FEDERAL COURT OF AUSTRALIA

Liprini v Pascoe as Trustee of the Bankrupt Estate of Liprini [2012] FCA 886

THE COURT ORDERS THAT:

1.    There be an inquiry into the conduct of the trustee in refusing or failing to convene a meeting of creditors in accordance with the applicant's request under s 64(1)(b) of the Bankruptcy Act 1966 (Cth).

2.    The applicant is to file and serve any further affidavits on which he wishes to rely in respect of the inquiry by 23 August 2012.

3.    The respondent is to file and serve any further affidavits on which he wishes to rely in respect of the inquiry by 6 September 2012.

4.    The matter be listed for further hearing on 17 September 2012.

5.    The costs of today be reserved.

Note:    Settlement and entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE APPLICATION

1        This is an application filed on 20 June 2012 by the applicant, Kevin Liprini, who is the major creditor of the bankrupt estate of his brother, Allan Liprini. The respondent to the proceeding is Scott Pascoe, who is the trustee of the bankrupt estate of Allan Liprini. The applicant seeks orders that the respondent be immediately removed as trustee of the bankrupt estate of Allan Liprini and that Messrs Mark William Pearce and Andrew John Heers be appointed as joint trustees of that estate. Consequential orders were sought to the effect that the respondent not be indemnified from the bankrupt estate of Allan Liprini for the costs of and incidental to the application.

LEGAL PRINCIPLES

2        Unfortunately, the application did not identify the particular source of power to be relied upon for the orders sought. Nevertheless, in subsequent correspondence the solicitors for the applicant confirmed that the applicant was relying upon s 179 of the Bankruptcy Act 1966 (Cth) (the Act). Section 179(1) provides that:

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.

3        If there had been a focus on the relevant power and the nature of the power then it would have been apparent to the applicant at a much earlier time that there are a number of authorities in respect of the operation of s 179. As the respondent’s submissions set out, s 179 is commonly referred to as involving a two-stage process. The authorities in relation to s 179 were conveniently gathered in Moore v Macks [2006] FMCA 594 at [13]-[18]:

13. In Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262 Riley J observed in relation to a request by the Registrar in Bankruptcy for an inquiry in relation to the conduct of a trustee at p.268:

“Before the application is heard, therefore, the trustee will know the grounds on which the court will be asked, inter alia, to inquire into his conduct and the facts on which the Registrar proposes to rely in supply of his application that the court do so inquire. I do not wish to be taken as presuming to lay down any rule as to the procedure to be followed in, or the approach to be made by the court to, a case of this sort; but it seems to me that in such a case there is a preliminary question to be decided by the court – namely on the grounds and facts before it, has a case been made for inquiry into the trustee’s conduct? If the answer to that question is ‘yes’, the next question is – what is to be the scope of the inquiry? It may be that the material already before the court sufficiently defines the scope of the inquiry; on the other hand, the court may find it necessary to define the subjects for inquiry – e.g. in the form: ‘Did the trustee do (or fail to do) so and so?’ – and to give directions before proceeding to inquire.”

14. In Re Gault; Gault v Law (1982) 57 FLR 165 the Federal Court was asked to conduct an inquiry in relation to the trustee of the bankrupt’s estate. In fact, the case involves the second such request for an inquiry made many years after the first request had been made and refused. Ellicott J referred to Re Alafachi (supra) at p.173 and said:

“It was with his Honour’s comments in mind that I required the applicant to give particulars of the misconduct he relied on to found his application. The court has a broad discretion in deciding whether to order an inquiry. In my opinion it is not required to order an inquiry unless it is satisfied that sufficient grounds had been made out.

For instance, the court should be loathe to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. 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. It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example in an action for breach of trust.”

