_ 15 August 1983 CATCHWORDS Bankruptcy ~ trustee - application for removal of trustee — trustee's discretion in administration of estate - seizure of partnershp assets - dissolution of partnership by bankruptcy - interest in partnership of assignee in bankruptcy. Bankruptcy Act 1966 ss-179, 129. New South Wales Partnership Act 1892 ss-31, 33. No. W 1060 of 1979 No. W 1061 of 1979 No. W 74 of 1979 Carolyn Nancy Mannigel v. Lindsay Robert Aitken Gunther Henry Frederick Mannigel v. Lindsay Robert Aitken Heinrich Oswald Herman Mannigel v. Lindsay Robert Aitken Smithers J. - Sydney. IN THE FEDERAL COURT OF AUSTRALIA) BANKRUPTCY DISTRICT OF THE STATE No. W 1060 of 1979 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY ee es Se ee GENERAL DIVISION IN THE MATTER OF The Bankruptcy Act 1966 Dee TS ee .. . APPLICATION FOR THE REMOVAL OF i a re TRUSTEES AND OTHER ORDERS - CAROLYN NANCY MANNIGEL THE BANKRUPT (applicant) Judge Making Order: Smithers J. Date of Order: 18 August 1983 Where Made: Sydney. ORDER THE COURT ORDERS THAT: 1. There be a declaration that no ground has been .shown for an inquiry into the conduct of the respondent in relation to the applicant's bankruptcy. 2. The application dated 22 June 1982 in action No. NSW 1060 of 1979 be dismissed. 3. The applicant pay the respondent's costs. IN THE FEDERAL COURT OF AUSTRALIA) BANKRUPTCY DISTRICT OF THE STATE No. W 1061 of 1979 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY Ne et ee ee ee ee GENERAL DIVISION IN THE MATTER OF The Bankruptcy Act 1966 TN a ee . APPLICATION FOR THE 'REMOVAL OF woe . eT TRUSTEES AND OTHER ORDERS GUNTHER HENRY FREDERICK MANNIGEL THE BANKRUPT (applicant) Judge Making Order: Smithers J. Date- of Orders 16 August 1983 Where Made: Sydney. ORDER THE COURT ORDERS THAT: 1. There be a declaration that no ground has been shown for an inquiry into the conduct of the respondent in relation to the applicant's bankruptcy. 2. The application dated 22 June 1982 in action No. NSW 1061 of 1979 be dismissed. 3. The applicant pay the respondent's costs. IN THE FEDERAL COURT OF AUSTRALIA) BANKRUPTCY DISTRICT OF THE STATE No. W 74 of 1979 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY es we Se Se GENERAL DIVISION IN THE MATTER OF The Bankruptcy Act 1966 . APPLICATION FOR THE REMOVAL OF TRUSTEES AND OTHER ORDERS ~ : HEINRICH OSWALD HERMAN MANNIGEL THE BANKRUPT (applicant) Judge Making Order: Smithers J. Date of Order: 16 August 1983 Where Made: Sydney - - ORDER THE COURT ORDERS THAT: 1. The application dated 22 June 1982 in action No. NSW 74 of 1979 be dismissed. 2. The applicant pay the respondent's costs. IN THE FEDERAL COURT OF AUSTRALIA No. W 1060 of 1979 No. W 1061 of 1979 No. W 74 of 1979 BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY GENERAL DIVISION ot -° IN THE-MATTER OF The Bankruptcy aan Act 1966 - i an . ' APPLICATION FOR THE REMOVAL OF ° "oo. . " TRUSTEES AND OTHER ORDERS CAROLYN NANCY MANNIGEL ' THE BANKRUPT (applicant) APPLICATION FOR THE REMOVAL OF TRUSTEES AND OTHER ORDERS GUNTHER HENRY FREDERICK MANNIGEL THE BANKRUPT (applicant) APPLICATION FOR THE REMOVAL OF TRUSTEES AND OTHER ORDERS HEINRICH OSWALD HERMAN MANNIGEL THE BANKRUPT (applicant) LINDSAY ROBERT AITKEN 7. ot . _ ; (Respondent) Coram: Smithers J. 16 August 1983 a REASONS FOR JUDGMENT Before the Court are applications brought pursuant to s.179(1) of the Bankruptcy Act 1966 (the Act) by Gunther Henry Frederick Mannigel (GM), (Bankruptcy No. 1061 of 1979) and his: wife. Carolyn Nancy Mannigel (CM), (Bankruptcy No. LOGL of 197%) who. both became bankrupt on. 3 December 1979 and am application by his father Heinrich Oswald Herman Mannigel (HM) (Bankruptcy No. 74 of 1979) as assignor under Part X of the Act of his estate.~ The respondent is the trustee of the bankrupt estates of GM and CM and the controlling trustee of the estate of HM under a deed of assignment. Orders are sought against the trustee for alleged failure of duty in that capacity. First, an order is sought that an inquiry be held into the conduct of the respondent as , trustee. Secondly, an order is sought that the respondent be removed from the position of trustee and that another person be appointed to that position. Thirdly an assessment is sought of the damages suffered by the estates by reason of alleged breach of duty of the respondent in the management of the estates and an order that the respondent make good the loss that the estates have sustained. It is alleged by the applicants that the loss suffered by reason of the conduct of the respondent 1s such that the damages recoverable would be so high that the bankruptcies would be annulled. Finally, there are applications for discharge from bankruptcy of and CM. 3. The Legal Foundation of the Proceedings ~ Section 179(1) of the Act provides as follows:- ~~ "The Court may, on the applicatiom of the Registrar, a creditor or the bankrupt, inquire inta the conduct af 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." GM The circumstances in which the Court may proceed to an enquiry under s.179 were discussed by Mr. Justice Riley in Re Alafaci (1976) 9 ADR 262. His Honour approached the problem under s.179 in the following way:- (v) The court may inquire into any aspect of the conduct of a trustee in relation to a bankruptcy, and is enabled to deal with the situation which it. finds by making such order as it thinks proper. A case of misfeasance, negligence or wilful default on the part of the trustee may emerge otherwise than from the accounts submitted by him im accordance with s.175 of the Bankruptcy Act or an audit af those accounts; if it does, or kf it appears that for any other reason the trustee's conduct should be inquired into, there is no reason why s.179 should not be set in motion, or why the court cannot under s.179 order the trustee to make good, if the court thinks such an order to be proper. (vi) Where the Registrar wishes to proceed under s.179 of the Bankruptcy Act he should make application (a) for an order that an inquiry be 4. made by the court into the conduct of the trustee in relation to the bankruptcy, and (b) such other orders as he thinks fit. This requires a preliminary question to be decided by the court, namely on the grounds and facts put before it; Has the case been made for an inquiry into the trustee's conduct? If the answer to that question is "Yes", the next question is: What is the scope of the inquiry? Then the court should give directions before any proceedings to inquire, ensuring that the trustee is given proper