Khadpekar v Official Trustee in Bankruptcy

b) there is no property in defending an action of this kind which is capable of vesting in the trustee, therefore the Official Trustee is unable to assign any right to prosecute the appeal, (see the decision in Cummings v Claremont Petroleum), c) it is the view of ITSA that the bankrupt in these circumstances is not an "other party to the action" as per s 60(3) and therefore is unable to compel the trustee to make the election, d) there is no possibility of a realisation in the estate that would benefit creditors if the trustee were to seek the appeal in its own name, and e) the ultimate purpose of this action seems to be to overturn the sequestration order made against your client, so in taking this action the trustee would effectively be acting on behalf of the bankrupt against the petitioning creditor. This action would be inconsistent with the trustee's role to act impartially. If your client is dissatisfied with the trustee's decision as outlined above she may appeal to the Court in accordance with s 178 of the Bankruptcy Act 1966. I have attached for your easy reference an extract highlighting the relevant points of the decision in Cummings v Claremont Petroleum. 14 On 1 October 2007, Ms Khadpekar commenced an application in the Federal Magistrates Court whereby she sought a review of the respondent's decision pursuant to s 178 of the Act.

THE DECISION OF THE FEDERAL MAGISTRATE 15 On 23 May 2008, the application for review pursuant to s 178 of the Act came on for hearing before the Federal Magistrate. Ms Khadpekar was unrepresented at the hearing. 16 As previously mentioned, Ms Khadpekar had filed a voluminous affidavit in support of her application. The affidavit annexed many documents going to the various legal proceedings in which Ms Khadpekar had engaged in seeking to set aside the Cairns Magistrates Court judgment and the subsequent bankruptcy proceedings. However, also annexed to the affidavit were 37 medical certificates and reports of various kinds attesting to her mental condition and other health problems since the late 1980s. Some of the documents comprised no more than doctor's certificates but other reports went into further detail. In general, the tenor of the reports is to the effect that Ms Khadpekar has long been suffering from numerous mental and medical conditions, the most debilitating appearing to be stress and anxiety, depression and post‑traumatic stress syndrome. Some of the effects of these conditions include confusion, impaired memory, inability to concentrate, inability to deal with legal problems, inefficiency, and becoming erratic in mood and cognitive processes. 17 Many of the reports are to the effect that Ms Khadpekar is unable to function normally and to attend to the tasks normally associated with conducting legal proceedings. 18 When the matter came on for hearing on 23 May 2008, Ms Khadpekar applied for an adjournment so that she could produce further medical reports from a clinical psychologist and a forensic cognitive psychologist. The Federal Magistrate at [6] of his reasons said as follows in respect of this proposed evidence: From my inquiries of [Ms Khadpekar] it appears that she principally requires these reports to deal with the underlying issue which concerns the decision which gives rise to her application today. In other words, she believes these reports will support her contention that the trustee wrongly exercised his discretion in not seeking to appeal the orders made in the Magistrates Court. She seeks to appeal on the basis that at the time the orders were made the applicant was suffering under some mental disability which inhibited her from exercising her rights and accordingly resulting in a judgment which was not a proper judgment because it was one that should not have been entered. (Emphasis added.) 19 At paragraph 8 of the reasons, the Federal Magistrate said: Furthermore, it was clear to me that the need for these reports did not bear upon the outcome of the application which is pursued by her against the trustee. Whilst it could be said that those matters are relevant to the underlying contention, which is the entry of the judgment, it could not be said that the medical reports themselves are particularly relevant to the events which were immediately in the mind of the trustee at the time that he made his decision the subject of the review application. 20 Further, at [17], the Federal Magistrate recognised that Ms Khadpekar had said that her medical condition had been "extant since about 1996", and that there was evidence before the court to that effect. The Federal Magistrate went on to say that it was now too late to lead to further evidence in respect of her medical condition to support her claim to impugn the September 1997 judgment. 21 The Federal Magistrate also observed that in order to determine whether to grant an adjournment it was necessary to consider the merits of the application under s 178 of the Act. 22 The Federal Magistrate concluded that "on the merits the applicants [sic] prospects are poor if not hopeless". In coming to that conclusion, the Federal Magistrate considered the following contentions which were made by the respondent. 