JUDGMENT NO. see! Queenl att. CATCHWORDS BANKRUPTCY - Deed of Arrangement under Part X, Bankruptcy Act, 1966 (Cth) - collection of money or property by Official Receiver from party to transaction that is void against the trustee - whether sale by trustee of property with net value in excess of $20,000 was in breach of ss. 134 and 135 - whether, notwithstanding trustee's breach, transaction valid. BANKRUPTCY - Trustees -— Remedies and penalties for breach of duty by trustee - trustee also appointed trustee of deed of maintenance under s.87 Family Law Act - whether court's power pursuant to s.176(2)(c) should be exercised as a remedy for a breach of duty a trustee in his capacity as a trustee under the Bankruptcy Act. FAMILY LAW - Deed of maintenance agreement under s.87, Family Law Act, 1975 - whether trustee owed any fiduciary duty to debtor's estate other than in relation to any surplus remaining from the proceeds of realisation of an assigned asset. Bankruptcy Act, 1966 (Cth) ss. 134, 135, 176, 237, Family Law Act, 1975 (Cth) 5s. 87 RECEIVED 17 OCT 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTAY g JUDGMENT NOx ends Coal tn eee IN_THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES No NB 247 of 1988 Re: JOHN PHILIP SWAIN WILLIAM EDWARD ANDKEW Applicant/Cross—Respondent INSPECTOR-GENERAL IN BANKRUPTCY First Respondent/Cross-Applicant ANGUS BARTLEY CAMERON THORBURN Second Respondent Third Respondent COMMISSIONER OF TAXATION Fourth Respondent ARTLEY Fifth Respondent Coram: Olney J Place: Melbourne (Heard in Sydney) Date: 7 October 1994 MINUTE OF ORDERS THE COURT ORDERS THAT: 1. The applicant be directed to distribute all moneys presently held by him in his capacity as trustee under the Deed of Arrangement executed on 20 July 1988 by John Philip Swain in accordance with the terms of the deed and the Bankruptcy Act. NOTE: The amended application filed on 3 June 1993 be otherwise dismissed with no order for costs. The cross-claim filed on 21 April 1993 be dismissed. The cross-claimant pay the costs of the third respondent of and incidental to the amended application and the cross-claim. The amended application filed in the Family Court of Australia on 26 November 1993 be dismissed with no order for costs. 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 STATE OF NEW SOUTH WALES ) No NB 247 of 1988 Re: JOHN PHILIP SWAIN WILLIAM EDWARD ANDREW Applicant/Cross—Respondent INSPECTOR-GENERAL IN BANKRUPTCY First Respondent/Cross-Applicant ANGUS BARTLEY CAMERON THORBURN Second Respondent ELIZABETH KENDALL -G OCT 1994 Third Respondent TEORUSTRALA TAXATI PRINCIPAL REG ISTRY Fourth Respondent BARTLEY RON TH Fifth Respondent Coram: Olney J Place: Melbourne (Heard in Sydney) Date: 7 October 1994 REASONS FOR JUDGMENT IHTRODUCTION The matters presently before the Court have to do with the affairs of the late Dr John Philip Swain, who entered into a deed of arrangement under Part X of the Bankruptcy Act (the Part X deed) on 20 July 1988, and who died on 12 April 1990. At the time the Part X deed was signed Dr Swain (to whom I will refer as the debtor) was the registered proprietor of an -2— undivided half share as tenant in common in a house property at 12 Boolarong Road St Ives (the St Ives property). The other half share was held by the debtor's former wife Janet Gwendoline Audrey Swain who is now known as Mrs Arthur-Lennox. Under the Part X deed the debtor's interest in the St Ives property vested in William Edward Andrew a registered trustee under the Bankruptcy Act (the trustee), for the benefit of the creditors. On 24 June 1991 the trustee transferred his interest in the St Ives property to Mrs Arthur-Lennox without having obtained the permission of the creditors or the leave of the Court. THE PROCEEDINGS By application filed on 2 March 1993 the trustee sought the following declarations and orders namely: 1. A declaration that the action of the trustee in selling to Janet Gwendoline Audrey Arthur-Lennox his right and interest in the property known as 12 Boolarong Road, St Ives did not require a resolution of creditors or the leave of the Court. 2. Directions generally in connection with the distribution of moneys from the sale to Janet Gwendoline Audrey Arthur-Lennox of his right title and interest in the property known as 12 Boolarong Road, St Ives. 3. Such further or other orders as the Court may deem fit. On 21 April 1993 the Inspector-General in Bankruptcy (the Inspector-General) filed a cross-application seeking: 1. A declaration that the Applicant, ae Trustee of the estate of John Philip Swain has been guilty of breaches of duty in relation to the estate and affairs of John Philip Swain. 