Maas, Nicholas Christopher v Maas, Jill Elizabeth & Anor [1998] FCA 1447

REASONS FOR JUDGMENT On 20 March 1997, Nicholas Christopher Maas ("the husband") filed a debtor's petition pursuant to s. 55 of the Bankruptcy Act 1966 ("the Act"). At the request of the husband, the above-named cross appellant, Richard Brien ("the trustee") signed a consent to act as the trustee of the husband's bankrupt estate. The petition was accepted on the date on which it was filed whereupon the husband became bankrupt and the trustee became the trustee of his estate. On 16 April 1997, the first respondent, Jill Elizabeth Maas ("the wife") filed an application in this Court for the annulment of the husband's bankruptcy. On 17 July 1997, that application was transferred by order of Whitlam J to the Family Court. In that Court, O'Ryan J, after a hearing which occupied two days on 16 and 17 March 1998, acceded to the wife's application and, on 23 March 1998, ordered that the husband's bankruptcy be annulled pursuant to s. 153B of the Act. In the course of his reasons for judgment published on that day, the learned primary judge reproduced the following statement by the trustee of the husband's assets and liabilities as at 20 March 1997 when he presented his own petition: "• Cash in bank $ 90,561.00 • Debtor, KD Sales Force Specialists Pty Limited $ 71,000.00 • Motor vehicle Toyota Camry $ 10,000.00 • Personal and household furniture and effects $ 36,000.00 • Equity in Bogan Avenue, Baulkham Hills $ 69,324.98 TOTAL $276.885.98 • Australian Taxation Office $101,800.00 • Commonwealth Bank $ 5,142,67 • Mastercard $ 2,210.91 • Diners Club $ 2,487.21 • HCA Pty Limited $ 25,200.00 • KD Bassi $ 19,855.48 • National Australia Bank $ 164.78 • Whetson Wadley and Roberts $ 500.00 TOTAL $157,325.05 BALANCE $119,533.93" His Honour also rehearsed, in these terms, the competing contentions of the trustee and the wife as to whether the husband had been solvent on 20 March 1997: "The trustee said that in his opinion the husband was insolvent on 20 March 1997 as the husband was unable to pay his debts as and when they became due. The wife submits that this is wrong and that in fact the husband was solvent. The trustee said that the husband was insolvent because none of the assets listed above were available to the husband to meet his liabilities to his creditors and that the only liquid asset of the husband, namely cash at bank, was subject to an order of the Family Court. The trustee said that had the husband's major creditor, the Deputy Commissioner of Taxation, instituted bankruptcy proceedings against the husband in March 1997, given the Family Court orders in place, the husband would have gone bankrupt." After referring to various authorities on the principles governing annulment of bankruptcy, the learned primary judge made these findings of fact in relation to what he called "the Western Samoan transaction": "I am of the opinion that the husband's evidence about what I shall call the 'Western Samoan transaction' was very unsatisfactory. The husband said that he went to Western Samoa for three days to visit a friend and also look at investment opportunities. The husband took with him a cheque for US$156,000 drawn in his favour on an account with a bank located in the United States. The husband said that he endorsed the cheque in favour of DDD Management Limited. In his affidavit the trustee said:- 'In relation to the DDD Management shares whilst on paper it would appear that the husband has lost US$155,900, I have no doubt that the transaction was a sham and that the husband has some de facto control over the funds.' … In the circumstances of this case I am satisfied that the alleged loss of the investment in Western Samoa of US$155,900 is sufficiently improbable to require as a practical matter some corroboration and there was none. I am satisfied that the husband made the alleged investment because he was concerned to avoid the funds being taken into account in the property settlement proceedings. As the husband said he wanted to 'freeze' the money and he did so by placing the money in a tax haven country. The husband alleges that the money is lost. In the absence of some corroboration I do not accept what the husband said. The trustee does not believe the husband. The husband has made no attempt to recover the money. The husband gave no evidence of any attempts by him or others on his behalf to ascertain why the money was lost and what efforts have been made to recover the money. The husband knew that he had these funds available to him at the time when the debtor's petition was filed and that such funds alone were sufficient to pay the majority, if not all, of the debts of the husband. It could hardly be said in those circumstances that the husband believed that he was insolvent. … In his oral examination the trustee accepted, in response to a question which I asked of him, that the husband may be entitled to the benefit of the alleged capital loss on the redemption of the shares in the Western Samoan company and that the net result may be that the husband would pay little, if any, of the tax claimed. It is true that the capital gain was made in the financial year ended 30 June 1996 and the husband alleges that the money was lost in the financial year ended 30 June 1997. However this assumes that the husband's evidence is accepted as to when the alleged loss took place. On one view it may mean that the husband's liabilities would be only $55,552.05. However the trustee then said that in his opinion the Taxation Office would not accept that the husband incurred the loss and that the husband still has control of the Western Samoan interest. In my opinion, the trustee had not considered or was not prepared to consider, the impact which the alleged capital loss on the Western Samoan investment would have if accepted on the liability of the husband to the Australian