CATCHWORDS Bankruptcy - trustee given authority by debtor under s.188 of the Bankruptcy Act 1966 - debtor already bankrupt - invalidity of authority - no right of trustee to remuneration out of the estate for work performed - not a transaction for valuable consideration concerning after-acquired property. Bankruptcy Act 1966 ss.126 and 188 RE: MAVIS LORRAINE HAWKES A Debtor EX PARTE: ALEX NEVILLE BIRD Applicant PART X NO: 284 of 1983 Woodward J. Melbourne 22 February 1984 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ) ) ) PART X NO: 284 of 1983 BANKRUPTCY DISTRICT OF THE ) ) ) STATE OF VICTORIA RE: MAVIS LORRAINE HAWKES - A Debtor EX PARTE: ALEX NEVILLE BIRD Applicant ORDER JUDGE MAKING ORDER Woodward J. oe DATE OF ORDER 22 February 1984 WHERE MADE : Melbourne THE COURT ORDERS THAT: 1. The purported authority under s.188 of the Bankruptcy Act 1966 dated 30 November 1983, given by the debtor to the applicant, is declared to be void. 2. The applicant account to Mr. J.W. O'Brien, the debtor's trustee in bankruptcy, for any stock transferred to him by or on behalf of the debtor. 3. The applicant forthwith forward to the said trustee in bankruptcy any monies received by him from or on behalf of the debtor. IN THE FEDERAL COURT OF AUSTRALIA ) ) GENERAL DIVISION ) ) PART X NO: 284 of 1983 BANKRUPTCY DISTRICT OF THE ) ) STATE OF VICTORIA ) RE: MAVIS LORRAINE HAWKES A Debior EX PARTE: ALEX NEVILLE BIRD Applicant CORAM: Woodward J. DATE: 22 February 1984 WOODWARD J. REASONS FOR JUDGMENT This 1s an application by Alex Neville Bird, a registered trustee in bankruptcy, for a declaration that the authority which a debtor purported to give him to call a meeting of creditors, and take over control of her property, pursuant to s.188 of the Bankruptcy Act 1966 ('the Act') is void. Other consequential declarations and orders are also sought. Evidence on affidavit discloses that the debtor signed such an authority on 30 November 1983 and on the same day Mr. Bird Signed a consent to exercise the powers conferred by the authority. He did so without knowledge of the fact that the debtor had previously been made bankrupt, by order of this Court in Sydney, on 28 June 1982. Mr. Bird has sworn that his staff asked the debtor if she had ever been bankrupt and she replied that she had not. On 20 December 1983 Mr. Bird became aware that the debtor had been arrested for contempt of court in failing to obey an order to file a statement of affairs in relation to her bankruptcy. He thereupon cancelled the meeting of creditors he had called for the following day, and commenced these proceedings. The declarations and orders sought by Mr. Bird are as follows: l. THAT the authority given by the Debtor to the Trustee purportedly under Section 188 of the Act 1s void and of no effect and that all subsequent proceedings are consequently void and of no effect. _ 2. THAT the Debtor's Estate be no longer under the control of the controlling Trustee. 3. THAT the Trustee be at liberty to sell any stock belonging to the Debtor under his control. 4. THAT the Trustee's costs and expenses ancluding his remuneration be fixed by the Registrar and when so fixed deducted from Moneys in hand. 5. THAT the applicant's costs of this application be taxed and when taxed deducted from money in hand. 6. THAT the balance of moneys 1n hand (if any) be forwarded to the Trustee in Bankruptcy of the Debtor, one J.W. O'Brien. The application and supporting affidavit in this matter have been served upon the debtor, who has not responded, and upon Mr. J.W. O'Brien of Sydney, the trustee of the debtor's bankrupt estate. Mr. O'Brien wrote a letter to the applicant's solicitor which has properly been put before the Court. The relevant part of that letter reads as follows. "I wish to advise that I object to Orders 3,4 and 5 sought by Mr. Bird on the basis that: 1. The stock and cash on hand forms part of the assets of the estate of the bankrupt and therefore vest in me as Trustee of her estate. 2. That correspondence forwarded to Mrs. Hawkes advising her of her bankruptcy were not returned unclaimed and therefore I must assume that they were received by her and that she was aware of her bankruptcy. 3. Details of her bankruptcy are on record with the Registrar in Bankruptcy. 4. The costs and expenses including the remuneration of the applicant were unnecessarily incurred. Would you please ensure me that my objections will be brought to the attention of the Court. Alternatively, it will be necessary for me to be represented on the hearing of the application." The solicitor for the applicant first asked that the Court make the declaration contazrned in paragraph 1 of the application. He said that, although the point is not expressly made in the Act, the whole scheme of the legislation makes it clear that when a person such as the present debtor has been made bankrupt and her affairs have been put into the hands of a trustee, she cannot validly authorise a different trustee to call a meeting of her creditors and take over the control of her property. This submission 1s clearly correct, even in relation to after-acquired property and debts incurred after bankruptcy. The primary object of s.188, with its related provisions in Part.X of the Act, 1s to provide a simple and comparatively inexpensive way of enabling a debtor to make satisfactory arrangements with his creditors, without having to bear the stigma of bankruptcy. Although the Act provides for second and subsequent bankruptcies, there is in my view no room in the