CATCHWORDS

BANKRUPTCY  -  application to set aside a composition  -  whether controlling trustee opposed application and liable for costs without right of indemnity.

Bankruptcy Act 1996 Pt X; ss32, 201, 222

Adsett v Berlouis (1992) 37 FCR 201

Re Beddoe; Downes v Cottam [1893] 1 Ch 547

Re Dingle; Westpac Banking Corporation v Worrell (1993) 119 ALR 265

House v The King (1935) 55 CLR 499

Oayda v Mercantile Mutual Life Insurance Company Limited, Federal Court of Australia, Wilcox J, 20 February 1994 (unreported)

DAVID KENNEDY V AUSTRALIAN MUTUAL PROVIDENT SOCIETY

(ARBN 008 387 371)

SG 31 OF 1996

LEE, O'LOUGHLIN, MANSFIELD JJ

ADELAIDE

12 NOVEMBER 1996

IN THE FEDERAL COURT)

OF AUSTRALIA         )

SOUTH AUSTRALIA      )

DISTRICT REGISTRY    )

GENERAL DIVISION     )    NO. SG 31 OF 1996

                          ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

B E T W E E N:            DAVID KENNEDY

                               Appellant

                          and

                          AUSTRALIAN MUTUAL PROVIDENT SOCIETY (ARBN 008 387 371)

                               Respondent

                       MINUTE OF ORDER

THE COURT:           LEE, O'LOUGHLIN, MANSFIELD JJ

DATE OF ORDER:       12 NOVEMBER 1996

WHERE MADE:          ADELAIDE

THE COURT ORDERS THAT:

The appeal be dismissed with costs.

          Note:  Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT)

OF AUSTRALIA         )

SOUTH AUSTRALIA      )

DISTRICT REGISTRY    )

GENERAL DIVISION     )    NO. SG 31 OF 1996

                          ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

B E T W E E N:            DAVID KENNEDY

                               Appellant

                          and

                          AUSTRALIAN MUTUAL PROVIDENT SOCIETY (ARBN 008 387 371)

                               Respondent

CORAM:    LEE, O'LOUGHLIN, MANSFIELD JJ

DATE :    12 NOVEMBER 1996

PLACE:    PERTH

                    REASONS FOR JUDGMENT

THE COURT:

          This is an appeal from an order made by a Judge of this Court (von Doussa J) directing the appellant ("the trustee") to pay to the respondent ("AMP") the costs incurred by AMP from 21 December 1995 in an application it commenced in this Court under the Bankruptcy Act 1966 ("the Act") in April 1994.

          The application, under s222 of the Act, sought an order, inter alia, setting aside a composition approved at a meeting of creditors of Mr and Mrs Hughes held on 28 March 1994 and convened by the trustee as the controlling trustee appointed under Pt X of the Act.  The application joined the trustee as first respondent and Mr and Mrs Hughes as second respondents.

          In the course of the meeting of creditors of which the trustee was appointed chairman, the trustee, as chairman, rejected the claim of AMP that it was entitled to vote as a creditor of Mr Hughes.  It was not in issue in this appeal that if AMP had been permitted to vote on the resolution presented at the meeting, the proposed composition would not have been approved.

          In a lengthy pleading, described as points of claim, AMP sought an order that the composition be declared void on the ground that the trustee had wrongly denied AMP's claim that it was a creditor of Mr Hughes and on the further grounds that there had been non-compliance with the provisions of Pt X of the Act by Mr and Mrs Hughes, and that the composition proposed by Mr and Mrs Hughes was not reasonable and not in the interests of creditors.

          The application was defended by Mr and Mrs Hughes.  The trustee filed three affidavits, the last of which, filed on 6 October 1994 sought to uphold the decision he had made as chairman and to support the reasonableness of the composition.

          At a directions hearing held on 24 October 1994, the trustee appeared in person and informed the Court that he had filed all the material he wished to put before the Court and  indicated that he would abide by the decision of the Court.

          Further directions hearings were held on 18 November 1994, 14 December 1994, 9 February 1995, 2 March 1995, 10 April 1995, 19 May 1995 and 9 June 1995, none of which were attended by the trustee. At the directions hearing held on 9 June 1995 an order was made requiring the trustee to appear in person, or by counsel, at the next direction hearing to be held on 1 September 1995 so that his status in the continuation of the litigation could be ascertained.  The points of claim pleading was filed on 7 July 1995.  On 1 September 1995 the trustee appeared, represented by counsel, and an order was made permitting the trustee, if so advised, to file a defence to the points of claim.

