Construction of s 149B(1) of the Bankruptcy Act
114 Having found that one of the reasons for Whitton objecting to the discharge of Spencer and Perovich from bankruptcy was to allow the bankrupts to propose compositions with their creditors, the next question is whether that purpose was an improper purpose.
115 The applicants' allegation of improper purpose is that Whitton lodged the objection for a purpose other than a purpose for which a trustee is lawfully permitted to lodge objections. This involves a question of the proper construction of s 149B(1).
116 The applicants submit that the purpose of the objection procedure is to provide the trustee with a power by which he or she can induce the bankrupts to act in accordance with the bankrupts' obligations. They rely on the judgment of the Full Court in Prentice v Wood (2002) 119 FCR 296 and submit that this judgment remains applicable despite the amendments to the objections provisions made by the Bankruptcy Legislation Amendment Act 2002 (Cth) ("the 2002 amendments"). The applicants submit that although s 149C(1)(c) does not require the trustee to state his or her reasons where a "special ground" exists, the trustee must nevertheless have reasons for objecting, and those reasons must involve inducing the bankrupt to comply with his or her obligations.
117 The 2002 amendments included adding ss 149C(1A) and 149N(1A) to the Bankruptcy Act. The respondents submit that the 2002 amendments answer the applicants' arguments. They submit that the trustee need not have reasons where he or she relies on special grounds. They submit that where there are special grounds the only limitation upon the trustee's power to object is that it must be directed to achievement of a purpose of the law of bankruptcy.
118 The respondents also submit that where special grounds are relied upon, no review is available of the trustee's reasons under s 178(1), or, alternatively, that the Court should decline to grant relief in the exercise of its discretion under s 178(1).
119 In order to analyse the parties' arguments, it is necessary to consider the 2002 amendments and any effect of those amendments upon earlier decisions of the Full Court.
120 Section 149C(1)(c) requires that the trustee state his or her reasons "for objecting to the discharge on that ground or those grounds". This section was present before the 2002 amendments. The effect of s 149C(1A) is that the trustee need not give reasons for objecting to discharge where the trustee relies on certain grounds set out in s 149D(1) that have become known as "special grounds".
121 In Inspector-General v Nelson (1998) 86 FCR 67, the Full Court, considering the objection provisions in their form prior to the 2002 amendments, said at 78-79:
In providing that the trustee "may file" a written notice of objection to discharge, s 149B(l) uses language by which discretions are commonly conferred.
The policy of the current bankruptcy legislation is that, prima facie, a bankrupt is entitled to the benefit of a discharge by operation of law. The sections dealing with objections to discharge are consistent with this policy. By requiring that a notice of objection must not only set out the ground or grounds of objection and refer to the evidentiary material relied upon in support, but also state the "reasons" for objecting, s 149C makes it clear that a trustee filing such a notice must have reasons for doing so, in addition to being satisfied that the evidentiary material establishes one or more permissible grounds. By providing for review by the Inspector-General of the decision to object, s 149K makes it clear that the reasons for objecting were intended to be subject to scrutiny. Finally, by providing for review by the AAT of, inter alia, a decision to file a notice of objection and the Inspector-General's decision on review of such a decision, s 194Q again makes it clear that the reasons for the filing of a notice of objection are to be the subject of scrutiny.
There is no reason to be found in these provisions for thinking that the considerations relevant to the exercise of the discretion to file a notice of objection are any less extensive than all those conformable to the purpose and objects of the Act. In the absence of any indication of a contrary legislative intention, we would be disposed to think that in order to ''keep a person bankrupt" beyond the ordinary period, a trustee would need to have reasons directed to achievement of a purpose of the law of bankruptcy. In fact, although ss 149B-149D do not indicate what will be "sufficient reasons", as distinct from "permissible grounds", to support an objection, s 149N(l) (set out earlier) provides that on review of a trustee's decision to object the Inspector-General must cancel the objection if, inter alia, he is satisfied that the reasons given by the trustee for objecting "do not justify the making of the objection". Thus, far from giving rise to a prima facie right to object, the existence of a permissible ground supported by sufficient evidence is a threshold: there must also be reasons justifying the making of the objection in the particular case.
