FEDERAL COURT OF AUSTRALIA

Young v Thomson (Trustee), in the matter of Young (Bankrupt) [2016] FCA 1410

ORDERS

THE COURT DIRECTS THAT:

1.    Pursuant to ss 30 and 134(4) of the Bankruptcy Act 1966 (Cth) that the first respondent, in her capacity as trustee of the bankrupt estate of Leslie James Young, would be justified in adjourning the creditor’s meeting convened for 2.30 pm on Monday, 21 November 2016 to a date no more than 14 days after the hearing of the application for orders under s 178 of the Bankruptcy Act 1966 (Cth) filed by the applicant, Ms Young, on 19 October 2016.

THE COURT ORDERS THAT:

2.    Costs of the first respondent’s interlocutory application for directions filed on 15 November 2016 are reserved.

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

REASONS FOR JUDGMENT

1    In the late afternoon of 15 November 2016, Ms Louise Thomson, as trustee of the bankrupt estate of Mr Leslie James Young, filed an interlocutory application for advice and direction pursuant to ss 30 and 134(4) of the Bankruptcy Act 1966 (Cth) and s 63 of the Trustee Act 1925 (NSW) that she would be justified in adjourning a meeting of creditors scheduled for 21 November 2016 to a date after 2 December 2016. The significance of the date of 2 December 2016 is that it is the date set down for the hearing of an application by Ms Joanne Young seeking orders under ss 178 and 179 of the Bankruptcy Act (the substantive proceedings) explained further below.

2    At a case management hearing in the afternoon of 17 November 2016, the parties agreed that Ms Thomson’s interlocutory application would be heard on the papers and I would deliver judgment on the morning of Monday, 21 November 2016, since the creditors’ meeting was scheduled for 2.30 pm on that day. Written submissions were filed: by counsel for Ms Thomson on 17 November 2016 and by counsel for Ms Young on 18 November 2016.

3    The written submissions indicate that:

    The affidavit sworn on 15 November 2016 by Mr Stefan Peter Psaltis, a solicitor in the employ of the solicitor for Ms Thomson, was read in support of her application.

    The affidavit sworn on 17 November 2016 by Mr Gregory Alexander Walsh, Ms Young’s solicitor, was read by Ms Young. In that affidavit, Mr Walsh also referred to his earlier affidavits sworn on 10 and 21 October 2016.

Background

4    Ms Young is the principal creditor of the bankrupt estate. Mr Leslie Young is her former husband. In 2013 Ms Young obtained judgment against Mr Young for an amount of $2,828,000. With interest this amount now exceeds $3 million.

5    The principal asset of the estate is a half share in an apartment in Pyrmont. The estate has the benefit of its interest in the Pyrmont apartment as a result of litigation instituted by Ms Young against Mr Young and his then partner, Ms Josephine Smith, pursuant to s 37A of the Conveyancing Act 1919 (NSW). The Pyrmont apartment is subject to a mortgage in favour of Westpac Banking Corporation. As a result of orders made in the Supreme Court of New South Wales by Sackar J on 19 June 2015 and entered on 25 June 2015, Ms Smith is the registered owner of the Pyrmont apartment, and Ms Smith and Ms Thomson (as trustee of Mr Young’s estate) will share in the proceeds of sale after the mortgage has been satisfied. On 17 October 2016 Westpac gave notice to Ms Smith pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) that there had been a default under the mortgage and that unless the sum of $804,648.42 is paid within one month after service of the notice, Westpac proposes to exercise its power of sale.

6    On 7 October 2016 Ms Young commenced proceedings in this Court against Ms Thomson. The proceedings sought urgent relief under s 23 of the Federal Court of Australia Act 1976 (Cth) and r 7.01 of the Federal Court Rules 2011 (Cth). The anticipated proceedings were under ss 178 and 179 of the Bankruptcy Act 1966 (Cth). The proceedings were principally an attack on Ms Thomson’s decision to enter into a litigation funding agreement on 30 September 2016 with Ironbark Funding Red Pty Ltd. The urgent application sought to restrain Ms Thomson from incurring any further costs under the funding agreement.

7    The application in the substantive proceedings was filed on 19 October 2016. Ms Young seeks an order under s 178 of the Bankruptcy Act setting aside the funding agreement or, in the alternative, an inquiry into Ms Thomson’s conduct under s 179 with one or more of the following orders being made: (1) setting aside the funding agreement; (2) removing Ms Thomson as trustee; and (3) any such order as the Court thinks proper.

