Ground 1
47 Ground 1 alleges that:
(a) the Federal Magistrate erred in the exercise of his discretion in failing to consider whether the period of delay for which an extension of time was being sought in the application caused or resulted in any actual or material prejudice to Bain;
(b) there was no evidence that Bain suffered any actual or material prejudice as a result of the delay; and
(c) as there was no evidence that Bain suffered any actual or material prejudice as a result of the delay, "the delay was of no moment".
48 The Trustee submits that this error is significant given that the factor of delay was held to be the most important factor, but that it was considered without reference to prejudice, a separate factor from which delay cannot be divorced. The Trustee submits that the decision below necessarily gives rise to a substantial injustice because the practical effect of the decision is to deny the Trustee the opportunity to pursue Bain in the third party action in relation to a claim said to be in excess of $1 million. The Trustee submits that the effect of the decision is to deny the creditors of Keet's estate the chance of obtaining a substantially greater distribution from the estate.
49 The Trustee submits that this is an error of the kind referred to in House v R, being a failure by the decision maker to take into account a material consideration in the exercise of his discretion.
50 He further contends that Bain raised no evidence of prejudice from the delay, therefore, the only discernable prejudice was that of the lack of finality which Bain could expect as a result of the deemed abandonment of the third party action under s 60(3) of the Act.
51 The Trustee submits that had the Federal Magistrate considered the factor of prejudice to Bain caused by the delay, he would have concluded that Bain had not identified any actual or material prejudice. Flowing from this, the Trustee submits that the Federal Magistrate should have found that delay was not the most significant factor in the exercise of his discretion, and that in any event, for the majority of the period of the delay, Bain acquiesced in relation to the delay. Additionally, the Trustee submits that the Federal Magistrate should have found that, for the majority of the period of delay, Bain was on notice of the fact that the Trustee was likely to seek an extension of time to respond to the Notice and, until Bain finally applied to dismiss the action in the Supreme Court, he did nothing to assert his rights.
52 The Trustee then contends that against this background the Federal Magistrate should have turned to the interest of the creditors, which, when combined with his finding that the claim in the Supreme Court was arguable, should have led him to the grant application for an extension of time.
53 The Trustee places considerable reliance upon the decision in Vince v Sellers [2004] FMCA 564 as providing guidance to the Court's exercise of discretion to grant an extension of time to respond to a notice served pursuant to s 60(3) of the Act. In that case the sole prejudice of a lack of finality regarding pending proceedings was outweighed by the responsibility of a trustee in bankruptcy to their creditors.
54 The Trustee also relies upon the decision in Abeyratne v Trkulja (1998) 90 FCR 253 where it was held that, in the absence of any evidence in relation to the prejudice caused by delay of about one year, an extension of time would not be refused on the ground of delay alone. This, the Trustee submits, is a case which is close factually to the present case. He contends that in the absence of any prejudice flowing from the delay in this case then, all other factors being favourable, the application should have been allowed.
55 The Trustee also submits that, where an application to extend time to respond to a notice issued under s 60(3) is made in circumstances where the determination of the relevant proceedings also extinguishes the underlying rights the subject of the Supreme Court proceedings of the fact that because further proceedings in relation to those rights are unable to be commenced because the rights are statute barred, then the Court should more readily grant this extension of time. This, the Trustee contends, is because the time limit set by s 60(3) of the Act specifies that a failure to respond to a notice within the prescribed time will result in the disposal of the relevant proceedings, but does not specify that a failure to respond should also dispose of the underlying substantive rights.
56 Where a time limit is prescribed by legislation, whether there is a satisfactory explanation for a failure to comply with that time limit is a relevant consideration in an application for an extension of time.
57 As to delay, the Federal Magistrate found that:
(a) Even after the Trustee became aware of the necessity to do so, he failed to make a prompt application to the Court for an extension of time as would have been expected by a conscientious and prudent trustee;
(b) The Trustee conducted himself as if he was unaware of the time limits or as if the time limit were meaningless or of no significance, or not requiring observation; and
(c) There were significant periods of delay by the Trustee during which he was unable to offer any adequate explanation for his delay and, indeed, at one point, he decided to go on holiday rather than take any action.