(Underlining added.)
122 In Prentice v Wood, the Full Court, also considering the objections provision in their form prior to the 2002 amendments, said:
19 The power to prevent a discharge from bankruptcy by operation of law by filing a Notice of Objection is "a great power": Van Reesema v Official Trustee in Bankruptcy (1983) 69 FLR 424 at 430-431; 50 ALR 253 at 260.
20 Section 149C(1)(c) requires the notice to state the reasons for objecting to the discharge on the ground relied upon: Re Ansett; Ex parte Ansett v Pattison (1995) 56 FCR 526 at 530 per Olney J. There must be more than a recitation of the s 149D ground: Re Hall (1994) 14 ACSR 488 at 493. Section 149C makes it clear that a Trustee filing a Notice of Objection to Discharge must have reasons for doing so, in addition to being satisfied that the evidentiary material establishes one or more permissible grounds. One of the grounds on which the Inspector-General may cancel the objection is if the reasons given for objecting on that ground do not justify the making of the objection (s 149N(l)(c)).
21 In Inspector-General in Bankruptcy v Nelson (1998) 86 FCR 67 at 78 a Full Federal Court said that in order to "keep a person bankrupt" beyond the ordinary period, a trustee would need to have reasons directed to achievement of a purpose of the law of bankruptcy. The existence of a permissible ground supported by sufficient evidence is a threshold; there must also be reasons justifying the making of the objection in the particular case.
22 Thus, a Trustee would not be bound to lodge a Notice of Objection on the s 149D(l)(f) ground if the failure to pay was due to some circumstances outside the control of the bankrupt, or was trivial in amount. Equally, if the failure to pay was contumelious or unexplained, then a statement by the Trustee that he was objecting to the discharge on the s 149D(l)(f) ground for that reason would satisfy s 149C(1)(c), inasmuch as the reason (good or bad) for objecting on that ground has been given. That would enable a review to take place of whether the reasons given for objecting on that ground justify the making of the objection.
23 The Trustee relies upon the following statement in the Notice of Objection as constituting his reasons for objecting to the discharge on the s 149D(l)(f) ground:
"In my opinion, creditors will directly benefit from my Notice of Objection to Discharge since, if Mr Wood continues to practice as he has done in the past, creditors will be entitled to enjoy a further five (5) assessment periods of Mr Wood's income."
…
24 A notice is liable to cancellation if the reasons given for objecting on the ground specified in the notice do not justify the making of the objection, but a notice is not invalidated on that account. However, the passage relied upon in the notice does not state reasons for objecting to the discharge on the ground assigned. Rather, it simply records the consequence of an objection having been made, it being a consequence which is of equal application to all the grounds specified in s 149D. Section 149C(l)(c) is not a requirement that the Trustee state the reason or reasons for objecting to a bankrupt's discharge; rather it specifies the more particular requirement that the Trustee give the reason or reasons for objecting to the discharge of the bankrupt on the ground or grounds set out in the notice. The mandatory requirement of s 149C(1)(c) is to enable the bankrupt to know the answer to the question "why are you objecting on this ground to my discharge?" The so-called "reason" does not relate to the ground relied upon, hence it is not a reason for objecting to the discharge on that ground.
(Underlining added.)
123 At least prior to the 2002 amendments, the trustee had to have reasons justifying the making of the objection on any ground. The reasons had to relate to the ground relied upon. The reasons had to be directed to the achievement of a purpose of the law of bankruptcy.
