FEDERAL COURT OF AUSTRALIA
Starkey as Trustee of the Estate of Peter John Dance v Rondo Building
Services Pty Ltd [2005] FCA 1081
BANKRUPTCY – trustee – removal of trustee – creditors’ resolution to remove trustee defeated – whether some creditors wrongly admitted to vote – nature of trustee’s decision on entitlements to vote – removal of trustee for likely difficulty in acting with impartiality in the interests of creditors – whether reasonable apprehension of partiality is sufficient to enliven discretion – requirement that trustee be independent and be seen to be independent – difficulties arising for trustee in responding to apprehension of partiality
WORDS AND PHRASES - ‘likely’, ‘difficult’
Bankruptcy Act 1966 (Cth) ss 30, 156A(4) and (5), 178, 179, 63A, 64D, 64ZA, 181, 5(1)
Starkey (Trustee) v Rondo Building Services Australia [2005] FCA 551 cited
Re Zantiotis; Ex parte Andrew (unrep, FCA, Beaumont J, 17 May 1998) cited
Re Spanney; Ex parte Holtzmann (1935) 38 WALR 13 cited
Staples v Milne (1998) 83 FCR 203 cited
Macchia v Nilant (2001) 110 FCR 101 cited
Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391 cited
Re Hetherington (unrep, FCA, Sweeney J, 14 December 1982) cited
Re Partridge (unrep, FCA, Lockhart J, 22 September 1982) cited
Re Beale; Ex parte Board of Trade [1939] 1 Ch 761 cited
Dillinger v Halcha Holdings Pty Ltd (Administrator Appointed) (1995) 134 ALR 178 cited
Commonwealth of Australia v Irving (1996) 144 ALR 172 cited
GRAHAM LINDSAY STARKEY AS TRUSTEE OF THE ESTATE OF PETER JOHN DANCE v RONDO BUILDING SERVICES PTY LTD (ACN 000 289 207)
QUD 89 OF 2005
FRENCH J
5 AUGUST 2005
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IN THE FEDERAL COURT OF AUSTRALIA |
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QUEENSLAND DISTRICT REGISTRY |
QUD89 OF 2005 |
On Appeal from the Federal Magistrates Court
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BETWEEN: |
GRAHAM LINDSAY STARKEY AS TRUSTEE OF THE ESTATE OF PETER JOHN DANCE APPELLANT
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AND: |
RONDO BUILDING SERVICES PTY LTD (ACN 000 289 207) RESPONDENT
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FRENCH J |
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DATE OF ORDER: |
5 AUGUST 2005 |
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WHERE MADE: |
PERTH |
THE COURT ORDERS THAT:
1. The appeal and the cross-appeal be dismissed.
2. Each party bear its own costs of the appeal.
3. The respondent pay the appellant’s costs of the cross-appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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QUEENSLAND DISTRICT REGISTRY |
QUD89 OF 2005 |
On Appeal from the Federal Magistrates Court
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BETWEEN: |
GRAHAM LINDSAY STARKEY AS TRUSTEE OF THE ESTATE OF PETER JOHN DANCE APPELLANT
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AND: |
RONDO BUILDING SERVICES PTY LTD (ACN 000 289 207) RESPONDENT
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JUDGE: |
FRENCH J |
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DATE: |
5 AUGUST 2005 |
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PLACE: |
PERTH |
REASONS FOR JUDGMENT
Introduction
1 Peter John Dance became a bankrupt upon his own debtors petition on 3 September 2003. Graham Lindsay Starkey was appointed as his trustee in bankruptcy pursuant to a consent filed with the debtors petition.
2 At a meeting of creditors convened on 20 November 2003 one of the creditors, Rondo Building Services Pty Ltd (Rondo) moved a resolution that Mr Starkey be removed as the trustee of the estate and that another be appointed in his place. The basis upon which that resolution was proposed was said to be Mr Starkey’s prior association with the bankrupt, having been appointed by him as receiver and manager of the assets and undertaking of the bankrupt’s company, Casaron Pty Ltd (Casaron).
3 Rondo took objection at the meeting to the entitlement of a number of creditors to vote on the basis that their proofs of debt did not disclose provable claims. Those objections were disallowed. The resolution was put to a vote and defeated by a majority in value of the creditors. Two out of the fourteen creditors, Rondo and CSR Ltd (CSR), voted in favour of the resolution. They are both major creditors of the estate.
4 On 13 January 2004 Rondo applied to the Federal Magistrates Court in Brisbane seeking declarations that Mr Starkey had wrongly admitted various creditors to vote at the meeting. Rondo also sought an order for the removal of Mr Starkey. Mr Starkey did not call any evidence at the hearing before the magistrate but relied upon submissions based on Rondo’s evidence.
5 After a lengthy delay between hearing and judgment, the Federal Magistrates Court made an order on 10 March 2005 that Mr Starkey be removed as the trustee and that Mr Nick Combis, nominated by Rondo, be appointed as trustee in his place. Each party was to bear its own costs.
6 Mr Starkey filed a notice of appeal against the judgment on 30 March 2005. The order for his removal was stayed pending the hearing and determination of the appeal. Rondo filed a notice of contention seeking to support the decision of the magistrate on other grounds and also filed a cross-appeal in relation to the costs order made at first instance.
7 The learned magistrate ordered the removal of Mr Starkey as trustee on the basis of a perception of want of impartiality having found that in fact he would be impartial in the administration of the estate. Having so found she found in favour of Mr Starkey on the objections taken to his decisions about the voting entitlements of four of the creditors at the meeting. In so doing, her Honour gave only brief consideration to the evidence in relation to those creditors.
8 There appeared to be some confusion as to the particular statutory power under which the learned magistrate could make the order that she did. However, for the reasons which follow I am satisfied that her Honour applied a criterion for removal consonant with the provisions of s 156A(4)(b) of the Act. I find that her discretion in ordering the removal of the trustee did not miscarry. I am also satisfied, on the evidence before the magistrate, that the challenge to Mr Starkey’s decisions to admit the disputed creditors to vote at the meeting could not properly have succeeded. For these reasons the appeal will be dismissed. The question of the voting entitlements having been a discrete issue raised in a notice of contention by Rondo, each party will be required to bear its own costs of the appeal and of the stay application. The costs order made at first instance will not be disturbed. The cross-appeal challenging that order will therefore be dismissed with costs.
