FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - Decision of the trustee not to withdraw certain notices of opposition to the discharge from bankruptcy - Whether trustee should consider that decision

Bankruptcy Act 1966 (Cth) ss 149, 177, 178

JOHN ROBERT THOMAS  v MAX CHRISTOPHER DONNELLY (IN THE MATTER OF JOHN ROBERT THOMAS) (No. 2)

NG 8028 of 1997

Emmett J

Sydney

23 October 1997

IN THE MATTER OF JOHN ROBERT THOMAS

THE COURT ORDERS THAT:

1.         The trustee consider in the light of the Court’s reasons of today the question of whether or not the notices of objection dated 24 November 1994 and 21 February 1997 should be withdrawn.

2.         The costs of the bankrupt and of the Trustee be paid out of the bankrupt’s estate.

3.         The application be otherwise dismissed.

Note:    Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE MATTER OF JOHN ROBERT THOMAS

EX TEMPORE REASONS FOR JUDGMENT (No. 2)

HIS HONOUR:   There is presently before the court an application under section 178 of the Bankruptcy Act 1966 (Cth) brought by John Robert Thomas, a bankrupt, on 7 October 1997.  I have dismissed an objection to the competency of the application and I have now heard the substance of the application.  The bankrupt seeks an order setting aside “the act, omission or decision” of the respondent (“the Trustee”) as trustee of the estate of Mr Thomas, not to withdraw notices of opposition to the discharge of the bankrupt from bankruptcy lodged on 24 November 1994 and 21 February 1997.  He also seeks an order directing the Trustee to withdraw both of the notices.

The Trustee was appointed as Trustee in Bankruptcy on 4 December 1991.  The notice of objection filed on 24 November 1997 relied upon the following grounds:

(1)        after the date of the bankruptcy the bankrupt continued to manage a corporation as mentioned in section 91A of the Corporations Law without having been given leave to do so, under 229 of that Law (s.149D(1)(b));

(2)        the bankrupt, John Thomas, when requested in writing by the Trustee to provide written information about the bankrupt's income, failed to comply with the request (s.149D(1)(d));

(3)        the bankrupt failed to disclose to the Trustee a liability that existed at the date of the bankruptcy (s.149D(1)(i)); and

(4)        the bankrupt failed, whether intentionally or not, to disclose to the Trustee the bankrupt's beneficial interest in property (s.149D(n)).

The first two grounds had the effect of extending the bankruptcy to 4 December 1999.  The second two grounds had the effect of extending the bankruptcy to 4 December 1996.  Those two grounds therefore are of no present significance.  The evidence before me included evidence directed to the gravity of the matters referred to in the first two grounds.  It may have been possible for the bankrupt to seek to have those grounds made the subject of review.  However, that course was not adopted.  In any event the Trustee has not suggested that the matters which were the subject of the first two grounds would presently lead him to conclude that he ought to withhold withdrawal of the objection.

In my earlier reasons for concluding that the application was competent I outlined briefly the structure of the legislation pursuant to which the Trustee may withdraw an objection.  Under section 149B, the Trustee may file a written notice of objection.  Under section 149J, if at any time before the bankrupt is discharged the Trustee withdraws the objection, the Trustee is required to give notice of the withdrawal and the withdrawal takes effect at the beginning of the day when details of the notice are entered in the National Personal Insolvency Index.  It is clear that section 149J confers on a trustee a discretionary power to consider and make a decision as to whether, in particular circumstances, he should withdraw an objection which he has lodged.

A trustee is of course an officer of the court and, in the exercise of his powers and functions, he is required to take into account not only the interests of creditors but also the interest of the bankrupt and of the community generally.  In exercising his powers, the trustee should have in mind the object of enforcing careful and moral conduct on the part of the debtor and to uphold the commercial morality of the community.  While section 177 of the Bankruptcy Act requires the trustee to have regard to any lawful directions given by a resolution of the creditors, it is open to a trustee to decline to follow a direction of the creditors if in circumstances he regards it as inappropriate to comply with the directions.

The basis for the challenge to the Trustee's exercise or failure to exercise discretion concerns the conduct of the bankrupt in relation to the payment of contributions pursuant to section 139L of the Act.  As at 14 October 1996 the bankrupt was in arrears with the payment of contributions.  On 14 October 1996 his solicitors wrote to the Trustee saying, amongst other things:

...if the objections are withdrawn then simultaneously with such withdrawal our client would be prepared to arrange for payment of a further sum of $50,000.00 as a final payment to be made by Mr and Mrs Thomas to their estates.