8    On 13 October 2016 Mr Walsh wrote to Ms Thomson requesting a creditors’ meeting (pursuant to s 64(1)(b) of the Bankruptcy Act) and nominating 24 or 25 October 2016 as suitable dates. Mr Walsh re-iterated many complaints raised in a letter sent to Mr Hamish McLeod, solicitor for Ms Thomson, the day before and concluded that:

g)    there has been insufficient reporting to creditors during the bankruptcy. We have not seen a creditor’s report since November 2015 and it was scanty as to detail in particular making no reference to the position of the unsecured creditors; and

h)    finally, to the gross disadvantage of creditors, you purported to enter into an agreement which burdens what assets are or will be in the bankrupt estate to the tune of 35% plus GST to the benefit of a litigation funder in circumstances where that litigation funder is only required to pay between $250,000 and $275,000 in costs (and these amounts are a maximum).

9    On 28 October 2016 Ms Thomson’s solicitors wrote to Mr Walsh, making the following points (in addition to commenting on a number of other issues):

    First, on 27 October 2016 Ms Smith had made an offer to purchase the trustee’s interest in the Pyrmont apartment. That offer would expire on 1 November 2016. Ms Thomson’s solicitors enquired whether Ms Young would object to Ms Thomson accepting the offer.

    Second, Ms Thomson noted Ms Young had made the request for the creditors’ meeting after Ms Young had commenced proceedings under s 179 seeking orders that Ms Thomson be removed as trustee. Ms Thomson thought it would be appropriate for the creditors to know the outcome of the substantive proceedings before the meeting was held. Indeed Ms Thomson considered that the estate could be prejudiced if she were to resign at that stage. Accordingly, she stated that she intended to hold a creditors’ meeting on a date after the hearing of Ms Young’s application.

    Third, Ms Thomson drew Mr Walsh’s attention to clause 14.2(d) of the funding agreement, which, on Ms Thomson’s interpretation, requires the estate to pay the “agreed portion” of any “resolution sum” received within six years after termination of the funding agreement.

10    The substantive proceedings were set down for hearing on 3 November 2016. However, they were adjourned on that day to allow Ms Young to join Ironbark as a party. The hearing has now been set down for 2 December 2016.

11    A report to the creditors was signed on 7 November 2016. It included a notice of meeting of creditors scheduled for 2.30 pm on Monday, 21 November 2016 (today). At the case management hearing on Thursday, 17 November 2016 Mr Sheller, counsel for Ms Young, informed the Court that Ms Young pressed her application dated 15 November 2016 (lodged 16 November 2016 and accepted for filing on 18 November 2016) to adjourn the hearing of the substantive proceedings from 2 December 2016 to a date at the commencement of term in 2017. The reason is that Mr Stewart Free of Jirsch Sutherland has agreed to act as the new trustee of the bankrupt estate, but he would not be in a position to engage in the present litigation in the current time frame. Mr Free would also not exercise any rights under the funding agreement.

The Submissions

Ms Thomson’s submissions

12    Ms Thomson accepts that she will ultimately be replaced as trustee. She points out that the holding of the creditors’ meeting is in connection with the administration of the estate. The duties of the trustee under ss 19(1)(j) and (k) of the Bankruptcy Act are, respectively, to administer the estate as efficiently as possible by avoiding unnecessary expense and to exercise powers and perform functions in a commercially sound way. Section 30(1)(b) of the Bankruptcy Act empowers the Court to make such orders as the Court considers necessary for the purpose of carrying out or giving effect to the Bankruptcy Act in any such case or matter. Section 134(4) allows the trustee to apply to the Court for directions in respect of a matter arising in connection with the administration of the estate.

13    Ms Thomson says that a proper subject of directions is the manner in which a trustee is to discharge his or her functions so as to protect the trustee from liability to a creditor for breach of duty, relying on Re Weber (2006) 154 FCR 80; [2006] FCA 636. She notes that in Donnelly (Trustee), in the matter of Hancock (Bankrupt) v Porteous [2002] FCA 607 at [17] Stone J sets out the relevant principles:

Section 134(4) of the Act provides that a trustee may at any time apply to the Court for directions “in respect of a matter arising in connexion with the administration of the estate”. The Court is not under an obligation to give such directions; it is a matter for it to decide in the exercise of its discretion; Re Driller (1972) 21 FLR 159. It is however settled that the Court will not give an advisory opinion in the form of a direction; Willoughby v Official Trustee in Bankruptcy [2001] FCA 1345.  It is also said that the duty of the judge on a petition for advice is to advise the trustee on questions of law, but not to tell him how to exercise discretionary powers vested in him; In the Will of Osborne (1863) 2 SCR (NSW) Eq 89.

