FEDERAL COURT OF AUSTRALIA

Bendigo and Adelaide Bank Limited v Clout (No 2) [2016] FCA 561

ORDERS

THE COURT ORDERS THAT:

1.    The compositions entered into by:

1.1    the Second Respondent;

1.2    the Third Respondent; and

1.3    the Second and Third Respondents jointly;

on 3 December 2013 be set aside pursuant to ss 76B and 222 of the Bankruptcy Act 1966 (Cth).

2.    Pursuant to ss 222(10) and 222(11) of the Act, a sequestration order be made against:

2.1    the estate of Michel Emmanuel Mouglalis;

2.2    the estate of Julie Ann Mouglalis; and

2.3    the joint estate of Michel Emmanuel Mouglalis and Julie Anne Mouglalis;

with the effective date of bankruptcy in three estates being 20 February 2015.

3.    David Mansfield, Registered Trustee in Bankruptcy, of Deloitte Touche Tohmatsu be appointed as the trustee in bankruptcy of the joint and several estates of the Second and Third Respondents in lieu of David Clout.

4.    The Applicant’s costs, including any reserved costs but excluding the costs of and incidental to the hearing on 10 March 2016, and the First Respondent’s costs be taxed and paid from the joint and several estates of the Second and Third Respondents in accordance with the Bankruptcy Act as if they were the costs of a petitioning creditor.

5.    The Applicant is to pay the costs of the Second and Third Respondents of and incidental to the hearing on 10 March 2016, but excluding any costs associated with the travel to Adelaide by counsel for the Second and Third Respondents for the hearing.

6.    Otherwise, there be no order with respect to the costs of the proceedings.

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

REASONS FOR JUDGMENT

WHITE J:

1    On 18 February 2016, I delivered a judgment in which I found that the compositions of the debts of the second and third respondents (Mr and Mrs Mouglalis) on 3 December 2013 should be set aside and a new trustee in bankruptcy appointed to investigate their estates: Bendigo and Adelaide Bank Limited v Clout [2016] FCA 119. I directed the applicant (Bendigo Bank) to bring in minutes of the orders appropriate to give effect to my conclusions.

2    The form of the orders became a matter of some contention. This judgment contains my reasons for the orders made by the Court today.

3    On 24 February 2016, all parties made submissions as to the appropriate orders but, as a result of a change of attitude by Bendigo Bank at the conclusion of the hearing, ultimately the only difference between them concerned the costs order sought by Bendigo Bank against the first respondent (Mr Clout) who was the trustee of the bankrupt estates. In particular, the parties were agreed that orders should be made setting aside the compositions, directing that the bankrupts and their creditors be restored to the positions they were in before the special resolutions were carried on 3 December 2013, and that a new trustee be appointed to each bankrupt estate.

4    However, on the following day the Court received a supplementary submission from the solicitors for Bendigo Bank. In the supplementary submissions, Bendigo Bank contended that, instead of an order that the bankrupts and their creditors be restored to the positions they were in before the passage of the special resolutions, the Court should make the following order:

[2]    Pursuant to ss 222(10) and 222(11) of the Act, a sequestration order be made against:

[2.1]    the estate of Michel Emmanuel Mouglalis;

[2.2]    the estate of Julie Ann Mouglalis; and

[2.3]    the joint estate of Michel Emmanuel Mouglalis and Julie Anne Mouglalis;

with the effective date of bankruptcy in three estates being 20 February 2015.

5    The substance of the email accompanying the supplementary submission, which was shown as having been copied to the respondents’ solicitors, was as follows:

The Applicant respectfully seeks leave to rely upon the attached Supplementary Submission in respect of the form of proposed Order 2 in the Minutes of Order.

Given the Court’s intimation yesterday that orders may be made shortly, the applicant is providing the attached to the Court now but we are urgently seeking the position of the Respondents (their solicitors copied in on this email) as to whether they will consent to leave being granted for the Applicant to rely upon the attached Supplementary Submission given the Applicant only had the opportunity of reviewing and responding to the Second and Third Respondents’ submission at the hearing itself.

We will inform the Court as soon as possible as to what their response is.

6    As the solicitors’ email and the accompanying submissions acknowledged, leave had not previously been granted to any party to provide a supplementary submission. Further, Bendigo Bank’s solicitors had not sought the consent of the respondents for its communication to my Associate. The first that the respondents learnt of Bendigo Bank’s intention to seek leave to make a supplementary submission was when they received the copy of the email sent to the Court.

7    The course adopted by Bendigo Bank led to further emailed communication to my Chambers. By an email of 25 February 2016, the second and third respondents indicated that they objected to any further submissions being received or to the matter being reopened. By a later email, Mr and Mrs Mouglalis requested the opportunity to provide a reply to the submissions of Bendigo Bank “in the event [that] the Court accepts [the] further submissions”. I indicated that any submissions responding to Bendigo Bank’s request to file further submissions should be filed promptly. Mr and Mrs Mouglalis did make further submissions. Bendigo Bank’s counsel then sought the opportunity to make further oral submissions. Accordingly, I listed the matter for hearing on 10 March 2016 in order to hear the application of Bendigo Bank for leave to reopen the matter and, in the event that leave was granted, to hear those further submissions.

