FEDERAL COURT OF AUSTRALIA

Maxwell-Smith v Donnelly (No 3) [2011] FCA 1226

THE COURT ORDERS THAT:

1.    The application filed on 2 February 2011 is otherwise dismissed.

2.    Order 2 made by Nicholas J on 25 March 2011 be varied so as to substitute “8C” for “8B”.

3.    A writ of possession in respect of the property known as 8C Surf Circle, Tura Beach, New South Wales issue but not before 28 days from today.

4.    The application for a stay is dismissed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

Background

1        There are two principal matters outstanding in this long-running dispute between the applicants (Mr and Mrs Maxwell-Smith) and their former trustee in bankruptcy, Mr Max Donnelly (the trustee). The first arises out of Mr and Mrs Maxwell-Smith’s application for relief pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth) (the Act) filed in court on 2 February 2011 (the application). In my previous reasons for judgment delivered on 25 March 2011, I explained why most of the claims for relief sought in that application should be struck out on the basis that they were vexatious and oppressive and constituted an abuse of process: Maxwell-Smith v Donnelly (No 2) [2011] FCA 259 at para [36]. However, I also explained why I was not disposed to dismiss Mr and Mrs Maxwell-Smith’s claim for an order under s 179(1) of the Act based upon the matter raised in para 6 of the application. That aspect of the proceeding was stood over to allow the provision of further particulars and the filing of evidence (see paras [37] to [39] of my previous reasons).

2        The second principal matter also arises out of my previous reasons for judgment delivered on 25 March 2011 and the order that I made requiring that the applicants give vacant possession of the property referred to in my orders as 8B, Surf Circle, Tura Beach, New South Wales (the Tura Beach property). The trustee has applied for an order for the issue of a writ of possession in relation to the Tura Beach property. That application is opposed by Mr and Mrs Maxwell-Smith.

3        Mr and Mrs Maxwell-Smith applied for leave to appeal from my orders of 25 March 2011. That application was heard by Buchanan J on 4 May 2011. His Honour delivered judgment on 19 May 2011 refusing leave to appeal: Maxwell-Smith v Donnelly [2011] FCA 523.

4        Mrs Maxwell-Smith has drawn my attention (in a notice served by her dated 9 May 2011) to the fact that the Tura Beach property is actually known as 8C, not 8B, Surf Circle, Tura Beach. I will return to this matter later in these reasons but I will say now that I propose to make an order under the slip rule rectifying this error in the order for possession.

The application

5        Mr and Mrs Maxwell-Smith’s outstanding claim for an order that there be an inquiry under s 179(1) concerns two related matters. First, Mr and Mrs Maxwell-Smith allege that the trustee was guilty of misconduct by procuring registration in his name of Mr and Mrs Maxwell-Smith’s interest in a property at Jindabyne (the Jindabyne property). Secondly, Mr and Mrs Maxwell-Smith allege that the trustee was guilty of misconduct in refusing to restore to them the title to the Jindabyne property following their requests that he do so. The specific relief that Mr and Mrs Maxwell-Smith seek in their application was described in my previous reasons for judgment at para [28] and was the subject of consideration at paras [29] to [30].

6        The full history of this matter is lengthy and tortuous. It is set out in greater detail in earlier decisions of this Court: see Maxwell-Smith v Donnelly [2010] FCA 474 at [1] to [20]; Maxwell-Smith v Donnelly [2011] FCA 523 at [1] to [39]. However, it will be necessary for me to recount some of that history as well as some of the facts, as found by me, which are relevant to the s 179(1) application.

Relevant statutory provisions

7        There are two provisions of the Act relevant to the questions now before me. The first of these is s 154(1) of the Act. It is in Division 5 of Part VII of the Act which provides for the annulment of bankruptcy. Section 154(1) provides:

    If the bankruptcy of a person (in this section called the former bankrupt) is annulled under this Division:

    (a)    all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment are taken to have been validly made or done; and

    (b)    the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and

    (c)    subject to subsections (3), (6) and (7), the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt.

The second is s 179(1) itself. It provides:

    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.

