FEDERAL COURT OF AUSTRALIA

Pekar v Holden (Trustee) (No 2) [2019] FCA 1212

ORDERS

THE COURT ORDERS THAT:

1.    The matter be listed for mention on a date to be fixed.

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

REASONS FOR JUDGMENT

MOSHINSKY J:

1    On 3 April 2019, I delivered reasons for judgment in respect of the contentions raised by Mr Pekar in this proceeding: Pekar v Holden (Trustee) [2019] FCA 442 (the April 2019 Reasons). These reasons should be read together with the April 2019 Reasons. I will adopt the abbreviations used in the April 2019 Reasons.

2    In the April 2019 Reasons, I left open one issue, which had not been fully explored at the hearing. I indicated that I would list the matter for mention in relation to that issue. The outstanding issue was whether Mr Pekar was entitled to return of the $200,000 on the basis that the Trustee had breached the Agreement by failing to admit, reject or require further evidence in support of the proofs of debt in accordance with the Bankruptcy Act 1966 (Cth) and/or within a reasonable time: see the April 2019 Reasons at [15] and [66]. I indicated that I would list the matter for mention to ascertain whether Mr Pekar sought the return of the money on this basis, and whether the parties wished to make any further submissions.

3    The matter was listed for mention on 10 April 2019. Mr Pekar (who continued to appear for himself) indicated that he did seek the return of the $200,000 on this basis, and the solicitor for the Trustee indicated that the Trustee sought to file further evidence and submissions. Orders were made for the filing of further evidence and submissions, and the matter was listed for further hearing.

4    A further affidavit of the Trustee, dated 1 May 2019, was filed. Both parties filed further submissions.

5    At the further hearing of the matter, on 3 June 2019, each party made submissions on the outstanding issue.

6    The Agreement was constituted by the email from Mr Ball to Ms Rothwell dated 27 June 2017 (set out at [37] of the April 2019 Reasons) and the email from Ms Rothwell to Mr Ball on the same day (set out at [38] of the April 2019 Reasons). The Agreement provided for payment of the sum of $200,000 into an interest-bearing trust account in the name of the Trustee for the bankrupt estate of Mr Pekar by 30 June 2017. The money paid into the account was for the payment of creditors and remuneration and expenses of the Trustee (including legal costs and disbursements). It was a term of the Agreement that the Trustee would call for and adjudicate on proofs of debt, tax the legal costs (of the Trustee) and have his fees reviewed, in accordance with the Bankruptcy Act.

7    The Agreement also provided that, if there was a shortfall, Mr Pekar would cause the money in the account to be topped up within 21 days to meet such shortfall, failing which the Trustee could immediately enforce the order of Tracey J for possession and sale of the Property. If there was an excess of funds, this was to be returned to Mr Pekar within 21 days. It was also agreed that the order for possession would be stayed in order to give effect to the arrangement (with each party having liberty to apply).

8    As described in the April 2019 Reasons, there has been significant delay in the administration of Mr Pekar’s bankrupt estate. The dividend notice (set out at [41] of the April 2019 Reasons) required creditors to lodge any proof of debt on or before 8 September 2017, being the “final date” for the purpose of s 102 of the Bankruptcy Act. Section 102 required the Trustee to admit, reject or require further evidence in support of the proofs of debt within 14 days of the final date (ie, by 22 September 2017). In the April 2019 Reasons I stated that the Trustee did not appear to have complied with s 102 because there was no evidence that he admitted, rejected or sought further evidence in support of the proofs of debt by 22 September 2017. At the hearing before me on 3 June 2019, the solicitor for the Trustee conceded that my statement was based on a correct reading of the section (transcript, page 9, line 33). The solicitor for the Trustee accepted that the Trustee had not admitted or rejected any of the proofs of debt within the 14 day period referred to in s 102, but submitted that he had sought further information. However, there is no evidence to support the proposition that the Trustee sought further information (or evidence) within the 14 day period.