15. In Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 Beaumont J was considering an application by the Registrar in Bankruptcy for a s.179 inquiry. His Honour referred to the passages from Re Alafachi and Gault (supra) and said at p.233:

“In my opinion, the balance of convenience in this case indicates that a preliminary inquiry of the type urged by the respondent was the appropriate course to be adopted provided that, in the event that the matter goes forward to an inquiry on a final hearing, the evidence taken and submissions made in the preliminary inquiry are to be regarded as evidence and submissions in the final inquiry: in other words, the preliminary inquiry should be treated as part of the final inquiry. It is as if the respondent were to move for the dismissal of the proceedings as an abuse of process and then to fail in that application, in which event the material before the court in the summary application is to be treated as part of the material before the court upon the final hearing of the proceeding.”

16. Finally, in Wilson & Anor v The Commonwealth of Australia & Anor [1999] FCA 219 Branson J discusses the nature of proceedings pursuant to s.179 of the Act in addition to proceedings under s.178 of the Act. At [44] Her Honour summarises the law in relation to s.179 as follows:

“Although it is not a rule of universal application, the court will not ordinarily initiate an inquiry under s.179 unless it is satisfied that a proper case for an inquiry has been demonstrated… There will ordinarily be a proper case or an inquiry where there is a reasonable cause to believe that a trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the general law. However, as Ellicott J pointed out in Re Gault at 173:

‘The court has a broad discretion in deciding whether to order an inquiry. In my opinion it is not required to order an inquiry unless it is satisfied that sufficient grounds have been made out.’ ”

17. Section 178 of the Act provides:

(1)    If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he 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 date on which the person became aware of the trustee’s act, omission or decision.”

18. There can be no doubt then that the Court is not obliged to embark upon an inquiry pursuant to s.179 simply because it is asked to do so. I have to be satisfied before embarking upon the inquiry that sufficient grounds have been demonstrated for the inquiry to be conducted. I will only be able to determine that if the applicant has revealed the basis claimed for the inquiry and the trustee given the opportunity to respond. I am satisfied that I am obliged to carry out this discrete preliminary step before embarking upon the inquiry and I would do so whether or not an application for summary dismissal was before me. The application for summary dismissal was based upon the same preliminary adjudication that the authorities discussed above require me to carry out. It was not pursued on any other basis. I propose to deal with the application as one made pursuant to the provisions of the Act itself rather than as one made pursuant to Rule 13.10.

4        As is apparent from the above summary, a number of principles can be isolated about the operation of s 179: – (i) there is a preliminary question to be decided – namely, on the grounds and facts before the court, has a case been made for inquiry into the trustee’s conduct? If the answer to that question is yes, then the next question is what is to be the scope of the inquiry, (ii) given the nature of the power, it may well be appropriate for a trustee to be given particulars of any misconduct said to found the application. The reason for this is that s 179 involves a broad discretion as to whether or not to order an inquiry and an inquiry should not be ordered unless sufficient grounds have been made out, (iii) it has been said that the court should be loathe to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee has erred in his administration. That is, if the Court considers that an inquiry is unlikely to reveal misconduct, it should not make such an order putting the trustee and possibly the creditors to the expense and trouble involved, and (iv) although misconduct is itself an obvious and available ground for the decision that an inquiry should be held, there is also authority that the power in s 179 is not so limited. Accordingly, it has been said that there will ordinarily be a proper case for an inquiry where there is reasonable cause to believe that the trustee may have failed to act in relation to a bankruptcy in the manner required by the Act or the general law. In addition to this summary of principles, it is apparent from the decision in Doolan v Dare [2004] FCA 682 that s 179 should not be construed in a manner mutually exclusive from other provisions of the Act. In particular, this is apparent in Doolan v Dare at [47]-[48] where it was noted that the power in s 179 is available despite other powers in the Bankruptcy Act also being available.

