FEDERAL COURT OF AUSTRALIA

McKinnon v Pattison [2009] FCA 1421

PRACTICE AND PROCEDURE – appeal from refusal by Federal Magistrate to disqualify himself – where Federal Magistrate had previously heard proceeding involving appellants –no contested issues of facts or credibility in previous proceeding – no other grounds for disqualification – reasonable observer would not conclude that Federal Magistrate would not bring an unbiased mind to the application

BANKRUPTCY AND INSOLVENCY – taxation of trustee’s remuneration – application for taxation out of time – appeal from decision of Federal Magistrate refusing to extend time pursuant to s 33(1)(c) of the Bankruptcy Act 1966 (Cth) – Federal Magistrate erred in solely considering the futility of any extension – no deliberate delay on the part of the appellants – public interest in enabling scrutiny of trustee’s remuneration

HELD – Appeal allowed

Bankruptcy Act 1966 (Cth) s 33(1)(c)

Bankruptcy Regulations 1996 (Cth) reg 8.09(1)

McKinnon v Pattison [2009] FMCA 695 referred to

McKinnon v Pattison [2009] FMCA 696 referred to

McKinnon v Commonwealth Bank of Australia [2005] FCA 1898 referred to

Abeyratne v Trkulja (1998) 90 FCR 253 referred to

Vince v Sellers [2004] FMCA 564 discussed

House v The King (1936) 55 CLR 499 referred to

Draffin v Construction, Forestry, Mining and Energy Union [2009] FCAFC 120 applied

Wenkart v Pantzer (No 6) [2003] FCA 1210, referred to

Adsett v Berlouis (1992) 37 FCR 201 referred to

Pantzer v Wenkart (2006) 153 FCR 466 referred to

JEANETTE BEVERLY DAWN MCKINNON and DONALD NEIL MCKINNON v PAUL ANTHONY PATTISON

VID 513 of 2009

MARSHALL J

7 DECEMBER 2009

MELBOURNE

THE COURT ORDERS THAT:

1.         The appeal is allowed.

2.         The orders of the Federal Magistrates Court of Australia of 25 May 2009 in proceeding MLG 369 of 2009 are set aside.

3.         The orders of the Federal Magistrates Court of Australia of 19 June 2009 in McKinnon v Pattison [2009] FMCA 696 are also set aside.

4.         The appellants’ time within which to request Insolvency and Trustee Services Australia (being the taxing officer pursuant to reg 1.03 of the Bankruptcy Regulations 1996 (Cth) and s 167 of the Bankruptcy Act 1966 (Cth)) to tax the respondent’s claim for remuneration pursuant to reg 8.09 of the Bankruptcy Regulations 1996 (Cth) is extended to the expiry of 28 days after the date of these orders.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                          The appellants appeal from two judgments of Phipps FM published on 19 June 2009. The appellants are undischarged bankrupts. The respondent is their trustee in bankruptcy.

2                          In his first judgment, Phipps FM dismissed an application by the appellants that he disqualify himself from hearing an application to review a decision of a Registrar of the Court below made on 25 May 2009 (“the First Judgment”); see McKinnon v Pattison [2009] FMCA 695. The substantive application before Phipps FM was for an extension of time under s 33(1)(c) of the Bankruptcy Act 1966 (Cth) (“the Act”) for the appellants to give a taxing officer notice of their wish to have the costs and remuneration of their trustee in bankruptcy taxed pursuant to reg 8.09 of the Bankruptcy Regulations 1996 (Cth) (“the Regulations”).

3                          In the second judgment, his Honour dismissed the application for review and ordered the appellants to pay the costs of that application and the costs before the Registrar (“the Second Judgment”); see McKinnon v Pattison [2009] FMCA 696.

GROUNDS OF APPEAL

(i)         Disqualification issue

4                          The appellants claim that Phipps FM should have disqualified himself from hearing the application because he had heard a similar matter previously. They also allege that the proceeding was part-heard before another Federal Magistrate.

(ii)        Substantive issue

5                          The appellants further allege that his Honour’s judgment was made on “grounds that are not a factor for consideration” in the proper exercise of his discretion.

