IN THE MATTER of the bankrupt estate of HENRY HARLAND HUDSON (a bankrupt): PATRICIA HUDSON v THE OFFICIAL TRUSTEE IN BANKRUPTCY as trustee of the estate of HENRY HARLAND HUDSON

Federal Court of Australia|2004-03-04|Before: Ryan J

Introduction 1 This is an application under s 178 of the Bankruptcy Act 1966 (Cth) ("the Act") by the applicant, Patricia Hudson, in relation to the administration of the bankrupt estate of Henry Hudson ("the bankrupt"). The trustee of the bankrupt estate is the Official Trustee in Bankruptcy, the respondent in these proceedings. 2 The application, which was apparently prepared by the applicant herself without the assistance of a legal practitioner, seeks, amongst other things, a specific order directing the respondent to apply under s 305 of the Act for payment by the Commonwealth of the costs of examining Mr Hudson before this Court pursuant to s 81 of the Act.

Background 3 On 14 July 2000, Mr Hudson filed a debtor's petition and a statement of affairs, thereby becoming a bankrupt on that day pursuant to s 55(4A) of the Act. The statement of affairs disclosed, amongst other things, that the bankrupt's sole creditor was the applicant, in the sum of $221,042.00 being a judgment debt resulting from an order made by the County Court of Victoria in proceedings against the bankrupt by the applicant who is his estranged wife. 4 On or about 2 August 2000, the respondent provided Ms Hudson with a "report to creditors" which recited, amongst other things, that; 'I have completed my preliminary assessment and find that the Bankrupt is not required to make any payments from their income … I have made preliminary enquiries into the Bankrupt's affairs and find nothing to benefit creditors. If you have additional information that I do not have which may lead to a dividend to creditors, please provide specific details of any undisclosed assets or matters that I should consider investigating to enable sufficient funds to be recovered for a dividend.' 5 Following the provision of that report, a series of correspondence was conducted between the applicant and the respondent during September 2000. In the correspondence, Ms Hudson queried the conclusions in the report and requested further information from the respondent. The respondent was able to provide Ms Hudson with some further information, but did not see fit to change the conclusion reached in the report of 2 August 2000. 6 On 11 July 2003, three days before Mr Hudson was due to be discharged from bankruptcy by operation of the Act, the applicant applied to this Court for a direction that the respondent: (a) lodge an objection to the discharge of Mr Hudson's bankruptcy; and (b) apply under s 305 of the Act for payment by the Commonwealth of the costs of examining Mr Hudson before this Court under s 81 of the Act. 7 On 14 July 2003, I made an order directing the respondent to file a notice of objection to the discharge of Mr Hudson's bankruptcy. The respondent subsequently filed the notice of objection later that day. Ms Hudson's application was otherwise adjourned and resumed on 25 August 2003. Between the adjournment and the resumption of the hearing, both Ms Hudson and the respondent filed numerous affidavits which provided the Court with further information concerning the bankrupt's affairs. 8 The principal basis upon which Ms Hudson's application under s 178 is founded is that the bankrupt has not disclosed the following information to the respondent: (a) his full involvement or interest in two companies, Integrated Consulting Engineers Pty Ltd ("ICE") and Chandler-Roberts Enterprises Pty Ltd ("CRE"); (b) his interest in a property situated at Main Road, Walhalla ("Walhalla property"); and (c) his ownership of substantial assets, including a coin and banknote collection, tools and other equipment ("miscellaneous assets").