124 The Explanatory Memorandum for the Bankruptcy Legislation Amendment Bill 2002 stated that its objects included to:
Strengthen the objection-to-discharge provisions of the Bankruptcy Act 1966 (the Act) by making it easier for trustees to lodge objections to a person's discharge from bankruptcy and harder for bankrupts to sustain challenges to objections.
125 The Explanatory Memorandum also stated:
47 In practice, trustees have often found it difficult to maintain objections. Frequently objections have been cancelled on review by the Inspector-General, the Administrative Appeals Tribunal (AAT) or the Federal Court. The reasons for cancellation vary. Some trustees have found it difficult to differentiate clearly the ground(s) of an objection and the reason for filing the objection. Moreover, on occasions, the AAT has upheld a bankrupt's challenge to an objection simply because, either during an AAT hearing or just before it occurs, the bankrupt eventually has provided information long sought by the trustee and the non-supply of which information was the ground of the trustee's objection. Such decisions undermine a prime purpose of the objection regime which is to induce a bankrupt to cooperate, promptly, with the trustee of the bankrupt estate.
…
49 To address these deficiencies in the present law which have hampered a trustee's capacity to elicit cooperation from some bankrupts, and to strengthen the trustee's hand, the Bill proposes a tougher objection-to-discharge regime under which it is expected that more objections will withstand the review process.
50 It is proposed that trustee objections will fall into one of two groups, namely, those which specify at least one 'special ground' and those which specify none. In the first group, the trustee's notice of objection still will have to set out the ground(s) of objection and the evidence relied on to establish it or them, but need not state the reasons for filing an objection to the bankrupt's discharge from bankruptcy. For objections which contain no 'special ground', the trustee will be obliged, as now, to provide in the notice the trustee's reasons for filing an objection.
51 …Special grounds are directed at deliberate actions by the bankrupt to defeat creditors or to hinder the trustee's administration. The bankrupt's pre-objection conduct, rather than the trustee's capacity to show that an objection will advance the conduct of the administration, will determine whether any notice of objection will have to state the reason(s) why it has been lodged. …
126 It is necessary to consider the following issues in light of the 2002 amendments:
(a) Whether the trustee need not have any reasons for objecting where a trustee relies on special grounds.
(b) Whether review of the trustee's decision is available under s 178(1) where a trustee relies on special grounds, or alternatively, whether the Court should decline to allow review under that provision.
(c) Whether the sole purpose of the trustee's power to object is to induce the bankrupt to act in accordance with the bankrupt's obligations under the Bankruptcy Act; or whether the only limitation upon the trustee's power to object is that it must be directed to achievement of a purpose of the law of bankruptcy.
127 It is clear that s 149B(1) confers a discretion on the trustee to object where the trustee is satisfied that the evidentiary material establishes one or more permissible grounds.
128 Section 149C of the Bankruptcy Act sets out the requirements for a notice of objection. There are three requirements.
129 Firstly, the notice of objection must set out the ground or each of the grounds of the objection, being a ground or grounds set out in s 149D(1).
130 Secondly, the notice of objection must refer to the evidence or other material that, in the opinion of the trustee, establishes that ground or each of those grounds.
131 Thirdly, s 149C(1)(c) requires a notice of objection to state the reasons of the trustee for objecting to the discharge on that ground or those grounds.
132 However, s 149C(1A) provides that where special grounds are relied upon, the reasons for objecting on the special grounds need not be stated in the notice. The special grounds include the grounds specified in ss 149D(1)(d) and (e), which the trustee's notice relied on in this case.
133 Unless at least one of the grounds in s 149D(1) exists and the trustee exercises his or her discretion to object, the bankrupt is automatically discharged from bankruptcy at the end of three years from when he or she files a statement of affairs.