Taxation Office." Reference was also made in the reasons for judgment of 23 March 1998 to moneys on deposit which represented what was disclosed by the trustee's statement reproduced above as "Cash in bank $90,561.00". As to those moneys, his Honour said: "The order made in the Family Court, which restrained the husband dealing with the funds on term deposit, was until further order, and specific liberty was granted to apply to the court on 24 hours notice in relation to this order. The husband said that he understood that he could always apply to the court to amend the interim order restraining him from dealing with these funds. The trustee said that he had not understood that the order could be varied. I find the evidence of the trustee somewhat difficult to understand." His Honour then concluded: "In this matter, in all the circumstances, I am satisfied that the husband was not insolvent at the time when he presented his petition under s. 55 of the Bankruptcy Act . Further, I am satisfied that the husband did not believe that he was insolvent. I therefore regard the presentation of the petition as an abuse of process. I am of the opinion that the husband filed the petition because he wanted to frustrate or defeat the claim by the wife in the Family Court." The learned primary judge then proceeded to indicate why, in the exercise of his discretion, he considered it appropriate to make an order annulling the bankruptcy. After making that order and publishing those reasons, his Honour received written submissions on the orders which should be made in respect of the costs of the wife's application. In considering those submissions, he identified the question for resolution as follows: "The wife was wholly successful and, in my view, subject to any limitations imposed by the law, ought to receive her costs. The question to be answered is 'from whom?' - the trustee, the husband, or apportioned between both?" Reference was then made to s.154 of the Act which was then, so far as is relevant, in these terms: "(1) If the bankruptcy of a person (in this section called the former bankrupt) is annulled under this Division: … (b) the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and … (2) If the property of the former bankrupt referred to in paragraph (1)(b) is insufficient to meet the costs, charges and expenses referred to in that paragraph, the amount of the deficiency is a debt due by the former bankrupt to the trustee and is recoverable by the trustee by action against the former bankrupt in a court of competent jurisdiction." After noting certain submissions which had been made about the operation of that section, his Honour said: "Having considered these matters, I find that I do not accept that s.154 means that the Court is devoid of jurisdiction to make an order against the Trustee for which he is not entitled to indemnity out of the trust estate. I therefore proceed on the basis that s. 154 is no bar to my making an order for costs against the Trustee which are not to be paid from the property which vested in the husband at the time of annulment. Having determined that I have jurisdiction to make the order sought by the wife, I turn to how I should exercise my discretion." An analysis was then undertaken of the judgment of a Full Court of this Court in Adsett v Berlouis (1992) 37 FCR 201, after which his Honour canvassed the competing submissions of the wife and the trustee on whether the trustee should be entitled to be indemnified out of the husband's estate against the costs of the application for annulment. The learned primary judge then reached this conclusion: "The catalyst for the commencement of the annulment proceedings which are the subject of applications as to costs was, I found, the husband's abuse of process in filing a petition when he was not insolvent for the purposes of thwarting the wife's claim. Mr Brien, the trustee who consented to act in that role, gave instructions to the husband's former solicitors to act for him (the trustee). The trustee actively but unsuccessfully opposed the wife's application for the annulment of the husband's bankruptcy. That opposition affected the course and costs of the proceedings. Although I expressed criticisms of the trustee in my reasons for judgment in granting the application I place on the record that I made no findings as to dishonesty or conspiracy associated with the purpose I attributed to the husband's presentation of his own petition. Mr criticisms do, however, call into question the trustee's prudence in respect of the Western Samoan transactions and the trustee's understanding of the interim orders restraining the husband's dealing with the funds on term deposit. On this latter issue I refer to what I said in the Reasons for Judgment at page 15 which I have already quoted in these reasons. Notwithstanding my view that the trustee did not act with mala fides, and bearing in mind policy considerations as to the personal responsibility for costs liability of trustees in bankruptcy, I do not consider that the wife's costs should be solely borne by the husband. Having regard to my concerns about his approach to the Western Samoan dealings and interim order on the Commonwealth Bank funds, the trustee's errors were imprudent and, in my view, attract an award of costs against him. In balance in the trustee's favour on the facts, is that the Deputy Commissioner of Taxation supported the trustee's opposition, although as I have said, I do not know with what state of knowledge as to the husband's affairs. I further note that at the time of argument in the substantive application, the husband has a liability of $7,715.50. In conclusion therefore, I propose to make an order requiring the trustee and the husband to equally share the costs of the wife's annulment application. Further, that the trustee's costs shall not be paid by the husband." The husband's appeal