ICE and CRE 9 Mr Hudson has described ICE and CRE as the contracting vehicles through which he, and other engineers, provided engineering consulting services. One of the clients to whom these services were provided was the Commonwealth Department of Administrative Services. Mr Hudson's statement of affairs reveals that he was a director of ICE and CRE until he resigned those directorships in July 2000 and on 8 March 2000 respectively. 10 On their face, the financial results of ICE and CRE have been poor. Two affidavits by Alistair Page which were filed on behalf of the respondent and sworn 6 August 2003 and 22 August 2003, reveal that, between the financial years ending on 30 June 1999 and 30 June 2002, ICE recorded a small loss in each year except 2000 when it achieved a profit of $773. The accounts of CRE for the same period disclose a similar pattern with the exception of the financial year ending 30 June 2002, when it made a relatively more substantial loss of $28,047. 11 However, Counsel for Ms Hudson pointed out at the hearing that, while the profit and loss statements reveal poor financial results, significant sums of money had flowed through ICE between the financial years ending 30 June 1999 and 30 June 2002. In particular, Mr Page's affidavit of 6 August 2003 indicates that between the financial years ending 30 June 1999 and 30 June 2002, ICE received income totalling $383,567 and paid "consultants fees" totalling $385,920. Further, since the financial year ending 30 June 2000 (i.e. after Mr Hudson's bankruptcy commenced), ICE received $155,143 in income and paid out "consultants fees" of $168,308. 12 After the hearing on 25 August 2003, the respondent, by way of a further affidavit of Mr Page sworn 4 September 2003, sought to explain the income flowing through ICE and CRE. Mr Page helpfully exhibited to that affidavit summaries of information which detailed consulting fees paid by ICE and CRE generally between the financial years ended 30 June 1999 and 30 June 2002, as well as amounts paid specifically to the bankrupt. Copies of the bankrupt's tax returns during this period were also exhibited to Mr Page's affidavit. Mr Page conceded in his affidavit that the summaries revealed several discrepancies in respect of the total amount of consulting fees paid by ICE. For example, in the financial year ended 30 June 2000 consultant's fees allegedly paid by ICE totalled $112,214, but the particulars given of specific payments made amounted to only $90,776. In the affidavit of 4 September 2003 it is deposed that the discrepancies have been explained by Mr Hudson as arising "from business expenses being included with consultants' fees and cheques that were unpresented as at the end of the financial year."

Walhalla property 13 The evidence reveals that the sole registered proprietor of the Walhalla property since 11 May 1982 has been, and continues to be, the bankrupt's father, William Harland Hudson. On 10 September 1986, the bankrupt lodged a caveat over the Walhalla property claiming that it had been purchased "under a contract of sale from William Harland Hudson dated 1 September 1986." However, on 29 March 1994, the caveat over the Walhalla property was withdrawn. According to the respondent, the bankrupt explained that he had withdrawn the caveat when he realised that he did not have the financial resources to purchase the Walhalla property. 14 It appears that William Hudson has also been contacted by the respondent. His explanation for the withdrawal of the caveat differed somewhat from that of the bankrupt. William Hudson claimed that the caveat had been withdrawn because he was concerned about the threat of legal action against his son. William Hudson also stated that the rate notices for the Walhalla property have been forwarded to his son, Henry Hudson, since the caveat was lodged against the title to the property. 15 The applicant also furnished evidence that she has been informed by the Baw Baw Shire Council that the bankrupt, Henry Hudson, has been shown as residing at the Walhalla property on the voter's roll maintained by the Victorian Electoral Commission, as at 29 November 1999 and 16 December 2002.

Miscellaneous assets 16 Very little evidence has been adduced in relation to the miscellaneous assets, save for an affidavit by Ms Hudson sworn 26 August 2003, which alleges that Henry Hudson's coin and banknote collection was the subject of a property settlement between her and the bankrupt. A copy of the property settlement, which appears to have been an agreement registered with the Family Court on 4 October 1982, is exhibited to the affidavit of 26 August 2003. Ms Hudson has asserted that the coin and banknote collection has never been delivered to her as required by the property settlement.

Submissions 17 Counsel for the applicant submitted that in order for this Court to exercise its jurisdiction under s 178 of the Act, it is not necessary for an applicant to establish that the trustee has done anything wrong (Gray v Clout (1990) 27 FCR 141). It is sufficient that justice and equity require the Court's intervention (Healey v Prentice (No 2) 2000 FCA 1598). 18 Counsel for the applicant further submitted that the evidence disclosed that the respondent had omitted to make adequate inquiries into the affairs of the bankrupt and that further investigation is needed to ensure that there is not property of the estate, as yet unidentified, which may be realised to pay a dividend to the applicant, the estate's sole creditor. Specific matters said to require further investigation were, relevantly, said to be the nature and extent of the bankrupt's interest in ICE and CRE, his involvement in their business activities and how much income he derived from those companies. In relation to the Walhalla property, Counsel submitted that the respondent should have explored the provisions of the contract of sale dated 1 September 1986, the source of funds used by the bankrupt to pay the municipal rates, as well as power and water services, and what other members of the Hudson family knew of the transaction between the bankrupt and his father, William Hudson. 19 Counsel for the respondent contended there was no evidence to suggest that the whole of the consulting fees, or even a substantial portion of them, has been paid to the bankrupt by ICE or CRE, or that the bankrupt has any interest in the Walhalla property. As to the miscellaneous assets, Counsel submitted that, if the coin and banknote collection had not been delivered to Ms Hudson in accordance with the property agreement, the applicant's complaint should be pursued in the Family Court and not by way of an examination of the bankrupt in this Court. Finally, on behalf of the respondent, it was submitted that the bankruptcy ought to come to an end and that the respondent has not been satisfied of any grounds upon which to object to the discharge of the bankrupt. In any event, if it be discovered that any property has come into the hands of the bankrupt and been retained by him, the respondent has standing to pursue those assets notwithstanding a discharge from bankruptcy (McVeigh v Long [2002] FMCA 53). 20 Counsel for the bankrupt, who was given leave to make oral submissions, submitted that, in an application under s 178 of the Act like the present, an applicant has to satisfy the Court that the respondent's discretion not to object to the discharge has miscarried. No such miscarriage, it was contended, had occurred in this case. Counsel also argued, in relation to income that may have been received by Mr Hudson during the bankruptcy, that a notice of income contribution must be issued before the income contribution period expires (Challen v Bendiech [1999] FCA 845). In the present bankruptcy, three income contribution periods have expired and it is therefore not open to the respondent, on the authority of Challen, now to issue a fresh income contribution assessment to recover such income from the bankrupt.