On 30 October 1996, the solicitors wrote again saying in part:

The offer that our client s [sic] instruct us to put to you is that they will pay an initial payment of $50,000 and thereafter a further payment of $25,000 on or before 11 December 1997.

On or shortly before 22 November 1996 the Trustee met with the bankrupt to discuss his outstanding compulsory contributions.  During that meeting, a conversation to the following effect took place:

JRT [Mr Thomas]:     “If I pay all these contributions to date will you withdraw your objection”?

MCD [Trustee]:         “When you pay all contributions outstanding to the estate, I would be prepared to withdraw my notice of objection to your discharge.”

On 22 November 1996 the Trustee wrote to Mr Thomas saying, in part, as follows:

I refer to your recent telephone conversation with Angela Gallucci of my office and confirm that the amounts outstanding in respect of contributions are as follows:..

I confirm that upon payment of the above amounts, I should be in a position to withdraw my objection to your discharge on 4th December 1996 as discussed.

Thus, as at 22 November 1996 the arrears were in excess of $100,000.  It appears that the bankrupt had offered to pay something less than that.  It is also fair to say that the Trustee was evincing an intention, as at that time, if the full arrears were paid by 4 December 1996, to withdraw his objection to discharge.  The arrears were not paid by that date.  On 9 December 1996, the bankrupt's solicitors wrote to the Trustee saying in part:

Accordingly our client's offer in this matter is revised as follows:...

in relation to both estates.

Thus at that stage the bankrupt was not evincing an unequivocal intention to pay the arrears but was only indicating an intention to pay conditionally upon withdrawal of the objections.  At that stage there does not appear to have been any doubt expressed about the bankrupt's obligation to pay the amounts in question.

The Trustee says that following his meeting with the Bankrupt at about 22 November it occurred to him that it would be “fitting and proper to seek confirmation from the creditors to withdraw his objection” provided Mr Thomas satisfied his obligations to pay his outstanding compulsory contributions.  Accordingly he convened a meeting of creditors of the bankrupt which was held on 6 January 1997.  The meeting was attended by representatives of a number of creditors.  The minutes of that meeting record, amongst other things the following under the heading “WITHDRAWAL OF OBJECTION TO DISCHARGE”:

The President advised creditors that the main purpose of the meeting was to discuss the bankrupt’s proposal for the Trustee to withdraw his objection to discharge ...the President pointed out...

...that the proof of debt from the Australian Taxation Office was in respect of group tax and that they were claiming $524,774.38 in priority.  Therefore, it appeared unlikely that a dividend would be paid to any other creditor... this put a different light on the matter.

Anthony Higgs of the Commonwealth Bank asked the Trustee the nature of the objections, and the President explained these to him...

Mr Fitzgerald asked what reasons would creditors have to continue the bankruptcy if the money received by way of contributions from the bankrupt would all go to the tax office.  The President replied that in a commercial sense there would be no benefit.  The President stated that he felt he must take cognisance of any comments the Australian Taxation Office had to make, as in effect they were the only creditor to receive benefit from the continuation of the bankruptcy.  Helen O'Sullivan on behalf of the tax office responded that she had come to the meeting with an open mind...

The President... suggested that the meeting be adjourned as he could not calculate the value of votes.

A resolution was then passed to adjourn the meeting to 20 January 1997.  On that day the meeting was resumed.  Under the heading "WITHDRAWAL OF OBJECTION TO DISCHARGE" the following appears:

The President reminded creditors that the meeting of 6th January 1997 had been adjourned in order that the Trustee could determine the voting entitlements of certain creditors who realised securities since lodging their original Proofs of Debt in the administration.

The President confirm [sic] that Proofs of Debt had been determined for voting purposes and thus the resolution was put to creditors:

“That the Trustee be authorised to withdraw his objection to discharge against the bankrupts provided all outstanding contributions are paid.”

In favour of the motion were debts totalling $5,818,855 including the Australian Taxation Office.  Against the motion were debts totalling $13,305,594.  The motion was declared lost.  The minutes continue:

The President indicated he would give the bankrupt fourteen days in which to pay the outstanding contributions.  Failure to bring the contributions up to date would result in the Trustee lodging a further objection to discharge pursuant to Section 149D(1)(f).  This objection, and the objection already lodged, would mean that the administration would continue until 4th December 1999.