(ii)        Other grounds

6                          The appellants contend that Phipps FM failed to give them time “to read two submitted precedents” which were referred to in the reasons for judgment. In addition the appellants submit that his Honour “failed to seek the requested info from the respondent to be returnable 19 June 2009”.

RELEVANT LEGISLATION

7                          Section 33(1)(c) of the Act provides that the Court may:

extend before its expiration or, if this Act does not expressly provide to the contrary, after its expiration, any time limited by this Act, or any time fixed by the Court or the Registrar under this Act (other than the time fixed for compliance with the requirements of a bankruptcy notice), for doing an act or thing or abridge any such time.

8                          Regulation 8.09(1) of the Regulations provides that:

Where the trustee of the estate of a bankrupt claims remuneration under section 162 of the Act, the bankrupt or a creditor who is dissatisfied with the amount of the claim may, by notice in writing lodged within 28 days of being notified in writing or becoming aware of the amount of the claim, request a taxing officer to tax the claim.

9                          There is no provision of the Act which expressly provides that the time under reg 8.09(1) may not be extended or abridged pursuant to s 33(1)(c).

Disqualification issue

10                        In his First Judgment at [6] of his reasons, Phipps FM said:

The current application is an application that I disqualify myself. This matter originally came before Burchardt FM on Monday of this week, that is, 15 June [2009] and he adjourned it for hearing until today. I imagine he would have initially adjourned it to hearing before him, given that it would have then been on his docket. Burchardt FM is unavailable and the matter has been assigned to me.

11                        It is apparent that Burchardt FM had not begun to substantially hear the matter and that therefore he was not part-heard in the proceeding. There is no reason why Phipps FM could not hear the matter assigned to him by another Federal Magistrate, providing there is no other valid basis for disqualification.

12                        The appellants’ main concern with Phipps FM hearing the application was that he had previously heard a case involving them in their bankruptcy matter. The earlier proceeding was heard on 29 March 2004. On that date, his Honour observed that he had two matters before him: an application by the appellants to adjourn the proceeding and an application by the appellants to set aside a bankruptcy notice. Federal Magistrate Phipps refused the application for an adjournment of the proceeding. His Honour then proceeded to hear and dismiss the appellants’ application to set aside the bankruptcy notice.  

13                        At [13] in the First Judgment, Phipps FM said:

None of the issues on both the application for the adjournment and the application to set aside the bankruptcy notice [on 29 March 2004] involved any contested matters of fact. None of them involved any issues of credit. All of them argued questions of interpretation about circumstances which were not disputed.

14                        His Honour considered that there was no basis for the submission that a reasonable observer might consider that he would not bring an unbiased mind to the application before him. His Honour noted at [15] that the facts before him on the application concerning the trustee’s costs and remuneration were not in dispute and that the case concerned whether he should exercise an available discretion having regard to those facts.

15                        I agree with the views of Phipps FM referred to in the preceding paragraph. Simply because a judicial officer has dealt with a matter concerning a litigant does not mean that she or he is disqualified from hearing any other matter involving that litigant. The case against disqualification is even stronger in circumstances, such as exist in this matter, where no contested issues of fact or credibility fell for determination in the previous proceeding.

16                        The appeal grounds concerning his Honour’s failure to disqualify himself on the basis of having previously heard a matter concerning the appellants is without merit.

17                        In a similar vein, the appellants made an application at the commencement of the appeal hearing seeking that I disqualify myself on the basis that I had previously heard an application by the appellants on 3 November 2005. That earlier application sought a stay of sequestration orders against the appellants’ estates and is referred to by Dowsett J in McKinnon v Commonwealth Bank of Australia [2005] FCA 1898.  No contested issues of fact or credibility fell for determination in that application. Simply because I dealt with an earlier matter involving the appellants, I did not consider that I was required to disqualify myself from hearing this appeal and ruled accordingly.