opportunity to prepare and present his -case on those matters. At p.268' his. Honour said: "IT 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 1s_a preliminary question to be decided by the Court - namely on the grounds and facts before it, has a case been made for enquiry into the trustee's conduct." In considering the procedure to be followed in this case it emerged that in dealing in a preliminary way with the question as to whether an enquiry should be held the very conduct of the Trustee which is in question would have tc be substantially investigated. So apparent was this that Mr. Emmet for the respondent stated that it may be convenient that the Court launch into an enquiry without further delay. But he submitted that the adoption of this course should not preciude the Court from ultimately finding, if thought fit, that no basis for an enquiry had been established. It appeared that each party was fully prepared to litigate the . issues in full. As a resuit I entered upon the consideration . a of the issues and in the event all the evidence desired to be called by each of the parties was called. In the case of bankruptcy the Trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus - forcrthe benefit of the bankrupt. It is: clear that the We oot le - minimunr standard required of the Trustee is. that he shail Jhandle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt- Obviously a great deal of discretion and judgment is required to be exercised by the Trustee.~ It was said by Rogerson J. In Re Ladyman (1981) 38 ALR 631 at pp. 641 and 642 that the standard of conduct required of the Trustee will ordinarily be the standard required of a professional man and perhaps higher. The learned Judge referred to "the high standard of conduct required of trustees". In Re Brogden (1888) All E.R. 927 Lord Justice Fry said at p.935 = . . ws ~ = ."% Trustee undoubtedly has a discretiom as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion 1s never an absolute one. It is always limited by - the dominant duty - the guiding duty of recovering, securing and duly applying the trust fund: and no Trustee can claim any right of discretion which does not agree with that paramount obligation." at p.285. . : - > Where an order is sought that the Trustee be removed and to make good the losses suffered by the estate, it must be established that the Trustee has been guilty of a breach of duty to act "diligently and prudently in regard to the business of the Trust" See Riley J. in In re Alafaci (supra) °* According. ta Halsbury Laws of England 3rd Ed. Vol.38 p.967,-A trustee must take all reasonable and proper measures te. obtain posesssion of the trust property ... and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. The Trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs. But beyond this he is not bound to adopt further precautions. It was said by their Honours Dixon CJ, McTiernan and Windeyer JJ in Elder's Trustee and Executor Co. Ltd. v. Higgins & Ors (1963) 113 C.L.R. 426 that:- "We are not to judge what the Trustee then did or failed to do by the light of later events .... The duty of the Trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator's estate... --. The argument that the Trustee having, 1t was said, exercised a discretion. its conduct is now ~~@teferent positiom from that. 7. unchallengeable is sufficzently answered by a . passage from the judgment of Fry L-J.- In Re Brogden (supra) ... Whether or not one calis the trustee's action] an exercise of discretion, the question remains was it the act of a prudent Trustee." It is not the role of the Court to decide whether the path chosen by the Trustee led to the realization of the greatest value for the assets of the estate. The Court is in a - =~ . -7 weer - of the Trustee. The Court can - toast examine the facts with hindsight and with the benefit of the evidence om oath of the relevant debtors and ereditors and witnesses called in their support. The Trustee is required to act diligently and prudently in the exercise of his discretion in deciding matters as they arise in the course of administration of the-state. He may be constrained to act by reference to the knowledge which he has of the circumstances balancing the benefit of further enquiry against further delay and the further expense to the estate, to the creditors and possibly to the debtor if there is a surplus in the estate. Between. 1973 and 1979 the three applicants carried on a retail business at Nowra known as the "Nowra Camera Centre". The business traded in the sale of cameras and accessories, repair work, the provision of facilities for the development of photographic film and related services. The business was carried on under a partnership agreement, whereby HM had a 50% interest and GM and CM each had a 25% interest. ' By 1978 the business was in serious financial difficulties and those difficulties intensified in 1979. On 18 May 1979 HM executed a deed of assignment under Part X of the Act and the respondent was appointed Trustee. On 3 December 1979 sequestration orders were made in respect of the-estates of GM and CM and the Official Trustee became the Trustee of their estates. On 11 May 1980 the respondent became the Trustee in respect of their estates. ~ - The applications before this Court arise out of ' dissatisfaction of the applicants with the conduct of the respondent in the management of their estates. In relation ta the Camera business it is their contention that the respondent: (a) took possession of the assets of the business without legal justification; (b) negligently or otherwise improperly adopted a procedure for realization of those assets as a result of which the value of the goodwill of the business. was Iost and the stock was sacrificed, and debts due to the business were not collected. It is also contended that the respordent has wrongtully failed to take steps to enforce an alleged right of action in 9. GM and CM against a firm of solicitors for alleged negligence in advising them in relation to a building contract in respect of which they suffered losses. It is a further contention that the respondent " wrongfully failed to realize the interest of GM in a company, ~Mannigel. Broadcasting Pty. Ltd. which "purchased and later solt = radio transmitting licence and business known as. 4VL Charleville. . Alternatively it is said that the respondent has failed to pursue a claim against the directors of that company' for disposing of the licence and business at an undervalue. The