Starkey as Trustee of the Estate of Peter John Dance v Rondo Building

REASONS FOR JUDGMENT Introduction 1 Peter John Dance became a bankrupt upon his own debtors petition on 3 September 2003. Graham Lindsay Starkey was appointed as his trustee in bankruptcy pursuant to a consent filed with the debtors petition. 2 At a meeting of creditors convened on 20 November 2003 one of the creditors, Rondo Building Services Pty Ltd (Rondo) moved a resolution that Mr Starkey be removed as the trustee of the estate and that another be appointed in his place. The basis upon which that resolution was proposed was said to be Mr Starkey's prior association with the bankrupt, having been appointed by him as receiver and manager of the assets and undertaking of the bankrupt's company, Casaron Pty Ltd (Casaron). 3 Rondo took objection at the meeting to the entitlement of a number of creditors to vote on the basis that their proofs of debt did not disclose provable claims. Those objections were disallowed. The resolution was put to a vote and defeated by a majority in value of the creditors. Two out of the fourteen creditors, Rondo and CSR Ltd (CSR), voted in favour of the resolution. They are both major creditors of the estate. 4 On 13 January 2004 Rondo applied to the Federal Magistrates Court in Brisbane seeking declarations that Mr Starkey had wrongly admitted various creditors to vote at the meeting. Rondo also sought an order for the removal of Mr Starkey. Mr Starkey did not call any evidence at the hearing before the magistrate but relied upon submissions based on Rondo's evidence. 5 After a lengthy delay between hearing and judgment, the Federal Magistrates Court made an order on 10 March 2005 that Mr Starkey be removed as the trustee and that Mr Nick Combis, nominated by Rondo, be appointed as trustee in his place. Each party was to bear its own costs. 6 Mr Starkey filed a notice of appeal against the judgment on 30 March 2005. The order for his removal was stayed pending the hearing and determination of the appeal. Rondo filed a notice of contention seeking to support the decision of the magistrate on other grounds and also filed a cross-appeal in relation to the costs order made at first instance. 7 The learned magistrate ordered the removal of Mr Starkey as trustee on the basis of a perception of want of impartiality having found that in fact he would be impartial in the administration of the estate. Having so found she found in favour of Mr Starkey on the objections taken to his decisions about the voting entitlements of four of the creditors at the meeting. In so doing, her Honour gave only brief consideration to the evidence in relation to those creditors. 8 There appeared to be some confusion as to the particular statutory power under which the learned magistrate could make the order that she did. However, for the reasons which follow I am satisfied that her Honour applied a criterion for removal consonant with the provisions of s 156A(4)(b) of the Act. I find that her discretion in ordering the removal of the trustee did not miscarry. I am also satisfied, on the evidence before the magistrate, that the challenge to Mr Starkey's decisions to admit the disputed creditors to vote at the meeting could not properly have succeeded. For these reasons the appeal will be dismissed. The question of the voting entitlements having been a discrete issue raised in a notice of contention by Rondo, each party will be required to bear its own costs of the appeal and of the stay application. The costs order made at first instance will not be disturbed. The cross-appeal challenging that order will therefore be dismissed with costs. Factual and procedural background 9 In 2001 Peter John Dance, a construction manager, was the sole director and secretary of Casaron. He was also the sole director and secretary of Casaron's only shareholder, Spuncod Pty Ltd (Spuncod). He and his wife Elizabeth were shareholders of Spuncod. Spuncod was trustee of the Dance Family Trust No 2 of which Mr Dance is a beneficiary. Spuncod held a fixed and floating charge over the assets of Casaron which had been registered on 11 April 1997. 10 On 23 October 2001 Rondo obtained a judgment in the District Court of Queensland against Casaron in the sum of $168,889.19. Another creditor of Casaron, CSR, was owed over $250,000. Both companies held guarantees from Mr Dance against whom they asserted his personal liability to them for those amounts. 11 On 18 February 2002 Mr Dance, as a director of Spuncod, appointed Mr Starkey as receiver and manager of the assets and undertaking of Casaron. On the same day Moynihan J in the Supreme Court of Queensland made an order winding up Casaron in insolvency under the provisions of the Corporations Act 2001 (Cth). 