u S ¥y CATCHWORDS A TO ETSY, 2 4 BANKRUPTCY - trustees - duties - whether obliged to recover debts due to estate - application by Registrar for inquiry - procedure to be followed - removal of trustee. \ = Bankruptcy Act, 1966 55.19, 109(10); 129(1); 155; 179 oe Re: Ian Geoffrey Goddard Ex parte: Robert Arthur Allen & Ors Qld E181 of 1982 4 Re: John Waymouth Ahern and Desmond William Knight Ex parte: Robert Arthur Allen & Ors Qld OM2 of 1986 eae mee we gee PINCUS J. BRISBANE 14 NOVEMBER 1986 Aus ea Wa ONS vitveisny dO 1HNOD W303 9861 AON 8b IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) QLD E181 of 1982 RE: TAN GEOFFREY GODDARD EX PARTE: RE: JOHN ROBERT ARTHUR ALLEN Deputy Registrar in Bankruptcy for the Southern District of the State of Queensland Applicant JOHN WAYMOUTH AHERN First Respondent DESMOND WILLIAM KNIGHT Second Respondent QLD OM2 of 1986 WAYMOUTH AHERN and DESMOND WILLIAM KNIGHT EX PARTE: ROBERT ARTHUR ALLEN Deputy Registrar in Bankruptcy for the Southern District of the State of Queensland Applicant JOHN WAYMOUTH AHERN First Respondent DESMOND WILLIAM KNIGHT Second Respondent MINUTES OF ORDER JUDGE MAKING ORDER: DATE OF ORDER: WHERE MADE: THE COURT ORDERS: 1. PINCUS J. 14 NOVEMBER 1986 BRISBANE by consent, that John Waymouth Ahern be removed from office as trustee of the estate of Ian Geoffrey Goddard; that the applications be otherwise dismissed. Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ~ BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND ~ ~ QLD E181 of 1982 RE: IAN GEOFFREY GODDARD EX PARTE: ROBERT ARTHUR ALLEN Deputy Registrar in Bankruptcy for the Southern District of the State of Queensland Applicant AND: JOHN WAYMOUTH AHERN First Respondent AND: DESMOND WILLIAM KNIGHT Second Respondent QLD OM2 of 1986 RE: JOHN WAYMOUTH AHERN and DESMOND WILLIAM KNIGHT EX PARTE: ROBERT ARTHUR ALLEN Deputy Registrar in Bankruptcy for the Southern District of the State of Queensland Applicant AND: JOHN WAYMOUTH AHERN First Respondent AND: DESMOND WILLIAM KNIGHT Second Respondent PINCUS J. 14 NOVEMBER 1986 REASONS FOR JUDGMENT These are applications brought by Mr. R.A. Allen, Deputy Registrar in Bankruptcy for the Southern District of the State of Queensland, for orders relating to Messrs. Ahern and Knight who are registered trustees. One of the applications is made in the estate of Mr. I.G. Goddard. Reasons in respect of an application by Mr. Goddard concerning his discharge have been delivered today, and it seems to me unnecessary to repeat the history of the matter insofar as it is set out in those reasons. These applications and that made by Mr. Goddard have been procedurally connected in that the present applicant sought to attach these matters to Mr. Goddard's application. Initially, he attempted todo that by suggesting in a report by him concerning Mr. Goddard's bankruptcy affairs that steps should be taken against Messrs. Ahern and Knight. In the end, however, two formal applications were filed. One of those asks that there be an inquiry anto the bankrupt estates of Mr. Goddard, that Mr. Ahern be removed from the trusteeship of Estate 181 of 1982, that Messrs. Ahern and Knight be examined in relation to those estates, and that Mr. Knight pay the sum of $522.61 to the trustee of Estate 181 of 1982. Two of those matters are easily disposed of. Mr. Ahern, without making any admission, consents to an order for his removal and I will order accordingly. As to the $522.61, it seems clear, as was submitted, that the same was after-acquired property and no order should be made relating to it. That leaves for consideration, in respect of the application just mentioned, the questions whether there should be an inguiry into the bankrupt estates, and whether Messrs. Ahern and Knight should be examined in relation to them. Hear oe nen eee er a es | ne en ep ee . oo Ss The other application asked for orders that Messrs. Ahern and Knight "do answer the matters referred to" in two reports of Mr. Allen dated 12 March 1986 and 14 April 1986. As I understood the argument of Mr. Logan of counsel for the applicant, that was not pressed and I will say no more about it. The second application further asks that Messrs. Ahern and Knight show cause why their registration as trustees under the Bankruptcy Act should not be cancelled and for directions. In brief summary then, the applications remaining to be dealt with are for an inquiry, examinations