FEDERAL COURT OF AUSTRALIA

Quin (Trustee), in the matter of Rowe (Bankrupt) [2016] FCA 823

ORDERS

UPON THE UNDERTAKING of the applicants to take all necessary steps under s 181A of the Bankruptcy Act 1966 (Cth) to arrange for the appointment of a new trustee or trustees to each of the bankrupt estate of Mr Adrian Stuart Rowe and the bankrupt estate of Mrs Amanda Jane Rowe, THE COURT ORDERS THAT:

1.    The application be dismissed.

2.    The applicants file short written submissions in relation to costs by 5.00 pm on 20 July 2016.

3.    The second and third respondents file short written submissions in relation to costs by 5.00 pm on 21 July 2016.

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

REASONS FOR JUDGMENT

MOSHINSKY J:

Introduction

1    The issue before the Court is whether the applicants (the Trustees), who are the joint and several trustees in bankruptcy of several estates of individuals who are members of the one family, may continue to act in that capacity in relation to a proposed claim and a proposed settlement of that claim as between the various estates.

2    The Trustees have applied to the Court for directions pursuant to s 134(4) of the Bankruptcy Act 1966 (Cth) (the Act) to the effect that they be permitted to continue to act as trustees in bankruptcy of the estates notwithstanding a potential conflict of interest and that they may settle the proposed claim as between the estates on terms which are outlined in the application.

3    In my view, it would not be appropriate for the Court to give the directions sought by the Trustees. It is not clear that the Court has the power under s 134(4) to give the directions sought. But even if the Court does have the power to give directions of this type, whether under s 134(4) or s 30(1) of the Act, or both sections, in circumstances where there is an actual or apparent conflict of interests, the better course is for a new trustee or new trustees to be appointed to some of the estates, namely the estates of the second and third respondents.

The application

4    The application is brought by David Charles Quin and Stephen John Michell in their capacities as joint and several trustees in bankruptcy of the estates of:

(a)    the first respondent, Cheryle Margaret Rowe (Cheryle);

(b)    the second respondent, Adrian Stuart Rowe (Adrian);

(c)    the third respondent, Amanda Jane Rowe (Amanda); and

(d)    the fourth respondent, Colin Stewart Rowe (Colin).

(It is convenient to refer to the respondents by their first names. I mean no disrespect in referring to them in this way.)

5    The directions sought are in the following terms:

1.    A direction pursuant to sub-section 134(4) of the Bankruptcy Act 1966 (Act) that, notwithstanding a potential conflict of interest in the Applicants acting simultaneously as trustees of the bankrupt estates of each of the Respondents, the Applicants may continue to act as trustees of the bankrupt estates of the Respondents, subject to the supervision of the Court.

2.    A direction pursuant to sub-section 134(4) of the Act that the Applicants, in their capacity as trustees of the bankrupt estate of the First Respondent may settle the claim they have under section 120 of the Act to set aside the transfer by the First Respondent to the Second and Third Respondents of all of her right title and interest in the property at 8 Lawsons Lane, Mansfield, Victoria, being the land more particularly described in certificate of title volume 11072 folio 931 (Property) by paying 45% of the net proceeds from the realisation of sale of the Property, after payment of all mortgages or encumbrances thereon together with all usual sale costs, into the bankrupt estate of the First Respondent, with the balance thereafter to be retained in the joint bankrupt estate of the Second and Third Respondents.

6    The background facts to the application are, briefly, as follows.

7    On 4 December 2013, the Supreme Court of Victoria appointed Damian Neylon (the Receiver) as a Limited Receiver to the law practice of Birch Ross & Barlow (BRB) pursuant to s 5.2.2 of the Legal Profession Act 2004 (Vic). Cheryle is a former employee of the law firm BRB, where she was employed as a Law Clerk. She is being investigated by Victoria Police in relation to the alleged theft of significant client funds from that firm between 2009 and 2013. It was alleged by the Receiver that money was stolen by Cheryle and paid to the benefit of Colin, Adrian and Amanda, and was recoverable by action.

