FEDERAL COURT OF AUSTRALIA

Young v Thomson (formerly trustee of the property of Young) [2017] FCAFC 140

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The orders made on 19 December 2016 and orders 4, 5, 6, 7, 8, 9 and 10 made on 28 February 2017 be set aside and in lieu thereof it be ordered that:

4.    Subject to order 6 below, upon the applicant by her counsel giving to the Court an undertaking that she will pay the second respondent the sum of $26,656.64 together with interest from the dates on which it made each payment comprised in that sum, the funding agreement dated 30 September 2016 between the first and second respondents be set aside.

5.    The first and second respondents pay the applicant’s costs.

6.    The applicant may set off any entitlement to costs she is owed by the second respondent against her liability under her undertaking recorded in order 4 above.

7.    The first respondent apply to a judge of the Court to pass all of her accounts in respect of her administration of the bankrupt estate of Leslie James Young, including for her remuneration, legal costs and disbursements, notwithstanding any prior approval for the payment of any such sums under s 64ZBA of the Bankruptcy Act 1966 (Cth).

3.    The respondents pay the appellant’s costs.

4.    The first respondent bear the orders for costs against her in the appeal and in the proceedings below personally and not be entitled to (and, to the extent that the estate has already paid them, repay to it) any of her costs of the proceedings below and of the appeal out of the bankrupt’s estate.

5.    Unless before 15 September 2017 any party makes submissions, limited to five pages, as to those orders or their form, orders 1 to 4 above shall take effect on 15 September 2017.

6.    If any party makes a submission pursuant to order 5, any other party may make a submission in reply, limited to five pages, and orders 1 to 4 will not take effect unless the Court otherwise orders.

THE COURT NOTES THAT:

7.    The appellant by her counsel gave to the Court the undertaking referred to in the substituted order 4 made on 28 February 2017 recorded in order 2 above.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

SIOPIS AND RARES JJ:

1    From 2 September 2014 to 15 December 2016, Louise Thomson, the first respondent, was the trustee of the property of the bankrupt, Leslie James Young. The new trustee, Stewart Free, was appointed on 1 February 2017, replacing the Australian Financial Services Authority which had become trustee in Ms Thomson’s place. The bankrupt filed a debtor’s petition on 1 September 2014, shortly after he had transferred, on 7 August 2014, his half share in a very valuable apartment in Pyrmont (the Pyrmont property) to his de facto partner and co-owner, Josephine Smith. The appellant, Joanne Young (Mrs Young), is the bankrupt’s former wife.

2    On 23 April 2013, Mrs Young obtained a judgment for over $2.3 million against the bankrupt in the Supreme Court of New South Wales: Young v State of New South Wales (No 2) [2013] NSWSC 330. Mrs Young is the most substantial creditor of the bankrupt’s estate that is worth over $5.5 million.

3    On 30 September 2016, Ms Thomson entered into a funding agreement with the second respondent, Ironbark Funding Red Pty Ltd. She did so without giving the creditors of the bankrupt’s estate any proper notice of her intention to do so or seeking judicial advice. The broad effect of the funding agreement is that Ironbark agreed to provide Ms Thomson with up to $253,900 to fund certain litigation, general expenses of the trustee and assume liability for adverse costs orders in that litigation, in return for an agreed fee, after reimbursement of its outlays, of 35% of the net proceeds recovered using the funding. Ms Thomson and Ironbark intended that those proceeds would include the estate’s half share in the Pyrmont property that by then was already held on trust for Ms Thomson under an order of the Supreme Court.

4    On 19 December 2016, the primary judge dismissed Mrs Young’s applications, under s 178 of the Bankruptcy Act 1966 (Cth), to set aside Ms Thomson’s decision to enter into the funding agreement and, under s 179, for an order that Ms Thomson be removed as trustee and for an inquiry into her conduct. For the reasons below, her Honour erred and should have set aside the trustee’s entry into the funding agreement.

The legislative scheme

5    Relevantly, the Act provided:

19    Duties etc. of trustee

(1)    The duties of the trustee of the estate of a bankrupt include the following:

….

(b)    determining whether the estate includes property that can be realised to pay a dividend to creditors;

(c)    reporting to creditors within 3 months of the date of the bankruptcy on the likelihood of creditors receiving a dividend before the end of the bankruptcy;

(d)    giving information about the administration of the estate to a creditor who reasonably requests it;

(e)    determining whether the bankrupt has made a transfer of property that is void against the trustee;

(f)    taking appropriate steps to recover property for the benefit of the estate;

…

(j)    administering the estate as efficiently as possible by avoiding unnecessary expense;

(k)    exercising powers and performing functions in a commercially sound way.

…

134    Powers exercisable at discretion of trustee

(1)    Subject to this Act, the trustee may do all or any of the following things:

…

(da)    mortgage or charge any of the property of the bankrupt for the purpose of raising money for the payment of the debts provable in the bankruptcy;

…

(j)    bring, institute or defend any action or other legal proceeding relating to the administration of the estate;

(k)    execute powers of attorney, deeds or other instruments for the purpose of carrying the provisions of this Act into effect;

…

Part VIII – Trustees

Division 4 – Control over trustees

177    Control of creditors over trustees

(1)    Subject to this Act, in the administration of the estate of a bankrupt, the trustee shall have regard to any lawful directions given by resolution of the creditors at a meeting of the creditors or by the committee of inspection.

178    Appeal to Court against trustee’s decision etc.

(1)     If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.

…

179    Control of trustees by the Court

(1)    The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:

(a)    remove the trustee from office; and

(b)    make such order as it thinks proper.

(2)    The Inspector General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs.

(emphasis added)

Background

6    In August 2014, Mrs Young obtained freezing orders in the Supreme Court prohibiting the bankrupt and Ms Smith from dealing in the Pyrmont property.

7    On 4 September 2014, Rothman J, in the Supreme Court, continued those freezing orders, however, they were not noted then, or later, on the certificate of title of the Pyrmont property.

8    On 10 September 2014, Greg Walsh, of Greg Walsh & Co. Solicitors, wrote to Ms Thomson on behalf of Mrs Young. The letter noted that her appointment had taken place on 2 September 2014, the day before the deemed service of Mrs Young’s bankruptcy notice on the bankrupt would have occurred. The letter asked Ms Thomson to inform Mr Walsh of any further information she required relevant to her appointment. Mr Walsh wrote that one of the outstanding issues was the recent purported disposal to Ms Smith by Mr Young of his interest as joint tenant in the Pyrmont property that appeared to have been for no consideration and in circumstances where he continued to reside there with Ms Smith. Mr Walsh noted that the bankrupt owed Mrs Young a judgment debt that was then in excess of $3 million (which presumably included interest) and that his statement of affairs had falsely noted that the debt was only in the amount of the judgment sum.

9    Mr Walsh noted that the bankrupt had received notice of the bankruptcy application three days before the transfer and was fully aware of the judgment debt because he was a party to those proceedings. Mr Walsh inquired whether Ms Thomson could inform him when she would be in a position to indicate whether she would endeavour to recover the bankrupt’s interest in the Pyrmont property for the benefit of his estate. He said that if she was not going to proceed, Mrs Young sought Ms Thomson’s consent for her to make an application pursuant to s 58(3) of the Bankruptcy Act for leave to commence proceedings against the bankrupt and Ms Smith pursuant to s 37A of the Conveyancing Act 1919 (NSW), seeking to have the transfer avoided. He noted that Mrs Young had been unable to have her judgment satisfied for about 18 months and that the proceedings in the Supreme Court had taken five years to complete.

10    On 15 September 2014, Ms Thomson sent an email to Mr Walsh in the following terms:

In your haste to send me a facsimile on the 10 September 2014, you neglected to advise of the further Orders you obtained from Justice Rothman in direct contravention of S.58(3) of the Bankruptcy Act 1966.

I would request you seek not to enforce those orders and immediately apply to have them dismissed.

Please be aware I do not have any expectation, at this stage, to summarily abrogate my obligations as the Trustee appointed to the Bankrupt Estate of Leslie James Young. I have only begun my investigations and your request is presumptive. I certainly have no intentions of granting a third party any rights to continue an action that would appear to be detrimental to the rights of all parties, in particular, the other creditors. It is likely I will seek from you, in due course, such information as to why you consider the course of action under the Conveyancing Act 1919 is preferable to a recovery under s.121 or 122 of the Bankruptcy Act 1966.

As to the issues you raise in your letter, I shall be issuing a Notice under 77A seeking documentation, pleadings etc from you in due course. I have already had cause to issue a Notice under S.77A seeking information and documentation concerning the disposition of the property at Pyrmont, from Ms Smith. (emphasis added)

11    That email revealed much about Ms Thomson’s approach to administering the estate in the following two years. Without investigating what had happened in relation to the Pyrmont property, Ms Thomson requested that Mr Walsh cease to protect a major, or potential, asset of the estate for which his client had already obtained freezing orders, having satisfied a Supreme Court judge that there was sufficient danger to that asset to warrant the making of those orders. It reflected Ms Thomson’s disregard for her obligations to act in circumstances that called for co-operation with a, if not the, major creditor of the estate and to conduct prompt and immediate investigations. The fact that Ms Thomson had asked Ms Smith for information did not mean that it was reasonable, let alone appropriate, for her to seek to have the proceedings in which Mrs Young had obtained the freezing orders dismissed, as opposed to holding the position on behalf of the bankrupt’s estate until Ms Thomson could put herself into a position in which she could make an informed decision about what was, on any view in light of the freezing orders, potentially, if not actually, a valuable asset.

12    Her suggestion that granting Mrs Young “rights” to take the s 37A proceedings that “would appear to be detrimental to the rights of all parties, in particular, the other creditors” did not appear to have any foundation. It was obvious that the bankrupt and Ms Smith had sought to defeat the rights of creditors of the estate by a transfer of his interest shortly before Mrs Young satisfied a Supreme Court judge that a freezing order was appropriate. Mrs Young’s request should not have been dealt with by a trustee in such a hostile way without any investigation into its merits. The freezing orders and any order under s 37A could only have preserved an asset (or potential asset) of the estate and, as Mr Walsh’s letter stated, Mrs Young was not claiming any legal or beneficial interest in the Pyrmont property for herself.

13    Understandably, in light of Ms Thomson’s insouciant email of 15 September 2014, Mrs Young commenced proceedings in the Supreme Court the next day, 16 September 2014, seeking orders to set aside the bankrupt’s transfer to Ms Smith of his half share in the Pyrmont property under s 37A of the Conveyancing Act (the s 37A proceedings). If the orders she sought were made they would revest the bankrupt’s half share in the Pyrmont property in the estate, not in Mrs Young.

14    In her first report to creditors of 29 September 2014, Ms Thomson noted that the bankrupt’s statement of affairs had revealed that he owed Ms Smith $4 million and Mrs Young the judgment sum of $2,316,000.

15    Ms Thomson appears to have done nothing to preserve any potential interest of the bankrupt’s estate in the Pyrmont property until Mrs Young joined her to the s 37A proceedings in early February 2015. On 16 February 2015, Ms Thomson filed a submitting appearance in those proceedings.

16    On 6 March 2015, Ms Thomson and Ms Smith entered into a deed in relation to separate Supreme Court proceedings for damages against the builder of the Pyrmont property, Brookfield Multiplex (the Brookfield proceedings), after Ms Thomson had elected to continue, in the bankrupt’s stead, with Ms Smith as a plaintiff. Ms Smith covenanted to indemnify Ms Thomson against both the costs of prosecuting the Brookfield proceedings and any adverse costs order in them.

17    On 10 April 2015, in the s 37A proceedings, Sackar J made declarations and orders setting aside the bankrupt’s transfer to Ms Smith of his half share in the Pyrmont property and ordering that Ms Thomson be registered as a proprietor in his stead. His Honour declared that the bankrupt had made the void transfer with intent to defraud creditors: Young v Smith [2015] NSWSC 400.

18    However, on 19 June 2015, Sackar J varied those orders by consent, after joining Westpac Banking Corporation, to which Ms Smith, as sole registered proprietor, had granted a mortgage over the Pyrmont property on 2 February 2015 that became registered: Young v Smith (No 2) [2015] NSWSC 1267 at [9], [13]. Ms Thomson explained, in her undated affidavit filed on 31 October 2016 (the October 2016 affidavit), that she had identified the existence of Westpac’s mortgage after Mrs Young’s solicitors had asked her to assist in preparing orders to give effect to his Honour’s reasons of 10 April 2015. On 5 May 2015, Ms Thomson’s solicitors notified Westpac of his Honour’s orders and it applied on 11 May 2015 for them to be varied. Ms Thomson negotiated the consent orders of 19 June 2015 with Ms Smith, Westpac and Mrs Young. Initially, Westpac had sought that the s 37A proceedings should have been dismissed, but Ms Thomson informed Westpac that she would oppose that course.