8        The procedure for inquiry under s 179(1) of the Act has been described as involving a ‘two-stage’ process. First, the Court must be satisfied that it is appropriate to order an inquiry. Secondly, if the Court orders an inquiry, the inquiry must take place and the Court will thereafter make such orders as it thinks fit in the circumstances. The power to order an inquiry is discretionary and the Court will not ordinarily make an order for an inquiry unless it is satisfied that a proper case for one has been demonstrated: Re Gault; Gault v Law (1981) 57 FLR 165. The power to make orders under s 179(1) continues to operate after the bankrupt has been discharged: Ferella v Official Trustee in Bankruptcy (2010) 188 FCR 68 at [22].

The evidence

9        Mr and Mrs Maxwell-Smith relied on parts of a number of affidavits, statements and other documents filed throughout the course of this proceeding. Counsel for the trustee did not take any formal objection to any part of the material relied upon by Mr and Mrs Maxwell-Smith but submitted that such material should be received by the Court subject to relevance. Having reviewed that material, it is readily apparent that some of it is not relevant to the issues to be determined but, rather, repeats arguments which Mrs Maxwell-Smith has previously put to this Court and which have been considered and dealt with in previous judgments. I should add that I have read all the material which Mrs Maxwell-Smith indicated she wishes to rely upon (including that referred to in the notice served by her dated 9 May 2011) some of which consists of affidavits made by the trustee as well as Mr and Mrs Maxwell-Smith back in 2004. Mrs Maxwell-Smith was cross-examined by counsel for the trustee.

The facts

10        On 15 September 2003, pursuant to a sequestration order of this Court, Mr Donnelly was appointed trustee to each of Mr and Mrs Maxwell-Smith’s bankrupt estates. Following the making of the sequestration order the trustee instructed solicitors to lodge caveats against the titles of properties in which Mr and Mrs Maxwell-Smith held an interest, being the Tura Beach property and the Jindabyne property (together, the properties). The Tura Beach property was an unencumbered property registered to Mr and Mrs Maxwell-Smith. Title to the Jindabyne property was registered to four individuals as joint tenants each holding an equal share in the property. Mr and Mrs Maxwell-Smith owned one half of the Jindabyne property and the remaining half was owned by two of Mrs Maxwell-Smith’s sons (the co-owners) each of whom had a one quarter share.

11        In about January 2004, the trustee instructed his solicitors to cause Mr and Mrs Maxwell-Smith’s interests in the properties to be registered in his name. Nobody was living at the Jindabyne property at that time and it was apparently used, or intended to be used, as a holiday house for Mr and Mrs Maxwell-Smith’s family.

12        On 10 February 2004, Mr and Mrs Maxwell-Smith filed an application to have their bankruptcies annulled which was served on the trustee by Mrs Maxwell-Smith on 27 February 2004. Following a hearing on 11 June 2004, Mr and Mrs Maxwell-Smith’s bankruptcy was annulled by Moore J on 2 July 2004: Maxwell-Smith v S & E Hall, in the matter of Maxwell-Smith [2004] FCA 840.

13        In April 2004, Mr and Mrs Maxwell-Smith’s interests in the Jindabyne property were transferred into the trustee’s name. However, in his evidence to me the trustee said that at that time he was not aware that this had occurred as he did not have access to the certificate of title which he believed was required to be produced to the Land Titles Office in order for the transfer to be registered. The trustee said in his evidence to me that he became aware that he had been registered on the title to the Jindabyne property shortly after a further hearing before Moore J on 10 September 2004. I accept this evidence from trustee.

14        According to his evidence, the trustee formed the view that selling Mr and Mrs Maxwell-Smith’s share in the Jindabyne property to the co-owners would be a more suitable way of recovering his fees than by selling the Tura Beach property. He said that he thought that this would make more sense as he believed that the Tura Beach property was Mr and Mrs Maxwell-Smith’s principal place of residence, was of a much greater value, and had been specifically constructed to meet the special needs of their family. I accept this evidence from the trustee.

15        On 27 and 29 September 2004, the trustee wrote to the co-owners of the Jindabyne property seeking to sell them Mr and Mrs Maxwell-Smith’s share in the property. His letter to one of their sons, Mr Frank Wakewood, was dated 27 September 2004 and was, relevantly, in these terms:

I advise that by Sequestration Order made in the Federal Court of Australia on 15th September 2003 I was appointed Trustee of the bankrupt estate of Eugene & Inge Maxwell-Smith.

