Liprini v Pascoe as Trustee of the Bankrupt Estate of Liprini

REASONS FOR JUDGMENT 1 The remaining issue in this proceeding is the costs of the proceeding and whether those costs should be paid out of the bankrupt estate. On 16 August 2012, I delivered reasons for judgment in this matter in which, amongst other things, I ordered that there be an inquiry into the conduct of the trustee in refusing or failing to convene a meeting of creditors in accordance with the applicant's request under s 64(1)(b) of the Bankruptcy Act 1966 (Cth) (the Act): Liprini v Pascoe as Trustee of the Bankrupt Estate of Liprini [2012] FCA 886. 2 The published reasons for judgment set out the factual circumstances in which the applicant, being the major creditor of the bankrupt estate, requested a meeting of creditors on 28 March 2012 and continued making requests to the same effect thereafter, culminating in the commencement of this proceeding on 20 June 2012. By that time the trustee had not convened the meeting and had indicated that the trustee would not be calling such a meeting, at least not until after the resolution of proceedings in the Federal Magistrates Court of Australia relating to one of the applicant's proofs of debt. 3 Before this proceeding was commenced and consistent with earlier correspondence, the solicitors for the applicant notified the solicitor for the trustee that they were commencing the proceeding because the trustee had not convened a meeting, despite the request in writing to do so, the applicant's position being that the failure to convene the meeting as requested constituted a gross dereliction of duty. It was clear from the correspondence from the applicant's solicitors that the applicant as the major creditor had wished the meeting to be held since about 28 March 2012 in order to vote on removing the trustee and having new trustees appointed. The expressed reason for the applicant's request was the applicant's loss of confidence in the trustee in respect of the administration of the estate, particularised in a letter of 18 June 2012 as involving concerns about lack of transparency, escalation of the administration costs, costs of third party expenses including legal fees, duplication of costs with the trustee's solicitor, lack of responsiveness, insufficient communication and delay. 4 In an affidavit of 7 September 2012, Mr Pascoe, the trustee, records the reasoning underlying the position he took. According to this affidavit, the trustee had concerns about a particular proof of debt which the applicant had lodged, known as the "Modifications Proof", which claimed a substantial sum of money as a loan initially in the sum of over $2 million and later reduced to about $1.7 million. The trustee rejected that proof of debt and there was no review of that decision ultimately sought. After rejection of that proof of debt there was a dispute between the trustee and the applicant involving another proof of debt relating to legal costs. This is the proof of debt which ultimately ended up in the Federal Magistrates Court. 5 There were ongoing communications in relation to that proof of debt between the applicant's solicitors and the trustee, culminating in the applicant's solicitors advising that they would seek instructions from the applicant as the majority creditor to bring a creditor's meeting. This was on 23 March 2012 and, in the trustee's view, formed the basis for the later dealing between the applicant's solicitors, the trustee and the trustee's solicitor. According to Mr Pascoe, he formed the view that "[b]ased on my concerns relating to the Modifications Proof…the applicant was seeking to pressure me to accept the amount had the applicant had offered for his proof of debt. I did not consider that to be appropriate and I was not prepared to be pressured into accepting the proof of debt as claimed by the applicant". After this correspondence the circumstances described in the earlier judgment took place. Mr Pascoe, the trustee, thereafter remained of the view that there was a connection between his refusal of the applicant's proof of debt and the applicant's request for the meeting to replace him. 6 The review of the proof of debt in question was the subject of the proceeding in the Federal Magistrates Court and was heard by Federal Magistrate Barnes on 7 June 2012, at which time her Honour reserved judgment. After that hearing, when the applicant's solicitors again repeated the request for the meeting to be called, the trustee's solicitor responded by proposing that the request be suspended until such time as the judgment in the Federal Magistrates Court had been delivered and orders made. 7 The applicant was not satisfied with this position and, following the sending of the letter of 18 June 2012 to which I have referred, commenced this proceeding. The trustee reviewed this proceeding and, according to his affidavit, instructed his solicitors that, if the application was amended to seek relief involving the convening of the meeting of creditors, then he wished to "file a counter action seeking an injunction restraining the holding of the meeting on the basis that the applicant was continuing to apply pressure for [the trustee] to accept [the applicant's] contentions in the proof of debt proceedings". 8 The application was not amended and instead the matter was listed for hearing before me. It is true that the application did not expressly seek an order that a meeting of creditors be held. Instead, the application sought an order that the trustee be immediately removed as the trustee of the bankrupt estate and that other trustees be appointed in his place. In the hearing on 16 August 2012 the trustee adduced evidence and made detailed submissions, the upshot of which was that in the trustee's view the application should be dismissed on the basis that no case for his removal had been made out and the applicant should pay the trustee's costs of the proceeding. 9 In my earlier reasons for judgment I noted at [19] that I accepted, consistent with the principles discussed in In Re Burn; ex parte Dawson, McClellan and the Trustee [1932] 1 Ch 247, the trustee had power to apply to the court for directions in respect of the creditor's request for a meeting. No such approach to the court seeking appropriate directions had been made. To the contrary, the trustee awaited the commencement of this proceeding by the applicant and actively defended the proceeding. As noted, the proceeding sought orders for the removal of the trustee. The trustee now agrees that orders should be made for his removal. Accordingly, the applicant has been successful in the proceeding in obtaining the orders sought. As counsel for the applicant said the trustee, by reason of this proceeding, has acceded to the orders sought. In addition, Federal Magistrate Barnes delivered her judgment in the interim, upholding the trustee's position in relation to the proof of debt. 10 Consequently, there are two separate issues for resolution. The first is the costs of this proceeding. The trustee accepts, in accordance with the usual position, that the applicant is entitled to an order for the costs of this proceeding. This is consistent with the usual position because the trustee now accepts that the substance of the orders that the applicant sought - namely, the trustee's removal - should indeed be made. The applicant, however, seeks his costs of this proceeding on an indemnity basis, whereas the trustee says that the costs of the proceeding to which the applicant is entitled should be the usual order as to costs. 