19    After he became aware of the Westpac mortgage, on 5 May 2015 Mr Walsh wrote to Ms Thomson criticising her for failing to take steps to prevent such a dealing in light of the known conduct of the bankrupt and Ms Smith. The primary judge accepted Ms Thomson’s argument that Mrs Young or Mr Walsh should have taken steps to register the Supreme Court’s freezing orders on the certificate of title of the Pyrmont property. She found that Mr Walsh had conceded in cross-examination that his criticism of Ms Thomson was unfair and he was in a position to have had the orders noted on the certificate of title.

20    It is difficult to understand her Honour’s finding against Mr Walsh, given that Ms Thomson had asked Mr Walsh not to enforce the freezing orders in her email of 15 September 2014 and, subsequently, had not only failed to co-operate with Mrs Young but had forced Mrs Young, in February 2015, to seek leave under s 58(3) of the Bankruptcy Act to bring the s 37A proceedings that Ms Thomson initially contested by expending over $5,600 of the estate’s money on legal fees. Ms Thomson’s obstruction and active failure to take the benefit of the freezing orders to protect the interests of the estate do not appear to have had any justification and would justify, of themselves, an inquiry as to her conduct. As will appear, the interpolation of the mortgage involved Ms Thomson expending not only a large amount of legal fees but also her own time, for which she seeks a significant sum as remuneration and indemnification by the estate.

21    Sackar J’s varied orders provided that Ms Smith held the Pyrmont property subject to Westpac’s registered mortgage and then as to a half share on trust for Ms Thomson. His Honour’s 19 June 2015 orders also permitted Ms Thomson to lodge a caveat to protect the interest of the bankrupt’s estate on the title of the Pyrmont property, and only at that time did she do so. The consent orders noted an agreement between Westpac and Ms Thomson that Westpac would not take any further steps to sell that property until Westpac had realised its security under another mortgage it had taken from Ms Smith over the Lucky Australian Hotel. Ms Smith purchased that hotel for about $5.8 million in February 2015 using both the Pyrmont property and hotel as security for Westpac’s provision of finance.

22    In cross-examination, Ms Thomson agreed with a question that in the six weeks after 4 May 2015, when she became aware of the Westpac mortgage, she incurred about $150,000 in legal fees in the s 37A proceedings but had never disclosed this in a report to creditors. In fact she had incurred about $170,000 in fees by that time. Sackar J had ordered that Ms Smith pay Ms Thomson’s costs. However, Ms Thomson had done nothing to ascertain what of the costs she had incurred were, or were likely to be, recoverable from Ms Smith under the costs order or to have those costs assessed in order to be in a position to recover any such sum. She justified that inaction saying:

… it seemed a bit pointless at the time because … I still need the property. I need to make sure that I get total cooperation from her for the property.

23    Ms Thomson asserted in her October 2016 affidavit that:

my involvement contributed to the making of those [consent] orders and the preservation of my interest in the Pyrmont Property.

She also asserted that, but for her involvement, Westpac might have sold that property:

in circumstances where no surplus would have been available to creditors of the estate.

24    She gave no explanation for her inaction, prior to early May 2015, in taking steps to preserve her interest as trustee of the estate. However, the effect of the agreement between Ms Thomson and Westpac noted in the consent orders was to cause Westpac to marshall by resorting to its other securities over Ms Smith’s assets that it took in February 2015 when she purchased the Lucky Australian Hotel, so as to preserve the net value of Ms Thomson’s share in the Pyrmont property. Had Westpac not agreed to realise its other securities first, before resorting to the Pyrmont property, Ms Thomson had a right to cause Westpac to marshall in that way: cf. Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501 at 510-511 per Dixon CJ, Menzies and Windeyer JJ; Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) at [11-180]. Moreover, she said that the consent orders contemplated that Westpac would sell the Pyrmont property and that, until 27 October 2016:

I considered the most cost effective way for me to realise my interest in the Pyrmont Property would be by allowing the mortgagee to exercise its power of sale.

25    In about early June 2015, Ms Thomson’s solicitor, Hamish McLeod, of Mercantile Legal, approached Douglas Hayter, the director of Ironbark, to seek litigation funding. On 20 August 2015, Mr Hayter emailed Mr McLeod with a proposed funding agreement in respect of claims in which Ms Thomson was involved concerning Ms Smith, Smith & Smith Investments Pty Ltd and or the Pyrmont property. On 4 September 2015, Mr McLeod informed Mr Hayter that Ms Thomson had received an offer of settlement from Ms Smith and was hopeful of reaching resolution. Nothing further occurred in 2015 involving Ironbark.

The 8 September 2015 report to creditors

26    Ms Thomson made seven reports to creditors, namely on 29 September 2014, 8 September 2015, 23 October 2015, 23 November 2015, 15 June 2016, 23 September 2016 and 7 November 2016. The first of those reports was not included in the appeal books.

27    In the 8 September 2015 report, Ms Thomson said that, since her appointment, she had “undertaken an investigation into the Bankrupt’s examinable affairs”. She said that she had “sought initial information from certain creditors in the Estate most [sic] of the work being undertaken in the various Court rooms”. She reported that she had requested information from the bankrupt about three companies in which he held interests of 25%, 50% and 100%, but that she had not been able to estimate any market values for those holdings. She noted that the bankrupt also held a 50% interest, that she valued at nil, in Smith & Young Pty Ltd, the corporate trustee of the partnership between the bankrupt’s family trust and Ms Smith’s family trust. She also reported that Computershare had advised her that the bankrupt might hold shares in AMP Ltd and Woolworths Ltd and that her investigations into those shareholdings were continuing.

28    Ms Thomson reported that the bankrupt claimed that Jetobee Pty Ltd (In Liq), in which he owned all the shares, owed him over $6.6 million, but that she had not seen evidence of that debt. She said that since he had made his statement of affairs, she had not sighted any evidence to contradict his assertion there that he did not own any other items of value.

29    Ms Thomson stated that the bankrupt had disclosed Ms Smith as a secured creditor for a debt of $4 million secured over the Pyrmont property. Extraordinarily, Ms Thomson reported that (as at September 2015) her solicitors were still seeking the orders made by Sackar J under s 37A of the Conveyancing Act and that the Commonwealth Bank of Australia (not Westpac) had obtained a mortgage over the Pyrmont property from Ms Smith (who then held the title in her sole name) for $5.8 million as security for the purchase of an hotel that was completed in February 2015. However, Ms Thomson did not report that, as she then knew, Sackar J had found, in his 10 April 2015 reasons, that Ms Smith’s claim for $4 million as a secured creditor was not valid, that she was not a creditor, let alone a secured creditor, of Mr Young and that this claim had been made with the fraudulent intention of defrauding the bankrupt’s creditors, and Mrs Young in particular: Young [2015] NSWSC 400 at [25], [187]-[190] esp at [190] .

30    She reported that after the Supreme Court had made the consent orders, negotiations had occurred for refinance and that she considered that the best outcome was the sale of the estate’s share in the Pyrmont property to Ms Smith. She said that the value of that property was likely to be in excess of $5 million, although there was no formal valuation, and that if the repair claim in the Brookfield proceedings succeeded “it could be as high as $7,000,000”. Thus, other than Westpac’s claim over the Pyrmont property, the estate had no secured creditors.

31    Critically, Ms Thomson identified five unsecured creditors totalling $2,356,400, of which she said that Mrs Young’s claim comprised $2,316,000 or about 98%. Ms Smith had claimed $164,000, in respect of which Ms Thomson noted, “Since the Court case, this may change”.

32    Ms Thomson reported that she had realised a total of about $6,200 for the estate and that she had a preference claim against the Australian Taxation Office for about $96,000 (the ATO preference proceedings). She noted that Ms Smith had given her an indemnity against any costs and costs orders in respect of participating, in lieu of the bankrupt, as a plaintiff in the Brookfield proceedings and that she had sent Ms Smith her legal fees for payment.

33    In the 8 September 2015 report, Ms Thomson also called for creditors to submit a proof of debt. She also set out a table identifying the actual and estimated increases in her remuneration since her first report and sought approval to expend a further $78,000 plus GST and disbursements. Previously, the creditors had approved $45,000 plus GST and disbursements for Ms Thomson’s remuneration. In the 10 months to 30 June 2015, she reported that she had spent 196.9 hours (or about five weeks of 40 hours) and earned $74,881 in remuneration on the administration of the estate, including 58.6 hours on litigation. Ms Thomson reported that she had spent $2,325 on counsels’ fees and, for the ATO preference proceedings, $5,464 on solicitor’s fees. She said, disturbingly, given the substantial assets and sums involved:

At the beginning, I attempted to stay away from the ongoing litigation, as I wished to preserve my rights to take any actions that I with proper advice should undertake. However, I was drawn, regardless of my considerations, in these actions. (emphasis added)

34    On 10 September 2015, Mr Walsh wrote to Ms Thomson about the 8 September 2015 report. He expressed concerns that she had failed to disclose communications with the bankrupt’s (scil: Ms Smith’s) lawyer concerning refinancing of the Pyrmont property and that Ms Thomson was treating Ms Smith as a secured creditor. He complained of her minimal disclosure as to the Brookfield proceedings and expressed a lack of confidence in Ms Thomson’s approach to her duties (J40).

35    Mr McLeod replied to Mr Walsh on 17 September 2015 asserting that Ms Thomson was mindful of her obligations, including her fiduciary duties as trustee. He defended Ms Thomson’s approach to disclosure of material information to creditors by observing that her obligation did “not extend to providing copies of each and every communication”. Mr McLeod said that there was “little reason to think that anything less than payment in full” of the estate’s interest, including Ms Thomson’s costs, would be acceptable. He argued that Ms Thomson had not adopted the truth of the bankrupt’s assertion that Ms Smith was a secured creditor for $4 million and asked Mrs Young to express her concerns.

36    Mrs Young’s concern was obvious. As noted above, the 8 September 2015 report failed to note, as a trustee properly performing her duties would have noted, that Sackar J had found that Ms Smith’s claim, which the bankrupt had supported by giving evidence that his Honour also rejected, had no basis and was an attempt to defraud creditors.

The 23 November 2015 report and following events

37    In her report of 23 November 2015, Ms Thomson advised the creditors that she had not received any information about any shareholdings that the bankrupt may have had in AMP Ltd, Insurance Australia Group Ltd and Woolworths Ltd. She noted that she expected that the ATO preference proceedings to recover $96,595 would settle shortly.

38    Ms Thomson reported that a “formal valuation of the [Pyrmont] property was undertaken resulting in a value of $4,000,000 on an ‘as is’ basis”. She added that a “secondary valuation”, based on the state of the Pyrmont property after repairs claimed in the Brookfield proceedings, arrived at a value of $4,800,000. She said that the then current equity (after repayment of Westpac’s mortgage) may be as high as $3.8 million, which would increase to $4.6 million if the Brookfield proceedings were successful. (The primary judge noted that Hymans, Valuers and Auctioneers had made a valuation on 15 September 2015 that was in evidence before her.) Ms Thomson noted that, as she had advised in her report of 23 October 2015 (that was not in evidence), the “current agreed position for my share of the Property between Ms Smith and myself still remains … the full $2,000,000 for the Property and a further $250,000 on any settlement of the Brookfield Matter”, and that each creditor had agreed to her accepting $2 million as her 50% share of the Pyrmont property. It is not clear how Ms Thomson asserted that any agreement then existed to settle the Brookfield proceedings, since there was never any such agreement.

39    Ms Thomson noted that while the creditors had voted, under s 64ZBA of the Act, to cap her fees at $45,000 plus GST and disbursements, she had incurred remuneration to 31 October 2015 of $131,070 plus GST and disbursements and she sought approval for a further $212,000 plus GST and disbursements in remuneration. She claimed that this increase had occurred as a result of litigation, namely, an application under s 60 for Mrs Young to continue the s 37A proceedings, to become a joint plaintiff in the Brookfield proceedings (to both of which, on the evidence before the Full Court, she had no apparent basis to do anything other than consent or elect to prosecute herself), followed by the issues in the s 37A proceedings in relation to Westpac’s mortgage and finally the ATO preference proceedings. She reported that she had spent 325.7 hours for the remuneration of $131,070 claimed, including 59.3 hours dealing with the real property valuations, caveats and the like and 102.8 hours in relation to litigation.

40    On 1 March 2016, Ms Thomson informed Mr Walsh that Ms Smith had filed an application against the bankrupt’s estate in the Family Court (the Family Court proceedings). Ms Thomson sought information from Mrs Young under s 77A of the Bankruptcy Act to assist her and the liquidator of Jetobee in dealing with the Family Court proceedings.

41    On 7 April 2016, Mr Walsh wrote to Mr McLeod informing him that Mrs Young had complied with her obligations under s 77A. Mr Walsh asked about the likely return to Westpac on the sale by the receivers of the Lucky Australian Hotel and whether that would result in the mortgage over the Pyrmont property securing any remaining amount. He asked for an indication of what timeline Ms Thomson envisaged for the realisation of the assets of the estate “in circumstances where she [Mrs Young] is overwhelmingly the principal creditor of [the bankrupt]”.