5        It is convenient at this point to note certain other principles. In Doolan v Dare at [13] Spender J referred to the related decision of Cooper J (Dare v Doolan [2004] FCA 461) in which his Honour said (at [12]-[13]):

12. Prima facie, the Act empowers the creditors to remove a trustee in circumstances which appear to the creditors to justify such a removal. The power to remove is not preconditioned upon there being any misconduct on the part of the trustee. If, for example, relations between the trustee and the creditors have broken down for whatever reason, that will be sufficient. Where a trustee has lost the confidence of creditors and those creditors seek the removal of the trustee, he or she should not resist removal unless there are proper reasons to do so: Adsett v Berlouis (1992) 109 ALR 100 at 112.

13. Ordinarily, the Court would not interfere with an exercise of the power under s 181 to remove a trustee unless a good cause is shown for its interference: Re Crawford Ex parte The Trustee (1943) 13 ABC 201 at 202; Macks v Ardalich [1999] FCA 679 at [22] - [23].

6        In Doolan v Dare it was claimed, and a declaration was sought, that the trustee had improperly exercised various powers. The Court found against the trustee and held that the trustee had acted in her own self-interest (at [38]). At [49] Spender J observed that it seemed to him “that it is plain beyond argument that the relationship between the trustee and the bankrupt has totally broken down; that, in many cases, is a sufficient reason for the trustee to be removed”. Accordingly, his Honour made orders for removal of the trustee and appointment of another trustee.

7        In Adsett v Berlouis (1992) 37 FCR 201 at 213 it was observed that:

Except in the most unusual of circumstances — as, for example, where there is a question about the conduct or representativeness of the vote — a trustee who has lost the confidence of the majority of creditors ought not to cling to office, but make way for someone else. For a trustee to involve the estate in litigation about his or her past performance, especially when a composition is likely to be approved, is to incur unnecessary expense.

FACTUAL BACKGROUND

8        The features of the present case which are of particular importance include that there is no doubt on the evidence that the applicant is a creditor who has at least, and indeed more than, one fourth of the value of the estate. There is equally no doubt that on a number of occasions the applicant as such a creditor has requested in writing that the trustee convene a meeting of the creditors. Such a request was at the least foreshadowed as early as 28 March 2012. The request for the meeting was then confirmed by a letter of 30 March 2012. This led to a response of 2 April 2012 from the trustee seeking the written consent of another trustee. On 4 April 2012 the solicitors for the applicant provided the trustee with the consent of Mark William Pearce and Andrew John Heers of Pearce & Heers Insolvency Accountants dated 3 April 2012 and asked whether the trustee would consent to the change of trustee or, alternatively, advise of the date of the creditors’ meeting requested in the letter dated 30 March 2012. There was a delay in response and on 11 April 2012 the solicitors for the applicant sent a follow-up letter to the trustee. Thereafter, on 13 April 2012 the applicant’s solicitors wrote to the trustee noting that unless a response was received by 16 April 2012 as to whether the trustee was prepared to consent to his removal or alternatively hold the creditors’ meeting the applicant would be left with no alternative but to report the matter to the Insolvency and Trustee Service Australia (ITSA).

9        On 16 April, presumably in response to the letter of 13 April, an email was sent from the office of the trustee to the applicant’s solicitors stating that a notice to creditors for the transfer of the trustee under the streamlined method was expected to be issued by 18 April. By 26 April, it appears that not much had happened, prompting an email from the applicant’s solicitors to the trustee’s office. This email noted that approximately four weeks ago the applicant’s solicitors had requested that either the trustee consent to his removal or a creditors’ meeting be held, failing which an application would be brought and/or the matter would be reported to ITSA. This prompted an email from the trustee’s office of 26 April 2012 confirming that the trustee was issuing a notice of streamlined method which was in its final stages. On 30 April 2012, the applicant’s solicitors noted by letter that they had still not received the foreshadowed notice of transfer. On 2 May 2012, the applicant’s solicitors sent a request enclosing a notice of resolution and asking that if any objection was received to the transfer to Messrs Pearce and Heers then the meeting of creditors be convened as previously requested.