8    At the conclusion of the hearing on 24 February 2016, the parties had been agreed that the following orders should be made:

1.    The compositions entered into by:

1.1    the second respondent;

1.2    the third respondent; and

1.3    the second and third respondents jointly;

on 3 December 2013 be set aside pursuant to sections 76B and 222 of the Bankruptcy Act 1966 (Cth).

2.    Consequent upon Order 1, each of the Second Respondent and the Third Respondent and the creditors of each, including the creditors of their joint estate, are restored to the positions they were in before the acceptance by the creditors by special resolutions on 3 December 2013 of the composition proposals under s 73 of the Bankruptcy Act such that the Second and Third Respondents are and have been bankrupt on and from 16 May 2012 pursuant to the Orders of the then Federal Magistrates Court of Australia, and the creditors of the Second and Third Respondents are, and have been from 16 May 2012, creditors of their respective bankrupt estates.

3.    David Mansfield, Registered Trustee in Bankruptcy, of Deloitte Touche Tohmatsu be appointed as the trustee in bankruptcy of the joint and several estates of the second and third respondents.

9    Proposed Order 2 was derived from the order made by the Full Court in Hingston v Westpac Banking Corporation [2012] FCAFC 41. Counsel’s submissions on 24 February made it apparent that Bendigo Bank had the belief that, if an order in these terms was made, the bankruptcies of Mr and Mrs Mouglalis would be taken to have commenced on 16 May 2012 and that it would be open to the trustee to seek an extension of the three year period fixed by s 149 of the Bankruptcy Act 1966 (Cth), even though that period had since expired. After the hearing on 24 February 2016, Bendigo Bank realised that its belief in that respect was mistaken because s 149B(1) of the Bankruptcy Act permits a trustee to file with the Official Receiver a written notice of objection to the discharge of a bankruptcy only before the bankrupt is discharged from the bankruptcy under s 149.

10    Bendigo Bank took the view that it was desirable in the public interest and in the interests of creditors that the further investigation of the affairs of Mr and Mrs Mouglalis contemplated by the Court’s judgment on 18 February 2016 occur while they are still subject to the sequestration orders. Hence, it wanted to submit that, instead of the second order upon which the parties had agreed on 24 February, the Court should make the order set out at the commencement of these reasons.

11    Bendigo Bank pointed out that sequestration orders of a similar kind had been made by Rares J in Commonwealth Bank of Australia v Robson [2013] FCA 1430 and had not been disturbed on appeal (Shannon v Commonwealth Bank of Australia [2014] FCAFC 108), although the terms of the order had not been the subject of consideration by the Full Court.

12    Bendigo Bank also put forward an alternative form of order, but it is not necessary to address that presently.

13    Mr Clout did not wish to be heard on the application to reopen the submissions, nor to be heard further in the event that that application was allowed.

14    Counsel for Mr and Mrs Mouglalis opposed leave being granted to Bendigo Bank to reopen the submissions and contended that, in the event that leave was granted, the Court should nevertheless make an order in the terms which Bendigo Bank had accepted at the hearing on 24 February 2016.

15    I considered it appropriate to hear submissions on the application to reopen and the parties’ further submissions on the basis that leave had been granted. I then reserved my decision on both aspects of the matter.

The application to reopen

16    Senior counsel for Bendigo Bank provided the following explanation for the application to reopen.

17    In the minutes of orders circulated in anticipation of the hearing on 24 February 2016, Bendigo Bank had sought, relevantly, an order of the kind it now seeks, namely:

[2]    Pursuant to ss 222(1) and 222(11) of the Act, a sequestration order be made against:

[2.1]    the estate of Michel Emmanuel Mouglalis;

[2.2]    the estate of Julie Ann Mouglalis; and

[2.3]    the joint estate of Michel Emmanuel Mouglalis and Julie Ann Mouglalis.

[3]    David Mansfield, Registered Trustee in Bankruptcy, of Deloitte Touche Tohmatsu be appointed as the trustee in bankruptcy of the joint and several estates of the second and third respondents.

18    Bendigo Bank had received the submissions of the then counsel for Mr and Mrs Mouglalis in relation to the proposed orders just 30 minutes before the hearing on 24 February 2016. Those submissions provided (relevantly):

[3]    Paragraph 2 is opposed for this reason: The debtors were declared bankrupt on 16 May 2012. Upon the compositions being ordered to be set aside, the bankruptcies continue, with the relation-back day in 2012, and the new trustee’s ability to pursue antecedent transactions prior to that date.

