FEDERAL COURT OF AUSTRALIA

Frost v Sheahan (Trustee) [2009] FCAFC 20

BANKRUPTCY – appeal – exercise of Court’s discretion under Bankruptcy Act 1966 (Cth) s 178 – notices of objection to automatic discharge from bankruptcy – power to make such order as court thinks just and equitable – whether primary judge erred in not ordering withdrawal of the notices of objection – substantial compliance with bankrupt’s obligation to provide particulars of income – other discretionary factors

Held: appeal dismissed

Bankruptcy Act 1966 (Cth)

Frost v Sheahan (2005) 220 ALR 733; [2005] FCA 1014

Frost v Sheahan (2008) 249 ALR 538; [2008] FCA 1073

House v The King (1936) 55 CLR 499

Macchia v Nilant 110 FCR 101; [2001] FCA 7

Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24

Re Asset Risk Management and Others (1995)130 ALR 605

Re Tyndall; Ex parte Official Receiver (1977) 30 FLR 6; 17 ALR 182; [1977] FCA 15

ALLEN GORDON FROST v JOHN SHEAHAN AS TRUSTEE OF THE BANKRUPT ESTATE OF ALLEN GORDON FROST

SAD 126 of 2008

RYAN, MANSFIELD AND JAGOT JJ

27 february 2009

ADELAIDE

THE COURT ORDERS THAT:

1.                  The appeal is dismissed.

2.                  The appellant is to pay the respondent’s costs of the appeal as agreed or taxed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

the court:

1                     The appellant, Mr Frost, is a bankrupt.  The respondent is the trustee of Mr Frost’s bankrupt estate.  Mr Frost applied to the Court to set aside the trustee’s decision not to withdraw objections to Mr Frost’s discharge from bankruptcy.  The primary judge dismissed the application (Frost v Sheahan (2008) 249 ALR 538; [2008] FCA 1073).  In this appeal Mr Frost contends that the primary judge erred in dismissing his application and seeks an order that the trustee withdraw all objections to the discharge from bankruptcy. 

2                     Although the submissions of both parties on the appeal emphasised a range of discretionary considerations said to make it just and equitable (or not) for an order to be made under s 178 of the Bankruptcy Act 1966 (Cth) (including matters arising after the decision of the primary judge) it is first necessary to determine whether the decision of the primary judge discloses any error of the requisite kind.  Under s 178 the Court may make “such order in the matter as it thinks just and equitable”.  Accordingly, the decision at first instance was discretionary and the principles in House v The King (1936) 55 CLR 499 at 504 – 505 apply to the appeal, namely:

The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.

3                     Mr Frost submitted that the primary judge’s discretion miscarried for four reasons: - (i) the primary judge should have found that the provision of Mr Frost’s income tax returns was substantial compliance with the obligations imposed on Mr Frost by s 139U of the Bankruptcy Act, (ii) the primary judge had proceeded on the erroneous basis that if he were to find that Mr Frost had not substantially complied with his obligations under s 139U then the discretion under s 178 would not be available to be exercised in Mr Frost’s favour, (iii) the primary judge had proceeded on the erroneous basis that a potential collateral advantage to the trustee in Family Court proceedings was a discretionary factor in favour of the bankruptcy continuing, and (iv) the primary judge erred in failing to find that a range of factors favoured the withdrawal of the notices of objection.

4                     Certain provisions of the Bankruptcy Act set the context for the resolution of these issues.  Under s 149 a bankrupt is usually discharged from bankruptcy at the end of the period of three years from the filing of a statement of affairs.  However, a trustee of a bankrupt estate may (and in certain circumstances must) file a notice of objection to the discharge in accordance with s 149B.  The grounds of objection are set out in s 149D(1) and include, relevantly, s 149(1)(e) (where the bankrupt fails to disclose any particulars of income or expected income as required by s 139U), and s 149(1)(f) (where the bankrupt fails to pay the trustee an amount the bankrupt was liable to pay under s 139ZG).  By s 149A, a discharge under s 149 does not operate if such an objection takes effect.  Instead the bankruptcy continues for a further prescribed period unless, at an earlier time, the trustee withdraws, the Inspector-General cancels, or the Court orders the trustee to withdraw, the notice of objection (as contemplated by ss 149J, 149N and 178 respectively).

5                     Section 178 of the Bankruptcy Act is as follows:

(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.

(2)     The application must be made not later than 60 days after the day on which the person became aware of the trustee's act, omission or decision.

6                     Mr Frost filed a statement of affairs on 29 June 2001.  In the usual course he would have been discharged from bankruptcy on 29 June 2004.  He was not discharged because the trustee filed notices of objection to the discharge.  The trustee acknowledges that Mr Frost will be discharged from bankruptcy on 29 June 2009 by operation of s 149A(2)(a)(i) of the Bankruptcy Act, irrespective of any notices of objection outstanding at that date.