10        There followed further dealings between the applicant’s solicitors and the trustee’s office concerning certain proceedings in the Federal Magistrates Court of Australia, to which I shall return. Ultimately, there was a letter of 23 May 2012 from the applicant’s solicitors which, amongst other things, noted that the trustee’s solicitors had appeared in court and had advised that an objection had been received to the transfer to Messrs Pearce and Heers to act as trustees of the estate pursuant to the streamlined method. In that letter, the applicant’s solicitors requested a notice of the objection and asked when the notice of the creditors’ meeting would be sent. The solicitors for the trustee sent a form of holding reply on the same date while they obtained instructions. Leaving aside other correspondence between the applicant’s solicitors, the office of the trustee and the trustee’s solicitors, the position culminated in a letter of 25 May 2012 from the trustee’s solicitors addressing a number of issues. Amongst other things, that letter said that the trustee had real concerns that the motivation for the request for a change of trustee is:

…directly aligned to the adjudication of [the applicant]’s proof of debt. Our client considers the request for a change in trustee to be for a collateral (and impermissible) purpose. The proof of debt has been rightfully rejected based on the information and particulars that you have supplied.

11        Further correspondence ensued, including a letter from the applicant’s solicitors to the trustee’s office of 30 May 2012. That letter again contained a request from the applicant as the majority creditor that the trustee convene a meeting pursuant to s 64 of the Act without further delay. The solicitors for the trustee replied on the same day and said:

You have now sought to call a creditors’ meeting for the purposes of removing the trustee pursuant to section 181 of the Act. The trustee is of the view that [the applicant], and regrettably your office, have made improper and unfounded allegations against the trustee to secure or justify his removal in circumstances where [the applicant] is seeking to obtain a more favourable adjudication of his proof of debt. This is not permissible.

We invite [the applicant] to withdraw his request to convene a meeting for the purpose identified and put you on notice that in the event an application is lodged seeking the removal and replacement of our client as trustee then an application will be filed seeking to restrain the holding of the meeting given the circumstances in which [the applicant] has requested that it be convened.

12        Regrettably, this led to further correspondence between the solicitors. This led to the commencement of these proceedings following further communications including from the applicant’s solicitors of 8 June 2012 where it was said, as is the fact, that “[i]t appears that your client is refusing to call a creditors’ meeting despite our client’s request pursuant to section 64 of the Bankruptcy Act”.

13        There was also a letter of 12 June 2012 from ITSA noting that the applicant’s debt was not in dispute and that as a creditor the undisputed portion of his claim easily exceeded 25 per cent. In circumstances where the trustee had been requested to convene a meeting of creditors, the letter from ITSA stated:

Please take steps to convene the meeting as you are required to do under section 64.

Please confirm in writing to me within the next seven days that you are taking action to convene a meeting.

14        The applicant has not suspended or withdrawn his request for a meeting to be convened.

15        Finally, there was a letter of 12 June 2012 from the trustee’s solicitors which said, amongst other things, that:

…in order to progress the matter in a pragmatic way, the trustee requests that your client suspend his request for the holding of a meeting, at least until Barnes FM delivers her reasons for judgment and makes orders. The trustee is making this request on the basis that unnecessary costs will be avoided if the trustee forms the view that an injunction should not be sought based on the reasons of Barnes FM. In which case, a meeting may well be called without the need for an application for an injunction.

16        The proceeding before Barnes FM in the Federal Magistrates Court of Australia, as I understand it, concerns one of the proofs of debt lodged by the applicant. In particular, the proof of debt relates to a claim in relation to legal costs in the sum of $126,646.26. The trustee rejected that proof of debt because those costs had not been assessed or taxed in accordance with the requirements of the relevant legislation providing for the assessment or taxing of costs. Apparently the decision of Barnes FM on the issue is reserved.