[4]    We apprehend there may be a concern that section 74 of the Act will have the effect that the bankruptcy is annulled but if that is a concern, it can be dealt with by an order made under section 222(8) of the Bankruptcy Act which provides that the Court may make such other orders as it thinks fit. The Revised Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 2004 stated (in para 94) that this provision was to allow the Court to make orders where necessary to place the parties in the position in which they would have been had they not entered into the agreement. The precise words of the Memorandum were:

[94]    Where the Court makes an order setting aside a personal insolvency agreement, proposed subsection 222(8) would also allow the Court to make such other orders as it thinks fit. This is intended to allow the Court to make any orders necessary to place the parties in the position in which they would have been had they not entered into the agreement. By virtue of proposed subsection 222(9), this could include orders for compensation.

[5]    In other words, the purpose is to restore the creditors to the same position had the composition not been approved.

[6]    Accordingly, we respectfully submit that the order in paragraph 2 ought not to be made, as it would create new bankruptcy estates, but rather, for the purposes of clarity, a consequential order ought to be made that the bankruptcies were not annulled by force of section 74 of the Act when the compositions were approved, and the debtors’ bankruptcies pursuant to Order of the Court made 16 May 2012 are still effective.

19    Senior counsel said that on receiving this written submission, he had had “a hurried look for authorities”, and had formed the view at the time that an order along the lines made in Hingston would be appropriate. He said that he and the solicitors for Bendigo Bank had been prompted to research the matter further after the hearing on 24 February as a result of an exchange between Bench and Bar. In the course of that research, the decision in Donnelly v Edelsten (1992) 109 ALR 651 had been located. That case confirmed that the effect of s 149 of the Bankruptcy Act (as then in force) was that there is no power to object to a discharge of a bankrupt from bankruptcy after the expiration of the three year period commencing on the filing of the statement of affairs by the bankrupt. Section 149B in the present Act makes that position more explicit.

20    In this case, Mr and Mrs Mouglalis had lodged their respective statements of affairs on 12 December 2012, with the consequence that the three year period to which s 149 refers expired on 12 December 2015. That being so, the orders proposed on 24 February 2016 would not have the effect which Bendigo Bank considered appropriate and which, it submitted, the Court had contemplated by the decision published on 18 February 2016.

21    In short, Bendigo Bank’s position was that it had proceeded in the submissions on 24 February 2016 on a misapprehension; that the matters it wished to agitate on the reopening were matters of law; that it did not seek to adduce further evidence; that the application to reopen had been brought promptly (albeit in an irregular fashion); and that the lateness with which the then counsel for Mr and Mrs Mouglalis had provided the submissions on 24 February 2016 had contributed to Bendigo Bank not having considered the position more fully.

22    Mr and Mrs Mouglalis opposed the grant of leave to reopen on the following basis:

(1)    the way in which Bendigo Bank had sought the reopening was irregular, and it had apologised for that irregularity only at the commencement of the hearing on 10 March 2016;

(2)    although the solicitors for Bendigo Bank had received the written submissions of Mr and Mrs Mouglalis on 24 February only 30 minutes before the commencement of the hearing that day, they had been informed on the previous afternoon that Mr and Mrs Mouglalis objected to the order proposed by Bendigo Bank and had then been referred to the passage in the Explanatory Memorandum quoted in the submissions provided on 24 February;

(3)    Bendigo Bank had not provided any evidence in support of its application to reopen;

(4)    this case did not fall within any of the recognised categories of cases summarised by Kenny J in Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 at [24] in which courts have granted leave to reopen, namely, circumstances of fresh evidence, inadvertent error, mistaken apprehension of the facts, or mistaken apprehension of the law;

(5)    Bendigo Bank should not be permitted to resile from the position which it had agreed at the hearing on 24 February 2016, when it does not rely on any new evidence and had had a full opportunity to present its submissions at that hearing. Counsel emphasised the public interest in the finality of litigation and in litigants presenting all their submissions at the one hearing.

23    In addition to Bradshaw, counsel for Mr and Mrs Mouglalis referred to Autodesk Inc v Dyason (No 2) [1993] HCA 6, (1993) 176 CLR 300 at 303 and to The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust v Lenard’s Pty Ltd (No 2) [2004] FCA 1310 in support of these propositions.

24    The Court’s power to permit a reopening of submissions is discretionary. Prominent considerations in the exercise of the discretion are the public interest in the finality of litigation and in the efficient disposal of the Court’s business. For these reasons, parties are expected to bring forward all their evidence and submissions at the one hearing and the circumstances in which courts allow a reopening of submissions once judgment has been reserved tend to be exceptional: Re Application by the Chief Commissioner of Police (Vic) [2005] HCA 18; (2005) 79 ALJR 881 at [22].

