FEDERAL COURT OF AUSTRALIA

Ferella v Official Trustee in Bankruptcy [2010] FCA 766

THE COURT ORDERS THAT:

1.                  Within seven days the parties are to endeavour to agree on the form of orders giving effect to these reasons.  If agreement cannot be reached in that time, the parties are to re-list the proceeding at the earliest possible time by arrangement with my Associate.

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 Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                                             In this proceeding the applicants have applied for an order pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) that an inquiry be made by the Court into the conduct of the respondent in relation to their respective bankruptcies, with a view to consequential orders being made.  The applicants raise eleven separate issues in respect of which an inquiry should be held.

2                                             Sequestration orders were made against the estates of the applicants on 14 October 2005.  On 3 December 2008 the applicants were discharged from bankruptcy by operation of law.  However, the bankrupt estates have not been finalised and the respondent remains as trustee of those estates. 

3                                             The application commencing this proceeding was filed on 11 November 2009.  An amended application has since been filed. 

4                                             Three issues arise for determination at the present time: first, whether, because they were discharged from bankruptcy at the relevant time, the applicants were and are entitled to bring an action under s 179(1); secondly, whether certain paragraphs of a notice to produce should be set aside; and, thirdly, whether the parties should be directed to put on now and before any further directions are made, all evidence they would wish to put on in relation to the inquiry sought by the applicants.

issue 1:  ARE THE APPLICANTs ENTITLED TO BRING AN ACTION UNDER S 179(1) OF THE BANKRUPTCY ACT?

Procedural background

5                                             In their application as originally filed the applicants sought relief based on s 178 of the Bankruptcy Act as well as an inquiry pursuant to s 179(1).  The application was supported by a statement of claim filed on 2 December 2009. 

6                                             On 7 December 2009 leave was granted to the applicants to file in court an amended application.  The amended application (amongst other things) removed the claim for relief based on s 178.  On the same day the respondent was ordered to file a defence.

7                                             On 12 February 2010 the respondent filed a defence.

8                                             On 19 April 2010 the applicants filed an amended statement of claim. 

9                                             On 27 April 2010 I made directions providing for the hearing of various interlocutory disputes that had arisen between the parties. 

10                                          On 30 April 2010 the respondent filed a defence to the amended statement of claim.  The defence repeated the previous defence with some amendments (not presently relevant) and added two paragraphs, as follows:

57.               As to the whole of the Applicants’ claim, the Respondent asserts that they are no longer “bankrupts” for the purpose of s179 of the Bankruptcy Act.

58.               As discharged bankrupts neither Applicant is entitled to bring an action under s179 of the Bankruptcy Act.

11                                          Those paragraphs raised a defence to the entirety of the applicants’ claim.

12                                           On the day appointed for the hearing of the various interlocutory disputes I made an order, at the request of the parties, pursuant to O 29 r 2, that the question raised by paragraphs 57 and 58 of the defence be determined separately from and prior to all other questions and issues in the proceeding.  I then proceeded to hear that question.

13                                          The question so framed raised a question of law that could be determined by reference to the pleadings without the need for evidence.  If resolved in favour of the respondent, the effect would be to bring an end to the proceeding.    

The legislative background

14                                          Division 4 of Pt VIII of the Bankruptcy Act is headed “Control over trustees”.  It comprises three sections, as follows:

177  Control of creditors over trustees

(1)        Subject to this Act, in the administration of the estate of a bankrupt, the trustee shall have regard to any lawful directions given by resolution of the creditors at a meeting of the creditors or by the committee of inspection.

178  Appeal to Court against trustee’s decision etc.

(1)        If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she 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.

179  Control of trustees by the Court

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

                        (a)        remove the trustee from office; and

                        (b)        make such order as it thinks proper.

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

15                                          Section 5(1) of the Bankruptcy Act defines the word “bankrupt” as follows:

bankrupt means a person:

                     (a)  against whose estate a sequestration order has been made; or

                     (b)  who has become a bankrupt by virtue of the presentation of a debtor’s petition.

16                                          It is convenient to note now that that definition is not subject to any temporal constraint:  Official Receiver v Todd (1986) 14 FCR 177 at 183; Re Cheesman; Cheesman v Waters (1997) 143 ALR 78 at 89; Macchia v Nilant (2001) 110 FCR 101 at [41].  As Lockhart J observed in Todd (at 183):  “The description applies to [the person] as aptly after, as it does before, [the person] is discharged from bankruptcy or [their] bankruptcy is annulled”.  It is also important to note that the definition applies “unless the contrary intention appears”.

17                                          The word “end” is defined, relevantly, in s 5(1) as follows:

end means:

(a)      in relation to a bankruptcy – the discharge of the bankrupt from the bankruptcy or the annulment of the bankruptcy;

…

18                                          Section 43(2), which assumed importance in the respondent’s submissions, provides as follows:

Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until:

(a)  he or she is discharged by force of subsection 149(1); or

(b)  his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.

19                                          Section 55(8), which relates to bankruptcies through acceptance of a debtor’s petition, is substantially in the same terms.  

The parties’ submissions

20                                          The respondent’s submissions on this issue can be summarised as follows:

(a)        Although the definition of “bankrupt” in s 5(1) of the Bankruptcy Act does not exclude a person who is discharged from bankruptcy, there are good reasons why s 179(1) does not encompass applications by such persons.