23 First, the Federal Magistrate accepted the contention of the respondent that it was relevant and significant that Ms Khadpekar had no standing as a result of the bankruptcy to apply to extend time to appeal, and to appeal, the decision of the Cairns Magistrates Court of 16 September 1997. The Federal Magistrate said at [25] of his reasons: In support of that contention the trustee relies upon the High Court authority in Cummings v Claremont Petroleum. From my perusal of the head note of that authority it is plain that the trustee's contention in that regard is correct. As they [sic] submit the fact that the appeal is in relation to the judgment upon which the bankruptcy petition was founded does not justify any departure from the general rule denying locus standi. And to reinforce their submission on this point they make the further observation, and again in my view correctly so, that any right of appeal from a sequestration order or a money judgment against the bankrupt is not property of the bankrupt within the meaning of s 5. 24 Secondly, the Federal Magistrate accepted the respondent's contention that it would be an improper exercise of the duty of the respondent to act in the best interests of the estate, to permit Ms Khadpekar to maintain an action in the name of the trustee which Ms Khadpekar had no standing herself to pursue. This was because in taking action the trustee would effectively be acting on behalf of the bankrupt against the petitioning creditor. This, said the Federal Magistrate, would be inconsistent with the trustee's role to act impartially. 25 Thirdly, the Federal Magistrate found that the merits of Ms Khadpekar's contention that the process leading to the entry of the judgment in Cairns was flawed, were "not particularly strong". This was because of the prospect that an appeal court would find that any irregularities in the proceedings, arising from the fact that the order for discovery made on 17 July 1997 did not order that discovery be given by any specific date, were waived. It was said that the Magistrates Court Rules in Queensland permitted the court to waive any irregularities, and that it was to be inferred that by entering judgment against Ms Khadpekar in September 1997, after the July discovery order, the court had exercised its power to waive any irregularity in the previous process. Further, the Federal Magistrate accepted the respondent's contention that if the matter was returned to the Magistrates Court it could waive the irregularity. 26 Fourthly, the Federal Magistrate accepted the respondent's contention that the prospects of persuading the District Court in Queensland to extend the time to appeal were poor. The Federal Magistrate said that Ms Khadpekar's explanation as to the delay was inadequate because she had had 11 years within which to make the application to appeal and had during that time received advice from a number of different legal practitioners on what to do to protect her position. She had, therefore, been on notice for a long time. 27 Fifthly, the Federal Magistrate said that the petitioning creditor would be prejudiced if the judgment was to be set aside. This is because the Council had incurred a considerable amount of costs and it was likely that even if the District Court gave leave to appeal it would impose the condition that Ms Khadpekar pay the creditor's costs on an indemnity basis. There was, said the Federal Magistrate, no indication in the material before him as to how Ms Khadpekar might meet those costs if so ordered. Further, it was said that if the appeal against the Cairns Magistrates Court judgment was successful, it would be necessary for the parties to litigate the original action in the Magistrates Court and that the creditor would be prejudiced by having to do so because of the lengthy period between the events in controversy and any subsequent trial which might then have to take place. Further, said the Federal Magistrate, Ms Khadpekar's medical evidence "put in question her reliability as a witness". Further, there was no public interest consideration in favour of permitting Ms Khadpekar to appeal after such a long delay. 28 Sixthly, the Federal Magistrate accepted the contention that the respondent would incur costs in pursuing any appeal, and it would not be a proper exercise of the trustee's power to incur such costs, on the basis only of the unsecured indemnity for costs offered by Ms Khadpekar. 29 The Federal Magistrate dismissed Ms Khadpekar's application for an adjournment of the hearing to another date. 30 The Federal Magistrate adjourned until later on the same day, before hearing Ms Khadpekar's substantive application for relief under s 178 of the Act. 31 In respect of Ms Khadpekar's substantive application the Federal Magistrate observed in his reasons: [A]s I have earlier indicated, and I will not restate my reasons, I am satisfied that on the merits the applicants [sic] prospects are poor if not hopeless. 32 The Federal Magistrate then went on to observe: The Court, in exercising its power, has to bear in mind that the trustee is an officer of the Court and has both a public duty and a duty to administer the estate so as to maximise the return from estate assets and thereby maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt. In that regard when one considers the prospects of the application it seems to me that it could not be demonstrated that there has been or there is any likelihood that the trustee's decision in relation to those matters was wrong, having regard to the overriding obligation upon him. 33 The Federal Magistrate found that Ms Khadpekar had not discharged the onus upon her. 34 In awarding costs against Ms Khadpekar, the Federal Magistrate said the applicant's claim to review the respondent's decision could "almost be described as hopeless".