Legislation and case law 21 This application invokes the exercise by the Court of the power conferred by s 178 of the Act, which provides: 'If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.' 22 The principles governing the exercise by the Court of this power are well established. Section 178 confers a wide discretion on the Court to mould its order to suit the circumstances of the particular case; Re Tyndall (1977) 30 FLR 6, at 9-10. However, it is the applicant who has the onus of showing a ground upon which the trustee's administration of the affairs of the bankrupt ought to be reviewed; Healey v Prentice (No 2) (supra), at [21]. 23 Counsel for Mr Hudson submitted that, in order to exercise its power under s 178, the Court must be satisfied that the trustee's discretion has miscarried. However, this contention does not accord with the observations of Deane J in Re Tyndall, where his Honour said, at 9; 'In my view, the wording of s 178 of the Act is such as to confer upon the court the widest possible discretion as to the appropriate order which should be made in the particular case and is quite inconsistent with the approach that, upon an application made pursuant to the section by a bankrupt, creditor or other person affected by an act, omission or decision of the trustee, the court is only empowered to interfere with the trustee's act, omission or decision if it is of the view that the trustee has acted absurdly or unreasonably or in bad faith. This is not, of course, to say that the court should either disregard the relevant decision of the trustee or ignore the well-established policy under bankruptcy legislation that the court should not unduly interfere with the day-to-day administration of a bankrupt's estate by a trustee. The trustee is made responsible for the administration of the bankrupt's 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 … 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.' 24 Observations to similar effect have been made by Pincus J in Gray v Clout (supra) at 144, and by French J in Macchia v Nilant (2001) 110 FCR 101, at 115 [38]. 25 A further indication of the circumstances in which the Court should exercise its discretion under s 178 has been given by a Full Court of this Court in Willoughby v Official Trustee in Bankruptcy (WA) (2000) 102 FCR 261, which pointed out, at 265 [26]; 'Section 178 falls to be considered against the background provided by s 30 of the Act, which gives the Court full power to decide all questions of fact or law in any case of bankruptcy coming within the cognisance of the Court. The Court may make such orders as are necessary for the purposes of carrying out or giving effect to the Act: s 30(2).'