(b)        First, while the bankruptcy is on foot, the bankrupt is subject to considerable control and supervision by his or her trustee. Thus, before discharge, there is a much greater likelihood that actions of the trustee will impact on the bankrupt.  Section 179 exists to provide a mechanism by which the bankrupt can apply to the Court to have the trustee’s decisions or actions reviewed, and the trustee removed.  On the other hand, after discharge, the position of the former bankrupt, in respect of acts, omissions or decisions of the trustee, is, as a matter of status, equivalent to that of any other person affected by those acts, omissions or decisions.  Thus a discharged bankrupt comfortably fits within that class of persons entitled to make an application under s 178 provided he or she is affected by the act, omission or decision and makes an application within the prescribed time. 

(c)        Secondly, there is nothing in the words of s 179(1) that would suggest that it is intended to extend to a person who is discharged from bankruptcy.  On the other hand, s 43(2) read with s 179(1) would suggest that s 179(1) was not intended to extend to a person who is discharged from bankruptcy.

(d)        Thirdly, the existence of s 178 and the access it allows for judicial review means that there is no need to adopt an “expanded definition” of the word “bankrupt” where it appears in s 179.  Thus the two sections are able to operate without overlap and in conformity with each other.

(e)        Fourthly, if s 179 is construed to extend to former bankrupts it will create the prospect of the trustee being made the subject of complaints by the former bankrupt in respect of matters that have occurred in the distant past.

(f)         Fifthly, the authorities on the subject are in conflict.  In this connection the respondent submitted that Cheesman and Macchia both failed to give adequate consideration to s 43(2).  The respondent specifically submitted that Macchia was wrongly decided and should not be followed.  I infer that, in conformity with that submission, the respondent also submits that Cheesman was wrongly decided and should not be followed.

21                                          The applicants’ submissions on this issue can be summarised as follows:

(a)        The Bankruptcy Act contemplates that it will continue to act on bankrupt estates after the discharge of a bankrupt.  For example, s 152 requires a discharged bankrupt, even though discharged, to give assistance as the trustee reasonably requires in the realisation and distribution of property vested in the trustee.  Also, although s 153(1) provides that the discharge of a bankrupt operates to release the bankrupt from all debts provable in the bankruptcy, that release is subject to a number of exceptions.  These provisions contradict the apparent effect of s 43(2). 

(b)        Given that the Bankruptcy Act imposes both rights and duties on the trustee and the bankrupt, before and after discharge, it would be odd to read into s 179(1) a limitation that restricted standing, in the case of a bankrupt, to a bankrupt whose bankruptcy had not been discharged.

(c)        Macchia, which held that a discharged bankrupt had standing to apply under s 179(1), should be followed. 

Consideration

22                                          In my view the applicants were and are entitled to bring an action under s 179(1) of the Bankruptcy Act even though they were discharged from bankruptcy at the time the action was commenced.  The weight of authority supports this conclusion and the submissions made by the respondent do not compel a contrary conclusion.  The majority judgments in Todd are the starting point for consideration of the relevant authorities.

23                                          Todd concerned a person who became bankrupt following the presentation of her own petition.  Following her discharge from bankruptcy four summonses were issued pursuant to s 81 of the Bankruptcy Act requiring the attendance of the discharged bankrupt and three others for examination in relation to the bankruptcy.  The issue was whether a person could be examined under s 81 after the bankrupt had been discharged from bankruptcy.  A majority of the Full Court (Fisher and Lockhart JJ) determined that issue affirmatively.

24                                          In its then form, s 81 provided as follows:

The Court or the Registrar may, on the application of a creditor who has proved his debt and on such terms as to costs as the Court or the Registrar thinks fit to impose, or on the application of the Official Receiver or the trustee, at any time summon -

(a)     the bankrupt or the spouse of the bankrupt; or

(b)     a person who is known or suspected to have in his possession any of the property of the bankrupt, or is supposed to be indebted to the bankrupt or to be able to give information concerning the bankrupt or his trade dealings, property or affairs,

to attend, on a date and at a time and place fixed in the summons, before the Court or the Registrar or, if the Court or the Registrar thinks fit, before a magistrate, to give evidence concerning, and produce any books (whether or not in existence at the time the bankrupt became a bankrupt) in his custody or power relating to, the bankrupt or his trade dealings, property or affairs.

25                                          Central to the reasoning of both Fisher J and Lockhart J was the fact that, notwithstanding that a bankrupt has been discharged, the trustee in bankruptcy remains as trustee of the undistributed property of the bankrupt estate and continues to have duties in relation to that estate.  As Fisher J (at 178) said: 

The Act does not link temporally the completion of the administration of the bankrupt’s estate, and in particular the ascertainment of the assets, their respective whereabouts and their realisation and distribution, with the obtaining of a discharge with its consequential change of status and release from debts. Many years may separate the date of discharge of the bankrupt on the one hand and the release of the trustee upon completion of his administration.

26                                          Lockhart J (at 181) quoted with approval the following observations of Sir Wilfred Greene in Re a Debtor [1939] Ch 489 at 501: 

... the discharge of the bankrupt does not put an end to the bankruptcy regarded as a series of judicial and administrative acts and rights and powers.