12 On 3 September 2003 Mr Dance became a bankrupt upon the presentation of his own debtors petition. Rondo had evidently filed a creditors petition against him at that time. Mr Starkey became trustee of his estate by operation of s 153A(3) of the Bankruptcy Act 1966 (Cth) (the Act) having lodged with the Insolvency and Trustee Service Australia (ITSA) his consent to act as trustee. Had he been made bankrupt pursuant to Rondo's creditors petition, the trustee would have been Mr Nick Combis. 13 On 22 October 2003 Rondo, which by then claimed to be owed $201,993.79 by Mr Dance, requested that Mr Starkey convene a meeting of creditors pursuant to s 64A(1)(b) of the Act within 14 days. Acting on Rondo's request Mr Starkey convened a meeting of creditors on 20 November 2003. By a letter to Mr Starkey dated 6 November 2003 Rondo's solicitors gave notice that it would be proposing a resolution at the meeting in the following terms: 'That Graham Lindsay Starkey be removed as the trustee of the estate of Peter John Dance and that Nick Jim Combis be appointed to be the trustee in his place.' Mr Starkey was asked to give notice to the other creditors of the proposed resolution. 14 Mr Dance's initial statement of affairs showed debts owed to unsecured creditors totalling $826,000. This included sums to a maximum of $270,000 and $250,000 said to be owing to Rondo and CSR respectively. Another major debt shown on the statement of affairs was the sum of $362,917 said to be owing to one Isabel Olsen and to have been incurred as a loan. 15 At the meeting held on 20 November 2003 Mr Yam, a solicitor from the law firm James Conomos Lawyers, representing Rondo, took issue with the acceptance, for the purpose of voting, of a number of proofs of debts. He objected to Gill McKerrow & Associates, Accountants, being allowed to vote pointing out that the statement attached to their proof of debt had been rendered to the Dance Family Trust. Mr Gill, who was at the meeting, replied that they were relying upon a guarantee given by Mr and Mrs Dance as outlined in a standard engagement letter. Mr Yam said he had not sighted the engagement letter and thought the matter related to Mrs Olsen. Mr Gill advised that was not the case. Gill McKerrow & Associates were permitted to vote on the basis that they were creditors in the amount of $9,641.94. 16 Mr Yam challenged the voting entitlement of Coorparoo Constructions Pty Ltd which had lodged a proof of debt in the amount of $65,581.11. He noted that a loan agreement relied upon to support the claim mentioned a loan made on 30 September 1990 carrying interest at 10% per annum. On his calculations this would yield a figure of approximately $46,000. Mr Starkey responded that the interest was 10% compound interest. Coorparoo was permitted to vote on the basis that it was a creditor in the claimed amount. 17 Mr Yam challenged the proof of debt of Isabel Olsen who was admitted to vote in the sum of $362,917 based on three loans to Mr Dance. He said there was no evidence of the loans. The statement attached to the proof of debt indicated that the information about the debt to her was provided by the bankrupt. Mr Gill advised that he looked after the affairs of Mrs Olsen. Mr Starkey advised that the information had been supplied by Mrs Olsen's accountant. Mrs Olsen was allowed to vote. 18 Mr Yam also queried a proof of debt lodged by Hawthorn Cuppaidge & Badgery, lawyers, who were admitted to vote in the amount of $103,047.79. He noted that the statement of account was addressed to four parties and asked whether the work was carried out for Mr Dance or for various entities. Mr Starkey said that individual invoices provided were made out to Mr Dance. 19 Mr McGaw, a legal practitioner advising Mr Starkey, was present at the meeting and informed the creditors that Mr Starkey had investigated the various matters for the purpose of the meeting and that the material given had been given on proofs of debt sworn. He had advised Mr Starkey that, on the face of the material, and given the purpose for which it was now being dealt with, it was proper for him to have admitted those debts for voting purposes only. Mr Starkey was advised that his decision to admit the proofs for the purpose of voting at the meeting was proper. Whether they became final proofs was a matter for the trustee to investigate further. 20 Mr Starkey tabled a letter dated 29 October 2003 from James Conomos Lawyers, evidently written by Mr Yam, on behalf of Rondo. In the letter it was asserted that Mr Starkey, as trustee of the estate of Mr Dance, had a duty under s 19 of the Act to: '1. determine whether the estate of [Mr Dance] includes property that can be realised to pay a dividend to creditors; 2. determine whether [Mr Dance]has made a transfer of property that is void against you; 3. take appropriate steps to recover property for the benefit of the estate; 4. take whatever action is practicable to try to ensure that [Mr Dance] discharges all of his duties under the Act; 5. consider whether [Mr Dance] has committed an offence against the Act.' 21 In a notice, which he had given to creditors of Mr Dance on 3 September 2003 and in a covering letter, Mr Starkey had stated that he was of the opinion that Mr Dance would not be liable to pay income contributions to his estate, that it was unlikely that any dividend distribution would be paid to creditors and that there were no assets in the estate. 