Conclusion 26 Two important purposes of the Act are to enable the recovery of distributable assets of the bankrupt for the benefit of his or her estate and to require a bankrupt who derives income during the bankruptcy to contribute to the pool of funds available for distribution to creditors. These purposes are reflected in s 139J of the Act, which appears in Part VI, Division 4B dealing with contribution by the bankrupt and recovery of property. 27 I am satisfied that Ms Hudson has discharged the onus of showing grounds upon which the administration of the present bankrupt estate should be reviewed. The evidence adduced on each side has not revealed an investigation of the bankrupt's actual and potential assets and the extent of the income which he has derived during the bankruptcy which has been searching enough to assure interested persons that the estate has been as fully and effectively realised for the benefit of the creditors as is reasonably practicable. In my view, both the bankrupt's possible receipt of income from CRE and ICE and his interest, if any, in the Walhalla property, warrant further investigation. 28 The Court should not, on an application like this, attempt to prescribe exhaustively the lines of inquiry which a trustee might appropriately pursue. Subject to that caveat, an example of inquiries which suggest themselves is one into which consultants engaged by ICE and CRE actually performed worked for its clients, particularly the Commonwealth Department of Administrative Services. A related inquiry would be into the consultants who were paid fees by ICE and CRE and in what amounts. Those inquiries should, at least, assist in reconciling the discrepancies identified in the exhibit to Mr Page's affidavit of 4 September 2003 which is noted at [12] above of these reasons. The inquiries under this head should also permit the trustee to determine conclusively whether the bankrupt derived any income from ICE or CRE in the financial year ending 30 June 2003 as to which the Court has, at present, no information. 29 In relation to the Walhalla property, I agree that further investigations should be conducted along the lines for which Counsel for the applicant contended as summarised at [18] of these reasons. I note that the bankrupt and William Hudson have advanced inconsistent explanations for the withdrawal of the caveat over the property. Although the withdrawal occurred before the bankruptcy commenced, the inconsistent explanations for the withdrawal lend support for the submission that it should be explored further to find out whether there was any consideration for it or whether it was voluntary or at an undervalue. 30 I am not persuaded that further investigation is required into any alleged interest of the bankrupt in the miscellaneous assets. If, as submitted, Ms Hudson is entitled to ownership of various assets by virtue of a property settlement registered in the Family Court, then her claim to that property should be pursued in that jurisdiction. 31 It should not be thought that, in arriving at the result reached in these reasons, I have made any finding, even by implication, that the bankrupt has received moneys from ICE or CRE which formed part of the estate vested in the trustee or that some beneficial interest in the Walhalla property formed part of his distributable assets. The present state of the information available to the Court, and apparently to the trustee, simply leaves those questions open. Nor should I be taken to imply that the trustee has acted unreasonably or in bad faith. On the contrary, I have taken into account in exercising the discretion under s 178 the long experience and acknowledged skill in administering insolvent estates which can be called on by the Official Trustee. The conclusion which I have reached entails only that I regard it as just and equitable in the circumstances for the extent of any moneys paid by ICE or CRE to the bankrupt and the nature and extent of any interest which he may have had in the Walhalla property to be investigated more fully. The most appropriate means, in conjunction with direct enquiries of relevant persons and entities, for carrying out the further investigations required is for the bankrupt to be examined under s 81 of the Act. This view accords with that expressed by a Full Court of this Court in Karounas v Official Trustee (1988) 19 FCR 330, where it was said, at 335; 'However the power [in s 81] is exercised in the interest of the creditors, and those interests should not be defeated by an unduly technical or restrictive approach to the use of the power. The procedure is basically designed to establish what assets the bankrupt had, what has happened to those assets, and whether action should be begun (or continued) to recover them: see Re Price (No 4) (1948) 14 ABC 142 at 144; Re Andrews (1958) 18 ABC 181 at 184; Re Poulson [1976] 1 WLR 1023 at 1032; [1976] 2 All ER 1020 at 1029.' 32 Counsel for the respondent relied on the decision of the Federal Magistrates Court in McVeigh v Long in contending that the trustee has standing to pursue these matters even after the bankruptcy has come to an end. Conceding that to be so, it does not preclude the making of an order under s 178 that Mr Hudson be examined under s 81 before his discharge from bankruptcy takes effect. Counsel for the bankrupt also argued, on the basis of Challen v Bendiech (supra), that Mr Hudson should not be examined as it is no longer open for the respondent to serve an income contribution notice on him. The provisions in the Act considered in Challen differ slightly from those applicable in the present case but accepting that the principle in Challen means that Mr Hudson is no longer amenable to an income contribution does not entail that a s 81 examination would have no utility. If it is revealed that there has been non-disclosure of income, the respondent will have to determine, for example, whether any assets have been acquired with that undisclosed or understated income. 33 Given the history of this matter and the fact that she is the only creditor of the bankrupt estate, the carriage of the s 81 examination, as far as it involves legal representation, can reasonably be expected to devolve to Ms Hudson. I am therefore not persuaded to direct the respondent to apply under s 305 of the Act for the costs or part of the costs of the s 81 examination to be paid by the Commonwealth. That is not to say that the respondent should not make such an application if it be considered advisable. In the result, I shall confine the relief to be granted on the present application to an order that the bankrupt be summoned for examination pursuant to s 81 of the Act in relation to his bankruptcy, such examination to be confined to: (a) the amount of moneys, by way of consulting fees or otherwise, paid by either or both CRE and ICE to the bankrupt in the financial years ending 30 June 1999 to 30 June 2003; and (b) the extent of the bankrupt's interest in the Walhalla property. It will be a matter for the respondent, in the light of what emerges from the s 81 examination, whether the considerations reflected in ss 149B(2) and 149D of the Act make it appropriate to withdraw the notice, filed on 14 July 2003, of objection to the bankrupt's discharge. In the circumstances, I consider that there should be no order as to any party's or person's costs of the application.

I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.

Associate: Dated: 4 March 2004 Counsel for the Applicant: Mr A W Sandbach and Mr A Ritchie

Solicitor for the Bankrupt: Puglisi, Heffey & Pavlidis

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