42    On 22 April 2016, Ms Thomson began proceedings in the Supreme Court seeking to wind up Smith & Young Pty Ltd on the just and equitable ground (the winding up proceedings).

The 15 June 2016 report

43    On 15 June 2016, Ms Thomson gave a notice to creditors in which she encouraged the recipients to seek legal advice as to its contents. She stated that in the course of the administration she had been involved in 15 different legal matters and had incurred legal fees of $312,068 “to protect and realise assets which the Estate holds an interest in”. She said that the total claims were worth between $2.5 and 2.8 million and that those were tied up in six of the 15 legal matters that were then ongoing. Ms Thomson then stated:

Several of the ongoing legal matters are interrelated and are co-dependent on each other, thus making it difficult to summarise for creditors. In saying that, it is crucial for the Estate for each of these matters to continue in order to return an enhanced dividend to creditors. I do not intend to publish details of those matters in this notice to protect creditor’s interests though I encourage you to seek further details from me if you require.

It is my view that for the interest of creditors I seek to obtain funding to pursue these legal matters on behalf of creditors. It is also appropriate that I seek indemnities.

Please notify me in writing from fourteen (14) days from the date of this notice if you are interested in funding matters on behalf of creditors. If I do not receive an expression of interest within that time, I intend to seek commercial funding. (emphasis added)

44    The notice of 15 June 2016 was bereft of any meaningful information. It did not refer to any of the specific matters for which Ms Thomson required funding or nominate how much money she needed or what the proceedings involved and the asset or amount that they sought to recover. Additionally, it did not disclose the amount of legal costs that Ms Thomson had incurred to date in each or any of the matters. In particular, Ms Thomson had never given creditors any information about any proceedings that she had taken, or contemplated, to wind up Smith & Young Pty Ltd. No creditor responded to Ms Thomson’s notice of 15 June 2016.

The 29 June 2016 application for funding

45    On 29 June 2016, Mercantile Legal wrote to Ironbark seeking litigation funding for Ms Thomson (the 29 June 2016 letter). The 15 different legal matters to which Ms Thomson referred in her 15 June 2016 report appear to be the following that were included as an attachment to that letter. Four matters (items 3, 5, 6 and 15), which the letter described as “Bankruptcy Proceedings”, “Contempt Proceedings”, “Costs Assessment Matter” and “Young Proof of Debt Matter”, had no legal fees noted. The 11 remaining matters in that attachment were:

46    Item 9, the “funding matter” appears to be the costs of preparing to enter into a litigation funding agreement. Item 14, the “winding up proceedings” appears to be a reference to Ms Thomson’s application to wind up Smith & Young Pty Ltd.

47    In the 29 June 2016 letter, Mercantile Legal described each of the 15 matters. Relevantly, the letter noted that the bankruptcy proceedings involved Mrs Young having served a bankruptcy notice on Ms Smith and stated that “Ms Thomson is not a party to these proceedings”. The letter said that the only relevance of that matter was that if Ms Smith were made bankrupt, that may affect her position in litigation with Ms Thomson, but she had not incurred any fees in respect of it.

48    The letter noted that Ms Thomson was not a party to, and had little active involvement in, the contempt proceedings that Mrs Young had brought in the Supreme Court against Ms Smith. It observed that Mercantile Legal had communicated with Mrs Young’s solicitors from time to time “to monitor … progress” in the contempt proceedings. The letter noted that the costs assessment matter related to Sackar J’s order that Ms Smith pay Ms Thomson’s costs of the s 37A proceedings and stated that Mercantile Legal was preparing an application for costs assessment. The letter described the Young proof of debt matter as follows:

Background

58.    Ms Young has lodged a proof of debt with Ms Thomson in relation to the bankrupt estate of Mr Young. That form is supported by a judgment entered in Ms Young’s favour. Accordingly it is unlikely that this debt be resisted by the estate.

Further Work

59.    It is unlikely that further work in this matter will be required. (emphasis added)

49    Ms Thomson gave the following evidence about Mrs Young’s subsequent proof dated 10 November 2016 for $3,016,264.39 (that was based on the attached Supreme Court order for the judgment debt and included further sums, no doubt interest and possibly costs):

… as at 21 November 2016, to the best of your knowledge, on the existing evidence at that point, Mrs Young was a principal creditor?---Yes.

And that has, as it were – her status as a principal creditor – been the case, to your knowledge, almost since inception of the bankruptcy; correct?---Which part are you asking?

The fact that Mrs Young is the principal creditor of the bankrupt estate of Mr Young?---No. Not from the inception. No.

No one else has put in, via a proof of debt, a substantial claim against the bankrupt estate; correct?---That’s correct.

You have no doubt that Mrs Young’s proof of debt that’s been put in is correctly valued?---I have not put my mind to it.

Well, you saw that a figure was calculated in the proof of debt on behalf of Mrs Young? ---Yes.

And you were told in that proof of debt that it was by reference to a judgment that she’d obtained?---Yes.

You’re aware of that judgment?---I’ve seen the attachment. Yes.

Such that there’s no reason for you to doubt what’s claimed by Mrs Young is accurate?---Not at this stage, no, but as I said, I haven’t put my mind to it. (emphasis added)

50    While there may have been an issue as to the amount included in Mrs Young’s claim for interest and costs, she founded her underlying claim on a judgment debt owed by the bankrupt determined after a contested final hearing in 2013. That unsatisfied judgment debt was the basis on which Mrs Young had established, before Sackar J in the s 37A proceedings, that the bankrupt and Ms Smith had acted to defraud creditors, and principally, Mrs Young. Ms Smith had not challenged Sackar J’s decision. In those circumstances, it is difficult to understand what the “Young proof of debt” matter was that Ms Thomson asserted had been one of 15 “legal” matters. The only issue, since she had never put her mind to the question, was the mathematical calculation of the sum of the judgment that she as a trustee and accountant, and not lawyers, could calculate without difficulty.

51    The 29 June 2016 letter explained that, importantly, items 1, 8, and 13 all involved the s 37A proceedings. It recorded that Ms Thomson had spent almost $170,000 on the s 37A proceedings in which Mrs Young had proved that the bankrupt’s transfer to Ms Smith was void. That expenditure only occurred after Ms Thomson became involved once Westpac’s mortgage had come to light. By then, it would have been obvious that the consent orders that Sackar J ultimately made on 19 June 2015 were necessary and appropriate. Westpac had dealt on the faith of the certificate of title, so its mortgage had priority over the trustee’s interest, that Ms Thomson had done nothing to protect from the moment that she became trustee or became aware of the freezing orders and s 37A proceedings that Mrs Young had begun. The 29 June 2016 letter also explained that Mercantile Legal had given Ms Thomson advice about the possibility of her making a claim against Westpac and offers that Ms Smith had made to settle by purchasing the estate’s interest in the Pyrmont property.

52    Ms Thomson made no report to creditors, and sought no permission, to incur such a large sum of money for the s 37A proceedings. It is not apparent why, first, Ms Thomson chose to describe these as three separate matters in her 15 June 2016 report or, secondly, she said, without a basis, that legal fees had been incurred in the four other matters in which she had not incurred fees, namely the bankruptcy proceedings, the contempt proceedings, costs assessment matter or the Young proof of debt matter.

53    The 29 June 2016 letter explained that item 12 involved proceedings that Ms Smith had brought against Westpac and the receivers it had appointed under its charge over the Lucky Australian Hotel. Mercantile Legal stated that they had appeared in those proceedings to protect Ms Thomson’s interests and that, in the event, those proceedings were dismissed.

54    The 29 June 2016 letter revealed that the ATO preference proceedings had resulted in Ms Thomson recovering $75,000 and that no further work in it would be necessary. Significantly, the letter described the Family Court proceedings as being “at their infancy” and that, if they proceeded to trial, the Family Court would be required to determine the respective interests of the bankrupt’s estate and Ms Smith in a pool of alleged assets of their relationship with a total indicative value of over $11 million. Ms Thomson did not reveal to the creditors at any time, and, in particular, in her 15 June 2016 report, that the bankrupt’s estate had an interest in any substantial assets beyond the Pyrmont property and Brookfield proceedings for which she had given a maximum value (before adjusting for the value of the mortgage debt and any interest of Ms Smith) of $4.8 million. The letter stated:

17.    Assets which have been described from time to time as being those of the relationship or as potentially being assets of the relationship include the following. Various accounts have been given of the value of those assets. The amounts which follow are indicative only.

18.    Further amounts that may be recoverable from Ms Smith, or in connection with proceedings Ms Smith is a party to, are as follows.

19.    Ms Smith has previously raised the following additional claims though these may have resolved in the various Jetobee proceedings. In relation to the claim described at 19.2 part [sic] are all of this may be the claim described in paragraph 17.14. Further enquiries will need to be made in that respect.

20.    Preservation orders are presently being advanced and interim distribution orders may be available prior to final hearing.

(items 17.2 and 17.11 described the Pyrmont property and the Brookfield proceedings)

55    The Brookfield proceedings had been listed for a 10 day hearing in February 2017 but the parties were not in a position to inform the Full Court, on the hearing of the appeal, as to what had occurred in relation to that matter.

56    The letter gave estimates of Ms Thomson’s future costs in six matters and sought future funding of $423,900 that she would require (using the matter numbers in the table in [45] above).

57    On 10 and 17 August 2016 respectively, Mercantile Legal wrote letters similar to the 29 June 2016 letter to two other funders, but neither of those letters bore fruit. Ms Thomson was in hospital for most of August and up to 23 September 2016 when she left.

58    Mercantile Legal and Ironbark, through Mr Hayter, negotiated the terms of a funding agreement during September 2016. By the time Ms Thomson left hospital on or before 23 September 2016, the draft of the funding agreement had reached a fairly advanced stage. The draft then contained the following features that remained in the final version, including:

    the total funding that would be provided was limited to $253,900;

    Ironbark was entitled to an agreed proportion of 35% of any amount recovered by Ms Thomson for the estate after repayment of its expenditure;

    Ironbark would meet any adverse costs order against Ms Thomson and would seek to obtain insurance to meet that liability, naming Ms Thomson, if possible, as an insured;

    Ms Thomson had the benefit of a cooling off period of seven days in which she could withdraw from the funding agreement.

The 23 September 2016 report

59    On Friday, 23 September 2016, Ms Thomson sent a sixth report to creditors that referred to her invitation to creditors to express interest in funding matters within 14 days of her 15 June 2016 report (see [43] above). The 23 September 2016 report continued:

I have not received any response to my Report [of 15 June 2016].

I now advise-

1.    That I have approached a number of commercial funders and arrived at terms with one of those that I consider would accommodate ongoing expenses to pursue the various litigations on behalf of creditors; and

2.    I intend entering into an agreement with one of those funders on terms which include the following if [sic] do not receive any objections from creditors within the next 5 days.

a.    That funding is available in the amount of $273,900.00 [sic]; and

b.    the proportion of recoveries entitled to the funder would be 35% plus GST; and

c.    I will also have adverse costs insurance protection.

I must stress that this Report is strictly confidential and would ask you only make any enquiries to myself or … of my office only.

Should you have questions regarding the information contained in this notice please contact me by telephone on … or [email address]. (emphasis added)

60    As the primary judge noted:

    the cap on the funding was $253,900, not $273,900;

    it was not accurate for Ms Thomson to suggest to the creditors that the terms of the proposed funding agreement to which she had referred were in final form. That was because, as at 23 September 2016, she had only seen a draft agreement prepared on or about 22 September 2016;

    the period for response was five days, including the weekend of 24 and 25 September 2016.

61    Ms Thomson did not explain to her Honour why she had given such a short period for response. Moreover, Ms Thomson sent the 23 September 2016 report to creditors by post despite being aware of how to contact Mrs Young and her lawyers by email. Thus, the prospect that they would have any meaningful opportunity to consider their position, on the scanty and inaccurate information that Ms Thomson had provided, was remote. It can safely be inferred that Ms Thomson’s intention was as the primary judge found:

Ms Thomson dismissed the need to seek creditors’ approval of the funding agreement on the basis that no creditor had responded to her fifth report dated 15 June 2016. She did not explain why she did not approach the Court for advice save to accept that she regarded herself as having “carte blanche” to enter into a funding agreement because of the failure of creditors to respond to her fifth and sixth reports [of 15 June 2016 and 23 September 2016] within the timeframes specified in those reports. (bold emphasis added)

62    Her Honour rejected Ms Thomson’s evidence that, had she received an objection, she would have ceased all activity, based on her subsequent conduct after Mr Walsh objected on behalf of Mrs Young. Moreover, the funding agreement as executed and, we infer, in its form as drafted at 23 September 2016, capped the funding that Ironbark had to provide in respect of the six estimates that Ms Thomson had given (set out at [56] above) specifically as follows:

63    The funding agreement gave Ironbark an unfettered discretion to allocate the agreed funding for each item that it had agreed to fund, “in amounts it determines appropriate for” the relevant proceeding and, to the extent that an allocated amount was not exhausted, it could be reallocated to fund another of those funded items, but so as not to exceed the total agreed funding of $253,900 (cl 4.6). Thus, Ironbark had agreed to fund no more than 80% of Ms Thomson’s estimate for the Brookfield proceedings and only about 73% of her estimate for the Family Court proceedings. And, it was not funding any examinations or the winding up proceedings.