25    Nevertheless, there are circumstances in which it is appropriate to grant leave. A change in the subject matter of the litigation, new evidence, the publication of a binding or persuasive judgment, the character of the matter on which judgment is reserved, the importance of the issues sought to be raised on the reopening to the just disposition of the proceedings, and the reason for the matters not having been raised earlier may, by themselves or in combination, warrant a favourable exercise of the discretion. This is not intended to be an exhaustive list.

26    I have concluded that Bendigo Bank should be granted leave to reopen the matter so as to make further submissions. A number of considerations indicate that the grant is appropriate. First, there is the character of the hearing on 24 February. That character is indicated by the final paragraph in the principal judgment:

[145]    For the reasons given above, I consider that Bendigo Bank has shown that the compositions should be set aside and that a new trustee should be appointed to investigate the bankrupt estates of Mr and Mrs Mouglalis. Orders to that effect will be made. Bendigo Bank is directed to bring in minutes of the orders which will be appropriate, including any consequential orders. I will hear from the parties as to costs.

27    The formal orders made at the time of judgment delivery were:

1.    Bendigo Bank is to file and serve within seven days minutes of the orders which will be appropriate to give effect to the Court’s conclusion that the compositions of the bankrupt estates of the Second and Third Respondent be set aside.

28    Thus, the purpose of the hearing on 24 February was to hear the parties’ submissions as to the form of orders appropriate to give effect to the Court’s conclusions and the relief to which it had previously held Bendigo Bank was entitled. A hearing of this character is different from a hearing concerning the entitlement or otherwise of a party to substantive relief. Amongst other things, the Court itself has an interest in the orders which it makes achieving the effect intended by its judgment.

29    Secondly, the decisions in Bradshaw, Autodesk v Dyason and in The Silver Fox Company on which counsel for Mr and Mrs Mouglalis relied do not concern circumstances like the present at all. Instead, they concern applications to reopen a matter after the Court had delivered judgment. Plainly, the approach which the courts adopt in circumstances of that kind will be more restrictive than their approach in circumstances of the present kind.

30    Thirdly, the absence of evidence from Bendigo Bank on the application to reopen is not, to my mind, a significant matter. Senior counsel informed the Court, frankly, that he accepted responsibility for what had occurred. The circumstances to which he referred are matters which were self-evidently within his knowledge and were consistent with the course of the hearing on 24 February. There is no reason why the Court should not accept senior counsel’s explanation. Counsel for Mr and Mrs Mouglalis did not contend to the contrary, even though maintaining the submission that the Court did not have evidence in support of the application to reopen. As I pointed out during the hearing, it should go without saying that the Court can proceed on the basis that senior counsel would not knowingly mislead the Court.

31    I agree with counsel for Mr and Mrs Mouglalis that the manner in which the solicitors for Bendigo Bank went about seeking the reopening was irregular.

32    A party is not entitled as of right to provide supplementary submissions once judgment has been reserved. At best, a party may seek leave to do so (which Bendigo Bank’s solicitors did in this case) but any such application should be made only after the attitude of the other parties has been sought and obtained. The decision of the Court of Appeal in New South Wales in Bale v Mills [2011] NSWCA 226; (2011) 81 NSWLR 498 contains a convenient statement of the relevant principle:

[57]    … It is useful, however, to remind the parties (and through the publication of these reasons the profession and public generally) of the correct position that has been stated, over and over again, by the courts. The High Court, intermediate courts of appeal and other courts have deprecated in strong terms the filing of material after an appeal without, or outside, any leave given: … .

[58]    Notwithstanding these clear statements the practice still occurs. That the practice still occurs notwithstanding the regular statements of the courts that it should not is no reason not to continue to state clearly to the profession and the public the correct position.

[59]    Not only have the parties and their legal representatives no right (whether they agree among themselves to do it or not) to place before the court without prior leave further material after an appeal has been heard, it is wrong. It undermines and derogates from the principle of the open administration of justice. The practice is not legitimated by sending the material and in that material seeking leave. The proper course (unless prior leave, statute or court rule permits otherwise) is for the proceedings to be relisted so that an application to enlarge the record can be made and determined in open court: … .

[60]    The appeal is not an occasion merely for a discussion of the issues so that the parties can go away to marshall and develop their ideas further, bearing in mind the discussion with the court. It is the time and place when and where argument, and sometimes decision, occurs. Once the appeal is reserved, the parties' rights to argument and to be heard have been exhausted.

[61]    The consequence of this is not only that sending submissions to the court is wrong, but also the court may (and generally will) ignore what has been sent.

(Citations omitted)

33    However, this is not a case in which Bendigo Bank seeks to rely upon a supplementary written submission. The Court has held a further hearing and both parties have had the opportunity to address the matters in open court.

34    Counsel for Mr and Mrs Mouglalis did not suggest that, if a reopening was allowed, they would suffer any prejudice over and above that which could be cured by an order for costs.

35    For these reasons, I grant Bendigo Bank leave to reopen the matter for the purpose of making further submissions and now turn to the substantive matters agitated by the parties on the reopening.

