FEDERAL COURT OF AUSTRALIA

Hughes v Holbrook [2002] FCA 920

BANKRUPTCY – trustees – application for removal – whether proper case – whether sufficient grounds – alleged failure to advise – trustee voting as creditor on composition – trustee’s fees – trustee’s complaint to police concerning one applicant – alleged failure to produce compulsory contribution assessments – lodgement of objection to discharge of bankrupt – alleged dealings with Australian Taxation Office

Bankruptcy Act 1966 (Cth) ss 5(1), 19(1), 64ZB(5), 73, 73(2), 73(2A), 73(4), 139K, 139P, 139Q, 139U, 139ZA, 139ZF, 139ZG, 139ZL, 149D(d), 149D(1)(c), 149D(1)(f), 149K, 178, 179(1), 180

Federal Court Rules O 35 r 10

Meagher et al Jacob’s Law of Trusts 6^th ed. 1997 at pp. 402 – 405

Wilson v Commonwealth of Australia [1999] FCA 219 followed

Macchia v Nilant (2001) 110 FCR 101 followed

Adsett v Berlouis (1992) 37 FCR 201 followed

Hughes; Ex parte Australian Mutual Providence Society v Kennedy & Hughes (von Doussa J, 5 March 1996, unreported) distinguished

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

DEREK HUGHES and SANDRA ANNE HUGHES v KIM DAVID HOLBROOK

W7097 of 2000

RD NICHOLSON J

26 JULY 2002

PERTH

THE COURT ORDERS THAT:

1.                  The applicants’ application for removal of the controlling trustee be refused.

2.                  The applicants pay the respondent’s costs of the application.

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

REASONS FOR JUDGMENT

1                     On 23 November 2000 the applicants filed an application to remove a trustee pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) and an application in opposition to a s 139ZL notice issued by the Official Receiver dated 10 November 2000.  The respondent is the trustee of the applicants’ bankrupt estate.  He is said also to be the major creditor of that estate and, in the submission of the applicants, is therefore unable to discharge his duties as trustee with impartiality and neutrality.  Furthermore, it is claimed by them that the respondent has failed to discharge his duties in the best interests of the real creditors or the applicants.  The applicants therefore seek cancellation of the s 139ZL notice and removal of the respondent from his office as trustee.  Section 139ZL provides for the Official Receiver by written notice given to a bankrupt to require payment to the trustee of a contribution under ss 139P or 139Q.

2                     Section 179(1) of the Act provides that:

“179(1)           The Court may, on the application of the Registrar, the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:

(a)               remove the trustee from office; and

(b)               make such order as it thinks proper.”

It is preceded by s 178 which gives a bankrupt, a creditor or any other person “affected by an act, omission or decision of the trustee, power to apply to the Court which may make such order in the matter “as it thinks just and equitable”.”  It is followed by s 180 which provides that “the Court may, subject to such terms and conditions as it thinks just, accept the resignation of a registered trustee from the office of trustee of an estate”.  These latter sections will be referred to subsequently.

3                     In affidavits in support of their application the applicants depose that the respondent has failed to or refuses to deduct the significant amount of expenses incurred by the first named applicant in earning his taxable income and as such continues to produce compulsory contribution assessment calculations not reflecting the applicants’ true position.  In respect of the application to remove the trustee from office, their affidavit evidence is that the respondent failed to advise them of the fact they could draw down on the first named applicant’s superannuation to satisfy the creditors’ claims at the time of the first meeting of creditors in September 1998.

4                     Additionally it is said that on 10 December 1999 the respondent in his capacity as a creditor cast the deciding vote not to accept the applicants’ composition.  The evidence of the applicants is that the respondent is the largest creditor of their estates and therefore cannot and does not appear to be discharging his duty as controlling trustee in the best interests of the other creditors.  In particular it is said that in voting at the creditors’ meeting on 10 December 1999 the respondent had a clear conflict of interest.  It is claimed he has not acted in accordance with his duties as trustee under the Act because he has not administered the estate efficiently and has not avoided unnecessary expense.  Nor has he exercised his powers or performed his functions in a commercially sound way, it is claimed. 