64    Moreover, undisclosed to the creditors, Ms Thomson had commenced the winding up proceedings against Smith & Young Pty Ltd, incurred costs of over $70,000 to her lawyers up to 29 June 2016 (see item 14 at [45] above) and estimated that then she would incur nearly $20,000 more in pursuing those proceedings.

65    And as at 23 September 2016, the final hearing of the winding up proceedings, fixed for 11 October 2016, was imminent. The primary judge found that this factor had a bearing on Ms Thomson’s haste to enter into the funding agreement. Her Honour accepted Mr Hayter’s evidence that he would have allowed the $50,000 funding for general attendances to be used to pay for Ms Thomson’s costs of conducting the winding up proceedings. Those proceedings were a defined term in the funding agreement. Correspondingly, Ironbark would be liable to indemnify Ms Thomson for any adverse costs order in the winding up proceedings if (as occurred) those proceedings were dismissed with costs.

The events after 23 September 2016

66    On 29 September 2016, Mr Walsh received Ms Thomson’s report dated 23 September 2016 in the post: i.e. one day after the five days Ms Thomson had allowed for objections.

67    On 30 September 2016, at 11.00am, Ms Thomson and Mr Hayter, on behalf of Ironbark, executed the funding agreement and they, with Mr McLeod on behalf of his firm, executed a retainer agreement, in schedule 2 to the funding agreement, for Mercantile Legal to provide legal services in respect of the legal proceedings the subject of the funding agreement.

68    Also on 30 September 2016, Mr Walsh emailed Ms Thomson and asked her to outline the scope of the intended litigation for which she sought funding. He enquired whether the 35% fee would apply to the proceeds of sale of the Pyrmont property or to other proceeds. Mr Walsh noted that Mr McLeod had told him on several occasions that there was a realistic prospect that the Brookfield proceedings would settle and that may realise about $200,000 for benefit of the estate with the balance going to Ms Smith. He said that it was difficult, in those circumstances, to understand why it was necessary for Ms Thomson to seek funding.

69    Ms Thomson said that she did not receive this email until after she had executed the funding agreement and that in any event it was not an objection and was out of time. Mr McLeod replied to Mr Walsh’s email only on 6 October 2016, marking his emailed letter “urgent”. Mr McLeod referred to Ms Thomson’s reports of 15 June 2016 and 23 September 2016 and identified five matters as subject to the funding agreement, namely the Brookfield proceedings, the Family Court proceedings, the winding up proceedings, the cost assessments matter and General Attendances. The letter gave perfunctory information about those, although, it revealed for the first time the existence of winding up proceedings. For example, under the heading “General Attendances”, it stated:

Our client is funded in relation to attendances relating to advice.

70    Mr McLeod also noted that, while the Brookfield proceedings might settle, any such event was neither imminent nor certain. He stated that the funding agreement had been entered into (without disclosing when) and that Ms Thomson had the right to terminate it pursuant to cooling off provisions that had to be exercised by close of business the following day, 7 October 2016. He added that under the funding agreement, the unnamed funder “is entitled to recover 35% plus GST which would include recoveries from the Pyrmont Property”. He required a response by noon on 7 October 2016 and offered to “discuss this with you or [Mrs Young’s counsel] if you prefer”.

71    Later on 6 October 2016, Mr Walsh replied notifying Ms Thomson’s lawyers that Mrs Young objected to the funding agreement because of the lack of detail that Ms Thomson had provided about her legal fees to that time and those anticipated for the future and the value that Ms Thomson ascribed to the current and any future litigation. Moreover, he noted that the funder would receive 35% of the estate’s interest in the proceeds of sale of the Pyrmont property and other assets.

72    On 7 October 2016, Mr Walsh wrote again to Ms Thomson’s lawyers giving notice that the creation of a right of the funder to receive 35% of the sale price of an asset already vested in Ms Thomson, as trustee, would be a breach of s 19(1)(j) of the Bankruptcy Act and that Mrs Young would seek relief under s 178 in proceedings that she would commence urgently if Ms Thomson proceeded with the agreement. He noted that Ms Thomson still had not identified the funder.

The proceedings before the primary judge

73    Later on 7 October 2016, Mrs Young began proceedings for urgent relief before the commencement of a proceeding under r 7.01 of the Federal Court Rules 2011 and the matter came before the primary judge. Ms Thomson and Ironbark provided a copy of the funding agreement to Mrs Young and agreed to extend the cooling off period until 11 October 2016. After hearings on 10 and 11 October 2016, her Honour ordered that Ms Thomson be restrained from incurring costs under the funding agreement until 2 December 2016, other than in the winding up and Family Court proceedings.

74    On 11 October 2016, Brereton J dismissed the winding up proceedings and ordered Ms Thomson to pay costs.

75    On 17 October 2016, Westpac served Ms Smith with a notice under s 57(2)(b) of the Real Property Act 1900 (NSW). That notice identified, as a default under the mortgage, Ms Smith’s failure to comply with Westpac’s demand on her of 30 September 2016 to pay it $804,648.42 by 12 October 2016. The notice required her to pay that sum within one month after service. If she failed to do so, s 57 of the Real Property Act authorised Westpac to exercise its power to take possession of the Pyrmont property as mortgagee.

76    Mrs Young commenced proceedings against Ms Thomson for final relief on 19 October 2016 and subsequently she joined Ironbark.

77    On 27 October 2016, Ms Smith made a conditional offer to purchase Ms Thomson’s interest in the Pyrmont property for $2 million and for her to assign her interest to Ms Smith in the Brookfield proceedings for a further $250,000, subject to finance and to Ms Thomson, effectively, ceasing all recovery actions, including the Family Court proceedings.

78    Ms Smith’s offer was open for acceptance until 1 November 2016 by reason that Westpac would soon be able to take possession of the Pyrmont property.

79    In her October 2016 affidavit, Ms Thomson asserted her belief that Ms Smith had acted to delay Westpac selling the Pyrmont property by applying to the Financial Ombudsman Service.

The 7 November 2016 report

80    On 7 November 2016, Ms Thomson issued another report to creditors giving notice of a meeting of creditors on 21 November 2016 that Mrs Young had called under s 181 to replace Ms Thomson with Mr Free as trustee. In this report Ms Thomson revealed that she had not yet received shareholder identification numbers so as to enable her to realise the bankrupt’s interest in 352 shares in AMP Ltd and 1,400 shares in NIB Ltd that she estimated were worth $6,000.00. She said that the bankrupt’s shares in Smith & Young Pty Ltd had been transferred but that because of Ms Smith’s claims in the Family Court proceedings nothing could be done until those proceedings were resolved. Ms Thomson gave no explanation of when or how that transfer had occurred or what the shares were worth in which the estate may have had an interest. She also reported that she had begun the winding up proceedings following a sale of a property by Smith & Young Pty Ltd as trustee of the discretionary trusts of each of the bankrupt and Ms Smith. Ms Thomson said that she had also sought an order that “the shares held by the bankrupt … [be] transferred to me”. She explained that there was a link between the winding up proceedings involving Smith & Young Pty Ltd and the Family Court proceedings that she could not discuss because of the confidential nature of proceedings under s 121 of the Family Law Act 1975 (Cth).

81    Ms Thomson revealed that she had settled the ATO preference proceedings for $75,000 on 12 January 2016. She disclosed that on 26 February 2016 she had paid, into the estate’s account, the balance of $51,750, after meeting her legal fees. She asserted that she had conducted investigations that had “reveal[ed]” the freezing orders that the Supreme Court had made in 2014, saying, without disclosing her attitude expressed in the email of 10 September 2014, that Mrs Young “or her solicitors never registered the order over the Pyrmont Property title protecting her position” and that Ms Smith had mortgaged the property to Westpac in breach of the freezing orders. She noted that she and Ms Smith had not resolved their disputes.

82    Ms Thomson reported that, originally, she and Ms Smith had agreed that Ms Smith’s solicitor would conduct the Brookfield proceedings for both of them but that:

without consultation or notice to me, [Ms] Smith suddenly dismissed the team of solicitors and barrister, and I was forced to engage my own solicitor and barrister.

However, she did not add that that change of solicitor had occurred in 2015 and Ms Smith’s new lawyers had continued to provide Ms Thomson with information.

83    In her 7 November 2016 report, Ms Thomson also revealed that she had “executed an agreement with a litigation funder” and that Ms Smith had made an offer on 27 October 2016 that she had not accepted. She noted that the creditors had approved a total $256,700 in her remuneration and that she had been paid $67,235.

84    On 15 November 2016, Ms Thomson applied to her Honour for advice under ss 30 and 134(4) of the Bankruptcy Act. On 21 November 2016, the primary judge gave Ms Thomson judicial advice that she would be justified in adjourning the creditors’ meeting later that day until 14 days after the final hearing set down for 2 December 2016. Ms Thomson adjourned that meeting and, as noted above, ceased to be trustee on 15 December 2016.

85    On 19 December 2016, her Honour dismissed Mrs Young’s application and reserved her reasons. The primary judge published those reasons on 17 January 2017. On 28 February 2017, her Honour made costs orders that, among others, required Mrs Young to pay most of Ms Thomson’s and Ironbark’s costs in respect of the litigation: Young v Thomson (Trustee), in the matter of Young (Bankrupt) (No 4) [2017] FCA 175.

The primary judge’s reasons

86    Her Honour considered the principles that applied to a review of a trustee’s decision under s 178 as discussed in Frost v Sheahan (Trustee) [2009] FCAFC 20 at [8]; Moore v Macks [2007] FCA 10 at [28] and Hacker v Weston [2015] FCA 363 at [10]-[13], and to an order for an inquiry into a trustee’s conduct under s 179 as discussed in Patel v Ruhe [2016] FCA 520 at [33]; Moore [2007] FCA 10 at [29]-[30] and Macchia v Nilant (2001) 110 FCR 101 at 120-121 [49]-[50].

87    The primary judge noted that under s 178, an applicant had to establish that the trustee’s impugned conduct was incorrect or, based on material before the Court, other conduct was preferable and such that justice and equity required the Court to intervene. Her Honour said that the Court should not be too ready to intervene, even if it might have acted differently. Her Honour said that where a trustee and those who contract with him or her act in a substantial matter affecting the interests of creditors, without either their consent or against the wishes of the majority and without judicial advice, they were at risk that the Court will intervene.

88    The primary judge acknowledged that Ms Thomson’s process of consultation with creditors was undoubtedly inadequate. Her Honour found that Ms Thomson had not consulted with creditors in any meaningful way in September and October 2016 and that her conduct was open to several criticisms including:

    the incomplete, and in some respects, inaccurate, nature of the 23 September 2016 report;

    the unexplained reason for allowing creditors only five days (including a weekend) to raise objections or seek information;

    Ms Thomson’s lack of an adequate process to bring any objection promptly to her attention, her reliance on her lawyers and the little attention or weight she gave to Mrs Young’s objections.

89    However, her Honour accepted Ms Thomson’s evidence that she thought that entering into the funding agreement was in the best interests of the estate, albeit, as the primary judge also found, doing so was in Ms Thomson’s interests too. She found that Ms Thomson’s interest would not be served if Ms Smith succeeded in having her property interests adjusted in the Family Court proceedings so as adversely to affect Ms Thomson’s capacity to recover her legal costs and remuneration.

90    The primary judge balanced those matters against Ms Thomson’s position, when entering into the funding agreement, as a party to each of the Family Court, Brookfield and winding up proceedings. Her Honour said that while a strike out application had yet to be heard in the Family Court proceedings, there was a risk that, if undefended, Ms Smith might be able to secure orders there that vested in Ms Smith the trustee’s interest in the Pyrmont property, thus putting at risk a return to the estate. Her Honour said that it was unclear what impact Mrs Young’s recent intervention would have on the course, cost or duration of those proceedings.

91    The primary judge also said that Ms Thomson had to engage her own lawyers for the 10 day hearing set down in February 2017 in the Brookfield proceedings and Ms Thomson was entitled to take into account that, first, Ms Smith’s indemnity in respect of her costs may be difficult to enforce or valueless and, secondly, in the past Ms Smith had refused to settle the dispute on terms acceptable to Ms Thomson. Her Honour said that Ms Thomson had commenced the winding up proceedings for the purpose of getting in assets to which the bankrupt may have been beneficially entitled under discretionary trusts. Her Honour also noted that the bankrupt’s business and personal affairs were complex, he and Ms Smith had taken steps to defeat his creditors and Ms Smith had actively resisted claims against her.

92    Her Honour said that the trustee had funded the estate’s legal fees for about two years in many proceedings, many of which she had not initiated so that, as at 23 September 2016, Ms Thomson’s unpaid legal expenses and remuneration totalled almost $600,000, with no quick end in sight and no creditor had responded to that report or the 15 June 2016 report’s request for funding. It was common ground that Mrs Young’s personal circumstances meant that she could not fund the trustee.