27                                          In considering whether a person is a “bankrupt” for the purposes of s 81 (in the form in which it then existed), both Fisher J and Lockhart J had regard to the definition of “bankrupt” in s 5(1) of the Bankruptcy Act and the operation of s 55(8) (which was substantially in the same terms as (the then) s 43(2)).  Sections 43(2) and 55(8) have since been amended but, as I have noted, are substantially in the same terms and the amendments are not material for present purposes.  Lockhart J (at 183-186) concluded that s 55(8) did not qualify the definition of “bankrupt” in s 5(1) and that the word “bankrupt” had a different meaning in ss 43(2) and 55(8) as the context of those provisions made clear.  However, the word “bankrupt” was used with its defined meaning in s 81.  Fisher J came to the same conclusion.  At 179-180 his Honour said: 

To my mind the use of the word "bankrupt" in s 81 should not be construed as limiting the scope of that section to the period prior to discharge, certainly in circumstances where the estate is still in the process of administration and the assets still being got in. It could not be suggested that the analogous power of the court to examine under s 179(3) a trustee, engaged in the administration of an estate in bankruptcy, was limited to a time prior to discharge of the bankrupt. Likewise an inquiry under s 179(2) by the Registrar, Inspector-General or creditor in relation to a "bankrupt's estate or affairs" must surely be answered by the trustee notwithstanding the facts that the bankrupt has been discharged.

28                                          The reasoning in Todd was central to the decisions in Cheesman and Macchia.

29                                          In Cheesman the applicants sought relief under ss 178 and 179.  The respondent trustee contended that, as the applicants were discharged bankrupts at the date of the application, they were not entitled to make an application as a “bankrupt” under either section: see at 82.  Merkel J considered that the starting point must be the definition of “bankrupt” in s 5(1).  His Honour noted the majority view in Todd that that definition was not subject to any temporal constraint.  His Honour also noted that the definition in s 5(1) was expressed to apply “unless the contrary intention appears” and identified the issue as being whether, having regard to the nature, context and purposes of ss 178 and 179, there is an intention that the statutory definition not apply.  His Honour could not discern any such intention. 

30                                          With respect to s 178 his Honour said (at 90):

It is clear that the legislative intent is that the jurisdiction of the court to control a trustee is at the least, to be coextensive with the power of a trustee to engage, or omit to engage, in conduct under the Act that might affect a “bankrupt”. Other provisions of the Act demonstrate explicitly or implicitly that a trustee may be liable for, or may engage or omit to engage in, conduct which affects a “bankrupt” well after the bankrupt's discharge.

31                                          Merkel J then identified a number of provisions of the Bankruptcy Act that illustrated that proposition: see ss 184, 152, 81, 134 and 135, 148, 170(2) and s 171. His Honour concluded by saying (at 90):

It is sufficient to say that, in these circumstances, a consideration of the nature, context and purpose of s 178 demonstrates that there is no basis for discerning an intention to exclude a discharged bankrupt from the class of persons entitled to make application under the section.

32                                          His Honour noted that in Watson v Healey (1996) 64 FCR 301 Lee J had reached a contrary view and had decided that a discharged bankrupt had no entitlement to make an application under s 178.  Watson was a case where the jurisdiction conferred by s 178 was sought to be invoked in circumstances where the bankrupt had not only been discharged from bankruptcy but the bankrupt estate had been fully administered and finalised by the trustee.  Whilst the decision in that case had been made in that context, Lee J had expressed the obiter view that there was nothing in the words of s 178 or the context in which that provision was found to indicate that the term “bankrupt” in s 178 extended to a discharged bankrupt. However, Merkel J (at 91) considered that decision to be “clearly wrong” and declined to follow it.  In that connection his Honour observed that, in Watson, the applicant had appeared in person and that the matters that had led his Honour to the contrary view in Cheesman had not been drawn to Lee J’s attention in Watson.

33                                          With respect to s 179 Merkel J said (at 90-91):

A similar analysis can be applied to s 179. While application under that section cannot be made by “any other person”, the section confers jurisdiction to inquire into “conduct of a trustee in relation to a bankruptcy”. In a sense the section's subject matter is as broad as, and possibly broader than, s 178 which limits application to persons “affected” by particular conduct of the trustee. It seems to me that the jurisdiction conferred by s 179 is intended, at the least, to be coextensive with the capacity of a trustee to engage in conduct in relation to a bankruptcy. As that can occur both before and after discharge, as with s 178, there is no basis for discerning an intention to exclude a discharged bankrupt from the class of persons entitled to make application under the section.

There is a further reason for declining to read down the class of persons entitled to make application under ss 178 and 179.  As I later observe in considering the discretion conferred under each section, the court may make such orders as it “thinks just and equitable” (s 178) or “proper” (s 179).  Such criteria ensure that the court has fairly wide discretionary powers in relation to the orders it might make and the considerations it might take into account in determining whether, and if so how, it will exercise its jurisdiction under either section.  The legislative purpose of conferring a broad jurisdiction in relation to the conduct of trustees in exercising the power conferred upon them under the Act and the width and nature of the court’s jurisdiction under each section affords good reason for not being restrictive in the interpretation of the categories of persons entitled to make application to the court under either section.

