Liprini v Pascoe as Trustee of the Bankrupt Estate of Liprini

THE APPLICATION 1 This is an application filed on 20 June 2012 by the applicant, Kevin Liprini, who is the major creditor of the bankrupt estate of his brother, Allan Liprini. The respondent to the proceeding is Scott Pascoe, who is the trustee of the bankrupt estate of Allan Liprini. The applicant seeks orders that the respondent be immediately removed as trustee of the bankrupt estate of Allan Liprini and that Messrs Mark William Pearce and Andrew John Heers be appointed as joint trustees of that estate. Consequential orders were sought to the effect that the respondent not be indemnified from the bankrupt estate of Allan Liprini for the costs of and incidental to the application.

LEGAL PRINCIPLES 2 Unfortunately, the application did not identify the particular source of power to be relied upon for the orders sought. Nevertheless, in subsequent correspondence the solicitors for the applicant confirmed that the applicant was relying upon s 179 of the Bankruptcy Act 1966 (Cth) (the Act). Section 179(1) provides that: The Court may, on the application of 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. 3 If there had been a focus on the relevant power and the nature of the power then it would have been apparent to the applicant at a much earlier time that there are a number of authorities in respect of the operation of s 179. As the respondent's submissions set out, s 179 is commonly referred to as involving a two-stage process. The authorities in relation to s 179 were conveniently gathered in Moore v Macks [2006] FMCA 594 at [13]-[18]: 13. In Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 Riley J observed in relation to a request by the Registrar in Bankruptcy for an inquiry in relation to the conduct of a trustee at p.268: "Before the application is heard, therefore, the trustee will know the grounds on which the court will be asked, inter alia, to inquire into his conduct and the facts on which the Registrar proposes to rely in supply of his application that the court do so inquire. I do not wish to be taken as presuming to lay down any rule as to the procedure to be followed in, or the approach to be made by the court to, a case of this sort; but it seems to me that in such a case there is a preliminary question to be decided by the court - namely on the grounds and facts before it, has a case been made for inquiry into the trustee's conduct? If the answer to that question is 'yes', the next question is - what is to be the scope of the inquiry? It may be that the material already before the court sufficiently defines the scope of the inquiry; on the other hand, the court may find it necessary to define the subjects for inquiry - e.g. in the form: 'Did the trustee do (or fail to do) so and so?' - and to give directions before proceeding to inquire." 14. In Re Gault; Gault v Law (1982) 57 FLR 165 the Federal Court was asked to conduct an inquiry in relation to the trustee of the bankrupt's estate. In fact, the case involves the second such request for an inquiry made many years after the first request had been made and refused. Ellicott J referred to Re Alafachi (supra) at p.173 and said: "It was with his Honour's comments in mind that I required the applicant to give particulars of the misconduct he relied on to found his application. 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 had been made out. For instance, the court should be loathe 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 considers 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. In Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 Beaumont J was considering an application by the Registrar in Bankruptcy for a s.179 inquiry. His Honour referred to the passages from Re Alafachi and Gault (supra) and said at p.233: "In my opinion, the balance of convenience in this case indicates that a preliminary inquiry of the type urged by the respondent was the appropriate course to be adopted provided that, in the event that the matter goes forward to an inquiry on a final hearing, the evidence taken and submissions made in the preliminary inquiry are to be regarded as evidence and submissions in the final inquiry: in other words, the preliminary inquiry should be treated as part of the final inquiry. It is as if the respondent were to move for the dismissal of the proceedings as an abuse of process and then to fail in that application, in which event the material before the court in the summary application is to be treated as part of the material before the court upon the final hearing of the proceeding." 16. Finally, in Wilson & Anor v The Commonwealth of Australia & Anor [1999] FCA 219 Branson J discusses the nature of proceedings pursuant to s.179 of the Act in addition to proceedings under s.178 of the Act. At [44] Her Honour summarises the law in relation to s.179 as follows: "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… There will ordinarily be a proper case or an inquiry where there is a 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 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.' " 17. Section 178 of the Act provides: (1) 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. (2) The application must be made not later than 60 days after the date on which the person became aware of the trustee's act, omission or decision." 