8    On 9 September 2014, a sequestration order was made against the estates of Adrian and Amanda on the petition of the Receiver. A separate sequestration order was also made that day against Colin’s estate, again on the petition of the Receiver. The Trustees became the joint and several trustees in bankruptcy of the bankrupt estates.

9    On 6 November 2014, a sequestration order was made against the estate of Cheryle on the petition of the Receiver. The Trustees were appointed the joint and several trustees of her bankrupt estate.

10    The application relates to a property located at 8 Lawsons Lane, Mansfield, Victoria (the Property). The Property was purchased by Colin and Cheryle (as to 9 out of 10 equal undivided shares as joint proprietors) and Adrian and Amanda (as to 1 out of 10 equal undivided shares as joint proprietors) on 2 September 2009 for $144,000.

11    Subsequently, on 17 July 2012, Colin and Cheryle transferred all of their interest in the Property to Amanda and Adrian (the Transfer). As at the date of the bankruptcies, Adrian and Amanda continued to hold the Property as joint proprietors. The Transfer states that the consideration for the transfer was $252,000. However, there is hearsay evidence to the effect that the consideration was not in fact paid.

12    A kerbside valuation of the Property values it at approximately $520,000. There is a mortgage on the Property of approximately $250,000.

13    The Trustees are of the opinion that:

(a)    the Transfer is a transfer of property within the meaning of s 120 of the Act;

(b)    the Transfer took place in the period beginning five years before the commencement of the bankruptcy of Colin and Cheryle;

(c)    Adrian and Amanda did not give any consideration for the Transfer, alternatively gave less consideration than the market value of the Property;

(d)    by reason of the above, the Transfer is voidable as against the Trustees pursuant to s 120 of the Act.

14    The Trustees in their capacities as the trustees of Cheryle’s estate wish to bring a claim pursuant to s 120 against the estates of Adrian and Amanda (the Claim). (For the reason that it was anticipated that Colin’s bankruptcy would be annulled, the Claim does not relate to his estate.)

15    The Trustees recognise that by reason of being joint and several trustees of each of the respective estates, they are in a position of conflict insofar as they wish to bring the Claim. As indicated by the orders sought in the application, the Trustees propose that the Claim be resolved as between the relevant estates on the basis that the Property be sold, and the net proceeds (after payment of secured debts) be paid as to 45% to Cheryle’s estate, and as to 55% to Adrian and Amanda’s estates. The 45% is referable to Cheryle having a 50% interest in 90% of the Property.

16    Mr Quin stated in his first affidavit that he is satisfied that the Claim has very good prospects of success; that the primary creditor in each of the bankrupt estates is the Receiver; and that the Receiver supports the application being made to the Court.

17    In his second affidavit, Mr Quin stated that the Trustees had engaged Mr Robert Woods of Deloitte Touche Tohmatsu to prepare a report as an independent third-party trustee. The brief requested Mr Woods to provide his opinion as to whether the Trustees are justified in agreeing to pay (in their capacities as trustees of the bankrupt estates of Adrian and Amanda) 45% of the net proceeds from the sale of the Property to Cheryle’s estate. Mr Woods’s report was annexed to Mr Quin’s second affidavit. He expressed the view that the percentage of 45% seemed logical and he agreed with a claim being made to that extent by the trustees of Cheryle’s estate. He also stated that the Trustees’ claim to 45% of the net proceeds from the sale of the Property is consistent with the normal process regarding s 120 claims.

18    Adrian and Amanda were jointly represented by counsel at the hearing and opposed the application.

Section 134(4)

19    Section 134(4) of the Act provides as follows:

134    Powers exercisable at discretion of trustee

…    

(4)    The trustee may at any time apply to the Court for directions in respect of a matter arising in connexion with the administration of the estate.

20    The principles applicable to s 134(4) were recently summarised by Beach J in Unal v Cetinkaya [2015] FCA 270 as follows (at [61]-[68]):

61    A trustee in bankruptcy can apply to the Court for directions under s 134(4) of the Act. …

There are a number of principles that can be distilled from Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111 at [9] to [11] per Mansfield, Besanko and Flick JJ and the cases they referred to.