DISCUSSION

17        The practical position is that on the evidence there has been an apparently valid request in writing by the applicant who has at least one-fourth in value of the creditors, within the meaning of s 64(1)(b) of the Act. That section provides that “[t]he trustee must convene a meeting of the creditors of a bankrupt whenever so requested in writing by at least one-fourth in value of the creditors”. Section 64(2) of the Act provides that “[t]he trustee may convene at any time a meeting of the creditors of a bankrupt”. Insofar as it was submitted, I do not accept the proposition that s 64(2) provides the trustee with an overriding discretion not to convene a meeting despite having received a request in writing within the meaning of s 64(1)(b). The terms of s 64(1)(b) are clear. If the relevant request is made by at least one-fourth in value of the creditors then whenever that request is made the trustee must convene a meeting.

18        It is also clear in the present case that no such meeting has been convened. As far as can be ascertained from the evidence, the reasons that the meeting has not been convened are various and include, but may not be limited to: – (i) a concern on the part of the trustee that the request is being made for the alleged improper purpose of obtaining some different or better outcome in relation to the proof of debt for $126,646.26 for legal costs, (ii) the fact that the administration of the estate is almost complete, (iii) the fact that there is a reserved decision before Barnes FM relating to the same proof of debt, and (iv) the fact that the trustee, at least, estimates that the costs of a transfer of the role of trustee will involve the estate in costs in the order of $60,000. It is apparent from the evidence, at least insofar as the evidence goes, that these are the reasons that the trustee has not convened a meeting. It is also apparent, insofar as the evidence goes, that the concern about the request having been made for an alleged improper purpose underlies the references to obtaining an injunction in the correspondence from the trustee’s solicitors. In particular, s 30(1) of the Act provides that the Court:

(a)    has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and

(b)    may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.

19        The trustee, as I accept is the case, has a capacity to approach the court to seek orders and directions as considered appropriate. In this regard, I was taken to the decision of In Re Burn; ex parte Dawson, McClellan and the Trustee [1932] 1 Ch 247 where it was said (at 257):

Now, the Court has wide powers in bankruptcy…It is obvious that the Court has complete control over the administration of a bankrupt’s estate for the benefit of all persons interested, subject only to such expressed limitations as are to be found in the Act. It is admitted that if a meeting of creditors resolved on some particular course which the trustee might think would not be beneficial, the trustee has power to apply to the Court for directions with regard to it. It would indeed be strange if the Court, while having power to direct a trustee not to act on a particular resolution, had no power to direct a trustee not to call a meeting for the purpose of getting that resolution passed. I think the trustee had ample power…to apply to the Court for directions whether a requisition for a meeting in compliance with the requirement of the Act shall be acted on or not.

20        I accept that the trustee has such power in the present case – that is, on receiving the request for the meeting, it would have been open to the trustee to approach the Court seeking an order or direction, as considered necessary or appropriate, to the effect that the meeting not be held; that, however, was not done. Equally, on receiving the correspondence from the trustee’s solicitors of 30 May 2012 which expressly referred to the request for the creditors’ meeting and stated that the trustee’s view was that the request was being made for an improper purpose and was not permissible, the applicant could have commenced the proceeding under s 178 of the Act. Section 178(1) provides that “[i]f 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”. Section 178(2) provides that “[t]he 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”. It seems to me to be clear that, at least as at 30 May 2012, if there was not a decision by the trustee not to convene the meeting there was at the least an omission to call the meeting.

21        The parties have proceeded before me today on the common basis that the 60 day time limit in s 178(2) has expired and accordingly the applicant can no longer appeal against the decision of the trustee not to call the meeting or the omission of the trustee to call the meeting. The situation is accordingly an unfortunate one. The applicant has given evidence that he has lost confidence in the trustee. He is by far the major creditor of the bankrupt estate. The applicant wishes to take action for a meeting to be convened to remove the trustee; he acted in accordance with s 64 of the Act, the prima facie result of which should have been that whenever so requested the meeting was required to be convened. The trustee, however, was apparently of the view that for the reasons I have identified the meeting should not be convened. Despite the mandatory language of s 64, the trustee did not himself take action to invoke the jurisdiction of the Court under s 30 of the Act to relieve himself of what would otherwise appear to be a mandatory duty to convene the meeting. The matter thereby remained in limbo under s 179 until this proceeding, apart from the extraordinary amount of correspondence between the solicitors for the applicant and the solicitors for the trustee, the latter of which is presumably at the cost of the estate.

