Hughes v Holbrook

REASONS FOR JUDGMENT 1 On 23 November 2000 the applicants filed an application to remove a trustee pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth) ("the Act") and an application in opposition to a s 139ZL notice issued by the Official Receiver dated 10 November 2000. The respondent is the trustee of the applicants' bankrupt estate. He is said also to be the major creditor of that estate and, in the submission of the applicants, is therefore unable to discharge his duties as trustee with impartiality and neutrality. Furthermore, it is claimed by them that the respondent has failed to discharge his duties in the best interests of the real creditors or the applicants. The applicants therefore seek cancellation of the s 139ZL notice and removal of the respondent from his office as trustee. Section 139ZL provides for the Official Receiver by written notice given to a bankrupt to require payment to the trustee of a contribution under ss 139P or 139Q. 2 Section 179(1) of the Act provides that: "179(1) The Court may, on the application of the Registrar, 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." It is preceded by s 178 which gives a bankrupt, a creditor or any other person "affected by an act, omission or decision of the trustee, power to apply to the Court which may make such order in the matter "as it thinks just and equitable"." It is followed by s 180 which provides that "the Court may, subject to such terms and conditions as it thinks just, accept the resignation of a registered trustee from the office of trustee of an estate". These latter sections will be referred to subsequently. 3 In affidavits in support of their application the applicants depose that the respondent has failed to or refuses to deduct the significant amount of expenses incurred by the first named applicant in earning his taxable income and as such continues to produce compulsory contribution assessment calculations not reflecting the applicants' true position. In respect of the application to remove the trustee from office, their affidavit evidence is that the respondent failed to advise them of the fact they could draw down on the first named applicant's superannuation to satisfy the creditors' claims at the time of the first meeting of creditors in September 1998. 4 Additionally it is said that on 10 December 1999 the respondent in his capacity as a creditor cast the deciding vote not to accept the applicants' composition. The evidence of the applicants is that the respondent is the largest creditor of their estates and therefore cannot and does not appear to be discharging his duty as controlling trustee in the best interests of the other creditors. In particular it is said that in voting at the creditors' meeting on 10 December 1999 the respondent had a clear conflict of interest. It is claimed he has not acted in accordance with his duties as trustee under the Act because he has not administered the estate efficiently and has not avoided unnecessary expense. Nor has he exercised his powers or performed his functions in a commercially sound way, it is claimed. 5 In a responsive affidavit the respondent opposed both the application for an injunction in respect of the contribution notice and his removal as trustee. He deposed that the legal fees and disbursements incurred by him in relation to the estates of the applicants exceed the funds realised in their estates. He said further that a costs order had been made in his favour by the Federal Court on his application to have the applicants made bankrupt following their failure to execute a deed of arrangement in accordance with the resolution of their creditors. Those costs were taxed in excess of $13,000. 6 On 28 November 2000 Lee J made directions providing inter alia for re-listing of the matter on 15 December 2000. That listing was adjourned by consent. 7 On 5 December 2000 the applicants filed an amended application for removal of the trustee and the setting aside of the s 139ZL notice. That was supported by a supplementary affidavit from the second named applicant. It resulted in a further responsive affidavit from the respondent sworn on 12 December 2000. 8 By consent the hearing listed for 15 December 2000 was adjourned to 20 December 2000. On that latter date supplementary affidavits of each of the applicants were filed. At the hearing on the same date it was ordered by Lee J that "upon the applicants undertaking to commence by 29 December 2000, and to prosecute the application diligently thereafter, application to the AAT under s 139ZF of the Bankruptcy Act for review of the trustee's decision to make an assessment of the income of the bankrupt D Hughes, the application of 23 November 2000 be adjourned sine die". 9 On 24 April 2002 a minute of consent orders was filed with the Court signed by the solicitors for the applicants and the solicitors for the respondent. The minute provided for the respondent to be removed from his office as trustee and for the action to be otherwise dismissed with no order as to costs. Pursuant to O 35 r 10 of the Federal Court Rules the matter was referred to a judge for consideration. 10 The outcome was that a directions hearing was held on 16 May 2002. It was there directed that the amended application to remove the trustee pursuant to s 179(1) of the Act filed on 5 December 2000 be heard as to the preliminary question of whether the affidavits disclose appropriate grounds for such application. Provision was made for filing of any additional affidavit material. By 8 May 2002 additional affidavit material from each of the applicants had been filed. A further affidavit of the second named applicant was filed on 23 May 2002. 