34                                          It should be noted that, in the present case, unlike the position in Watson and Cheesman, the respondent continues to act as trustee of the bankrupt estates.  In Cheesman Merkel J went on to consider the question of jurisdiction where an applicant was not only a discharged bankrupt at the time the action was commenced, but the trustee had also ceased to act.  His Honour said (at 91):

In these circumstances there is no reason to conclude that a court's jurisdiction under s 178 or s 179 should cease at any time prior to a trustee being released from liability for his conduct under the Act. As this may occur after the trusteeship has ceased, the trustee ought to remain subject to the court's jurisdiction under ss 178 and 179. 

My conclusion is supported by the wording of the sections. Jurisdiction arises in relation to “any act, omission or decision” (s 178) or “conduct” (s 179) of a trustee. As long as the conduct in question falls within the statutory description, the fact that a person has since ceased to be the trustee is irrelevant.

35                                          Later his Honour said (at 92):

The mere fact that a person has ceased to act as a trustee, whether by resignation, removal or otherwise, should not result in the court losing its jurisdiction in relation to conduct engaged in prior to the date of cessation. Indeed there might be very good reason why such a jurisdiction is appropriate after removal, particularly if the removal might have come about as a result of wrongful conduct by a trustee.

In my view the discernible legislative policy under the Act is that the court should have a broad jurisdiction in relation to the conduct of a trustee which might be exercised whenever it is “just and equitable” or “proper” to do so. If any policy considerations arise in relation to a person who has ceased to be a trustee then, as with a discharged bankrupt, the cessation is not relevant to jurisdiction although it may be relevant to discretion.

For these reasons I have concluded that the court has jurisdiction to hear and determine the application notwithstanding that at the date it was lodged with the court the applicants were discharged bankrupts and the trustee had ceased to act as trustee of their bankrupt estates.

36                                          In Macchia a discharged bankrupt sought orders which included an order for an inquiry into the conduct of his trustee in bankruptcy pursuant to s 179 and consequential orders (including orders for the payment of damages).  Similar orders pursuant to s 178 were sought in the alternative.  French J (as his Honour then was in this Court) dealt with the question of standing under both sections, holding that the supervisory jurisdiction of the Court conferred by ss 178 and 179 extended to conduct of the trustee under the Bankruptcy Act after the discharge of the bankrupt: [42], [50] and [51].  Although in that case reliance was placed primarily on s 179, his Honour considered it to be convenient to deal first with the scope of operation of s 178: at [29].  His Honour noted that the definition of “bankrupt” in s 5(1) was not limited to persons who are undischarged bankrupts, referring in that regard to the judgments of Fisher and Lockhart JJ in Todd at 178-179 and 183.

37                                          His Honour also noted at [41] the conflicting views expressed in Cheesman and Watson about whether s 178 may be invoked by a discharged bankrupt and the dismissal by Fisher J in Todd (at 179-180) of the suggestion that the power of the Court under (the then) s 179(3) to examine a trustee engaged in the administration of an estate in bankruptcy and the power under s 179(2) to require a trustee to answer an inquiry in relation to the bankrupt’s estate or affairs, was limited to a time prior to the discharge of the bankrupt.

38                                          French J then held as follows (at [42]) with respect to the question of jurisdiction under s 178:

In my respectful opinion, for the same reasons as expressed by Fisher J in Todd, the supervisory jurisdiction of the Court conferred by s 178 extends to conduct of the trustee under the Act after the discharge of the bankrupt. So extended, it cannot be said that the section is unavailable to a person who has been discharged from bankruptcy. If the trustee's conduct post-discharge, exercising powers that may affect the bankrupt, is to be subject to the supervisory jurisdiction then the bankrupt should be able to approach the Court in relation to any such exercise. This does not mean that s 178 provides an unlimited charter for bankrupts or any other persons after discharge to, at any time, seek a review of a decision of the trustee taken whether before or after discharge. The Court must determine whether any order proposed would be just and equitable and in so doing may have regard, inter alia, to the lapse of time which has occurred since the conduct complained of. The remedy is in that sense discretionary.

39                                          His Honour then held as follows (at [50]) with respect to the question of jurisdiction under s 179:

Section 179 operates in aid of the Court's supervision of trustees who are its officers. That operation, however, is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry. Like s 178, it may be invoked by a bankrupt after discharge and in part for the same reason, namely that the trustee's powers continue in the various ways referred to by Merkel J at first instance in Cheesman. It may also be the case that the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way.

40                                          In Zegarac v Rambaldi [2010] FCA 219 Gray J dismissed an application for leave to appeal from a decision which, in turn, had dismissed (as an abuse of process) an application seeking various orders which his Honour saw as arguably capable of being grounded in the jurisdiction conferred by either or both of ss 178 and 179.  In relation to the scope of s 179 his Honour (at 42) noted the view that:

… s 179 of the Bankruptcy Act is intended to confer on the Court a supervisory jurisdiction with respect to a trustee in bankruptcy during the bankruptcy, and not a general jurisdiction to revisit at any time thereafter any aspect of the conduct of a trustee in bankruptcy.  That policy is also expressed by the short limitation period in s 178(2), within which an application must be made to review an act, omission or decision of a trustee.