5                     In a responsive affidavit the respondent opposed both the application for an injunction in respect of the contribution notice and his removal as trustee.  He deposed that the legal fees and disbursements incurred by him in relation to the estates of the applicants exceed the funds realised in their estates.  He said further that a costs order had been made in his favour by the Federal Court on his application to have the applicants made bankrupt following their failure to execute a deed of arrangement in accordance with the resolution of their creditors.  Those costs were taxed in excess of $13,000. 

6                     On 28 November 2000 Lee J made directions providing inter alia for re-listing of the matter on 15 December 2000.  That listing was adjourned by consent. 

7                     On 5 December 2000 the applicants filed an amended application for removal of the trustee and the setting aside of the s 139ZL notice.  That was supported by a supplementary affidavit from the second named applicant.  It resulted in a further responsive affidavit from the respondent sworn on 12 December 2000. 

8                     By consent the hearing listed for 15 December 2000 was adjourned to 20 December 2000.  On that latter date supplementary affidavits of each of the applicants were filed.  At the hearing on the same date it was ordered by Lee J that “upon the applicants undertaking to commence by 29 December 2000, and to prosecute the application diligently thereafter, application to the AAT under s 139ZF of the Bankruptcy Act for review of the trustee’s decision to make an assessment of the income of the bankrupt D Hughes, the application of 23 November 2000 be adjourned sine die”.

9                     On 24 April 2002 a minute of consent orders was filed with the Court signed by the solicitors for the applicants and the solicitors for the respondent.  The minute provided for the respondent to be removed from his office as trustee and for the action to be otherwise dismissed with no order as to costs.  Pursuant to O 35 r 10 of the Federal Court Rules the matter was referred to a judge for consideration.

10                  The outcome was that a directions hearing was held on 16 May 2002.  It was there directed that the amended application to remove the trustee pursuant to s 179(1) of the Act filed on 5 December 2000 be heard as to the preliminary question of whether the affidavits disclose appropriate grounds for such application.  Provision was made for filing of any additional affidavit material.  By 8 May 2002 additional affidavit material from each of the applicants had been filed.  A further affidavit of the second named applicant was filed on 23 May 2002. 

11                  By motion filed on 23 May 2002 the applicants then sought to amend the directions of 16 May 2002 as the consequence of the service by the respondent on the first named applicant on 20 May 2002 of a notice of objection to discharge which had the effect of extending the bankruptcy to 10 June 2007.  Directions were made on 31 May 2002. 

12                  In an affidavit of the first named applicant sworn on 5 June 2002 it was deposed that the ground referred to by the respondent in the notice had no basis.  A responsive affidavit sworn on 13 June 2002 was filed by the respondent. 

13                  It will therefore be necessary to turn to each of the matters upon which the applicants place reliance in support of the application to remove the trustee and the evidence brought in support. 

Basis of inquiry and removal

14                  In Wilson v Commonwealth of Australia [1999] FCA 219 at [44] Branson J addressed s 179 in the following terms, reliance upon which is placed in the present application, particularly for the respondent:

“Section 179 of the Act serves a different purpose [from s 178].  It reflects the position that trustees are subject to the general control of the Court.  It authorises the Court, on the application of the Registrar, the Inspector-General, a creditor or the bankrupt, to inquire into the conduct of a trustee.  Although it is not a rule of universal application, the Court will not ordinarily initiate an inquiry under s 179 unless it is satisfied that a proper case for an inquiry has been demonstrated (Re Alafaci; Registrar in Bankruptcy v Hardwick at 268 per Riley J; see also Re Gault; Gault v Law (1981) 57 FLR 165 at 173 per Ellicott J; Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 at 233 per Beaumont J).  There will ordinarily be a proper case for inquiry where there is reasonable cause to believe that a trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the general law.  However, as Ellicott J pointed out in Re Gault; Gault v Law at 173:

            “The court has a broad discretion in deciding whether to order an inquiry.  In my opinion it is not required to order an inquiry unless it is satisfied that sufficient grounds have been made out.