against the order of 23 March 1998 has been abandoned and the trustee now presses only paragraph 10 of his notice of cross appeal which is in these terms: "10. That his Honour erred in law in exercising his discretion in making orders personally against the Trustee: (a) he failed to have sufficient regard to the fact that the Deputy Commissioner of Taxation, the major creditor of the Second Cross Respondent supported the Trustee's opposition to the annulment; (b) he failed to have sufficient regard to the role of the Trustee as contradictor in the proceedings, and the genuinely held belief by him that it was necessary to put to the court submissions as to why the Second Respondent's bankruptcy should not be annulled. (c) he failed to have sufficient regard to the fact that the Trustee, was following the advice of Counsel in opposing the annulment application; (d) he failed to have sufficient regard to the fact that the Trustee held reasonable an genuinely held opinion that the annulment of the Second Cross Respondent's bankruptcy would not be in the interests of the Second Cross Respondent's creditors; (e) he failed to have sufficient regard to the fact (on his finding) that the proceeding arose out of the husband's abuse of process in filing his own petition." It is accepted on both sides that the resolution of the questions of what order should be made in respect of the wife's costs of her application for an annulment, and whether the trustee should be indemnified out of the trust estate against any liability for the wife's or his own costs of the same application, involved the exercise of a discretion. Accordingly, the review by this Court of that exercise of discretion is circumscribed in the way indicated in this well-known passage from the joint judgment in House v The King (1935) 55 CLR 499 at 504: "The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court at first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred. Unlike courts of criminal appeal, this court has not been given a special or particular power to review sentences imposed upon convicted persons. Its authority to do so belongs to it only in virtue of its general appellate power." The legal principles governing a trustee's right to an indemnity out of the trust estate for costs and expenses clearly establish that those costs and expenses must be reasonably incurred. As Bowen LJ put it in Re Beddo. Downes v Cottam [1893] 1 Ch. 547 at 562: "The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust - a proposition in which the word 'properly' means reasonably as well as honestly incurred. 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." That passage was approved by a Full Court of this Court in Adsett v Berlouis (supra) where it was observed at 211: "The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe; that 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. It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper. Nor is it profitable to attempt a detailed rule covering all circumstances. But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. 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 expresses 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." The matters which the learned primary judge took into account in impliedly characterising the conduct of the trustee as unreasonable seem to fall into two categories. The first embraces the course taken by the trustee in participating in the litigation instituted by the wife. That participation was said to have been undertaken "actively but unsuccessfully" and to have "affected the course and costs of the proceeding". When we sought, during the hearing of the appeal, to understand how the course and costs of the hearing below had been so affected, the relevant conduct of the trustee appeared to have been constituted by the following elements: 1. The trustee was represented by a solicitor (being a member of the same firm which had previously acted for the husband). 2. The trustee had prepared and filed an affidavit about seven pages in length to which there were twelve exhibits. That affidavit, for the most part, comprised an uncontroversial narrative of matters which the trustee had discovered during his administration of the husband's estate. As well, the trustee indicated steps which he proposed to take by way of further administration of the estate in the event that the bankruptcy was not annulled. In the course of argument on the appeal, attention was focused on the following paragraphs from the trustee's affidavit: "8. As at the 20 March 1997 none of the Husband's Assets listed above, were available to him to meet his liabilities to his creditors. His only liquid asset (Cash at Bank) was subject to an order of this court. 9. In my opinion, as a Chartered Account and as a Registered Trustee in Bankruptcy, the Husband was insolvent on the 20 March 1997, as he was unable to pay his debts as and when they became due. 10. Had the Husband's major creditor, the Deputy Commissioner of Taxation instituted bankruptcy proceedings against the Husband at that time, given the Family Court Orders in place the Husband would have gone bankrupt." 3. The trustee was cross-examined on his affidavit by Counsel for the wife and the record of that cross-examination occupied over seventy pages of the transcript of the hearing below and took up the greater part of the first day and a small part of the second day of that hearing. 