Willoughby v Official Trustee in Bankruptcy

The application under s 178 22 A "preliminary point of competence" was taken in relation to the application to review the Trustee's decision to enter the deed. Whilst it is the decision of the Trustee which the application attacks as invalid, the substance of the complaint made by the application is as to the entry into and completion of the deed so as to transfer the appellants' claim against Clayton Utz to Lawcover. 23 The preliminary point is that s 178 does not apply to a sale of property under s 134 which has been completed. The primary judge upheld the preliminary point and dismissed the application insofar as it related to s 178 of the Act upon the ground that the application was incompetent. His Honour did so without prejudice to any entitlement which the appellants might have to bring an action in another court on a properly pleaded case to establish collusion or fraud. 24 The result of the matter being dealt with in this way was that any "merits" which the appellants' claim might have were not the subject of full consideration. There was no cross examination on the affidavits which had been filed. The primary judge did indicate a view on the issue of possible collusion between the Trustee and the purchaser based on such evidence as was before him, but his Honour made it clear that he was not deciding any factual issue in a determinative sense. On the hearing of this appeal, the parties were agreed that if this Full Court were to conclude that the application to set aside the deed under s 178 was competent, then the matter would need to be remitted to the primary judge for further consideration of the facts. 25 Section 178 of the Act provides: "If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the Trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable." 26 Section 178 falls to be considered against the background provided by s 30 of the Act, which gives the Court full power to decide all questions of fact or law in any case of bankruptcy coming within the cognisance of the Court. The Court may make such orders as are necessary for the purposes of carrying out or giving effect to the Act: s 30(2). 27 A sale by a trustee of the property of a bankrupt is an act of the trustee which, if improperly undertaken, could adversely affect the bankrupt. As a matter of ordinary English, such an act is within the purview of s 178. The fact that a third party is also involved does not deny the proposition that the bankrupt is affected by an act of the trustee although, clearly enough, the involvement of a third party, and any rights acquired by that third party through dealing with the trustee, would be relevant in deciding whether it is just and equitable to make any order on the application which would adversely impact upon the position of the third party. 28 It is too narrow a reading of s 178 to treat it as being incapable of applying to a sale which has been carried into effect so that title to property of the bankrupt has passed to a purchaser. The fact that property has passed, simply reinforces the conclusion that the bankrupt is affected by the act of the trustee which produces that result. Nor is there any justification for holding that s 178 is capable of application to an executory contract for the disposition of the property of a bankrupt, but that in some way its potential for operation is spent upon the completion of the contract. It is true that s 178 contains no provision for the giving of notice of the application to an affected third party. For that matter, it contains no provision for giving notice of the application to the Trustee. But these omissions do not give guidance as to the scope of the section, as matters of notification and joinder are often left to be supplied by the judicial method. 29 His Honour's decision on the competency point was founded on the decision of the Full Court of the Supreme Court of Victoria in Re Chirnside, Digby v Union Trustee Co of Australia Ltd [1929] VLR 217. That case was concerned with the effect of s 80 of the Bankruptcy Act 1914 (4 & 5 GEO.V.Cap 59) ("the 1914 Act"). That section read: "If the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the Trustee he may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just." 30 In Re Chirnside, the Full Court decided that a completed sale of property by the trustee is not an "act or decision" of the trustee within the meaning of s 80 of the 1914 Act. That section, in their Honours' view, was not intended to confer a general jurisdiction upon the Court of Bankruptcy to set aside such a sale, and thereby affect rights acquired by purchasers. 31 The decision of the Victorian Full Court in Re Chirnside was considered by Clyne J, in the context of s 148 of the 1924 Act in Re Carson: Ex parte Carson; Sadleir (1960) 19 ABC 108. Section 148 of the 1924 Act was in similar terms to s 80 of the 1914 Act. After referring to Re Chirnside, and to Canadian authority which pointed in a different direction, Clyne J said: "I cannot see why a sale by the Trustee cannot be an act whereby a bankrupt may be aggrieved within the meaning of this section. … I come to the conclusion that where a Trustee sells the bankrupt's property at an inadequate price, and in doing so there has been fraud on his part or collusion between him and the purchaser, or where he has acted in a manner utterly unreasonable and absurd, a bankrupt is entitled to say that he is aggrieved under s 148 by the act or decision of the Trustee." This decision was not drawn to the attention of the primary judge. 32 For the reasons earlier given, we prefer the decision of Clyne J to that of the Victorian Supreme Court in Re Chirnside. The position is a fortiori in the context of s 178. One of the matters relied upon by the Victorian Supreme Court in coming to the conclusion which it did was that s 80 of the 1914 Act provided that the "act or decision" of the trustee may be "confirmed, reversed or modified", which was not an apt expression to encompass setting aside a sale to a third party. Section 178 does not include that expression, but empowers the Court, in perfectly general terms, to make such order in the matter as it thinks just and equitable. In Re Tyndall (1977) 30 FLR 6, 9 Deane J adverted to the significance of this change in expanding the scope of the section. 33 Accordingly, we would set aside the decision of the primary judge in which he dismissed the application under s 178 as incompetent, and remit the matter for further consideration.

