendant accepted that the trust's final taxation position depended upon other aspects of its financial position during the relevant year of which Mr Madden had no knowledge. In cross-examination, Mr Madden accepted that, at present, the issue of capital gains tax was a matter of speculation. 83 My consideration of whether the respondent was justified in not disclosing the ATO letter to the applicants in the period following 22 October 2008 commences with my acceptance that the applicants had an interest in knowing the contents of the ATO letter in relation to the administration of their bankrupt estates. The ATO letter was plainly relevant to the likelihood that an assessment for capital gains tax would issue in respect of the sale of the Point Piper land. The respondent had raised this likelihood as an important issue in the administration of the applicants' bankrupt estates and it had sought, by litigation, to justify its entitlement to a charge or lien over the Point Piper funds on the basis that it was sufficiently likely that an assessment would issue against the applicants as trustees of the Cavallino Unit Trust. At all times, the applicants resisted that claim. Even in the appeal, the applicants and their co-appellants (Agusta and Riva) maintained that position, although they also successfully raised another ground by which they said the respondent's claim in this regard would be defeated. The applicants' interest in knowing the contents of the ATO letter cannot be diminished by speculating about whether or not, and if so how, they could deploy the ATO letter in the pending appeal in the Court of Appeal or more generally in relation to their dispute with the respondent. 84 Once it is accepted that, in relation to the administration of their bankrupt estates, the applicant's had an interest in knowing the contents of the ATO letter, the question arises: What interest, in relation to the administration of the applicants' bankrupt estates, was the respondent seeking to protect by not disclosing the ATO letter to the applicants? Certainly the respondent was not seeking to protect the applicants' interests; nor was it seeking to protect the interests of creditors - the only relevant creditor, for this purpose, having given notice to the respondent that the request to withhold funds had been withdrawn and that it was not intended that an assessment for capital gains tax would issue. 85 The respondent did not seek to address this question. Moreover, the respondent did not seek to explain the basis for the legal advice or otherwise propound its correctness beyond submitting that, given that the proceedings before Nicholas J had concluded, and the fact that the respondent had been directed to pay the Point Piper funds into court, there was nothing to suggest that the advice was wrong, let alone that it was "wrong-headed or perverse": In re Beddoe at 562. I do not think that that response really engages with the extent of the respondent's duties and responsibilities as a trustee, or with all the facts and circumstances of the present case. 86 I do not propose to speculate on the legal reasons underpinning the advice that was given, when the respondent has not itself sought to advance any reasons at the inquiry. It is sufficient for me to observe that I can think of no legal reason that would require the contents of the ATO letter to be withheld from the applicants. The advice seems to address the question whether, in the course of the litigation, the respondent was then obliged to disclose the ATO letter to the plaintiffs/appellants, not whether, in the course of administering the bankrupt estates, it should disclose it to the applicants. It contained the cautionary observation that the letter (that was contemplated would be sent) should not be misleading as to the existence or non-existence of any claim by the ATO. This part of the advice recognised that the ATO letter had brought about a change in circumstances and that the contemplated letter could well have the capacity to mislead through miscommunication of the (then) true state of affairs concerning the ATO's intentions. What the advice failed to recognise was that the non-communication of the changed circumstances also had the capacity to mislead the applicants in the same way. Indeed, I think that the applicants were misled by the non-disclosure. 87 I can think of no interest of the respondent that required protection by non-disclosure of the ATO letter, beyond a concern that criticism might have been levelled at it for not discovering the letter sooner. However, any such concern, had it been held, could not have overridden the reasonable expectation of the applicants to have been informed by the respondent of the true state of affairs - that, on 16 July 2008, the ATO had withdrawn its request to withhold funds and had stated that "the assessments mentioned will now not issue". The respondent had raised the question of capital gains tax as an important aspect of its administration of the bankrupt estates. The applicants were resisting the respondent's retention of funds for any asserted capital gains tax liability on the ground that, as a matter of fact, any such liability was so remote that it could not be categorised as either possible or potential. The ATO letter was plainly relevant to that controversy and adverse to the position being maintained by the respondent. The respondent plainly appreciated that fact. In those circumstances, it was not reasonable for the respondent, as trustee, to withhold the information in the ATO letter from the applicants. 