93    Her Honour distinguished Re Wheeler; Ex parte Wheeler v Halse (1994) 54 FCR 166 and Willoughby v Official Trustee in Bankruptcy (2001) 102 FCR 261 on the basis that in those cases not only had there been failures of process by the trustee, but the Court had intervened because it had identified an alternative course of action that was to be preferred. The primary judge found that the only alternative course proposed by Mrs Young was that the trustee continue to undertake the litigation, unfunded, on the basis that the sale of the Pyrmont property was imminent, Ms Smith had little prospect of success in the Family Court proceedings and the 35% funding fee outweighed any benefit that might be obtained in the Brookfield proceedings. Her Honour rejected that argument, finding:

This view takes no account of the benefit to the estate in the trustee being able to pursue the ongoing matters with funding and without fear of Adverse Costs Orders or that Ms Young’s advisors’ assessment of timeframes and the outcome of the litigation is “best case”. (emphasis added)

94    Her Honour found that a trustee’s entry into the funding agreement on commercial terms to undertake appropriate litigation when the trustee and no creditor was willing to fund the litigation would not breach s 19(1)(j). The primary judge said that Mrs Young’s impecuniosity and her success in the s 37A proceedings, that secured an asset for the estate, were not relevant considerations.

95    Her Honour accepted Ms Thomson’s evidence that the 35% fee was at the lower end of returns that commercial litigation funders required and that had been approved by courts in corporate insolvencies. Her Honour said that a sliding scale of return to the funder, depending on the amount of funding, adverse costs orders actually funded and the timeframe in which that occurred, would be easier to justify. However, she accepted Mr Hayter’s evidence that he was not prepared to offer such an arrangement. Accordingly, her Honour was not prepared to find that Ms Thomson had breached s 19(1)(k) in entering into the funding agreement.

96    Her Honour held that Ms Thomson was not obliged to fund ongoing litigation. She said that Mrs Young’s recent intervention in the Family Court proceedings “does not obviate the need for the trustee to have a role in those proceedings”. Her Honour said that after Ms Smith dismissed the lawyers jointly acting for her and Ms Thomson, the latter was “entitled to be concerned” that the success of the Brookfield proceedings might be prejudiced and that Ms Smith’s indemnity “may well prove inadequate and difficult to enforce” and:

The fact that Ms Thomson was not fully seized of the detail of the Brookfield Claim when she gave her evidence can be explained by the terms on which she agreed to become a party; those terms were designed to secure the benefit of the litigation at least cost to the estate in circumstances where the estate’s interests coincided with Ms Smith’s. I do not accept Ms Young’s criticisms of Ms Thomson on this issue; in my view her decision to enter into the funding agreement in September 2016 is consistent with an appreciation that work needed to be done to prepare for the hearing of the Brookfield Claim in February 2017 and Ms Smith could not be relied on. (emphasis added)

97    Her Honour found (correctly) that the fact that Ironbark had not taken out insurance in respect of its liability to meet adverse costs orders was not a breach of the funding agreement, since cl 16.3 gave it the option of choosing whether it wished to do so. The primary judge rejected Mrs Young’s argument that Ms Thomson had breached s 19(1)(b) by failing to determine whether the estate included property that could be realised to pay a dividend to creditors. She found:

The abrupt tone of Ms Thomson’s correspondence from an early stage and the manner in which she gave evidence leads me to conclude that she is highly defensive of her position as trustee and does not readily give information to or accept input from others interested in the administration of the estate. (emphasis added)

98    Her Honour said that Mrs Young had not established that pursuit of the winding up proceedings was inappropriate or that Ms Thomson should have pursued Ms Smith for the costs of the s 37A proceedings. The primary judge said:

Ms Thomson had reason to be cautious about the content of her reports to creditors given the nature of Ms Smith’s conduct and the fact that there is a claim that Ms Smith is a creditor of the estate and she is a party (directly or indirectly) to much of the litigation. Moreover, Ms Thomson told Mr Walsh about the Family Law Proceedings soon after they commenced, albeit that she was not able to share much information about Ms Smith’s application. The material amount of Ms Thomson’s remuneration was detailed in her reports to creditors up to November 2015 and she disclosed her legal fees in the fifth report in June 2016. Having said that, as indicated above, Ms Thomson can fairly be criticised for the limited information she provided in relation to the funding agreement and its implications for the return to creditors. (emphasis added)

99    Her Honour found that Mr Walsh should have had the freezing orders noted on the certificate of title of the Pyrmont property as Mrs Young’s solicitor and that his correspondence with Ms Thomson and belief about her conduct had been based on his “misguided belief that Ms Thomson was responsible for failing to prevent Ms Smith from mortgaging” that property.

100    In those circumstances, her Honour was not satisfied that Mrs Young had identified any misconduct that amounted to maladministration or was otherwise sufficient to warrant ordering an inquiry into Ms Thomson’s conduct under s 179. Her Honour found that it was “not a dereliction of duty” for Ms Thomson to have failed to seek directions from the Court, after Mrs Young refused to consent to her entry into the funding agreement. Her Honour saw “no reason to think that Ms Thomson’s costs in” the s 37A proceedings were not warranted. She found:

In my view, while Ms Thomson was justified in entering into the funding agreement, she was wrong in her perception that she had “carte blanche” to act as she did simply because creditors had not responded to her request for expressions of interest to fund the estate. On the basis of the material currently before me, it appears that Ms Thomson has generally behaved appropriately as trustee in seeking to avoid cost while maximising returns to the estate having regard to the complexity of Mr Young’s personal and business affairs. (bold emphasis added)

The appeal

101    Mrs Young’s amended notice of appeal relied on five grounds of error by the primary judge, namely that her Honour:

(1)    should have set the funding agreement aside on a number of bases, including that, first, Mrs Young was not afforded procedural fairness by Ms Thomson, secondly, Ms Thomson entered into the funding agreement without creditors’ or Court approval and, thirdly, the funding agreement was grossly disadvantageous to her;

(2)    erred in finding that Mrs Young had argued to her Honour that Ms Thomson should have continued to administer the estate unfunded when she had made no such submission;

(3)    erred in finding that Mrs Young had to establish that, in the circumstances, there was a preferable course in order to set the funding agreement aside under s 178;

(4)    alternatively to (3), erred in failing to consider whether the Pyrmont property would be sold imminently so as to realise funds with which to conduct the administration;

(5)    erred in failing to order an inquiry as to Ms Thomson’s entry into the funding agreement and incurring over $600,000 in legal and remuneration expenses in respect of court proceedings of which she gave no notice to, nor obtained any approval from, creditors and for which she did not seek or obtain Court approval.

Ironbark’s notice of contention

102    Ironbark filed a notice of contention seeking to support her Honour’s decision not to set the funding agreement aside on the ground that to do so would deprive Ironbark of its potential benefit, where that agreement was on commercial terms, had been made at arms-length and had been partly performed by Ironbark paying costs incurred by Ms Thomson on behalf of the estate.

Ms Thomson’s and Ironbark’s submissions

103    Ms Thomson argued that her Honour had exercised her discretions not to interfere with the decision to enter into the funding agreement and to refuse to order an inquiry on the correct principles and had not committed any error that would permit the Full Court to do so, acting in accordance with the principles in House v The King (1936) 55 CLR 499 at 504-505.

104    Ironbark supported Ms Thomson’s submissions with additional arguments. It relied on the terms of ss 178 and 179 and contended that the question was whether it was “just and equitable” (s 178) or “proper” (s 179) for each order sought to be made.

105    Both Ms Thomson and Ironbark contended that the primary judge was correct to find that Ms Thomson had no practical alternative than to enter into the funding agreement. They submitted that, whatever deficiencies in the process leading up to the entry into the funding agreement that her Honour found, or that Mrs Young asserted on appeal, in essence, by the time of the trial Mrs Young had full information on which to argue what alternatives were open to the trustee, yet she could only argue that Ms Thomson should not have entered into any funding agreement. They argued that this offered no solution to the difficulty that Ms Thomson could not, nor could she be expected to, carry on the then current litigation without funding.

106    Ms Thomson contended that her Honour had not imposed any onus on Mrs Young to prove that there was a preferable alternative, but rather, had found that there was no alternative in all the circumstances of the case and Ms Thomson had done the best she could. Ironbark argued that the primary judge had not made the finding complained of in Mrs Young’s second ground of appeal. Rather, it contended, her Honour had drawn the inference, based on Mrs Young’s correspondence and submissions, that Mrs Young was, in effect, saying that Ms Thomson had to continue unfunded when acting in all the extant litigation. They both submitted that although Mrs Young may not have had much time in, or information on, which to decide whether to object to the entry into the funding agreement, any more time or information would have no difference, since Mrs Young was in no position to assist and, by the time of the trial, had that information.

107    Ms Thomson argued that the funding agreement was made at arms-length and provided a fee within an acceptable range. She contended that her Honour did not need to consider Ms Smith’s prospects in the Family Court proceedings in order to determine the commerciality of the funding agreement and, indeed, those “two elements are mutually exclusive”. And, Ms Thomson argued that s 121 of the Family Law Act prevented the primary judge from receiving any evidence from or about the Family Court proceedings. She contended that Mrs Young had not argued to the primary judge that Ms Thomson should have sought judicial advice, but even if she had sought it in respect of entering into the funding agreement, there was no reason to suppose that the Court would not have approved that course. Ms Thomson submitted that Mrs Young’s claim for an inquiry was academic since Ms Thomson was no longer the trustee. Ironbark made no submission on this issue.

108    In addition, Ironbark argued that the protection against adverse costs orders in the funding agreement offered a real benefit to Ms Thomson sufficient to justify the 35% fee applying to the realisation of the Pyrmont property because of the risk that Ms Smith might obtain that property in the Family Court proceedings. Ironbark supported its notice of contention arguing that it had acted to its detriment in partly performing the funding agreement and was an innocent third party in the dispute between Mrs Young and Ms Thomson. It contended that it would not be just and equitable to deprive it now of the benefit of the funding agreement under which it had commenced to perform and assume risk. In addition, it argued that the Full Court should be mindful that a decision to set the funding agreement aside would establish a precedent that “would likely have drastic and detrimental consequences for the ability of bankruptcy trustees to obtain the benefit”, in the future, of such funding arrangements. And, it submitted, such a decision could lead to higher transactional costs and a potential decrease in the willingness of funders to operate in this market, to the detriment of the purposes of the Bankruptcy Act and recoveries for the benefit of creditors.

The s 178 issue – principles

109    The jurisdiction that s 178(1) confers on the Court is enlivened when the bankrupt, a creditor, or other person affected by an act, omission or decision of a trustee applies to the Court under that section. On the making of such an application, s 178(1) empowers the Court to “make such order in the matter as it thinks just and equitable”. The Court’s discretion is at large and must be exercised, as Brennan CJ, Gaudron and McHugh JJ held in Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 139, “in the particular circumstances of each case”. They held that the jurisdiction under s 178 had long been exercised by the courts charged with the supervision of administrations in bankruptcy.

110    A trustee in bankruptcy is a trustee with all the fiduciary duties of a trustee under the general law, save to the extent that any such duty is modified or excluded by the Act: Re Fuller, a bankrupt; Fuller v Wily [1996] FCA 523 (Austlii MNC [1996] FCA 1593) at [58] per Sheppard, Spender and Hill JJ. Importantly, as their Honours explained, in reliance on Jacobs’ Law of Trusts in Australia (Butterworths, 5th ed, 1986) at 375 [1609] (a passage repeated in the 7th edition at [1608]), because the trustee is exercising a fiduciary power, he or she has a duty to do so honestly (i.e. in good faith), to act upon genuine consideration, “that is to take an informed view of whether or not to exercise his [or her] discretion, and not to act irresponsibly capriciously or wantonly”, and to exercise the relevant power with due consideration for the purpose for which it was conferred and not for some ulterior purpose.

111    A professional trustee should be particularly careful to act strictly within the line of the trustee’s duty: Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149 at 165 per Starke, Dixon and Williams JJ. They held (at 164) that where a trustee had a statutory discretion to allow time for payment of a debt without being liable for any loss occasioned by doing so in good faith, the power:

“involves the exercise of an active discretion, not the mere passive attitude of leaving matters alone, and no relief is afforded where (as here) loss has arisen from carelessness or supineness”: Re Greenwood; Greenwood v. Firth [(1911) 105 LT 509]; Godefroi on Trusts, 5th ed. (1927), p. 258.

