Mannigel, Carolyn Nancy & Ors Aitken, Lindsay Robert [1983] FCA 206

Federal Court of Australia|1983-08-15|Before: Smithers J

ORDER THE COURT ORDERS THAT:

The application dated 22 June 1982 in action No.

No. W 1060 of 1979 No. W 1061 of 1979 No. W 74 of 1979

ot -° IN THE-MATTER OF The Bankruptcy aan Act 1966 - i

an . ' APPLICATION FOR THE REMOVAL OF ° "oo. . " TRUSTEES AND OTHER ORDERS

APPLICATION FOR THE REMOVAL OF TRUSTEES AND OTHER ORDERS

Before the Court are applications brought pursuant to

s.179(1) of the Bankruptcy Act 1966 (the Act) by Gunther Henry Frederick Mannigel (GM), (Bankruptcy No. 1061 of 1979)

and his: wife. Carolyn Nancy Mannigel (CM), (Bankruptcy No. LOGL of 197%) who. both became bankrupt on. 3 December 1979 and am application by his father Heinrich Oswald Herman Mannigel (HM) (Bankruptcy No. 74 of 1979) as assignor under Part X of the Act of his estate.~ The respondent is the trustee of the bankrupt estates of GM and CM and the controlling trustee of

failure of duty in that capacity. First, an order is sought that an inquiry be held into the conduct of the respondent as , trustee. Secondly, an order is sought that the respondent be removed from the position of trustee and that another person be appointed to that position. Thirdly an assessment is sought of the damages suffered by the estates by reason of alleged breach of duty of the respondent in the management of the estates and an order that the respondent make good the

loss that the estates have sustained. It is alleged by the

applicants that the loss suffered by reason of the conduct of

the respondent 1s such that the damages recoverable would be

so high that the bankruptcies would be annulled. Finally,

there are applications for discharge from bankruptcy of

inta the conduct af a trustee in relation to a bankruptcy and may do one or both of the following: -

The circumstances in which the Court may proceed to

an enquiry under s.179 were discussed by Mr. Justice Riley in

Re Alafaci (1976) 9 ADR 262. His Honour approached the

(v) The court may inquire into any aspect of the conduct of a trustee in relation to a bankruptcy, and is enabled to deal with the situation which it. finds by making such order as it thinks proper. A case of misfeasance, negligence or wilful default on the part of the trustee may emerge otherwise than from the accounts submitted by him im accordance with s.175 of the Bankruptcy Act or an audit af those accounts; if it does, or kf it appears that for any other reason the trustee's conduct should be inquired into, there is no reason why s.179 should not be set in motion, or why the court cannot under s.179 order the trustee to make good, if the court thinks such an order to be proper.

s.179 of the Bankruptcy Act he should make application (a) for an order that an inquiry be

made by the court into the conduct of the trustee in relation to the bankruptcy, and (b) such other

orders as he thinks fit. This requires a preliminary question to be decided by the court, namely on the grounds and facts put before it; Has the case been made for an inquiry into the

trustee's conduct? If the answer to that question is "Yes", the next question is: What is the scope of the inquiry? Then the court should give directions before any proceedings to

inquire, ensuring that the trustee is given proper opportunity to prepare and present his

"IT 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 1s_a preliminary question to be decided by the Court - namely on the grounds and

facts before it, has a case been made for enquiry into the trustee's conduct."

In considering the procedure to be followed in this case it emerged that in dealing in a preliminary way with the question as to whether an enquiry should be held the very conduct of the Trustee which is in question would have tc be substantially investigated. So apparent was this that Mr. Emmet for the respondent stated that it may be convenient that the Court launch into an enquiry without further delay. But he submitted that the adoption of this course should not preciude the Court from ultimately finding, if thought fit, that no basis for an enquiry had been established. It

appeared that each party was fully prepared to litigate the

issues in full. As a resuit I entered upon the consideration

of the issues and in the event all the evidence desired to be

In the case of bankruptcy the Trustee is in charge of

the assets of the bankrupt and those assets are to be applied

for the benefit of the creditors and if there be any surplus

forcrthe benefit of the bankrupt. It is: clear that the

minimunr standard required of the Trustee is. that he shail

Jhandle the assets with a view to achieving the maximum return

from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt- Obviously a great deal of discretion and judgment is required

to be exercised by the Trustee.~ It was said by Rogerson J.