Pursuant to Section 58 of the Bankruptcy Act, assets of the bankrupts vested in me at the date of bankruptcy and I have had the bankrupts’ shares of the property at Snowgum Court, Lakewood Estate, Jindabyne, as well as title to their property at Tura Beach transmitted into my name.

I note that you are the registered proprietor as joint tenant, of a one quarter share, of the property at Lakewood Estate, Jindabyne. I understand that Eugene and Inge Maxwell-Smith are your parents.

An Order for the annulment of the bankruptcies of each of Mr. and Mrs. Maxwell-Smith has been made. Notwithstanding that Order, pursuant to the Act, the properties continue to vest in me, until all amounts due with respect to my administration costs are paid. The Act further permits me to sell such properties to provide funds to pay such fees.

As at 31st July 2004 the amount due to me with respect to these administrations totalled $92,704.69. To date the costs have not been paid, further costs are consequently being incurred, and Mr. and Mrs. Maxwell-Smith have not made any proposal as to how it could be paid.

Unless I receive a proposal within the next seven days from Mr. and Mrs. Maxwell-Smith for payment of the amounts outstanding I will have no alternative but to exercise my rights to sell the property/ies to realise funds to pay those amounts.

The bankrupts advised the court at a recent appearance that the Tura beach property had been constructed as their principal residence, and to accommodate a disabled grandchild. It is my present understanding that the value of the one half share of the Jindabyne property which has vested in me would be sufficient to discharge the amounts due to the bankrupt estate. Accordingly, I consider it appropriate to, in the first instance, seek to realise my interest in the Jindabyne property.

Thus, I am prepared to consider an offer by you to purchase for market value, the share in the Jindabyne property which I hold. However, I would require you to provide me with details of your offer within the next seven days.

Should you wish to discuss this matter, please do not hesitate to contact Angela Gallucci of my office on (02) 9286 9964.

A similar letter is being sent today to Ralph Wakewood, who is the holder of the remaining one quarter share of the property and who I understand to be your brother. Copies of this correspondence is also being sent to Mr. Eugene Maxwell-Smith at Jindabyne and Mrs. Inge Maxwell-Smith at Tura Beach.

I accept the trustee’s evidence that the co-owners never responded to this correspondence and that he therefore redirected his attention to the Tura Beach property.

16        Mrs Maxwell-Smith approached the Department of Lands in May 2005 and sought the registration of an ‘Annulment of Bankruptcy Dealing’ to record herself and Mr Maxwell-Smith as registered proprietors of the Jindabyne property in place of the trustee. On 16 May 2005, at the request of Mrs Maxwell-Smith, the Department wrote to the trustee conveying an intention to record Mr and Mrs Maxwell-Smith as registered proprietors of the Jindabyne property. The trustee’s solicitors replied on 8 June 2005 indicating that the trustee was still owed outstanding costs, charges and expenses for his administration of the former bankrupts’ estate and that he would be relying on his rights under s 154(1) of the Act to receive payment of his fees from the sale of the Jindabyne property. The Department subsequently undertook not to take any further action until further notice from the trustee or court order.

17        On a further three occasions (on 6 July 2006, 8 March 2010 and 27 January 2011), prompted by Mrs Maxwell-Smith, the Department wrote to the trustee’s solicitors asking whether the trustee would consider transferring his title in the Jindabyne property back to Mr and Mrs Maxwell-Smith. On each occasion, the trustee’s solicitors responded by confirming that the trustee’s position remained as previously stated, that he was relying on his rights under s 154(1) of the Act and that he would not reconvey the title to the Jindabyne property until such time as his costs, charges and expenses had been paid by the former bankrupts.

18        On at least three other occasions (6 July 2006, 24 June 2007 and 21 December 2007), Mrs Maxwell-Smith wrote directly to the trustee requesting that the title to the Jindabyne property be transferred to her and her husband. On each occasion, the trustee refused these requests and indicated to Mrs Maxwell-Smith he would continue to rely on his rights under the Act to retain the property until he was paid his entitlements.

19        It is these refusals by the trustee and his initial action in transferring the title of the Jindabyne property into his name that are the subject of the Maxwell-Smiths’ outstanding application for an inquiry under s 179(1) of the Act.

