FEDERAL COURT OF AUSTRALIA

Trkulja v Morton (No 2) [2005] FCA 1044

COSTS – trustee in bankruptcy – application to remove – dismissed – form of costs order – whether against bankrupt personally or to be paid out of the bankrupt estate of the bankrupt

BANKRUPTCY – trustee – application to remove – dismissed – form of costs order – whether against bankrupt personally or to be paid out of the bankrupt estate of the bankrupt

Bankruptcy Act 1966 (Cth) ss 179(1), 32, 109(1)(a)

Federal Court of Australia Act 1976 (Cth) s 43(1)

Bankruptcy Regulations 1996 (Cth) reg 6.01, sch 3

Re Aley; Aley v Sweeney (unreported, Cooper J, Federal Court of Australia, 12 February 1996) cited

Re Carlos: Ex parte Official Trustee in Bankruptcy (unreported, Spender J, Federal Court of Australia, 14 April 1997) cited

Wallin v MJB Building Services Pty Ltd [2002] FCA 1355 cited

Coyne v Douglas-Brown [2002] FCA 1324 cited

Hughes v Holbrook [2002] FCA 920 cited

Re: Fuller; Fuller v Wily (unreported, Full Court, Federal Court of Australia, 28 June 1996) cited

MICHAEL TRKULJA v ROBERT MORTON

V 614 of 2004

GRAY J

22 AUGUST 2005

MELBOURNE

THE COURT ORDERS THAT the respondent’s costs, except for the costs of the respondent’s application for a costs order different from that first pronounced on 30 May 2005, be taxed and paid out of the bankrupt estate of the applicant in accordance with the Bankruptcy Act 1966 (Cth).

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

REASONS FOR JUDGMENT

1                     On 30 May 2005, I dismissed an application by the applicant, who is a bankrupt, seeking an order removing the respondent as his trustee in bankruptcy, pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth) (‘the Bankruptcy Act’).  The orders I then pronounced were in the following terms:

‘1.        The application be dismissed.

2.         The respondent’s costs be taxed and paid out of the bankrupt estate of
            the applicant in accordance with the Bankruptcy Act 1966 (Cth).’

2                     After I had pronounced these orders, counsel for the respondent requested that he be given an opportunity to make submissions to the effect that I should make an order that the applicant pay the respondent’s costs of the unsuccessful application.  Accordingly, I recalled par 2 of the order and, in substitution for that paragraph, made the following orders:

‘2.        The respondent file and serve any written submissions on the question
            of costs on or before 6 June 2005.

3.         The applicant file and serve any answering written submissions on that
            question on or before 14 June 2005.

4.         The question of costs be reserved.’

3                     These reasons for judgment deal with the question of costs, consequent upon the submissions made by both parties in accordance with those orders. 

4                     It is clear that the Court has a discretion, both as to whether to make any order for costs, and as to the nature of any order it makes.  Section 32 of the Bankruptcy Act and s 43(1) of the Federal Court of Australia Act 1976 (Cth) so provide.  The exercise of the discretion is guided by principles, the most commonly applied of which is the principle that costs follow the event, ie that the losing party is ordered to pay the winning party’s costs.  In proceedings under the Bankruptcy Act, it is necessary to recognise that a bankrupt has no assets vested in him or her; the bankrupt’s estate is vested in the trustee in bankruptcy.  Thus, where a sequestration order is made on a creditor’s petition, it is usual to order that the taxed costs of the petitioning creditor be paid out of the bankrupt estate, and provision for the priority of those costs is made by s 109(1)(a) of the Bankruptcy Act, reg 6.01 of the Bankruptcy Regulations 1996 (Cth) (‘the Bankruptcy Regulations’), and sch 3 to the Bankruptcy Regulations.