            For instance, the court should be loath to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration.  If the court considered that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved.  It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example, in an action for breach of trust.””

15                  The approach of Branson J in Wilson was generally followed by French J in Macchia v Nilant (2001) 110 FCR 101 at 119 – 121.  At 120 French J said:

“As appears from the language of s 179 it invites first a consideration, albeit upon application by a person with standing, of whether the Court should inquire into the conduct of the trustee.  If inquiry is undertaken, the next question is whether the trustee should be removed from office and/or any other order made.  The first question requires the Court to consider whether, on the grounds and facts before it, a case has been made for an inquiry – Re Alafaci at 268.  The application of s 179 to that first step involves a broad discretion as to whether or not there are sufficient grounds to make an inquiry appropriate – Turner v Official Trustee in Bankruptcy  (unreported, Federal Court, Full Court, No 8 of 1998, 27 November 1998).”

He added:

“The policy consideration referred to by Deane J in Re: Tyndall that “the court should not unduly interfere with the day-to-day administration of a bankrupt’s estate by a trustee” applies also to the operation of s 179 – Turner at pp 2-3.”

He also stated:

“In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes.  For “although the court is given a broad discretion under s 179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt’s estate” – Re Challen (a Bankrupt); Ex parte Brown (unreported, Federal Court, Beaumont J, No QB 1548 of 1993, 23 April 1996) cited with approval by Merkel J in Cheesman at first instance, p 114.”

16                  The duties and responsibilities of a trustee find statutory support in s 19(1) of the Act.  Additionally, it is recognised that the trustee is an officer of the court:  Adsett v Berlouis (1992) 37 FCR 201 at 208 – 209.  There it was stated by the Full Court (Northrop, Wilcox and Cooper JJ) at 208:

“A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt’s estate.  The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules 1968 (Cth).  The trustee has a dual function:  first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act:  see Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 at 329.”

At 208 – 209 their Honours continued:

“A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money:  see Re Grimthorpe (Dec’d) [1958] 1 Ch 615 at 623; Re Whitley; Lloyds Bank Ltd v Whitley [1962] 1 WLR 922 at 931; [1962] 3 All ER 45 at 53.  A trustee in bankruptcy is in no different position.  The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee’s obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditor’s claims and any possible surplus for the bankrupt.  We adopt, as a correct statement of the duty of a trustee and the proper manner of its performance, the words of Smithers J in Mannigel v Aitken (1983) 77 FLR 406 at 408 – 409:

            “In the case of bankruptcy the trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt.  It is clear that the minimum standard required of the trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt.  Obviously a great deal of discretion and judgment is required to be exercised by the Trustee.  It was said by Rogerson J in Re Ladyman (1981) 55 FLR 383 at 394 – 396 that the standard of conduct required of the trustee will ordinarily be the standard required of a professional man and perhaps higher.  The learned judge referred to ‘the high standard of conduct required of trustees’.

            In Re Brogden; Billing v Brogden (1888) 38 Ch D 546 Lord Justice Fry said (at 571):

                        ‘A trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect.  But his discretion is never an absolute one.  It is always limited by – the dominant duty – the guiding duty of recovering, securing and duly applying the trust fund; and no Trustee can claim any right of discretion which does not agree with that paramount obligation.’

            Where an order is sought that the trustee be removed and to make good the losses suffered by the estate, it must be established that the trustee has been guilty of a breach of duty to act ‘diligently and prudently in regard to the business of the Trust’.  See Riley J in Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 at 285.

            According to Halsbury’s Laws of England (3^rd ed), Vol 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss.  He must take reasonable precautions to see the property is not stolen or lost by default.  The Trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs.  But beyond this he is not bound to adopt further precautions.  It was said by their Honours Dixon CJ, McTiernan and Windeyer JJ in Elder’s Trustee and Executor Co Ltd v Commissioner of Taxation (Cth) (Higgin’s case) (1963) 113 CLR 42 that:

                        ‘We are not to judge what the trustee then did or failed to do by the light of later events…The duty of the trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator’s estate…The argument that the trustee having, it was said, exercised a discretion, its conduct is now unchallengeable is sufficiently answered by a passage from the judgment of Fry LJ in Re Brogden…  Whether or not one calls [the trustee’s action] an exercise of discretion, the question remains was it the act of a prudent trustee.’”