sequestration orders of 3 December 1979 were made on the petition of the respondent on the ground that GM and CM had failed to execute a deed of assignment pursuant to a resolution of creditors under s.204 of the Act. Circumstances leading to sequestration and the assignment under Part X On 1 March 1979 at the request of Messrs Hunt & Hunt, Solicitors. for the partners, the respondent attended a meeting at which HM, GM and Mrs. Frieda Mannigel, Heinrich Mannigel's wife and their solicitor were present. The financial position of the partners was discussed. Creditors were pressing, judgments had been obtained and a bankruptcy 10. notice had already been served on GM. The returns from the business were diminishing. The respondent was shown balance sheets of previous years and the partners' tax returns. it appeared that GM had personal debts of approximately $79,000; CM had no assets or debts apart from those owned or owed jointly with GM. HM had personal debts of $51,000 against assets of $84,000. It was said that the _partnership had debts of approximately $50,000" and there were debts owed toa it of approximately $2,000. The respondent gave the partners. advice as to what in his opinion were the options available to them. The options were also explained to GM and his wife by letter from their solicitors dated 20 March 1979. Those options were, if bankruptcy was to be avoided, to arrange with the creditors for the execution of a deed of arrangement or a deed of assignment under Part X of the Act. According to GM there was a meeting on 22 March 1979 between himself, his parents and the respondent and his solicitor where he urged upon the respondent the desirability of selling the business as a going concern and the respondent made it clear that it was. the respondent's view that the assets; of the business would have to be sold at auction. Although the Trustee denies that there was a meeting on 22 March 'r am satisfied that GM was made aware before 30 March 1979 that the respondent saw no possibility of selling the business as a going concern. On that day the respondent visited the Camera Centre and insvected the stock and ~ ll. premises. After discussion, each of the applicants signed instruments of authority to the respondent under s.188 of the Act. The Respondent asked G for a list of creditors and Gi handed to him a copy of a telex dated 9 January 1979 sent by Gi to his own salicitor which set out a number of creditors with debts tatalling some $38,000. ~~ oe To--test the attitude of creditors the respondent arranged for- an 'informal. meeting of the four major suppliers tothe Centre to be held on 19 April 1979. Although requested to attend, Gi failed, quite wilfully, to do so. The question of the Centre continuing to trade was discussed with the four creditors who attended. One such creditor was prepared to continue trading but the other three had decided that they would not supply further goods to the Centre on any terms. The respondent telephoned G4 and he explained that the creditors were largely in opposition to continued trading and that he was not optimistic that a deed of arrangement would be acceptable to creditors generally. Om 19 April 1979: the respondent wrote to Gi advising trim that a formaL meeting of creditors would be held on 27 ApriI I979 and requiring him to attend and to supply a written and verified statement of affairs. The respondent also advised G@ that if he failed to attend the meeting or to supply the documents requested the creditors might require the respondent to present a pet:tion for a sequestration 12. order in respect of G's estate. The meeting was held and resolved to require the debtor to execute a deed of assignment and that the respondent, be nominated as trustee. G4 arrived at the meeting just as it was coming to an end. He had been delayed waiting for an aircraft on which one Kirton, a business associate, was travelling, his erroneous idea being that Mr. Kirtom could contribute something of . value to.-the meeting. GM did address the meeting but did not induce the creditors to depart from their resoltuion. Similar resolutions were passed at meetings of the creditors of Of and EM also held on 27 April 1979. On 18. May HM executed-~a deed of assignment. On the same day the respondent was. advised by Mr. B. Sharpe from the firm of Messrs Stephen, Jacques and Stephen, who had become the Solicitors for GM and &™, that his clients would only sign a deed of assignment on condition that they be given five months to sell the business and that no sale of the interests of GM in Mannigel Broadcasting Co. Pty. Ltd. be held for two years. The respondent called a formal meeting of creditors with a view to obtaining the creditors' views concerning a deed of assignment subject to these conditions. The meeting was held on 30 May 1979 and although neither of the applicants attended the meeting Mr. Sharpe did. Mr. Sharpe urged creditors to agree to the stated conditions and he submitted a memorandum from counsel stating that subject to Gf and CM being believed, the prospects of success in the 13. Supreme Court action for negligence brought by them against the applicants' former solicitors, Messrs Marriot Oliver & Co. were good and approximately $40,000 might be realized from it. The creditors rejected the conditions and resolved that the respondent as controlling trustee apply to the Court for a sequestration order against the estates of the a applicants. - ~ , 6 ane : ' a » . - t a : - 7 . - . 4 - Im duly I97% GM consulted Hooker & Co- with a view to selling -the business. Mr. Wilson of Hookers' Agency considered that he could sell the business satisfactorily but nothing came of it. In early July the respondent received a letters from Messrs Stephen Jacques & Stephen alleging that not all the creditors of the applicants had been advised of the two creditors meetings and requesting that the debtors be allowed a period of five months to negotiate a sale of the Centre and fifteen months to negotiate sale of the shares in the radio station. The respondent called a further formal meeting of creditors. It was held 1 August 1979 and the creditors adhered to their previous decision. The respondent then commenced proceedings to have the estates of GM and his wife sequestrated. He became increasingly concerned that the Nowra Camera Centre was not viable and that it would be in the best interests of the creditors that the Centre be closed as soon as possible. In early November the respondent was 14. informed