2. An Order that the Applicant pay to the estate of John Philip Swain the sum of $77,378.00 with interest. 3. Such other orders as the Court considers just and equitable in the circumstances. Costs. An amended application was filed on 3 June 1993 in which the trustee sought, original application the following further relief, namely: 3. An order that the approval of the Family Court of Australia at Sydney of the Deed of Maintenance Agreement dated 24 May 1989 between John Philip Swain, Janet Gwendoline Audrey Swain, William Edward Andrew and the Deputy Commissioner of Taxation be revoked. An Order that the Application of the Trustee, William Edward Andrew dated 25 February 1993 and filed herein be transferred to the Family Court of Australia pursuant to 8 35A of the Bankruptcy Act 1966. Subsequently, on 22 November 1993, the trustee filed in addition to the relief claimed in the an application in the Family Court of Australia which was amended on 26 November 1993, in which the following relief was sought: 1. 4. A Declaration that a Deed of Maintenance Agreement dated 24 May 1989 between John Philip Swain, Janet Gwendoline Audrey Swain, William Edward Andrew and the Deputy Commissioner of Taxation is unenforceable either in law or in equity or pursuant to the provisions of the Family Law Act 1975. An order that the approval pursuant to the provisions of the Family Law Act 1975 Deed of Maintenance Agreement dated 24 May 1989 between John Philip Swain, Janet Gwendoline Audrey Swain, William Edward Andrew and the Deputy Commissioner of Taxation be revoked. An order that the application of William Edward Andrew be transferred to the Federal Court of Australia. Such further and other orders as the Court may deem fit. On 10 February 1994, the Family Court of Australia ordered by consent that the trustee's amended application be transferred to this Court. The matters presently before the Court are the trustee's amended application filed 3 June 1993, the Inspector-General's cross-application filed 21 April 1993 and the trustee's -4- amended application filed in the Family Court of Australia on 26 November 1993. THE FACTS The debtor's statement of affairs placed before a meeting of his creditors held on 20 July 1988 disclosed assets of $256,500 including his half interest in the St Ives property which he then valued at $200,000. The statement disclosed liabilities of $174,027 owing to 5 creditors. The major creditor was the Commissioner of Taxation (the Commissioner) who was said to be owed $168,000. At the meeting, the creditors approved a scheme of arrangement whereby the debtor conveyed and assigned his half interest in the St Ives property to the trustee upon trust to deal with in accordance with Part X of the Bankruptcy Act for the benefit of the creditors and as to any surplus after paying the creditors in full and the costs of the scheme, for the debtor, his executors administrators or assigns. The deed was executed by the debtor and the trustee on 20 July 1988. The deed provided that the creditors agreed and accepted the distribution made pursuant to the deed in full and final satisfaction of their respective claims against the debtor. The only creditors to prove their debts were the Commissioner, who proved for the sum of $155,361 and Mervyn Finlay Thorburn & Marshall, a firm of solicitors, who proved for $2,597. Angus Bartley Cameron Thorburn (Thorburn) to whom reference is -5- made later, is and was at all material times a partner in that firm. On 24 May 1989 certain proceedings in the Family Court of Australia between the debtor and his former wife relating to financial and other matters were settled pursuant to an agreement which was approved by the Family Court pursuant to s 87 of the Family Law Act. The agreement is hereafter referred to as the s 87 agreement. The parties to the s 87 agreement were the debtor (described as the husband), his former wife (described as the wife), the trustee and the Commissioner. Relevant to the matters presently in dispute, the s 87 agreement provided as follows: 4. The Trustee and the Wife shall within six weeks of the date of approval of this agreement sign all documents and do all acts and things necessary to cause the matrimonial home to be listed for gale by private treaty through such real estate agents that the Trustee and the Wife may agree (excepting Raine & Horne) and in absence of agreement then L J Hooker Limited at such asking price as the Wife and the Trustee may agree in writing but in any event not less than $585,000.00 and in the event of a willing buyer being found at a price agreed between the Trustee and the Wife in accordance with this provision then both the Trustee and the Wife covenant that they shall each give such instructions, sign all documents and otherwise do all acts and things necessary to cause the property to be sold to such buyer. 