A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act or Rules:  see Re Ladyman (1981) 55 FLR 383 at 394 – 396”

It is against these standards that the case brought by the applicants against the respondent is to be judged. 

Failure to advise as to drawing down on superannuation

17                  In her affidavit sworn on 20 November 2000 the second named applicant stated that at the first meeting of creditors in September 1998 the respondent failed to advise the applicants of the fact that they could draw down on the first named applicant’s superannuation to satisfy the creditors’ claims at that point in time.  It is stated that the respondent was aware of the first named applicant’s superannuation and had the respondent advised them of the entitlement, they would have been able to offer to creditors almost one hundred percent of the monies which they had admitted to owing them at that time.  In her further affidavit sworn on 20 December 2000 the second named applicant said that she had met with the respondent for the first time in or about August 1998.  He had asked how much the first named applicant’s superannuation was worth in the process of determining the applicants’ assets and he was given details of that superannuation. 

18                  The sequestration orders were made against the estates of the applicants on 20 May 1999. 

19                  In his affidavit filed on 28 November 2000 the respondent claimed that the applicants initially consulted him with a Pt X proposal to be funded from their ongoing income.  In any event, he stated that he did not accept that they were entitled to draw down any superannuation entitlement and that the onus rested on the applicants to establish this.  The respondent’s affidavit was sworn in response to the second named applicant’s affidavit sworn on 20 November 2000.  I do not consider that the second named applicant’s affidavit sworn on 20 December 2000 is an adequate response to the respondent’s affidavit.  That is, it does not establish that there was in fact the relevant superannuation entitlement which could be drawn down. 

20                  In any event, I accept the submission for the respondent that the events relied upon by the applicants occurred prior to the occurrence of the bankruptcy.  Consequently, they cannot be “conduct of the trustee in relation to the bankruptcy” for the purposes of the application of s 179. 

Trustee voting at a meeting of creditors

21                  In the second named applicant’s affidavit sworn on 20 November 2000 she deposed that at a meeting of creditors on 10 December 1999 the respondent, in his capacity as a creditor, cast the deciding vote not to accept the applicants’ composition by which all creditors would have received an equivalent of around 30 cents in the dollar and the respondent would have received in excess of that figure.  It was also stated by her that at that time the respondent was and remains the largest creditor to the applicants’ bankrupt estate.  It is therefore submitted that the respondent did not discharge his duties in the best interests of other creditors and the bankrupts with impartiality and neutrality.  It is said that in voting as a creditor at the meeting on 10 December 1999 the respondent had a conflict of interest.  Further, it is stated that the fact that some of the other creditors provided the respondent with proxies to vote against the composition must be viewed in light of the fact that the respondent had previously circulated an advice to creditors indicating the respondent’s intention as an influential creditor in voting against the proposal.  In support of this contention it is submitted that the duty of impartiality required of a trustee necessitates the trustee adopting a neutral position in respect of voting at a creditors’ meeting.  It is said that the adoption of a proactive position takes the trustee beyond a neutral stance:  Hughes; Ex parte Australian Mutual Providence Society v Kennedy & Hughes (von Doussa J, 5 March 1996, unreported). 

22                  The respondent’s affidavit denies that he had the deciding vote in relation to the composition.  It asserts that the composition would have failed even if he had abstained from voting because a special majority would not have been achieved in the separate estate of the first named applicant or in the joint estate. 

