RODNEY KENT AND TIM ORLIZKI (TRADING AS KENT ATTORNEYS) v TERRY GRANT VAN DER VELDE AND JASON SHANE CRONAN AS TRUSTEES OF THE BANKRUPT ESTATE OF MILOVAN STANKOVIC

REASONS FOR JUDGMENT 1 I have before me an application under s 104 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) for review of a decision of the trustee of a bankrupt estate, made under s 102 of the Bankruptcy Act. Section 102 provides that a trustee in bankruptcy must examine each proof of debt and the grounds of the debt sought to be proved and, subject to the power of the Court to extend the time, must, within a specific period, either admit the proof of debt in whole, admit it in part and reject it in part, reject it in whole, or require further evidence in support of it. Under s 102(2), where the trustee rejects a proof of debt in whole or in part, the trustee must inform the creditor by whom it was lodged of the grounds of the rejection. 2 Under s 104, a creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under s 102 in respect of a proof of debt. The Court may, on the application, confirm, reverse or vary the decision of the trustee. An application under s 104 to review a decision must not be heard by the Court unless it was made within 21 days from the date on which the decision was made. However, the Court may extend the time within which an application may be made. 3 This proceeding is brought in the bankrupt estate of Mr Milovan Stankovic (the Bankrupt). There is current in the Court another application, brought on the part of the Bankrupt, for an extension of time within which to appeal from the sequestration order that was made in respect of his estate. The present application has been on foot since 28 February 2011. Of course, if leave to extend the time for lodging an appeal were granted, and the appeal were upheld, this proceeding might prove to be of no utility. Nevertheless, it is desirable that it be resolved as soon as possible. 4 On 12 May 2009, a sequestration order was made in respect of the estate of the Bankrupt by the Federal Magistrates Court. Messrs Jason Cronan and Terry Van Der Velde (the Trustees) were appointed joint and several trustees of the estate. On 13 July 2009, the Bankrupt completed and provided a statement of affairs to the Trustees. The statement of affairs disclosed unsecured creditors for amounts in the sum of $716,958. That sum included an amount of $246,000 for legal fees due to Kent Attorneys, solicitors (Kents). In their report to creditors of 12 August 2009, the Trustees reported that the Bankrupt had disclosed unsecured creditors for amounts in the sum of $716,958. A schedule to the report disclosed Kents as unsecured creditors in the sum of $266,000. The discrepancy is unexplained, but probably does not matter at this stage. 5 On 4 February 2010, the Trustees wrote to Kents, requiring the provision of further information in relation to their claim, to enable the Trustees to make a determination as to the admissibility of their proof of debt. A proof of debt had been lodged on 13 August 2009. On 2 December 2010, what was described as an updated proof of debt dated 30 November 2010 was lodged, showing a debt of $246,677 plus interest. For present purposes, the interest is not relevant. 6 On 7 February 2011, the Trustees wrote to Kents, summarising their determination under s 102. The letter of 7 February 2011 stated the amount of the proof of debt as being $273,246, and said that the amount under consideration was $248,417. Again, the discrepancy between that amount and the amount shown in the proof of debt of 30 November 2010 is not explained. The letter of 7 February 2011 said that the sum of $59,053 was rejected, and that the proof would be admitted in the sum of $189,364, plus interest to be determined subsequently. Attached to the letter was a formal notice of rejection of proof of debt, together with a further document entitled "Notice of Objections to Accounts Rendered by Kents Attorneys for Four Matters to Milovan Stankovic" (the Notice of Objections). 7 The proof of debt lodged by Kents was in respect of legal fees charged by them to the Bankrupt in respect of four separate proceedings - one in the District Court of New South Wales, one in the Land and Environment Court of New South Wales, one in the Supreme Court of New South Wales, and one in the Family Court of Australia. The Notice of Objections set out the basis upon which the sum of $59,053 was rejected. The complaint made by Kents in support of their application for review is that the Trustees failed to take account of the fact that the fees for legal services were due and owing by the Bankrupt, subject only to a right of the Bankrupt to have the costs assessed by the Supreme Court. An application for such an assessment by the Supreme Court must be made within 12 months of the fees being rendered. Alternatively, if there had been a failure by Kents to comply with the requirements of the Legal Profession Act 2004 (NSW) (the Legal Profession Act), it would have been necessary for Kents to make an application for an assessment of the fees to the Supreme Court before the fees would be payable. 8 It is common ground in this application that all of the formalities necessary under the Legal Profession Act, in terms of fee disclosure and fee agreements, had been complied with by Kents. Accordingly, the only basis upon which the fees would not have been payable as a debt due by the Bankrupt to Kents is that a successful application for assessment was made to the Supreme Court on the part of the Bankrupt. 