Factual and procedural background
9 In 2001 Peter John Dance, a construction manager, was the sole director and secretary of Casaron. He was also the sole director and secretary of Casaron’s only shareholder, Spuncod Pty Ltd (Spuncod). He and his wife Elizabeth were shareholders of Spuncod. Spuncod was trustee of the Dance Family Trust No 2 of which Mr Dance is a beneficiary. Spuncod held a fixed and floating charge over the assets of Casaron which had been registered on 11 April 1997.
10 On 23 October 2001 Rondo obtained a judgment in the District Court of Queensland against Casaron in the sum of $168,889.19. Another creditor of Casaron, CSR, was owed over $250,000. Both companies held guarantees from Mr Dance against whom they asserted his personal liability to them for those amounts.
11 On 18 February 2002 Mr Dance, as a director of Spuncod, appointed Mr Starkey as receiver and manager of the assets and undertaking of Casaron. On the same day Moynihan J in the Supreme Court of Queensland made an order winding up Casaron in insolvency under the provisions of the Corporations Act 2001 (Cth).
12 On 3 September 2003 Mr Dance became a bankrupt upon the presentation of his own debtors petition. Rondo had evidently filed a creditors petition against him at that time. Mr Starkey became trustee of his estate by operation of s 153A(3) of the Bankruptcy Act 1966 (Cth) (the Act) having lodged with the Insolvency and Trustee Service Australia (ITSA) his consent to act as trustee. Had he been made bankrupt pursuant to Rondo’s creditors petition, the trustee would have been Mr Nick Combis.
13 On 22 October 2003 Rondo, which by then claimed to be owed $201,993.79 by Mr Dance, requested that Mr Starkey convene a meeting of creditors pursuant to s 64A(1)(b) of the Act within 14 days. Acting on Rondo’s request Mr Starkey convened a meeting of creditors on 20 November 2003. By a letter to Mr Starkey dated 6 November 2003 Rondo’s solicitors gave notice that it would be proposing a resolution at the meeting in the following terms:
‘That Graham Lindsay Starkey be removed as the trustee of the estate of Peter John Dance and that Nick Jim Combis be appointed to be the trustee in his place.’
Mr Starkey was asked to give notice to the other creditors of the proposed resolution.
14 Mr Dance’s initial statement of affairs showed debts owed to unsecured creditors totalling $826,000. This included sums to a maximum of $270,000 and $250,000 said to be owing to Rondo and CSR respectively. Another major debt shown on the statement of affairs was the sum of $362,917 said to be owing to one Isabel Olsen and to have been incurred as a loan.
15 At the meeting held on 20 November 2003 Mr Yam, a solicitor from the law firm James Conomos Lawyers, representing Rondo, took issue with the acceptance, for the purpose of voting, of a number of proofs of debts. He objected to Gill McKerrow & Associates, Accountants, being allowed to vote pointing out that the statement attached to their proof of debt had been rendered to the Dance Family Trust. Mr Gill, who was at the meeting, replied that they were relying upon a guarantee given by Mr and Mrs Dance as outlined in a standard engagement letter. Mr Yam said he had not sighted the engagement letter and thought the matter related to Mrs Olsen. Mr Gill advised that was not the case. Gill McKerrow & Associates were permitted to vote on the basis that they were creditors in the amount of $9,641.94.
16 Mr Yam challenged the voting entitlement of Coorparoo Constructions Pty Ltd which had lodged a proof of debt in the amount of $65,581.11. He noted that a loan agreement relied upon to support the claim mentioned a loan made on 30 September 1990 carrying interest at 10% per annum. On his calculations this would yield a figure of approximately $46,000. Mr Starkey responded that the interest was 10% compound interest. Coorparoo was permitted to vote on the basis that it was a creditor in the claimed amount.
17 Mr Yam challenged the proof of debt of Isabel Olsen who was admitted to vote in the sum of $362,917 based on three loans to Mr Dance. He said there was no evidence of the loans. The statement attached to the proof of debt indicated that the information about the debt to her was provided by the bankrupt. Mr Gill advised that he looked after the affairs of Mrs Olsen. Mr Starkey advised that the information had been supplied by Mrs Olsen’s accountant. Mrs Olsen was allowed to vote.
18 Mr Yam also queried a proof of debt lodged by Hawthorn Cuppaidge & Badgery, lawyers, who were admitted to vote in the amount of $103,047.79. He noted that the statement of account was addressed to four parties and asked whether the work was carried out for Mr Dance or for various entities. Mr Starkey said that individual invoices provided were made out to Mr Dance.
19 Mr McGaw, a legal practitioner advising Mr Starkey, was present at the meeting and informed the creditors that Mr Starkey had investigated the various matters for the purpose of the meeting and that the material given had been given on proofs of debt sworn. He had advised Mr Starkey that, on the face of the material, and given the purpose for which it was now being dealt with, it was proper for him to have admitted those debts for voting purposes only. Mr Starkey was advised that his decision to admit the proofs for the purpose of voting at the meeting was proper. Whether they became final proofs was a matter for the trustee to investigate further.
20 Mr Starkey tabled a letter dated 29 October 2003 from James Conomos Lawyers, evidently written by Mr Yam, on behalf of Rondo. In the letter it was asserted that Mr Starkey, as trustee of the estate of Mr Dance, had a duty under s 19 of the Act to:
‘1. determine whether the estate of [Mr Dance] includes property that can be realised to pay a dividend to creditors;
2. determine whether [Mr Dance]has made a transfer of property that is void against you;
3. take appropriate steps to recover property for the benefit of the estate;
4. take whatever action is practicable to try to ensure that [Mr Dance] discharges all of his duties under the Act;
5. consider whether [Mr Dance] has committed an offence against the Act.’