23                  The respondent’s affidavit exhibits a copy of the minutes of the meeting held on 10 December 1999.  As part of the minutes it is recorded that the respondent advised the meeting that after taking legal advice he claimed to be a creditor to the extent of his controlling trustee’s fees of $17,141 (to be allocated over the joint estate 80% or $13,713 and each separate estate 10% or $1,714 each) and taxed legal fees of $13,008 in the joint estate for his application for the bankruptcy of Mr and Mrs Hughes.  Later, the minutes record that he advised the meeting that he only had one vote with the amount of his claim as previously specified. 

24                  In relation to voting the minutes record as follows:

“Mr Holbrook then suggested that a motion concerning the bankrupts proposal be put to the meeting and first be considered by joint estate creditors.

It was moved by Mr Fisher representing MFA Finance Pty and seconded by Mr Fisher representing Telstra Corporation:

“That the bankrupt’s proposal or a composition in the terms as detailed in the Report by Trustee made pursuant to section 189A of the Bankruptcy Act, 1966 and dated 2 December 1999, be accepted.”

Creditors voting:

Method of voting used was show of hands.

The Special Resolution was declared                          NOT ACCEPTED

Mr Holbrook advised that given that joint estate creditors had failed to accept the proposal, there was little point in having the proposal considered by creditors of the two separate estates.”

25                  The applicants’ proposal for composition was brought before the creditors in accordance with the provisions of s 73 of the Act.  Pursuant to s 73(2) the trustee was obliged to call a meeting of creditors and to send to each creditor before the meeting a copy of the proposal accompanied by a report on it.  In accordance with s 73(2A) the report was required to indicate whether the proposal would benefit the bankrupts’ creditors generally.  This necessarily required the respondent to state his opinion in that respect.

26                  By operation of s 73(4) the creditors could accept the proposal but were required to do so by special resolution.  That term is defined in s 5(1) to mean a resolution passed by a majority in number and at least three-fourths in value of the creditors present personally, by telephone, by attorney or by a proxy at a meeting of creditors and voting on the resolution.  It is apparent from the record of the meeting that there was not a majority in number of creditors present by any of those means in favour of the resolution.  There was an equal division among the creditors in terms of their number, seven being for and seven against.  Furthermore, the total value of the creditors was $47,268.97, three-fourths of which in value is $35,451.728.  If the respondent had not voted there would have been a numerical majority in number of creditors in favour of the composition but it would not have attained the requisite value of creditors to satisfy the requirement of a special resolution. 

27                  There remains the question whether the trustee acted contrary to his obligations in voting at all.  Certainly there is no statutory restriction on the trustee voting on a s 73 composition.  For example, contrast the restriction provided for in s 64ZB(5) in relation to casting a creditors vote on a motion relating to the trustee’s remuneration.  The applicants relied on Hughes; Ex parte Australian Mutual Providence Society v Kennedy & Hughes (von Doussa J, 5 March 1996, unreported).  That was a case in which there was an application to set aside a composition where a controlling trustee had wrongly rejected a creditor’s claim to vote in circumstances where he had failed to obtain legal advice on the creditor’s entitlement to vote.  In the course of his reasons von Doussa J referred to the duties of a person acting in the position of a controlling trustee as considered in Re Dingle, Westpac Banking Corporation v Worrell (1993) 119 ALR 265 at 276.  That was a decision on appeal to the Full Court considering circumstances in which it was appropriate to review a decision of a trustee as to whether a creditor was qualified as such and entitled to vote at a meeting.  In reliance on Dingle it was contended in the matter before von Doussa J that the trustee had a duty to obtain independent legal advice in respect of the disputed debt.  That contention was accepted by von Doussa J.  However, that is not the issue arising here and there were no such circumstances arising before the meeting as disclosed by the minutes of that meeting to occasion the respondent to obtain independent legal advice.  Furthermore, no authority has been brought to my attention which makes it inappropriate for a controlling trustee who properly qualifies as a creditor to vote in relation to the composition.  While I would not wish to rule out the possibility that such an action could in certain circumstances arguably give rise to breach of the trustee’s duties I do not consider that the case brought by the applicants establishes sufficient grounds in reliance on the act of voting alone in the statutory and evidentiary context in which it occurred. 

28                  Accordingly, I do not consider that this particular ground is made out so as to support the removal of the trustee. 