of the two trustees and cancellation of their registration. Before coming to the details of these matters, I note that there appears to me to have been some problems relating to the administration of bankrupts' estates, arising from trustees' inactivity. That is particularly so, of course, where there is no cash in an estate, so that the trustee either has to work at his own expense or persuade creditors to provide money, for the purpose, for example, of recovering debts claimed by the bankrupt to be due to his estate. The facts to be referred to below show that as to Mr. Ahern, and to a lesser extent, as to Mr. Knight, the estate of Mr. Goddard illustrates the problem. The Act sets out some trustees' duties in s.19, and it will be noted that they include ascertaining the assets and liabilities of the bankrupt (1(b)) and investigating his conduct, dealings and transactions (l({c)(i)). Section 19 does not appear - es + on . bel -r FOR oe ern re to be a comprehensive statement of the duties of those consenting to be appointed as trustees of an estate, and those duties are to be found, in large part, in the general law of trusts. Under that law, trustees have a duty to sue when necessary. In Re Brogden; Billing v. Brogden (1888) 38 Ch.D. 546, the trustee was held to have failed in that duty and the case went to the Court of Appeal. Fry L.J. gaid, at p.571: "A trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which and at which he shall carry his duty into effect. But his discretion is never an absolute one; 1t is always limited by the duty - the dominant duty, the guiding duty - of recovering, securing, and duly applying the trust fund." Lopes L.J. at p.574, speaking of a trustee whose duty it was to obtain payment of trust moneys at a specified time, said: "Such a trustee, in my opinion, is bound at the expiration of a specified time to demand payment of the trust moneys, and if that demand is not complied with within a reasonable time to take active measures to enforce its payment, and if necessary, to institute legal proceedings. [I know of nothing which would excuse the neglect of such action on the part of a trustee, unless it bea well-founded belief that such action on his part would result in failure and be fruitless, the burden of proving the grounds of such well-founded belief lying on the trustee setting it up in his own exoneration." In my view, however, Brogden's case, and others like it in the law of trusts, do not show that a trustee in bankruptcy is necessarily obliged to expend his own funds in recovering the property of the bankrupt and money said to be due to him. Section 129(1) requires the trustee to take possession of all property of the bankrupt capable of manual delivery, but there is no express provision requiring him to recover choses in action. Section 109(10) empowers the Court to make orders giving creditors who have indemnified a trustee 1n respect of costs of litigation an advantage over others "in consideration of the risk assumed ...". The presence of that provision is hardly consistent with a view that the trustee has a general obligation to assume the risk himself. It does not seem necessary to attempt to define the extent of the duty of the trustee in bankruptcy in respect of recovery of assets, including debts, said to farm part of the estate of the bankrupt. Clearly, however, the fact that there is no cash in the estate does not of itself justify the trustee in taking no steps whatever towards recovery of assets; in some circumstances, he will have to make the choice between spending his own money and giving up the trusteeship. In Re Gulf Sawmills Ltd. £19221 3 W.W.R. 870, McDonald J. referred to the "duty of the trustee before taking a trusteeship to guard against the contingency of being placed in the uncomfortable position of having to bear these expenses himself". If a prospective trustee is not prepared to take at least some reasonable steps towards recovery of assets, where there is no cash in the estate, he should not accept the trusteeship. I turn now to the provisions which are immediately relevant to the applications before me. Under s.179, the Court has power to inguire into the conduct of the trustee in relation to a bankruptcy and may remove him from office (sub-s.1). The hoe re eee 7 ow me . of rooye te ptm wee Ree 7% -_ vot vas ernie eee Court may also order the examination of a trustee in