62    First, s 134(4) should be read together with s 30(1).

63    Second, s 134(4) is not by itself an appropriate mechanism to determine the substantive rights of creditors as against a trustee.

64    Third, the fact that a trustee invokes s 134(4) because he has a doubt “in respect of a matter arising in connexion with the administration of the estate” does not oblige the Court to give the directions sought.

65    Fourth, generally, a proper subject matter for directions is the manner in which a trustee should act in carrying out his statutory functions and exercising or not exercising his powers under the Act. But the power to give a direction should be exercised with considerable care.

66    Fifth, the Court will generally not give an advisory opinion divorced from a concrete issue between the trustee and creditors, the trustee and the bankrupt, the trustee and third parties or otherwise decontextualised from an actual transaction or course of conduct.

67    Sixth and relatedly, the Court may decline to give a direction where:

(a)    the relevant issue has not been appropriately crystallised, including where its factual or legal foundation is still evolving;

(b)    the trustee has not yet obtained legal or other expert opinion on the matter in doubt so that the trustee can then consider and act on such an opinion thereby obviating the need to approach the Court;

(c)    there is a more suitable mechanism for addressing the issue;

(d)    relatedly, s 134(4) (and the protection it may provide) is being used for the purpose of avoiding a more suitable inter-partes dispute resolution mechanism; or

(e)    an opinion is being sought from the Court on a decision whose character, say a purely commercial decision, is more appropriate for the trustee to make, subject to the review mechanisms of s 178; s 134(4) and its counterparts in ss 424(1), 447D and 479(3) of the Corporations Act 2001 (Cth) do not justify juridical commercial proxies for what the trustee should decide.

68    Seventh, if a trustee has made full disclosure of all material facts he may be protected from liability for a breach of at least his statutory duty for things done in accordance with the direction.

Application of principles to present case

21    In the present case, it is accepted by the Trustees that there would be a conflict of interest if they were to act as the trustees in bankruptcy of the estates of Cheryle, Adrian and Amanda in relation to the Claim and the proposed resolution of the Claim. Having properly recognised this conflict, they have brought this application as their proposed means of addressing it. However, it is not clear that the Court has the power under s 134(4) to give directions which would enable the Trustees to act in relation to the Claim and its proposed resolution notwithstanding the conflict. Generally, a proper subject matter for directions is the manner in which a trustee should act in carrying out his or her statutory functions and exercising or not exercising his or her powers under the Act. The effect of the directions sought would be to authorise the Trustees to act notwithstanding a conflict of interest. This seems to go beyond the usual scope of directions under s 134(4). No case was cited where a comparable direction had been given.

22    In any event, even if the Court has power under s 134(4) or s 30(1) or a combination of those provisions, it would not be appropriate to give the directions sought by the Trustees. This is because it would entail the Trustees acting in relation to the Claim and its resolution in a situation of conflict. This would be contrary to the general principle that a trustee in bankruptcy should not act in circumstances where there is an actual or potential conflict of interest: see clauses 2.2 and 2.3 of Sch 4A of the Bankruptcy Regulations 1996 (Cth); Horne (Trustee), In the matter of Pruzanski [2000] FCA 571 at [12], citing Re Peter Leslie Challen (unreported, Federal Court of Australia (Beaumont J), 23 April 1996); Application by Solomons [2013] FCA 1273.

Conclusion

23    There was discussion at the hearing as to alternative courses that may be available to address the conflict of interest issue. One of the alternatives proposed by the Trustees was that, if I was of the view that they were unable to act for all the relevant estates in relation to the Claim and its resolution, they could give an undertaking to take all necessary steps under s 181A of the Act to arrange for the appointment of a new trustee or trustees to each of the bankrupt estate of Adrian and the bankrupt estate of Amanda, and I could dismiss the application on the basis of such an undertaking. This is a course which commends itself to me as a practical way of addressing the conflict issue. I will therefore seek such an undertaking and dismiss the application on this basis. I will hear from the parties in relation to costs.

Associate:

Dated:    18 July 2016

SCHEDULE OF PARTIES