py the landlord of the Centre that the partners were substantially in arrears with rent, that the lease would expire in December and that he intended taking action to have the partners removed. - 'The applications for sequestration were contested by GM and CM on the ground that the meeting at which the resolutions. requiring them to execute the deeds of assignment were passed were not attended by all creditors entitled to be at such meetings. In addition HM applied for an order that the deed of assignment executed by him on 18 May 1979 be declared void on the ground that it had been signed conditionally on the applicants executing similar assignments. After lengthy hearing Mr. Justice Lockhart rejected the submissions of HM, GM and CM and on 3 December 1979 ordered that the application by HM be dismissed and the estates of GM and CM be sequestrated that that costs of the proceedings be taxed and paid according to the Act. Realization of the Assets of the Nowra Camera Centre Following the orders made by Mr. Justice Lockhart the respondent conferred with the Official Receiver and arranged for an appointment with a Mr. Cruikshank, the officer handling the estates of GM and CM. On 7 December 1979 the respondent advised Mr. Cruickshank that he considered that the Centre was running at a loss and that the possession cf 15. the assets of the business and an auction thereof should be arranged as soon as possible. The respondent indicated that it was his view that while the business continued and the stock was- being sold the moneys realized were being used for the living expenses of GM and CM. He indicated his view that it. was. not practicable to carry on the business profitably ané that the prospects of sale of the business as a going concern were nil- He indicated that he would like to take charge of the assets, of the business. forthwith and sell them at auction for the benefit of the creditors of the business. Mr. Cruikshank concurred and it was agreed that the respondent would take the necessary action to take possession, close the Centre and sell the stock. The Official trustee wrote to the respondent a letter confirming that he "had no objection to the respondent taking charge of the assets of the business and selling them". The respondent refrained from giving notice to the partners. as he felt that GM might cause difficulties. It was important to have access to the premises without having to use force. There was a history of a lack of co-operation by GM including his refusal to sign a deed of assignment, his failure to prepare or certify a Statement of Affairs for the r creditors meeting and his non-attendance at meetings. The respondent acted promptly and on 10 December 1979 sent his employee Mr. Starr and one Mr. Byrne an auctioneer 16. to Nowra to take possession of all the stock and fittings of the business with a view to their sale.~ The respondent was advised by telephone from Mr. Starr at Nowra that there were a great number of items, that it would be extremely difficult to list all the stock and return it in one day and that CM would not allow them access. to one of the rooms of the shop believe to contaim records, in particular of the radio station .The respondent states that he told Mr- Starr to take possession of what he could and to arrange with Mr. Byrne to make an "inventory thereof on its arrival in Sydney. Mr. Byrne put the more valuable items of stock in his car and took them to Sydney. The other items were packed in boxes, sealed arid taped down, and delivered to a carrier chosen by Mr. Starr for transport to the premises of Mr. Byrne in Sydney. The number of boxes was not recorded and the inventory was not made until early January 1980 some four weeks after the goods arrived in Sydney. On 12 December 1979 the respondent wrote to GM and CM requesting advice as ta whether there were any assets books or records of the business other than those obtained on 10 December. They did not reply. On 17 December 1979 he was advised by one Cook that om behalf of the landlord, he had taken possession of the Centre and changed the locks. On 16 January 1980 the respondent wrote to GM and CM enclosing a copy of the inventory of goods seized and advising them that certain items of furniture and equipment of the Centre were 17. 'in the custody of Mr- Cook. He further advised them that the items seized would be sold after fourteen days. Mr. Byrne arranged an auction of the stock of the business- to be held on 31 January 1980. GM attended the auctiom- He said that certain items of equipment at the - impending auction belonged to certain clients of the Centre. Various items claimed were delivered to him. The auction realized a gross amount of $10,656.50 and a net amount of $7,847.27. Following the seizure and sale of the stock GM developed great hostility to the respondent. He enlisted the aid and sympathy of his Federal member of Parliament who took > up his case with enthusiasm. On 3 June 1980 the respondent wrote to GM advising GM that he could inspect the records at any mutually convenient time and seeking from them information regarding any other of his assets, all books, documents, papers and writings relating to his trade dealings, property or affairs, his passport. and a statement of affairs in the appropriate form. There was: no. response to this. e On 17 June 1980 GM and CM, having arranged for press coverage, attended the respondent's offices in the APA Building, Martin Place and chained themselves to the . 18. reception desk. GM stated to the respondent and reporters present that "I have to do this to get the information L require". He distributed a press release stating that his difficult financial circumstances were a result of 'losses incurred through dealing with an unlicensed builder, and he was making a claim for damages against his solicitors for professional negligence, that the respondent had given false evidence in court,-had failed to take an inventory of goods seized, had refused to return shop records and goods belonging to customers, and had refused him information relating to his company interests in Queensland. The police rescue squad were called by the respondent to cut the chains. Shortly thereafter GM, the. police and the respondent inspected the records in the respondent's possession. GM took certain personal items and left. On l May 1980 the first meeting of the creditors was held and as a result of resolutions passed, the respondent was appointed Trustee of the estates of GM and CM. At the request of the creditors, GM and CM were not invited to attend the meeting. Om 6 May 1980 the respondefit consented to act as Trustee. r Authority to seize the assets of the Nowra Camera Centre The applicants' firct contention is that on 10 December 1979 the respondent had no authority to move against 19. the assets of the Nowra Camera Centre on behalf of the ereditors of GM, CM and HM. This contention was based on clause 20 of the Partnership Agreement and ss.31 and 33 of the New South Wales Partnership Act 1892. Clause 20 of the deed of partnership provides as « ellowss—- .. | -2.