21 In a notice, which he had given to creditors of Mr Dance on 3 September 2003 and in a covering letter, Mr Starkey had stated that he was of the opinion that Mr Dance would not be liable to pay income contributions to his estate, that it was unlikely that any dividend distribution would be paid to creditors and that there were no assets in the estate.
22 In the letter of 29 October 2003, James Conomos Lawyers stated that there was no indication that the opinion formed by Mr Starkey had been formed after any thorough investigation of books, accounts and records kept by Mr Dance. They also contended that Mr Starkey’s role as receiver and manager of Spuncod had an impact on his role as trustee.
23 The solicitors then asserted in the letter that:
‘1. you [Mr Starkey] have a conflict between interest and duty as the receiver and manager of Spuncod and as the trustee of the estate of [Mr Dance];
2. you [Mr Starkey] have a conflict between your duty as the receiver and manager of Spuncod and your duty as the trustee of the estate of [Mr Dance];
3. such a conflict might be perceived by others, not only by our client, but by the other creditors of [Mr Dance], as casting doubt upon your independence.’
They noted that Mr Starkey remained the receiver and manager of Casaron as at 22 October 2003, that Mr Dance was, until 15 April 2003, a director of Spuncod and continued as its majority shareholder and that Timothy Dance, the current director of Spuncod, was the son of Mr Dance. The solicitors expressed Rondo’s concern that Mr Starkey’s connection with Mr Dance and his son, in his capacity as receiver and manager of Spuncod, was likely to make it difficult for him to act with impartiality in the interests of the creditors of Mr Dance. They suggested that Mr Starkey nominate Mr Combis as the new trustee of the estate of Mr Dance. Mr Combis had consented to act as trustee of the estate of Mr Dance if he had become bankrupt under Rondo’s creditors petition.
24 Upon tabling the letter at the meeting of creditors, Mr Starkey advised the meeting that he was the receiver and manager of Casaron appointed by Spuncod. After questions and debate the motion for his removal was put and was defeated. Creditors in favour of the motion comprising Rondo and CSR totalled $512,246.36. Those voting against the motion totalled $711,698.84.
25 On 13 January 2004 Rondo filed an application in the Federal Magistrates Court in Brisbane seeking declarations that Mr Starkey had wrongly admitted the proofs of debt of various creditors for the purpose of their entitlement to vote at the meeting of creditors. The proofs of debt challenged in the application were as follows:
(i) Carol Nanette Beitz $3,200
(ii) Davtron Pty Ltd $38,007
(iii) Isabel Marion Olsen $362,917
(iv) Elizabeth Ann Dance $9,500
(v) Graham Marshall Elect Pty Ltd$1,551
(vi) Melisande Rita Ridge $20,000
(vii) Coorparoo Construction Pty Ltd $68,581.11
(viii) D’arcy R Marshall $4,000
(ix) Gill McKerrow & Associates $9,641.94
(x) Phillip Alexander George Dance $10,000
(xi) Peter Leslie Challen trading as
Hawthorn Cuppaidge & Badgery
Lawyers $103,047.79
Particulars under the heading ‘Details of Claim’ and ‘Further Details of Claim’ were filed on 6 February and 18 February 2004, the latter particulars setting out the bases upon which it was said that the various named creditors should not have been admitted to vote. Further, and in the alternative, a declaration was sought that the meeting was not conducted in accordance with Div 5 of Pt IV of the Act. A declaration was also sought that the resolution for the removal of Mr Starkey was not defeated at the meeting and further, or in the alternative, an order that Mr Starkey be removed as the trustee of the estate of Mr Dance and that Mr Combis be appointed to be trustee in his place. The application sought an order for indemnity costs.
26 Mr Starkey filed a notice of opposition to the application on the following stated grounds:
1. That the meeting was held in accordance with the relevant legislation and in particular Div 5 Pt IV of the Bankruptcy Act.
2. The respondent is unaware of the grounds upon which the applicant wishes to have the admission of the proofs of debt set aside as the respondent admitted the applicants (sic) proof of debt after careful consideration of the same information.
3. The applicant has failed to particularise any of the circumstances surrounding the admission of any of the proofs of debt by the respondent.
4. That the respondent did not wrongfully admit the proofs of debt referred to in the Applicants (sic) application.’
It may be noted that he ceased to be the receiver and manager of Casaron on 27 February 2004.
27 The hearing of the application was conducted on 11 May 2004. The learned magistrate said at the end of the hearing that she hoped to be able to deliver judgment the following Friday. In the event, for reasons which do not appear from the record, 10 months elapsed. Judgment was delivered on 10 March 2005. Orders were made in the following terms:
‘1. That the respondent be removed as the trustee of the estate of Peter John Dance and that Mr Nick Combis be appointed as trustee in his place.
2. That there be no order as to costs.’
On 30 March 2005 Mr Starkey filed a notice of appeal against the judgment. On 29 April 2005 Spender J stayed the removal order of the Federal Magistrates Court pending the hearing of the appeal – Starkey (Trustee) v Rondo Building Services Australia [2005] FCA 551. Mr Starkey has continued in office up to the present time.
Grounds of appeal
28 The grounds of appeal as originally formulated in the notice of appeal were as follows:
1. The Learned Magistrate erred in holding that there was a sufficient prior connection between the appellant trustee and the bankrupt, Peter John Dance as to warrant an order that the appellant be removed as the trustee of the Estate of Peter John Dance.
2. The Learned Magistrate erred in finding that an impartial fair minded person would harbour doubt as the appellant’s impartiality in the exercise of his duties, obligations and functions as the trustee of the Estate.’ (sic)
29 It became apparent from written submissions and the course of argument at the appeal that the power of the learned magistrate to make the removal order was under challenge. Mr Starkey was given leave to amend his notice of appeal after the hearing and file supplementary submissions. Rondo was given leave to file supplementary submissions in reply. Two additional grounds were raised by the amended notice of appeal which was filed on 29 June 2005. They were:
‘3. The learned magistrate was not empowered to remove the appellant on the ground of perceived lack of impartiality.
4. The learned magistrate erred in failing to take into account the lack of utility of a removal order.’
Supplementary submissions were filed by Mr Starkey on 29 June 2005 and by Rondo on 13 July 2005.