11 By motion filed on 23 May 2002 the applicants then sought to amend the directions of 16 May 2002 as the consequence of the service by the respondent on the first named applicant on 20 May 2002 of a notice of objection to discharge which had the effect of extending the bankruptcy to 10 June 2007. Directions were made on 31 May 2002. 12 In an affidavit of the first named applicant sworn on 5 June 2002 it was deposed that the ground referred to by the respondent in the notice had no basis. A responsive affidavit sworn on 13 June 2002 was filed by the respondent. 13 It will therefore be necessary to turn to each of the matters upon which the applicants place reliance in support of the application to remove the trustee and the evidence brought in support. Basis of inquiry and removal 14 In Wilson v Commonwealth of Australia [1999] FCA 219 at [44] Branson J addressed s 179 in the following terms, reliance upon which is placed in the present application, particularly for the respondent: "Section 179 of the Act serves a different purpose [from s 178]. It reflects the position that trustees are subject to the general control of the Court. It authorises the Court, on the application of the Registrar, the Inspector-General, a creditor or the bankrupt, to inquire into the conduct of a trustee. Although it is not a rule of universal application, the Court will not ordinarily initiate an inquiry under s 179 unless it is satisfied that a proper case for an inquiry has been demonstrated (Re Alafaci; Registrar in Bankruptcy v Hardwick at 268 per Riley J; see also Re Gault; Gault v Law (1981) 57 FLR 165 at 173 per Ellicott J; Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 at 233 per Beaumont J). There will ordinarily be a proper case for inquiry where there is reasonable cause to believe that a trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the general law. However, as Ellicott J pointed out in Re Gault; Gault v Law at 173: "The court has a broad discretion in deciding whether to order an inquiry. In my opinion it is not required to order an inquiry unless it is satisfied that sufficient grounds have been made out. For instance, the court should be loath to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. If the court considered that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved. It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example, in an action for breach of trust."" 15 The approach of Branson J in Wilson was generally followed by French J in Macchia v Nilant (2001) 110 FCR 101 at 119 - 121. At 120 French J said: "As appears from the language of s 179 it invites first a consideration, albeit upon application by a person with standing, of whether the Court should inquire into the conduct of the trustee. If inquiry is undertaken, the next question is whether the trustee should be removed from office and/or any other order made. The first question requires the Court to consider whether, on the grounds and facts before it, a case has been made for an inquiry - Re Alafaci at 268. The application of s 179 to that first step involves a broad discretion as to whether or not there are sufficient grounds to make an inquiry appropriate - Turner v Official Trustee in Bankruptcy (unreported, Federal Court, Full Court, No 8 of 1998, 27 November 1998)." He added: "The policy consideration referred to by Deane J in Re: Tyndall that "the court should not unduly interfere with the day-to-day administration of a bankrupt's estate by a trustee" applies also to the operation of s 179 - Turner at pp 2-3." He also stated: "In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes. For "although the court is given a broad discretion under s 179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt's estate" - Re Challen (a Bankrupt); Ex parte Brown (unreported, Federal Court, Beaumont J, No QB 1548 of 1993, 23 April 1996) cited with approval by Merkel J in Cheesman at first instance, p 114." 16 The duties and responsibilities of a trustee find statutory support in s 19(1) of the Act. Additionally, it is recognised that the trustee is an officer of the court: Adsett v Berlouis (1992) 37 FCR 201 at 208 - 209. There it was stated by the Full Court (Northrop, Wilcox and Cooper JJ) at 208: "A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt's estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules 1968 (Cth). The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act: see Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 at 329." At 208 - 209 their Honours continued: "A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money: see Re Grimthorpe (Dec'd) [1958] 1 Ch 615 at 623; Re Whitley; Lloyds Bank Ltd v Whitley [1962] 1 WLR 922 at 931; [1962] 3 All ER 45 at 53. A trustee in bankruptcy is in no different position. The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee's obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditor's claims and any possible surplus for the bankrupt. We adopt, as a correct statement of the duty of a trustee and the proper manner of its performance, the words of Smithers J in Mannigel v Aitken (1983) 77 FLR 406 at 408 - 409: "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; Billing v Brogden (1888) 38 Ch D 546 Lord Justice Fry said (at 571): '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; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 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 Commissioner of Taxation (Cth) (Higgin's case) (1963) 113 CLR 42 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… Whether or not one calls [the trustee's action] an exercise of discretion, the question remains was it the act of a prudent trustee.'" A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act or Rules: see Re Ladyman (1981) 55 FLR 383 at 394 - 396" It is against these standards that the case brought by the applicants