Annulment of bankruptcy 34 Section 153A(1) provides that if the Trustee is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled, by force of the subsection, on the date on which the last such payment was made. "Bankrupt's debts" means all the proved debts plus "the costs, charges and administration of the bankruptcy". Section 153B provides, relevantly, that the Court may make an order annulling the bankruptcy if it is satisfied that a sequestration order ought not to have been made. 35 Although the application sought an order from the Court that the bankruptcies of the appellants be annulled no attempt was made to invoke s 153B. The appellants' case was that all of the debts were paid in full, so that s 153A should have applied in their favour at the point in time when they were so paid. 36 The primary judge held that the short answer to the annulment claim was that there is no power in the Court to annul the appellants' bankruptcy as it is only in the case of s 153B that the Court is given any power to make an order annulling the bankruptcy. That is true, and it is also true that the relief sought in the application was simply: "That the bankruptcies of the abovenamed applicants referred to in this application be declared annulled." 37 However, a lack of satisfaction on the part of the Trustee as to the payment of the appellants' debts of the first bankruptcy could itself be the subject of an application to the Court under s 178, which could give appropriate directions to the Trustee, if a case that the Trustee should have been so satisfied is made out, including a direction that the Trustee give the certificate under s 153A(2). Where the Trustee is satisfied that the bankrupt's debts have been paid in full, the annulment has retrospective operation inasmuch as it relates back to the date on which the last payment was made. 38 Ordinarily, the practical implementation of s 153A will not be productive of difficulty or uncertainty because it is the trustee who has charge of the administration of the bankrupt estate, and it is the trustee who attends to the payment of dividends to creditors. But here the creditors' claims were discharged, in a sense outside the bankruptcy, by the making of payments from the proceeds of the Esanda claim. Whilst it is known that on 7 July 1999 Mr Schneider acknowledged that "all funds in this matter have been settled in full", it is not known when Mr Schneider's claim was paid in full, assuming, as the acknowledgment suggests, that this in fact occurred. It will be remembered that Mr Schneider was not a creditor of the third appellant, Michael Willoughby. 39 Section 154(1)(a) protects and preserves dispositions of property made by the trustee before the annulment. But, if the last of the debts of the first bankruptcy was paid in full prior to 14 April 1999, s 154(1)(a) would not protect and preserve the efficacy of the disposition by the Trustee of the chose in action in favour of Lawcover in the event that the Trustee thereafter was satisfied that all the bankrupts' debts had been paid in full. 40 Thus the observation of the primary judge: "It was not until 17 July 1999 that information was forwarded on behalf of the applicants to the Trustee which was arguably capable of supporting a conclusion by him that Mr Schneider's claim was no longer maintained" is, with respect, not to the point. 41 However, that does not assist the appellants if costs charges and expenses of the bankruptcy, including the remuneration and expenses of the Trustee, had not been paid in full as at 14 April 1999. Prima facie there were fees and expenses owing to the trustee as of that date as the $5,810 notified in the letter of 23 October 1996 had not been paid, and there was evidence of a further $2,885.94 for fees and costs owing on behalf of the joint estate, although no communication of this latter liability had been made to the appellants. 42 The prima facie position would be otherwise if the events of 1994 involved a contractual release on the part of the Trustee of any outstanding fees, or an estoppel to that effect. As to this, the primary judge held: "There is no evidence in the terms of the agreement which would support a finding that the Trustee had held out a position in relation to its costs and fees in relation to which it could be estopped. There was no evidence to support any finding of waiver by the Trustee of any right to recovery of such costs and fees. Indeed the applicants' acknowledgment that they would have paid the fees and expenses had they known of them at the time is an acknowledgment of the appropriateness of the debt." 43 On the hearing of this appeal (as was the case before the primary judge) the appellants were unrepresented, and there was little, if any, development of an argument by them to the effect that no fees or expenses were due to the Trustee. In essence, the claim was that the Trustee should not have authorised the release of the surplus funds arising from the Esanda claim in 1994 if there was then any outstanding liability for fees or expenses. 44 The letter of 25 May 1994 is silent on the question of fees. The letter envisaged that a deed would be drawn up "to finalise all matters". There may be room for argument as to what that expression encompassed, but the fact of the matter is that no such deed was drawn up. 45 The letter of 25 May 1994 does not expressly release outstanding fees. Nor can it be said that an implication to that effect is necessarily implied into the agreement reflected in that letter. Whilst a trustee cautious to protect its own interests may have sought to impose a stipulation for payment of its own fees out of the balance of the Esanda claim, there was no established entitlement to have recourse to that fund for payment of those fees, or, for that matter, any other of the liabilities of the appellants. In those circumstances, a failure to assert an entitlement to fees until the letter of 23 October 1996 cannot be regarded as reflecting an agreement not to make such a claim, or as giving rise to an estoppel precluding the later making of it. There is nothing to suggest any detrimental change in position on the part of the appellants upon the faith of and expectation created or encouraged by the Trustee that no such claim would be made. 46 The primary judge did give consideration to the merits of the asserted entitlement on the part of the appellants to an annulment, notwithstanding the deficiencies as to form in their application in that respect. We agree with his Honour's conclusion that the appellants have not made out a case for relief in this respect.

Cross Appeal 47 Lawcover contends that the primary judge made an error of principle in denying to it its costs on the issue of the competency of the application insofar as it relates to s 178 of the Act, because Lawcover took the point that the application was incompetent at an appropriate stage of the proceedings, and was not responsible for what the primary judge found to be erroneous advice given by the Trustee as to entitlement to review under s 178. There would have been force in Lawcover's contentions had we agreed with the decision of the primary judge in this respect. As we do not, the matter simply does not arise.

48 The appeal will be allowed insofar as it relates to the application under s 178 of the Act to review the decision of the Trustee to assign a chose in action to Lawcover but otherwise the appeal will be dismissed. The application will be remitted to the primary judge for further consideration. The cross appeal will be dismissed and there will be no order as to the costs of the appeal or cross appeal. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Associate: Dated: 8 June 2000 The appellants were represented by J F Willoughby. Counsel for the First Respondent: F Carles

Solicitor for the First Respondent: Carles Solicitors

Counsel for the Second Respondent: P C S van Hattem

Solicitor for the Second Respondent: Freehill Hollingdale & Page