112    Where a statutory trust exists, such as that created by the Bankruptcy Act, the trustee’s powers and duties fall to be exercised in accordance with, or having regard to, the requirements of the legislation. And, that is a reason why the Court has the supervisory jurisdiction under s 178 over a trustee’s acts, omissions or decisions. That jurisdiction exists so as to enable the Court to evaluate what order is just or equitable in the particular circumstances. In Adsett v Berlouis (1992) 37 FCR 201 at 208, Northrop, Wilcox and Cooper JJ held that a trustee in bankruptcy, who acts for remuneration, has a duty to bring reasonable skill to the performance of his or her duties. They said:

The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee’s obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors’ claims and any possible surplus for the bankrupt. (emphasis added)

113    Moreover, Northrop, Wilcox and Cooper JJ adopted (37 FCR at 209) the principles identified in Halsbury’s Laws of England (Butterworths, 3rd ed) Vol 38, p 967, that a trustee must:

    take all reasonable and proper measures to obtain possession of the trust property, get in all debts and funds due to the trust estate, to preserve it and secure it from loss;

    take reasonable precautions to see the property is not stolen or lost by default;

    execute the trust with fidelity and reasonable diligence;

    conduct the affairs of the trust in the same manner as an ordinary prudent business person would conduct his or her own affairs.

114    In Frost [2009] FCAFC 20 at [8] Ryan, Mansfield and Jagot JJ said that, in exercising its jurisdiction under s 178:

the Court will be slow to make orders which will have the effect of interfering in the day-to-day administration of a bankrupt’s estate and, in cases involving an exercise of business or commercial judgment, will place considerable weight on the trustee’s decision. Furthermore, a Court will not intervene under s 178 simply because the Judge forms a different view from that of the trustee. (emphasis added)

115    Importantly, a trustee in bankruptcy, whether appointed by the Court or pursuant to a debtor’s petition, must act to the standard expected of an officer of the Court, given that, pursuant to ss 178 and 179, his or her acts or omissions are, in general, reviewable by the Court. That is because the statutory office of a trustee in bankruptcy is a public one that reposes considerable statutory powers in the trustee to enable him or her to carry out the public duty to administer the bankrupt’s estate according to the Act.

116    The Court’s power in s 178(1) extends to setting aside both executory and fully executed contracts and conveyances to which a trustee in bankruptcy is a party: Willoughby 102 FCR at 265-266 [26]-[28] per Burchett, Lee and Hely JJ. And, in a proceeding under s 178(1), the Court is not confined to consideration of the material on which the trustee acted and can take into account material that was not before the trustee or was not available at the time that the impugned act or omission occurred: Gray v Clout (1990) 27 FCR 141 at 144 per Pincus J; Moore [2007] FCA 10 at [28(3)] per Besanko J.

117    The trust executed by a trustee in bankruptcy under the Act is not a trust for persons but a trust for statutory purposes: cf. Fouche v The Superannuation Fund Board (1952) 88 CLR 609 at 640 per Dixon, McTiernan and Fullagar JJ; Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566 at 592 [67] per Gaudron, McHugh, Gummow, Hayne and Callinan JJ. That is because the creditors and the bankrupt are not beneficiaries in the proper sense, although they each have an interest in the trust estate and each also has standing to apply to the Court under s 178(1) in respect of acts, omissions or decisions of the trustee in his or her administration of the estate. The duty of the trustee, at general law, is to take reasonable care, namely, the care which an ordinary prudent businessperson would take. Moreover, “supine negligence” is a breach of that duty: Fouche 88 CLR at 641.

The s 178 issue – consideration

118    For the reasons that follow, in our opinion, the primary judge erred in the exercise of her discretion to refuse to make an order under s 178(1) setting aside the funding agreement. Ms Thomson breached her duties under s 19(1)(d), (j) and (k) of the Act and her fiduciary duty to take an informed view of whether or not to exercise her discretion to enter into the funding agreement. She acted irresponsibly in doing so in circumstances where she had a conflict of interest and duty, having incurred liabilities in litigation of over $300,000 without directions, under s 177(1), from a meeting of creditors, or, under s 134(4), from the Court, that she should do so. Her evidence to the primary judge demonstrated that she had no grasp of the reasons why she had sought funding of over $100,000 in respect of the Brookfield proceedings or the issues in that litigation. Moreover, on the additional facts before the primary judge, Westpac was about to exercise its power of sale that would realise all the cash that Ms Thomson would require to conduct any litigation.

119    Contrary to the primary judge’s finding, both Re Wheeler 54 FCR 166 and Willoughby 102 FCR 261 did not involve any question concerning the availability of an alternative course of action as a condition or requirement of granting relief under s 178. In Willoughby 102 FCR at 265-266 [26]-[28], Burchett, Lee and Hely JJ held, reversing the trial judge, that the Court had power under s 178 to set aside an agreement that a trustee had made that was no longer executory and had been completed by property passing. Their Honours remitted the proceedings to the trial judge. They stated that (102 FCR at 266 [28]):

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.

120    They added, approving what Deane J had held in Re Tyndall (1977) 30 FLR 6 at 9, that s 178 empowered the Court “in perfectly general terms, to make such order in the matter as it thinks just and equitable” (102 FCR at 267 [32]). And in Re Wheeler 54 FCR 166, Lee J made an order setting aside a trustee’s decision and remitted the matter to the trustee to consider it using “an adequate decision making process” (at 171E-F).

121    Similarly, in Re Fuller [1996] FCA 523 at [72], Sheppard, Spender and Hill JJ said that a review under s 178 “must be approached practically and realistically”. They concluded that, based on practical considerations in evidence in those proceedings, there “was no course reasonably open to the [trustee] other than the one which was taken”.

122    None of the authorities supported the primary judge’s acceptance of Ms Thomson’s argument that where there were “failures of process by the trustee, the Court intervened because it identified an alternative course of conduct which was to be preferred”. The identification of an alternative course will often be a relevant, indeed possibly decisive, consideration, but it is ultimately for the Court to determine, in all of the circumstances of the case, what order is just and equitable: Cummings 185 CLR at 138-139.

123    Her Honour erred in approaching the exercise of the discretion by characterising Mrs Young’s argument as being that “the only acceptable alternative to the funding agreement is that the trustee continues to undertake litigation unfunded”. Rather, Mrs Young’s complaint was about the terms of the funding agreement and its substantive consequence of a large diminution in the return to creditors in circumstances where Ms Thomson had not acted on genuine consideration of the creditors’ interests (particularly Mrs Young’s) or taken an informed view of each relevant proceeding and the likelihood of her being put in funds in the foreseeable future by the sale of the Pyrmont property and settlement of, or judgment in, the Brookfield proceedings.

124    Moreover, her Honour had to decide what order was just and equitable on the evidence then before her, including the fact, not before Ms Thomson, that Westpac was about to exercise its power of sale to realise in the order of $2 million for the benefit of the estate (see [75]-[79] above). Receipt of the proceeds of that sale should not have remained vulnerable to Ironbark receiving 35% of its net value for, potentially, meeting a relatively small sum of Ms Thomson’s costs from the $50,000 for general attendances.

125    Ironbark made a commercial decision to enter into the funding agreement without making its efficacy conditional on the approval of the creditors or judicial advice that it was open to Ms Thomson to enter into it. It was a professional litigation funder and may be taken to have been aware of the risk that, without those protections, the Court may intervene. That risk was obvious given that Ironbark stood to gain 35% of the net value of the estate, that could be in the order of half the contested assets in the Family Court proceedings (i.e. about $5.5 million, 35% of which amounted to nearly $2 million), after recouping its expenses of funding up to a maximum of $253,900 and meeting any adverse costs orders. While Ironbark may have been exposed to the limited risk of an adverse costs order in the winding up proceedings, its risk beyond those proceedings was minimal.

126    Prior to entering into the funding agreement, Ms Thomson made no meaningful attempt to communicate to creditors sufficient information to enable them to understand, first, the extent or potential extent of the bankrupt’s estate, secondly, the nature of any issues and potential to recover assets in the litigation in which the estate was involved and, thirdly, what she had done in administering the estate. Nor did she seek judicial advice, as she ought to have done in such a major dealing with the estate.

127    In the context of Ms Thomson’s history of past uninformative reports, and her failure to seek the creditors’ approval or directions or advice from the Court, her presentation of the 15 June 2016 and 23 September 2016 reports obfuscated and concealed material information including that the estate and Ms Smith were making claims in the Family Court proceedings of entitlements to a pool of over $11 million in assets. Those reports were calculated to draw a response such as that Mr Walsh sent after he had received the 23 September 2016 on 29 September 2016. Inexplicably, Ms Thomson had sent that report by post and not electronically, despite her self-imposed urgent deadline.

128    The terms and consequence of the funding agreement were manifestly detrimental to the creditors and to the estate as a whole and were not the product of reasoned or careful consideration to the standard of a prudent businessperson. And, unlike the position discussed in Frost [2009] FCAFC 20 at [8], the entry into the funding agreement was not a matter of day-to-day administration.

129    First, Ms Thomson exposed the estate’s 50% share in the Pyrmont property to an immediate 35% diminution when there was no remaining risk as to the estate being able to make a substantial, if not complete, recovery of its interest once Westpac had exercised its power of sale or Ms Thomson, as trustee, obtained an order for its sale. The likelihood was remote that the Family Court proceedings would adjust the estate’s interest in the Pyrmont property to diminish that entitlement. But, if that were a risk, it was one which Ms Thomson at an appropriate time should have considered carefully as to whether she should make funding arrangements for the Family Court proceedings, where the parties were contesting rights to combined assets worth over $11 million. There did not appear to be any reason why the estate should burden one of its existing valuable assets with an immediate liability to pay Ironbark in the order of $800,000 or more when it had only agreed to fund a maximum of $253,900 on only some of the matters that Ms Thomson was pursuing and its accepting future liability for adverse costs orders. That was the more so, on the evidence before her Honour, when Westpac was about to exercise its power of sale, and, when that occurred, Ironbark’s funding would be unnecessary.

130    Secondly, it was unlikely that the estate would be burdened with substantive adverse costs orders in either the Family Court or Brookfield proceedings. That is because, first, in the Family Court proceedings, there was a presumption under s 117(1) of the Family Law Act that each party to proceedings under that Act should bear his or her own costs and, secondly, in the Brookfield proceedings, as Ms Thomson said in evidence, the issue was the cost of repairing an expensive apartment and:

[t]here has never been a suggestion in any of those creditors reports that there’s some risk of losing those proceedings, has there? --- No. It’s just the quantum.

131    Thirdly, Ms Thomson’s inclusion of the costs assessment in the funding agreement also reduced by 35% the value of an existing asset of the estate, worth considerably more than the $3,900 maximum funding that Ironbark would provide for that assessment to be prepared. Ms Thomson gave no reasonable justification for her failure to have assessed the costs that Sackar J had ordered Ms Smith to pay her in June 2015 in relation to the s 37A proceedings. Ms Thomson’s assertion that she needed to keep Ms Smith on side is at odds with her complaints that Ms Smith had been acting in a way that put at risk the estate’s ability to recover against her. A prompt assessment of the costs ordered against Ms Smith was called for, especially if Ms Thomson had incurred in the order of $170,000 in solicitor/client costs in the s 37A proceedings. Once assessed, Ms Thomson would be able to enforce the costs assessment against Ms Smith’s share of the Pyrmont property, or the proceeds of its sale. Delay would only assist Ms Smith in doing, once again, what she had demonstrated was her intent, namely to defeat her (and the bankrupt’s) creditors.

132    Ms Smith’s creation of the mortgage in breach of the freezing orders should have demonstrated to Ms Thomson that any delay in enforcing orders against her would be fraught with difficulty for later recovery. Yet, Ms Thomson did nothing between mid-2015 and 30 September 2016 to pursue an assessment of costs for an estimated expense of only $3,900. That was so even after the recovery of $75,000 in January 2016 in the ATO preference proceedings. It is difficult to understand, if Ms Thomson’s delay in pursuing this costs assessment could be justified, why she needed to include its cost in the funding agreement. She could simply have waited until she was in funds from a recovery to pursue this, without giving up 35% of its worth, after costs, to the funder, Ironbark. Her decision to give up this asset was again “supine negligence”: Fouche 88 CLR at 641; Partridge 75 CLR at 164.

133    Fourthly, the February 2017 trial of the Brookfield proceedings was imminent, as at 30 September 2016. Ms Thomson could not answer in her oral evidence even basic questions about the state of the evidence or preparation in those proceedings. She had given no information to the creditors of what she or the estate had to do or why she, and not Ms Smith, needed to do it so close to the trial. Her inability to identify any detail about the Brookfield proceedings meant that it was not open to the primary judge to find, as she did, that Ms Thomson appreciated “that work needed to be done to prepare for the hearing of the Brookfield Claim in February 2017 and Ms Smith could not be relied on” (see [96] above). It is difficult to understand how, in the absence of any evidence to her Honour, Ms Thomson, as a co-plaintiff, was under any existing obligation or order in the Brookfield proceedings that had not already been satisfied, to file lay evidence (the source of which would necessarily be the bankrupt or Ms Smith) or expert evidence so close to the 10 day trial fixed for February 2017. It would have been easy for Ms Thomson to give such evidence, but, in contrast, she appeared to have no knowledge of what, if anything, needed to be done that, first, required funding and, secondly, justified disposing of 35% of the net proceeds of a damages assessment where liability was not an issue, as the price for such funding. Moreover, it was in Ms Smith’s interest to maximise the verdict in the Brookfield proceedings, for she would benefit from doing so and could be relied on to pursue, as she had demonstrated, her own self-interest.