against the respondent is to be judged. Failure to advise as to drawing down on superannuation 17 In her affidavit sworn on 20 November 2000 the second named applicant stated that at the first meeting of creditors in September 1998 the respondent failed to advise the applicants of the fact that they could draw down on the first named applicant's superannuation to satisfy the creditors' claims at that point in time. It is stated that the respondent was aware of the first named applicant's superannuation and had the respondent advised them of the entitlement, they would have been able to offer to creditors almost one hundred percent of the monies which they had admitted to owing them at that time. In her further affidavit sworn on 20 December 2000 the second named applicant said that she had met with the respondent for the first time in or about August 1998. He had asked how much the first named applicant's superannuation was worth in the process of determining the applicants' assets and he was given details of that superannuation. 18 The sequestration orders were made against the estates of the applicants on 20 May 1999. 19 In his affidavit filed on 28 November 2000 the respondent claimed that the applicants initially consulted him with a Pt X proposal to be funded from their ongoing income. In any event, he stated that he did not accept that they were entitled to draw down any superannuation entitlement and that the onus rested on the applicants to establish this. The respondent's affidavit was sworn in response to the second named applicant's affidavit sworn on 20 November 2000. I do not consider that the second named applicant's affidavit sworn on 20 December 2000 is an adequate response to the respondent's affidavit. That is, it does not establish that there was in fact the relevant superannuation entitlement which could be drawn down. 20 In any event, I accept the submission for the respondent that the events relied upon by the applicants occurred prior to the occurrence of the bankruptcy. Consequently, they cannot be "conduct of the trustee in relation to the bankruptcy" for the purposes of the application of s 179. Trustee voting at a meeting of creditors 21 In the second named applicant's affidavit sworn on 20 November 2000 she deposed that at a meeting of creditors on 10 December 1999 the respondent, in his capacity as a creditor, cast the deciding vote not to accept the applicants' composition by which all creditors would have received an equivalent of around 30 cents in the dollar and the respondent would have received in excess of that figure. It was also stated by her that at that time the respondent was and remains the largest creditor to the applicants' bankrupt estate. It is therefore submitted that the respondent did not discharge his duties in the best interests of other creditors and the bankrupts with impartiality and neutrality. It is said that in voting as a creditor at the meeting on 10 December 1999 the respondent had a conflict of interest. Further, it is stated that the fact that some of the other creditors provided the respondent with proxies to vote against the composition must be viewed in light of the fact that the respondent had previously circulated an advice to creditors indicating the respondent's intention as an influential creditor in voting against the proposal. In support of this contention it is submitted that the duty of impartiality required of a trustee necessitates the trustee adopting a neutral position in respect of voting at a creditors' meeting. It is said that the adoption of a proactive position takes the trustee beyond a neutral stance: Hughes; Ex parte Australian Mutual Providence Society v Kennedy & Hughes (von Doussa J, 5 March 1996, unreported). 22 The respondent's affidavit denies that he had the deciding vote in relation to the composition. It asserts that the composition would have failed even if he had abstained from voting because a special majority would not have been achieved in the separate estate of the first named applicant or in the joint estate. 23 The respondent's affidavit exhibits a copy of the minutes of the meeting held on 10 December 1999. As part of the minutes it is recorded that the respondent advised the meeting that after taking legal advice he claimed to be a creditor to the extent of his controlling trustee's fees of $17,141 (to be allocated over the joint estate 80% or $13,713 and each separate estate 10% or $1,714 each) and taxed legal fees of $13,008 in the joint estate for his application for the bankruptcy of Mr and Mrs Hughes. Later, the minutes record that he advised the meeting that he only had one vote with the amount of his claim as previously specified. 24 In relation to voting the minutes record as follows: "Mr Holbrook then suggested that a motion concerning the bankrupts proposal be put to the meeting and first be considered by joint estate creditors. It was moved by Mr Fisher representing MFA Finance Pty and seconded by Mr Fisher representing Telstra Corporation: "That the bankrupt's proposal or a composition in the terms as detailed in the Report by Trustee made pursuant to section 189A of the Bankruptcy Act, 1966 and dated 2 December 1999, be accepted." Creditors voting: Name For Against Total $ $ $ Adelaide R Torrens 600.00 600.00 MFA Finance Pty Ltd 3,487.65 3,487.65 Kim Holbrook 26,721.00 26,721.00 Colin and Margaret Andrews 1,508.00 1,508.00 Mundaring Veterinary Hos. 723.40 723.40 Murdoch Uni Veterinary 1,511.75 1,511.75 Sandra Anne Hawkins 439.62 439.62 Telstra Corporation 1,017.35 1,017.35 Anne Payne 960.00 960.00 WA Newspapers 231.20 231.20 Rodney Mark Taylor 2,657.00 2,657.00 L.A.K. Stedman 3,250.00 3,250.00 Pricewaterhousecoopers 2,972.00 2,972.00 Temkara Pty Ltd t/a Economic Pest Control 1,190.00 1,190.00