-- 7 a -. ERs - - oo -* : . Es "If either partner shall assign charge or encumber his share im the partnership or any part thereof or shall suffer the same be charged for his separate debt under the Partnership Act or shall become bankrupt or insane or otherwise permanently incapable of attending to the partnership business or shall act in any manner inconsistent with the good faith observable - 'between the partners or shall be guilty of any conduct which would be a ground of dissolution of the partnership by the Court then and in any such case it will be lawful for the other partner by notice in writing to the offending or incapacitated partner to determine the partnership so far as concerns such partner where upon the interest of such offending or incapacitated partner in the partnership shall cease and the provisions contained herein for the determination of the agreement shall apply." Section 31 of the Partnership Act provides that an assignee of the interest of a partner is not entitled:—- - . " "tq. Imterfere im the management or administration " | of the partnership business or affairs or to require any account of the partnership transactions or to inspect the partnership books." It is said that this restriction on the authority of an assignee accords with principle because when a partner 20. assigns his interest in a partnership he does not transfer to the assignee any interest in any particular item of partnership property. What is assigned is a chose in action consisting "of a right to a portion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership." See Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440 at 446. "A mortgage orm a charge [of a partner's interest in a partnership] is considered to vest rights over that chose in action but is not considered to carry any title to the specific assets until dissolution", per Mason J. in United Builders Pty. Ltd. & Anor v. Mutual Acceptance Ltd. (1980) 144 CLR 673 at 688. And it is also contended accordingly that the acquiescence of the bankrupt's trustee contributed nothing by way of authority to the respondent to make the seizure and sale. It was argued that it is apparent from the provisions of ss.61l and 177 of the Act that the trustee in bankruptcy could not take action by himself or by authorising another person to take possession of the actual items of property constituting assets of the partnership. All that the trustee had was the interest of each partner in the partnership namely a right to aw share of the surplus on realization upon a dissolution of the partnership. ,It was contended by Mr. Tuckfield that the partnership was not dissolved by the assignment by HM to the respondent of his estate under Part X of the Act nor by the bankruptcy of the other partners. 21. However it clearly was the duty of both the Official Receiver and the respondent to acquire possession of the partnership property and to deal with it for the benefit of the creditors. The restrictions on the rights of an assignee of the interest of a partner contained in the Partnership Act are designed to protect the other partners from an assignee who- seeks to exercise rights in the management of the oe a partnership contrary to the will 'of those other partners. But n@ matter how strict: a view is taken that the interest of a partner im the partnership assets is only to his share of the surplus on dissolution, it is clear that all the partners acting together can deal with particular assets of the partnership in any way that they agree upon. At any particular time the partners acting together can by agreement convert what might be called their floating and separate interests in particular partnership assets to a fixed interest in which the legal and equitable title to the particular assets vests, according to the agreement, in them as joint proprietors, or in one partner only, or in a third party, and may be dealt with accordingly. Thus upon an assignment either by deed or by bankruptcy of the interest of @ partner his assignee has full capacity to join with the other partners in dealing according to their combined will with "any asset or all the assets of the partnership. Accordingly, when the trustee in bankruptcy concurred with the proposal of the respondent to seize the partnership property of the Centre and sell it at auction, that was an 22. exercise by the owners of every interest, legal and equitable, in those assets. The decision in Palmer v. Thompson (1879) 0.B. and F (S.C.) 182 shows the capacity of partners acting together to transmit interests in specific partnership assets. See also Rowe v. Wood (1822) 2 Jac & W 554, 37 E.R. 740. Accordingly the respondent states that he took passession of and dealt with the partnership stock in the capacity of assignee of the interest in the partnership of one partner, HM, with the consent of the Trustee in ' bankruptcy of GM and CM in whom the interest of every other partner in the partnership property had vested by reason of the sequestration order. In my view, the suggestion that this was an unlawful proceeding cannot be supported. It was also argued that the Trustee in bankruptcy lacked authority to take action to obtain possession of assets in the bankruptcy in the interests of the creditors pending instructions from creditors at the first meeting. Section 64 of the Act was relied upon. I do not consider this argument ta be sound. It was the plain duty of the trustee to gaim possession of the assets of the bankrupts. See section 129 of the Act. 23. The Decision to Close Down the Business It is said that the decision to close the business and seize the stock was not a reasonable or prudent decision. It is said that the removal of the stock and consequent termination of the business destroyed a valuable asset namely, the goodwill of the business and ked_.to the sale of the. stock at an undervalue. It was submitted that the respondent acted negligenty or