FEDERAL COURT OF AUSTRALIA

Horne (Trustee), In the matter of Pruzanski [2000] FCA 571

BANKRUPTCY – Applicant sought removal of trustee in bankruptcy and orders restraining a firm of solicitors from further acting on behalf of the trustee and any other trustee subsequently appointed – whether conduct of trustee justifies his removal – whether conduct of firm of solicitors justifies its restraint

Bankruptcy Act 1966 (Cth) s81

Horne (Trustee), In the matter of Pruzanski [2000] FCA 151 referred to

Re Ly; Ex p Dixon v Ly (1995) 62 FCR 432 followed

Re Peter Leslie Challen (Beaumont J, 23 April 1996, unreported) followed

Karounos v Official Trustee (1988) 19 FCR 330 applied

RE: LEON MARK PRUZANSKI, KAREN YVONNE PRUZANSKI, KEILA PRUZANSKI and TEWEL PRUZANSKI (Bankrupts) and EX PARTE: STIRLING LINDLEY HORNE (In his capacity as the Trustee of the Bankrupt Estates of Leon Mark Pruzanski, Karen Yvonne Pruzanski, Keila Pruzanski and Tewel Pruzanski)

V7731 of 1999

V7806-7808 of 1999

MARSHALL J

12 MAY 2000

MELBOURNE

THE COURT ORDERS THAT:

1.                  The bankrupts’ motion, notice of which was given on 23 February 2000, be dismissed.

2.                  There be no order as to costs of the motion.

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

REASONS FOR JUDGMENT

1                     There are two motions before the Court which deal with aspects of the administration of the bankrupt estates of Leon Mark Pruzanski, Karen Yvonne Pruzanski, Keila Pruzanski and Tewel Pruzanski (“the bankrupts”).

Background

2                     On 8 February 2000 the Court made orders and delivered ex-tempore reasons for judgment dealing with a motion filed by Stayglen Investments Pty Ltd (“Stayglen”) on 20 December 1999 as amended on 7 February 2000. See Horne (Trustee), In the matter of Pruzanski [2000] FCA 151. These reasons for judgment should be read together with the reasons delivered on 8 February 2000.

3                     In its orders of 8 February 2000 the Court restrained Freehill Hollingdale and Page, solicitors, (“Freehills”) from acting on behalf of the trustee of the estates of the bankrupts having regard to that firm’s role in advising the Australian and New Zealand Banking Group Ltd (“the ANZ Bank”). The Court deferred further consideration of any order sought by Stayglen to remove Stirling Lindley Horne (“the trustee”) as the trustee of the relevant bankrupt estates. The deferral was nominally until 26 April 2000.

4                     On 23 February 2000 the bankrupts filed a motion in which they sought the removal of the trustee and an order restraining his new solicitors from further acting on behalf of any trustee appointed by the Court to administer the relevant bankrupt estates. Further ancillary orders were also sought.

5                     The bankrupts’ motion was made returnable for 24 February 2000 but was adjourned to 7 April 2000. The Court brought forward the listing of Stayglen’s adjourned motion to 7 April 2000 so that par 1 of that motion and the bankrupts’ motion could be heard together. On 7 April 2000 both motions were adjourned to 28 April 2000 with the trustee’s costs of the adjournment being reserved.

6                     On 28 April 2000 Stayglen did not appear to advance its claims made in par 1 of its adjourned motion. The balance of the adjourned Stayglen motion was dismissed, with costs, including the reserved costs of 7 April 2000.

7                     The bankrupts’ motion primarily sought to remove the trustee. That issue was dealt with in the hearing that led to the order of 8 February 2000 but in a secondary way to the main issue which was whether Freehills should continue to act for the trustee or any other trustee appointed by the Court.

8                     At par 7 of the Court’s reasons of 8 February 2000 the following was said:

“There is inadequate material presently before the Court to justify an order in terms of par 1 of the Notice of Motion. It is the view of the Court that there is no persuasive evidence that Mr Horne has engaged in conduct which justifies his removal as trustee, at least at this stage. On the evidence before the Court Mr Horne appears to have substantially conducted himself professionally and relied on legal advice where appropriate on all contentious issues. However, given the concerns of counsel for Stayglen and counsel for the Pruzanskis that the trustee has acted in combination with Freehills to disadvantage their clients, the Court will adjourn par 1 of the motion to a later date … .”

9                     It is obvious from the reasons for judgment of 8 February 2000 that I was concerned to allow for the trustee to appoint new solicitors and for his future administration of the relevant bankrupt estates to be reviewed in the context of him having new solicitors advising him. In attempting to persuade the Court to now remove the trustee, the bankrupts invited the Court to consider not only the conduct of the trustee since 8 February 2000 but prior conduct which was reviewed by the Court and determined to be insufficient to justify the trustee’s removal in February 2000.