14    Ms Thomson says that it is on a matter of law that she approaches the Court - that is, whether she is justified in adjourning the creditors’ meeting. Ms Thomson does not seek advice as to how to exercise any discretion vested in her. The adjournment allows the real issue of the funding agreement to be decided. She submits that:

    Ms Thomson is best placed to assist the Court in the substantive proceedings. A new trustee will be ill equipped to do so for some time involving cost and inefficiency.

    There is a prima facie legally binding agreement between Ms Thomson as trustee and Ironbark. The substantive proceedings should be disposed of promptly.

    The 2 December 2016 hearing date should not be vacated, having regard to ss 37M and 37N of the Federal Court of Australia Act.

    Given the orders which are in place limiting the actions the trustee can take under the funding agreement until 2 December 2016, no prejudice is occasioned to the creditors from the short adjournment.

    Ms Young or her advisers are the architect of their own problems, having elected not to call a creditors’ meeting under s 64 of the Bankruptcy Act until after Ms Young commenced the proceedings, especially the s 179 proceedings. Ms Young failed to join Ironbark to the proceedings until the date set down for hearing of the substantive proceedings on 3 November 2016, causing cost and delay. Ms Young’s poor forensic decisions should not be a basis for opposing the trustee’s decision to adjourn the creditors’ meeting.

    While Ms Young is clearly the major creditor, she is not the only creditor and the trustee owes a duty to all creditors. Adjournment of the creditors’ meeting until after the issues in the substantive proceedings are decided will provide clarity as to the status and likely costs under the funding agreement.

    Ironbark’s position is neutral with respect to her application to adjourn the creditors’ meeting.

Ms Young’s submissions

15    Ms Young on the other hand notes that no creditor has been identified who supports Ms Thomson’s application, a point conceded by Ms Thomson. The proof of debt prepared by Mr Walsh shows that Ms Young is a creditor for $3 million, whereas other creditors are American Express for $400, the Australian Taxation Office for $28,961 and St George Bank for $40,000.

16    Despite a request made on 13 October 2016 for a creditors’ meeting to be convened, Ms Thomson did nothing until after Ms Young’s submissions in respect of the substantive proceedings were served on 1 November 2016. Therefore, in effect, a period of five weeks elapsed before Ms Thomson moved to convene a meeting.

17    Ms Thomson has not cited any authority where a trustee has made an application to adjourn a creditors’ meeting in circumstances where the trustee admits that he or she will be removed in any event. Neither Ms Thomson’s submissions nor her evidence addresses the case law relevant to the circumstances in which a court might intervene in a meeting properly convened under s 64. The relevant principles which can be distilled from the case law are:

(1)    The Bankruptcy Act empowers creditors to remove a trustee in circumstances which appear to the creditors to justify it: Dare v Doolan [2004] FCA 461 at [12].

(2)    The Court can interfere in an application to remove a trustee by creditors where creditors make improper and unfounded allegations: Re Crawford (Deceased); Ex parte the Trustee; the Official Receiver v Autoterms Limited (1943) 13 ABC 201 at 205.

(3)    Section 134(4) is not designed to alleviate a trustee’s obligation to do acts which the Bankruptcy Act requires the trustee to do. The creditors are given a statutory right under s 64(1) to requisition a meeting of creditors if the statutory number requisition such a meeting: Dunwoody v Jefferson; in the matter of Dunwoody [2000] FCA 456 at [17].

(4)    A meeting could be restrained from occurring if there was impropriety or it was against the public interest: Dunwoody at [18].

(5)    The trustee’s failure to call a meeting when requested to do so by creditors can warrant an inquiry into the conduct of the trustee under s 179: Liprini v Pascoe as Trustee of the Bankrupt Estate of Liprini (2012) 292 ALR 778; [2012] FCA 886 at [27].

18    Ms Young says:

    There is no impropriety in Ms Young calling for the creditors’ meeting and there is no public interest identified which would be served by adjourning it.

    Ms Thomson sees a forensic benefit to herself in adjourning the creditors’ meeting so that she can participate in the hearing on 2 December 2016. But, even if she is replaced as trustee, the Court has power to allow Ms Thomson to remain a party to the substantive proceedings.

    In relation to the claim that it will take a new trustee time and expense to investigate the affairs of the estate and the funding agreement, it is preferable that a new trustee start as soon as possible. The fact that Mr Free cannot immediately start to investigate the litigation in which the estate is engaged should not be a concern. One piece of litigation, the Brookfield Multiplex litigation (prior to the bankruptcy, Mr Young and Ms Smith had commenced proceedings against various entities relating to defects and resultant damage to the Pyrmont apartment) is set down for hearing in February 2017. Ms Young has taken steps to be joined in the Family Court proceedings in which Ms Smith is seeking orders adjusting property rights in relation to the Pyrmont apartment.