In the event, the bankrupt did not in fact pay the arrears and the Trustee accordingly filed the second of the notices of objection to which I have referred.  The ground specified in that notice of objection was that the bankrupt had failed to pay to the Trustee an amount that the bankrupt was liable to pay under section 139ZG of the Bankruptcy Act.

Before filing that notice of objection, however, a meeting took place between the bankrupt and the Trustee on 3 February 1997.  There are slightly differing versions of the conversation, although on careful analysis, I conclude that both the bankrupt and the Trustee are saying much the same thing.  The bankrupt's version was as follows:

Respdt[Trustee]:        If you don’t pay the arrears of income contribution within 14 days I shall have no alternative but to lodge a further objection to your discharge.

Me[Bankrupt]:           Well, you can do that if you have to, but once the money is paid the ground for objection will be gone.

Respdt[Trustee]:        Yes, that's right.

The Trustee's version of the conversation on 3 February was as follows:

MCD[Trustee]:          “If you don't pay the arrears of income contribution within 14 days, I shall have no alternative but to lodge a further objection to your discharge.”

JRT[Bankrupt]:          “Well, you can do that if you want to, but once the money is paid the ground for your objection will be gone.”

MCD[Trustee]:          “If you pay all outstanding contributions there will be no need for me to lodge any further objection to your discharge.”

Whichever version of that conversation is accepted, the substance seems to be, as I understand both of them, that the Trustee was discussing with the bankrupt the question of whether or not a further objection would be lodged.  It is common ground that at that stage there were still arrears. The Trustee was, in effect, saying: “if you do not pay the arrears I will lodge a further objection; however, if you do pay the arrears then the reason for filing objection will have disappeared”.  I do not read either version as referring to the objection which had already been lodged.

The arrears were not in fact paid until late June 1997.  The bankrupt's contention is that, once he had paid the arrears and indeed paid in excess of what was then assessed, the Trustee should then have withdrawn his objections.  The complaint of the bankrupt is that the Trustee in effect failed to exercise his discretion properly because he had undue regard to the decision of the creditors.

The question of withdrawal of objection is a matter for the Trustee.  It is not a matter for the creditors. An issue arose as to whether or not section 177 would apply to such a question.  Section 177 of the Bankruptcy Act provides that “in the administration of the estate of a bankrupt, the trustee shall have regard to any lawful directions given by resolution of the creditors”.  Counsel for the bankrupt contended that the decision to withdraw a notice of objection to discharge was not a matter arising in the administration of the estate of the bankrupt. So long as the Trustee continues to hold that office, any exercise of power by him must in my view be an exercise in the administration of the estate of the bankrupt. 

The administration of the estate of a bankrupt would primarily involve the matters which are specified in section 19 of the Bankruptcy Act.  Section 19(1) provides that the duties of the Trustee of the estate of a bankrupt include a number of matters such as determining whether the estate includes property that can be realised to pay a dividend to creditors, determining whether the bankrupt has made a transfer of property that is void against the Trustee, taking steps to recover property, taking whatever action is practicable to try to ensure that the bankrupt discharges all of the bankrupt's duties, referring to relevant law enforcement authorities any evidence of an offence, administering the estate as efficiently as possible by avoiding unnecessary expense and finally, exercising powers and performing functions in a commercially sound way. All of those matters it seems to me are in the administration of the estate of the bankrupt. 

Accordingly, I consider that, under section 177, the Trustee would be required to have regard to any lawful directions given by resolution of the creditors concerning withdrawal of an objection to discharge.  However, the resolution which was passed at the meeting on 20 January was not expressed to be a direction.  The meeting was convened to enable the Trustee to sound out the creditors as to their attitude but there was no direction given that the Trustee not withdraw his objection.  The creditors rather rejected a proposal that the Trustee be “authorised” to withdraw his objection to discharge. The Trustee, of course, did not need the authority of the creditors to withdraw his objection. 

Accordingly, I do not consider that the resolution of the meeting of creditors constituted a lawful direction given by them to the Trustee so as to require him to have regard to it.  On the other hand, the result of the meeting did indicate an attitude on the part of the creditors which it may be appropriate for the Trustee to have regard to, if he chose to do so, provided that the attitude was one which could be said to be relevant to the decision of the Trustee.

One comment which one can make about the decision of the creditors is that no reason appears to have been advanced as to why the creditors opposed the withdrawal of objection to discharge.  It was suggested in the minutes that the only creditor who, on the balance of probabilities, was likely to benefit from the continuation of the bankruptcy, was the Australian Taxation Office. The Australian Taxation Office supported the withdrawal of the notice.  Nothing is stated by any of the creditors who opposed the withdrawal as to why they opposed.