relation to a bankruptcy (sub-s.3). Section 155 provides for registration of persons as trustees and under s.155(5B) the Court may suspend for a specified period, or cancel, the registration of a person as trustee. Under r.102, an application to the Court that is not required to be made by petition is to be instituted by filing an application and r.103(1) makes it necessary that the facts on which the applicant proposes to rely in support of the application be stated in the affidavit. Where the application is one for an inquiry only, it presupposes that the facts are not fully known and a question arises as to what extent it is necessary to prove facts relating toa trustee inorder to justify an inquiry. Obviously, an inquiry should not be ordered as a matter of course. In Re Alafaci; Registrar in Bankruptcy v. Hardwick (1976) 9 A.L.R. 262, Riley J. discussed, at pp.267 and 268, the procedure to: be followed on an application for an inquiry and said, among other things: "Before the application is heard, therefore, the trustee will know the grounds on which the Court will be asked, inter alia, to inquire into his conduct and the facts on which the Registrar proposes to rely in support of his application that the Court do so inquire ... in such a case as this, there is a preliminary question to he decided by the Court - namely on the grounds and facts before it, has a case been made for inquiry into the trustee's conduct? If the answer to that question is 'yes', the next question is - what is to be the scope of the inquiry? ... the Court will seek to inquire into specific matters, and to ensure that the trustee is given proper opportunity to prepare and present his case on those matters." meee ere pri caer + foamy. y - por ot we ee ape ere oe coded aie o In Re Gault; Gault v. Law (1981) 57 F.L.R. 165, an application was made for an inquiry under s.179, and Ellicott Jd., after referring to the remarks of Riley J. in Re Alafaci (above), and mentioning that he, (Ellicott J.) had required particulars to be given of the misconduct relied on, remarked: "The Court has a broad discretion in deciding whether to order an inquiry. In my opinion it is not required to order an inquiry unless it is satisfied that sufficient grounds have been made out. For instance, the Court should be loath to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration." (p.173) See also Re Ladyman (1981) 38 A.L.R. 631, a decision of Rogerson dg., as to the circumstances in which an examination of a trustee might be ordered under s.179(3). It is now necessary to turn to the facts relating to each trusteeship, but I should say at the outset that having considered the material, I am not satisfied that any inquiry is necessary with respect to the estate of Mr. Goddard. That is so, not because the estate was satisfactorily administered - it was not ~- but because the facts relating to it appeared to me to have been sufficiently elicited by the praceedings which have already taken place. As mentioned in my reasons in the application by Mr. Goddard, he filed his own petition on 16 March 1982. The sequestration order was made on 28 April 1982. It was, perhaps, "wt 4 oa aawoot oe me . a +o \ - Se rt ener et Fe at Seontubenndheerihanata or Out hhh Or fe aveieeiehe "oat ad to be expected that the sequence of events would cause confusion. Mr. Knight, who was appointed trustee under the first bankruptcy, undertook the trusteeship and carried it on after the making of the sequestration order under which Mr. Ahern was to be trustee. Neither trustee appeared to know who should carry the responsibility for administration of Mr. Goddard's estate, and at the request of Mr. Ahern, the Registrar made a "ruling"" on that question. He ruled on 2 March 1983 that Mr. Ahern should, and that was accepted by Mr. Knight, who ceased to act, and by Mr. Ahern, who promptly wrote to Mr. Goddard asking him to call. However, neither before nor after March 1983, did Mr. Ahern take any positive step of a significant kind towards administration of the estate. I turn now to the evidence in greater detail. On 20 April 1982, according to the affidavit of Mr. Knight, Mr. Goddard told him he intended to file a debtor's petition. (He had, in fact, already signed one and it had been lodged in the Court.) Mr. Goddard told Mr. Knight that he wanted Mr. Knight to act as his trustee and had a detailed discussion with him; a statement