5. In the event that the matrimonial home does not sell by private treaty and there has been no exchange of an unexpired preliminary agreement within five months of the date of approval of this Deed, then the trustee and the Wife shall both forthwith sign all documents and do all acts and things necessary to cause the property to be submitted for sale by public auction at the earliest convenient date thereafter as recommended by the auctioneer, such auctioneer to be agreed between the Wife and the Trustee and in absence of agreement then L J Hooker Limited, such auction to be conducted at such reserve price as the trustee and the Wife may agree in writing and in absence of agreement at a reserve price nominated by a valuer to be appointed by the President of the Real Estate Institute of New South Wales and upon the said auction being held the Trustee and the Wife shall attend such auction and shall do all acts and things necessary to sell to the highest bidder at or above the said reserve price at such auction or at such other price as the trustee and the Wife may agree in writing and negotiate with the highest bidder. 6. In the event that the matrimonial home fails to sell at public auction in accordance with operative clause (5) herein then the trustee and the Wife do covenant that they shall both join in doing all acts and things necessary to cause the said property to be resubmitted for auction at the earliest convenient date to be recommended by the auctioneer pursuant to the same terms and conditions excepting that there shall be no reserve price. 7. In the event of the matrimonial home being sold pursuant to the forgoing (sic) provisions of this Deed then the proceeds of sale shall be paid and applied in the following manner and priority namely: (a) in payment of agents' commission and auction expenses, if any, on the sale. {b) 1n payment of solicitors costs and disbursements on the sale. {c) in payment of any valuation fees incurred pursuant to these covenants. (da) in payment of the sum of $12,000.00 to the Australian Government Solicitor being the agreed legal costs of the Commissioner and the Trustee in these proceedings. {e)} the balance of the proceeds of the matrimonial home as remain after payments (a) to (d) above shall be referred to herein as "the nett fund". (f) fifty per cent of the nett fund shall be paid to the Trustee to enable payment by the Trustee pursuant to the terms of the Deed of Arrangement dated 20 July 1988 and pursuant to his obligations under the Bankruptcy Act and Bankruptcy Rules. (g) the husband and the wife shall then join in signing all documents and doing all acts and things necessary to cause the surplus of funds held by the Trustee after discharging all duties referred to in (f) herein together with the remaining fifty per cent of the nett fund to be distributed between them by a payment to Messrs McDonell Milne Fowler on behalf of the Wife equivalent to 60% of "x" where "X" equals (nett fund, less $155,361.13 payable to the Commissioner by the Trustee and less the proper remuneration and costs of the Trustee in administering the Deed of Arrangement dated 20 July 1988) thereafter the balance then remaining shall be paid to the Husband or as he shall direct. Thorburn had acted as the debtor's solicitor in the Family Court proceedings and witnessed his signature to the agreement, but neither he nor his firm (in its capacity as a creditor of the debtor) was a party to the agreement. -7J=- Initially, the debtor's former wife did not co-operate with the trustee in giving effect to the s 87 agreement. Indeed, the trustee went so far as taking proceedings in the Family Court against her for contempt, but those proceedings were not pursued. The debtor died on 12 April 1990. By his will he appointed Thorburn and Elizabeth Kendall (Mrs Kendall) to be his executors. Probate was granted to the executors on 6 June 1990. Subject to her surviving the debtor for a period of 30 days (which she did), Mrs Kendall was the sole beneficiary. Acting pursuant to