          As noted by His Honour in his judgment at page 10, the order as made was permissive and did not direct the trustee to file a defence.  Nevertheless, points of defence were filed by the trustee on 21 December 1995 in which the trustee opposed the claim in part, by pleading that the decision to refuse to permit AMP to vote was correct and that the composition was not unreasonable.  The defence also put in issue the claim of AMP that the composition was not for the benefit of the creditors.

          The application was listed for trial on 4 March 1996.  When the matter came on for hearing on that date the Court was informed that a settlement had been reached on substantive issues and the the only issue remaining was in respect of the costs of the proceeding.

          Accordingly, an order was made that the composition be declared void and that at relevant times AMP was a creditor of Mr Hughes.  AMP sought an order that the trustee pay the whole of the costs of the proceedings claiming that the litigation had been caused by breaches of duty by the trustee as chairman of the meeting of creditors by not obtaining independent legal advice about the AMP claim that it was a creditor of Mr Hughes and by not allowing AMP to vote on the composition resolution put to the meeting.  AMP further submitted that in any event the trustee, by his affidavits and points of defence, had taken a position as an opponent of the AMP's case in the litigation.

          It was accepted by the trial Judge that the trustee had committed a breach of duty by failing to obtain legal advice on the claim by AMP that it was a creditor of Mr Hughes entitled to vote at the meeting.  (See:  Re Dingle; Westpac Banking Corporation v Worrell (1993) 119 ALR 265 at 276.

          His Honour noted that pursuant to s32 of the Act the Court had a discretion to make such order as to costs as it thought fit, such discretion to be exercised judicially according due weight to reason and justice.  (See:  House v The King (1935) 55 CLR 499 per Starke J at 502.)  His Honour also noted that a trustee who took an active role in proceedings relating to the performance of the trustee was at risk of an order for costs in the same manner as any other litigant. 

          The nature of a trustee's right to an indemnity in respect of such a costs order as described in Adsett v Berlouis (1992) 37 FCR 201 at 210, was also considered.  In Adsett the Court held that under the general law, a trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred.  The Court said at page 210:

            "The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred.  Where for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout.  It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper."

          In Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562 Bowen LJ stated:

            "If there be one consideration again more than another which ought to be present to the mind of
a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred."

          His Honour recognised that a trustee exercising a statutory duty imposed by s201 of the Act fulfilled a public duty in the public interest, and stated that a Court should be  reluctant to impose "too heavy a burden on people who have responsibilities of that kind to fulfil lest...a reluctance grows amongst those who have the qualifications and expertise to take on the role to do so".  His Honour accepted that this consideration must be weighed against the further consideration identified by Wilcox J in Oayda v Mercantile Mutual Life Insurance Company Limited, Federal Court of Australia, 20 February 1994 (unreported), namely, that trustees receive substantial remuneration for their services and, therefore, assume substantial responsibilities and duties.

          Having given due attention to these matters his Honour was not persuaded that the trustee should be made liable for the costs of the proceeding by reason of the trustee's breach of duty which led to the commencement of the litigation.

          His Honour recognised that at the time the composition was approved, there was already a dispute between AMP and Mr Hughes the subject of litigation.  After the composition that dispute "mushroomed" and a great deal of the costs of the proceeding in this Court had its genesis in the dispute beteen AMP and Mr Hughes.  His Honour found that it would impose too heavy a burden upon the trustee if the entire costs of the proceeding were awarded against him.

          His Honour found that in the first two affidavits filed the trustee acted reasonably and as required of a trustee of a composition but in filing an affidavit and a defence which joined issue with AMP, the trustee adopted the position of an opposing litigant and should bear costs accordingly.  It was on this basis that his Honour awarded the costs of the proceedings against the trustee from the date the points of defence were filed, namely, 21 December 1995 regarding such an order as striking an appropriate balance between the claim of AMP against the trustee for the whole of the costs of the litigation and the trustee's obligation to participate in the litigation to inform the Court of relevant matters as a neutral party.  His Honour further ordered that the trustee was not entitled to be indemnified out of the funds of the composition, either in respect of the costs he had incurred or the costs to be paid to AMP.  The exclusion of the right of indemnity operated in respect of the trustee's costs incurred after 21 December 1995, being the date on and after which his Honour considered that costs incurred by the trustee were not properly incurred and hence no right of indemnity arose.