of affairs was prepared. Mr. Knight says that he thinks the reason for Mr. Goddard's approach was that the two men had had contact with one another in relation to a receivership of a company, and that connection, said Mr. Knight, gave him knowledge of some of Mr. Goddard's assets. Mr. Knight signed a consent to act as trustee on the same day, but, eight days later, the sequestration order was made. On 7 May 1982, Mr. Knight advised creditors of his appointment; ot some proofs of debt were received. On 17 May 1982, Mr. Knight wrote asking for copies of mortgages over Mr. Goddard's home and they were supplied on 21 May. On 26 May 1982, Mr. Knight arranged to collect Mr. Goddard's books and business records, resulting in the location of two further unsecured creditors, who were then invited to lodge proofs of debt. On 9 July 1982, Mr. Ahern wrote to the Australian Federal Police, trying to locate Mr. Goddard. It was at one stage suggested that Mr. Goddard had secreted himself, but that appears to me not to be so; he kept in touch with Mr. Knight, but not with Mr. Ahern. It is not clear why he did not appreciate that Mr. Ahern had also been appointed trustee. On 30 August 1982, Mr. Knight wrote to Mr. Goddard, enclosing income tax returns in respect of the year ended 30 June 1982. I would remark that it does not seem desirable, prima facie, that a bankrupt's trustee act as personal accountant for him. On 16 September 1982, Mr. Ahern wrote a letter to Messrs. R.G. Kilner and Black, Solicitors, advising that "despite exhaustive enquiries we have been unable to locate Ian G. Goddard nor obtain a statement of his affairs". The reference to "exhaustive enquiries" appears to be an overstatement. In November 1982, Mr. Knight forwarded a copy of Mr. Goddard's statement of affairs to a Mr. Tuckey in connection with a debt allegedly owing by San Carlos Constructions Pty. Ltd. On 8 December 1982, there was received the sum of $522.61 referred to more . ae ae werk Noe ee oer ees ate - Tarn er) me POT nw. * » 10. above, and on 22 December 1982, Mr. Ahern asked for the Registrar's ruling which is also referred to above. It appears that he had not, until then, appreciated that Mr. Goddard had another trustee, Mr. Knight. After the ruling was given, Mr. Knight says "the administration of the estate was left to the other trustee, Mr. Ahern." Mr. Ahern, however, seems to have done very little. He wrote to the Deputy Commissioner of Taxation in August saying that there had been no receipts and disbursements, and to Australian Guarantee Corporation the same month, saying that no dividend was likely to be paid. Apart from a few letters of that sort, nothing of consequence occurred until the application for discharge was made. The statement of affairs shows that Mr. Goddard claimed to have due to him a_ sum of $75,000 by Royal Insurance Co. Ltd. As to that, Mr. Knight says, the debt was disputed and that there was no money to enable the institution of proceedings; however, the matter is said to have been "investigated"; he produces a diary note relating to it. According to that note, a premium was received after the occurrence of the fire, but Mr. Goddard said he had "a legal opinion to the effect that the insurance company, if they had accepted the risk it should have paid out..." On the face of it, one would suspect that the claim was not very promising, but it did not receive any real attention, apart from a brief conversation with Mr. Goddard about it. Mr. Knight also deals in his affidavit with debts claimed by Mr. Goddard to be due by others; nothing was recovered and it has to be said that no ne re veer Oe a - epee epee: . . wi ae og eae ee na a nr ae poets eee ee y il. steps of any consequence appear to have been taken towards recovery; in particular, no demand was made on any alleged debtor to Mr. Goddard. The impression created by perusal of the file is that in substance all that was done was to go through the forms of acting as trustee, no doubt because Mr. Knight was of the view that nothing was likely to be achieved by more vigorous action to get some money into the estate. One aspect of Mr. Knight's conduct of which particular complaint was made was delay in producing his file after requests were made. It 1s clear that there was such delay; the requests were treated as a matter having low priority. Mr. Knight says in his affidavit that about 5% of bankruptcy