41                                          If by the expression “during the bankruptcy” his Honour was intending to refer to the period during which a person is an undischarged bankrupt then the view noted by his Honour is not consistent with the decisions in Cheesman or Macchia.  However, his Honour also found (at [43]-[44]) that even if ss 178 or 179 could be availed of in that case, for other reasons the proceedings were bound to have failed and thus the orders made by the primary judge (Zegarac v Rambaldi [2009] FCA 1463) were not open to sufficient doubt to warrant their reconsideration by a Full Court.  It is important to observe that the applicant appeared in person and the respondent trustee did not appear.  His Honour does not appear to have been provided with any real assistance by the applicant.  In particular it does not seem that the decisions in Todd and Cheesman were drawn to his Honour’s attention.  His Honour’s reasons do include a passing reference to Macchia, but on a point different to that now under consideration.

42                                          The decision in Re Quinn; Ex parte Quinn v Official Trustee in Bankruptcy (1995) 63 FCR 129 was also drawn to my attention.  In that case Tamberlin J held that a discharged bankrupt was not a “bankrupt” within the meaning of s 73 of the Bankruptcy Act which relates to compositions and schemes of arrangement proposed by a bankrupt and the calling by a trustee of meetings of creditors to consider such proposals.  His Honour reasoned that the decision in Todd (dealing with s 81) was distinguishable from the case before him (dealing with s 73).  His Honour held that the wording and context of the two provisions were quite different.

43                                          From this brief review of the relevant cases it can be seen that both Cheesman and Macchia stand as direct authority that s 179 can be invoked by a bankrupt after discharge.  Both decisions gave detailed consideration to the nature, context and purpose of the jurisdiction conferred by ss 178 and 179 and, with great respect, advanced detailed and persuasive reasons why those provisions should be available to a bankrupt after discharge.  Both decisions took as their starting point the majority judgments in Todd with respect to the scope of the definition of “bankrupt” in s 5(1) and adopted reasoning, similar to that in Todd, in reaching a conclusion on the scope of the jurisdiction conferred by ss 178 and 179.  Both decisions rejected the contrary obiter in Watson that s 178 could not be invoked by a discharged bankrupt.  The obiter remarks of Gray J in Zegarac with respect to the supervisory jurisdiction conferred by s 179 may not stand with Cheesman and Macchia but, as I have already observed, the relevant cases, and the analysis undertaken in them, do not seem to have been brought to his Honour’s attention.  Although cited in Watson, the decision in Quinn is, in my view, plainly distinguishable and provides no real assistance in deciding the present issue.

44                                          The respondent’s submissions were directed to identifying reasons why the definition of “bankrupt” in s 5(1) of the Bankruptcy Act should not apply to s 179 and, ultimately, to why the decisions in Cheesman and Macchia should not be followed.

45                                          The first and third of those submissions sought to suggest a rationale for a complementary operation of ss 178 and 179 which confined a discharged bankrupt to recourse only to the jurisdiction granted by s 178 in that person’s capacity as “any other person” who is affected by an act, omission or decision of a trustee.  That submission should not be accepted.  It ignores the accepted position that s 179 serves a different purpose to s 178.  Section 178 is a provision that allows a bankrupt, a creditor or any other person affected by the conduct of the trustee in the course of the administration of a bankrupt estate to challenge that conduct by seeking review by the Court of the act, omission or decision: Wilson v The Commonwealth of Australia [1999] FCA 219 at [43]; Macchia at [48].  Plainly recourse to the jurisdiction conferred by that provision is limited by the requirement that the applicant (whether as “the bankrupt, a creditor or any other person”) is “affected” by the act, omission or decision, and by the requirement that the time limit prescribed by s 178(2) is met: Cheesman at 90.  On the other hand, s 179 is a broad provision that serves a different purpose, reflecting the position that trustees are subject to the general control of the Court: Wilson at [44]; Macchia at [48]. 

46                                          In Macchia French J, in that connection, quoted with approval the following passage from Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 at 267:

Its terms are wide and general. The court may inquire into any aspect of the conduct of a trustee in relation to a bankruptcy, and is enabled to deal with the situation which it finds by making ‘such order as it thinks proper’. A case of misfeasance, negligence or wilful default on the part of a trustee may emerge otherwise than from the accounts submitted by him in accordance with s 175 or an audit of those accounts; if it does, or if it appears that for any other reason the trustee's conduct should be inquired into, I see no reason why s 179 should not be set in motion, or why the court cannot under s 179 order the trustee to make good, if such an order is what the court ‘thinks proper’.

47                                          The decisions in Todd, Cheesman and Macchia demonstrate that the conduct or acts of a trustee in bankruptcy may well affect a “bankrupt” or “bankrupt estate” after the “bankrupt” has been discharged.  Given the different scope and purpose of the two provisions, there is no apparent reason why, after discharge, a discharged bankrupt should loose the benefit of s 179 and be confined to recourse to s 178 when, prior to discharge, that person had the benefit of both provisions. 