134    Moreover, if Ms Thomson had a basis to put forward that Ms Smith’s lawyers had not prepared the Brookfield proceedings for the trial properly, as at the time of the entry into the funding agreement or before her Honour on 2 December 2016, it would have been easy to call such evidence. Ms Thomson did not prove, by her own evidence or that of her lawyers, that there was such a basis. Ms Thomson’s resort to speculation, in those circumstances, should have led her Honour to draw the inference that there was no sufficient basis for Ms Thomson to seek funding in respect of the Brookfield proceedings: Jones v Dunkel (1959) 101 CLR 298.

135    It may be accepted that the Family Court proceedings were different in kind to the Brookfield proceedings and the costs assessment matter. However, these were at an early stage and, given the likelihood of the sale by Westpac of the Pyrmont property and the estate’s receipt of about $2 million from that sale, Ms Thomson had a ready source of future funding that was likely to be received within a reasonably short time. Likewise, the estate could expect to receive a substantial sum from settlement or judgment in the Brookfield proceedings at some, uncertain, time in the future.

136    What seems to have driven Ms Thomson’s urgency to enter into the funding agreement is her pursuit of, and, in particular, her exposure to a costs order against her in, the winding up proceedings that were listed for hearing on 11 October 2016. She had never mentioned those proceedings in reports to creditors and only revealed their existence, with the barest of detail, in Mr McLeod’s letter of 6 October 2016 to Mr Walsh. Ms Thomson’s exposure to her and Smith & Young Pty Ltd’s costs was the product of her conduct in instigating and pursuing that litigation without the approval of the creditors or judicial advice. Her explanation in the 7 November 2016 report that she could not provide to Brereton J information about matters that she had ascertained in the Family Court proceedings because that “important evidence” was “confidential” is impossible to reconcile with s 121(9)(a) of the Family Court Act. That provided that the provisions of s 121:

do not apply to or in relation to … the communication, to persons concerned in proceedings in any court, of any pleading, transcript of evidence or other document for use in connection with those proceedings. (emphasis added)

137    Even if her unsustainable assertion were correct, the imminence of the winding up proceedings did not provide a reasonable or sufficient foundation for Ms Thomson’s decision to enter into the funding agreement and to expose the estate to a substantive diminution of 35% of its major assets, as Ironbark’s fee, after the repayment to it of its funding costs and its payment of any adverse costs orders.

138    By the time of her decision to seek litigation funding in June 2016, Ms Thomson was in a position of conflict between her interest and her duty because of her unapproved conduct that had involved the estate incurring considerable legal costs (see [90] above). Moreover, as found by the primary judge, Ms Thomson believed she had “carte blanche” to act as she did after the creditors did not respond to her uninformative reports of 15 June 2016 and 23 September 2016. That conduct was a breach of her statutory duties to:

    give information about the administration of the estate to a (indeed, each) creditor because the creditor reasonably required full and frank information about the position of the estate generally and the assets or potential assets that the trustee had, first, identified and, secondly, recovered (see s 19(1)(b)) (including those she identified as the subject of the Family Court proceedings amounting to over $11 million) (s 19(1)(d));

    administer the estate as efficiently as possible by avoiding unnecessary expense (s 19(1)(j)); and

    exercising her powers and performing her functions in a commercially sound way (s 19(1)(k)).

139    The decision to enter into the funding agreement on the terms that it contained was commercially unsound for the reasons above. Ms Thomson had a trust interest over 50% of the Pyrmont property that had been established as against Ms Smith by the 19 June 2015 orders of Sackar J and a legal half share of the cause of action in the Brookfield proceedings. Ms Thomson did not explore, under her power pursuant to s 134(1)(da), offering a mortgage to a bank or financial institution over those assets to raise, if and when required, money for the payment of debts provable in the bankruptcy, including to finance any legal costs to recover or realise assets with which to pay those debts.

140    Instead, without any reasonable regard for, or genuine consideration of, the interests of the creditors, and in particular Mrs Young whom Ms Thomson knew was virtually the only substantial creditor, she entered into a funding agreement that had the effect, as she knew, of squandering 35% of the, or the major, net assets of the estate. Moreover, she appeared to have little knowledge of, and, it may be inferred, little interest in, the detail of any of the extensive litigation in which the estate was a party.

141    With respect, the primary judge erred in finding that Ms Thomson’s lack of knowledge of the detail of the Brookfield proceedings could be explained by the terms on which she had agreed to become a party to them in the bankrupt’s stead. It was Ms Thomson’s duty as trustee to be aware of that detail, especially before she decided, by entering into the funding agreement, to give away to Ironbark 35% of the net proceeds as consideration for its providing up to $100,000 in funding for unspecified work in relation to them. She had had 18 months in which to obtain detail about, and make an assessment of, her prospects in those proceedings and what, if any, further work needed to be done to advance her or the joint interests of her and Ms Smith in preparing them for trial.

142    On the material before the Full Court, including Ms Thomson’s October 2016 affidavit and the transcript of her oral evidence, she had not acted to perform her functions in relation to the Brookfield proceedings in a commercially sound way (s 19(1)(k)). At best, she was speculating that any work to the value of over $100,000 needed to be done by her or her lawyers, because she had not familiarised herself, in 18 months, with any detail of those proceedings, except that it was about the quantum that the estate would recover from its pursuit, or what, if anything, she could add by incurring such expense. Her attitude was “supine negligence”, not the conduct of a prudent businessperson involved in such litigation.

143    Moreover, we see no reason why Ms Thomson’s indemnity from Ms Smith for the Brookfield proceedings could not have been enforced by her seeking freezing or garnishee orders over any judgment sum recovered or requiring it to be paid into a trust account until a court (such as the Supreme Court or Family Court or this Court) decided how much Ms Smith owed to Ms Thomson under the indemnity.

144    The fact that in other circumstances courts have approved funding agreements with trustees and liquidators that provided fees payable to the funder of 35% or more, did not entitle her Honour to reject Mrs Young’s argument that this funding agreement, in the circumstances, including the additional fact of Westpac’s imminent exercise of its power of sale, was not one that Ms Thomson was justified in entering in conformity with her duty to act in a commercially sound way under s 19(1)(k): Cummings 185 CLR at 138-139.

145    Mrs Young also argued that Ms Thomson had denied her procedural fairness and that the principles of judicial review of administrative action applied directly or analogously to a review of Ms Thomson’s conduct as trustee under s 178 of the Act. Mrs Young cited no authority to support that submission. It is not necessary to decide whether this novel approach to the performance of the duties and functions of a trustee in bankruptcy is arguable or correct. However, this argument appeared to confuse administrative law considerations with the duty of a trustee in bankruptcy under s 19(1)(d) to give information about the administration of the estate to a creditor who reasonably requests it and the duty of the trustee, as a fiduciary, when seeking judicial advice or authorisation by creditors to embark on a course of action or, where the trustee is in a position of having a substantial possibility of, or real, conflict between his or her interest or duty and the interest of, or duty owed to, those interested in the estate, to give full and frank disclosure so as to obtain a fully informed consent to the trustee’s proposed course of action: Furs Ltd v Tomkies (1936) 54 CLR 583 at 592-593 per Rich, Dixon and Evatt JJ; Pilmer v Duke Group Ltd (In Liq) (2001) 207 CLR 165 at 199 [78]-[79] per McHugh, Gummow, Hayne and Callinan JJ.

146    In substance, here, Ms Thomson gave the creditors, and in particular Mrs Young, little information over the whole course of her administration of the estate on which the creditors could determine what, if any, response was appropriate. The culmination of Ms Thomson’s deliberate conduct in providing little, if any, meaningful information was her decision to ask the creditors for funding proposals in her report of 15 June 2016 and asking for objections in her report of 23 September 2016. She did so with the insouciance, found by the primary judge, of a wrong belief that she had “carte blanche” to do with the estate as she wished.

147    Given that Ms Thomson had no real understanding of the substance of live issues in the Brookfield proceedings, beyond the fact that they involved a quantification of the damages to which Ms Smith and the estate were entitled, it is safe to infer that Ms Thomson had little interest or knowledge of the position of the estate generally. That is demonstrated by her earlier disinterest in the s 37A proceedings and her duty to protect the estate’s interest in the Pyrmont property, until after Mrs Young had secured the initial orders by Sackar J. The fact that Ms Thomson had not even made a search of the certificate of title between her appointment on 2 September 2014 and 4 May 2015, when she discovered Ms Smith’s February 2015 mortgage, demonstrated her inattention and supinely negligent approach to her duties.

148    Ms Thomson’s excuse, which the primary judge appears, wrongly, to have accepted, that she could not provide much information to creditors because that would reveal matters to Ms Smith, who was one of the creditors, was without substance. If anyone among the creditors knew what was occurring in the litigation to which Ms Thomson was party, it was Ms Smith. Nothing could possibly be disclosed that was confidential in giving creditors sufficient information about the state of those various proceedings and Ms Thomson’s position in them, beyond what had been revealed already in Court documents or exchanges with Ms Smith. Yet, Ms Thomson asserted that she could not reveal this material to creditors. And, initially, she persuaded the primary judge to suppress her reasons of 17 January 2017 in their entirety lest such supposedly confidential matters be disclosed. However, subsequently Ms Thomson could not identify anything in those reasons that was confidential, and the reasons were then published in full.

149    During the hearing of the appeal, the Full Court raised with senior counsel for Mrs Young the question whether his client was prepared to make good any moneys expended by Ironbark under the funding agreement if it were set aside. Her preparedness and ability to make restitution (or to do equity) was essential if the Full Court were to set aside the funding agreement: Maguire 188 CLR at 474-475. Mrs Young’s solicitors informed the Full Court on 28 June 2017 that Mrs Young and Ironbark had attempted, but failed, to reach agreement on the form of such an order. They offered on Mrs Young’s behalf an undertaking to the effect that within 28 days of any judgment in favour of Mrs Young concerning the funding agreement, she would reimburse Ironbark $26,656.64 together with interest from the dates of its payments totalling that sum.

150    An undertaking in that form appears to be appropriate. However, in case Ironbark is able to demonstrate that its interests are not adequately protected by it, the final orders that the Full Court will make will offer Ironbark an opportunity to address any such concern before the order setting the funding agreement aside will take effect.

The s 178 issue – conclusion

151    On the material presently before the Full Court it is just and equitable in all of the circumstances to order that, first, the funding agreement be set aside, provided that Mrs Young undertakes to reimburse Ironbark the sum of $26,656.64 together with interest from the dates on which it made each payment comprising that sum, secondly, Ms Thomson and Ironbark must pay Mrs Young’s costs of the proceedings below and the appeal, thirdly, Mrs Young be entitled to set off her liability under her undertaking against any costs recoverable by her from Ironbark and fourthly, Ms Thomson should not have any right of indemnity from the bankrupt’s estate in respect of either her liability to Mrs Young or for her own costs of the proceedings below or the appeal. However, the parties did not address questions of costs of the disagreement that Ironbark had in respect of Mrs Young’s undertaking and they should have an opportunity to do so before final orders are made.

The s 179 issue – consideration

152    Had Ms Thomson remained trustee, it would have been appropriate to order that she be removed from that office. For the reasons explained above, her conduct fell short of the high standard expected of a trustee. Ordinarily, it would also have been appropriate to order, under s 179, an inquiry into Ms Thomson’s conduct and her justification for the significant financial burden that she appears to have imposed on the estate.

153    However, the Full Court is anxious not to increase, or create the potential for a significant increase, in that burden. Rather than ordering an inquiry, the preferable course may be to order that Ms Thomson apply to a judge of the Court to pass all accounts for her remuneration and expenses to date prior to the estate making any payment to her, or on her behalf or that of the estate, in respect of expenses or remuneration incurred or claimed by her as trustee. It will then be possible for a judge to assess, having regard to these reasons, whether the particular expenditure should be approved, notwithstanding any earlier approval by creditors under s 64ZBA. The parties also should have an opportunity to make submissions as to the appropriateness of the Full Court making such an order.

Conclusion

154    The following orders should be made:

1.    The appeal be allowed.

2.    The orders made on 19 December 2016 and orders 4, 5, 6, 7, 8, 9 and 10 made on 28 February 2017 be set aside and in lieu thereof it be ordered that:

4.    Subject to order 6 below, upon the applicant by her counsel giving to the Court an undertaking that she will pay the second respondent the sum of $26,656.64 together with interest from the dates on which it made each payment comprised in that sum, the funding agreement dated 30 September 2016 between the first and second respondents be set aside.

5.    The first and second respondents pay the applicant’s costs.

6.    The applicant may set off any entitlement to costs she is owed by the second respondent against her liability under her undertaking recorded in order 4 above.