RELIANCE ON PRECEDENTS

18                        The appellants also complain of a failure by Phipps FM to allow them to consider two precedents submitted by the respondent during the course of the proceeding subject to this appeal. The transcript of the proceeding in the Court below is not before me. However, at [15] of the Second Judgment, Phipps FM said:

I have been referred by Mr Black to two decisions, Aparatne v Tredula [sic] (North J 18 December 1998, VG 7894 of 1998), and a decision McInnis FM, as he then was, Vince v Sellars [sic] (2004) FMCA 564. They are both concerned with applications to extend time in different circumstances. North J at [35] described the power to extend time as a broad discretionary power which is unfettered and must be exercised with a view to doing justice between the parties.

19                        Federal Magistrate Phipps did not otherwise refer to Vince. His reliance on Abeyratne v Trkulja (1998) 90 FCR 253 was unexceptional. Doubtless the appellants were seeking to invoke a broad power in their favour to have justice to them done as they saw it. However there is nothing in the cases relied on by Phipps FM which was adverse to their position. The appellants’ grounds of appeal based on this issue are also without merit.

SUBSTANTIVE ISSUE

Background

20                        The appellants contend that, in deciding whether to extend the time in which the appellants could apply for a taxation of trustee’s remuneration, his Honour was not entitled under the Act or the Regulations to have regard to the fact that the appellants would not derive any financial gain from a grant of the extension.

21                        The following background matters are contained in the Second Judgment or are discernible from documents referred to in that judgment:

·          The appellants were made bankrupt by a sequestration order on 26 August 2005. The respondent is their trustee in bankruptcy.

·          There appear to be two creditors of the appellants — the Commonwealth Bank of Australia and the Australian Taxation Office. The Commonwealth Bank of Australia obtained a judgment against the appellants in the Supreme Court of Victoria in the amount of $222,985.29. The appellants dispute the Australian Taxation Office debt.

·          On 8 December 2008, the respondent sent the appellants a letter which contained a summary of his fees.

·          On about 12 December 2008, the creditors passed a resolution in accordance with the process set out in s 64ZBA of the Act approving the remuneration of the respondent in the sum of $137,000.

22                        Pursuant to reg 8.09 of the Regulationsthe remuneration of a trustee can be taxed, provided that notice is lodged with a taxing officer in writing within 28 days of the bankrupt or a creditor becoming aware of the amount of the claim. As the claim for remuneration was made on 8 December 2008, the request for taxation should have been made by 5 January 2009.

23                        On 2 January 2009, the first appellant wrote to the respondent advising that the appellants intended to have his “costs” taxed. Further, on 4 January 2009, the first appellant sent an email to the respondent which said, “I will be giving notice that we will require your costs to be taxed”. Although the appellants gave notice to the trustee that they wished to have his remuneration taxed, they gave no notice to a taxing officer within the required time.

24                        The respondent does not appear to have informed the appellants at any time that the notice requesting taxation had to be sent to the Insolvency and Trustee Service Australia (“ITSA”), as the relevant taxing officer, before it could be effective under reg 8.09 of the Regulations. The appellants only seem to have been made aware of the need to send the notice to ITSA after contacting ITSA on 16 March 2009.

25                        On 31 March 2009, the appellants were informed of their right to make an application for an extension of time under s 33(1)(c) of the Act.

26                        In early April 2009, the appellants applied to the Court below to extend the time for them to give notice to seek to have a taxation of the trustee’s remuneration.

The judgment below

27                        Counsel for the respondent did not rely on any question of delay on the part of the appellants. At [8] of the Second Judgment, Phipps FM said:

The argument which is put is that to order a taxation of costs here would be futile because it can have no benefit for the applicants, the bankrupts, because there will not be any money left over in this estate on any view, even if trustee’s remuneration is ignored.

28                        At [13], Phipps FM noted that there was no prospect of any return of funds to the appellants and said that “[t]herefore they have no financial interest in having the trustee’s remuneration taxed and possibly reduced”. His Honour went on at [14] to observe that there was no evidence before him that taxation would reduce the trustee’s costs.