administrations "actually pay their way in the sense of providing the trustee with sufficient funds to at least cover the costs of administration". Plainly, the estate in question was not within that 5%. It was argued on behalf of the applicant that directions should be given in respect of the claim for the orders sought against Mr. Knight. Mr. Robin Q.C. contended that particulars should be ordered, that the wrong procedure had been used and that an order for costs should be made against the applicant. Although there is a possibility that further examination of Mr. Knight's conduct might throw more light upon it, the material presently before the Court makes it plain enough that an inquiry is unnecessary. be anal sete oo aero — roe st capaseeny ers te ote for le bye nnne ae sha ard 12. The bankruptcy consequent upon acceptance of the gebtor's petition has been annulled. However, in accordance with the view expressed in my reasons dealing with the application by Mr. Goddard, there was a bankruptcy and Mr. Knight was a trustee. The impression created by the papers is that there was never any serious expectation on the part of Mr. Knight that the bankruptcy would produce anything for the creditors and no strong effort was made to get in any assets, because the estate was seen from the outset as one which would be unprofitable. Mr. Logan, counsel for the applicant, told me that it was proposed to rely as against Mr. Knight on his conduct in relation to other estates which were being investigated. I see no reason to keep this application alive to enable that to be done. It appears to me that, in accordance with the authorities set out above, it 1s, in general, necessary that a fairly specific prima facie case be made out before an inquiry is ordered. I propose to dismiss these applications against Mr. Knight but in the circumstances will not make any order as to costs. I turn now to the applications against Mr. Ahern. He has made reports to the Court saying, among other things: "It was not until December 1985 that Goddard accepted that the current trustee administer his estate and therefore no information in regard to the debtor was available to the trustee until that time." It is clear that none other than very desultory steps were taken by Mr. Ahern after he (with reluctance) accepted the tt eg aceon ec « " woe oa we yt mi to eg gp My Le i er iad ote en ek es "4 \' £ ;}- h ts i n 13. "ruling" in March 1983 that he, and not Mr. Knight, should administer Mr. Goddard's estate. It aus improbable that' the znactivity was wholly or largely due to Mr. Goddard's attitude, as mentioned above. Mr. Ahern has consented to his removal as trustee of the estate and that will be ordered; in the circumstances, his consent might not have been necessary. However, an inquiry under s.179 into the administration of the estate by Mr. Ahern, the facts relating to which are only too simple, appears to me unnecessary; nothing 1s to be gained by it. A more difficult question is whether the applicant should be allowed to pursue the foreshadowed course of filing material in respect of Mr. Ahern's administration of other estates in these applications. Mr. Logan, for the applicant, sought directions about that, although it is not mentioned in either application. While not wishing either to encourage or to discourage the taking of further steps against Mr. Ahern, I express the view that if those matters are to be pursued a fresh application should be filed. In my view, the assembly of the material which the applicant intimated that he hoped to gather in respect of estates other than that of Mr. Goddard should precede the making of the application. If one is made, it should be accompanied by an affidavit setting out in detail the evidence relied on. I do not favour the course which was adopted here of making an application before most of the information to support it was to hand. pc eee 14. I therefore propose to make no other order on the applications than that Mr. Ahern be removed from office as trustee of the estate of Mr. Goddard; otherwise the applications will be dismissed, but with no costs. t certify that this andthe {3 preceding Pages are a true copy of the reasons for judarrent herein of His Honour Mr Juscice Pincus A lbcck Lot re / Associate ee en, He ot Be rtd Pa ee eee wpe wens tenors we: ae Salted (alr tealietae aietemecenetettaten s4 mm . sett tte ee eres ep > . a . . '