5                     When a trustee in bankruptcy is involved in a proceeding against the bankrupt, it is also common for the Court to make an order to the effect that the trustee’s costs of the proceeding be paid out of the bankrupt estate.  Thus, in Re Aley; Aley v Sweeney (unreported, Cooper J, Federal Court of Australia, 12 February 1996), upon the dismissal of an application for removal of a trustee in bankruptcy, it was ordered that one third of the trustee’s costs ‘be recoverable by the trustee as costs in the administration of the bankrupt estate.’  In Re Carlos: Ex parte Official Trustee in Bankruptcy (unreported, Spender J, Federal Court of Australia, 14 April 1997), on the application of the trustee in bankruptcy, the Court made orders as to how certain funds collected under indemnities for the costs of litigation should be applied, and ordered that the costs of and incidental to the application ‘be the costs of the Official Trustee in the administration of the estate.’  In Wallin v MJB Building Services Pty Ltd [2002] FCA 1355, Moore J dismissed appeals by a bankrupt from the Federal Magistrates Court, which had dismissed applications by a bankrupt to stay the bankruptcy; in respect of one of the appeals, his Honour ordered that the trustee’s costs ‘be paid in priority out of the property of’ the bankrupt estate.  In Coyne v Douglas-Brown [2002] FCA 1324, French J dismissed an application pursuant to s 179 of the Bankruptcy Act and ordered that the trustee’s costs of the application be paid out of the bankrupt estate.  In such circumstances, costs ordered to be paid in this manner then become part of the trustee’s remuneration and expenses for managing the bankrupt estate, and the trustee benefits from the priority given to that remuneration and those expenses by items 1A, 2, 3 and 6 of sch 3 to the Bankruptcy Regulations.

6                     Counsel for the respondent submitted that the usual principle, that costs follow the event, should be applied in this case.  He argued that, as the bankrupt estate has no funds, and the remuneration and expenses of the respondent to date are in the vicinity of $600 000.  He contended that an order only permitting the respondent to have his costs out of the bankrupt estate would have the effect of preventing the respondent from recovering his costs of the proceeding, in which he was the successful party. 

7                     There is considerable controversy as to what are the assets of the applicant’s bankrupt estate.  In his written submissions, the applicant claims that the respondent has received $94 500, without paying anything to creditors.  From the evidence that was before me in the application to remove the respondent as the applicant’s trustee, I am aware that the respondent has been pursuing claims that assets held in the names of others are assets of the applicant, and are vested in the respondent as part of the bankrupt estate.  I am not able to say whether those claims will be successful.  Accordingly, I am not able to find that the bankrupt estate will ultimately be wound up without the respondent being able to recoup his remuneration and expenses, including his costs of this proceeding.

8                     Counsel for the respondent also submitted that the respondent ought not to be placed in the position of competing with the applicant’s creditors for any assets that may be part of the bankrupt estate of the applicant.  This argument warrants some examination. 

9                     The system under which bankrupt estates are administered by private enterprise trustees has a degree of built-in conflict between the interests of the trustee and the interests of the creditors.  As I have said in [4], provisions of the Bankruptcy Act and the Bankruptcy Regulations give the trustee’s remuneration and expenses some priority in the winding up of a bankrupt estate.  It is primarily for the trustee to decide what steps should be taken, or not taken, in the administration of a bankrupt estate.  If there are funds in the estate, the trustee must decide whether it is appropriate to remunerate himself or herself from those funds in the pursuit of further possible assets, or whether to distribute those funds to creditors instead.  Mostly, a trustee will not pursue further assets unless specifically funded by one or more creditors to do so.  Such a decision itself will involve remuneration of the trustee for making or obtaining some assessment of the likelihood of recovering further assets.

10                  The remuneration and expenses of a trustee in bankruptcy will also be dictated, to some extent, by events beyond the control of the trustee.  There will be many situations to which a trustee has to respond in the administration of a bankrupt estate.  Those situations will often include legal proceedings in which the trustee is a party in his or her capacity as trustee of the bankrupt estate.  In responding to those situations, the trustee will be entitled to remuneration and may incur expenses.  The more such situations occur, the greater will be the remuneration and the expenses, and the more creditors will be deprived of such funds as the estate has. 