Grounds of notice of contention
30 Rondo filed a notice of contention on 18 April 2005 seeking to support the magistrate’s decision on the following two grounds:
‘1. The respondent raised the ground that:
(a) the appellant is not independent and is not seen to be independent or alternatively the appellant is not in a position where he is seen not to be impartial.
(b) the appellant is in a position where he may be seen to be in a position of conflict or potential conflict.
(c) the appellant’s previous involvement with the Bankrupt, Casaron Pty Ltd, Spuncod Pty Ltd or as Receiver and Manager of Casaron Pty Ltd is one where the appellant could not fairly and impartially carry out his duties as trustee of the Estate of Peter John Dance and would not be in a position where it would be seen that he was acting fairly and impartially in the carrying out his duties as trustees. (sic)
(d) the appellant would have an unconscious loyalty to the Bankrupt or alternatively subconsciously the appellant would not likely to act with impartially. (sic)
(e) the appellant with, or the relationship of the appellant to, the Bankrupt, is likely to make it difficult for the appellant to act with impartiality in the interests of creditors generally and the appellant should be removed as trustee under s 156A(4) of the Bankruptcy Act 1966 (Cth).
2. The proofs of debt of the creditors referred to below were wrongly admitted at a meeting of creditors held on 20 November 2003 and if the proofs of debt had been rejected, by resolution of the creditors at that meeting the appellant would have been removed as trustee of the Estate of Peter John Dance and Mr Combis would have been appointed trustee in his place.
CREDITORS AMOUNT WRONGLY
ADMITTED
1. Isabel Olsen $362,917.00
2. Peter Challen trading as Hawthorn
Cuppaidge & Badgery $103,047.79
3. Coorparoo Constructions Pty Ltd $65,581.11
4. Gill McKerrow & Associates $9,641.94’
Cross-Appeal
31 A cross-appeal was also filed by Rondo on 18 April 2005. In the cross-appeal it was asserted that the learned federal magistrate erred in exercising her discretion to make no order for costs. It was said also that she erred in not making an order that the appellant pay the respondent’s costs of the application or, in the alternative, that the respondent’s costs of the application be costs in the bankruptcy of Mr Dance.
The reasons for judgment in the Federal Magistrates Court
32 The learned magistrate in her reasons for judgment noted Mr Starkey’s stance that he did not wish to be seen to take an active part in the application and that no reliance would be placed upon any affidavit which he had filed. He wished to make it clear that he resisted the application only for the following reasons:
1. Two out of 14 creditors in the estate challenged his ability to act impartially.
2. Fifty eight per cent in value of the creditors voted against a change in trustee knowing of the two creditors’ complaints.
3. He was not biased in favour of the bankrupt or unwilling to investigate his affairs.
4. He believed the applicant’s claim to a perception of bias was unreasonable. If as trustee he thought that the creditor’s application had no merit he would be justified in an initial decision to resist it unless it could be seen that the creditors had voted decisively in favour of the trustee’s removal from office.
33 The learned magistrate identified as the issues for consideration:
1. Whether the Court should order the removal of Mr Starkey as trustee and appoint another trustee. She saw the application as brought under ss 30, 156A(4)(b) and 178 of the Act.
2. The conduct of the meeting of creditors under Pt IV of the Act held on 20 November 2003 and in particular the entitlements to vote of various creditors at that meeting.
3. The effect of the position taken by the trustee Mr Starkey who had not stated that he opposed his removal as trustee of the estate and had not set out in the notice of opposition the basis upon which he opposed such relief and had not adduced any evidence relied upon at the hearing of the application.
34 The learned magistrate set out briefly the history of events leading up to the bankruptcy of Mr Dance. She held that she had power to remove a trustee under s 178 by way of review of the trustee’s decision to continue as trustee. A separate head of power to remove arose under s 156A(4). It appears also that she regarded herself as having power to remove under s 30 of the Act. Whether she regarded this as an ancillary or stand-alone power is not clear. Her Honour then recited what she described as ‘general principles for removal’ by reference to case law. She referred to Mr Starkey’s position which relied upon the evidence adduced by Rondo and sought only to put submissions based on that evidence and the relevant legal principles to the Court.
35 In her consideration and findings the learned magistrate accepted that if Mr Starkey remained as trustee of Mr Dance’s estate ‘... he would in fact be likely to be quite impartial as he is a professional in his field’. However she said (at [58]):
‘I am satisfied that an impartial fair minded person would harbour doubt as to impartibility (sic) in the exercise of the trustee’s very important duties, obligations and functions as the Trustee of the bankrupt estate. I accept that Mr Starkey himself has a strong belief that he would act with impartiality as he is a person who is highly professional in undertaking his role as trustee.’
Her Honour was at pains to make clear that there had been no wrongdoing on Mr Starkey’s part. However the fact remained that ‘... two very large and truly at arms length creditors have significant concerns as to this issue’. The learned magistrate had regard to the fact that the question as to whether, in settling the administration of the estate, very significant proofs of debt were accepted from very close family members of the bankrupt would need to be determined by the trustee. She also considered that the affairs of the bankrupt were extremely complex, adding to the need for the trustee to be seen by all concerned as completely independent and impartial. She said:
‘61. Upon determining that the Court should exercise the powers in ss 30 and 178 of the Act and make an order for removal of the trustee on these grounds. I find that it is not necessary for the Court to then step into the role of determining whether there was (sic) any difficulties with the decision of the trustee to accept all of the identified proof’s (sic) of debt and then whether a declaration be made as to the resolutions which arose from that meeting.
62. After reviewing the evidence of the minutes of that meeting and the evidence in the statement of affairs of the bankrupt and other supporting documents, as far as is possible for the Court to do so, I can see no reason to find that the trustee acted improperly in any way in accepting the proofs of debt as he did for the purpose of the voting rights being established at the meeting. Thereafter the trustee was governed by the outcome of the votes obtained at the meeting.
63. Accordingly I make the orders as set out at the commencement of these reasons. As neither the applicant nor the trustee have been entirely successful in obtaining all relief sought from the Court I am not satisfied that the Court should exercise it’s (sic) discretion to make any order for costs to be paid by the applicant or by the trustee. Therefore, I propose to make no order as to costs.’