134 Section 149B(1) requires that the trustee exercise a discretion, even where special grounds exist. The exercise of that discretion must involve consideration of whether there are reasons that favour extension of the period of bankruptcy, and what those reasons are. If the legislative intention when making the 2002 amendments was to remove the necessity for the trustee to have reasons for objecting, it is likely that the discretion would not have been retained; or there would have been specific provisions to the effect that the trustee need not have reasons. The effect of s 149C(1A) is merely that the trustee need not state the trustee's reasons for objecting on special grounds in the notice of objection. Although the trustee need not state his or her reasons the trustee must still have reasons for exercising the discretion to lodge a notice of objection.
135 Nothing in the Explanatory Memorandum persuades me to a contrary view. It is true that the object of the 2002 amendments was to make it more difficult for a bankrupt to review a trustee's decision to lodge an objection to discharge from bankruptcy where there are special grounds. That is done in four ways. Firstly, it is more difficult to mount an application for review of the decision under s 178(1) because the trustee is not required to state reasons for the decision to object on special grounds. Secondly, the power of the Inspector-General and the Administrative Appeals Tribunal ("the AAT") to review an objection is restricted where the objection is based on special grounds, as I will discuss later. Thirdly, the situation in Prentice v Wood, where the bankrupt succeeded because the trustee stated the ground but not a reason is avoided in respect of special grounds. Fourthly, the situation where the AAT upholds a bankrupt's challenge to an objection because the bankrupt has finally provided the information sought by the trustee is avoided. While it would certainly make it more difficult for a bankrupt to review the trustee's decision made on special grounds if the trustee is not required to have reasons, the Explanatory Memorandum says nothing to indicate that was intended.
136 The respondents submit that the addition of s 149N(1A) under the 2002 amendments confirms their submission that the trustee need not have reasons for objecting where a special ground exists.
137 Section 149N provides as follows:
(1) On a review of a decision, if the Inspector-General is satisfied that:
(a) the ground or grounds on which the objection was made was not a ground or were not grounds specified in subsection 149D(1); or
(b) there is insufficient evidence to support the existence of the ground or grounds of objection; or
(c) the reasons given for objecting on that ground or those grounds do not justify the making of the objection; or
(d) a previous objection that was made on that ground or those grounds, or on grounds that included that ground or those grounds, was cancelled;
the Inspector-General must cancel the objection.
(1A) An objection must not be cancelled under subsection (1) if:
(a) the objection specifies at least one special ground; and
(b) there is sufficient evidence to support the existence of at least one special ground specified in the objection; and
(c) the bankrupt fails to establish that the bankrupt had a reasonable excuse for the conduct or failure that constituted the special ground.
For this purpose, special ground means a ground specified in paragraph 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (ia), (k) or (ma).
138 The respondents point out that where there are special grounds the Inspector-General can no longer cancel the objection on the basis set out in s 149N(1)(c), that the reasons given for objecting on those grounds do not justify the making of the objection. This is both because the trustee is not required to give reasons for objecting and, more specifically, because of s 149N(1A). The requirement of s 149N(1)(c) that the reasons for objecting on particular grounds must justify the objection was a factor that influenced the Full Court in Nelson to conclude that the trustee must have reasons. The respondents submit that amendment indicates that the trustee is not required to have reasons.
139 That submission would have merit if the discretion under s 149B(1) had been removed. But, it remains. The submission would also have merit if the only avenue for review is s 149N; but it is necessary to consider whether review is still available under s 178(1). If review is still available under s 178(1), and that review is capable of extending to review on the basis of the trustee's reasons for objecting, that would weaken the respondents' argument.
140 As to the availability of review under s 178(1), the respondents submit that s 149N(1A) demonstrates a legislative intention that no bankrupt or creditor or anyone else may challenge the trustee's reasons for lodging an objection based on a special ground. As an objection cannot be cancelled by the Inspector-General on the basis that the trustee's reasons do not justify the objection, the respondents submit that it would be incongruous if the objection could be set aside by the Court on the basis that the trustee's reasons do not justify the objection. This is said to indicate a legislative intention that there is to be no avenue of review of a trustee's reasons under s 178(1).