incompetently in acting on the view that the business had no goodwill. I do not accepted this submission. The evidence is against it. The respondent had been a@irectly involved in assisting in the resolution of the financial problems of GM, CM and HM and the partnership for approximately eight months. He had held meetings and had conversations with the creditors and the applicants. He had been trustee of the estate of HM since 18 May 1979. He knew that the previous two years of trading by the partnership had produced surpluses before provision of remuneration of GM and CM for their work in the business of $11,800 and $9,595. MThe-turnover for those years had fallem from $170,000, ta $55,000. CM worked in the business full time throughout the twa years and GM had devoted a substantial portion of his time to the business. Thus for some years the profits did not sustain an adequate wage for the work involved in running the business. The respondent knew that the applicants and the business had a 24. serious and increasing Liquidity problem, that several important suppliers were refusing supplies, that various ereditors had taken legal action and that the business was subsisting only on a hand to mouth basis. There was a history of dishonoured cheques. ~ He knew that. the business had been on the market im 1978 and in 1979 and that there had been no interest shown im it. He knew that the lease was due to expire on 9 December 1979 and that the landlord had indicated that he was not prepared to extend the lease and wanted vacant possession of the premises on that day. In 1979 it appears that the business earned no remuneration for the partners. Thus to attempt to carry on the business would have meant revival of the business in new premises with Liability in the respondent for rent, wages of staff, and other outgoings, and for the purchase of new stock, in circumstances in which there was no reason to think that such a venture could succeed. If the partners, who appear to have beer reasonably efficient in the actual carrying om of the business could not prevent the business from failing, the chance of the respondent reviving it re successfully was surely less than nil. It 1s clear that at the stage when the respondent decided to close the business 1t was hopelessly insolvent and 25. running at a sig nificant loss. Although the respondent did " not have before iim the precise figures for the last eighteen months. of eraaihg it. is clear that his judgment of the ) situation was sound. The evidence given in these proceedings } reveals that for | the twelve months to June 1979 there was a loss o£ about $1.0,000- without allowing any remuneration to . the partners. For the. following six mOénths the position > Vs af _- 2 % - - Zz detertorated furtiier- The takings for 1979 appear to have e - 0 . 5 . -~_-t an been. less, than half what they were, in 1978. By December 1979 aren) vse the debts. of the partnership, including $31,990 due to HM, ls . had reached a totaI of $94,000. And the stock was ymevetabiy « ay materially reduced. ° os « Tn the handling of an estate as trustee it fis . necessary on,acacasion to exercise a judgment on facts, se available although those facts may not include all that is - _ relevant. The respondent was faced with an exercise of business judgment in December 1979. He decided it was impractical to attempt to sell the business as a going concern. It is clear at this stage that he made the correct Fa decision. I do. not accept the evidence of Mr. Miller or Mr. ' Wilson insofar as it carries an assertion that at the ~~ relevant time, namely December 1979 the goodwill was of any ia value, or that, in the ordinary course of business done on the basis of full disclosure, it could have been sold for any material sum. I think their views were formed before they ae - , 26. knew of the serious decline in takings of 1979 jland that they never adequately appreciated the extent of that ) It was argued that the respondent acted in a decline. negligent manner in deciding to auction the stock in Sydney rather than in Nowra. It was contended that, being the Christmas" season such a sale would have attracted many members. of the public and achieved higher' prices. The - a _— - te ee respondent considered that_.'s<"the circumstances a sale by auction in Sydner was. the sounder course. He considered that } < y a local sale! involved overheads, not warranted by the volume and value o* the goods. He considered that a sale in Sydney of the" stock as a large lot would be economical and would athEe ct the kind of purchasers unterested in the kind of stock for sale. Mr. Byrne stated that a sale at the premises in Nowra, a small coastal town, would not have attracted camera dealers and although certain items of stock would have been bought by the general public many accessories and other Less popular items would have had very little or no ordinary public appeal. I do not consider that the decision to sell the stock: by auction in Sydney rather than to attempt to Gispose of it im Nowra was erroneous. It was certainly not a negligent or incompetent decision. . e " 27. Method of Removal of Stock It is said that the removal of the goods was carried out in a manner which was careless and without proper regard to the interests of the creditors and the applicants. Certainly. there is room: for criticism. The respondent * om - entrusted this to Mr. Starr and Mr. Byrne, both experienced mem with whonr the respondent had prior business association. Nevertheless it was not wise to postpone the taking of the inventory until the goods arrived in Sydney. But the rather lengthy delay in taking the inventory was the fault of Mr. Byrne rather than that of the respondent. The respondent was well justified however, in leaving to Mr. Byrne the procedure for transferring the goods to Sydney. The most valuable items of stock were taken to Sydney by him personally in his own car. The other items were placed in boxes which were sealed down. They were delivered to a carrier chosen by Mr. Starr- .No receipts were obtained from the carrier and the boxes were not counted. It appears that the goods were transferred ta a second carrier and spent several nights in store im Nowra.. r Mr. Byrne was an experienced business man accustomed to participate in activities such as the removal of the stock in question from Mowra and Sydney. Re regarded the steps taken as appropriate. Objectively they were open to 28. criticism. Although it is not certain that there was no loss