48                                          The respondent’s second submission proceeded on the basis that both Cheesman and Macchia were decided without regard to s 43(2) of the Bankruptcy Act which provides that, upon the making of a sequestration order against the estate of the debtor, the debtor becomes a bankrupt and continues to be a bankrupt until he or she is discharged from bankruptcy or his or her bankruptcy is annulled.  It is true that the reasons in Cheesman and Macchia do not explicitly refer to s 43(2) when dealing with the standing of a person to commence an action under either s 178 or s 179.  However, both cases proceeded upon the correctness of, and applied, the reasoning of the majority judgments in Todd including the conclusion reached by the majority in Todd that neither s 55(8) nor its corresponding provision s 43(2) affect the application of the definition of “bankrupt” in s 5(1).  In Todd Lockhart J (at 185) expressed the view that s 55(8) properly construed provides no barrier to the exercise of the power conferred by s 81(1) after the bankrupt is discharged from bankruptcy.  Fisher J (at 177) expressed general and full agreement with Lockhart J’s reasons and conclusions.  By parity of reasoning, s 43(2) properly construed provides no barrier to the exercise of the jurisdiction conferred by s 179(1) after the bankrupt is discharged from bankruptcy.  

49                                          The respondent’s fourth submission raised the spectre that, if s 179 gives standing to a discharged bankrupt, the trustee will remain subject to complaints in respect of matters that have occurred in the distant past.  However, as the authorities recognise, the language of s 179 invites, as a first consideration, whether the Court should inquire into the conduct of the trustee.  This is a matter to which I will return in dealing with the third issue.  For present purposes it is sufficient to note that the operation of s 179 is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry: Macchia at [50].

50                                          Finally the respondent refers to the fact that the authorities are in conflict.  This is true to the extent and in the circumstances that I have noted above.  However, in my respectful view, Cheesman and Macchia correctly decided the scope of the jurisdiction under s 179, at least in relation to the circumstances of the present case where the trustee’s administration of the bankrupt estates is continuing, and I propose to follow those cases.

issue 2: should the notice to produce be set aside in part?

Procedural background

51                                          The applicants have served on the respondent a notice to produce dated 13 April 2010, paragraphs 2 and 3 of which seek the production of the following documents:

2.         The correspondence and advice referred to in paragraphs (a) and (b) of the respondent’s solicitor’s letter to the applicants’ solicitor dated 17 February 2010.

3.         In relation to each of the “creditors” referred to in 6(iii) of the respondent’s defence filed on 12 February 2010:

(a)        the proof or proofs of debt;

(b)        any rejection pursuant to section 102(2) of the Act;

(c)                any information pursuant to section 102(5)(a) of the Act.

52                                          The correspondence and advice referred to in paragraph 2 of the notice to produce is correspondence with the respondent’s counsel and solicitors and advice from them pertaining to the administration of the bankrupt estates, in respect of which an explicit claim of legal professional privilege was made in the letter dated 17 February 2010.

53                                          On 20 April 2010 the respondent filed a notice of motion seeking to set aside paragraphs 2 and 3 of the notice to produce.

54                                          Documents have been produced in answer to paragraph 3 of the notice to produce.  As events have transpired, the applicants do not press for further production.  On that basis, the respondent no longer seeks to set aside paragraph 3 of the notice to produce. 

55                                          However, the applicants continue to press for production under paragraph 2 of the notice to produce.  They have, however, limited their request for production to documents related to four issues said to arise from paragraphs 23, 34(b), 36 and 45 of the respondent’s defence to the amended statement of claim.

The parties’ submissions

56                                          In light of the way this issue has been approached, it is common ground between the parties that, but for the question of implied waiver, legal professional privilege attaches to the communications evidenced by the documents sought by paragraph 2 of the notice to produce, both generally and in relation to the more limited production now sought by the applicants.  The applicants submit that the identified paragraphs of the respondent’s defence raise the respondent’s state of mind, with the consequence that the privilege attaching to the relevant communications has been waived.

Consideration

57                                          In the course of submissions the applicants accepted that paragraph 23 was an example of their “best case” on waiver.  They accepted that if they failed on that example their other claims for production would also fail in light of the privilege that has been claimed.  It is convenient, therefore, to deal with that example at the outset.  For that purpose the following is a brief summary of some of the allegations made in the amended statement of claim that are relevant to the present issue.

58                                          Until April 2006 certain land at Point Piper in New South Wales was a valuable asset of a trust of which the applicants had been trustees until 19 April 2005.  The applicants held units in that trust.  Those units now comprise part of the bankrupt estates now administered by the respondent.  The land was subject to a mortgage.  On 31 January 2006 the mortgagee obtained judgment for possession of the land.  Prior to 3 March 2006 a company called Agusta Pty Ltd (Agusta) was acting as trustee of the trust and was attempting to raise finance with a view to avoiding a mortgagee sale, thus preserving the value of that asset for the trust.  A proposed new mortgagee had been found and was prepared to refinance the existing loan secured by the mortgage.  A settlement was arranged for 3 March 2006.  However, on that date, the respondent lodged a caveat over the land and corresponded with the proposed new mortgagee.  As a result the settlement was cancelled.  Subsequently, on 8 March 2006, the applicants and Agusta made an offer to the respondent relating to the annulment of their bankruptcies and the withdrawal of the caveat, to allow the settlement with the proposed new mortgagee to proceed.  There was correspondence between the applicants and the respondent.  By 13 March 2006 the applicants had procured payment to the respondent of a sum of money sufficient to annul the bankruptcies, which sum the respondent deposited in its Common Fund.