In Re Ladyman (1981) 38 ALR 631 at pp. 641 and 642 that the

standard of conduct required of the Trustee will ordinarily

be the standard required of a professional man and perhaps

higher. The learned Judge referred to "the high standard of

= ."% Trustee undoubtedly has a discretiom as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion 1s never an absolute one. It is always limited by - the dominant duty

the guiding duty of recovering, securing and duly applying the trust fund: and no Trustee can claim any right of discretion which does not agree with that paramount obligation."

Where an order is sought that the Trustee be removed and to make good the losses suffered by the estate, it must be

established that the Trustee has been guilty of a breach of

duty to act "diligently and prudently in regard to the

business of the Trust" See Riley J. in In re Alafaci (supra)

°* According. ta Halsbury Laws of England 3rd Ed. Vol.38

p.967,-A trustee must take all reasonable and proper measures

te. obtain posesssion of the trust property ... and to get in

all debts and funds due to the trust estate, and to preserve

it, and to secure it from loss. He must take reasonable

precautions to see the property is not stolen or lost by

default. The Trustee is bound to execute the trust with

fidelity and reasonable diligence and ought to conduct its

affairs in the same manner as an ordinary prudent man of

business would conduct his own affairs. But beyond this he

is not bound to adopt further precautions. It was said by

their Honours Dixon CJ, McTiernan and Windeyer JJ in Elder's

Trustee and Executor Co. Ltd. v. Higgins & Ors (1963) 113 C.L.R. 426 that:-

"We are not to judge what the Trustee then did or failed to do by the light of later events .... The duty of the Trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator's estate... --. The argument that the Trustee having, 1t was said, exercised a discretion. its conduct is now

unchallengeable is sufficzently answered by a . passage from the judgment of Fry L-J.- In Re

Brogden (supra) ... Whether or not one calis the trustee's action] an exercise of discretion,

the question remains was it the act of a prudent Trustee."

It is not the role of the Court to decide whether the path chosen by the Trustee led to the realization of the greatest

value for the assets of the estate. The Court is in a

examine the facts with hindsight and with the benefit of the

evidence om oath of the relevant debtors and ereditors and

witnesses called in their support. The Trustee is required to act diligently and prudently in the exercise of his discretion in deciding matters as they arise in the course of administration of the-state. He may be constrained to act by

reference to the knowledge which he has of the circumstances

balancing the benefit of further enquiry against further

delay and the further expense to the estate, to the creditors

and possibly to the debtor if there is a surplus in the

Between. 1973 and 1979 the three applicants carried on

a retail business at Nowra known as the "Nowra Camera

Centre". The business traded in the sale of cameras and

accessories, repair work, the provision of facilities for the development of photographic film and related services. The business was carried on under a partnership agreement,

whereby HM had a 50% interest and GM and CM each had a 25%

difficulties and those difficulties intensified in 1979. On

18 May 1979 HM executed a deed of assignment under Part X of the Act and the respondent was appointed Trustee. On 3 December 1979 sequestration orders were made in respect of the-estates of GM and CM and the Official Trustee became the Trustee of their estates. On 11 May 1980 the respondent became the Trustee in respect of their estates.

dissatisfaction of the applicants with the conduct of the

respondent in the management of their estates. In relation

ta the Camera business it is their contention that the

business. was Iost and the stock was sacrificed, and

It is also contended that the respordent has wrongtully

failed to take steps to enforce an alleged right of action in

GM and CM against a firm of solicitors for alleged negligence

in advising them in relation to a building contract in

" wrongfully failed to realize the interest of GM in a company, ~Mannigel. Broadcasting Pty. Ltd. which "purchased and later

solt = radio transmitting licence and business known as. 4VL

Charleville. . Alternatively it is said that the respondent

has failed to pursue a claim against the directors of that

company' for disposing of the licence and business at an

The sequestration orders of 3 December 1979 were made on the petition of the respondent on the ground that GM and CM had failed to execute a deed of assignment pursuant to a

Circumstances leading to sequestration and the assignment

On 1 March 1979 at the request of Messrs Hunt & Hunt,

Solicitors. for the partners, the respondent attended a meeting at which HM, GM and Mrs. Frieda Mannigel, Heinrich Mannigel's wife and their solicitor were present. The

financial position of the partners was discussed. Creditors

were pressing, judgments had been obtained and a bankruptcy

notice had already been served on GM. The returns from the business were diminishing. The respondent was shown balance sheets of previous years and the partners' tax returns. it appeared that GM had personal debts of approximately $79,000; CM had no assets or debts apart from those owned or owed jointly with GM. HM had personal debts of $51,000 against assets of $84,000. It was said that the _partnership had debts of approximately $50,000" and there were debts owed toa it of approximately $2,000. The respondent gave the partners. advice as to what in his opinion were the options available to them. The options were also explained to GM and his wife by letter from their solicitors dated 20 March 1979. Those options were, if bankruptcy was to be avoided, to arrange with the creditors for the execution of a deed of arrangement