the s 87 agreement, the trustee arranged for the St Ives property to be offered for sale by auction on 24 April 1990. The reserve price was set at $450,000. The auction did not take place. On 19 April 1990 the trustee became aware that there was a caveat on the title to the property which had been lodged by the trustee of a previous Part X scheme which had been set aside. The caveat had not been withdrawn when the scheme was set aside. On 21 April 1990 Mrs Arthur-Lennox told the trustee that she intended to obtain revocation of the s 87 agreement and that she had instructed solicitors to seek an injunction to prevent the auction taking place on 24 April 1990. On the same occasion Mrs Arthur-Lennox said she had arranged a loan through the National Australia Bank for sufficient funds to enable the debtor's creditors to be paid and she offered to acquire the trustee's interest in the St Ives property for $225,000. -g8- Subsequently, on 23 April 1990, a solicitor acting for Mrs Arthur-Lennox told the trustee that he had instructions to seek an injunction and an order setting aside the s 87 agreement. The St Ives property was withdrawn from sale on the trustee's instructions but as it happened, no action was taken on Mrs Arthur-Lennox's behalf in respect of either obtaining an injunction or setting aside the s 87 agreement. The trustee also spoke to the manager of the National Australia Bank at St Ives and was told that the bank would provide funds to enable Mrs Arthur-Lennox to purchase the trustee's interest in the St Ives property provided that a clear title could be obtained. The trustee formed the opinion that Mrs Arthur-Lennox's offer should be accepted. It was clear to him that unless the caveat could be withdrawn, the auction could not proceed on 24 April 1990. A valuation obtained in March 1989 had placed the value of the property in the range of $380,000 to $400,000. At an inspection of the property on 21 April 1990 a prospective purchaser had offered $380,000 and was later prepared to increase the offer to $400,000. Clearly, an offer of $225,000 for the trustee's half share in the property, without the cost and risk involved in a sale by auction represented reasonable value. He agreed to cancel the auction and sell his interest to Mrs Arthur-Lennox for $225,000. There is no evidence of a formal contract having been executed. -3J—- It is not suggested by any party to these proceedings that $225,000 was other than an appropriate value of the trustee's interest in the St Ives property. The trustee called a meeting of creditors for 23 August 1990. In a report to the creditors dated 16 August 1990 the trustee wrote: I refer to my Report dated 18th November 1988, and advise following the death of Doctor Swain in April, 1990, I agreed to sell my interest in the house property at St Ives to his former wife Janet Arthur Lennox for $225,000 and anticipate settlement of the sale will be effected shortly. As the result of the necessity to institute proceedings in the Family Court of Australia my remuneration to 3lst July, 1990, calculated in accordance with the scales of fees recommended by Insolvency Practitioners Association of Australia to 3lset July, 1990 totals $18,865.00 Creditors are requested to fix my total remuneration in this matter at the sum of $20,000.00 such amount including future remuneration in the finalisation of my administration. The meeting on 23 August 1990 was attended by the trustee, Ms Helen O'Sullivan (as proxy for the Commissioner) and Thorburn (representing his firm). The minutes record the following reference to the sale of the St Ives property: The trustee informed the meeting of the present position regarding the sale to Mrs Arthur-Lennox and tabled the copy certificate of title issued on lst August, 1990. At the same meeting Thorburn advised that he was one of the executors appointed by the debtor. In that capacity he enquired as to what surplus was expected from the administration. The trustee agreed to furnish an estimate. The sale of the trustee's interest in the St Ives property to Mrs Arthur-Lennox was settled on 24 June 1991. On 23 July -10- 1991 the trustee made a distribution of 50 cents in the dollar. A further meeting of creditors was convened for 20 December 1991. The meeting purported to pass resolutions relating to the payment of legal costs, auctioneer's fees and the trustee's remuneration. As no quorum was present these resolutions were a nullity. On 30 November 1992 another meeting of creditors was held. The notice