Form of the orders

36    Bendigo Bank referred to the Court’s powers set out in s 222 of the Bankruptcy Act. The Court has indicated that it will make an order pursuant to s 222(1) setting aside each of the compositions. The setting aside of the compositions under Div 6 of Pt IV, in which s 73 is located, is a defined act of bankruptcy (s 40(1)(n)).

37    Bendigo Bank relies upon s 222(10) in submitting that the Court should, when setting aside the compositions, also make sequestration orders. Subsections (10) and (11) are pertinent.

Application for sequestration order

(10)    The trustee or a creditor may include in an application under subsection (1), (2) or (5) an application for a sequestration order against the estate of the debtor. If the Court, on the first-mentioned application, makes an order under this section setting the personal insolvency agreement aside, it may, if it thinks fit, immediately make the sequestration order sought.

(11)    The making of an application by the trustee or a creditor for a sequestration order under this section is taken, for the purposes of this Act, to be equivalent to the presentation of a creditor’s petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application.

Bendigo Bank also referred to the Court’s powers to make ancillary orders conferred by s 222(8).

38    Section 115(1B) governs the time at which a bankruptcy occurring as a result of a sequestration order made under s 222(10) has effect. It provides that the bankruptcy “is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of six months immediately before the date on which the application for the sequestration order was made”. In this case, the latter date is 20 February 2015, being the date upon which Bendigo Bank commenced the present proceedings which included an application for sequestration orders pursuant to s 222(10).

39    Bendigo Bank submitted that the evidence did not identify any act of bankruptcy by Mr or Mrs Mouglalis in the six month period before 20 February 2015. It contended therefore that, in the event that the Court made sequestration orders pursuant to s 222(10), those bankruptcies would be taken to have commenced on 20 February 2015. In that event, all of the property of the bankrupts would vest in the new trustee (s 58(1)) and the trustee in the earlier bankruptcy would have rights in relation to the later bankruptcy (s 59(1)(c)).

40    Mr and Mrs Mouglalis submitted that the terms of the orders agreed on by the conclusion of the hearing on 24 February 2016 were appropriate. Those orders would have the effect of setting aside the compositions and restoring the bankrupts and their creditors to the positions they were in before the passage of the composition proposals. Counsel submitted that this should be the principle guiding the Court in the making of the orders. In support, he referred to Hingston, the factual circumstances of which are analogous to the present case. In that case, the bankrupt (Dr Hingston) had become bankrupt on his own petition on 4 August 2009, a resolution for a composition had been passed at a meeting on 2 October 2009, and the trial Judge made orders setting the composition aside one year later, on 15 October 2010. At the same time, the trial Judge had made a sequestration order pursuant to s 222(10) with the bankruptcy to take effect from 4 August 2009.

41    The Full Court set that order aside. A critical part of the Full Court’s reasoning appears in [118]:

Section 76B which applies s 222 in relation to a composition bears the heading in part “setting aside … a composition”. The notion inherent in s 76B and s 222 in providing for the setting aside of a composition is that Dr Hingston, on the one hand, will be restored to his pre-composition position as a bankrupt, and the creditors, on the other hand, will be restored to their position as creditors of the bankrupt estate of the debtor. An order under s 222(8) as applied by s 76B, together with s 30(1)(b), that properly reflects the restoration of the pre-composition position (when a composition has been set aside in the circumstances prevailing in Dr Hingston’s case), serves to protect the interests of the creditors by enabling the trustee to examine the conduct of the bankrupt (in terms of an examination of whether any voidable dispositions have occurred for the purposes of the Bankruptcy Act or other conduct) by reference to the date on which the debtor became bankrupt on his own petition arising out of the Official Receiver’s acceptance of the petition and supporting Statement of Affairs, on 4 August 2009, rather than a postponed date much later in time (15 October 2010) which would apply as the commencement of the bankruptcy, on the making of a sequestration order under s 222(10).

42    As can be seen, the Full Court was concerned to make an order which had the effect of restoring the parties to their respective pre-composition positions. In the circumstances of Hingston, this meant the position resulting from the acceptance of Dr Hingston’s own petition and not the later date which would be effect of a sequestration order pursuant to s 222(10).

43    Counsel also referred to other passages in Hingston indicating that the Full Court had been guided by the same principle, in particular, at [124]-[125] and [129]. In Hingston, the Full Court made the order which, at the conclusion of the hearing on 24 February 2016, Bendigo Bank accepted was appropriate in this case.

44    Counsel for Mr and Mrs Mouglalis then submitted that, if an order in the Hingston terms was made, the new trustee would have full powers to investigate the affairs of Mr and Mrs Mouglalis. In particular, he contended that it was not necessary for further sequestration orders to be made to achieve that effect. At the heart of counsel’s submissions was the proposition that a trustee in bankruptcy retains the powers of investigation and powers with respect to trust property even after the discharge of the property. Counsel referred to a number of provisions in the Bankruptcy Act indicating that this is so. These include s 19AA(1) (the trustee’s power of investigation); s 58(1)(b) (after-acquired property); s 81(1) (trustee’s power to examine in relation to the bankruptcy both before and after the end of the bankruptcy); ss 115-122 (powers with respect to the bankrupt’s property); s 127 (the limitation period of 20 years); and s 139R (the liability of a bankrupt under s 139P not affected by the discharge from bankruptcy).