According to GM there was a meeting on 22 March 1979 between himself, his parents and the respondent and his solicitor where he urged upon the respondent the desirability of selling the business as a going concern and the respondent made it clear that it was. the respondent's view that the assets; of the business would have to be sold at auction. Although the Trustee denies that there was a meeting on 22 March 'r am satisfied that GM was made aware before 30 March 1979 that the respondent saw no possibility of selling the

business as a going concern. On that day the respondent

visited the Camera Centre and insvected the stock and

premises. After discussion, each of the applicants signed instruments of authority to the respondent under s.188 of the Act. The Respondent asked G for a list of creditors and Gi handed to him a copy of a telex dated 9 January 1979 sent by Gi to his own salicitor which set out a number of creditors

oe To--test the attitude of creditors the respondent arranged for- an 'informal. meeting of the four major suppliers tothe Centre to be held on 19 April 1979. Although requested to attend, Gi failed, quite wilfully, to do so. The question of the Centre continuing to trade was discussed with the four creditors who attended. One such creditor was prepared to continue trading but the other three had decided that they would not supply further goods to the Centre on any terms. The respondent telephoned G4 and he explained that the creditors were largely in opposition to continued trading and that he was not optimistic that a deed of arrangement would be acceptable to creditors generally.

Om 19 April 1979: the respondent wrote to Gi advising trim that a formaL meeting of creditors would be held on 27 ApriI I979 and requiring him to attend and to supply a written and verified statement of affairs. The respondent also advised G@ that if he failed to attend the meeting or to supply the documents requested the creditors might require

the respondent to present a pet:tion for a sequestration

order in respect of G's estate. The meeting was held and resolved to require the debtor to execute a deed of assignment and that the respondent, be nominated as trustee. G4 arrived at the meeting just as it was coming to an end. He had been delayed waiting for an aircraft on which one Kirton, a business associate, was travelling, his erroneous

idea being that Mr. Kirtom could contribute something of

value to.-the meeting. GM did address the meeting but did not induce the creditors to depart from their resoltuion. Similar resolutions were passed at meetings of the creditors

On 18. May HM executed-~a deed of assignment. On the same day the respondent was. advised by Mr. B. Sharpe from the firm of Messrs Stephen, Jacques and Stephen, who had become the Solicitors for GM and &™, that his clients would only sign a deed of assignment on condition that they be given five months to sell the business and that no sale of the interests of GM in Mannigel Broadcasting Co. Pty. Ltd. be held for two years. The respondent called a formal meeting of creditors with a view to obtaining the creditors' views concerning a deed of assignment subject to these conditions. The meeting was held on 30 May 1979 and although neither of the applicants attended the meeting Mr. Sharpe did. Mr. Sharpe urged creditors to agree to the stated conditions and he submitted a memorandum from counsel stating that subject

to Gf and CM being believed, the prospects of success in the

Supreme Court action for negligence brought by them against

the applicants' former solicitors, Messrs Marriot Oliver &

Co. were good and approximately $40,000 might be realized from it. The creditors rejected the conditions and resolved that the respondent as controlling trustee apply to the Court

for a sequestration order against the estates of the

Im duly I97% GM consulted Hooker & Co- with a view to selling -the business. Mr. Wilson of Hookers' Agency considered that he could sell the business satisfactorily but

In early July the respondent received a letters from Messrs Stephen Jacques & Stephen alleging that not all the creditors of the applicants had been advised of the two creditors meetings and requesting that the debtors be allowed a period of five months to negotiate a sale of the Centre and

fifteen months to negotiate sale of the shares in the radio

station. The respondent called a further formal meeting of creditors. It was held 1 August 1979 and the creditors

adhered to their previous decision. The respondent then commenced proceedings to have the estates of GM and his wife sequestrated. He became increasingly concerned that the Nowra Camera Centre was not viable and that it would be in

the best interests of the creditors that the Centre be closed

as soon as possible. In early November the respondent was

informed py the landlord of the Centre that the partners were

substantially in arrears with rent, that the lease would expire in December and that he intended taking action to have

'The applications for sequestration were contested by GM and CM on the ground that the meeting at which the resolutions. requiring them to execute the deeds of assignment were passed were not attended by all creditors entitled to be at such meetings. In addition HM applied for an order that the deed of assignment executed by him on 18 May 1979 be declared void on the ground that it had been signed conditionally on the applicants executing similar assignments. After lengthy hearing Mr. Justice Lockhart rejected the submissions of HM, GM and CM and on 3 December 1979 ordered that the application by HM be dismissed and the

estates of GM and CM be sequestrated that that costs of the

proceedings be taxed and paid according to the Act.