10                  It is inconsistent with the thrust of the Court’s reasons of 8 February 2000 to revisit allegations which predate that day. However, out of an abundance of caution, I will deal with all submissions made by counsel for the bankrupts at the hearing on 28 April 2000 as to why the trustee should be removed.

Test for Removal

11                  As Beazley J said in Re Ly; Ex p Dixon v Ly (1995) 62 FCR 432 at 437:

“A trustee is an officer of the Court with a duty to act impartially… That duty involves the trustee acting fairly and with due regard to the true interests of parties with an interest in a bankrupt’s estate.”

12                  Each party accepted, and I agree, that the test for removal of a trustee of a bankrupt estate is accurately stated by Beaumont J in Re Peter Leslie Challen, 23 April 1996, unreported at par 4 (internet version) where his Honour said:

“… the Court will not countenance a situation where there are grounds for a reasonable apprehension on the part of a creditor that a trustee ... might be impeded or inhibited from acting impartially in the interests of all creditors. As Branson J put it in Irving’s case, where the relationship between the trustee … and the bankrupt is shown to be such that a fair-minded person informed of the facts could reasonably entertain a doubt as to his or her capacity to be independent in circumstances in which he or she was required to investigate the bankrupt’s past conduct, it is not appropriate for the trustee … to continue to act in the administration of the estate.”

In the instant case the focus is on the relationship between the trustee and a creditor (the ANZ Bank) rather than the relationship between the trustee and the bankrupt.

The allegations made against the trustee

13                  Mr M Pirrie of counsel appeared for the bankrupts on 28 April 2000. His submissions raised the following issues:

·        whether the trustee was biased in favour of the interests of one creditor, i.e. the ANZ Bank, and acted at its behest;

·        whether the trustee should have accepted assistance from the ANZ Bank when it had been recently involved in litigation against the bankrupts over a two-year period;

·        whether in the circumstances the trustee should have engaged Freehills, a firm which had a long history of acting for the ANZ Bank;

·        whether the trustee treated the ANZ Bank as his “advisers” in respect of the administration of Karen Yvonne Pruzanski’s bankrupt estate;

·        whether the trustee should have called a meeting of creditors to advise that Leon Mark Pruzanski did not have any assets that were capable of recovery;

·        whether the trustee should have advised creditors other than the ANZ Bank of proposals put by the bankrupts to the trustee for the further conduct of the administration of their bankrupt estates;

·        whether the trustee should have applied for public examinations under s81 of the Bankruptcy Act 1966 (Cth) (“the Act”) without informing the Registrar of communications taking place between solicitors;

·        whether the trustee should have sought an indemnity for his legal costs from creditors without disclosing whether he had a view, and if so what view, about their claims;

·        whether in his affidavit in support of his application for the issue of summonses for oral examinations the trustee disclosed all relevant material “for the purpose of assisting the registrar in determining whether or not this was an examination for the benefit of the general body of creditors as opposed to for the benefit of one creditor only” (per counsel at transcript p50);

·        whether the trustee intended to use the examination process partly for the purposes of investigating claims at the behest of the ANZ Bank;

·        whether the liquidator of a company in which some of the bankrupts have an interest, T and K Nominees Pty Ltd, is affected in his duties by the conduct of the ANZ Bank which in turn depends on the conduct of the public examinations initiated by the trustee;

·        whether the trustee should be removed because he was unaware of the contents of the files that passed from Freehills to his new solicitors, Abbott Stillman and Wilson (“Abbotts”); and

·        whether the trustee has any reason to consider further a transaction involving Stayglen and Karen Yvonne Pruzanski.

The trustee’s evidence

14                  The trustee swore an affidavit in opposition to the relief sought by the bankrupts. He was cross-examined by Mr Pirrie. The trustee gave his evidence in a straightforward manner and impressed me as a witness of the truth. As recorded in his affidavit, he has been an insolvency practitioner for thirty-five years and has been involved in the administration of a large number of bankrupt estates. He became a trustee in bankruptcy in 1981 and has “never been removed by any Court from such a position” (par 18 of his affidavit).

15                  In relation to his initial retainer of Freehills, the trustee said as follows (at par 19 of his affidavit):

“… I was first approached to act as Trustee of the bankrupt estates of the Applicants on or about 16 November 1998. At that time, I was not briefed as to the history of the dispute between the Applicants and ANZ and it was not a condition of my appointment that I agree to use Freehills as my solicitors. The reasons why I subsequently chose to retain that firm were ... because of their detailed knowledge of the Applicant’s affairs and because I perceived that the firm’s previous knowledge of those affairs would provide a significant cost saving to my administration of their estates.”