58 I do not disagree with the view of the Federal Magistrate that the Trustee's conduct and his explanation for his delay were unsatisfactory. He was also correct to find that the Trustee's submissions that Bain 'acquiesced' in the Trustee's conduct were misconceived. As the Federal Magistrate correctly found, if the Trustee had wished to make an application for an extension of time then he should have done so and done so promptly.
59 However, delay is but one of a number of relevant factors, and accordingly, it is not necessarily determinative. Prejudice is a factor although it is a related and usually overlapping consideration. So too, in a case such as this, is a consideration of the merits of the relevant proceeding: the third party action in the Supreme Court.
60 In the context of applications of the type before the Federal Magistrate, it has been recognised that defendants to the proceedings pending in the Supreme Court reasonably expect some degree of finality in the decision making by the trustee in bankruptcy and an extension of time will prejudice the interests of such persons by causing further uncertainty: Vince v Sellars at [9].
61 The Federal Magistrate did consider such prejudice. In his reasons at [48], the Federal Magistrate expressly noted that this was an important matter for him to take into account, that the function of the time limit in the Act is to provide certainty for persons involved in litigation and such persons need to know whether the litigation is going to continue.
62 It is for the Trustee to establish that the third party action has real merit. He did not do so. The Federal Magistrate found, without stating why, that the third party action was "arguable". That is not a very high threshold and was a conclusion reached by the Federal Magistrate without any consideration of the expert evidence on the central issues in the third party action. Such evidence was before him.
63 The third party action involves allegations of negligence against Bain in the conduct of the audit of Keet's accounting practice. There was, in the evidence before the Federal Magistrate, an expert accounting report by Beverley Bahlmann, a Chartered Accountant and Associate Director of BDO Audit (WA) Pty Ltd, dated 26 August 2010, obtained by Keet's solicitors in aid of the third party action. It provides no support for the Trustee's claim against Bain. Indeed, the report contains a number of statements by Ms Bahlmann which, if anything, support Bain's defence. They include the following at pp 5-6:
(a) … I cannot determine whether the unauthorised transactions made by Mr Smith [Keet's employee] would have been detected by the audit procedures carried out ... [I am] unable to conclude whether fraud would have been suspected.
(b) … I am unable to determine whether the auditor would have identified the "cash" transactions.
(d) … I am unable to determine whether any detected discrepancies or discovered issues in the audit work performed would have led to further enquiries.
(e) … I cannot conclude whether the audit carried out by Mr Bain was in compliance with Australian Auditing Standards, and whether he exercised due skill and care required of an auditor in carrying out his procedures.
. . .
I am unable to conclude whether there was anything Mr Bain did not do which would have led him detecting the fraudulent transactions.
64 Moreover, the third party action has been on foot since February 2007. The Trustee's allegations in that action are denied in Bain's defence filed in April 2007. Positively, Bain alleged that, of the thirty-five impugned transactions pleaded in the plaintiffs' amended statement of claim, and upon which, in turn, the third party action relied, only six took place during the year ending 31 March 2002 which was the year of the relevant audit. Such evidence, as there is, demonstrates that the third party action had not progressed very far in the approximately 4½ years from its commencement till Keet's bankruptcy. Indeed, an amended statement of claim in the third party action was filed by Keet as late as 30 June 2011, a little over two months before his bankruptcy and some four years approximately since the third party action was instituted.
65 The prejudice to the Trustee needs to be seen in the context of the apparent lack of merit in the third party action and the meandering pace of its prosecution over more than 4½ years between its inception and Keet's bankruptcy when it was stayed.
66 Against that there is to be balanced the very significant prejudice to Bain should leave be granted given that he would no longer have a complete defence to the third party action on the ground that it is time barred.
67 In my view, the third party action has no demonstrated merit. It has not been prosecuted diligently as was the case by Keet in the main proceeding.
68 It is in these circumstances unnecessary to consider the other grounds of appeal.
69 I am not satisfied that the decision of the Federal Magistrate was attended with sufficient doubt to warrant its reconsideration on appeal.
70 The application for leave to appeal will be dismissed with costs.
I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.