Mr and Mrs Maxwell-Smith’s submissions

20        Mr and Mrs Maxwell-Smith submitted that the trustee should never have transferred the title of the Jindabyne property into his name as the value of the Tura Beach property (which was unencumbered and did not have the complication of additional co-owners) was more than sufficient to cover the debt owing to the creditor as well as the trustee’s costs, charges and expenses in administering the estate. They submitted that the trustee should not have refused their requests that he convey the title to the Jindabyne property back to them.

21        Mrs Maxwell-Smith claimed that the trustee’s refusals were unreasonable and that they caused them financial loss, particularly to Mr Maxwell-Smith who is currently, and has been for some years now, the sole occupant of the Jindabyne property. Further, she claimed that the trustee’s dealings with the Jindabyne property caused harm to the co-owners of the property.

22        There was no evidence before me to show that the co-owners had suffered any hardship or loss as a result of any action taken, or not taken, by the trustee in relation to the Jindabyne property. Nor was there any evidence before me from Mr Maxwell-Smith to demonstrate that he had suffered any hardship or loss as a result of the change. However, Mrs Maxwell-Smith gave the following evidence:

After the annulment of the bankruptcy, Mr Donnelly continued to harass us and my two sons, the other joint tenants of the Jindabyne property, by enforcing his claim of costs, disregarding my request to leave my sons alone, as both have a large young family. They were very upset to receive intimidating letters from the trustee about the transfer of our shares.

The most disturbing fact is that the transfer of the 50% share into the trustee’s name caused unnecessary financial strain on Eugene Maxwell-Smith, the sole occupant of this property. Snowy River Council received from the trustee the notification of change of ownership in the Jindabyne property and consequently the age pension allowance could no longer be approved.

The amount of these alleged losses was not quantified.

23        Mrs Maxwell-Smith produced a copy of a letter (Exhibit A) written by herself which was dated 22 March 2005 and addressed to the trustee. She relied on the document in support of her contention that she and her husband had been co-operative and willing to pay the trustee’s costs and expenses. It contains a proposal from Mr and Mrs Maxwell-Smith that the trustee convey title to the Jindabyne property back to them upon their payment of the full amount of the trustee’s costs and expenses as taxed. The proposal was as follows:

Whatever your intention, I make the following proposal on behalf of both my husband and I.

1.    As soon as we receive your final account, properly taxed by the appropriate authorities, we will raise the required funds by using the Tura Beach property as security.

2.    On receipt of the full amount, we expect you to restore the title of both the Jindabyne and Tura Beach properties to the original owners.

3.    The full details of the insurance that you arranged on the Tura Beach property is also required in order to arrange a credit from either of the two insurance companies that insured the same property for the same period.

There is no evidence that the letter dated 22 March 2005 was ever sent by Mrs Maxwell-Smith to the trustee or that it was ever received by him. In her cross-examination of the trustee Mrs Maxwell-Smith did not refer him to the letter of 22 March 2005.

24        The date of the letter is significant. It was apparently written the day after the hearing before Wilcox J which marked the beginning of the protracted litigation between Mr and Mrs Maxwell-Smith and the trustee. My judgment of 14 May 2010 contains an account of the subsequent proceedings in the Full Court, the High Court and before Allsop J: see [2010] FCA 474 at [13]-[20]. It is common ground that the trustee has not been paid any of his entitlements including those that have been taxed and approved by the Court.

25        The trustee gave evidence that he formed the view early in the administration that Mr and Mrs Maxwell-Smith would not cooperate with him in administering their estates and that he would need to conduct the administration without their assistance. He also gave evidence that at the time he sought to be recorded on the title to the Jindabyne property he had not yet received their statement of affairs and had no evidence on which he could rely to indicate their solvency. His evidence was that he was also unaware at that time whether there were any other creditors beyond the petitioning creditor. I accept this evidence.

26        At the time the trustee wrote to the co-owners of the Jindabyne property he was claiming $92,704.69 said to be due to him as at 31 July 2004. This claim (for the period 16 September 2003 to 31 July 2004) was eventually taxed and, as a result, a substantially reduced amount was allowed. Nevertheless, the extent of his entitlements for that and subsequent periods was not determined until my judgment of 25 March 2011 was delivered following a second taxation by the Registrar.

Consideration

27        In my judgment in this proceeding given on 25 March 2011 I dismissed the majority of the claims to relief included in the application: [2011] FCA 259 at paras [36] and [39]. However, I was not satisfied at that time that the matters raised in para six of the application had been previously dealt with by the Court and that it should also be dismissed: [2011] FCA 259 at para [38]. Having now had the opportunity to receive further material, I have come to the view that the balance of the application should be dismissed.