Accordingly, while the fact of the opposition was a matter which the Trustee was entitled to take into account, I consider that decisive weight ought not to have been given to it, in the light of the absence of reasons and in the absence of any reason which occurred to the Trustee as to why it was in the interests of the creditors, other than the Australian Taxation Office, for the bankruptcy to continue.  However, the Trustee, both by his subsequent conduct but more particularly in his evidence before me, indicated that the decision of the creditors was decisive.  In cross‑examination, the Trustee said that when he had had the meeting with Mr Thomas in November, he indicated that he saw no reason why he could not withdraw the objection if the funds were paid.

However, he also said that when the creditors determined the way they determined in the creditors meeting, he made a decision not to withdraw his objection.  He agreed that, on or after 20 January, he made a decision that, even if the contributions were paid, he still would not withdraw his notices of objection.  He said that decision was made because, under his understanding of the situation, the compulsory contribution payments are payments that are to be made in any event, irrespective of whether there is any objection filed or not.

The Trustee agreed that, pursuant to that decision made on or after 20 January, even when all payments due were made on 30 June, he did not withdraw his notice of opposition.  He also agreed that that was a deliberate omission on his part not to withdraw.  He also said that in his view, there would have to be good reason for him to do something alternative to what the creditors recommended.  He said that it had become apparent, since the meeting, that some creditors were of the opinion that the bankruptcy should continue, which is one of the reasons why the meeting was called.

The Trustee also agreed that it was fair to say he was prepared to withdraw the objection but his final determination in relation to that was the outcome of the creditors meeting.  He agreed that what he regarded as the final outcome of the creditors meeting was the decisive factor that caused him to adopt the course that he did, that is of not withdrawing the objection.

That evidence is indicative of Mr Donnelly, as trustee, changing his attitude from that which he evinced in the discussion with the bankrupt in November 1996.  In regarding the resolution of the creditors as decisive of the question of whether or not he should withdraw the objection that had been filed in 1994, the Trustee gave excessive weight to the resolution.  His evidence also indicates that the same attitude was adopted to the notice of objection which was filed in February, although it is not entirely clear, from the way in which the questions were put to him and the answers that he gave, that any distinction was drawn between the two notices of objection.

In so far as the Trustee appears to have formed the view, as at November 1996 that, upon payment of the arrears he would withdraw the objection which was then current, nothing has occurred to alter that judgment other than the resolution.  Certainly there was a failure by the bankrupt to make any further payment and that failure continued for more than six months. However, the Trustee has not said that that continued failure changed his attitude as expressed in November.  The only thing which he says changed his attitude was the resolution of the creditors.

The second objection of course was lodged because of that continued failure to pay arrears.  It is not clear to me that the Trustee has turned his mind to the significance of the continued default after November 1996 and up to the end of June 1997.  On the other hand, his evidence indicates that he regarded the decision of the creditors as decisive.  I consider that the appropriate course is to direct the Trustee to reconsider the question of withdrawal of the notices of objection in the light of the circumstances as they exist at the time of that reconsideration.

However, I would also direct the Trustee that he should not regard the resolution of the creditors passed on 20 January 1997 as decisive of the matter of whether or not he should withdraw either of the notices of objection.  While he is entitled to have regard to the fact that some of the creditors oppose the withdrawal, the weight which should be given to that opposition would depend upon the reasons advanced by the creditors.  As I read the minutes, no reasons have been advanced and, accordingly the weight to be given to that resolution would be very slight.  On the other hand, the Trustee may well take the view that the continued default from November through to June, in the face of a further notice of objection is a factor which he would take into deciding whether or not to withdraw at that stage.

In other words, even in early February when the Trustee indicated that he was contemplating filing a further notice of objection based on that default, there was still no rectification of the default.  That matter of course is not decisive but it is the reason why I consider it appropriate that the Trustee look at the matter in the light of the circumstances as they now exist, having regard to the conduct of the bankrupt up until now rather than endeavouring, myself, to make a decision on behalf of the Trustee either as at today or as at some earlier time.

The orders I propose are that the Trustee consider, in the light of the reasons which I have expressed today, the question of whether or not the notices of objection dated 24 November 1994 and 21 February 1997 should be withdrawn.  I order that the costs of the bankrupt and of the Trustee be paid out of the bankrupt's estate.  I order that the application of 2 September 1997 be otherwise dismissed.

Associate:

Dated:              23 October 1997