Trustee’s fees

29                  In her affidavit sworn on 20 November 2000 the second named applicant said that the respondent had not acted in accordance with his duties as trustee in that he had not administered the estate efficiently, had not avoided unnecessary expense, and had not performed his powers or exercised his functions in a commercially sound way.  In support of this she stated that as at the date of the bankruptcy on 20 May 1999 she and the first named applicant were indebted to creditors in the sum of $24,819.12.  The position was that the respondent alone now claimed an entitlement in excess of $57,000 in professional and other fees against their bankrupt estate.

30                  The respondent in his affidavit filed 28 November 2000 denied these allegations.  He stated that the legal fees and disbursements incurred by him in relation to the estates of the applicants exceed the funds realised into their estates.  While undertaking to provide “details of my costs incurred” he stated that a costs order was made in favour by the Federal Court on his application to have the applicants made bankrupt following their failure to execute a Deed of Arrangement in accordance with the resolution of creditors.  Those costs were taxed in excess of $13,000.  He further stated that his pre-controlling trustee and controlling trustee fees of $1,213.85 and $17,141.00 respectively were approved at meetings of creditors.  The result is the taxed costs of the trustee of the sequestration order and Pt X fees approved by creditors together total $31,362.  In addition to those amounts it is asserted there is work in progress recorded on a time basis for work done on the bankrupt estate. 

31                  For the respondent it is said there is no evidence of any attempt by the bankrupts to have the trustee’s fees reviewed pursuant to s 178.

32                  In my opinion in the light of the evidence provided by the respondent the applicants have not discharged the onus of establishing a case for removal on this ground. 

Trustee’s complaint to the police

33                  In her affidavit sworn on 20 November 2000 the second named applicant stated that in or about June 2000 the respondent sought to have her charged with using threatening words against him.  She said that more particularly he alleged that she used threatening words when speaking to a third party about him.  However, her evidence was that the presiding magistrate determined that the allegation was unsupported by evidence and found there was no case to answer.  The affidavit evidence shows the dismissal occurred on 15 June 2000.

34                  The responsive evidence of the respondent was that he did make a complaint to the police after receiving information that the female applicant had made a threat concerning him about which he was genuinely concerned.  His submission was that it was up to the police to consider the evidence and decide whether a charge should be laid. 

35                  The fact that the respondent reported conduct to the police which did not lead to a prosecution in itself does not constitute improper conduct providing the foundation for removal.  For example, there is no evidence that the report to the police was ill-founded or made in the course of harassing the applicants or either of them. 

Adverse award of costs

36                  In her affidavit sworn on 20 November 2000 the second named applicant states that in the proceedings involving the complaint to the police the respondent admitted to being ordered to pay $400 in costs by the Chartered Accountants Board following the determination of a complaint lodged by her in respect of the respondent’s handling of the administration of the applicants’ bankrupt estate.  In response the respondent testified that the applicants complained to the Institute of Chartered Accountants in Australia about various matters arising from his administration of their affairs.  He claims he was exonerated on all issues apart from one matter being the provision of information by him to a third party whom he believed to be a creditor.  He stated that the Board took the view that he provided too much information to that party. 

37                  In the circumstances of this evidence the applicants have not discharged the onus that the respondent’s conduct is such as would support his removal. 

Failure to produce compulsory contribution assessments

38                  In her initial affidavit the second named applicant stated the respondent has failed to and refuses to deduct the significant amount of expenses incurred by the first named applicant in earning his taxable income each year in calculating the compulsory contribution assessment of the applicants.  Consequently it is said the calculations prepared by the trustee do not reflect the applicants’ true financial position.  In particular, it is said on 29 September 2000 the solicitors for the applicants wrote to the respondent requesting a review of the compulsory contribution assessment.  A response to that letter was not received until 6 November 2000.  It is claimed the response ignored the issue raised in the letter, which was whether the second named applicant was properly considered to be dependent on the first named applicant pursuant to s 139K of the Act for the purposes of calculating the first named applicant’s compulsory contribution assessment.  Consequently, it is said for the applicants, that the amount of the requested fortnightly deductions is based upon an incorrect calculation and does not reflect the true financial position of the applicants.  This position it is maintained has resulted from the respondent consistently ignoring issues raised by the applicants’ solicitors so that their calculated fortnightly liability is distorted and they are caused to endure extreme financial hardship.