there is no evidence that any loss was incurred and the probability is that there was no loss. Ideally the inventory ought to have been made at the time of the seizure of the stock. So to take it may have involved material expense but the proper course would have been to incur that expense. However, the decision to permit Mr. Byrne to make the inventory in Sydney was ta my mind an error of judgment rather tham misconduct. Having regard to the respondent's knowledge of the experience and efficiency of Mr. Byrne the respondent would not anticipate that Mr. Byrne would have failed to take appropriate steps for the security of the transfer of the goods from Nowra to his Sydney premises. Mr- Byrne was a most impressive person, a man of practical outlook with many years experience in the type of operation in hand. He said there was nothing unusual or improper or unduly risky in handling the matter as he did. There can be no question of his integrity. He was obviously the type of man that a businessman like the respondent would choose with confidence to carry out the operation. GM was present at the auction. He gave attention to the stock and pointed out that various items belonged to customers. Those items were taken by him to return to the persons concerned. No suggestion was made by him then or in any of his subsequent voluminous communications that items of stock were missing from those sold. 30. his duty as trustee failed to gather in the debts owed to the partnership in December 1979 and that the estates of the applicants suffered losses accordingly. The respondent states that he sought advice many times from the applicants regarding assets of the partnership and was not advised of outstanding debts. He stated that he believed that in view of the financial situation of the partners-every effort would. nave been made by the applicants to get im all cash owing to the business during the Iast months of trading and that any debts not paid during that time would be old and not recoverable. When the takings of the business had been in excess of $100,000 the debts outstanding at the end of the year were of the order of $3,000. They would have been at most a very small sum at the end of 1979 when the takings had fallen dramatically. So far as current items of film development are concerned there 1s every possibility that CM retained and dealt with them. No claim was made by anybody to the respondent. I am not satisfied that any breach of duty in this respect is revealed by the evidence. It is my view therefore that it is not established by the applicants that there was any breach of duty as trustee im his handling of the assets of the business of the Nowra Camera Centre. The interest in Mannigel Broadcasting Pty. Ltd. It is alleged that the respondent acted negligently and failed to protect the interest of GM in Mannigel Broadcasting Pty. Ltd. and thereby caused loss to the estate. It is: claimed by GM that he held sixty five percent of the "shareholding in this Company. He said that he had acquired this interest by = payment of $20,000 to the company. The evidence discloses that no such payment was ever made. A sum of $20,000 was paid to the Company by Mrs. Frieda Mannigel by way of loan to assist the company in the purchase of the broadcasting licence of station 4VL. GM was a guarantor of this loan. Although the guarantee is in writing and unambiguous in its terms, GM maintained that it did not represent the true situation which was that the loan had been made to him to purchase shares. I do not accept this. It is not the only occasion on which GM maintained that documents prepared by his solicitor and signed by him failed to reflect the true situation. This happened with respect to the Partnership Agreement prepared. by the applicants' previous solicitors. And he has am unfortunate propensity for dealing with people who. one after another according to him, let him -down.+ I am satisfied that GM had no shareholding in the Mannigel Broadcasting Company. There is no acceptable evidence upon which the respondent could act that he had any enforceable legal rights in the company or against any person connected with the company. In the end it appeared that GM claimed that the directors of the company had sold the broadcasting licence to a company, in which they had an interest, at an undervalue, and that in some way this was a breach of duty to him- This claim is unsupported by evidence of any significance. _ * The respondent was informed that GM had a shareholding of some significance in the company in 1978~- Two days after he became a trustee of the bankrupt estate he wrote to the company seeking a transfer of GM's shares. That letter was not answered. He then engaged Messrs P.A.- Somerset & Coa. solicitors of Sydney who are experienced practitioners in company situations to take the matter up. As a result of their efforts it was ascertained that only two shares had been issued and neither to GM. It appeared further that a statement of affairs had been prepared which indicated that the compaany was hopelessly insolvent. The respondent was so advised by Somerset & Co. From the evidence given by GM in these -proceedings there can be no doubt that this. advice was quite sound. The suggestion that it has, been showr im these proceedings that a responsible trustee could possibly have taken proceedings or any action at the expense of the creditors, or at all, to establish that GM had some interest in the company is quite unsupportable. Not only 1s there no reasonable basis on which such an interest could be supported but, having regard to the 33. Company's financial position any shareholding would be quite valueless. The suggestion that there has ever been any viable ground to require the respondent to pursue or justify him in pursuing the vague and unformulated claim against the directors for selling the licence at an undervalue is quite unrealistic. rs a he - - The Gegal Proceedings against the Applicants' Former Solicitors ~ I come now to the allegation concerning alleged negligence or misconduct of the respondent in connection with the claim of GM and CM against the solicitors Messrs Mariott Oliver & Co. At all material times it has been clear that the bankrupt and his wife 'have claimed that they have suffered damage because of negligence of their solicitors. The substantial claim seems to be that before signing a contract with the vendors, who were building a house for the applicants, they consulted Marriott Oliver & Co. The transaction