22 In the letter of 29 October 2003, James Conomos Lawyers stated that there was no indication that the opinion formed by Mr Starkey had been formed after any thorough investigation of books, accounts and records kept by Mr Dance. They also contended that Mr Starkey's role as receiver and manager of Spuncod had an impact on his role as trustee. 23 The solicitors then asserted in the letter that: '1. you [Mr Starkey] have a conflict between interest and duty as the receiver and manager of Spuncod and as the trustee of the estate of [Mr Dance]; 2. you [Mr Starkey] have a conflict between your duty as the receiver and manager of Spuncod and your duty as the trustee of the estate of [Mr Dance]; 3. such a conflict might be perceived by others, not only by our client, but by the other creditors of [Mr Dance], as casting doubt upon your independence.' They noted that Mr Starkey remained the receiver and manager of Casaron as at 22 October 2003, that Mr Dance was, until 15 April 2003, a director of Spuncod and continued as its majority shareholder and that Timothy Dance, the current director of Spuncod, was the son of Mr Dance. The solicitors expressed Rondo's concern that Mr Starkey's connection with Mr Dance and his son, in his capacity as receiver and manager of Spuncod, was likely to make it difficult for him to act with impartiality in the interests of the creditors of Mr Dance. They suggested that Mr Starkey nominate Mr Combis as the new trustee of the estate of Mr Dance. Mr Combis had consented to act as trustee of the estate of Mr Dance if he had become bankrupt under Rondo's creditors petition. 24 Upon tabling the letter at the meeting of creditors, Mr Starkey advised the meeting that he was the receiver and manager of Casaron appointed by Spuncod. After questions and debate the motion for his removal was put and was defeated. Creditors in favour of the motion comprising Rondo and CSR totalled $512,246.36. Those voting against the motion totalled $711,698.84. 25 On 13 January 2004 Rondo filed an application in the Federal Magistrates Court in Brisbane seeking declarations that Mr Starkey had wrongly admitted the proofs of debt of various creditors for the purpose of their entitlement to vote at the meeting of creditors. The proofs of debt challenged in the application were as follows: (i) Carol Nanette Beitz $3,200 (ii) Davtron Pty Ltd $38,007 (iii) Isabel Marion Olsen $362,917 (iv) Elizabeth Ann Dance $9,500 (v) Graham Marshall Elect Pty Ltd$1,551 (vi) Melisande Rita Ridge $20,000 (vii) Coorparoo Construction Pty Ltd $68,581.11 (viii) D'arcy R Marshall $4,000 (ix) Gill McKerrow & Associates $9,641.94 (x) Phillip Alexander George Dance $10,000 (xi) Peter Leslie Challen trading as Hawthorn Cuppaidge & Badgery Lawyers $103,047.79 Particulars under the heading 'Details of Claim' and 'Further Details of Claim' were filed on 6 February and 18 February 2004, the latter particulars setting out the bases upon which it was said that the various named creditors should not have been admitted to vote. Further, and in the alternative, a declaration was sought that the meeting was not conducted in accordance with Div 5 of Pt IV of the Act. A declaration was also sought that the resolution for the removal of Mr Starkey was not defeated at the meeting and further, or in the alternative, an order that Mr Starkey be removed as the trustee of the estate of Mr Dance and that Mr Combis be appointed to be trustee in his place. The application sought an order for indemnity costs. 26 Mr Starkey filed a notice of opposition to the application on the following stated grounds: 1. That the meeting was held in accordance with the relevant legislation and in particular Div 5 Pt IV of the Bankruptcy Act. 2. The respondent is unaware of the grounds upon which the applicant wishes to have the admission of the proofs of debt set aside as the respondent admitted the applicants (sic) proof of debt after careful consideration of the same information. 3. The applicant has failed to particularise any of the circumstances surrounding the admission of any of the proofs of debt by the respondent. 4. That the respondent did not wrongfully admit the proofs of debt referred to in the Applicants (sic) application.' It may be noted that he ceased to be the receiver and manager of Casaron on 27 February 2004. 