22        It was submitted for the trustee that there is no basis upon which it would be thought that there has been any misconduct by the trustee; however, as I have said, circumstances enlivening the powers in s 179 and the powers to remove a trustee are not dependent on misconduct. There is ample authority that a breakdown in the relationship between at least the major creditor and the trustee may be sufficient, both for the purposes of an inquiry and for removal. Moreover, 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 Act or the general law it has been said (as set out above in the extracts from Moore v Macks) that there would ordinarily be a proper case for an inquiry. In the present case there is at least a prima facie issue of non-compliance by the trustee with s 64(1)(b) of the Act. It may well be that the trustee is ultimately vindicated in being of the view that the meeting should not be convened and that an order might have been made to that effect. The problem is that the trustee did not invoke the powers of the court under s 30 and it has been left to the applicant to do so.

23        It is also said that the fact that the applicant is now out of time under s 178(2) is, in effect, the applicant’s problem. The applicant had the opportunity to bring the appeal within 60 days and failed to do so. In many cases a submission to that effect should be accepted, but in the present case there is an impasse. The applicant is the major creditor who wants the meeting to be held and has taken steps to require the meeting to be held. However, the meeting has not been held, apparently for the reasons identified. Whether or not they are good reasons simply remains untested. In circumstances where there is evidence, as there in fact is, that the applicant has lost confidence in the trustee there is a real question whether it would be an appropriate exercise of discretion to leave matters as they currently stand rather than to ensure that the applicant is able to have his concerns properly ventilated and tested.

24        The other discretionary indications upon which the trustee relied are also equivocal. I accept that on one level the administration is almost complete and final distribution imminent. However, it is apparent that there is a reserved decision before Barnes FM and it is obvious that there may well be an appeal by one or other party against that decision. In other words, finalisation of the administration is by no means imminent because it must await the outcome of that decision and any appeal. Insofar as it was said in the submissions for the trustee that the complaints by the applicant are all matters capable of resolution under s 178, that would have been so except time has now expired.

25        In terms of an inquiry being an additional and unwarranted cost and expense, I accept that additional cost and expense will be involved but I am not satisfied in the circumstances that it would be unwarranted. As a matter of fact, in the present case there is an apparent non-compliance by the trustee with a valid request for the convening of a meeting. In circumstances where the applicant as the major creditor has lost confidence in the trustee it seems to me that those two matters together provide sufficient grounds upon which I can be satisfied that there should be an inquiry into the conduct of the trustee, at least insofar as it is the conduct of the trustee in refusing to convene the meeting.

26        It will be apparent from what I have decided, namely, that there should be an inquiry but a limited one, that I do not accept the submission for the trustee that the fact that an inquiry was not sought in the application precludes such an order being made. It is true that the application sought only removal of the trustee and the appointment of the alternative trustees; however, subsequent correspondence makes it clear that the applicant was seeking to invoke s 179, which is the inquiry power.

27        I should also say that I do not accept the applicant’s submission that the inquiry has already occurred in relation to the conduct of the trustee. Indeed, this is the basis for my observation earlier to the parties that it seems they have passed like ships in the night. This is because of the form in which the application was made and the fact that neither party seems to have sought interlocutory directions which would have enabled the real issues between them to be more efficiently identified and resolved by the Court. In any event, order 6 of the orders in the application as filed sought any other orders that the Court deems appropriate. In circumstances where s 179 is invoked, it seems to me that it is appropriate to make an order that there be an inquiry into the conduct of the trustee in relation to the trustee’s failure to convene a meeting of creditors, as requested by the applicant.

28        Orders will be made accordingly.

Associate:

Dated:    21 August 2012