    The submission that Ms Young is making poor forensic decisions has no basis and little relevance.

    The new trustee will not be bound by any decision of the Court with respect to setting aside the funding agreement and can seek his own relief.

Consideration

19    The propositions on which Ms Thomson relies as discussed by Stone J in Donnelly (Trustee), in the matter of Hancock (Bankrupt) v Porteous at set out at [13] above are not contentious.

20    One of the cases drawn to my attention by Ms Young is the case of Dare v Doolan, in which Cooper J was called upon to consider the application of s 181 of the Bankruptcy Act, that is, the provision that enables creditors, by resolution at a meeting, to remove a trustee. Given that the purpose of the creditors’ meeting the subject of the current application is to remove a trustee, I accept that the principles set out in Dare v Doolan at [12]-[13] have relevance in the determination of this application:

Prima facie, the Act empowers the creditors to remove a trustee in circumstances which appear to the creditors to justify such a removal. The power to remove is not preconditioned upon there being any misconduct on the part of the trustee. If, for example, relations between the trustee and the creditors have broken down for whatever reason, that will be sufficient. Where a trustee has lost the confidence of creditors and those creditors seek the removal of the trustee, he or she should not resist removal unless there are proper reasons to do so: Adsett v Berlouis (1992) 109 ALR 100 at 112.

Ordinarily, the court would not interfere with an exercise of the power under s 181 to remove a trustee unless a good cause is shown for its interference: Re Crawford Ex parte The Trustee (1943) 13 ABC 201 at 202; Macks v Ardalich [1999] FCA 679 at [22]-[23].

21    Ms Young, in essence, asserts that there is no good cause shown for the Court to provide directions to Ms Thomson. Ms Thomson is merely seeking to secure a forensic benefit which she can obtain, in any event, as a party to the proceedings should she wish to do so. Ms Young is also the creditor with a 97% (approximately) interest in the estate.

22    However, I am persuaded that this is a case where a relatively brief adjournment of the creditors’ meeting is something which the trustee would be justified in considering and executing.

23    The trustee must act in the interests of all creditors, not just having regard to the wishes of the preponderant creditor. While no other creditor has proffered any opinion in relation to an adjournment, there are interests other than Ms Young’s that must be taken into account.

24    Mr Free is not able to address the litigation matters immediately. Ms Young seeks to minimise the importance of this, but Westpac has served notice on Ms Smith which may result in steps being taken to sell the Pyrmont apartment and the Brookfield Multiplex litigation is in court in February 2017. If it is to be settled and there is evidence that that is a possibility – it will be necessary to have familiarity with the issues. That Ms Young’s lawyers have some familiarity with the issues does not mean that Mr Free will be in that position.

25    It is not irrelevant that Ironbark has incurred liability under the funding agreement already in relation to proceedings to wind up Smith & Young Pty Ltd in the New South Wales Supreme Court. The only other costs which Ms Thomson may incur under the funding agreement before 2 December 2016 relate to the Family Court proceedings to which Ms Smith is a party. However, as noted above, steps in other litigation in which the estate is involved or crystallisation of rights is imminent. Ironbark is entitled to clarity of its rights and obligations.

26    I am satisfied that the trustee is justified in forming the opinion that it is in the interests of the estate’s creditors as a whole that the status of the funding agreement be settled sooner rather than later. That requires Ms Young’s application under s 178 to be resolved as soon as possible.

27    Ms Young and Ms Thomson filed evidence and submissions for a hearing of the substantive proceedings on 3 November 2016. The only reason why that hearing did not proceed was the failure by Ms Young to join Ironbark as a party earlier, a forensic choice she made. Ironbark is due to file its evidence by 24 November 2016. A hearing on 2 December 2016 will resolve the status of the funding agreement.

28    I am not satisfied that the overarching purpose of civil practice and procedure, set out in s 37M of the Federal Court of Australia Act, which reflects the public interest in the timely resolution of disputes, will be served by delaying the proceedings to the start of the term in 2017 in order to accommodate a new trustee. Indeed, there can be no assurance that that is when Mr Free would be in a position to address these proceedings.

29    Insofar as Ms Young has submitted that the Court would benefit from the evidence of a different experienced trustee in considering the issues in the substantive proceedings, it was open to Ms Young to put on that evidence by 3 November 2016.

Conclusion

30    Although I am satisfied that Ms Thomson would be justified in adjourning the creditors meeting for a short time, it should not be delayed any longer than necessary following the hearing on 2 December 2016.

31    I will give directions to the trustee, under s 134(4), that she is justified in adjourning the creditors’ meeting convened for today to a date which is no later than 14 days after Ms Young’s application under s 178 has been heard.

Associate:

Dated:    24 November 2016