Realization of the Assets of the Nowra Camera Centre

Following the orders made by Mr. Justice Lockhart the

respondent conferred with the Official Receiver and arranged

for an appointment with a Mr. Cruikshank, the officer handling the estates of GM and CM. On 7 December 1979 the

respondent advised Mr. Cruickshank that he considered that

the Centre was running at a loss and that the possession cf

the assets of the business and an auction thereof should be arranged as soon as possible. The respondent indicated that it was his view that while the business continued and the stock was- being sold the moneys realized were being used for

the living expenses of GM and CM. He indicated his view that

it. was. not practicable to carry on the business profitably

ané that the prospects of sale of the business as a going concern were nil- He indicated that he would like to take charge of the assets, of the business. forthwith and sell them at auction for the benefit of the creditors of the business. Mr. Cruikshank concurred and it was agreed that the respondent would take the necessary action to take possession, close the Centre and sell the stock. The Official trustee wrote to the respondent a letter confirming

that he "had no objection to the respondent taking charge of

partners. as he felt that GM might cause difficulties. It was

important to have access to the premises without having to

use force. There was a history of a lack of co-operation by GM including his refusal to sign a deed of assignment, his failure to prepare or certify a Statement of Affairs for the

r creditors meeting and his non-attendance at meetings.

The respondent acted promptly and on 10 December 1979

sent his employee Mr. Starr and one Mr. Byrne an auctioneer

to Nowra to take possession of all the stock and fittings of the business with a view to their sale.~ The respondent was advised by telephone from Mr. Starr at Nowra that there were a great number of items, that it would be extremely difficult to list all the stock and return it in one day and that CM would not allow them access. to one of the rooms of the shop believe to contaim records, in particular of the radio station .The respondent states that he told Mr- Starr to take possession of what he could and to arrange with Mr. Byrne to make an "inventory thereof on its arrival in Sydney. Mr. Byrne put the more valuable items of stock in his car and took them to Sydney. The other items were packed in boxes, sealed arid taped down, and delivered to a carrier chosen by Mr. Starr for transport to the premises of Mr. Byrne in Sydney. The number of boxes was not recorded and the inventory was not made until early January 1980 some four

On 12 December 1979 the respondent wrote to GM and CM requesting advice as ta whether there were any assets books or records of the business other than those obtained on 10 December. They did not reply. On 17 December 1979 he was advised by one Cook that om behalf of the landlord, he had taken possession of the Centre and changed the locks. On 16 January 1980 the respondent wrote to GM and CM enclosing a

copy of the inventory of goods seized and advising them that

certain items of furniture and equipment of the Centre were

'in the custody of Mr- Cook. He further advised them that the

Mr. Byrne arranged an auction of the stock of the business- to be held on 31 January 1980. GM attended the auctiom- He said that certain items of equipment at the

impending auction belonged to certain clients of the Centre.

Various items claimed were delivered to him. The auction

realized a gross amount of $10,656.50 and a net amount of

developed great hostility to the respondent. He enlisted the

aid and sympathy of his Federal member of Parliament who took

On 3 June 1980 the respondent wrote to GM advising GM that he could inspect the records at any mutually convenient time and seeking from them information regarding any other of his assets, all books, documents, papers and writings relating to his trade dealings, property or affairs, his passport. and a statement of affairs in the appropriate

On 17 June 1980 GM and CM, having arranged for press coverage, attended the respondent's offices in the APA

Building, Martin Place and chained themselves to the

reception desk. GM stated to the respondent and reporters present that "I have to do this to get the information L require". He distributed a press release stating that his difficult financial circumstances were a result of 'losses incurred through dealing with an unlicensed builder, and he was making a claim for damages against his solicitors for professional negligence, that the respondent had given false evidence in court,-had failed to take an inventory of goods seized, had refused to return shop records and goods belonging to customers, and had refused him information relating to his company interests in Queensland. The police rescue squad were called by the respondent to cut the chains. Shortly thereafter GM, the. police and the respondent

inspected the records in the respondent's possession. GM

On l May 1980 the first meeting of the creditors was

held and as a result of resolutions passed, the respondent was appointed Trustee of the estates of GM and CM. At the

request of the creditors, GM and CM were not invited to

attend the meeting. Om 6 May 1980 the respondefit consented

Authority to seize the assets of the Nowra Camera Centre

December 1979 the respondent had no authority to move against

the assets of the Nowra Camera Centre on behalf of the

ereditors of GM, CM and HM. This contention was based on

clause 20 of the Partnership Agreement and ss.31 and 33 of

"If either partner shall assign charge or encumber his share im the partnership or any part thereof or shall suffer the same be charged for his separate debt under the Partnership Act or shall become bankrupt or insane or otherwise permanently incapable of attending to the partnership business or shall act in any manner inconsistent with the good faith observable