29                        His Honour therefore concluded at [15] that:

Justice is done between the parties if the application is refused because there is nothing to be gained by extending the time for giving notice for taxation and so allowing a taxation to proceed.

30                        The power to extend time under s 33(1)(c) of the Act is a broad discretionary power. It is unfettered and must be exercised with a view to doing justice between the parties; see Abeyratne at 262 and see also Vince v Sellers [2004] FMCA 564 at [6]. In order to evaluate whether it is just to grant an extension of time it is necessary to consider all the factors which militate for and against an extension in the circumstances of the particular case. Examples of relevant factors which may need to be taken into account include: the reason why the applicant did not perform the required act within the statutory time limit, the prejudice to other parties of allowing an extension of time and the public policy interest in allowing or refusing an application to extend time.

31                        In the exercise of his discretion pursuant to s 33(1)(c) his Honour focused solely on the question of whether the grant of an extension of time would be futile as it would not improve the financial circumstances of the appellants. His Honour did not appear to consider any other relevant factors in the exercise of his discretion. In denying an extension of time, on the ground of “futility” alone, his Honour erred in the exercise of his discretion by allowing one matter to guide the exercise of that discretion to the exclusion of other material considerations; see, by way of analogy, House v The King (1936) 55 CLR 499 at 504–5 per Dixon, Evatt and McTiernan JJ. It can be seen by the ensuing discussion at [33]–[42] below that “futility” was not the sole criterion for consideration.

32                        The discretion in the Court below having miscarried, it is appropriate that this Court should exercise that discretion afresh; see Draffin v Construction, Forestry, Mining and Energy Union [2009] FCAFC 120 at [5] per Goldberg, Jacobson and Tracey JJ.

Consideration of the exercise of the discretion

33                        In determining whether to grant the extension of time requested by the appellants it is necessary to take into account a number of factors, in addition to the futility factor.

34                        First, the appellants’ failure to lodge their notice for taxation within the required time period does not appear to be due to deliberate delay on their part. The appellants were dissatisfied with the claim for remuneration by the trustee and gave early notice to him that they would seek a taxation of the claim. The appellants attempted to lodge a notice within the requisite time and appear to have made a genuine mistake about whom the notice should have been sent. They did not realise that they needed to apply to ITSA. The fact the appellants have provided a reasonable explanation as to why they failed to comply with the requirements of reg 8.09(1) is a matter which weighs in favour of granting an extension of time.

35                        Second, the time lapse between the date by which the appellants should have lodged their notice under reg 8.09(1) and the date by which they applied for an extension of time under s 33(1)(c) was only about three months. The appellants acted promptly once they became aware they had not lodged a notice in conformity with the requirements of reg 8.09(1) and could apply for an extension of time to comply with the terms of that provision. The fact that the delay was relatively brief and was not exacerbated by the appellants’ conduct again weighs in favour of granting the extension. The respondent stated before Phipps FM and at the hearing of this appeal that he takes “no issue on the question of delay”.

36                        The third factor which needs to be considered is that there is a public interest in ensuring that the time limits set out in the Regulations are adhered to. As has been noted the purpose of the time limit in reg 8.09(1) is to ensure that finality and certainty are brought to the quantification of a trustee’s remuneration within a relatively short period of time; see Wenkart v Pantzer (No 6) [2003] FCA 1210 at [34] per Lindgren J. This would ordinarily militate against the granting of an extension of time. However, in the present case, the respondent was aware prior to the expiry of the statutory time limit in reg 8.09(1) that the appellants intended to request a taxation of his remuneration. The respondent cannot contend that he was surprised by the appellants’ request to be allowed to lodge a notice for taxation after the 28 day period. The respondent has also not argued that he made any arrangements relying on the fact that the appellants failed to lodge a notice in conformity with reg 8.09 which will be disrupted if an extension of time is granted. Consequently, this argument is of little weight in the context of this case.

37                        Fourth, the respondent did not argue before Phipps FM that he would suffer any other prejudice if the extension of time is granted. However, in his written submissions the respondent asserted that:

In circumstances where the appellants are bankrupt and have not paid the outstanding costs orders made by Moore R and Phipps FM it would not be doing justice to the respondent or the creditors of the appellants to allow the appellants to seek a taxation, which would incur further costs to the respondent and thereby reduce the amount available to creditors.