88 I am satisfied that the respondent genuinely accepted the correctness of the legal advice that had been given on 22 October 2008. However, when it chose to act on that advice, it did so appreciating the significance of the ATO letter in respect of its claim to be entitled to a lien for a possible capital gains tax liability. In those circumstances, the respondent did not act reasonably in the interests of the applicants, as it was obliged to do. I do not think that the respondent's obligations in that particular regard were modified by the fact that it was in litigation with the applicants. The respondent unjustifiably put its own position in conflict with the interests of the applicants and, seemingly, preferred its own position to their interests. In this respect, the respondent failed in its duty to the applicants. 89 I do not accept that it is an answer for the respondent to say that the ATO letter does not state, in terms, that an assessment for capital gains tax in respect of the sale of the Point Piper land would never issue. Even accepting that proposition for the purposes of argument, it simply does not justify the non-disclosure of the ATO letter which made clear that, at that time, no assessment for capital gains tax would issue and that the ATO did not require funds to be withheld on account of capital gains tax. 90 I also do not accept that it is an answer for the respondent to say that the ATO letter had been overtaken by events, namely the making of the orders by Nicholas J on 24 July 2008 or that those orders rendered the disclosure of the ATO letter moot because the interested parties (at that time Riva and the Commissioner of Taxation) were free to debate the question of capital gains tax liability on an application to release the funds from court. The applicants still had a real interest in knowing the contents of the ATO letter. Such knowledge would, no doubt, have assisted in any application, in which the applicants were interested, to release the court-held funds. 91 But, in any event, earlier in October 2008, the applicants and their co-appellants had filed their notice of appeal in the Court of Appeal which included (as Ground 3) that Nicholas J had erred in holding that the respondent was entitled to a lien in respect of "the disputed claims". One of those claims was the possible capital gains tax liability. For its part, the respondent pursued a notice of contention which sought to uphold its claimed right of indemnity on the basis that the applicants had never been validly removed as trustees of the Cavallina Unit Trust. In its written submissions filed in the Court of Appeal, the respondent continued to support 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, based on Mr Madden's evidence. I refer, in that regard, to the submissions I have quoted at [42]-[44] above. As I have already noted, it is difficult to see how those submissions could have been advanced without at least informing the applicants of the changed circumstances brought about by the ATO letter. 92 For these reasons, I am not satisfied that, in the course of administering the applicants' bankrupt estates, the respondent was justified in not disclosing the ATO letter or its contents to the applicants on and after 22 October 2008 during the pendency of the Court of Appeal proceedings. 93 This finding then focuses attention on question (b) in this inquiry: What consequences did this non-disclosure have for the orderly administration of the applicants' bankrupt estates and what relief, if any, should be granted? 94 The applicants have made no submission as to the steps they would have taken (or not taken) had the ATO letter or its contents been disclosed to them on or after 22 October 2008, or how those steps would have been different from the steps they actually took. They have not suggested some other way in which the administration of their bankrupt estates was affected by the non-disclosure, beyond stating that disclosure of the ATO letter would have removed an issue before the Court of Appeal. I do not accept that that conclusion follows. In these circumstances, I am not satisfied that the non-disclosure of the ATO letter had any material consequences for the orderly administration of the bankrupt estates. Nevertheless, the applicants have submitted that the respondent should not be entitled to charge their estates for various legal costs and expenses: see [58] above. 