45    Next, counsel submitted that a sequestration order taking effect on 20 February 2015 would not restore the parties to their respective positions. In the case of Mr and Mrs Mouglalis, it would impair their position as they would again be bankrupt and the three year period to which s 149 refers would not expire until 20 February 2018. In addition, income and property which they had acquired after 12 December 2015 would vest in the trustee. The position of creditors, on the other hand was likely to be improved, although there remained the prospect that the different relation back periods could disadvantage creditors generally.

46    A consequence of the acceptance of the submissions of Mr and Mrs Mouglalis would be that s 149(4) of the Bankruptcy Act would have the effect that each of them was discharged from their respective bankruptcies on 12 December 2015, being the date three years after they filed their respective statements of affairs. As indicated, the new trustee would have no power to object to that discharge.

47    The decision of the Full Court in Hingston is of course persuasive but, in my opinion, does not indicate the form of orders which is appropriate in this case. There are two relevant distinguishing features. First, Hingston was not a case like the present in which the compositions will be set aside because they are unreasonable and not calculated to benefit creditors generally. In Hingston the composition was set aside pursuant to s 225(e) because Dr Hingston had failed to disclose in his statement of affairs that he had in March 2009 (only five months before presenting his own petition) transferred to his wife a very substantial asset. It is understandable that in those circumstances the Full Court was concerned that the order of the court should not diminish the rights of the creditors arising from that transfer. Such a diminution may have occurred if the bankruptcy commenced on a later date. There is no evidence of that consideration being applicable in the present case.

48    Secondly, the orders in Hingston were made during the currency of the three year period fixed by s 149 which, but for the annulment of the bankruptcy caused by the acceptance of the composition, would have resulted in Dr Hingston’s automatic discharge from bankruptcy. Accordingly, the ability of the trustee to object to Dr Hingston’s discharge from bankruptcy was preserved. The Full Court adverted specifically to that circumstance. That is not so in the present case.

49    An awareness by a bankrupt that a trustee may object to the automatic discharge from bankruptcy operates as an incentive to the bankrupt to cooperate in the discharge of the trustee’s duties with respect to the bankrupt estate. On my assessment, it is desirable that the new trustee in the present case have the advantage of Mr and Mrs Mouglalis having that awareness. It is true as counsel for Mr and Mrs Mouglalis pointed out, that the trustee in bankruptcy will have a number of other powers of investigation and collection of assets. However, the exercise of those powers may be impaired if the new trustee does not have the power of objection pursuant to s 149B.

50    In my opinion, this is a significant consideration bearing upon the return of the parties to their respective positions immediately before the composition was made.

51    It is appropriate to keep in mind that an order pursuant to s 222(8) is not the only means by which the parties may be returned to their pre-composition positions. A sequestration order pursuant to s 222(10) may also serve to achieve, in substance, the same effect.

52    In saying this, I am not overlooking that Mr and Mrs Mouglalis may be in bankruptcy for a longer period than would have been the case had the composition proposals not been passed. However, I think it pertinent in this respect that Mr and Mrs Mouglalis have brought upon themselves the circumstance by which this is occurring, namely, by propounding composition proposals which plainly were not calculated to benefit their creditors generally. Further, they have the benefit of the new bankruptcies commencing retrospectively.

53    For these reasons, I uphold the submissions of Bendigo Bank on the reopening, and will make orders in the terms it proposes.

Costs

54    In relation to costs, Bendigo Bank sought an order that Mr Clout pay 85% of its costs of the proceedings and a further order that Mr Clout not be reimbursed those costs from the bankrupt estates of Mr and Mrs Mouglalis. Mr Clout resisted that order and submitted that the appropriate order was that Bendigo Bank’s costs be taxed and paid from the joint and several estates of Mr and Mrs Mouglalis in accordance with the Bankruptcy Act as if they were the costs of a petitioning creditor.

55    Most of the circumstances of the case on which the parties relied in relation to the question of costs are set out in the principal judgment. I will endeavour to avoid repetition. It is sufficient to record that I found that the compositions should be set aside having regard in particular to my findings that the terms of the three compositions were not calculated to benefit creditors generally, the terms of the compositions were unreasonable, Mr Clout’s investigation of the affairs of Mr and Mrs Mouglalis had been incomplete in a number of material respects, notice of the bankruptcies of Mr and Mrs Mouglalis and of the proposed compositions had not come to the attention of the responsible officers within Bendigo Bank, Bendigo Bank’s participation in the meetings at which the creditors voted on the composition proposals would have meant that they did not achieve the requisite majorities, and that the circumstances were such that further investigation of the affairs of the bankrupts was appropriate.