THE APPEAL 35 In Cummings v Claremont Petroleum NL (1996) 185 CLR 124 (Cummings), the High Court considered the function of a court when dealing with an application under s 178 of the Act, and the ambit of the discretion open to a court when considering an application under that section. At 138‑139, Brennan CJ, Gaudron and McHugh JJ observed: When a trustee declines to exercise his power to sue or to appeal against a judgment, the bankrupt may apply to the Court under s 178 of the Act and the Court is empowered to make such order "as it thinks just and equitable". That jurisdiction has long been exercised by the courts charged with the supervision of administrations in bankruptcy. If it was just and equitable that an action should be brought or an appeal instituted in order to prevent an injustice being suffered by the bankrupt, Lord Eldon LC held that - the Court would say, with reference to the circumstance, that the bankrupt cannot sue, the law supposing, that he has no interest in the property, yet that is not to be acted upon to the effect of gross injustice. Therefore, if he can give security for the costs, the Lord Chancellor will order the assignees to permit him to use their names, to enable him to recover the property; indemnifying them. The bankrupt therefore is without any ground of complaint. The cases were reviewed by Hoffmann LJ in Heath v Tang where his Lordship said that, just as a bankrupt might apply to the court for an order compelling the trustee to lend his name to the bringing of an action, so the bankrupt might "apply to the court exercising bankruptcy jurisdiction to direct the trustee to appeal or to allow the bankrupt, on providing suitable security, to use the trustee's name". He further observed: The bankruptcy court acts as a screen which both prevents the bankrupt's substance from being wasted in hopeless appeals and protects creditors from vexatious challenges to their claims. The Court's discretion is at large and is to be exercised in the particular circumstances of each case. It may be that, before a bankrupt obtains an order under which an appeal will be instituted for the protection of his reputation, the trustee's costs would have to be met by sources other than the bankrupt estate in which the bankrupt no longer has an interest. The Court would be unlikely to permit the bankrupt to pursue his personal interests, in so far as they are not coincident with the due administration of the estate by the trustee, at the expense of the creditors. But it is unnecessary now to examine how the Court should exercise its jurisdiction under s 178 to safeguard the reputation of the bankrupt and, at the same time, protect the creditors from the risk of costs incurred in an appeal. There is no application under s 178 for consideration in this case. (Footnotes omitted.) 36 Further in the case of Frost v Sheahan (Trustee) [2009] FCAFC 20 at [8] (Frost), the Full Court approved the following observations as to the role of the Court in exercising the powers under s 178 of the Act: 1. Section 178 confers a "supervisory jurisdiction over the conduct of the trustee": Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124 at 132 per Brennan CJ, Gaudron and McHugh JJ. The section confers on the Court a very wide discretion: McGoldrick v Official Trustee in Bankruptcy [1993] FCA 636; (1993) 47 FCR 547 at 552‑553. 2. It is not necessary for an applicant for relief under the section to show that the trustee's decision was absurd, or unreasonable or taken in bad faith. The Court has a wide discretion to make such order as seems appropriate in the circumstances of the case: Re Tyndall; Ex parte Official Receiver (1977) 30 FLR 6 at 9‑10; [1977] FCA 15; 17 ALR 182 at 186 per Deane J. At the same time, the Court will be slow to make orders which will have the effect of interfering in the day‑to‑day administration of a bankrupt's estate and, in cases involving an exercise of business or commercial judgment, will place considerable weight on the trustee's decision. Furthermore, a Court will not intervene under s 178 simply because the Judge forms a different view from that of the trustee. 3. An order may be made under s 178 even if the trustee's decision was correct on the material before him, if, for example, additional material is put before the Court. 37 The respondent contended that the discretion under s 178 of the Act in a bankruptcy court to require a trustee in bankruptcy to appeal against a decision which a bankrupt had no standing to appeal, was only enlivened in respect of decisions which affected the reputation of the bankrupt. This, said the respondent, was the effect of the decision in Cummings. In my view, for the following reasons, Cummings does not confine the enlivening of the discretion to the circumstance contended for by the respondent. 38 First, the majority of the High Court in Cummings referred with approval to the observations made by Lord Eldon LC in Benfield v Solomons (1803) 9 Ves Jun 77 (Benfield). The observations of Lord Eldon were in general terms and were not confined in the manner referred to by the respondent. Further, Benfield was not a case where the bankrupt wanted to appeal against a judgment which reflected on his personal or professional character. 39 Secondly, the majority in Cummings also referred with approval to Heath v Tang [1993] 1 WLR 1421 ‑ a decision of the Court of Appeal. In that case, Hoffmann LJ (as he then was) considered the position of each of two bankrupts who wished to appeal against the judgment which formed the basis of the sequestration order in each case. Neither of the judgments in question was a judgment which affected the personal or professional character of each of the bankrupts. Nevertheless, the Court of Appeal recognised the existence of the discretion in those cases. 