9    It should be noted that only three creditors lodged proofs of debt and the amounts involved were relatively small: see the April 2019 Reasons at [43]. The evidence with respect to when those proofs of debt were accepted is as follows:

(a)    It is unclear precisely when the Trustee accepted Karen Katz’s proof of debt, but it appears that this had occurred by August 2018 (more than a year after Mr Pekar provided the $200,000): see the Trustee’s affidavit dated 1 May 2019 at [24].

(b)    The proof of debt lodged by Michael Rickards was not accepted until October 2018: see the Trustee’s affidavit dated 1 May 2019 at [14].

(c)    It is unclear precisely when the AIG Australia Limited proof of debt was accepted, however the quantum has still not been determined: see the Trustee’s affidavit dated 1 May 2019 at [17]-[23].

10    At the hearing on 3 June 2019, the solicitor for the Trustee sought to explain the Trustee’s delay in making decisions on the proofs of debt on the basis of the then practice (or advice) of the Australian Financial Security Authority (AFSA) (transcript, pages 9-10). It was said that AFSA’s practice was that, until such time as the petitioning creditor’s costs had been taxed, “you couldn’t deal with the estate”: transcript, page 9, line 44. In support of this proposition, the Trustee relied on an email from AFSA dated 10 April 2019, indicating a change to its previous advice. It was submitted that it was common practice not to finalise the proofs of debt until the trustee was ready to begin the process of distribution.

11    Even if the delay in finalising the proofs of debt is related to the fact that the petitioning creditor’s costs had not yet been taxed, the Trustee does not seem to have pressed the petitioning creditor (Rickards Legal) to have these costs taxed. The Trustee’s affidavits do not refer to him taking any steps to pursue this matter between 27 June 2017 (the date of the Agreement) and 16 April 2018, a period of over nine months. On 16 April 2018, the Trustee wrote to Rickards Legal asking whether they had commenced the taxation process and, if so, requesting an update on progress in this regard. In his affidavit dated 1 May 2019, the Trustee states that, by 2 August 2018, he had had no response to his letter of 16 April 2018. There is, however, no indication that the Trustee did anything to progress the matter between 16 April 2018 and 2 August 2018, a period of nearly four months. The Trustee sent a further letter on 2 August 2018 (the same day as he received a letter from Mr Pekar, discussed below). The Trustee does not appear to have taken further steps to progress the matter until 15 October 2018 (the first day of the hearing of this proceeding), when a further letter was sent. Indeed, as at 1 May 2019, when the Trustee swore his latest affidavit, the petitioning creditor’s costs had still not been taxed. If the matter holding up the administration of the estate was the need to have the petitioning creditor’s costs taxed, I consider that the Trustee should have done more to press the petitioning creditor to have these costs taxed. In light of the matters discussed in this paragraph and the preceding paragraphs, one can well understand the frustration experienced by Mr Pekar (who was discharged from bankruptcy on 7 November 2017) at the lack of progress in the administration of his estate.

12    In this context, Mr Pekar contends that the $200,000 should be returned to him. By letter dated 2 August 2018 addressed to the Trustee, Mr Pekar demanded that the Trustee return the $200,000. Mr Pekar referred to various provisions of the Bankruptcy Act relating to the acceptance of proofs of debt and the declaration and distribution of dividends. At the hearing on 3 June 2019, Mr Pekar submitted that the Trustee had breached the Agreement and he wanted his money back (transcript, page 3, lines 32-33). Mr Pekar is representing himself and is not legally trained. It is understandable, therefore, that he has not precisely identified the steps of reasoning that would lead to the result for which he contends. However it is readily apparent that his contention may be expressed in contract law terms as follows: that the Trustee breached a condition of the Agreement, or breached an ‘intermediate term’ in such a way that it deprived Mr Pekar of a substantial part of the benefit of the Agreement, or repudiated the Agreement, giving Mr Pekar a right to terminate the Agreement, and that Mr Pekar did so by his letter dated 2 August 2018 demanding release of the $200,000. The principles in this regard are summarised in Seddon, NC and Bigwood, RA, Cheshire and Fifoot Law of Contract (11th Aust ed, LexisNexis Butterworths, 2017) at [21.8], [21.11]-[21.22]. If the contract has been terminated for breach, Mr Pekar may be entitled to repayment of the $200,000 in accordance with restitutionary principles: see Cheshire and Fifoot Law of Contract at [21.38], [26.4].