56    Mr Clout accepted that it had been proper for Bendigo Bank to join him as a respondent to the proceedings in any event.

57    The usual order with respect to an applicant’s costs on applications of the present kind is that the costs are made costs in the bankruptcy: see for example, Cross v Rullo [2013] FCA 837 at [19]. Bendigo Bank submitted however, that Mr Clout’s conduct in the trial made it appropriate for costs to be ordered against him personally. In particular, it contended that Mr Clout had adopted the position of actively resisting the setting aside of the compositions. Counsel for both Bendigo Bank and Mr Clout referred to Re Hughes and Hughes; ex parte Australian Mutual Provident Society v Kennedy [1996] FCA 1286 in which von Doussa J stated the role expected of the trustee in bankruptcy in proceedings of the present kind:

[15]    In the face of an application to have a composition set aside on those grounds, it would be expected normally that a controlling trustee who had acted as chairman of the meeting of creditors would come to the Court at an early stage and indicate that he or she would abide by the decision of the Court on the substantive matters raised by the applicant. It would be normal, and expected, for the trustee to file an affidavit, informing the Court of the procedural steps which had occurred in relation to the meeting of creditors and of the voting which had occurred. Where it is alleged that the composition is unreasonable and not in the interests of the creditors, it would be appropriate for the controlling trustee to cover matters relating to the business affairs of the debtor or debtors, and to indicate to the Court the extent of claims that had been received so that the Court would be appraised of information that would permit the Court to judge the reasonableness or otherwise of the composition.

58    As can be seen, von Doussa J contemplated the trustee taking essentially a neutral role. In the circumstances of that case, von Doussa J considered that the trustee had “entered the arena as a partisan party, not only seeking to uphold his decision as to the AMP’s right to vote, but also seeking to answer other allegations made by the AMP, including the reasonableness of the composition”. That being so, von Doussa J made a partial order for costs against the trustee.

59    As noted at [6] of the principal judgment, at the trial Mr Clout adopted a neutral position and did not oppose the making of orders setting aside the composition. That was his formal position. Bendigo Bank submitted, however, that despite that formal position Mr Clout had, in a number of respects, actively resisted its attempts to have the compositions set aside.

60    There is some force in that submission. Mr Clout did admit that his investigations of the affairs of the bankrupts had been incomplete and said that he had been unable to do more because no creditor had been willing to provide him with funds for further investigations. I observe however, that in his filed defence Mr Clout either denied or did not admit a number of Bendigo Bank’s allegations concerning particular respects in which his investigations of the affairs of the bankrupts had been incomplete. An indication of Mr Clout’s position is his filed defence to the following paragraph of Bendigo Bank’s statement of claim:

[32]    In all the circumstances, the Composition passed by special resolution of the creditors in respect of the three estates should be set aside pursuant to section 76B and 222(1) of the Bankruptcy Act 1966 (Cth).

61    Mr Clout’s pleaded defence to that paragraph was as follows:

32.    In regard to paragraph 32 of the Points of Claim, the First Respondent:

(a)    states that:

(i)    section 78 of the Bankruptcy Act extends the operation of section 222 thereof to the Composition;

(ii)    the Applicant is not able to apply pursuant to section 222(1) of the Bankruptcy Act to set aside the Composition on the grounds that:

(A)    section 222(1) of the Bankruptcy Act only applies if the Composition is still in force;

(B)    the estates were finalised on or about 30 March 2014 following the distribution of the first and final dividend on or about 14 March 2014;

(C)    upon the finalisation of the estates on or about 30 March 2014, the Composition ceased to be in effect.

(b)    should it be found that the Applicant is able to apply pursuant to section 222(1) of the Bankruptcy Act (which is denied), states that:

(i)    the Applicant has failed to provide the material facts to support the allegation that the Composition should be set aside pursuant to that section;

(ii)    there is no longer any benefit to the Second and Third Respondents’ creditors generally in having the Composition set aside;

(iii)    despite this, the First Respondent will abide by the orders of the Court; and

(iv)    should further information be required in order for the Court to make a determination on the Applicant’s application, he is willing to provide whatever is required that is in his knowledge, possession or control.

As can be seen, by this paragraph Mr Clout actively disputed that it was even open to Bendigo Bank to apply to have the compositions set aside pursuant to s 222(1) of the Bankruptcy Act and he asserted that, even if it was, Bendigo Bank had “failed to provide the material facts” to support its claim.

62    In his written opening at the trial, Mr Clout’s position shifted to one of making “no positive submission one way or the other as to whether the composition should be set aside”. However, Mr Clout continued to deny several of Bendigo Bank’s allegations, particularly those concerning the adequacy of his investigations while trustee of the bankrupt estates. In particular, he asserted that his investigative work had been sufficient “albeit not extensive” in the circumstances. As has been seen, I did not accept that submission, and found Mr Clout’s investigations were deficient in a number of material respects.