59                                          The applicants then plead (at [33] of the amended statement of claim) that, as at 31 March 2006, the respondent was in a position:

(a)        to annul the bankruptcies;

(b)        alternatively, to pay-out creditors, leaving any dispute over a given proof by the creditor or the applicants to be dealt with as provided by s 104 of the Bankruptcy Act;

(c)        alternatively, in the event that additional creditors had proved, to invite the applicants to procure additional funds;

(d)        alternatively or additionally, to seek judicial advice, either under the general law or pursuant to s 134(4) of the Bankruptcy Act, in relation to the proper administration of the estates.

60                                          The applicants then plead in [34] of the amended statement of claim that the respondent did none of the things specified above.

61                                          In answer, the respondent, in [22] of its defence, denies that it was open to it to do, or that it was appropriate for it to do, any of the things specified by the applicants.  In this connection the respondent pleads a number of reasons for this state of affairs, which can be summarised as follows:

(a)        Proofs of debt of creditors of the applicants had not been determined.

(b)        All creditors had not been disclosed to the respondent by the applicants.

(c)        The applicants disputed the proof of debt of the petitioning creditors and the costs of the petitioning creditors, which costs were required to be, but had not been, taxed under the Bankruptcy Act.

(d)        The applicants disputed their liability to some creditors.

(e)        The funds held by the respondent as at March 2006 in the two bankrupt estates were insufficient to pay all creditors, remuneration, interest claims and estate realisation charges.

(f)         Interest claims under s 153A(1A) of the Bankruptcy Act could only be calculated once all creditors were known and paid.

(g)        The estate realisation charge could only be calculated once all creditors were known and paid and all monies received sufficient to pay all creditors, interest, remuneration and estate realisation charges.

 (h)       The respondent’s investigation of the two estates was on-going.

62                                          In [23] of its defence, the respondent pleads as follows:

In response to paragraph 34 of the Amended Statement of Claim, the Respondent says that, by reason of the matters referred to in the preceding paragraphs [namely, those referred to in [22] of the defence], the Respondent was not in a position to take the steps identified in paragraph 33 of the Amended Statement of Claim.  Alternatively, by reason of the circumstances, it was not appropriate to do any of those things.

63                                          The applicants submit that it is the pleading of that paragraph that constitutes a waiver of legal professional privilege in the documents sought in paragraph 2 of the notice to produce.  The applicants submit that the respondent is obliged to produce documents evidencing or tending to evidence any legal advice sought by or received by the respondent as to why the respondent was not in a position to take the steps alleged by the applicants or why the respondent believed those steps to be inappropriate.

64                                          In Mann v Carnell (1999) 201 CLR 1 a majority of the High Court (at [29]) held that the foundation for the implied waiver of legal professional privilege is the inconsistency between the conduct of the client and the continued maintenance of the confidentiality from which the privilege springs in the course of the relationship between legal adviser and client.  The foundation is not some overriding principle of fairness operating at large. 

65                                          In Commissioner of Taxation v Rio Tinto Ltd (2006) 151 FCR 341 a Full Court of this Court held (at [45]) that where implied waiver is alleged, a court is bound to analyse the acts or omissions of the privilege holder that are said to be inconsistent with the maintenance of the privilege.  The Full Court later observed (at [52]) that the waiver will be established where the privilege holder has expressly or impliedly made an assertion about the contents of an otherwise privileged communication for the purpose of mounting a case or substantiating a defence.  Thus where the contents of the otherwise privileged communication is put in issue that act will be regarded as inconsistent with the confidentiality that would otherwise pertain to the communication.  However the question is not simply whether the holder of the privilege has put that person’s state of mind in issue but whether that person has directly or indirectly put the contents of the otherwise privileged communication in issue: see at [65].  Indeed, even the fact that the holder of the privilege makes clear that the advice was relevant or contributed to a particular course of conduct would not be sufficient to waive the privilege unless, possibly, the contents of the legal advice (and not merely the fact of the advice) are specifically put in issue by relying on the contents of the advice to vindicate a claimed state of mind: at [67].

66                                          Significantly, in the present case, paragraph 23 of the defence does not plead reliance by the respondent on legal advice in coming to the position that the respondent was not in a position to take the steps alleged by the applicants or that those steps would be inappropriate.  Indeed, the respondent does not plead the existence of any legal advice or any awareness of such advice.  In these circumstances I am unable to discern how it can be the case that the pleading of paragraph 23 of the defence makes any assertion, expressly or impliedly, about the contents of an otherwise privileged communication.  The pleading of paragraph 23 of the defence does not constitute an implied waiver of the privilege that has been claimed. 

67                                          None of the other identified paragraphs of the defence put in issue the contents of privileged communications.  Indeed, as with paragraph 23, none of the other identified paragraphs plead any reliance on or even the existence or awareness of a privileged communication.  As I have noted, the applicants accept that if waiver cannot be made out by the pleading of paragraph 23, waiver cannot be made out by the pleading of the other identified paragraphs.