of meeting identified 5 motions which were to be put to the meeting. Four of them were identical to the motions put to the abortive meeting of 20 December 1991. The fifth was as follows: S. That the action of the Trustee in selling to Janet Gwendoline Audrey Arthur-Lennox his right, title and interest in the property known as 12 Boolarong Road, St Ives be and it is hereby approved and confirmed. The meeting was attended by the trustee, Ms O'Sullivan (proxy for the Commissioner) and Thorburn. Two officers of the Insolvency Trustee Service Australia and Mrs Kendall attended as observers. The motions relating to legal costs, auctioneer's fees and trustee's remuneration were duly passed. The minutes record the following under the heading "Sale to J.G.A. Arthur-Lennox": The Chairman restated the reasons for his decision to sell his right title and interest in the property at St Ives to Mrs Arthur-Lennox and a general discussion took place as to the result of that decision from which the following points: 1. There is a balance due by Mrs Arthur-Lennox to the trustee -11- for the adjustment of rates, repairs to swimming pool etc. However it was generally agreed any attempts to recover the balance would be futile. 2. The executors of the Will of John Philip Swain have no objection to the sale to Mrs Arthur-Lennox or the price agreed upon however contend the formulae provided for in the maintenance agreement for the distribution of the proceeds of sale must be followed. 3. Nothing in the maintenance agreement prevented a sale by the trustee to Mrs Arthur-Lennox and it was always open to a decision by the trustee to sell to her. 4. The Official Receiver will furnish to the Trustee and executors his calculation of the amount which Mrs Arthur-Lennox was liable for and the points he considers should be covered in the proposed Application to the Court for Directions. Mrs Kendall does not agree that the foregoing accurately records the whole of the discussion concerning the matter in question. However, it is common cause that the fifth proposed motion set out in the notice of meeting was not put to the creditors. Nor was any other motion touching upon the sale of the St Ives property. The trustee currently holds the balance of the net sale proceeds less his remuneration and other costs of the administration. The sum in hand is of the order of $70,000. The trustee proposes to distribute this sum in payment first of legal costs due to the Australian Government Solicitor in relation to the Family Court proceedings (payment of which has been approved by the creditors) and then to pay the creditors a further dividend. The amount in hand is insufficient to pay the creditors a full 100 cents in the dollar. There will be no surplus available to pay to the debtor's estate. Thorburn filed an affidavit in these proceedings, sworn by him on 27 April 1993. It is obvious that the affidavit relates -12- to his interest in the matter in his capacity as one of the debtor's executors rather than as a creditor. He did not appear at the hearing as a party in either capacity but he did make himself available for cross-examination. In his affidavit he said, inter alia: 38. The trustee did not, prior to his agreement with the deceased's former wife, seek my consent as to his course of action in selling the property to her. After being advised by the trustee of his decision to sell his half share of the property to the widow of the deceased, I accepted his reasons for deciding on this course, particularly those expressed as being that there had been no other offers on the property greater than that offered by the wife, and the likelihood of the wife instigating further proceedings in relation to the maintenance agreement, albeit, in my view, doomed to failure. I did, however, believe that he would conduct the sale according to the terms of the Maintenance Agreement, and make the necessary adjustment from the wife for the liabilities arising out of the agreement. I also believed that the trustee would, having in mind his past experience with the wife of the deceased during the course of the previous litigation - endeavour to ensure that a settlement was completed as quickly as was reasonably possible. Mrs Kendall also says that she was not consulted concerning the decision to sell the trustee's interest in the St Ives property to Mrs Arthur-Lennox. In an affidavit sworn on 15 August 1994 and filed in the proceedings on behalf of the Commissioner, Ms O'Sullivan recounts a conversation with the trustee on 8 May 1990 in which she was advised of the proposal to sell the trustee's interest in the St Ives property to Mrs Arthur-Lennox for $225,000. At paragraph 6 - 8 of her affidavit Ms O'Sullivan says: 6. To the best of my recollection during that conversation the trustee gave a number of reasons for his action. I -13- was aware that there had been difficulties dealing with Mrs Swain and I was pleased that the matter was finally coming to a conclusion. I assumed that the sale would be conducted according to the terms of the Maintenance Agreement dated 24 May 1989. 