scheme of the Act for an undischarged bankrupt to give a valid authority under s.188. I am accordingly prepared to make a declaration to the effect sought in paragraph 1 of the application, though not in the precise words of that paragraph. Having made such a declaration, I believe that a further declaration in the terms sought in paragraph 2 of the application would be inappropriate (in that the debtor's estate never was validly under the control of Mr. Bird) and unnecessary. Any stock of the debtor now in the physical possession or control of Mr. Bird is clearly the property of Mr. O'Brien, the trustee in bankruptcy, and must be dealt with in accordance with his wishes. The order sought in paragraph 3 is therefore quite inappropriate. Since Mr. Bird has never had any valid authority to deal with the debtor's estate or to call a meeting of creditors, I find it difficult to see how he can be entitled to deduct any costs or expenses from moneys in hand (an amount of some $1200 which he has apparently received from the debtor). It may be that he has a valid claim against the debtor, who apparently misled him, for the value of work he has done. But the cash paid over to him is obviously the property of the trustee in bankruptcy, and I can see no lawful excuse for Mr. Bird to retain any part of it. It was submitted by his solicitor that he 1s entitled to the protection of s.126 of the Act, on the basis that he has received after~acquired property of the bankrupt in good faith and for valuable consideration. It was further submitted that Mr. Bird was, for his services, entitled to a lien over the cash held by him. There 1s no evidence before me to show that the cash (or the small quantity of stock referred to earlier) do in fact represent after-acquired property of the bankrupt, although it seems quite possible that they do in view of the 18 months that have passed between the sequestration order and the transfer of possession to Mr. Bird. Even if I were satisfied that they are after-acquired property I would not make the order sought. They were transferred to Mr. Bird not as part of any normal business transaction or as remuneration for any services performed by Mr. Bird, but for ham to hold as a trustee for others. That purpose having failed completely, J can discern no "transaction .... for valuable consideration" in the circumstances of this case. So far as the applicant's claim to have a lien over the property is concerned, the facts only have to be stated to show that this submission must fail. A has handed B's property to C to hold as trustee for certain persons yet to be ascertained. It 1s conceded that the instrument pursuant to which the property was handed over was void. It might be added that prudent independent inquiries on C's part would quickly have revealed the invalidity of A's instrument and actions. There 1s no part of the law relating to liens which would entitle C to retain the property as against B, the rightful owner. The solicitor for Mr. Bird was unable to refer me to any authority which would, on the grounds advanced or any other grounds, justify his client's application to retain his costs and expenses, and I have been able to find no case directly in point. By way of analogy, however, I note that a solicitor may retain monies paid to him to conduct a defence against a bankruptcy petition. But this is regarded as a very special case, and the principle has not been extended to cover appeals against sequestration orders (In re a Debtor 1937 1 Ch 92). A further analogous case arose in Re Pascoe 1944 1 Ch 219, where a court made an order, under relevant legislation, that cash found on a person convicted of an indictable offence should be applied towards the costs of the case. The court was not aware that the accused was an undischarged bankrupt. On appeal, it was held that the cash, although acquired after he became a bankrupt, was the property of his trustee and could not be taken for the purposes of costs. In the absence of any valid contrary argument I must hold that the stock and cash were at all times the property of the trustee in bankruptcy and should now be returned to him. The next order sought 1s that the applicant should have his taxed costs of these proceedings out of the monies he is holding, and thus out of the bankrupt estate. I have some sympathy with this application, because Mr. Bird has acted responsibly as soon as he became aware of the difficulty of his position. One would, of course, expect such a responsible reaction from a registered trustee. However I am unable to conclude, in the exercise of my discretion, that this loss should fall upon the creditors of the bankrupt estate rather than on Mr. Bird. He has failed in his application to be paid in full for his useless work; a prompt accounting to the trustee in bankruptcy would probably have made any approach to the Court unnecessary; and the whole problem might have been avoided from the outset if the debtor had been thoroughly questioned about her affairs. Jt would certainly have been avoided by a search of the records of the Registrar in Bankruptcy. I shall make the order sought for the applicant to forward to the trustee in bankruptcy the monies he has in hand. I shall order further that he account to the trustee in bankruptcy for the small quantity of stock referred to earlier. I certify that this and the 7 preceding pages are a true and accurate copy of the Reasons for Judgment herein of The Hon. Mr. Justice Woodward (AssogVate) {f I Dated: J Fepruary 1984