63    In the course of his evidence, it seemed to me that Mr Clout frequently adopted the position of actively resisting matters upon which Bendigo Bank relied. Apart from his general acknowledgement that his investigations had been complete, he was not willing to acknowledge the particular respects in which Bendigo Bank asserted that that was so. My overall impression was that although Mr Clout’s formal position was one of neutrality, his evidence did have a certain partisan quality about it.

64    However, I consider that in assessing whether Mr Clout “crossed the line” so as to make an order for costs against him appropriate, it is appropriate to take into account the nature of the allegations made by Bendigo Bank. Its opening submission made it plain that Bendigo Bank put the propriety of Mr Clout’s conduct in relation to the composition meetings into issue. In other respects, Bendigo Bank was highly critical of Mr Clout’s conduct. The following passages from counsel’s opening provided illustrations:

There’s also a disputed issue as to the approach to accepting proofs of debt. The applicant submits that the trustee’s approach was superficial. He essentially waved through the proofs of debt of non-participating creditors, that is, creditors who were backing the proposal but not taking a dividend … [T]he applicant’s position is that, essentially, … the trustee waved through proofs of debt when he ought to have rejected numerous proofs and he displayed, essentially, a partiality in the approach to a major dissenting creditor, Premier Timber Trusses.

(Emphasis added)

Counsel then referred to Mr Clout’s omission to contact either Westpac or itself in relation to the composition proposal and, in particular, to Mr Clout’s failure to make personal contact with Westpac even though he had contact details for an officer of that Bank. Counsel continued:

[T]he respondent deliberately chose not to use [the contact name], but to send certain communications to Westpac via the Bank’s general fax number … The only reasonable conclusion, the applicant submits is that the trustee wanted to procure the passage of a composition, and to that extent, wasn’t acting in the best interests of all creditors.

(Emphasis added)

65    These were allegations that Mr Clout had not exercised his powers in relation to the compositions in the best interests of all creditors, and further that he had acted in a partisan way.

66    Counsel for Bendigo Bank did not pursue those allegations in cross-examination of Mr Clout and, in the final submissions, said that the Bank did not seek a finding that Mr Clout’s actions “were motivated by an improper purpose of desiring to see the composition approved”.

67    I think it reasonable to take into account that Mr Clout would have understood from counsel’s opening, which he heard, that a serious attack on his professional integrity was being made. It is understandable that he would have wished to defend himself in that respect. I consider that that explains, at least in a significant way, his attitude during the cross-examination.

68    I consider it also appropriate to take into account that a significant part of Bendigo Bank’s attack on the compositions turned on its criticisms of Mr Clout’s conduct as trustee and the inadequacy of his investigations. The very nature of its case involved adverse reflections on Mr Clout’s discharge of his responsibilities as trustee. Mr Clout understood that the proper performance of his functions was in question in the trial, and that a led to a certain defensiveness of his part. It was natural and reasonable for him to wish to defend himself against Bendigo Bank’s criticisms.

69    Finally, I take into account that the three affidavits filed by Mr Clout in the proceedings were appropriate having regard to the responsibility of a trustee as described by von Doussa J in Re Hughes.

70    In summary, I consider that there were aspects of Mr Clout’s conduct in the trial which came close to being partisan in nature. However, I am not satisfied that they are so significant in the context of the allegations made by Bendigo Bank in the trial as to warrant a departure from the usual rule. Nor am I satisfied that the issues on which Mr Clout “failed” warrant an adverse costs order.

71    Accordingly, there will be an order that the applicant’s costs, including any reserved costs, and the first respondent’s cost be taxed and paid from the joint and several estates of the second and third respondents in accordance with the Bankruptcy Act as if they were the costs of a petitioning creditor, and there will be no other order with respect to costs.

72    It is however appropriate that Bendigo Bank bear the costs of and incidental to the application to reopen the submissions. Had its submissions on 24 February been complete, there would not have been any need for an application to reopen. It should pay the costs of Mr and Mrs Mouglalis in respect of the reopening. Those costs should not of course include the costs associated with the travel of counsel for Mr and Mrs Mouglalis to Adelaide for the hearing on 10 March 2016.

Summary

73    In summary, I will make orders setting aside the compositions, make sequestration orders pursuant to s 222(10) of the Bankruptcy Act, and appoint a new trustee.

74    In relation to costs, Bendigo Bank’s costs, other than the costs of the hearing on 10 March 2016, and the first respondent’s costs, are to be paid from the bankrupt estates. Bendigo Bank is to pay the costs of Mr and Mrs Mouglalis in respect of the hearing on 10 March 2016, other than the costs associated with the travel by their counsel to Adelaide.

75    Otherwise there is to be no order with respect to costs.

Associate:

Dated:    20 May 2016