95 I am not satisfied that the applicants have made a proper case for the relief they seek. Their submissions ignore my earlier finding (see [185] of my earlier reasons) that, leaving aside the present question, 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, it being appreciated that the claim to a lien was not simply one based on a possible liability in respect of capital gains tax. 96 Nicholas J delivered his first reasons before the ATO letter had even been written. Thus, the ATO letter played no part in the proceedings before his Honour, although it is possible that the ATO letter may have had a bearing on whether Declaration 5(l) would have been made had the letter been brought to his Honour's attention at the time that final orders were made. 97 Even in the Court of Appeal, the applicants, as appellants, changed their line of attack on the capital gains tax issue. Although they maintained a "secondary position" - the argument that the possible capital gains tax liability had not been established with "sufficient potentiality" - and although the respondent sought to maintain the correctness of Nicholas J's finding in that regard, the applicants and their co-appellants had shifted the focus of the appeal to an argument about post-sequestration order liability. This argument had not been raised before Nicholas J, although, on appeal, it was decisive. The respondent properly made a concession at the outset of the hearing of the appeal, thereby disposing of the issue. I am not persuaded on the evidence before me (which essentially consists of the notice of appeal, notice of cross-appeal, notice of contention and the parties' written submissions) that any meaningful adjustment can be made to isolate the costs (to both the applicants and the respondent) referable to the factual issue of whether the possible capital gains tax liability found by Nicholas J had been established with "sufficient potentiality". In my assessment, the submissions specifically directed to that issue represented a very small part of the appeal. 98 The applicants have also submitted that the respondent's remuneration should be abated proportionately to reflect the time and effort directed to the proceedings before Nicholas J, the proceedings in the Court of Appeal, and this inquiry. I am not satisfied that the applicants have made a proper case for that relief, substantially for the same reasons. The proceedings before Nicholas J, the appeal in the Court of Appeal, and this inquiry have not been simply about a possible liability in the hands of the respondent for capital gains tax arising from the sale of the Point Piper land. 99 Overall, I am not satisfied that the respondent should be precluded from charging the applicants' bankrupt estates with: the costs ordered to be paid to the plaintiffs in the Supreme Court proceedings; the legal costs of the respondent in the Supreme Court proceedings; the legal costs ordered to be paid by the respondent to the appellants in the Court of Appeal; or, the legal costs of the respondent in the Court of Appeal. 100 The applicants' claim that the respondent should not be entitled to charge "all other expenses of [the respondent] in and about the Supreme Court proceedings, the appeal to the Court of Appeal and this inquiry". Insofar as the expenses relate to the Supreme Court proceedings and the appeal to the Court of Appeal, this submission should be rejected for the same reasons. 101 However, as regards the legal costs and other expenses of this inquiry, different considerations come into play having regard to my answer to question (a), bearing in mind also my answer given to question (b)(i). 102 The parties have not specifically addressed the question of what costs order or orders should be made in respect of this inquiry. They have touched on the question of whether the respondent should be entitled to be indemnified from the applicants' bankrupt estates for any costs it might be ordered to pay in respect of the inquiry. They have also touched on whether the respondent is entitled to be indemnified for its own costs of the inquiry in any event. 103 Unless some agreement can be reached, it will be necessary for the parties to address that specific question. In doing so, it will be necessary for the parties to address the consequences of Order 9 made on 13 August 2010. It will also be necessary for them to address the question of how reserved costs are to be dealt with.

Disposition 104 I have determined that the respondent was not justified in not disclosing the ATO letter. However, I am not satisfied that the non-disclosure had any material consequences for the orderly administration of the bankrupt estates. I am not satisfied that the applicants have established a case for the relief they seek in relation to the costs and expenses of the proceedings before Nicholas J and in the Court of Appeal, or in respect of the respondent's remuneration. It is now necessary for the parties to direct attention to the question of the costs of this inquiry. 105 In order to bring the matter to finality, I will make orders to the following effect. The applicants are to serve on the respondent a draft of the orders they propose, which will give effect to these reasons and provide for the question of costs of the inquiry. As regards the question of costs, the draft is to be supported by written submissions not exceeding two pages in length. This should be done by 4.00 pm on 22 July 2015. The respondent is to serve on the applicants a draft of the order it proposes. If the respondent disagrees on the appropriate order for costs, the respondent's draft is to be supported by written submissions not exceeding two pages in length. This should be done by 4.00 pm on 29 July 2015. Copies of the draft orders and submissions should be provided to my Associate at the time of service. If the parties wish to be heard orally on the question of costs or on the form of the orders proposed, they are to inform my Associate accordingly, by no later than 4.00 pm on 31 July 2015. A hearing date will then be appointed for that purpose. I certify that the preceding one hundred and five (105) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.