7. Annexed hereto and marked with the letter "C" is a copy of a file note I made in relation to a creditors meeting held on 23 August 1990. To the best of my recollection the Maintenance Agreement was not discussed at that meeting. 8. I did not give any thought to the fact that the funds from the gale were not being distributed in accordance with the Maintenance Agreement until I attended a creditors meeting held on 30 November 1992. That meeting was also attended by representatives of the Insolvency Trustee Service Australia. The Inspector-General has become involved in these proceedings following a complaint by Mrs Kendall as to the trustee's conduct in not disposing of his interest in the St Ives property in accordance with the terms of the s 87 agreement. Mrs Kendall says, and it is fact, that had the whole property been sold for $450,000, the debtor's estate would have had an entitlement to a substantial sum following a distribution of the sale proceeds in accordance with clause 7 of the s 87 deed. It was as a result of the intervention of the Official Receiver in Bankruptcy following Mrs Kendall's complaint that the trustee was encouraged to institute these proceedings. Indeed, the encouragement was supported by a firm indication from the Official Receiver that failure to seek appropriate orders from the Court could have dire consequences for the trustee. As it was, once the trustee commenced the proceedings the Inspector-General filed a cross-application, but seemed to step back from the position previously adopted by having his solicitors write to each of the parties as follows: Our client's Application, made under section 176 of the Bankruptcy Act 1976 (Cth), should enable all matters in dispute between the parties to the proceedings to be the subject of proper adjudication. It is designed to enable the Court: (1) to determine the merits of Mrs Kendall's complaint about the conduct of the Trustee; and (1i) to make such orders as the nature of the case may require in respect of that complaint. The Inspector-General does not propose to take what might be described as an ordinary adversarial role in these proceedings. His object will be to assist the Court by endeavouring to ensure that all parties have a reasonable opportunity to place before the Court such facts and submissions as may be appropriate to enable Mrs Kendall's complaint to be fairly determined by a Judge. The Inspector-General's role being to serve the public interest, it should not be assumed, by anybody, that he can serve the private interests of any party to the proceedings. We record these observations here, publicly, so as to ensure that all parties are on notice to take such precautions as they think appropriate to protect their personal interests. The Inspector-General has put in evidence a calculation said to be made in accordance with clause 7 of the s 87 agreement on the basis that there was a notional sale of the St Ives property for $450,000. The Inspector-General's figures are as follows: Notional sale price of property $450,000.00 Disbursements as per clause 7 of Maintenance Agreement Agent's commission (as per scale costs quoted by Real Estate Institute of NSW) $ 10,100.00 Legal Fees $ 1,630.00 Valuation fee $ 1,168.00 Survey fee § _ 350.00 $ 13,248.00 Costs due to Australian Government Solicitor £.12,000,00 § 25,248.00 Available for distribution as net fund $424,752.00 50% of $424,752.00 is payable to the Trustee pursuant to clause 7(f) $212,376.00 Paid by the trustee under the terms of the Deed of arrangement Legal costs $ 37,404.24 Official fees $ 4,315.80 Bank charges and administrative costs & 1,941.05 $43,661.09 Trustee's remuneration $ 26,500.00 Proved creditors $157,958.00 $228,119.09 4 share of water and council rates $2,713.63 4; share insurance premiums $454.4) $3,185.03 Less paid by Dr Swain $1,385.03 $1,405.00 $231,306.80 Deficit of deed of arrangement $(18,930.80) Adding back the $212,376.00 held by