9 The fees in question were rendered by invoices during 2008. The first appears to have been invoice number 316 dated 4 January 2008. There were then several invoices on 24 June 2008, 5 July 2008 and 31 July 2008. Thus, at the time of the appointment of the Trustees on the making of the sequestration order, the time for seeking assessment by the Supreme Court under s 350 of the Legal Profession Act had not expired, except in relation to the first invoice. On the other hand, that time was due to expire within three months of the date of the sequestration order. There is, however, provision for an extension of time within which to have the costs assessed by the Supreme Court. No application for assessment was made within the time limited by the Legal Profession Act. 10 However, following the sequestration order, it appears that the Bankrupt himself made two applications to the Supreme Court for assessment. On 7 August 2009, Kents wrote to the Supreme Court of New South Wales, drawing attention to the fact that the sequestration order had been made on 12 May 2009, and stating their understanding that, in those circumstances, the Bankrupt had no standing to file the applications. Subsequently, on 31 August 2009, the Trustees wrote to the Supreme Court of New South Wales confirming their appointment as trustees, and noting that the Bankrupt had applied for the costs rendered by Kents or, at least, part of them, to be assessed. I do not have before me any evidence of the request for assessment, nor any application for an extension of time, if one was lodged. 11 In their letter of 31 August 2009, the Trustees said that they had called for proofs of debt from all of the Bankrupt's known creditors, and that they would adjudicate on the proofs received and, if required, have them assessed by an independent assessor. The letter said that, if the matters were assessed by the Supreme Court, there would be a duplicate process, further increasing the costs in the bankruptcy. The Trustees, therefore, requested the Supreme Court not to proceed with the assessment requested by the Bankrupt in his own name. 12 I consider that, once the time for an assessment by the Supreme Court, on the application of the client, has expired, the fees, assuming compliance with the Legal Profession Act, must be regarded as a debt owing by the client to the solicitors. At the time of the sequestration order there was a debt owing by the Bankrupt to Kents. Kents could have sued on that debt. Because of the intervention of the sequestration order, of course, they were no longer entitled to sue, and their remedy was limited to lodging a proof of debt in the bankruptcy. 13 The approach taken by the Trustees appears to have been that it is a matter for them to assess the debt owing to a creditor. It is common ground that Kents are, and were at the date of the sequestration order, creditors of the Bankrupt. The second aspect of the duty of a trustee in bankruptcy, in dealing with a proof of debt, is to assess the quantum of the debt. That would involve an assessment of the prospects of success of an application for assessment to the Supreme Court, or an assessment of the possibility, when such an application was out of time, of succeeding in an application for an extension of time. It appears to be clear enough that the Trustees did not address those questions. There is nothing to suggest that the Trustees made an assessment of whether or not an application for an extension of time to the Supreme Court had any prospects of success. Indeed, they specifically abandoned the application that had been made by the Bankrupt, although there may be a question as to whether the application made by the Bankrupt was competent, having regard to the making of the sequestration order. 14 Nevertheless, I consider that, on a proper analysis, a trustee in bankruptcy does not, as against a creditor, have any greater right than the bankrupt. As at the date of the sequestration order, Kents were creditors of the Bankrupt in the amount of their final proof of debt. There may have been an inchoate right on the part of the Bankrupt, as at the date of the sequestration order, to have an assessment that might have resulted in that debt being varied. However, until such time as that step was taken, or until the time when it was possible for such a step to be taken had expired, there was a legal debt owing by the Bankrupt to Kents. 15 In those circumstances I consider that it was not open to the Trustees to make an assessment of what might have been done by the Supreme Court had an application for assessment been made in time, or, if made out of time, had such an extension of time been granted, and an assessment then made. It is apparent that the Trustees did, in fact, make a genuine and bona fide assessment of their own, in effect standing in the shoes of the Supreme Court, on the basis that an application had been made for review. I do not consider that it was open to them to take that step, and to approach the proof of debt in that way, in circumstances where there was no application for assessment on foot, and no competent application had been made. It follows, in my view, that the proof of debt should have been admitted in the full amount of $246,677.68. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.