'between the partners or shall be guilty of any conduct which would be a ground of dissolution of the partnership by the Court then and in any such case it will be lawful for the other partner by notice in writing to the offending or incapacitated partner to determine the partnership so far as concerns such partner where upon the interest of such offending or incapacitated partner in the partnership shall cease and the provisions contained herein for the determination of the agreement shall apply."

Section 31 of the Partnership Act provides that an assignee

" "tq. Imterfere im the management or administration " | of the partnership business or affairs or to require any account of the partnership transactions or to inspect the partnership books."

It is said that this restriction on the authority of an

assignee accords with principle because when a partner

assigns his interest in a partnership he does not transfer to the assignee any interest in any particular item of partnership property. What is assigned is a chose in action consisting "of a right to a portion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership." See Federal Commissioner of

Taxation v. Everett (1980) 143 CLR 440 at 446. "A mortgage

orm a charge [of a partner's interest in a partnership] is considered to vest rights over that chose in action but is

not considered to carry any title to the specific assets

until dissolution", per Mason J. in United Builders Pty. Ltd.

& Anor v. Mutual Acceptance Ltd. (1980) 144 CLR 673 at 688.

And it is also contended accordingly that the acquiescence of the bankrupt's trustee contributed nothing by way of authority to the respondent to make the seizure and sale. It was argued that it is apparent from the provisions of ss.61l and 177 of the Act that the trustee in bankruptcy could not take action by himself or by authorising another person to take possession of the actual items of property constituting assets of the partnership. All that the trustee had was the interest of each partner in the partnership namely a right to aw share of the surplus on realization upon a dissolution of the partnership. ,It was contended by Mr. Tuckfield that the partnership was not dissolved by the assignment by HM to the

respondent of his estate under Part X of the Act nor by the

However it clearly was the duty of both the Official Receiver and the respondent to acquire possession of the partnership property and to deal with it for the benefit of the creditors. The restrictions on the rights of an assignee of the interest of a partner contained in the Partnership Act are designed to protect the other partners from an assignee who- seeks to exercise rights in the management of the

oe a partnership contrary to the will 'of those other partners. But n@ matter how strict: a view is taken that the interest of a partner im the partnership assets is only to his share of the surplus on dissolution, it is clear that all the partners acting together can deal with particular assets of the partnership in any way that they agree upon. At any particular time the partners acting together can by agreement convert what might be called their floating and separate interests in particular partnership assets to a fixed interest in which the legal and equitable title to the particular assets vests, according to the agreement, in them as joint proprietors, or in one partner only, or in a third party, and may be dealt with accordingly. Thus upon an assignment either by deed or by bankruptcy of the interest of @ partner his assignee has full capacity to join with the other partners in dealing according to their combined will with "any asset or all the assets of the partnership. Accordingly, when the trustee in bankruptcy concurred with

the proposal of the respondent to seize the partnership

property of the Centre and sell it at auction, that was an

exercise by the owners of every interest, legal and

equitable, in those assets. The decision in Palmer v.

Thompson (1879) 0.B. and F (S.C.) 182 shows the capacity of partners acting together to transmit interests in specific

partnership assets. See also Rowe v. Wood (1822) 2 Jac & W

Accordingly the respondent states that he took passession of and dealt with the partnership stock in the capacity of assignee of the interest in the partnership of one partner, HM, with the consent of the Trustee in ' bankruptcy of GM and CM in whom the interest of every other

partner in the partnership property had vested by reason of

the sequestration order. In my view, the suggestion that

this was an unlawful proceeding cannot be supported.

It was also argued that the Trustee in bankruptcy lacked authority to take action to obtain possession of assets in the bankruptcy in the interests of the creditors pending instructions from creditors at the first meeting. Section 64 of the Act was relied upon. I do not consider this argument ta be sound. It was the plain duty of the trustee to gaim possession of the assets of the bankrupts.

It is said that the decision to close the business and seize the stock was not a reasonable or prudent decision. It is said that the removal of the stock and consequent termination of the business destroyed a valuable asset namely, the goodwill of the business and ked_.to the sale of

the. stock at an undervalue. It was submitted that the

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Cases Cited (3)

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