18. There can be no doubt then that the Court is not obliged to embark upon an inquiry pursuant to s.179 simply because it is asked to do so. I have to be satisfied before embarking upon the inquiry that sufficient grounds have been demonstrated for the inquiry to be conducted. I will only be able to determine that if the applicant has revealed the basis claimed for the inquiry and the trustee given the opportunity to respond. I am satisfied that I am obliged to carry out this discrete preliminary step before embarking upon the inquiry and I would do so whether or not an application for summary dismissal was before me. The application for summary dismissal was based upon the same preliminary adjudication that the authorities discussed above require me to carry out. It was not pursued on any other basis. I propose to deal with the application as one made pursuant to the provisions of the Act itself rather than as one made pursuant to Rule 13.10. 4 As is apparent from the above summary, a number of principles can be isolated about the operation of s 179: - (i) there is a preliminary question to be decided - namely, on the grounds and facts before the court, has a case been made for inquiry into the trustee's conduct? If the answer to that question is yes, then the next question is what is to be the scope of the inquiry, (ii) given the nature of the power, it may well be appropriate for a trustee to be given particulars of any misconduct said to found the application. The reason for this is that s 179 involves a broad discretion as to whether or not to order an inquiry and an inquiry should not be ordered unless sufficient grounds have been made out, (iii) it has been said that the court should be loathe to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee has erred in his administration. That is, if the Court considers that an inquiry is unlikely to reveal misconduct, it should not make such an order putting the trustee and possibly the creditors to the expense and trouble involved, and (iv) although misconduct is itself an obvious and available ground for the decision that an inquiry should be held, there is also authority that the power in s 179 is not so limited. Accordingly, it has been said that there will ordinarily be a proper case for an inquiry where there is reasonable cause to believe that the trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the general law. In addition to this summary of principles, it is apparent from the decision in Doolan v Dare [2004] FCA 682 that s 179 should not be construed in a manner mutually exclusive from other provisions of the Act. In particular, this is apparent in Doolan v Dare at [47]-[48] where it was noted that the power in s 179 is available despite other powers in the Bankruptcy Act also being available. 5 It is convenient at this point to note certain other principles. In Doolan v Dare at [13] Spender J referred to the related decision of Cooper J (Dare v Doolan [2004] FCA 461) in which his Honour said (at [12]-[13]): 12. Prima facie, the Act empowers the creditors to remove a trustee in circumstances which appear to the creditors to justify such a removal. The power to remove is not preconditioned upon there being any misconduct on the part of the trustee. If, for example, relations between the trustee and the creditors have broken down for whatever reason, that will be sufficient. Where a trustee has lost the confidence of creditors and those creditors seek the removal of the trustee, he or she should not resist removal unless there are proper reasons to do so: Adsett v Berlouis (1992) 109 ALR 100 at 112. 13. Ordinarily, the Court would not interfere with an exercise of the power under s 181 to remove a trustee unless a good cause is shown for its interference: Re Crawford Ex parte The Trustee (1943) 13 ABC 201 at 202; Macks v Ardalich [1999] FCA 679 at [22] - [23]. 6 In Doolan v Dare it was claimed, and a declaration was sought, that the trustee had improperly exercised various powers. The Court found against the trustee and held that the trustee had acted in her own self-interest (at [38]). At [49] Spender J observed that it seemed to him "that it is plain beyond argument that the relationship between the trustee and the bankrupt has totally broken down; that, in many cases, is a sufficient reason for the trustee to be removed". Accordingly, his Honour made orders for removal of the trustee and appointment of another trustee. 7 In Adsett v Berlouis (1992) 37 FCR 201 at 213 it was observed that: Except in the most unusual of circumstances - as, for example, where there is a question about the conduct or representativeness of the vote - a trustee who has lost the confidence of the majority of creditors ought not to cling to office, but make way for someone else. For a trustee to involve the estate in litigation about his or her past performance, especially when a composition is likely to be approved, is to incur unnecessary expense.