7                     Mr Frost first applied to the Court in 2004 to have the trustee withdraw certain of the notices.  He was unsuccessful in those proceedings (Frost v Sheahan (2005) 220 ALR 733; [2005] FCA 1014).  Mr Frost commenced further proceedings seeking similar orders on 8 August 2007.  After commencement the trustee filed a further (in fact, the fifth) notice of objection.  By the time of the hearing of this further proceeding before the primary judge only two notices of objection (the fourth and the fifth) remained relevant.  The fourth notice relied on Mr Frost’s failure to disclose particulars of income or expected income (ss 149D(1)(e) and 139U of the Bankruptcy Act) and failure to make payments of income contributions (ss 149D(1)(f) and 139ZG of the Bankruptcy Act).  The fifth notice relied only on Mr Frost’s failure to disclose particulars of income or expected income.  Mr Frost claimed that the trustee should have withdrawn the notices under s 149J(1) of the Bankruptcy Act in response to Mr Frost’s request to do so (albeit a request made after the proceedings were commenced).  The application before the primary judge proceeded on the basis that the trustee’s refusal to withdraw the notices constituted an act, omission or decision of the trustee within the meaning of s 178.  The primary judge dismissed the second application (to which this appeal relates) on 25 July 2008. 

8                     Neither party disputed the primary judge’s summary of the principles applicable to s 178 of the Bankruptcy Act at [34] of the reasons, which included the following:

1. Section 178 confers a "supervisory jurisdiction over the conduct of the trustee": Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124 at 132 per Brennan CJ, Gaudron and McHugh JJ. The section confers on the Court a very wide discretion: McGoldrick v Official Trustee in Bankruptcy [1993] FCA 636; (1993) 47 FCR 547 at 552-553.

2. It is not necessary for an applicant for relief under the section to show that the trustee’s decision was absurd, or unreasonable or taken in bad faith. The Court has a wide discretion to make such order as seems appropriate in the circumstances of the case: Re Tyndall; Ex parte Official Receiver (1977) 30 FLR 6 at 9-10; [1977] FCA 15; 17 ALR 182 at 186 per Deane J. At the same time, 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.

3. An order may be made under s 178 even if the trustee’s decision was correct on the material before him, if, for example, additional material is put before the Court.

9                     Further, neither party disputed the primary judge’s decision that the ground of alleged failure to make payments of income was so uncertain that it “should not stand in the way” of Mr Frost’s discharge from bankruptcy (at [75]). 

THE SUBSTANTIAL COMPLIANCE ISSUE

10                  As noted in [3] of these reasons, there are two aspects to this issue.  First, whether the primary judge should have found that Mr Frost had substantially complied with his obligations to provide particulars of actual and expected income (ss 149D(1)(e) and 139U of the Bankruptcy Act).  Second, whether the primary judge assumed that the discretion under s 178 was not available if Mr Frost was found not to have substantially complied with these statutory obligations.

11                  The primary judge (at [48]) considered that substantial compliance required the provision of sufficient information to facilitate a proper assessment of income by the trustee (which is the purpose of ss 149(1)(e) and 139U).  This approach accords with the reasoning of Burchett J in Re Asset Risk Management and Others (1995)130 ALR 605 at 607, namely, that “…substantial compliance is a matter of degree.  What the Court is concerned with is the practical effect of what has been done, which should be compared with the practical effect the legislature appears to have sought to achieve”.  The primary judge found that the provision of income tax returns did not amount to substantial compliance with the statutory obligation. 

12                  Mr Frost submitted that provision of his income tax returns disclosed to the trustee details of Mr Frost’s employer, the directors of the employer, the periods of employment, and the amount of income earned by Mr Frost during each financial year, which was sufficient to satisfy the purpose of the statutory obligation.  Section 139U(1)(a), however, requires the provision of particulars of actual and expected income.  Income tax returns do not provide information about expected income.  Further, there was ample evidence supporting the primary judge’s conclusion (at [58]) that the income disclosed in the returns may not have disclosed Mr Frost’s true income, particularly given the lack of any records evidencing the amount of cash he had been paid or the cheques payable to cash that he had received.  In these circumstances it was open to the primary judge to make the finding that Mr Frost had not substantially complied with his statutory obligations.  This conclusion is sufficient to dispose of this ground of appeal.

13                  Mr Frost submitted that the primary judge’s reasons at [48], [60] and [79] disclosed a mistaken assumption that a finding against Mr Frost as to whether he had substantially complied with his obligations precluded the making of any order in Mr Frost’s favour under s 178.  Those paragraphs, read according to their ordinary meaning and in the context of the reasons as a whole, do not disclose any such error.  When stating the relevant principles the primary judge identified the issue of substantial compliance as but one of a range of potentially relevant considerations a trustee (and also, implicitly, the Court on application under s 178) would consider on being asked to withdraw a notice of objection (see [35] at 5).  Further, the primary judge’s observation in [35] at 5 that it “is difficult to see how a trustee could be criticised for refusing to withdraw an objection that had not been substantially complied with” reinforces this acknowledgment that substantial compliance is one factor relevant to the trustee’s decision, albeit a factor of significant and potentially determinative weight.  The paragraphs on which Mr Frost relies in support of the allegation of error should be considered in this broader context.