was one in which payments were to be made from time to time as. the building was constructed. There seem to have been twa payments made, one of $18,000 and one of $2,000 and im respect of both of these GM and CM authorized the bank to maXe the payments. Counsel has advised that with respect to these payments there seems to be no claim. GM states that he informed Mr. Bevan the member of the firm who handled the transaction that he desired him "to do everything to ensure 34. that I am fully protected and that everything goes smoothly". It is said that Marriott Oliver & Co. undertook to act on this basis and that to perform the responsibility so undertaken it was necessary for the solicitors to give consideration as to whether the builder proposed was a licenced builder. The allegation is.that the solicitors gave no thought. to the question. as to whetHer the builder was Licenced or not. gave GM no advice as to the consequences of his not. being Ticenced. The builder was not licenced, he did make default in carrying out his work and was without means toa compensate GM and CM. The applicants would seem to have had a claim which would have 'een covered by insurance had the builder been a licenced builder. It would seem therefore that if GM could prove that he stipulated to be protected in @ general sort of way against all business risks of the purchase on building terms, then the failure of the solicitor to advise that unless the builder were licenced there would be no insurance and to ascertain whether in fact the builder was a licenced builder could be the basis of a successful action for negligence. Messrs: Hunt & Hunt commenced proceedings against Mariott Oliver & Con im the District Court claiming $20,000. After'GM discovered this fact he changed his solicitors and arranged for the litigation to be transferred to the Supreme Court and a claim made for $100,000. This claim appears to be made up of two elements. First the loss due to bad 35. workmanship and secondly, mental and nervous pain and suffering on the part of GM and CM. Looking at the matter realistically and in the light of counsel's final Statement of Claim and the particulars of loss stated by GM in his letter of 26 April 1979to his solicitors the real claim might reasonably be contemplated as possibly. in the order of $10, 000- The respondent has always. regarded: the claim as one that ought to be pursued when finance was available to him to sustain the proceedings. It has not been available. However one of the assets of the estate of HM is a joint interest of HM with his wife in certain real property. The returns from HM's interest in this: property would be adequate to sustain the proceedings against the solicitors. HM and his wife have resisted the realization of the value of the share of HM in this joint property. Thus it was necessary for the trustee to proceed in the Supreme Court pursuant to s.66G of the Conveyancing Act of New South Wales. This he did but was met by a successful application for a stay of proceedings on the ground that there was an application on foot in this Court to remove: the respondent from the position of trustee- It was the consequence of this that pending the decision in these proceedings there is no source of funds which can support the action of GM and CM against their former solicitors. Due largely to the expense occasioned by the opposition of GM and CM to the sequestration proceedings and the application of HM 36. to set aside his deed of assignment and also to other expenses of the administration of the estate including the trustee's remuneration there has never been finance adequate to sustain the Supreme Court proceedings against the solicitors. There is of course a risk that the action, because of its nature may be lost. " The three financial summaries of the debts of the business. the income and expenditure thereof and the takings for I978 and 1979, the contents of which I accept, I take into evidence as exhibits 25, 26 and 27 respectively. Conciusion In the result I am satisfied that the applications of GM and CM have no foundation. I consider that I should declare that no ground has been shown for an inquiry by the Court pursuant to s.179(1) into the conduct of the trustee. I have formed the opinion that, so far as matters of business are concerned, GM has no proper appreciation of the relationship between himseli and the actual circumstances in which he is placed. As a result his attitude is frequently quite unreasonable and his evidence is unreliable. Where he is in' conflict with the respondent I accept the evidence of the respondent. GM is prone erroneously to imagine bad faith on the part of others. In certain ways there is a degree of plausibility in his expositions. They sometimes have a + oad 37. superficial attractiveness likely to evoke a sympathetic response. But fundamentally he is unable to see the reality of situations. His assertions are thus in many respects without value. It is my view that it is his unrealistic approach which led to the expensive proceedings in the opposed bankruptcy proceedings and also to these proceedings im thetr unfortunate magmitude, doubly unfortunate as however Teen the decisior went. there was never any likelihood af a surplus whick would have benefited the applicants. * . . Im the event the applications of GM and CM must be dismissed with costs. By order of Lockhart J. made on 19 October 1982 it was directed fhat the applications of GM, CM and. HM be heard together. In the course of the proceedings little express reference was made to the applications of HM. However the fate of that applicant depends upon the considerations discussed above. It is clear that HM has not established any grounds for the orders he seeks. That application also must be dismissed with costs. In each of the applications before the Court in this concurrent hearing I regard each of the applicants as having relie&d upon the whole of the evidence called. The costs incurred by the respondent clearly relate equally to each application and were not increased by the circumstance that the three applications were heard together. I consider each applicant 1s responsible for the whole of those costs and 38. order each applicant to pay the same. Of course so far as any part of such costs are paid by any of the applicants the others of them will be pro tanto relieved. [~~ . - —Tor . - thirty seven v } i a ere coma hae Geer. ce Saute. thee. Te ; Dotud: (G-aapish 1483. ACEC. . Senemeeennatine' ee a wee enteral meee te