McDonnell Milne & Fowler pursuant to clause 7(g) $212,376.00 $193,445.00 60% to Mrs Arthur-Lennox $116,067.00 40% to Dr Swain $77,378.00 $193.4 0. The order sought in paragraph 2 of the cross-application is based upon the above calculation. There is no evidence before the Court to establish the accuracy of all of the figures used in the calculation but for present purposes the figures used are adequate to demonstrate that had the St Ives property been sold for $450,000 and the sale proceeds distributed according to clause 7 of the s 87 agreement, the creditors would not have been paid in full but Dr Swain's estate would have had some entitlement and Mrs Arthur-Lennox would have received a sum less than half of the value of the property. THE TRUSTEE'S ROLE IN RELATION TO THE PART X DEED The provisions of ss 134 and 135 of the Bankruptcy Act apply in relation to a deed of arrangement under Part X as if a sequestration order had been made against the debtors on the day on which he executed the deed and as if the trustee of the deed were the trustee in bankruptcy (s 237(2)). -16- Section 134(1)(a) empowers a trustee to sell all or any part of the property of a bankrupt but does not authorise a trustee to sell by private contract any property having a net value exceeding $20,000 (s 134(2), (2A)), but a trustee may, with the permission of the creditors granted by resolution passed at a meeting of the creditors, or with the leave of the Court, sell by private contract any property of the bankrupt having a net value exceeding $20,000 (s 135(1)(a)). The failure by a trustee to obtain the permission or leave required by s 135(1) in relation to a transaction by the trustee does not affect the validity of the transaction if the transaction was for valuable consideration and the person with whom it took place acted in good faith and without notice of the failure to obtain the necessary permission or leave (s 135(4)). Upon the evidence before the Court it is beyond question, and I find, that: (a) The trustee's interest in the St Ives property at all relevant times was valued in excess of $20,000; (b) The trustee was required to obtain the permission of the creditors granted at a meeting of creditors, or the leave of the Court, before he could sell his interest in the St Ives property to Mrs Arthur- Lennox by private contract; (c) The trustee did not obtain either the permission of the creditors or the leave of the Court; (d) The trustee's conduct in selling his interest in the St Ives property to Mrs Arthur-Lennox by private contract was in breach of his duty as trustee; (e) The transaction involved in the sale of the trustee's interest in the St Ives property to Mrs Arthur-Lennox was for valuable consideration; (£) It may be inferred in the absence of any evidence or suggestion to the contrary and from the nature of the transaction, that Mrs Arthur-Lennox took the trustee's interest in the property in good faith and without notice of the failure to obtain the required permission or leave. (g) Notwithstanding the trustee's breach of duty in failing to obtain the creditors' permission or the leave of the Court before selling his interest in the St Ives property to Mrs Arthur-Lennox, the creditors have not by reason of such failure suffered any loss or damage. These facts and circumstances lead to the conclusion that the trustee's failure to obtain permission or leave in relation to the sale of his interest in the St Ives property to Mrs Arthur-Lennox does not affect the validity of the transaction. Furthermore, insofar as the trustee has realised the asset assigned to him by the Part xX deed it is his duty to distribute the proceeds of the sale in accordance with the terms of the deed. This is what he proposes to do and the Court should not interfere in the carrying out of that function. -18- THE TRUSTEE'S ROLE IN RELATION TO THE S 87 AGREEMENT At the time the s 87 agreement was executed the trustee was entitled to an undivided half share in the St Ives property which he held upon trust for the creditors and the debtor for their respective interests. There is no information before this Court to indicate the nature and extent of the competing claims made by the debtor and his former wife in relation to financial matters in the Family Court proceedings. Nor is there any evidence as to whether those claims were made before or after the execution of the Part X deed and what effect they may have had on the carrying out of the Part X scheme. However, the fact that the trustee became