14                  Paragraph [48] of the primary judge’s reasons does not disclose the alleged error.  The paragraph is simply emphasising that, irrespective of the lack of substantial compliance, other discretionary factors were sufficient to lead to dismissal of Mr Frost’s application.  The same is true of the primary judge’s observations in [60].  In that paragraph the primary judge is explaining that the discretionary factor of lack of substantial compliance was sufficient, in and of itself, to lead to dismissal of Mr Frost’s application but, alternatively, other discretionary factors independently led to the same result.  The summary in [79] is consistent with this approach.  None of the paragraphs suggests that the primary judge (contrary to his own identification of the applicable principles in [35]) assumed that the question of substantial compliance was separate from the consideration of all factors relevant to s 178 or that a negative answer to that question necessarily precluded the making of an order under s 178. 

FAMILY COURT PROCEEDINGS

15                  The primary judge dealt with this potentially complex issue in [76] to [77] of his reasons.  In short, Mrs Frost commenced proceedings in the Family Court of Australia seeking orders about (amongst other things) property known as the Angas Street property.  A company associated with Mr Frost is the registered proprietor of that property.  There is a question whether the company holds the property in its own right or as trustee of the Frost Family Trust.  The trustee contends, and Mr Frost denies, that the outcome of the Family Court proceedings (at least if determined before 29 June 2009, which now seems unlikely) may potentially affect creditors because, depending on the outcome, half of the property may be vested in Mr Frost.  The primary judge said that the trustee’s submissions depended on a number of assumptions, not all of which had been addressed, but that he could not “rule out” the possibility raised by those submissions which his Honour described as seeming to be “a discretionary reason in favour of allowing the administration of the estate to continue”.

16                  On the appeal Mr Frost submitted that this was in error.  Section 149C(1)(a) requires a notice of objection to set out a ground of objection as referred to in s 149D(1).  The grounds identified in s 149D(1) are exhaustive.  Those grounds do not include each and every matter arising in connection with a bankruptcy.  Specifically, they do not include a trustee obtaining some collateral advantage such as the trustee claimed to be possible in the present case.  As the trustee could not file a notice of objection on that ground, Mr Frost submitted that the trustee could not refuse to withdraw a notice on that basis, with the consequence that the Family Court proceedings were not a relevant consideration for the primary judge under s 178. 

17                  The effect of Mr Frost’s submission is that the possible outcome of the Family Court proceedings was an irrelevant consideration which the primary judge was bound to disregard.  The difficulty with the submission is that, irrespective of any limitations on the functions of the trustee, s 178 enables application to be made to the Court by a nominated person affected by an act, omission or decision of a trustee and empowers the Court to make “such order in the matter as it thinks just and equitable”.  In Re Tyndall; Ex parte Official Receiver (1977) 30 FLR 6 at 9-10 Deane J described s 178 as conferring the “widest possible discretion as to the appropriate order which should be made in the particular case” (see also, to similar effect, Macchia v Nilant 110 FCR 101; [2001] FCA 7 at [38]).  The law relating to irrelevant considerations is clear; “where a statute confers a discretion which in its terms is unconfined, the factors that may be taken into account in the exercise of the discretion are similarly unconfined, except in so far as there may be found in the subject matter, scope and purpose of the statute some implied limitation on the factors to which the decision-maker may legitimately have regard” (Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 40).  Nothing in the subject matter, scope and purpose of the Bankruptcy Act supports the submission that the primary judge was precluded from having regard to the potential outcome of the Family Court proceedings. 

18                  Nor can it be accepted that the primary judge erred in accepting the possibility of an outcome affecting creditors.  The evidence before the primary judge was simply insufficient for his Honour to discount the possibility.  The evidence remains in that state on the appeal. 

OTHER DISCRETIONARY FACTORS

19                  Mr Frost submitted that a range of other factors favoured withdrawal of the notices of objection and the primary judge erred in concluding to the contrary.  This submission is difficult to reconcile with the limits on appellate review of discretionary decisions identified in House v The King.  First, it is apparent that the primary judge considered each of the seven matters on which Mr Frost relies as a factor favouring discharge.  Mr Frost did not submit to the contrary.  Second, the weight to be given to those factors was a matter for the primary judge (Peko-Wallsend at 41).  Third, the decision of the primary judge was not “unreasonable or plainly unjust” (House v The King at 505) upon the facts as at the date of judgment (25 July 2008).  The fact that the further passage of time has possibly reduced the utility of the bankruptcy continuing from that found by the primary judge is immaterial and does not support any conclusion of error. 

conclusion and orders

20                  Mr Frost has not identified any error of the requisite kind by the primary judge.  It follows that the evidence of circumstances arising after the primary judge’s decision and the submissions of the parties on the merits of making or not making orders under s 178 are immaterial.  There is no occasion for the exercise of any power by this Court other than the making of an order dismissing the appeal with costs.

Associate:

Dated:         27 February 2009