16                  The trustee also deposed that “it was not a condition of my indemnity that I retain the services of Freehill(s) …”. He also gave evidence that he sought independent legal advice from Mr Fryde at Abbotts about whether he should continue to retain Freehills in light of complaints made by the bankrupts then solicitors, Madgwicks.

17                  Mr Horne denied seeking the public examination at the request of the ANZ Bank. He also considered that the fact that he was in receipt of an indemnity from the ANZ Bank was not relevant to his application under s81 of the Act for the issue of summonses.

18                  At par 29 of his affidavit Mr Horne referred to discussions regarding Karen Yvonne Pruzanski’s interest in a property in Caulfield. He did not deny speaking to an officer of the ANZ Bank regarding the matter. In his evidence on 8 February 2000 he agreed that he told a representative of Karen Yvonne Pruzanski that he would need to speak to “advisers”. However, he explained in his affidavit:

“I agree that during the course of those discussions, I said that if a particular offer was made, I would have to make a phone call … I have always adopted the position that in circumstances where I am receiving an indemnity from a creditor which provides funding for me to seek to make recoveries in an administration, then if I receive a substantial offer in relation to any such recovery, I advise the creditor which has provided me with the indemnity.”

19                  Under cross-examination Mr Horne gave evidence that he is still pursuing an investigation of whether there may be recoverable assets of any members of the Pruzanski family in the liquidation of T and K Nominees Pty Ltd. He gave evidence about the “need to review all of the transactions that have taken place” with respect to the bankrupts and T and K Nominees Pty Ltd.

20                  The trustee specifically denied, under cross-examination, that he was acting at the behest of the ANZ Bank. He said, “No. I’m running this matter” and that “… I’m not beholden to that creditor … I’m endeavouring to (do) my job as fairly and as appropriately as I can”.

21                  Mr Horne referred to certain proposals put forward by the bankrupts in the following way. He said that the first proposal was not in an acceptable form. He responded to the second proposal by saying that he had insufficient information to properly consider it. He added that he had called a meeting in respect of the third proposal. In his view, public examinations were required to enable him to attain sufficient information to properly consider the proposal.

22                  The trustee accepted that Leon Mark Pruzanski did not appear to have any assets but added that “Mr Pruzanski is the person behind all of the transactions I’m concerned about, the whole lot …”. He gave evidence concerning why he thought there was utility in further examining the affairs of the other bankrupts.

Consideration

23                  I do not consider, when viewed as a whole, that the evidence before the Court discloses that the trustee is biased in favour of the interests of the ANZ Bank and has acted at its behest. I accept his explanation given in his affidavit and repeated under cross-examination about speaking to an officer of the ANZ Bank regarding a proposal advanced on behalf of Karen Yvonne Pruzanski. The use of the word “advisers” when referring to the ANZ Bank was inappropriate but the entire factual matrix does not disclose that Mr Horne was acting in the interests of only the ANZ Bank when considering the proposal, which involved his potential receipt as trustee of a large sum of money.

24                  I see nothing wrong with the trustee’s acceptance of an indemnity from the ANZ Bank as it was the only putative creditor that was prepared to unconditionally indemnify him.

25                  As considered in the 8 February 2000 reasons for judgment, Mr Horne’s retaining of Freehills, when challenged about it by Madgwicks, was inappropriate. However, it was something he ultimately took independent legal advice on. He acted on that advice in continuing with the retainer. It is not his fault that the Court disagreed with his legal advice.

26                  Having regard to the central role which Mr Horne considers Leon Mark Pruzanski to have played in transactions which the trustee requires to investigate further, it defies reality to suggest that the trustee should be removed for failing to report to a meeting of creditors that Leon Mark Pruzanski appears not to have any assets. A thorough investigation of the relevant transactions may ultimately lead to a contrary conclusion. It is simply too early to tell.

27                  Mr Horne adequately dealt with the issue about giving advice to all creditors concerning proposals put by the bankrupts in his evidence to which reference is made at par 21 above. In light of his explanation it is wrong to consider that his conduct in this respect calls for his removal.

28                  I do not consider that the trustee acted improperly in the way he sought public examinations under s81 of the Act. As the Full Court said in Karounos v Official Trustee (1988) 19 FCR 330 at 335:

“… the power (given by s81) is exercised in the interests of creditors, and those interests should not be defeated by an unduly technical or restrictive approach to the use of the power. The procedure is basically designed to establish what assets the bankrupt had, what has happened to those assets, and whether action should be begun (or continued) to recover them … .”