39                  In response the respondent testified in his affidavit filed on 28 November 2000 that he did not accept the allegations made. 

40                  In his further affidavit sworn on 13 June 2002 he stated he issued an income contribution assessment for the first named applicant on or about 30 April 2002 for his third income contribution assessment period commencing on 20 May 2001.  He stated the issuing of this was deferred because that applicant had not complied with his obligations under s 139U of the Act to provide the respondent with sufficient information and evidence as to his income.  Furthermore, he deferred issuing the assessment because there were proceedings pending in the Administrative Appeals Tribunal in which that applicant had sought to have his income contribution assessments for his first two contribution assessment periods reviewed.  The issues in those proceedings included the issues which would be relevant to making an assessment for the period commencing on 20 May 2001.  The proceedings in the Administrative Appeals Tribunal were settled in March 2002 without the Tribunal having made a decision on the issues.  Accordingly, he claims to have made an income contribution assessment for the period commencing 20 May 2001 as soon as was practicable in the circumstances. 

41                  Furthermore, he does not accept that the issue of the assessment for that period placed the applicants in an impossible position.  He referred to a tax refund to the first named applicant of $12,536.35 on or about 26 April 2002.  This, he says, was more than sufficient to meet the contributions assessment liability of $10,600.50 for the period commencing on 20 May 2001.  However, despite this the first named applicant has failed to make any payment to the respondent in reduction of that liability. 

42                  In response to the suggestion that these matters somehow support removal of the respondent as trustee, he submits that the Act sets out specific review procedures through the Inspector-General and the Administrative Appeals Tribunal in s 139ZA and thereafter and s 149K and thereafter.  In those circumstances he disputes that there are proper grounds for removal in these matters.

43                  In my opinion, in the light of the evidence for the respondent (unanswered for the applicants) it is apparent the applicants have not discharged the onus of establishing a case for removal in relation to these particular matters relating to the production of compulsory contribution assessments.  Indeed, there are parallel proceedings taken by the applicants by the issue of a s 139ZL notice in respect of such conduct which as yet remain undetermined. 

Lodging objection to discharge in respect of the first named applicant

44                  The affidavit of the solicitor for the applicants sworn on 22 May 2002 states that on 20 May 2002 the respondent served on the first named applicant a notice of objection to discharge.  That had the effect of extending the bankruptcy to 10 June 2007.  The grounds referred to in that notice were as follows:

1.                  Section 149D(d) of the Act, “the bankrupt, when requested in writing by the trustee to provide written information about the bankrupt’s property, income or expected income, failed to comply with the request”;

2.                  Section 149D(1)(c) of the Act, “the bankrupt failed to disclose any particulars of income or expected income as required by a provision of the Act referred to by section 139U.”;

3.                  Section 149D(1)(f) of the act, “the bankrupt failed to pay to the trustee an amount that the bankrupt was liable to pay under section 139ZG.”

45                  The notice of objection to discharge of 20 May 2002 has now been set aside by the Inspector-General.  In his reasons the Inspector-General found there was evidence sufficiently supporting the first ground to the effect that the bankrupt when requested in writing by the trustee to provide information about the bankrupts’ property, income or expected income failed to comply with the request.  As to the second ground, it was found that the first named applicant should have had an expectation of receiving a refund of tax which ought to have been disclosed to the trustee.  As to the third ground, there was insufficient evidence to support the ground that the first named applicant failed to pay to the trustee an amount for which he was liable to pay under s 139ZG. 

46                  The reasons given by the trustee for objecting to the clients discharge were, firstly, a failure to provide details of actual income and secondly, failure to pay the contribution liability.  As to the first reason, this was found to be clearly inadequate.  As to the second reason, this overlapped with the third ground for which it was found there was insufficient evidence.