11                  An application pursuant to s 179 of the Bankruptcy Act, to remove the trustee in bankruptcy, is a situation of a kind that can arise in the administration of a bankrupt estate.  It is essential that there be a degree of supervision of a trustee in bankruptcy by the Court, to maintain the integrity of the private enterprise trustee system.  Unfortunately, the presence of s 179 will lead, from time to time, to bankrupts making unmeritorious applications to remove their trustees.  In that event, there is no particular reason why the success of the trustee in meeting such an application should not be regarded as entitling the trustee to be remunerated and reimbursed out of the bankrupt estate in the normal way.  Such a result will not place a
trustee in bankruptcy in a position of greater conflict of interest with the creditors than will any other occasion for accrual to the trustee of a right to remuneration or expenses. 

12                  By contrast, an order of the kind sought by counsel for the respondent would create what I regard as an unacceptable conflict of interest.  To make an order that the applicant pay the respondent’s costs of the proceeding would be to make the respondent a creditor of the applicant.  Ordinarily, this might cause no problem, but, as I have said, the respondent is pursuing claims that assets rightly belong to the applicant’s bankrupt estate.  In order to execute a judgment for costs, the applicant would also have to find assets against which to execute.  In case of doubts as to whether assets uncovered should be treated as part of the bankrupt estate, or as being post-bankruptcy assets, the decisions would be for the respondent primarily.  In making such decisions, the respondent would be in an impossible situation, given his personal interest in executing his judgment for costs and his fiduciary duty to the applicant’s creditors in his administration of the bankrupt estate.  In this light, an order that the trustee be entitled to costs out of the estate is plainly the lesser of the evils. 

13                  Counsel for the respondent was not able to point to any authority of significant assistance on the issue.  He referred to Hughes v Holbrook [2002] FCA 920, in which Nicholson J made an order that two bankrupt applicants pay the trustee’s costs of an unsuccessful application pursuant to s 179 of the Bankruptcy Act.  Counsel also referred to Re: Fuller; Fuller v Wily (unreported, Full Court, Federal Court of Australia, 28 June 1996), in which a Full Court ordered a bankrupt appellant to pay his trustee’s costs of an appeal from the dismissal of an application by the bankrupt pursuant to s 179 of the Bankruptcy Act.  In neither case did the Court’s reasons contain any discussion as to the appropriate order for costs.  Similarly, in the cases to which I have referred in [5], there is no discussion as to the appropriate order, with the exception of Wallin where, at [3], Moore J described the order he made as to costs as ‘an order of the type ordinarily made in proceedings such as this.’ In Coyne, French J did not discuss the form of order at all.  It is clear that his Honour’s postscript in [68] of his reasons for judgment involved a discussion of the taxation of the trustee’s remuneration in general, and not a discussion of the costs of the particular application.  I do not therefore find the authorities to which counsel for the respondent referred me, or those which my own researches have uncovered, to be of assistance as to principle, other than to make clear that there are examples of cases in which costs in favour of a trustee in bankruptcy have been ordered to be paid out of the bankrupt estate, rather than by the bankrupt.

14                  The practical consequences of either of the alternative orders available in this case do not differ if, in fact, the applicant has no assets.  The respondent will not be able to recover his costs, either through the bankrupt estate or directly.  Only if the respondent is able to uncover assets will there be a possibility of recovery.  As I have said, in that event, the respondent would be placed in an impossible situation of conflict in deciding whether to treat assets as part of the bankrupt estate, or to execute his judgment for costs against them.  In my view, he ought not to be placed in that position. 

15                  Accordingly, the appropriate order is the order that I pronounced initially on 30 May 2005.  The only difference is that, having been unsuccessful in his application for a different costs order, the respondent ought not to have his costs of that application.  An exception will be made in the order.

Associate:

Dated:              19 August 2005