          The trustee now appeals from those orders submitting that his position throughout was that he intended to abide the decision of the Court.  It was submitted his Honour erred by failing to take into consideration that the trustee had consistently maintained that he had no view as to the outcome of the proceeding.  It was also submitted that his Honour was mistaken in assuming that the filing of the points of defence by the trustee caused the AMP to undertake further work other than that necessary to meet matters put in dispute by the defence of Mr and Mrs Hughes.

          It was accepted that the principles to be applied were set out correctly by his Honour where he stated:

            "In the face of an application to have a composition set aside on those grounds, it would be expected normally that a controlling trustee who had acted as chairman of the meeting of creditors would come to the Court at an early stage and indicate that he or she would abide by the decision of the Court on the substantive matters raised by the Applicant.  It would be normal, and expected, for the trustee to file an affidavit, informing the Court of the procedural steps which had occurred in relation to the meeting of creditors and of the voting which had occurred.  Where it is alleged that the composition is unreasonable and not in the interests of the creditors, it would be appropriate for the controlling trustee to cover matters relating to the business affairs of the debtor or debtors, and to indicate to the Court the extent of the claims that had been received so that the Court would be appraised of information that would permit the Court to judge the reasonableness or otherwise of the composition."

          With regard to the affidavits filed by the trustee, his Honour stated that the first affidavit, filed 28 April 1994, contained, for the most part appropriate background information, and that the second affidavit sworn by the trustee on 29 June 1994 contained information appropriate to be stated by a trustee adopting a neutral position.

          It was in relation to the third affidavit sworn by the trustee on 6 October 1994 that His Honour found the trustee had "entered the arena as a partisan party".

          The principles which govern an appeal in respect of the exercise of a discretion, such as that determining where the costs of a proceeding are to fall, are well known.  As stated in House v The King by Dixon, Evatt and McTiernan JJ at page 504-505:

           "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.  Unlike courts of criminal appeal, this court has not been given a special or particular power to review sentences imposed upon convicted person.  Its authority to do so belongs to it only in virtue of its general appellate power."

          It must be demonstrated that an error has occurred in the reasoning of the Court, or, alternatively that the matter on its salient facts required another decision to be made, and, therefore, the order appealed from set aside, notwithstanding that a specific error has not been identified, the failure to make the required order making it apparent that an error of law must be involved.

          In this appeal, no error of law has been identified.  The trustee's principal submission is that his Honour erred in having regard to the defence according to its terms.  The trustee submits that his Honour should have looked behind the defence pleaded and concluded that in truth the trustee did not intend to participate in the proceeding, notwithstanding the fact that the pleading, on its face, suggested otherwise.

          When the trustee instructed his solicitors to file points of defence on 21 December 1995, the trustee asserted that his decision to refuse AMP's claim as a creditor was correct and that he would make submissions to the Court
accordingly.  Notwithstanding that the trustee may have so acted after receiving legal advice, his Honour was entitled to consider that with regard to the funds of the composition, the costs incurred by that pleading, and thereafter, were not properly incurred by the trustee.

          His Honour had regard to relevant matters when exercising his discretion on the issue of costs and in determining what was a fair or just order in all the circumstances.  The order made by his Honour does not offend commonsense or reason and is not shown to have been affected by any error of law.

          It follows that the appeal must be dismissed with costs.

          I certify that this and the preceding ten pages are a true copy of the Reasons for Judgment of the Court.

           Associate:

           Date:     12 November 1996

                                APPEARANCES

Counsel for the Applicant:    J R Sulan QC

                              J A Neate

Solicitors for the Applicant:  Michell Sillar Lynch & Meyer

Counsel for the Respondent:  G A A Nettle QC

                             I D Martindale

Solicitors for the Respondent:  Minter Ellison Baker O'Loughlin

Date of Hearing  :12 November 1996

Date of Judgment :12 November 1996