Statutory framework – the powers of the Court
36 Section 30 of the Act provides, in the relevant parts:
‘(1) The Court:
(a) has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and
(b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.’
37 Section 156A appears within Pt VIII of the Act comprising ss 154A to 184A. Subsections 156A(4) and (5) provide:
‘(4) A creditor may file with the Court an application for the removal by the Court of a trustee of the estate of a bankrupt, being a trustee who is the trustee of that estate by virtue of sub-section (3), on the ground:
(a) that the trustee is not fit to act as trustee; or
(b) that the connection of the trustee with, or the relation of the trustee to, the bankrupt is likely to make it difficult for him or her to act with impartiality in the interests of the creditors generally.
(5) Where an application under subsection (4) is filed, the Court may, if a ground specified in that subsection is established, remove the trustee from office and may appoint another registered trustee to be trustee in his or her place.’
38 Section 178 of the Act provides:
‘(1) If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.
(2) The application must be made not later than 60 days after the day on which the person became aware of the trustee’s act, omission or decision.’
39 For completeness reference should also be made to s 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.
(2) The Inspector-General or a credit may at any time require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs.’
Statutory framework – the entitlement of creditors to vote at meetings
40 Division 5 of Part IV of the Act deals with meetings of creditors. The term ‘creditors’, as used in Div 5, is defined in s 63A thus:
‘(1) In this Division, unless the contrary intention appears:
...
“creditors and their representatives”, in relation to a meeting, means:
(a) the creditors who are entitled to vote at the meeting and are participating in person or by telephone in the meeting; and
(b) the persons participating in person or by telephone in the meeting as proxies or attorneys of any other creditors who are entitled to vote at the meeting;’
41 Section 64D relates to notice of meetings given by the trustee and is in the following terms:
‘The notice must state that each creditor must give to the trustee at or before the meeting a written statement setting out:
(a) the amount in respect of which the creditor claims that the bankrupt is indebted to the creditor; and
(aa) if the creditor has been assigned a debt that the bankrupt owes to the creditor – the value of the consideration that the creditor gave for the assignment of the debt; and
(b) if the meeting is the first meeting of the bankrupt’s creditors:
(i) whether the creditor holds a security in respect of the debt and, if so, the value of the security as estimated by the creditor and the amount of the creditor’s debt after deducting that value; and
(ii) brief particulars of the transaction and circumstances that gave rise to the debt.’
42 Section 64ZA relates to the entitlement of those at a meeting. Relevantly it provides:
‘(1) This section applies to voting:
...
(b) on any motion proposed at a meeting or an amendment proposed to such a motion.
(2) In this section:
“creditor” means a creditor who, or whose proxy or attorney, participates in the meeting in person or by telephone.
(3) A person other than a creditor is not entitled to vote.
(4) Subject to subsections (5) and (6), each creditor is entitled to vote and has one vote.
...
(6) A creditor who has failed to give to the trustee a statement in accordance with section 64D is not entitled to vote.
...
(8) The trustee may determine any question that arises as to the entitlement of a person to vote.
(9) If the trustee needs a period in which to determine a question referred to in subsection (8), the meeting is to be adjourned to such time, date and place as the meeting resolves, being a date not later than 14 days after the date of the original meeting, for the purpose of enabling the trustee to determine the question.’
Statutory Framework – the power of creditors to remove the trustee
43 Section 181 of the Act provides:
‘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 place.’
This and preceding provisions in relation to the entitlement of creditors to vote should be read in the light of the definition of ‘resolution’ in s 5(1) of the Act which provides:
‘“resolution” means a resolution passed by a majority in value of the creditors present personally, by telephone, by attorney or by proxy at a meeting of creditors and voting on the resolution.’
The contested creditors
44 A trustee is empowered under s 64ZA(8) of the Act to determine any question that arises as to the entitlement of a person to vote. At the meeting held on 20 November 2003 Rondo’s solicitor Mr Yam challenged the entitlements of Isabel Olsen, Gill McKerrow & Associates, Coorparoo Constructions Pty Ltd and Peter Challen trading as Hawthorn Cuppaidge & Badgery Lawyers. Other challenges were raised but it was on these that Rondo relied in its notice of contention.
45 In the application before the Federal Magistrates Court Rondo sought declarations that these and other creditors were not entitled to vote. Mr Starkey decided that they were. In so doing he made decisions under s 64ZA(8). These decisions were amenable to review by the Court under s 178 of the Act. The learned magistrate however dealt briefly with that aspect of the application because she had held that Mr Starkey should be removed in any event for perceived want of impartiality. She found, in any event, that he had dealt properly with the proofs of debt in deciding on questions of entitlement to vote at the meeting. Nevertheless Mr Starkey’s decisions in respect of the creditors raised a threshold question. If he was wrong to admit the four creditors to vote, then the resolution should have been passed because a majority in value of the remaining creditors voted in favour of it, namely Rondo and CSR. The learned magistrate undertook no detailed consideration of the evidence relating to the voting entitlement of the creditors but the evidence was not in dispute. The issue was whether, on the basis of the information provided to Mr Starkey, he was entitled to admit the disputed creditors to vote.
46 The admission by the trustee of a person to vote does not involve a final determination of that person’s proof of debt. The Act requires only that, at the time of the first meeting, a creditor is required to have submitted a written statement setting out the amount which the creditor says is owed (s 64D(a)) and ‘brief particulars of the transaction and circumstances that gave rise to the debt’ (s 64D(b)(ii)). No doubt a statement of particulars that discloses on its face a frivolous or baseless claim or a debt not provable in bankruptcy would lead to the trustee refusing entitlement to vote. To that extent the particulars may be seen as providing a procedural protection against frivolous or baseless claims – Re Zantiotis; Ex parte Andrew (unrep, FCA, Beaumont J 17 May 1998). But generally speaking the section contemplates the trustee acting in a summary way on the information available and does not require him or her to determine the matter finally – Re Spanney; Ex parte Holtzmann (1935) 38 WALR 13. Cooper J pointed out in Staples v Milne (1998) 83 FCR 203 that the trustee’s decision is not final and only relates to the right to vote at the meeting. Against this background the objections raised by Rondo to the four creditors can be considered.