This contention appears to assume that the remuneration claimed by the respondent will be upheld in any taxation. Whether the respondent is correct in his claim for remuneration and his entitlement to his costs of taxation may be a matter for the taxing officer. It is not for this Court to pre-empt any such decision. Any failure by the appellants to pay the respondent’s costs to date is not relevant to issue for current determination. The respondent has not shown that he would suffer any prejudice if the extension of time is granted. Indeed that is why he only relied on the futility factor in the Court below.

38                        The fifth factor to be taken into account is that the respondent has argued that the grant of the extension of time is futile because, in essence, even if the remuneration claimed by the respondent is taxed it will not improve the financial circumstances of the appellants. The implication is that the sole purpose of reg 8.09(1) is to enable the bankrupt or a creditor to gain some tangible financial benefit. Giving primacy to this approach, to the exclusion of other factors, fails to recognise and respect the wider public interest inherent in reg 8.09(1).

39                        A trustee in bankruptcy is under an obligation to exercise reasonable skill in the performance of his or her duties and “[a] trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee”; see Adsett v Berlouis (1992) 37 FCR 201 at 208 per Northrop, Wilcox and Cooper JJ. As a consequence, it has been held that under the Act:

the trustee's right to remuneration is limited to work properly undertaken. In this context, “properly” means work reasonably and bona fide undertaken for the purpose of administering the estate or performing any public duty imposed by the Act, conformably with the trustee’s duty to perform the work with reasonable care and skill and in an efficient and economical way.

Adsett at 212 and see also Pantzer v Wenkart (2006) 153 FCR 466 at [43] per Black CJ, Ryan and Moore JJ.

40                        There exists a public interest in ensuring that trustee’s remuneration is open to objective scrutiny. That public interest remains regardless of whether there would be any prospect of financial return to the appellants after the taxation. A prima facie entitlement to taxation, provided by legislation which promotes the public interest, should not be overridden by factors peculiar to the financial standing of any particular bankrupt, without good reason.

41                        While the extension of time may arguably be futile, in the contexts of what remains in the estates, it does not mean that no benefit is gained by granting the extension of time. On the contrary, there is a significant public benefit in allowing the respondent’s claim for remuneration to be taxed. This weighs considerably in favour of granting the extension of time under s 33(1)(c) of the Act.

42                        The respondent also relies on the creditors’ approval of his claim for remuneration. However, the creditor’s approval of the claim does not diminish the public interest in ensuring that the trustee’s remuneration is limited to work properly undertaken. The Act enables a bankrupt to request taxation regardless of the creditor’s approval of the trustee in bankruptcy’s remuneration. Similarly, the approval by creditors of a claim for remuneration does not mean that the claim for remuneration will be unchanged after taxation. The process of approval and taxation serve different aims.

43                        I have taken all the above factors into account, in forming the view that his Honour’s discretion miscarried. In order to do justice between the parties the discretion should be exercised afresh on appeal and the appellants’ application for time to be extended under s 33(1)(c) of the Act should be allowed, for the reasons set out at [33]–[42] above.

ADDITIONAL COMMENTS

44                        The appellants’ grounds of appeal also allege that Phipps FM erred in that he “failed to seek the requested info from the respondent to be returnable 19 June 2009”. It seems that this is a reference to the financial statement exhibited to the respondent’s affidavit sworn on 12 June 2009. That affidavit was filed before Burchardt FM on 15 June 2009. The appellants object to the affidavit and question the accuracy of its exhibit.

45                        Given the findings in relation to the exercise of the discretion conferred by s 33(1)(c) of the Act it is unnecessary to examine whether the Court below was mislead by the document.

CONCLUSION

46                        For the reasons set out above under the heading “substantive issue” the appeal should be allowed and an extension of time granted for the appellants to apply for a taxation of the respondents claim for remuneration.

Associate:

Dated:         7 December 2009