13    In my view, Mr Pekar’s contention is established. The Agreement contained an express term requiring the Trustee to call for and adjudicate on proofs of debts in accordance with the Bankruptcy Act. In my view, the Agreement also contained an implied or inferred term that the Trustee would perform this obligation within a reasonable time. The commercial purpose of the Agreement was to resolve Mr Pekar’s bankruptcy in a timely way, without the need to sell Mr and Mrs Pekar’s home. In this context, and in the context of the obligations of trustees under the Bankruptcy Act, it is to be implied or inferred that the Trustee was required to admit or reject proofs of debt within a reasonable time. Further, in my view, the Trustee breached each of these terms. In the circumstances described above, and for the reasons given above, the Trustee did not admit or reject proofs of debt in accordance with the provisions of the Bankruptcy Act (in particular, s 102) and he did not admit or reject proofs of debt within a reasonable time after the Agreement was formed. What amounts to a reasonable period of time depends on the circumstances. In the present circumstances, by early August 2018 the Trustee had only admitted one of the proofs of debt. I consider that the Trustee’s explanations for his delay, particularly with respect to the taxation of the petitioning creditor’s costs, are unsatisfactory.

14    In my view, each of the terms was an ‘intermediate term’, giving rise to an entitlement to terminate the Agreement if the breach deprived Mr Pekar of a substantial part of the benefit of the Agreement: see Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 at [71]. These terms formed an important part of the arrangements that were struck between the parties in late June 2017. In the circumstances, the Trustee’s breach of these terms did deprive Mr Pekar of a substantial part of the benefit of the Agreement. While it may be true that Mr Pekar benefited from the stay of Tracey J’s order for possession, the Agreement also required, and Mr Pekar was entitled to expect, the administration of his estate to proceed in a timely manner and in accordance with the Bankruptcy Act. As at 2 August 2018, Mr Pekar had been discharged from bankruptcy, but the Trustee was not even close to finalising his bankrupt estate. To the contrary, by early August 2018 the Trustee had only adjudicated on one of the three proofs of debt and had failed to promptly pursue the issue of the taxation of petitioning creditor’s costs. This unreasonable delay deprived Mr Pekar of a substantial part of the benefit of the Agreement. It was open to Mr Pekar to bring the Agreement to an end by demanding repayment of the $200,000, which he did by his letter dated 2 August 2018. For these reasons, in my view, the Agreement was terminated by Mr Pekar on 2 August 2018.

15    The Agreement having been terminated, Mr Pekar is entitled to repayment of the funds that remain of the $200,000 (approximately $180,000 as at 1 May 2019) on the basis that there was a total failure of consideration. Although Mr Pekar has claimed repayment of the whole $200,000 and interest, it appears to me that he is only entitled to repayment of the funds remaining of the $200,000. The evidence demonstrates that this is a sum of approximately $180,000. As explained in the Trustee’s affidavit dated 1 May 2019, the Trustee was required to remit a realisation charge of 7% to the Commonwealth, and any interest on the account was also required to be paid to the Commonwealth. An amount of $6,000 has also been paid to the petitioning creditor.

16    Although it is not necessary for my decision, I have also considered whether an order for repayment of the money should be made pursuant to the Court’s supervisory jurisdiction in s 45-1 of Sch 2 to the Bankruptcy Act. Section 45-1 is in the following terms:

45-1    Court may make orders in relation to registered trustees

(1)    The Court may make such orders as it thinks fit in relation to a registered trustee.

(2)    The Court may exercise the power under subsection (1):

(a)    on its own initiative, during proceedings before the Court; or

(b)    on application under subsection (3).

(3)    Each of the following persons may apply for an order under subsection (1):

(a)    the registered trustee;

(b)    the Inspector-General.