40 Thirdly, the reason why there is a specific reference in the observations of the majority in Cummings to a judgment which affects the reputation of a bankrupt, is that that case was concerned with a judgment of that character. The judgment against which Mr Cummings and Mr Fuller wished to appeal, had awarded damages against them on the basis that each had conspired to breach his duty as a director and was liable in deceit. Both Mr Cummings and Mr Fuller were lawyers and, as the majority recognised at 138, the judgment reflected on the personal and professional character of the bankrupts. In my view, the true position is as stated by the majority of the High Court at 139 (see [35] above), namely, that the "discretion is at large and is to be exercised in the particular circumstances of each case". 41 In my view, it follows that the discretion in s 178 of the Act is capable of being exercised even where the judgment which the bankrupt wishes to appeal from is not one that affects the personal or professional character of the bankrupt. It also follows that the fact that the bankrupt wishes to appeal against the judgment on which the sequestration order was founded, is not a bar to the exercise, in an appropriate case, of the discretion. 42 The Federal Magistrate approached Ms Khadpekar's application on the basis that Ms Khadpekar had not shown that the decision of the respondent was wrong. In doing so, in my view, the Federal Magistrate misapprehended the scope of the discretion. As the Full Court observed in Frost, the discretion under s 178 of the Act is wide enough to permit consideration of matters not raised before the trustee. 43 Before the Federal Magistrate, Ms Khadpekar, who was unrepresented, said that one of her proposed grounds of appeal against the Cairns Magistrates Court was that at the time of the judgment she was suffering from a mental illness which inhibited her from exercising her rights. The Federal Magistrate recognised this at [6] and [8] of his reasons (see [18] and [19] above). He also recognised that Ms Khadpekar claimed that the condition had been "extant since about 1996" and that there was evidence in support of the claim (see [20] above). 44 There was evidence before the Federal Magistrate which supported the contention that at the time of the Cairns Magistrates Court judgment Ms Khadpekar was suffering from some mental disability. Thus, for example, there was a letter from Dr Davis, dated 1 September 1999, to the following effect: Mangala has been a patient of mine since June 1997. In my opinion, Ms Khadpekar is suffering from post traumatic stress disorder which has resulted in a chronic reactive depression for the past two years. The major stress appeared to be a combination of legal and business losses which have accumulated in the period 1997‑1999 and have resulted in her current mental state. I have seen Ms Khadpekar for counselling therapy on weekly basis for the last year. Treatment of anti depressant therapy have been unsuccessful due to side effects. Ms Khadpekar's health has also been affected by intemittent [sic] illnesses which have a stress origin. These include a recent disabling attack of facial shingles, ongoing back pain, vestibulitis, and otitis extema. I enclose a list summarizing some of her medical attendance's [sic] at Smithfield Medical Centre where I worked prior to July 1999. Mangala's medical state and the co‑existing physical illnesses have rendered her incapacitated over the past two years. 45 There was also evidence that Ms Khadpekar continued thereafter to suffer from one or more mental conditions which affected her ability to manage her affairs, and to conduct litigation. 46 The case of Dib v Regtop [2006] NSWCA 380 is an example of a case where leave was given after a lengthy period to reopen the dismissal of a plaintiff's claim on grounds which included that the plaintiff's mental condition contributed to the manner in which she had previously conducted her claim. In that case, the plaintiff commenced an action for damages arising out of a motor vehicle accident. There were delays in the conduct of the litigation and the claim was deemed to be dismissed by the operation of the District Court Rules 1973 (NSW) Pt 12 r 4C on 1 January 1998. 47 The plaintiff, by her tutor, applied in August 2005 for leave to extend the time to apply to rescind the deemed dismissal of her action. The primary judge refused the application. In 2006, the New South Wales Court of Appeal upheld the plaintiff's appeal and extended the time to make the application to rescind the dismissal. There was uncontradicted medical evidence before the judge at first instance that the plaintiff was incapable of managing her affairs from 1994 onwards. One of the grounds for allowing the appeal was that the trial judge had failed to take into account, or had given insufficient weight to, the plaintiff's mental disability in considering the manner in which the motor vehicle accident proceedings were conducted. At [96]‑[97], McColl JA stated: As this analysis demonstrates, the primary judge appears to have given no weight to the uncontradicted expert evidence that since September 1994 the appellant had been incapable of managing her affairs. This evidence was compelling, coming as it did from two medical practitioners who had been involved in reviewing the appellant's medical condition since soon after her accident. But even if it was a permissible approach to test the validity of those opinions by reference to contemporary document, those records, too, gave a picture of a person drifting in and out of reality to such an extent that schizophrenia was diagnosed comparatively early in the peace. It may be a matter of debate as to why those medical records did not lead her legal representatives to consider appointing a tutor, but their inaction in this respect does not, in my view, diminish the expert evidence of her inability to manage her affairs throughout the relevant period. Once it was accepted that the appellant's incapacity had subsisted since September 1994, the inference that her incapacity played a substantial role in the manner in which her motor vehicle accident proceedings were conducted was inevitable. It is not to point, as the respondent submits, that no formal order had been made under the Protected Estates Act. As a person incapable of managing her affairs according to expert evidence, her ability to pursue her proceedings with the diligence the law attributes to the reasonable person must have been gravely compromised. 