47 In the case of Isabel Olsen, Rondo relied upon a proof of debt which she submitted on 17 November 2003. The sum claimed was $362,917. It was supported by a statement of ‘Interest and Principal Outstanding on Loans made by IM Olsen to PJ Dance’. This referred to three loans commencing 6 April 1995, 29 November 1996 and 9 August 1996. The loans were for $75,000, $50,000 and $100,000 respectively. The statement was prepared and signed by a chartered accountant, Mr NS Campbell. It was said to have been prepared from information provided by PJ Dance and Gill McKerrow & Associates for the benefit of IM Olsen. The minutes of the meeting record that Mr R Gill, who was present, advised in response to Mr Yam’s objection, that he had looked after the affairs of Mrs Olsen. Mr Starkey advised that information had been provided by Mrs Olsen’s accountant.
48 The objection taken on the appeal was that there was no evidence of the terms of repayment of the loan or interest or that the terms had been reduced to writing. In the absence of such terms the loan was repayable on demand and the six year limitation period for its recovery had commenced upon the making of the loan and had expired by the date of the bankruptcy. A statute-barred debt was not provable under s 82. These latter points were apparently not raised at the meeting, at least not as recorded in the minutes.
49 In my opinion, having regard to the summary character of the trustee’s decision-making on entitlements to vote, his decision to allow Mrs Olsen to vote cannot be impugned. There may not have been sufficient information to justify finally admitting the proof of debt but there was enough for the purpose of the decision whether to permit Mrs Olsen to vote at the meeting. The material provided did not exclude the possibility of an agreement for repayment at a particular date nor indeed did it necessarily exclude the possibility of a written agreement. These were matters which might have been the subject of further inquiry relevant to the question of the application of the limitation period. It was not necessarily a matter for determination at the creditors meeting.
50 Once it is accepted that Mrs Olsen’s vote was properly admitted, the challenge to the other three disputed creditors is academic. According to the minutes voters in favour of the resolution totalled $512,236.36. Voters against totalled $711,698.84. The remaining three disputed creditors were claiming amounts of $9,641.94 (Gill McKerrow & Associates), $68,581.11 (Coorparoo Constructions) and $103,047.79 (Peter Challen trading as Hawthorn Cappaidge Badgery Lawyers. The total of those remaining creditors if subtracted from the votes against the resolution still left a majority value against the motion.
51 The Gill McKerrow & Associates’ debt was $9,641.94. It comprised four accounts rendered for work done which was shown on a statement attached to the proof of debt. The statement recorded the work as having been done for the Dance Family Trust No 2. As already noted, Spuncod was the trustee of that trust. At the meeting Mr Gill cited a guarantee given by Mr Dance and his wife and referred to the standard engagement letter. He said that the guarantee had been made clear at the time the proof was submitted. Mr Starkey was entitled to act not only on the proof lodged but also on information provided at the meeting. He was entitled to admit Gill McKerrow & Associates to vote for the purpose of the meeting having regard to the general principles already referred to relating to the summary character of such determination.
52 The objection taken on the appeal to Coorparoo Constructions Pty Ltd was the same as that in respect of Mrs Olsen’s claim, namely that it was founded on a loan now statute-barred. In the case of Coorparoo Constructions Pty Ltd however there was a written loan agreement attached to the proof with a covenant to repay the principal sum by 30 September 2000. The amount of the loan was $20,000 with interest of 10% compounding annually in arrears. The point which had been taken at the meeting simply went to the quantum of the loan. Mr Starkey responded that the objection taken did not take account of the compound nature of the interest. I am satisfied that Mr Starkey was entitled to admit Coorparoo Constructions to vote.
53 In relation to the challenge to the Hawthorn Cuppaidge Badgery debt in the amount of $103,047.79, the proof of debt attached a statement of account made out to Mr Dance, Global Andorra Australia Pty Ltd and Spuncod. It was submitted in support of the notice of contention that there was no evidence of any agreement establishing that Mr Dance had agreed to be the client of the firm for work done for other entities or persons or to pay the legal fees in respect of work undertaken in relation to those matters.
54 Although the statement referred to the three parties mentioned, there were also attached individual invoices in respect of each of the items in the statement and directed to Mr Dance. Each of them however was dated 19 November 2003. It would appear that they had all been prepared at the same time to support the proof even though in some cases they related to work going back to 2001 and 2002. No doubt these matters would have required further inquiry in relation to the basis upon which Mr Dance was said to be liable to the firm. However it is difficult to see any basis upon which the trustee was required to reject the claim at that stage. The fact that a statement of account is made out to the bankrupt and others does not prevent the inference that all are liable. In any event the question in this case is academic because the proper inclusion of the other creditors left a clear majority in value against the resolution.
55 There was no proper basis for the learned magistrate to interfere with the trustee’s decisions in relation to the creditors’ voting entitlements to the effect that the resolution for his removal would have been passed. Rondo therefore fails in its notice of contention so far as it relates to voting entitlements at the meeting. The next question is whether the learned magistrate erred in determining that she had the power to make an order removing the trustee on the basis of his perceived lack of impartiality.
The power to remove the trustee for perceived want of impartiality
56 The learned magistrate appears to have thought that she had the power to remove the trustee under s 178 in the exercise of a review of the trustee’s decision to continue as such. It is true that Rondo’s solicitor effectively called upon Mr Starkey to resign in favour of Mr Combis on the basis of an asserted conflict of interest arising from his position as receiver and manager of Spuncod. The trustee declined to do so. In my opinion however that is not a decision open to review under s 178. Although it is not necessary to decide the matter for present purposes, in my opinion, it is highly questionable that s 30 confers power upon a court to remove a trustee.
57 There is specific provision to remove a trustee because of his or her connection or relationship to a bankrupt. That provision is to be found in s 156A(4) of the Act. There is also a power under s 179 of the Act to inquire into the conduct of a trustee in relation to a bankruptcy and to remove the trustee from office. No such inquiry was sought or undertaken in this case. A discussion of the operation of ss 178 and 179 and their legislative ancestry may be found in Macchia v Nilant (2001) 110 FCR 101 at 112-121. A trustee can also be removed by resolution of the creditors under s 181.