11 The second, and perhaps the most important issue, is that the applicant submits that the trustee should not be entitled to recover those costs from the estate, which was an order sought in the original application. The trustee submits that he should be entitled to recover the costs out of the estate, his conduct being reasonable and those costs properly incurred. 12 There is no dispute about the relevant principles. Both parties rely on the decision in Adsett v Berlouis (1992) 37 FCR 201. In that case, the Full Court of the Federal Court distinguished between the two issues. The Full Court held (at 210) that "[t]he obligation of a trustee in bankruptcy to pay costs of another party involved in litigation unsuccessfully instituted, or defended by the trustee, is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate" and said that "[o]rdinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation". The Full Court also said (at 212) that: The critical question is whether or not the conduct which gave rise to the burden of costs…was proper…[T]hat is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived, or even, if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout. 13 In this regard, the Full Court referred with approval (at 211) to the observations of Bowen LJ in Re Beddoe; Downes v Cottam [1893] 1 Ch 547 (Beddoe) at 562 where it was said: While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him. If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred. 14 The Full Court noted at 212 that the question of what was proper in the sense explained in Beddoe, that is, whether the expenditure was reasonably as well as honestly incurred, involved a consideration of the fact that: Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Beddoe, which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not "properly incurred". The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment. 15 In this case, the first issue is whether the costs that the trustee should be ordered to pay, leaving aside any right of recoupment, should be indemnity costs or costs on the usual basis. This, however, is connected with the question of the reasonableness of the defence of the proceeding. Coming to that second issue, and whether the expenses were properly incurred in the sense explained in Beddoe and referred to in Adsett v Berlouis, it seems to me that the difficulty for the trustee in this case is that the only reasons which have been put forward by the trustee for failing to hold the meeting, as would otherwise have been required, are: - (i) the trustee's opinion that the meeting was being called in order to pressure him to accept the applicant's proof of debt, and (ii) because of the pending decision of Federal Magistrate Barnes in respect of the same proof of debt. The difficulty is that it was plain from 28 March 2012 that the applicant, being the major creditor of the bankrupt estate, had lost confidence in the trustee which was said to be for a variety of reasons, not just the proof of debt. Even if the trustee was of the view, as I accept he was, that the calling of the meeting was intended to pressure him in relation to the proof of debt, there was still an obligation to call the meeting unless and until the court directed otherwise. Moreover, in circumstances where the applicant had expressed his loss of confidence in the trustee, there was no reasonable reason for the trustee in this case to, as it were, hang on. The trustee had no reason to believe that he would succumb to the perceived pressure but nor did he have reason to believe that any newly appointed trustee might succumb to the pressure. Any newly appointed trustee would have been subject to the same obligations as the current trustee. 16 More to the point, when the proceeding was commenced it must have been obvious to the trustee that the applicant's loss of confidence was such that the applicant was not willing to wait for the outcome of the proceeding in the Federal Magistrates Court. Indeed, when one takes into account the prospect of an appeal against any decision of Federal Magistrate Barnes, this unwillingness given the loss of confidence in the trustee does not seem unreasonable. The trustee, however, did not take a passive role in this proceeding - far from it. The trustee actively defended this proceeding on the basis that it should be dismissed - that is, there had been no case for removal of the trustee made out. This is despite the fact that it was clear from all of the correspondence that a major creditor of the bankrupt estate had lost confidence in the trustee, not just because of the proof of debt but for a range of other reasons as well. 17 In addition, although the trustee relies on the fact that he instructed his solicitor that if the application was amended to seek relief involving the holding of a meeting the trustee wished to counterclaim for an injunction restraining the holding of the meeting, all of this seems to me to be quite inconsistent with the principle expressed by Bowen LJ in Beddoe that "[i]f there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred". In this regard I cannot see how either the defence of this proceeding or the proposal of further proceedings for an injunction to restrain the holding of the meeting that the major creditor wanted could reasonably be seen to be in the interests of the estate. The reason for this is that the new trustees in whom the applicant as major creditor presumably would have confidence would be subject to precisely the same sort of obligations as the current trustee. 18 In these circumstances I am satisfied that, although the trustee honestly believed that the position he was adopting was reasonable, the trustee did act in breach of the Act by not convening the meeting and at the same time not seeking directions from the court that such a meeting not be held, and the defence of this proceeding was not properly and reasonably incurred in the relevant sense. The expense that the applicant has incurred in bringing this proceeding has been both unreasonable and unnecessary and there should be no right in the trustee in this case to claim his costs and expenses of this proceeding from the bankrupt estate. 19 That leaves the issue of whether the costs should be indemnity costs as against the trustee or not. This aspect of the matter is not one that I find easy to resolve. In terms of the trustee's position in the proceeding, I have found generally unpersuasive the attempts to rely on the admitted deficiencies in the clarity of the application to support the trustee's position. This is one of the reasons supporting my view that the expenses have not been reasonably or properly incurred in the relevant sense. Nevertheless, I am not satisfied that the order in favour of the applicant should be an order for indemnity costs as opposed to the usual order for costs. The level of unreasonableness, in this regard, seems to me to not warrant the making of an indemnity costs order as opposed to the usual costs order. I do not see any inconsistency between these two positions, particularly given that indemnity costs usually involve some form of punitive element, which does not seem to me to be appropriate on the facts of this case, although I have reached the view that the defence to the proceeding and the associated incurring of the costs was not properly incurred within the relevant principles. 20 Accordingly, the orders I make will be consistent with the orders that the applicant seeks. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.