141 Section 178(1) of the Bankruptcy Act is in broad terms and, on its face, is capable of applying to a trustee's decision to object to discharge from bankruptcy on any grounds, special and general. In Macchia v Nilant, French J held at [40], prior to the 2002 amendments, that s 178 could be used by a bankrupt to review a trustee's decision to object to discharge from bankruptcy. His Honour said at [39]:
Trustees are, according to the weight of authority, properly to be regarded as officers of the Court: Adsett v Berlouis (1992) 37 FCR 201 at 208. Given the nature and importance of the office, the general supervisory function of the Court is not lightly to be excluded in respect of particular classes of decision notwithstanding that specific provision is made by other parts of the Act for their reversal or modification.
142 The legislature could have amended s 178(1) to provide that it does not apply where a trustee objects on special grounds and to make Div 2 of Part VII an exclusive regime for review of such a decision. No such amendment was made. The Explanatory Memorandum does not refer to any intention to restrict the power of bankruptcy creditors to seek review under s 178(1). In my opinion, s 178 allows the Court to review a decision of the trustee, whether the trustee relies on special or general grounds.
143 While s 149N(1A) prevents the Inspector-General from cancelling an objection made on special grounds on the basis that the reasons do not justify the making of the objection, the availability of review under s 178(1) is not inconsistent with the aim of the 2002 amendments of "a tougher objection-to-discharge regime" and to make it "harder for bankrupts to sustain challenges to objections". It is more difficult for a bankrupt to apply to the Court for review under s 178(1) than to apply to the Inspector-General and then the AAT for review.
144 The respondents also submit that there is a discretionary reason why the Court should not permit the applicants to seek review of a trustee's notice of objection under s 178(1). Division 2 makes available a review process for notices of objection founded on special grounds only to the Inspector-General on his or her own initiative and to bankrupts. Such review is not available to creditors. Be that as it may, s 178(1) expressly allows a creditor to seek review of a trustee's decision and Div 2 does not establish an exclusive regime for review of a trustee's decision to object. There is no alternative remedy for a creditor who wishes to challenge a trustee's decision to object. I cannot see that there is a basis for preventing the applicants from pursuing their application for review.
145 While the trustee need not state reasons in the notice of objection, the trustee's reasons may be ascertainable, as they were in this case. One basis of review available under s 178(1) is that the trustee's reasons demonstrate that the trustee failed to act according to law. The availability of review under s 178(1) based on the trustee's reasons tends against the respondents' submission that the trustee need not have reasons for objecting.
146 The next issue is whether s 149B(1) is to be construed such that a trustee may not lodge a notice of objection for the purpose of extending the bankruptcy so that a bankrupt can put a proposal for composition to his or her creditors.
147 The starting point is that the discretion under s 149B(1) is, on its face, a broad one. In Nelson, the Full Court stated that there is no reason for thinking that the considerations relevant to the exercise of the discretion to file a notice of objection are any less extensive than all of those conformable to the purpose and objects of the Bankruptcy Act.
148 In Prentice v Wood, the Full Court emphasised, however, that the requirement of s 149C(1)(c) is that the reasons must be reasons for objecting on the grounds relied upon. They must be reasons that relate to the ground relied upon. The applicants submit that the reason would only relate to the ground if the trustee objects for the purpose of inducing the bankrupt to comply with an obligation under the Bankruptcy Act.
149 The difficulty with the applicants' argument is that the observation in Prentice v Wood that the reason must relate to the ground relied upon was based on the requirement of s 149C(1)(c) that the notice of objection must state the reason for objecting to the discharge "on that ground or those grounds". Section 149C(1)(c) has no application to special grounds. Where there are special grounds, the trustee's reasons need not be reasons for objecting on the special ground.
150 All that is left are the requirements of s 149C(1)(a) and (b) and the exercise of the discretion under s 149B. As to the exercise of the discretion, the requirement in Nelson is that the trustee must have a purpose directed to the achievement of a purpose of the law of bankruptcy.