58 There are two alternative criteria which enliven the discretion under s 156A(4) to remove a trustee. The first is that the trustee is not fit to act as such. There was no suggestion that Mr Starkey was not fit to act. The second is that the connection of the trustee with, or the relation of the trustee to, the bankrupt is likely to make it difficult for him or her to act with impartiality in the interests of the creditors generally.
59 In relation to the question of partiality, the learned magistrate expressly found that:
‘... if Mr Starkey remains as trustee of this bankrupt estate he would in fact be likely to be quite impartial as he is a professional in his field.’
She went on however to find that an impartial and fair-minded person would harbour doubts about his impartiality. Rondo, in its written submissions, referred to Mr Starkey’s connections with Mr Dance as at the date of Mr Starkey’s appointment as trustee of the estate and the date of the meeting of the creditors. These points emerged from the uncontested evidence before the Federal Magistrates Court:
1. Before the bankruptcy Spuncod appointed Mr Starkey as receiver and manager of Casaron.
2. Mr Dance was the sole director and secretary of Casaron until his bankruptcy.
3. Spuncod held the entire issued capital of Casaron.
4. Mr Dance was the sole director and secretary of Spuncod (from 5 January 1983 to 15 April 2003) including the date of the appointment of Mr Starkey as receiver and manager to the subsidiary, Casaron. Mr Dance’s son became a director of Spuncod on 15 April 2003. The issued capital of Spuncod was held by Mr Dance and his wife. Spuncod was a trustee of the Dance Family Trust No 2 of which Mr Dance was a beneficiary.
5. The proof of debt of the solicitors, Hawthorn Cuppaidge & Badgery, disclosed that fees are claimed for litigation between Rondo and Casaron. A portion of those fees related to the period during which Mr Starkey was receiver and manager.
6. In 2003 Mr Dance was employed as a manager of Spuncod and was being paid an income from that company. Spuncod was also providing Mr Dance a Mercedes motor vehicle for his use.
60 Rondo submitted that at the date of the bankruptcy Spuncod was indebted to Mr Dance. Mr Starkey as trustee of the estate would have to pursue collection of that debt against his successor as receiver and manager which appointment he had held until a significant time after the bankruptcy, that is until 27 February 2004.
61 One of the creditors, Davtron Pty Ltd (Davtron), claimed $38,007 based on a personal loan to Mr Dance which was payable to Spuncod. There was an amount owing by Spuncod, to the bankrupt, of $25,000 to be collected from Spuncod for the benefit of the estate. Mr Starkey would need to adjudicate on the proof of debt of Davtron and recover it from the company that had appointed him as receiver and manager. He would also have to adjudicate on a proof of debt for the services of solicitors for which Mr Dance was also said to be liable with Spuncod. It was submitted that the evidence was that the solicitors who lodged the proof of debt in the bankruptcy were claiming, in the administration, fees regarding discussions occurring with Mr Starkey which were prior to the bankruptcy. Mr Starkey would be in the position of having to adjudicate as to a creditor’s claim in respect of which he had a personal involvement. He would also have to adjudicate on proofs of debt of family members of the bankrupt, including Elizabeth Dance and Phillip Dance.
62 Rondo submitted that there is a need for a proper investigation into the examinable affairs of the bankrupt which included Casaron, Spuncod and the Dance Family Trust No 2. This would include Mr Dance’s dealings with each of the companies and the Trust generally, the income he was or is earning from the companies or the Trust and the amounts owed to or by Mr Dance. In determining any potential avenues for recovery the assets and liabilities of Spuncod would need to be examined to assess the worth of any chose in action. There would be a need to examine the Deed of Trust of the Dance Family Trust No 2 for the purpose of making income contribution assessments. Mr Starkey would also need to determine Mr Dance’s past and present income which would include benefits provided to Mr Dance or services or benefits provided by Mr Dance for which he received no remuneration or inadequate remuneration including benefits provided by Spuncod.
63 It was submitted for Rondo that the evidence supported the finding that an impartial fair-minded person would harbour doubt as to the impartiality of Mr Starkey. The learned magistrate took into account not only the views expressed by Rondo and the supporting creditor, CSR, but also the fact that some of the other creditors were not at arms length from Mr Dance. That was a relevant factor to be considered in assessing the weight to be given to such views.
64 It was also submitted that in the context of the mischief to which s 156A(4) is directed a prior connection or relationship through the entities Casaron and Spuncod was a connection for the purposes of s 156A(4). There was no reason to read down or limit the meaning of those words in the context of the purpose of the provision.
65 It was submitted for Mr Starkey that on its proper construction s 156A(4)(b) requires the Court to adopt a narrower test deciding on the question of the removal of a trustee than that which was in fact adopted in this case. Section 156A(4)(b) does not introduce as a criterion the question whether a fair and reasonable person fully informed might consider that the trustee, by reason of his alleged connection with the bankrupt, might not act impartially in the administration of the estate. The perception test, it was said, is inapt. The test was whether it was ‘likely’ that Mr Starkey’s prior relationship with the bankrupt would make it ‘difficult for him’ to act with impartiality in the interests of the creditors generally. It was submitted from a reading of the section that something more than a mere apprehension of the possibility of partiality is required. A whole range of factors including the nature of the trustee’s past contact with the bankrupt and the relevant experience must be closely examined. The onus, it was submitted, was on the creditor seeking removal to bring in direct evidence or strong circumstantial evidence of factors deeming to establish the likelihood that the trustee would in fact experience difficulty in remaining impartial, rather than merely point to facts which might give rise to the possibility of such difficulty. The magistrate never addressed this point because she did not purport to rely upon s 156A(4)(b).
66 In Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391, Sweeney J considered an application for the deregistration of a registered trustee on the basis of want of independence following his change in status from principal to employee. His Honour referred to the requirement that in the administration of estates a trustee be independent and be seen to be independent. He cited his own earlier decision in that regard in Re Hetherington (unrep, FCA, Sweeney J, 14 December 1982) and a decision of Lockhart J in Re Partridge (unrep, FCA, 22 September 1982). In the latter case, in a passage quoted by Sweeney J in Re Lamb (at 397), Lockhart J said of the trustee:
‘He must be scrupulously careful to ensure that he never allows himself to be placed in a position of conflict between various duties or between duty and interests; nor must he ever allow the situation to arise where he may be seen to be in that position of conflict or potential conflict. A registered trustee must not only be impartial; he must be seen to be impartial.’
67 The verbal formula which appears in s 156A(4)(b) has considerable ancestry. It appeared in s 19(2) of the Bankruptcy Act 1914 (UK) and as a criterion for removal from office by the Board of Trade under s 95(2)(b) of the English Bankruptcy Act. Sweeney J observed in Re Lamb (at 398):
‘These provisions emphasise the requirement that a trustee not be placed in a position where it is difficult for him to act with impartiality, regardless of whether he would in fact act with impartiality. The provisions illustrate a concern for a trustee to be seen to be independent and not in a position of potential conflict.’
68 In Re Beale; Ex parte Board of Trade [1939] 1 Ch 761 at 764, Farwell J, in a passage also cited by Sweeney J, said:
‘It may be that, if he were permitted to continue as trustee, he would in fact be quite impartial. That is not what I have to decide. I have to determine whether it would be difficult for him to act with impartiality.’
There is ample authority for the proposition cited by Sweeney J that the trustee should be, and appear to be, independent and impartial. The same principle applies to liquidators – Dillinger v Halcha Holdings Pty Ltd (Administrator Appointed) (1995) 134 ALR 178 at 183-184 (Sundberg J); Commonwealth of Australia v Irving (1996) 144 ALR 172 at 175-176 (Branson J) and the cases there cited.
69 An appeal from his Honour’s decision in Re Lamb was allowed on the basis that the mere existence of an employer and employee relationship would not necessarily operate as a disqualification from office as a registered trustee. On the evidence it did not appear that the employee trustee would not have the necessary independence. The general principles addressed by Sweeney J however were not in question. Indeed in the judgment of Smithers ACJ the passage already quoted from Lockhart J’s judgment in Re Partridge was cited with approval.
70 The words used in s 156A(4)(b) do not require, as a criterion of the discretion to remove a trustee, that the trustee would not or could not act with impartiality in the interests of creditors generally. It is sufficient that it is ‘likely to be difficult’ for the trustee so to act. The word ‘likely’ in this context does not, in my opinion, require it to be shown that there is a greater than even chance that the trustee would face the relevant difficulty. So long as there is a ‘real chance’ in the sense of a non-trivial risk of difficulty, then the criterion of the section would be fulfilled. The difficulty referred to in s 156A(4)(b) relates not to any actual want of impartiality but arises from the relationship or connection of the trustee to the bankrupt. Such a difficulty could arise, for example, where the trustee is faced with the possibility of making a decision in the administration of the estate which is adverse to a bankrupt who is a relative or friend. In that event the trustee would have consciously to put to one side the fact of the relationship in making the decision. The necessity to do that is properly characterised as a difficulty in the relevant sense. The partiality which the trustee would have to avoid in such a case has two possible manifestations. One would be the making of a decision favourable to the bankrupt because of the personal relationship or connection. The other manifestation would be the making of a decision unfairly adverse to the bankrupt because of concern that the relationship or connection might be perceived as affecting the trustee’s independence. The duty of the trustee of which the trustee is or should be aware is to be independent and to be seen to be independent. For if the trustee is not seen to be independent there will be a lack of confidence in the decisions which he or she has made and the possibility of challenges to decisions taken which would not otherwise arise. The very making of such challenges can impose delay and expense in connection with the administration of the estate.
71 The trustee carrying out his or her duty conscious of the needs of independence and perceived independence faces difficulty in carrying out those duties if he or she has to overcome a perception of partiality. For that reason the criterion that a reasonable person would apprehend that the trustee would not or might not act impartially in the interests of the creditors is a basis upon which s 156A(4)(b) can be invoked. In my opinion therefore despite the difficulties with the learned magistrate’s reasoning, the criterion which she ultimately applied was correct albeit it seems to have been applied in the context of s 30 or s 178 rather than s 156A(4). The facts on which she acted were set out in the respondent’s submissions referred to earlier. They were sufficient to show the requisite connection or relationship with the bankrupt generative of the relevant difficulty. Mr Starkey did not file any affidavit or expose himself to cross examination on these issues. As a matter of discretion, the views of two major independent creditors were relevant and properly taken into account by the learned magistrate.
72 As to the utility of removal in the context of what is said to be an impecunious estate, it is no doubt the case that if the major creditors want investigations to be carried out they will have to make some contribution to their funding. It cannot be assumed that, having come this far with the application and the appeal, they would not be prepared to do so.
73 In my opinion there is no basis for a finding that having reached the conclusions that she did, the learned magistrate’s discretion to remove the trustee miscarried. In my opinion, the challenge to her decision on this basis fails.
Conclusion
74 For the preceding reasons the appeal will be dismissed. Having regard to my own findings about the meeting point, that is to say the challenge to the voting entitlement of the creditors, I do not propose to disturb the costs order below. The cross-appeal will therefore be dismissed. The appellant has failed on the appeal so far as it related to the issue of perceived want of impartiality. On the other hand the respondent made substantial submissions under its notice of contention in relation to the voting entitlements of the creditors which was a discrete issue. I propose to order therefore that each party should bear its own costs of the appeal.
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I certify that the preceding seventy four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. |
Associate:
Dated: 5 August 2005
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Counsel for the Appellant: |
Mr G Egan |
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Solicitor for the Appellant: |
MacGillivrays Solicitors |
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Counsel for the Respondent: |
Mr P McQade |
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Solicitor for the Respondent: |
James Conomos Lawyers |
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Date of Hearing: Date of Written Submissions: |
15 June 2005 29 June 2005 and 13 July 2005 |
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Date of Judgment: |
5 August 2005 |