(4)    Without limiting the matters which the Court may take into account when making orders, the Court may take into account:

(a)    whether the registered trustee has faithfully performed, or is faithfully performing, the registered trustee’s duties; and

(b)    whether an action or failure to act by the registered trustee is in compliance with this Act and the Insolvency Practice Rules; and

(c)    whether an action or failure to act by the registered trustee is in compliance with an order of the Court; and

(d)    whether any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the registered trustee; and

(e)    the seriousness of the consequences of any action or failure to act by the registered trustee, including the effect of that action or failure to act on public confidence in registered trustees as a group.

(5)    This section does not limit the Court’s powers under any other provision of this Act, or under any other law.

17    This provision replaces former s 178 of the Bankruptcy Act. The principles developed in relation to s 178, in cases such as McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547, Re Tyndall (1977) 30 FLR 6 and Macchia v Nilant (2001) 110 FCR 101, remain relevant in relation to the new provision. As indicated by the cases in relation to the former provision, the section confers on the Court a very wide discretion: McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547 at 552; Re Tyndall (1977) 30 FLR 6 at 9-10.

18    In the present circumstances, there has been significant delay in administering the estate and, for the reasons given above, I am not satisfied with the explanation that has been provided. The commercial purpose of the Agreement (described above) has not been given effect in a timely way and Mr Pekar seeks the return of his money. It is true that (as I raised with Mr Pekar in the course of the hearing) this may work to his disadvantage (because the Trustee has indicated that he will immediately apply to have the stay of the orders of Tracey J lifted), but I have insufficient material to consider whether or not the return of the money is in Mr Pekar’s interests. It may be that he will have arguments against the lifting of the stay. It may be that he will not, or it may be that any such arguments will be unsuccessful. I am not in a position to form a view about these matters on the present application. However, what is clear is that Mr Pekar provided $200,000 to the Trustee on or about 30 June 2017 with a view to resolving his bankruptcy, and that the Trustee did not admit or reject proofs of debt in accordance with the Bankruptcy Act or within a reasonable period of time. In these circumstances, if it were necessary to do so, I would make an order pursuant to s 45-1 requiring the Trustee to repay to Mr Pekar the funds remaining of the $200,000.

19    I note for completeness that on 15 August 2018, AFSA rejected a complaint made by Mr Pekar to the effect that the administration of his estate had not progressed since his payment in the sum of $200,000 (including failure to pay a dividend and have legal costs taxed). AFSA’s rejection of the complaint is dealt with in a letter dated 15 August 2018. I have a number of difficulties with AFSA’s response. In particular, AFSA stated (on page 2) that “[t]here is no connection between the date that was nominated for the ‘last day for proofs’, and the date that the trustee adjudicates on a proof of debt”. This does not reflect the terms of s 102 of the Bankruptcy Act. In the present case, the ‘last day for proofs’ was 8 September 2017. Under s 102, the Trustee was required to admit or reject the proofs of debt or require further evidence within 14 days of the ‘last day for proofs’, that is, by 22 September 2017. Further, in rejecting Mr Pekar’s complaint AFSA stated that “the claims that have been made in this administration are fairly complex”. However, only three creditors lodged proofs of debt, the claims related to legal costs, and the amounts were relatively small: see the April 2019 Reasons at [43].

20    In his affidavit dated 25 October 2018, the Trustee suggested at [60] that Mr Pekar had the right to have AFSA’s decision dated 15 August 2018 reviewed by the Administrative Appeals Tribunal. The Trustee stated that Mr Pekar had failed to do so and had instead brought the present proceeding. However, it is unclear whether AFSA’s decision of 15 August 2018 was amenable to review by the Tribunal. The decision itself does not refer to a right of review, and the Trustee has not identified a provision conferring such a right in relation to this decision. Even if there was a right of review, I do not consider that this precludes the present proceeding being brought, or that this provides a discretionary reason for withholding relief in the circumstances.

21    I will list the matter for mention on a date to be fixed to discuss the form of orders, whether Mr Pekar seeks any ancillary relief, and costs.

Associate:

Dated:    7 August 2019