27 The hearing of the application was conducted on 11 May 2004. The learned magistrate said at the end of the hearing that she hoped to be able to deliver judgment the following Friday. In the event, for reasons which do not appear from the record, 10 months elapsed. Judgment was delivered on 10 March 2005. Orders were made in the following terms: '1. That the respondent be removed as the trustee of the estate of Peter John Dance and that Mr Nick Combis be appointed as trustee in his place. 2. That there be no order as to costs.' On 30 March 2005 Mr Starkey filed a notice of appeal against the judgment. On 29 April 2005 Spender J stayed the removal order of the Federal Magistrates Court pending the hearing of the appeal - Starkey (Trustee) v Rondo Building Services Australia [2005] FCA 551. Mr Starkey has continued in office up to the present time. Grounds of appeal 28 The grounds of appeal as originally formulated in the notice of appeal were as follows: 1. The Learned Magistrate erred in holding that there was a sufficient prior connection between the appellant trustee and the bankrupt, Peter John Dance as to warrant an order that the appellant be removed as the trustee of the Estate of Peter John Dance. 2. The Learned Magistrate erred in finding that an impartial fair minded person would harbour doubt as the appellant's impartiality in the exercise of his duties, obligations and functions as the trustee of the Estate.' (sic) 29 It became apparent from written submissions and the course of argument at the appeal that the power of the learned magistrate to make the removal order was under challenge. Mr Starkey was given leave to amend his notice of appeal after the hearing and file supplementary submissions. Rondo was given leave to file supplementary submissions in reply. Two additional grounds were raised by the amended notice of appeal which was filed on 29 June 2005. They were: '3. The learned magistrate was not empowered to remove the appellant on the ground of perceived lack of impartiality. 4. The learned magistrate erred in failing to take into account the lack of utility of a removal order.' Supplementary submissions were filed by Mr Starkey on 29 June 2005 and by Rondo on 13 July 2005. Grounds of notice of contention 30 Rondo filed a notice of contention on 18 April 2005 seeking to support the magistrate's decision on the following two grounds: '1. The respondent raised the ground that: (a) the appellant is not independent and is not seen to be independent or alternatively the appellant is not in a position where he is seen not to be impartial. (b) the appellant is in a position where he may be seen to be in a position of conflict or potential conflict. (c) the appellant's previous involvement with the Bankrupt, Casaron Pty Ltd, Spuncod Pty Ltd or as Receiver and Manager of Casaron Pty Ltd is one where the appellant could not fairly and impartially carry out his duties as trustee of the Estate of Peter John Dance and would not be in a position where it would be seen that he was acting fairly and impartially in the carrying out his duties as trustees. (sic) (d) the appellant would have an unconscious loyalty to the Bankrupt or alternatively subconsciously the appellant would not likely to act with impartially. (sic) (e) the appellant with, or the relationship of the appellant to, the Bankrupt, is likely to make it difficult for the appellant to act with impartiality in the interests of creditors generally and the appellant should be removed as trustee under s 156A(4) of the Bankruptcy Act 1966 (Cth). 2. The proofs of debt of the creditors referred to below were wrongly admitted at a meeting of creditors held on 20 November 2003 and if the proofs of debt had been rejected, by resolution of the creditors at that meeting the appellant would have been removed as trustee of the Estate of Peter John Dance and Mr Combis would have been appointed trustee in his place. CREDITORS AMOUNT WRONGLY ADMITTED 1. Isabel Olsen $362,917.00 2. Peter Challen trading as Hawthorn Cuppaidge & Badgery $103,047.79 3. Coorparoo Constructions Pty Ltd $65,581.11 4. Gill McKerrow & Associates $9,641.94' Cross-Appeal 31 A cross-appeal was also filed by Rondo on 18 April 2005. In the cross-appeal it was asserted that the learned federal magistrate erred in exercising her discretion to make no order for costs. It was said also that she erred in not making an order that the appellant pay the respondent's costs of the application or, in the alternative, that the respondent's costs of the application be costs in the bankruptcy of Mr Dance. The reasons for judgment in the Federal Magistrates Court 32 The learned magistrate in her reasons for judgment noted Mr Starkey's stance that he did not wish to be seen to take an active part in the application and that no reliance would be placed upon any affidavit which he had filed. He wished to make it clear that he resisted the application only for the following reasons: