FEDERAL COURT OF AUSTRALIA

Doolan v Dare [2004] FCA 682

BANKRUPTCY – TRUSTS – whether declaration of a first and final dividend was in accordance with Pt VI Div 5 of the Bankruptcy Act 1966 (Cth) – whether the declaration of dividend was made for an improper purpose by the trustee – if declaration of dividend made for improper purpose, whether it was, nonetheless, effective to pay out the creditors.

Bankruptcy Act 1966 (Cth) ss 64, 73, 82, 134, 140-147, 156, 179, 181, Pt VI Div 5

Re Allen; Ex parte Official Receiver (1954) 16 ABC 154 considered

Adsett v Berlouis (1992) 109 ALR 100 referred to

The Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83 referred to

Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 referred to

Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41

referred to

WILLIAM EDWARD DOOLAN v TRACEY JOY DARE

No Q 78 of 2004

SPENDER J

BRISBANE

27 MAY 2004

THE COURT DECLARES THAT:

          The payments by the trustee to the creditors for the full extent of their proved claim discharges them from their rights in the bankrupt estate.

THE COURT ORDERS THAT:

1.       Mr David Cranstoun be appointed Trustee in Bankruptcy of the estate of William Edward Doolan.

2.       The respondent pay the applicant’s costs of and incidental to the application, without recourse to the funds of the bankrupt estate of Mr Doolan, those costs to be taxed if not agreed.

3.       The respondent pay the costs of the creditors (Warwick McDonald, Ramon Pollach, Dominic Guinea and Southbank Property Pty Ltd trading as Remax Southbank Property) of and incidental to the application, without recourse to the funds of the bankrupt estate of Mr Doolan, those costs to be taxed if not agreed.

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

REASONS FOR JUDGMENT

1                     The applicant, William Edward Doolan, filed an application on 29 April 2004 which sought twelve forms of relief as follows:

‘1.     A declaration that it was an improper exercise of the respondent’s discretion to borrow money from KPMG on behalf of the estate to pay a dividend to creditors for the purpose of removing their rights to vote upon the respondent’s removal.

2.            A declaration that the declaration of dividends made by the respondent on or about 16 April 2004 was not properly made under section 140 of the Bankruptcy Act and were invalid.

3.            A declaration that the purported payment of dividends made by the respondent were not properly made and were invalid.

4.            A declaration that the acts of the respondent in purporting to declare a dividend and pay the creditors did not remove the creditors’ right to vote at the meeting on 20 April 2004 to remove the respondent.

5.            A declaration that Mr Pollach (by assignment of a debt from Roberts and Morrow) was and is a creditor of the estate.

6.            A declaration that Mr Pollach was entitled to vote at the meeting on 20 April 2004 to remove the respondent.

7.            An order that Ms T Dare be removed as trustee of the bankrupt estate of William Doolan and that Mr Cranston be appointed. OR

8.            An order that Ms Dare immediately convene a meeting for her removal under s.181.

9.            An injunction restraining Ms Dare from taking any further steps in the estate of Doolan until further order of the court.

10.        A declaration that Ms Dare did not faithfully convene a meeting for the creditors to consider her removal, and that she is not entitled to claim remuneration or expenses for convening this meeting, or the period thereafter.

11.        Costs

12.        Further and other relief as the Court sees fit.’

2                     Mr Doolan was made bankrupt on 2 June 1999 and the respondent, Tracey Joy Dare, was made his trustee in bankruptcy.  Mr Doolan was discharged from bankruptcy on 24 June 2002 by effluxion of time pursuant to the provisions of the Bankruptcy Act 1966 (Cth) (“the Act”).

3                     I summarise the general background to Mr Doolan’s application from the written submissions filed on behalf of the trustee by Mr Davis of Counsel. 

4                     There were a number of creditors originally in the estate of Mr Doolan.  For present purposes they can be described as Alan Newitt trading as “BMS”; Ms Brookes; Southbank Property Pty Ltd trading as Remax Southbank Property (“Remax”); various other creditors; and McLaughlins.  Over the course of time, Mr Newitt withdrew; McLaughlins were paid as a result of the liquidation of a company associated with Mr Doolan, Doolan Properties Pty Ltd; the claim by Remax was recognised by the trustee; and three persons, Mr Warwick McDonald, Mr Ramon Pollach and Mr Dominic Guinea took assignments of the other claims in the estate, a total of $14,187.45.  Ms Brookes’ debt was disputed and was the subject of an action taken by Mr Doolan to have the debt expunged. 

5                     Over the course of the administration there have been attempts by Mr Doolan to make proposals under s 73 of the Act, which proposals were rejected by the trustee who asserted that the proposals failed to provide for adequate security for payment of remuneration to the trustee, see subs 73(2A) of the Act.  

6                     Mr Doolan instigated various proceedings during the course of the administration, most of which challenged the remuneration and expenses of the trustee.  He asserted that at a meeting of creditors on 24 January 2003, a proposal under s 73 of the Act had been accepted.  The trustee did not accept that the meeting had been validly called, and the assertions by Mr Doolan were later withdrawn by him in proceedings before Kiefel J.

7                     The action involving the claim of Ms Brookes was settled on 30 March 2004, with Ms Brookes withdrawing her claim.   The submissions on behalf of the trustee summarised the position from her point of view as follows:

‘This left Mr Doolan, with Remax, Messrs McDonald, Pollach and Guinea (who Ms Dare sees as conspiring with Mr Doolan against the trustee) in total control of any creditors’ meetings.’

8                     Requisitions pursuant to s 64 of the Act were sent by creditors to the trustee on 29 and 30 March 2004, requiring her to call a meeting at which, pursuant to s 181 of the Act, there would be considered a resolution to remove her as trustee.  That meeting was scheduled to be held on 20 April 2004.  An application by Ms Dare was filed in the Federal Court seeking injunctive relief preventing the creditors from voting for her removal. 

9                     I will shortly come to the reasons for judgment of Cooper J who declined to grant interlocutory injunctive relief, and who made orders that the second and third respondents to the trustee’s application have their costs from the trustee personally, and that the expenses of that application not be a charge on the estate.  The hearing before Cooper J leading to those orders was heard on 16 April 2004. 

10                  Later on 16 April 2004, the trustee borrowed $14,187.45 from KPMG, Chartered Accountants, a firm of which she is a partner, for the purpose of declaring a first and final dividend of 100 cents in the dollar to all the unsecured creditors of Mr Doolan.   That amount was deposited into an account kept by the trustee, being the bankrupt’s estate bank account with Suncorp Metway.  The trustee on that day, 16 April 2004, declared a final dividend in relation to all the debts proved in the bankruptcy.  The trustee drew cheques and posted them to the creditors.  The creditors’ position I will come to shortly, but they have held the cheques in escrow, so to speak, pending a resolution of their status.  On 20 April 2004, Cooper J gave judgment. 

11                  The creditors meeting was then held at which were present: the trustee; a Ms Gemmell who acted as Minute Secretary employed by KPMG; Mr Hewlett who was the solicitor for the trustee; Mr Peter Gray, a solicitor for some of the creditors who also, from time to time, had acted as solicitor for Mr Doolan; Mr Pollach; and Mr Doolan.  Two new proofs of debt were produced at that meeting, Mr Doolan claiming $720 and Mr Guinea claiming $1,300. 

12                  The trustee rejected Mr Doolan’s proof of debt on the basis that the same debt had earlier been claimed and allowed, and the trustee disallowed Mr Guinea’s proof of debt on the basis that it was one and the same debt that had been the subject of a proof of debt which had been paid 100 cents in the dollar by the declaration of the dividend.  Mr Pollach did not seek to lodge a new proof of debt or to be recognised at the meeting as a creditor.  This was claimed to be an oversight by him and his solicitor.  The meeting was closed on the basis that the trustee declared that there were no creditors and obviously therefore no quorum.

13                  It will appear that this application, in a sense, is a sequel to the proceedings before Cooper J, proceedings Q71 of 2004, in which judgment was given by Cooper J on 20 April 2004.  It is helpful if I repeat much of the circumstances referred to by his Honour because it has a direct relevance to the present application.  Cooper J, in his reasons for judgment, said in part:

‘2.     The creditors of the bankrupt estate, on 29 and 30 March 2004, requisitioned the applicant to call a meeting of creditors which would consider a resolution pursuant to s 181 of the Act for the removal of the applicant as trustee and the appointment of another trustee in her stead. That meeting is to be held today.

3.            The applicant has sought interlocutory and permanent injunctive relief restraining the first, second and third respondents ‘from putting to any meeting of creditors a proposal for a resolution to remove the applicant as trustee of the estate of the first respondent’ and further ‘from voting in favour of any resolution put to a creditors’ meeting to remove the applicant as trustee of the estate of the first respondent.’

4.            In support of her application, the applicant filed an affidavit of 121 pages, together with 95 annexures totalling approximately 750 papers. This material is cross-referenced to 14 volumes of material filed in proceedings instituted in the bankruptcy. The material purports to set out and justify the applicant’s conduct of her trusteeship and the incurring of costs and expenses in the administration in an amount of $477 627.41, including trustee’s remuneration to date of $327 721.32. Subsequently she filed an affidavit dealing with the declaration by her of a first and final dividend under s 140 of the Act on 16 April 2004.

5.            The remaining unsecured creditors of the bankrupt are, or include, the first, second and third respondents. The first respondent is the former bankrupt and he and the second respondent became creditors of the bankrupt estate by taking an assignment of debts from other creditors. The third respondent is an original creditor. In total, the unsecured creditors in respect of which the applicant has admitted proofs of debt are owed $14 187.45.

6.            The estate is almost fully administered. All that remains to be done is to sell a residential property at 10 Sankey Street, Highgate Hill (where the first respondent resides) and to pay out the priority debts in the administration together with the costs and charges incurred in selling the residential property.

7.            The applicant deposed that there was no money presently available in the estate from which to pay rates outstanding on the Sankey Street property or to pay any of the priority debts. She further deposed (in par 5(g) of her affidavit) that there was no benefit to the creditors in replacing her as trustee as ‘my remuneration, costs, charges and expenses exceed the estimated value of the remaining asset by an amount of $49,248.76, and it would be inequitable for me to be removed as trustee.’

8.            It is clear that relations between the creditors and the applicant have totally broken down. Proceedings in respect of the applicant’s costs, charges and expenses are presently in this Court (Q7004 of 2003 and Q7005 of 2003) and in the Federal Magistrates court (BZ107 of 2004). The applicant alleges that the creditors seek her removal and replacement in order that the first respondent can avoid the sale of his home and deny the applicant her remuneration.

9.      The respondents, for their part, submit that the administration has been extravagantly expensive and the sale of the house immediately incurs an eight per cent realisation charge payable to the Commonwealth of Australia, which fee would satisfy their debts. They also submit that the trustee has unreasonably refused to put before a creditors´ meeting a proposed Deed of Arrangement or composition on the part of the first respondent, which provided for the securing and payment of the proper fees and expenses of the applicant out of the proceeds of a sale of the property outside of the bankruptcy administration or out of funds raised against the property to pay out the proper priority payments.

10.    The creditors seek the appointment of David John Cranstoun as trustee. Mr Cranstoun is a registered trustee.

11.        Section 181 of the Act provides:

            ‘181   The creditors may, by resolution, at a meeting of which not less than 7 days´ notice has been given, remove a registered trustee appointed by them, or a registered trustee who is, by virtue of subsection 156A(3), the trustee of the estate of the bankrupt concerned, and may at the same or a subsequent meeting appoint another registered trustee to be trustee in his or her place.’

12.    Prima facie, the Act empowers the creditors to remove a trustee in circumstances which appear to the creditors to justify such a removal. The power to remove is not preconditioned upon there being any misconduct on the part of the trustee. If, for example, relations between the trustee and the creditors have broken down for whatever reason, that will be sufficient. Where a trustee has lost the confidence of creditors and those creditors seek the removal of the trustee, he or she should not resist removal unless there are proper reasons to do so: Adsett v Berlouis (1992) 109 ALR 100 at 112.

13.    Ordinarily, the Court would not interfere with an exercise of the power under s 181 to remove a trustee unless a good cause is shown for its interference: Re Crawford Ex parte The Trustee (1943) 13 ABC 201 at 202; Macks v Ardalich [1999] FCA 679 at [22] - [23].

14.    In the present case, the applicant submits that the creditors are proposing to act for an improper purpose, namely to deny her payment of the remuneration she claims and the indemnity she claims in relation to costs and expenses incurred by her as trustee.’

14                  His Honour noted, in par 18 of his reasons that the dividends were declared and cheques paid in the various amounts to the respondents on 16 April 2004, after the hearing of the application had concluded. 

15                  Cooper J noted at pars 22 and 23:

‘22.   The applicant’s right to remuneration does not depend upon, nor can it be taken away by, a resolution of creditors made under s 162 of the Act: Jefferson v Official Trustee in Bankruptcy (2000) 175 ALR 671 at [18] – [21], [25]. 

23.    As was said in Adsett v Berlouis at 109 and Mayne v Jaques (1960) 101 CLR 169 at 171, 173 and 180, the Act assumes the existence of a right of a trustee to be remunerated unless the trustee has agreed to act without remuneration or has not done the work or no work needed to be done or the trustee has for some reason (for example misconduct) become disqualified to have the remuneration.  So too a trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred by the trustee:  Adsett v Berlouis at 109, and cases cited therein; Jefferson v Official Trustee at [19].’

Cooper J said at pars 28 and 29:

‘28.   Whether or not the applicant has acted properly in the conduct of her trusteeship, whether or not she is entitled to the remuneration and indemnity in the amount claimed, and whether or not there is further property of the bankrupt which the applicant has failed to pursue (namely $210 000 in Doolan Properties Pty Ltd (in liquidation) of which the applicant is a co-liquidator), which she should have sought to recover for the benefit of the bankrupt’s estate, are not matters to be determined in these proceedings. The issue on this application is solely one of whether there exists some sound reason for the Court to intervene to prevent the creditors doing what the Act provides they can do if they comply with s 181 and any other relevant provision.

29.        I am not satisfied that there is anything improper in what the creditors proposed. Nothing they do can disentitle the trustee to her remuneration and to her indemnity. If she is not entitled to the full amount claimed, then it will be because of conduct on her part disentitling her to recover. That question will be decided in proceedings presently in train in this Court and the Federal Magistrates Court.’ (Emphasis added)

Cooper J importantly said, at par 30:

’30.   … The offers to pay out the creditors when there are no funds to pay the rates to protect the remaining asset of the estate and the declaration of a dividend when there is no property of the bankrupt from which to declare a dividend, other than money borrowed from KPMG for that purpose, are not rational responses from a trustee acting objectively in the matter.  They disadvantage the applicant to the extent of the monies borrowed when she [the trustee] predicts that there will be a deficit by giving the creditors an advantage that they are otherwise denied by the operation of s 109 of the Act.’

16                  Later, his Honour ordered that the application for interlocutory relief be dismissed and that the second and third respondents have their costs, to be taxed if not agreed.  His Honour said at par 34:

‘34.   The application has been brought to protect the applicant’s personal interests when in my view they were never at risk, and will not be at risk even if she is removed as trustee.  The applicant has and will receive the rights and benefits to which she is entitled under the Act and the general law.’

And later at par 35:

‘35.   … At the end of the day, the only basis advanced for intervention of the Court was to protect the trustee's remuneration and indemnity and to prevent a new trustee concerning himself with the administration of the estate.’

17                  His Honour ordered that the trustee should bear her own costs of the application for interlocutory relief without recourse to the bankrupt estate.

18                  Mr Tucker of Counsel sought to appear on behalf of those creditors who had received cheques by way of dividend from the trustee before the meeting on 20 April 2004.  It was submitted on their behalf that they were concerned at the question of the validity of the trustee’s declaring the dividend on 16 April 2004.  On 16 April 2004, the creditors’ solicitor wrote to the trustee’s solicitor and advised that the creditors did not and could not accept the dividend, but would simply hold the cheques pending judicial consideration of the relevant issues.

19                  It was submitted that the creditors sought certainty in relation to the cheques tendered to them by the trustee.  It was submitted on their behalf that there was no doubt that the dividend was ‘paid out of Doolan’s estate’ although the moneys were ‘sourced elsewhere’.  It was submitted that, as the moneys formed part of Mr Doolan’s estate, they were impressed with the trust purposes prescribed by the bankruptcy legislation, and it was further submitted that, if those funds are found to have been paid out by Ms Dare in breach of trust, they are liable to be returned to Mr Doolan’s estate.  Because of those concerns, it was said, the creditors cannot at present apply those funds to their own use with any confidence.

20                  Notwithstanding the receipt of the cheques, it was submitted that the creditors acknowledge the catalogue of complaints previously raised in the proceedings before Cooper J concerning the conduct of the trustee.  Those complaints included:

(1)   the trustee’s history of an unwillingness to consider any proposal raised by Mr Doolan under s 73 of the Act to end his bankruptcy, and the trustee’s failure to take appropriate action to maintain the principal asset in Mr Doolan’s estate.  This is a reference to the non-payment of rates which had led to the Brisbane City Council threatening to sell the principal asset in the estate for arrears of rates. 

(2)   the trustee’s expressed loathing of Mr Doolan to the point that she ‘did not care about Mr Doolan and was prepared to engage in litigation’  at any cost.

(3)   the trustee’s willingness to advance her own interests ahead of the creditors as evidenced by the fact that the trustee had formed the view that the creditors’ interests could be ignored as the trustee’s remuneration and associated outlays were in excess of the value of Mr Doolan’s property at 10 Sankey Street, Highgate Hill, and therefore, the creditors would not receive any return from Mr Doolan’s estate.

(4)   the trustee’s view that, in all respects, her own conduct was beyond reproach.

21                  Concerning the complaint by the creditors of the trustee’s expressed loathing of Mr Doolan to the point that she did not care about him and was prepared to engage in litigation with him at any cost, in fairness to the trustee I should refer to a diary note of 4 September 2003 of a conversation between the trustee and Mr McDonald.  That conversation concerned the liquidation of Doolan Properties Pty Ltd of which the trustee was a co-liquidator and the diary note included, in that context, a statement:

‘… the upshot of all that was that all of the monies were used in litigation and liquidation costs.’

The diary note continued:

‘I stated exactly the same thing was happening on the Doolan bankruptcy and that at the rate at which matters were proceeding in the litigation, I had a strong concern that at the end of the day, the only parties that would receive any money would be ourselves and the lawyers, and this was not a desirable outcome for anyone.

 I stated I had concern for creditors such as Warwick who were owed debts and as Warwick had stated, he had outlaid funds to buy creditors’ debts and there was a risk, whilst he had anticipated he would get his money back, he may not.  Warwick stated that he was also concerned about this.  I stated that I did not really “care” about Bill Doolan, but I did care about the creditors’ interest.  Warwick stated that we had an obligation to “care” about Bill Doolan and I had a duty to both Doolan and to the creditors, and I agreed with this.  I then explained that what I had meant when I said that I didn’t really “care” about Bill Doolan, was that the costs that were being incurred were being caused solely by Doolan’s actions and therefore, he could control the costs that were being incurred.  If, because of the way he was acting, he ended up with nothing at the end of the day, then my position was that that was “on his own head” and the result of his own actions and therefore not a matter for us to worry about.’

As that diary note indicates, the trustee acknowledged that she ‘had a duty to both Doolan and to the creditors’.

22                  As I see it, there are three principal issues on the present application.  The first is whether the declaration of a first and final dividend was in accordance with Pt VI Div 5 of the Act.  The second is, whether the declaration of dividend was made for an improper purpose by the trustee.  The third question is, if the declaration of dividend was made for an improper purpose, whether it was, nonetheless, effective to pay out the creditors.  The consequential decision or issue is whether, in the circumstances, the Court should make orders under s 179 of the Act in respect of the trustee of the estate of Mr Doolan.

23                  As to the first of those matters, the declaration and distribution of dividends is governed by ss 140 to 147 of the Act. 

‘140  Declaration and distribution of dividends

(1)     The trustee of the estate of a bankrupt shall, subject to this section, with all convenient speed, declare and distribute dividends amongst the creditors who have proved their debts.

(2)     Subject to the retention of such sums as are necessary to meet the costs of administration or to give effect to the provisions of this Act, the trustee shall distribute as dividend all moneys in hand.

(3)     Before declaring the first dividend, the trustee must give written notice of the trustee’s intention to declare the dividend to anyone the trustee knows of who claims, or might claim, to be a creditor but has not lodged a proof of debt.

(4)     The trustee shall, in a notice published or sent in pursuance of subsection (3), specify a reasonable period within which creditors may lodge their proofs of debts.

(5)     The trustee shall, before declaring a dividend (other than the first dividend or the final dividend) send notice of his or her intention to do so to each person who, to his or her knowledge, claims to be, or might claim to be, a creditor but has not lodged a proof of debt and has not been sent a notice under this section in relation to the declaration of a previous dividend.

(6)     The trustee shall, in a notice sent in pursuance of subsection (5), specify a reasonable period within which creditors may lodge their proofs of debts.

(7)     Where the trustee has sent a notice in pursuance of subsection (3) or (5) of this section in relation to the declaration of a dividend, the trustee shall not declare the dividend until after the expiration of 21 days after the expiration of the period specified in the notice.

(8)     Subject to subsections (9) and (10), where the trustee declares a dividend, he or she shall send to each creditor who has proved his or her debt a cheque for the amount due to him or her and a statement in accordance with the approved form in relation to the realization and distribution of the estate.

(9)     Where, but for this subsection, the amount due to a creditor in respect of a dividend would be less than $10 or, if a greater amount is, as at the beginning of the day on which the dividend is declared, prescribed by the regulations for the purposes of this subsection, that greater amount, the trustee need not pay that dividend to the creditor.

(10)Where a creditor has furnished to the trustee an authority in writing to pay a dividend due to the creditor to another person, the dividend payable to the creditor may be paid, and the statement to be sent to the creditor in pursuance of subsection (8) may be sent, to that person.

                     …

            144    Right of creditor who has not proved debt before declaration of dividend  

                     A creditor who has not proved his or her debt before the declaration of a dividend is entitled to be paid, out of any available money for the time being in the hands of the trustee, dividends that he or she has failed to receive before that money is applied to the payment of a future dividend, but he or she is not entitled to disturb the distribution of a dividend declared before he or she proved his or her debt.

145       Final dividend

(1)     Subject to this section, when the trustee of the estate of a bankrupt has realized all the property of the bankrupt, or so much of it as can, in his or her opinion, be realized without needlessly protracting the trusteeship, he or she shall declare and distribute a final dividend.

(2)     The trustee shall distribute as the final dividend all moneys realized and not previously distributed and shall distribute the final dividend without regard to any debt that had not been proved at the time when he or she declared the final dividend.

(3)     The trustee shall, before declaring the final dividend, give notice, in the prescribed manner, to each person who to his or her knowledge, claims to be, or might claim to be, a creditor but has not proved his or her debt that, if the person does not prove his or her debt within the period specified in the notice, the trustee will proceed to declare a final dividend without regard to his or her claim.

(4)     The trustee shall, in a notice sent to a person in pursuance of subsection (3), allow a reasonable period within which the person may prove his or her debt.

(5)     The Court may, on the application of a person claiming to be a creditor, extend the period within which the person may prove his or her debt.

(6)     Where the trustee has sent a notice in pursuance of subsection (3) in relation to the declaration of the final dividend, the trustee shall not declare the dividend until after the expiration of 21 days after the expiration of the period specified in the notice or, if the Court, under subsection (5), extends the period within which a person may prove his or her debt, until after the expiration of 21 days after the expiration of that extended period.’

24                  It seems to me that subs 140(2) and (3) have particular importance in the present application.  The primary contention that the declaration of a first and final dividend was in breach of the Act is the assertion that the trustee had declared a first and final dividend without notifying potential creditors of her intention so to declare.  This relates in particular to Mr Pollach who, it was submitted, was a potential creditor as an assignee of a proof of debt which had been lodged in the winding up of Doolan Properties Pty Ltd.  The contention was that part of that proof of debt ought to be claimed in Mr Doolan’s bankruptcy.  It was submitted by Mr Doolan that Mr Pollach was a potential claimant and, consistent with the obligations of a trustee, notice ought to have been given by the trustee to Mr Pollach, and therefore the declaration of the dividend was in contravention of s 145 of the Act.

25                  The trustee expressed a view in a meeting of creditors in Mr Doolan’s estate on 5 August 2002 in respect of the claim for $1,275 made in respect of a debt owing to Roberts and Morrow, and made in the liquidation of Doolan Properties Pty Ltd.  The minutes recorded that:

‘The trustee noted also that, in her opinion, part of the debt should rightly be claimed in the bankruptcy.’

It is that observation which grounds the claim that Mr Pollach was a potential claimant and was entitled to notice. 

26                  Clyne J, in Re Allen; Ex parte Official Receiver (1954) 16 ABC 154, noted that there was no time limitation imposed on when a creditor might seek to prove in the bankrupt’s estate, and said at 159:

‘Lapse of time does not prevent a creditor from coming in and proving so long as there is any estate to be distributed though he cannot disturb the distribution of past dividend.’

Having noted the effect of the equivalent of s 144 of the Act, Clyne J considered the provision requiring the trustee to give notice of his intention to declare a dividend, and observed at 159:

‘This section was no doubt intended to provide that a creditor who had failed or neglected to prove should have a last opportunity of doing so and of doing so without unnecessary delay.’

27                  The claim is that, as the trustee’s declaration of dividend on 16 April 2004 did not conform with the notice requirements to Mr Pollach, the declaration and payment of a first and final dividend is liable to be set aside. 

28                  Notwithstanding the view expressed in the minutes by the trustee, the material, in my judgment, shows that Mr Pollach was not, in this respect, a potential creditor in the bankruptcy of Mr Doolan.

29                  The source document central to this claim is an invoice dated 31 August 1997 for the amount of $1,275 by Roberts and Morrow, Chartered Accountants.  The invoice is addressed to “Doolan Properties P/L, C/- Mr William E Doolan, Coronation Avenue, GLEN INNES NSW 2370”.  In the body of it appears the following -

‘1234016                                                                   1606990

Processing your books and records and

preparing therefrom Financial Statements

and your Income Tax Return for the year. 

Estimating income tax liability and attending

to matters incidental thereto.

Processing the books and records of the Company

for the year and preparing Financial Statements

and Income Tax Return.  Estimating income tax

liability and attending to matters incidental

thereto.

Attending to secretarial matters including meeting

of directors and shareholders and recording

minutes in relation thereto.

                                                                                  $1,275.00

1606990                REMITTANCE ADVICE             31-Aug-97

Doolan Properties P/L

C/- Mr William E Doolan

Coronation Avenue

GLEN INNES  NSW  2370                                        1,275.00’

30                  It will be noted that part of the accountant’s work was in respect of Mr Doolan personally, and part of the work was for the company.  Notwithstanding that, the whole of the moneys were invoiced to the company.  It is not unusual for a person to incur liabilities in respect, not only of accounting work done on that person’s behalf, but also on behalf of an associated person.  The fact that the work concerns the accounting affairs of Mr Doolan does not mean that any debt in respect of that work must be a debt owed by him.  It is clear that the work done by the accountants resulted in a debt owed by the company to Roberts and Morrow.

31                  Notwithstanding that, Roberts and Morrow purported to prove in the estate of Mr Doolan.  On 12 October 1999, Mr David Anderson, on behalf of the trustee, wrote to the accountants and said:

‘After reviewing your proof of debt I ask that you clarify whether you are a creditor of the above bankrupt estate or alternatively Doolan Properties Pty Ltd (In Liquidation).’

On 21 October 1999, Roberts and Morrow wrote back to the trustee, saying:

‘We refer to your correspondence of 12^th  October, 1999 and confirm that we are a creditor of Doolan Properties Pty Ltd.’

32                  A Deed of Assignment dated 26 July 2002 is exhibited to the affidavit of Elva Ann McCallum filed 14 May 2004 and is a Deed of Assignment between Roberts and Morrow and Mr Ramon Pollach, and the recitals include:

‘Whereas:

A.      The Purchaser wishes to buy and the Vendor wishes to sell all of the right, title and interest of the Vendor in the debt (and related creditor's rights) owed by Doolan Properties Pty Ltd (In Liquidation) A.C.N. 061 428 724.

…

On 1 August 2002, Messrs Hollingworth and Spencer, Lawyers on behalf of Mr Pollach, wrote to the trustee, saying:

‘RE:  DOOLAN PROPERTIES P/L (IN LIQUIDATION) ACN 061 428 724 and assigned claim of Roberts & Morrow

...

We advise that Mr. Pollach has been assigned the debt owed to Roberts & Morrow.  We enclose Mr. Pollach’s proof of debt and proxy.  Evidence of the consideration which was paid is included in the Deed of Assignment at recital B.  We also advise that payment was made by our trust account cheque on instructions.  The receipt to Doolan Properties is obviously incorrect.’

33                  The Formal Proof of Debt or Claim, Form 535, signed by Mr Pollach is addressed to “the Liquidator of Doolan Properties Pty Ltd (In Liquidation)”.  It seems to me plain that whatever rights Mr Pollach has is as a creditor in the liquidation of Doolan Properties Pty Ltd, and that he was not a potential creditor in Mr Doolan’s estate.  There was no obligation, then, pursuant to the provisions of the Act, to give notice to Mr Pollach before declaring a final dividend.

34                  Similarly, in my view, Mr Pollach was not a potential creditor in respect of a claim for deferred interest.  His claim for deferred interest does not qualify as a provable debt within s 82 of the Act and he is not a potential creditor on that account.

35                  The second principal issue was whether the declaration of dividend by the trustee was made for an improper purpose.  The submission by Mr Doolan is that the trustee’s borrowing moneys from KPMG for the purpose of paying a first and final dividend to his creditors was made for an improper purpose, namely, to avoid a vote at a meeting of Mr Doolan's creditors which would remove her as trustee of his estate. 

36                  In my opinion, the trustee had legal capacity to borrow funds for the purpose of declaring a dividend in Mr Doolan’s estate, notwithstanding there is  no specific power in s 134 of the Act to that effect.  I note subs 134(1)(da) of the Act provides that a trustee in bankruptcy has a specific power to: ‘mortgage or charge any of the property of the bankrupt for the purpose of raising money for the payment of the debts provable in the bankruptcy.’  Under subs 134(3) of the Act, a trustee has power, subject to the Act, to ‘use his or her own discretion in the administration of the estate.’

37                  The trustee’s duties in the course of administering an estate are prescribed by s 19 of the Act and, except as modified by the Act, a trustee in bankruptcy is subject to the general law affecting trustees: Adsett v Berlouis (1992) 109 ALR 100.  It is clear that the trustee has an obligation to administer the estate in the interests of the creditors and the bankrupt.

The High Court approved the following statement of principle in The Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83 at 99:

‘Where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settler or without giving a real or genuine consideration to the exercise of the discretion.’

38                  In my judgment, the payment of the dividend was motivated not by a consideration of the interests of the creditors or of Mr Doolan but by a consideration of the trustee’s own self-interest, and her conduct in borrowing the funds and declaring the dividend was for an improper purpose.

39                  In Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1, a judgment of Finn J, his Honour referred to the standard required of a trustee.  His Honour said at 81:

‘... if a fiduciary is one expected to act in another’s interest in a particular matter, that person is (informed consent apart) precluded from having a personal interest or a duty to a third party which conflicts with his or her duty to that other in that matter - irrespective of whether that interest or duty actually deflects the fiduciary from the loyal performance of that duty.  And so it can be said “[a] man of integrity can be a defaulting fiduciary without ceasing to be honest”: J. Glover, Commercial Equity: Fiduciary Relationship, Butterworths, Sydney, 1995, para 5.24.’ 

40                  In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, a judgment of the High Court, Mason J, as he then was, said at 103:

‘The rule that a fiduciary is not entitled to make a profit without the informed consent of the person to whom the fiduciary duty is owed is not limited to profits which arise from the use of the fiduciary position or of the opportunity or knowledge gained from it for it is said that the basis of this rule is the fiduciary may not place himself in a situation where his duty and his interest conflict: Consul Development Pty. Ltd. v. O.P.C. Estates Pty. Ltd. (1975) 132 C.L.R. 373, at p. 393.’.’ 

His Honour continued at 107:

‘A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position.’ 

41                  The trustee’s motivation in declaring and paying the dividends was, in my view, accurately summarised by Cooper J in his reasons for judgment of 20 April 2004 at par 30.  The offers were designed solely to maintain the trustee in place, to protect her claim for the remuneration and indemnity which she says she is entitled to in the quantum claimed.  The offers, in my view, were not designed to advance the interests or the rights of the beneficiaries.  The substantive reasons were to protect her own remuneration, costs, charges and expenses and to keep control of 10 Sankey Street, Highgate Hill to pay her remuneration.  So much is acknowledged by the trustee in her affidavit.

42                  The trustee’s exercise of discretion in borrowing funds from KPMG of which she was a partner and in whom, as borrower, she had a conflict in respect of her position as borrower and as her position as partner of KPMG as part of the lender, was to negate the creditors’ right to remove her as trustee and to secure her position regarding her claims to remuneration and indemnity, present and future, from challenge.

43                  Despite an undertaking by the trustee to pay rates where the Brisbane City Council were moving to auction the principal asset at 10 Sankey Street, Highgate Hill for unpaid rates, the trustee declared and paid the respondent creditors’ dividends instead of paying outstanding rates to the Brisbane City Council.  In the circumstances, it is clear, in my opinion, that the trustee breached subs 140(2) of the Act for her own personal interests.

44                  It was suggested by Mr Davis of Counsel for the trustee that the actions by the trustee were commercially sound, resulting in payment in full to the creditors and avoiding  unnecessary expense to the estate, it being contended that any new trustee would have to incur costs “to get on top of the administration of the estate” which would be avoided by the means that the trustee had adopted.

45                  It was submitted, on behalf of the trustee, that the description by Cooper J of the decisions to borrow the money and declare the dividend as “irrational” were made in circumstances where his Honour never had before him an application to review the decisions of the trustee to borrow money or declare a dividend.  His Honour did not ultimately decide whether the declaration of the dividend was a proper exercise of the discretion of Ms Dare, and the trustee, in those circumstances, was not afforded the opportunity of putting before his Honour all material relevant to that issue.

46                  The position, however, in my opinion is that precisely the same reasons were advanced before Cooper J as were advanced before me in relation to the justification for the declaration of the dividend.  I reject that there was any commercial utility in the conduct of the trustee.  It is absurd to think that the trustee was doing a kindness to either the creditors or Mr Doolan, or both, in preventing them from removing her because, by so doing, she saved them the expense that would be inevitably occasioned by a new trustee having to acquaint himself with the circumstances of the administration.

47                  In respect of the application that Ms Dare be removed as trustee of the bankrupt estate of William Edward Doolan and that Mr David Cranstoun be appointed, s 181 of the Act enables the creditors, by meeting, to remove the trustee.  Subsection 156A(4) of the Act enables the Court to remove the trustee on application of a creditor.  However, s 179 of the Act provides that Mr Doolan can bring such an application.  Section 179 of the Act is in these terms: 

‘(1)   The Court may, on the application of 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.

(2)         The Inspector-General or a creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs.’

48                  Section 179 of the Act provides a two-step process, in that the Court must be satisfied that an inquiry into the conduct of a trustee is warranted and, after the inquiry, has jurisdiction to remove the trustee.  It seems to me that in this particular circumstance, the question of the removal of the trustee has been a very live and real issue, and the conduct of the trustee has been at the centre of the application before Cooper J and this present one.

49                  It seems to me that it is plain beyond argument that the relationship between the trustee and the bankrupt has totally broken down; that, in many cases, is a sufficient reason for the trustee to be removed.  Here, there is such a clear conflict of interest between the trustee’s interests in having her remuneration paid and how she thinks that might be achieved, and her obligations as a fiduciary to the creditors and the bankrupt, that this clearly is a case where the Court should exercise its power under subs 179(1) of the Act and remove the trustee from office.

50                  Further, in my opinion, it is proper to make an order that Mr David Cranstoun, who has consented to be appointed as trustee of that estate, be appointed Trustee in Bankruptcy of the estate of William Edward Doolan. 

51                  While the conduct of the trustee was, in my opinion, improper, it does not have the effect, in my view, that the payment to the creditors by the trustee was ineffective to discharge their claims in the estate.

52                  In no sense were the creditors a party to any improper purpose or breach of trust by the trustee, and in the view I take of the matter, I ought to declare that the payments by the trustee to the creditors for the full extent of their proved claim discharges them from their rights in the bankrupt estate. 

53                  There remains a further question which cannot be resolved in the present proceedings.  The question of whether the trustee can charge the borrowings to the estate to the detriment of the bankrupt in any surplus, and her costs of the whole exercise, is a matter for another day.

54                  The question of the trustee’s entitlements, as I have indicated, are already the subject of proceedings in this Court and in the Federal Magistrates Court, and I simply indicate that nothing that I have said in these proceedings seeks to determine whether the estate of Mr Doolan is properly to be charged with the $14,187.45 borrowed by the trustee from her firm for the purpose of paying a full and final dividend to the creditors.

55                  I make the orders that I have indicated. 

56                  As to costs, it seems to me that the trustee should pay, without recourse to the estate of Mr Doolan, the costs of and incidental to the application by Mr Doolan, to be taxed if not agreed, and the costs of and incidental to that application of the creditors Mr Warwick McDonald, Mr Ramon Pollach, Mr Dominic Guinea, and Southbank Property Pty Ltd trading as Remax Southbank Property; again, those costs to be taxed if not agreed.

57                  On the question of costs, notwithstanding the submissions made by Mr Davis, it seems to me that it was proper for the creditors to seek to determine the validity of the payments to them, having regard to the conduct of the trustee which, quite frankly, was bizarre.  I think it is appropriate that the trustee pay the costs of and incidental to this application of the unsecured creditors for whom Mr Tucker acts without recourse to the funds of the estate.  Those costs to be taxed if not agreed.

Associate:

Dated:              31 May 2004