29                  In Karounos the Full Court went on to stress, also at 335, that the application for a summons “must clearly identify which part of par (b) of s81(1) is relied upon and provide sufficient information to show how the knowledge, suspicion or supposition referred to in that paragraph has been arrived at … The statement of grounds need not be compendious …”. The application for the summons in this matter conforms with the requirements referred to in Karounos. The failure of the trustee to refer to correspondence between Freehills and Madgwicks in the affidavit or other relevant material in support of the application hardly justifies a complaint about the trustee let alone his removal.

30                  In my opinion the evidence does not disclose that the trustee had a view which was firm and unshakeable about the claims of any creditor at the time he sought an indemnity for his legal costs. He cannot be validly criticised for the circumstances in which he sought the indemnity. I also consider it to be beyond doubt that the trustee did not intend to use the examination process partly for the purposes of doing anything at the ANZ Bank’s behest but rather in the fulfilment of his duties as a trustee.

31                  I also see nothing wrong in Mr Horne seeking to determine whether T and K Nominees Pty Ltd has any liability to any of the bankrupts. After all, it is his duty to determine whether the bankrupts have recoverable assets. Similarly, I see no vice in Mr Horne considering further any relevant transaction between Karen Yvonne Pruzanski and Stayglen. In doing so he is merely trying to perform his duties as a trustee to the best of his ability.

32                  There is also no merit in two further complaints raised about Mr Horne. It is nothing short of ridiculous to suggest that Mr Horne should be removed because he did not know the precise identity of all documents which passed from Freehills to Abbotts shortly after 8 February 2000. Further, although not the subject of any considered submission on 28 April 2000, the genesis for the current matter appears to be an innocent discussion between a representative of the trustee and a solicitor from Freehills about the identity of a person in the court room in an examination hearing before Registrar Wood in mid-February 2000. Insofar as that incident is relied upon to remove Mr Horne, I reject it as an incident justifying such removal.

33                  It follows from the above analysis of the complaints about the trustee raised by the bankrupts that Mr Horne should not be removed as trustee of the relevant estates. There are no grounds on which a fair minded person informed of the facts could reasonably entertain a doubt as to the trustee’s capacity to be independent and act impartially, fairly and with due regard to the true interests of all persons with an interest in the bankrupts’ estates. I dismiss par 1 of the motion.

Removal of Abbotts

34                  Paragraph 2 of the motion sought relief in these terms:

“That the Second Respondent, Abbott Stillman & Wilson, Solicitors be restrained from further acting on behalf of any Trustee appointed by this Honourable Court to administer the joint and several bankrupt estates of … (the bankrupts).”

35                  The complaint made about Abbotts by Mr Pirrie in his oral submission was that Abbotts was the firm that incorrectly advised the trustee that he could continue to retain Freehills. Mr Pirrie conceded that this complaint was “a fairly slender basis” on which to remove Abbotts and also conceded that no conflict of interest issue was present for Abbotts as was present for Freehills prior to that firm’s removal from acting for the trustee. Accordingly, par 2 of the relief sought in the motion is devoid of merit. Paragraph 2 of the motion is dismissed.

Request for certain documents

36                  The bankrupts, in par 3 of their motion, sought an order that certain documents relevant to a Supreme Court action involving the ANZ Bank be procured from the ANZ Bank by the trustee. It is not for the Court to tell the trustee how to conduct the administration of the relevant bankrupt estates by directing him to seek out certain information. If the trustee considers any documents to be relevant to his inquiries he will no doubt seek to obtain them or copies of them. In this case counsel for the bankrupts, in any event, did not impress upon the Court the crucial nature of such documents to the administration of the bankrupt estates but rather seemed to be embarking on a fishing expedition. Paragraph 3 of the motion is also dismissed.

Paragraph 4

37                  Paragraph 4 of the bankrupts’ motion sought relief in the following terms:

“Such orders and directions as to the discharge, adjournment or continuation of the public examinations as this Honourable Court deems appropriate.”

38                  The public examinations are due to continue next month before Registrar Wood. I see no reason to interfere with the conduct of these examinations by the Registrar. Paragraph 4 of the motion is also dismissed.

Order

39                  The appropriate order to make is as follows:

1.      The bankrupts’ motion, notice of which was given on 23 February 2000, be dismissed.

2.      There be no order as to costs of the motion.

40                  The reason for the second order is that the costs of 28 April 2000 have been the subject of an order made against Stayglen on its adjourned motion which it failed to appear to prosecute. If costs were awarded to the trustee on the bankrupts’ motion the trustee would in effect be “double-dipping” on the issue of costs.

Associate:

Dated:              12 May 2000