4. The solicitor for the trustee at the end of the hearing on 17 March 1998 filed written submissions extending over about twenty-eight pages on the law and evidence said to be relevant to the determination of the annulment application. In our view, the reasonableness of the participation of the trustee in the wife's application for annulment of the bankruptcy has to be assessed against the background that he was obliged by r. 44 of the Bankruptcy Rules to prepare a report including information about the bankrupt's conduct and examinable affairs and the administration of his estate. With the possible exception of paragraphs 8, 9, and 10 quoted above, we do not regard the trustee's affidavit as going beyond what was reasonably appropriate for inclusion in a report required by r. 44. In the second place, the obligation of a trustee, where an application for an annulment has been made, may extend beyond the filing of a report to appearance personally or by counsel on the hearing of the annulment application. Indeed, in Re Hatcher (unreported 6 November 1987) French J observed at page 5: In my opinion the report initially filed by the trustee did not meet minimum requirements of particularity. That deficiency was exacerbated by the trustee's failure to appear in person or by counsel on the first hearing of the application in this court. Instead he sent an employee of the firm of chartered accountants of which he is a member to appear in his stead. … At the critical point in the administration of an estate where the bankrupt applies for discharge or annulment, it is the trustee himself or properly instructed counsel who should appear." In the present case, the question of whether the husband had been insolvent when he presented his own petition raised complex questions of fact and law. Having regard to the fact that the husband appeared in person, we cannot regard it as unreasonable for the trustee to have obtained legal representation and to have endeavoured to assist the Court by presentation of written submissions. A cursory examination of those submissions discloses nothing which was calculated to lengthen the hearing or increase the costs of the annulment application. Similarly, the time occupied by cross-examination of the trustee by Counsel for the wife could not be laid at the trustee's door. On the hearing of the appeal, Mr McVay, who also appeared below, did not suggest that cross-examination had been extended by prevarication or evasiveness on the part of the trustee. Nor did the trustee's affidavit tend by obscurity of language or complexity of structure to prolong cross-examination on it. An application for annulment of bankruptcy, because it goes to a matter of status under the law, is different from ordinary litigation inter partes. The learned primary judge implicitly recognised this when he instanced, as a matter relevant to the exercise of his discretion, the fact that the opposition to annulment was supported by the Commissioner of Taxation, the husband's main creditor. However, in our respectful view, his Honour erred in not taking account of the special obligations of the trustee under the Rules. We consider that special care needs to be taken, when framing orders as to costs of applications under the Act, not to deter trustees from the full and frank discharge of their statutory obligations. We also consider that account was required to be taken of the state of representation in the present case of the other persons interested in the application. As a result of a failure to take account of the considerations just mentioned, attention was diverted from the critical question in this case which required identification of the respects in which costs had been incurred or increased by the unreasonable conduct of the trustee. The outcome of the annulment application resided in the discretion of the Court, as was clearly acknowledged from the outset in the reasons below. Moreover, as the discretion fell to be exercised against a factual background of some complexity, the wife was not so clearly entitled to succeed that the trustee ought not to have incurred any costs beyond those of preparing a report in compliance with r. 44. We are reinforced in this conclusion by the questioning in the reasons for judgment on costs of the trustee's prudence in respect of the Western Samoan transaction and of his understanding of the interim order restraining dealings with the moneys on deposit with the Commonwealth Bank. The "errors" which the learned primary judge imputed to the trustee in those respects were characterised as "imprudent" and were seen, in consequence, as attracting "an award of costs against" the trustee. In the first place, it should be noted that the trustee took a position quite independent from the husband's on the Western Samoan transaction. The trustee submitted this transaction was a sham. We are unable to discern an unreasonable act or omission by the trustee in relation to that transaction up to the time when the annulment application was heard. In any event, any error under that head was one in the administration of the bankrupt estate and was insufficiently connected with the litigation to warrant punishing the trustee by depriving him of an indemnity against the costs of the litigation. Similar considerations apply to the failure, which his Honour imputed to the trustee, to approach the Family Court for leave to pay the moneys on deposit at the Commonwealth Bank in discharge of the liability to the Commissioner of Taxation. Because of the error which we have discerned in the reasoning below, it falls to this Court, in accordance with the principles, in House v The King, to exercise for itself as whether the trustee should be indemnified out of the husband's assets against the liabilities for costs which have been incurred by the trustee. In the circumstances, we would preserve the primary order of the Family Court as to costs and make in lieu of paragraphs 2 and 3 thereof the following order as to the trustee's right of indemnity: 2. That the trustee's taxed costs of the application together with any costs which he is required to pay pursuant to paragraph 1 of this order, be paid or retained out of any property of the husband still vested in the trustee, and, to the extent of any deficiency in such property, be recoverable in accordance with s. 154(2) of the Act.