47                  The lodgement of a notice, being a step provided for at law, cannot of itself constitute a ground for removal of a trustee unless patently done in circumstances arguably constituting harassment.  There is no such evidence brought here. 

Dealings with Australian Taxation Office

48                  In an affidavit sworn on 8 May 2002 the applicants’ daughter, Beverley Hughes, deposed that on or about 23 April 2002 she requested that the second named applicant call the Australian Taxation Office (“the ATO”) on her behalf to check the progress of the issue of a GST refund due to the partnership of Highfield Thoroughbreds consisting of herself, her sister and Christine Hughes.  She was advised by an officer of the ATO that the tax refund was to be deposited into the bank account of the respondent.  During the same call she checked also as to the progress of a GST refund for Highfield Lodge Racing Stables, a partnership consisting of herself, Christine Hughes and the first named applicant.  Again, she was advised to the same effect.  On 24 April 2002 the second named applicant on behalf of Beverley Hughes spoke to another officer of the ATO who had responsibility for supervision of these matters.  He advised that the respondent should never have been listed as the recipient of the GST refunds and accordingly the placement of funds in the account of the respondent had been cancelled.  She denied the appropriateness of any such refund going to the account of the respondent. 

49                  In an affidavit sworn on 7 May 2002 the second named applicant gave corroborating evidence in respect to advices in respect of these matters from the ATO.  She further deposed that on 1 May 2002 the respondent sought and was granted a notice under s 139ZL of the Act to require payment of the tax refund by the ATO to him.  That matter does not arise in this present aspect of the proceeding.  However, it is contended on behalf of the applicants that “the attempt of the respondent to gain possession of the first named applicant’s tax refund where no notice requiring payment of the refund to the respondent existed is a further demonstration of the lack of good faith with which the respondent has conducted the affairs of the applicants’ estate”. 

50                  In his affidavit sworn on 13 June 2002 the respondent stated it was not possible for him to properly respond to allegations concerning the ATO due to the hearsay nature of the affidavit evidence.  However, he denied making any attempt to wrongfully take money belonging to the male applicant.  He claims to have followed the proper course by having a s 139ZL notice issued in respect of the tax refund. 

51                  In my opinion the case brought in the evidence relied upon for the applicants does not establish culpability on the part of the respondent.  It establishes only that at some time prior to the issue of the s 139ZL notice, officers of the ATO were prepared to make the payment of the amounts in issued to the respondent.  His own involvement in bringing that about is not established on the evidence.  It cannot, therefore, act as a proper basis for removal. 

Possible alternative courses of action

52                  As has been stated above, the respondent signed a consent order to his removal.  In the light of the provisions of s 180 of the Act the Court was disinclined to accept that it was appropriate to make that order by way of consent.  However, the possibility arises, in the event the respondent does wish to be relieved of the office of trustee that the respondent could move the Court to accept his resignation subject to such terms and conditions as the Court thinks just.  That matter is not presently before the Court. 

53                  As has been said, the general law applies save to the extent modified by the Act and Regulations.  The general law recognises that a court may remove a trustee pursuant to its inherent jurisdiction where the welfare of the beneficiaries and of the trust estate requires such a remedy:  Meagher et al Jacob’s Law of Trusts 6^th ed. 1997 at pp. 402 – 405.  However, such a power is strictly construed and friction or hostility between the trustee and beneficiaries is not of itself a reason for the removal of the trustee.  Here it is apparent that there is friction and hostility between the trustee and the beneficiaries.  However, on the evidence brought by the applicants in support of the present application I do not consider there are “substantial grounds for believing that the trustee erred in his administration”.

Conclusion

54                  I am not satisfied that the matters relied upon for the applicants establish to the requisite level a case for an inquiry and removal under s 179.  For these reasons I dismiss the application for inquiry and removal of the trustee pursuant to s 179. 

55                  Appropriate directions should be made with a view to advancing the determination of the remaining issue concerning the s 139ZL notice.

Associate:

Dated:              26 July 2002