28        The first matter concerns the alleged misconduct on the part of the trustee in causing the title to the Jindabyne property to be registered in his name. This matter was squarely raised before Wilcox J in the Maxwell-Smiths’ previous application for relief under s 179(1) of the Act: Maxwell-Smith v Donnelly [2005] FCA 332. His Honour recounted the Maxwell-Smiths’ argument at para [10] and made a finding that “it was both normal and proper for the trustee to seek to have the bankrupts’ interests in the Jindabyne property put in his name” at para [11]. This point was also the subject of submissions by counsel on appeal from Wilcox J’s decision before the Full Court: Maxwell-Smith v Donnelly [2006] FCAFC 150. I am not satisfied that it is either necessary or desirable for there to be any further inquiry into that matter.

29        The next matter concerns the ongoing refusals of the trustee to reconvey the title to the Jindabyne property to Mr and Mrs Maxwell-Smith. It is apparent that by the time of Mrs Maxwell-Smith’s first request to reconvey the Jindabyne property the trustee had formed the view that the Maxwell-Smiths would strongly resist payment of his entitlements and that such resistance was likely to result in further costs being incurred. Therefore, the trustee considered that he should retain his right in the Jindabyne property, as provided for under s 154(1)(b) of the Act, until such time as his entitlements were paid. The trustee has maintained this position since the first request was made. His position has been communicated to Mr and Mrs Maxwell-Smith repeatedly. I do not think that the trustee can be fairly criticised for maintaining this position.

30        I am satisfied that the trustee was at all relevant times open to discussions concerning the extent of his entitlements once Mr and Mrs Maxwell-Smith’s bankruptcies were annulled. I am also satisfied that he was also open to negotiate a significant reduction in the amount of his claim in order to finalise his administration and thereby enable Mr and Mrs Maxwell-Smith to reacquire title to the properties. The notion that the trustee could have submitted a “final account, properly taxed by the appropriate authorities” following which he would then be paid sounds simple enough but was complicated by the existence of the torrent of litigation in which the trustee was about to become involved.

31        I am also satisfied that Mrs Maxwell-Smith has never been open to such discussions with the trustee. Her position has been, and remains, that the trustee has been guilty of serious wrongdoing for which she believes he deserves to be punished. This is something which has at all times coloured her attitude to the trustee and which leads me to believe that Mrs Maxwell-Smith has never been willing to pay anything to her trustee in respect of his entitlements.

32        I am not satisfied that any case for an inquiry pursuant to s 179(1) of the Act has been made out. I am satisfied that it would be undesirable for further costs to be incurred in connection with such an inquiry in circumstances where there are insufficient grounds for believing that the trustee has erred in his administration: see Maxwell-Smith v Donnelly [2006] FCAFC 150 at para [53].

33        Accordingly, I refuse to make any order under s 179(1) of the Act. The application filed on 2 February 2011 should now be dismissed in its entirety.

Other issues

Should a writ of possession issue?

34        Mr and Mrs Maxwell-Smith have had ample opportunity to enter into arrangements with the trustee aimed at facilitating either the mortgage or sale of the Tura Beach property but nothing has eventuated. Mrs Maxwell-Smith is apparently still in possession of the Tura Beach property and, as best I can tell, is not likely to part with possession unless forced to do so. In the circumstances, I do not see any alternative to the issue of a writ of possession.

Should there be a stay?

35        There is no justification for the grant of a stay of the order of possession. However, so far as the writ is concerned, I will make an order that it not be issued for a period of 28 days to give Mrs Maxwell-Smith a final opportunity to give vacant possession of the Tura Beach property in accordance with my previous order.

Should the order for possession be varied?

36        As mentioned, Mrs Maxwell-Smith has drawn my attention to an error in the original order for possession made on 25 March 2011. The error can be traced to the trustee’s original notice of motion in which he first sought such an order. The order of 25 March 2011 was entered by the trustee in spite of the error. Order 2 made by me on 25 March 2011 should be corrected pursuant to the slip rule: see Rule 39.05 of the Federal Court Rules 2011, paras (e) and (h).

37        Orders accordingly.

Associate:

Dated:    31 October 2011