48 In my view, it cannot be said that Ms Khadpekar's mental condition would not be a relevant consideration capable of weighing with an appeal court in considering whether to extend the time to appeal against the Cairns Magistrates Court decision; and any subsequent appeal. 49 The Federal Magistrate did not, however, address the question of whether there was any merit in Ms Khadpekar's proposed ground of appeal based on her mental condition. Rather, he confined his consideration to the merits of the proposed ground of appeal based on the irregularity of the discovery order and its subsequent impact on the judgment entered against Ms Khadpekar. Nor did the Federal Magistrate have regard to whether Ms Khadpekar's mental condition would be a relevant consideration which an appeal court would take into account in assessing the explanation for the delay in deciding whether to extend time to appeal. 50 It follows that the exercise of the discretion of the Federal Magistrate miscarried. 51 The respondent contended that I should in any event dismiss the appeal because the decision of the Federal Magistrate could be supported on an independent ground. This was that Ms Khadpekar had not provided evidence that she was capable of supporting an offer to indemnify the respondent in respect of his costs of the appeal. It was an essential element, said the respondent, for the making of any order by a court that a trustee exercise his or her powers to appeal a judgment against the bankrupt, that the bankrupt indemnify him or her for the costs and expenses involved in the appeal. This was the effect of the judgment in Cummings, said the respondent. 52 In my view, the observations by the High Court in Cummings as to the furnishing of security for the trustee's costs do not stand for the proposition that the furnishing of security is a mandatory precondition to the making of an order in the exercise of the court's discretion that a trustee conduct an appeal. Rather, the observations support the view that the provision of security is a factor, and a very important factor, to which the court is to have regard in the exercise of its discretion. 53 I am not satisfied that this comprises an independent ground upon which the Federal Magistrate's decision can be sustained. It is possible that a Federal Magistrate fully appraised of the scope of the discretion to be exercised and the mental incapacity ground of appeal which Ms Khadpekar sought to raise, would, if he or she was minded to require the security, have adjourned the application to give Ms Khadpekar an opportunity to find the security. It might also be the case that the Federal Magistrate would, in the exercise of his or her discretion, not require the furnishing of the security. 54 The respondent also referred to the issue of prejudice to the creditor referred to by the Federal Magistrate in considering the strength of Ms Khadpecker's potential claim for an extension of time. However, the question of prejudice requires the balancing of the prejudice to one party against the prejudice of the other party. In my view, the error of the Federal Magistrate in this case, went to the heart of the exercise of the discretion, such that any assessment that the Federal Magistrate made as to how an appeal court would treat the question of prejudice, was flawed by the Federal Magistrate's error. I am not satisfied that the error was of such a nature that it could be said that it made no difference. 55 The appeal, accordingly, succeeds. The matter should be remitted to the Federal Magistrates Court for rehearing. 56 In my view, it is appropriate that Ms Khadpekar's application be remitted to a different Federal Magistrate to be reheard. This is because Ms Khadpekar lives in Western Australia. Further, in dismissing Ms Khadpekar's claim the Federal Magistrate observed that Ms Khadpekar's application could "almost be described as hopeless". The strength of the view expressed by the Federal Magistrate below is another reason why it is appropriate that a different Federal Magistrate hear the remitted application. 57 I would also recommend that legal aid and assistance be provided to Ms Khadpekar in respect of the rehearing of the application before the Federal Magistrate. An important reason for this is that the evidence strongly suggests that consideration should be given to the appointment of a tutor to Ms Khadpekar for the conduct of her application. 58 I also record that after I reserved my decision, Ms Khadpekar delivered further submissions to the Court. I have not read those submissions as I did not give Ms Khadpekar leave to make any further submissions. I will hear the parties on costs, including whether the respondent is able to charge the estate with the costs of this litigation. I certify that the preceding fifty‑eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.

Associate: Dated: 19 March 2009 Counsel for the Appellant: The Appellant appeared in person.

Solicitor for the Respondent: Rodgers Barnes & Green