7.    The first respondent apply to a judge of the Court to pass all of her accounts in respect of her administration of the bankrupt estate of Leslie James Young, including for her remuneration, legal costs and disbursements, notwithstanding any prior approval for the payment of any such sums under s 64ZBA of the Bankruptcy Act 1966 (Cth).

3.    The respondents pay the appellant’s costs.

4.    The first respondent bear the orders for costs against her in the appeal and in the proceedings below personally and not be entitled to (and, to the extent that the estate has already paid them, repay to it) any of her costs of the proceedings below and of the appeal out of the bankrupt’s estate.

5    Unless before 15 September 2017 any party makes submissions, limited to five pages, as to those orders or their form, orders 1 to 4 above shall take effect on 15 September 2017.

6.    If any party makes a submission pursuant to order 5, any other party may make a submission in reply, limited to five pages, and orders 1 to 4 will not take effect unless the Court otherwise orders.

Associate:

Dated:    1 September 2017

REASONS FOR JUDGMENT

FLICK J:

155    Warring spouses, a de facto partner and money provide all the necessary ingredients for confrontation and disputes. Add a bankrupt husband, his attempts to divest himself of property to his de facto partner and the inadequate discharge by a trustee of her duties as a trustee in bankruptcy and litigation becomes inevitable.

156    The former wife pursues litigation seeking to recover property. The trustee sits back and only belatedly (and ineffectually) enters the fray. Having pursued litigation and having incurred unfunded legal fees of over $350,000, the position confronting the trustee became such that no option was realistically open other than to enter into a funding agreement to try to recover property. Even then, only minimal information is disclosed by the trustee as to the basis upon which she has proceeded.

157    A challenge is mounted by the former wife to the decision of the trustee to enter into the funding agreement. An order for an inquiry as to the trustee’s conduct is also sought. A Judge of this Court refused both applications: Young v Thomson (Trustee), in the matter of Young (Bankrupt) (No 2) [2017] FCA 8.

158    The former wife now appeals.

159    The facts giving rise to the proceeding and the issues to be resolved on appeal have been set forth in the joint judgment. They need not be repeated.

160    Although the Grounds of Appeal in the Amended Notice of Appeal filed on 24 February 2017 are not set forth at all as clearly as may otherwise have been desirable, the appeal was argued upon the bases of the five grounds as summarised in the joint judgment.

161    For the reasons given in the joint judgment, it is similarly concluded that the appeal should be allowed. The trustee had failed to properly discharge her duties as a trustee and had placed herself in a position of conflict. The Notice of Contention dated 2 March 2017 should be rejected.

162    Three additional short observations, it is respectfully considered, should be added to the joint reasons.

The trustee & procedural fairness

163    In expressing agreement with the reasons and orders in the joint judgment, it should be expressly noted that no reliance has been placed upon any argument as to a denial on the part of the trustee of a duty to comply with the common law rules of procedural fairness. Before the primary Judge, the challenge mounted to the decision to enter into the funding agreement was unhelpfully founded upon a failure on the part of the trustee to comply with those common law requirements and it was common ground that those requirements bound the trustee.

164    Had the trustee been bound by those common law requirements, the argument as to a denial of procedural fairness was at least an open question.

165    But any argument so formulated, with respect, confronted a considerable difficulty. It is by no means certain that the trustee was bound to afford the former wife procedural fairness.

166    No authority of either this Court or any other Court was cited in support of the proposition that a trustee in bankruptcy (or a trustee generally) was bound by the common law requirements.

167    Although it may be accepted that a trustee in bankruptcy is:

    an officer of the Court (Adsett v Berlouis (1992) 37 FCR 201 at 208 per Northrop, Wilcox and Cooper JJ; Macchia v Nilant [2001] FCA 7 at [39], (2001) 110 FCR 101 at 116 per French J);

    a person who owes both statutory duties (Bankruptcy Act 1966 (Cth) s 19 (the “Bankruptcy Act”)) and fiduciary duties (Adsett v Berlouis (1992) 37 FCR 201 at 209 per Northrop, Wilcox and Cooper JJ); and

    a person who may exercise statutory power (Bankruptcy Act s 134)

a conclusion that such a trustee must nevertheless also comply with the requirements of procedural fairness is by no means self-evident.

168    To impose upon a trustee in bankruptcy a requirement to comply with those requirements, it is respectfully considered, would not sit comfortably with either:

    the well-recognised powers and duties of a trustee and the fiduciary duties owed and the well-recognised manner in which such powers and duties may be exercised; or

    the consequences of a breach of fiduciary duties as opposed to those attending a denial of procedural fairness.

Moreover, to impose upon a trustee in bankruptcy the additional requirement to comply with the rules of procedural fairness would also not sit comfortably with:

    the existing constraint upon the application of those rules generally to administrative decisions; or

    the constraint that judicial review is generally concerned with the exercise of “public power”.

A conclusion that both a trustee in bankruptcy and a decision-maker entrusted with statutory power must (for example) both exercise their power in good faith and must not abuse their power, falls well short of a conclusion that the trustee is required to afford creditors affected by a decision an opportunity to be heard. So, too, the fact that liability may be avoided for what would otherwise be a breach by the trustee where there has been fully informed consent of a beneficiary does not carry with it the further conclusion that a trustee is otherwise obliged to afford procedural fairness to all those who may be affected by a decision made.

169    Although the invitation was extended to this Court to re-write the law as to both the duties of a trustee in bankruptcy and the law as to the application of the rules of procedural fairness, the invitation is declined. Before any such invitation was accepted it would, with respect, be necessary for far more detailed submissions to be advanced as to both matters of principle and authority than were advanced in the present appeal. The submissions advanced to this Court descended, with respect, little beyond mere assertion.

170    Nor is it self-evident that such a development of the law is either necessary or prudent.

171    In the absence of any authority to support the proposition that a trustee in bankruptcy is bound to comply with the rules of procedural fairness, and the absence of any reason to impose such a requirement, any argument founded upon the trustee owing duties of procedural fairness is an argument which is not self-evidently correct.

172    Because the application of the rules of procedural fairness was common ground before the primary Judge, it was not surprising that no argument was advanced by any of the parties that the primary Judge erred in approaching the evaluation of the trustee’s decision to enter the funding agreement through the prism of procedural fairness.

Just and equitable – the terms of s 178

173    An alternative way in which much the same ultimate conclusion could be reached that the funding agreement should be set aside would be to shun reliance upon either:

    a breach of any fiduciary duty on the part of the trustee; or

    a breach by the trustee of the common law requirements of procedural fairness.

The alternative route would be to contend that the task of the Court when entertaining an application under s 178 is to simply initially determine:

    whether the bankrupt, a creditor or any other person has been “affected by an act, omission or decision of the trustee”;

and thereafter:

    make such order “as it thinks just and equitable”.

Such an approach as to the construction and application of s 178 is well-established.

174    The supervisory jurisdiction conferred upon this Court by s 178, and the width of the discretionary power conferred by s 178 was traced by French J (as his Honour then was) in Macchia v Nilant [2001] FCA 7, (2001) 110 FCR 101. French J there referred to the observations of Deane J in Re Tyndall (1977) 30 FLR 6 and continued (at 114):

[36]    … The wording of s 178 was such “as to confer upon the court the widest possible discretion as to the appropriate order which should be made in the particular case” (at 9-10). It was no longer limited to those cases in which the trustee’s decision was absurd or unreasonable or taken in bad faith. This expansive approach was moderated by the caveat that the court would follow well established policy under bankruptcy legislation that it “should not unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee” (at 10).

Justice French thereafter went on to further observe in respect to the width of the power conferred by s 178 (at 116):

[38]    … In relation to s 178 it is unnecessary, for the purpose of enlivening the court’s jurisdiction, to find that the trustee has done anything wrong. His decision may, on the material before him, have been quite correct and reasonable … On the other hand, it is not to the point that the judge who hears a review application might have acted differently … It is not necessary here to discern the outer limits of s 178 but rather to emphasise its importance in providing for wide ranging supervision by the Court of trustees who are appointed to administer the interests of bankrupts in the interests of creditors and, in so doing, to have regard also to the interests of the bankrupts …

See also: Albert, in the matter of Albert (Bankrupt) v Lock (Trustee) [2016] FCA 1547 at [34] to [35] per Yates J.

175    Upon this approach, a Court could make an order setting aside a decision of a trustee simply because it has determined that a person has been affected by a decision and the order setting aside the funding agreement is an order that is “just and equitable”. Such an order could potentially be made because – for example – the decision has been reached without disclosing to that person information necessary for the person to make an informed decision and to make an informed objection to the trustee’s proposed course of action.

176    On such an approach, it would not be necessary to identify any requirement on the part of the trustee to afford the person affected an opportunity to be heard and to make submissions or adduce evidence or other material. The circumstances making it “just and equitable” to make such an order could well emerge not from any common law or equitable duty but depend upon the facts and circumstances of an individual case. If necessary, recourse could well be had to the duty of a trustee not to place himself in a position of conflict and not to proceed where there is a conflict in the absence of a fully informed consent being given by creditors.

177    But such a construction of s 178 was not raised by any Ground of Appeal nor meaningfully pursued in either written or oral submissions. Nor was any detailed consideration given to the manner in which the phrase “just and equitable” has been applied in those circumstances in which a trustee in bankruptcy had placed himself in a position of conflict.

A new argument for which leave is required – a breach of fiduciary duty

178    Given that the appeal is to be allowed, it is unnecessary to resolve an application to further amended the Amended Notice of Appeal to raise a new argument founded upon a breach of a fiduciary duty on the part of the trustee.

179    Senior Counsel for the former wife accepted that this argument as to the alleged breach of fiduciary duty was not an argument advanced in those terms before the primary Judge. The argument presented below was founded upon a denial of procedural fairness.

180    Leave to now advance the argument as reformulated was sought and opposed.

181    Although it is unnecessary to resolve the application to amend, it is most likely that the application would have been refused.

182    Such a fundamental reformulation of the issues to be resolved should not be lightly encouraged.

183    Leaving aside any question as to whether a trustee may be required to comply with the requirements of procedural fairness, there has been no exploration either before the primary Judge or this Court as to the extent to which the duties of a fiduciary and the requirements of procedural fairness overlap. The overlap is certainly not apparent. An underlying purpose sought to be achieved by imposing upon a person fiduciary duties is to ensure that the best interests of the beneficiaries are served and that the person owing fiduciary duties does not place himself in a position of conflict: Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96 to 97 per Mason J; Chan v Zacharia (1984) 154 CLR 178 at 198 to 199 per Deane J. It is the integrity of the duties owed by fiduciaries and the interests of the beneficiaries which are the concern of the Court. The underlying purpose sought to be achieved by a decision-maker bound by the rules of procedural fairness is to ensure that the decision-maker acts in a procedurally fair manner: Kioa v West (1985) 159 CLR 550 at 584 to 585 per Mason J. The merits of the decision reached are not the concern of the law of procedural fairness: SZBEL v Minister for Immigration and Multicultural and Indigenous Affairs [2006] HCA 63 at [25], (2006) 228 CLR 152 at 160 per Gleeson CJ, Kirby, Hayne, Callinan and Heydon JJ.

184    Nor was there any exploration before this Court of the consequences of a breach of fiduciary duty as opposed to the consequences of a breach of the requirements of procedural fairness. A breach of fiduciary duty may have the consequence that the fiduciary must account to the person to whom the obligation is owed for any benefit or gain obtained or arising from a position of conflict or which was obtained by use or by reason of the fiduciary position: Chan v Zacharia (1984) 154 CLR 178 at 199 per Deane J. An accepted breach of the rules of procedural fairness may have had no prejudicial effect upon the manner in which a decision is reached and such a decision may not be set aside: Stead v State Government Insurance Commission (1986) 161 CLR 141 at 145 per Mason, Wilson, Brennan, Deane and Dawson JJ; Aronson M, Groves M and Weeks G, Judicial Review of Administrative Action and Government Liability (Lawbook Co, 6th ed, 2017) at [7.380].

185    To point to such areas of concern is not to ignore the overlap that may exist between principles of equity and principles of administrative law.

186    Without far greater assistance than was provided in the present appeal, no leave should be granted to the former wife to so fundamentally recast the basis upon which she now seeks to challenge the decision to enter the funding agreement.

187    Had the argument as now reformulated been advanced before the primary Judge, it is by no means certain that the proceeding at first instance would have been conducted in the same manner.

188    Nor is it certain that further evidence may not have been adduced. One area of factual inquiry which could, potentially, have been explored further was the state of knowledge of Ms Young and the extent to which she may have consented to the course pursued by the trustee. Although the period of time may have been brief between being provided with information upon which knowledge could be gained and consent forthcoming, there remained the prospect that that could have been a matter further addressed in evidence before the primary Judge.

CONCLUSIONS

189    The appeal should be allowed.

190    The proceeding before the primary Judge conducted as it was upon the basis of a denial of procedural fairness inevitably led her Honour into error.

191    Concurrence is also expressed with the view expressed in the joint judgment as to whether an inquiry into the conduct of the trustee should be ordered.

Associate:

Dated:    1 September 2017