151 The applicants rely on Frost v Sheahan (2005) 220 ALR 733, decided after the 2002 amendments. In that case, Lander J said:
[46] The purpose of the objection procedure is to provide the trustee with a power by which he can induce the bankrupt to act in accordance with the bankrupt's obligations.
[47] The trustee should not use the power for the purpose of punishing the bankrupt for acts taken by the bankrupt which cannot be rectified. Rather, the power should be used for the purpose of persuading the bankrupt to discharge the bankrupt's duties under the Act.
[48] It is a power, however, which must be used sparingly and for the purpose of protecting the interests of creditors and in generally advancing the administration of the estate of the bankrupt.
[49] In a sense, it is a power of last resort when no other form of persuasion will assist to remind the bankrupt of the bankrupt's obligations.
152 The context in which Lander J made these statements must be considered. The application was for review of the trustee's decision to not withdraw the objection to discharge under the trustee's power in s 149J. There was no challenge to the trustee's decision to object to the bankrupt's discharge from bankruptcy. Lander J made the comments simply as part of a recitation of the existing case law, and not in the context of ruling upon any argument. His Honour had no occasion to consider the effect of the 2002 amendments upon that case law. The case does not assist the applicants.
153 The applicants submit that s 149B(2) provides insight into the manner in which s 149B(1) is to operate: that is, a trustee would need to have reasons directed to achieving the purpose of inducing the bankrupt to discharge a duty. Section 149B(2) provides an exception to the requirement of s 149B(1) that a trustee exercise a discretion as to whether to object. Where the circumstances set out in s 149B(2) exist, the trustee has no discretion; the trustee must lodge an objection. As s 149B(2) provides an exception where particular circumstances exist, it does not indicate how the discretion under s 149B(1) is to be exercised in other circumstances. Section 149B(2) provides no indication that the only purpose which the discretion may be exercised under s 149B(1) is to induce the bankrupt to discharge a duty that the bankrupt has not discharged.
154 In addition, contrary to the applicants' submission, not all the special grounds relate to an obligation on the bankrupt which an extension of the bankruptcy period may induce the bankrupt to comply with. Section 149D(1)(ab) is a special ground in relation to a transfer of property that is void against a trustee under s 121. Such a transfer must necessarily have occurred prior to bankruptcy, as s 121(1) refers to a "transfer of property by person who later becomes a bankrupt". As the transfer has already occurred, lodging a notice of objection to extend the period of bankruptcy could not encourage the bankrupt not to make the transfer, as the transfer must have already occurred prior to bankruptcy. The existence of this special ground tends against the applicants' submission that the only permissible purpose of lodging an objection is to induce the bankrupt to comply with his or her obligations.
155 The applicants submit that the purpose of allowing the bankrupts to propose compositions with creditors is not a permissible or proper purpose. However, as long as the purpose is directed to the achievement of a lawful purpose of bankruptcy, it is a proper purpose. The purpose of allowing the bankrupts to propose compositions with the creditors obviously comes within that description.
156 Even assuming I am wrong in my construction of s 149B(1), and the only purpose of objecting can be to induce the bankrupt to discharge a duty, I have concluded that Whitton had a genuine belief that extending the bankruptcy would encourage the bankrupts to provide income details in accordance with their obligations under s 139U of the Bankruptcy Act. That was a purpose directed to inducing the bankrupts to discharge a duty which had not been discharged. That purpose was a substantial purpose.
157 In addition, the purpose of allowing the bankrupts to put proposals for compositions to their creditors and the purpose of encouraging the bankrupts to provide their income details are not mutually exclusive. As I have said, the bankrupts would need to provide Whitton with their income details for the purpose of preparing reports to the creditors. In this way, Spencer and Perovich were encouraged to comply with their obligations by the continuation of the period of bankruptcy.