68                                          It follows that the respondent would not be obliged to produce the documents sought by paragraph 2 of the notice to produce, as now confined.  As it is common ground that the only documents caught by paragraph 2 as so confined are documents that evidence communications that are otherwise privileged from production, it is appropriate, in light of my ruling, to set aside that paragraph of the notice to produce. 

issue 3: should all evidence be put on now?

The parties’ submissions

69                                          This issue arises as a matter of case management.

70                                          The applicants’ submissions on this issue can be summarised as follows:

(a)        Section 179(1) contemplates two stages to make out a case for relief, not two hearings and two sets of evidence in relation to that case.

(b)        As a rule, split proceedings should be avoided.  Applying case management principles to the present case, a direction requiring all evidence to be put on now is warranted.

(c)        By making such a direction, no prejudice will be suffered by the respondent. The application is not one by a patently insolvent person attempting to abuse the Court’s process to disturb, inconvenience or over-burden an officer of the Court performing his or her duty.

(d)        Having regard to the complete break-down in relationship between the parties, it is desirable that the matter be dealt with as swiftly as possible.

71                                          In advancing these submissions the applicants also made a number of submissions concerning the merits of their case for relief.  It is not necessary for me to detail their submissions in that regard.  It is sufficient to note that the applicants submit that their case “on paper” is, at this stage, a strong one.

72                                          The respondent’s submissions can be summarised as follows:

(a)        Applications under s 179(1) usually involve a two-stage process: an applicant is required to show that there is sufficient reason for there to be an inquiry before the trustee is obliged to respond substantively, including by leading any evidence if that is what the trustee proposes to do.

(b)        The rationale behind that approach applies with even greater force in a matter such as the present where the applicants seek an inquiry into eleven separate subjects covering conduct over a number of years and involving reconsideration of a large number of acts and alleged omissions on behalf of the trustee, including the conduct of contested litigation in another court.

(c)        If required to respond with evidence now on all of those matters, the trustee will be obliged to produce a massive amount of evidence, potentially from a number of officers.

(d)        The applicants’ complaints are entirely without merit and the trustee should not be put to the trouble and expense of responding to such matters until the Court has been satisfied that it is just that an inquiry be held at all and, if so, on what terms and in respect of what matters.

(e)        The course proposed by the applicants will produce considerable delay in the resolution of this proceeding and greatly increase its likely cost.  Consistently with case management principles and the requirements of s 37M of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act), the only direction that should be made now is that the respondent put on any affidavit evidence on which it intends to rely in respect of the question whether there should be an inquiry in respect of any of the eleven matters raised by the applicants.

Consideration

73                                          In my view it would not be appropriate to direct the parties to put on now all the evidence they would wish to put on in relation to the inquiry sought by the applicants, substantially for the reasons advanced in the respondent’s submissions. 

74                                          In Wilson, Branson J (at [44]) identified the following principles that are relevant to this issue:

(a)        The Court will not ordinarily initiate an inquiry under s 179 unless satisfied that a proper case for an inquiry has been demonstrated: Alafaci at 28; Re Gault; Gault v Law (1981) 57 FLR 165 at 173; Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 at 233.

(b)        There will ordinarily be a proper case for inquiry where there is reasonable cause to believe that a trustee may have failed to act in relation to a bankruptcy in the manner required by the Bankruptcy Act or the general law. 

(c)        However, the Court has a broad discretion in deciding whether to order an inquiry unless satisfied that sufficient grounds have been made out: Gault at 173.

(d)        If the Court considers that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved: Gault at 173; see also Macchia at [49].

(e)        In considering whether an inquiry should be ordered it is to be borne in mind that that applicant may have other remedies to pursue, for example, for breach of trust. 

75                                          In my view the precepts enshrined in these principles are unlikely to be observed by making a direction of the kind sought by the applicants.  Moreover, the objectives of the overarching purpose identified in s 37M of the Federal Court Act are unlikely to be achieved, particularly in view of the large number of issues into which the applicants seek to inquire.  Those objectives are more likely to be achieved by proceeding in an orthodox fashion, which would be to consider first and separately whether there should be an inquiry and, if so, on what matters and to what extent the inquiry should be held.  To anticipate the answer to that question by requiring the respondent to put on now all evidence on which it  would seek to rely on all matters would be productive of great inconvenience and expense, and productive of great delay, all of which or a substantial part of which may be avoidable.

76                                          I accept the respondent’s submission that the appropriate course is to direct the respondent to put on any affidavit evidence on which it intends to rely in respect of the question whether there should be an inquiry in respect of any of the eleven matters raised by the applicants.

DISPOSITION

77                                          The only order I propose to make at the present time is that the parties confer with a view to providing agreed draft orders giving effect to these reasons.  The parties will need to give particular attention to the framing of a suitable order to give effect to the ruling I have made concerning the standing of the applicants to rely on the jurisdiction conferred by s 179(1) of the Bankruptcy Act. 

78                                          I will hear the parties, if necessary, on the question of costs.  The applicants have succeeded on the question of standing but have failed on the other issues.  My provisional view is that there should be no order as to costs with the consequence that each party will bear his or its own costs in respect of the three issues covered by these reasons.  However, I have no concluded view on the matter.

Associate:

Dated:         22 July 2010