a party to the proceedings and participated in the settlement is strongly suggestive of the probability that until resolved, those proceedings constituted a threat to the asset which he held as trustee, and thus a threat to the interests of the creditors. The formula for distribution of the surplus funds provided for in clause 7(g) provided neither any benefit nor any detriment to the creditors, but it did provide some benefit to the debtor and his successors. It seems likely that the s 87 agreement was in the nature of "a compromise in respect of (a) claim exceeding $20,000 ... arising out of the administration of the estate of (the debtor)" which pursuant to s 135(1)(h) the trustee would have been authorised to make with the permission of the creditors or the leave of the Court, but no such permission or leave was sought or obtained. -19- The trustee seeks to justify his conduct in abandoning the s 87 agreement on the ground that Mrs Arthur-Lennox had repudiated the agreement and that he had accepted her repudiation. But it was not for him to repudiate the right of the debtor's estate under the agreement. It is clear from the formula in clause 7(g) that unless the sale of the property yielded less than "X" as defined in clause 7(g), the debtor's estate would become entitled to some payment under the agreement; and that such sum would be in addition to the entitlement the debtor had to any surplus remaining after the Part X scheme had been fully carried out. Whilst it is easy to criticise the trustee for walking away from the s 87 agreement when it became apparent that Mrs Arthur-Lennox's lack of co-operation was likely to render the carrying out of the agreement both difficult and expensive it must be said in his favour that he did not conceal his intentions from any of the other parties to the agreement. And having revealed his intentions, he encountered no dissent. By the time the proposal to sell to Mrs Arthur-Lennox was first canvassed Thorburn was both a creditor and one of the debtor's executors. He says that his consent was not sought, and this appears to be so, but nevertheless he was made aware of the proposal and acquiesced in it. He says further that he believed the trustee would conduct the sale according to the terms of the s 87 agreement "and make a necessary adjustment from the wife for the liabilities arising out of -20- the agreement" but it is difficult to understand how this could be done. Clearly, a sale to Mrs Arthur-Lennox of the trustee's half interest in the property was not a sale in accordance with the agreement. Further, to "make a necessary adjustment from the wife for the liabilities arising out of the agreement" must necessarily have involved the trustee obtaining from Mrs Arthur-Lennox a sum in excess of $225,000, which sum the trustee had no right either to demand or to receive. It would not have been money to which the trustee could lay claim either under the Part X deed or under the s 87 agreement. In my opinion the trustee owed no fiduciary duty to the debtor's estate other than in respect to any surplus remaining from the proceeds of the realisation of the assigned asset. He certainly owed no duty to the debtor's estate in respect of the debtor's entitlement under the s 87 agreement. THE RELIEF SOUGHT The trustee seeks a declaration that his action in selling his interest in the St Ives property to Mrs Arthur-Lennox did not require the permission of the creditors or the leave of the Court. It is obvious that either permission or leave was required and should have been obtained. Clearly, no order can be made in terms of paragraph 1 of the amended application. Nor is it appropriate for the Court to now grant such leave, even if it is within the Court's power to do so. What has been done has been done. The trustee's interest in the -21- property has been sold and the validity of the transaction cannot be attacked. It is however appropriate that the trustee should be directed to distribute all funds presently held by him as trustee under and by virtue of the Part X deed in accordance with the terms of the deed and the Bankruptcy Act. The Court's power to revoke the approval of the s 87 agreement is governed by s 87(8) of the Family Law Act which provides: 87(8) A court may, by order, revoke the approval of a maintenance agreement under this section if, and only if, the agreement 1s registered or deemed to be registered in that court and the court is satisfied that - (a) the approval was obtained by fraud; (b) the parties to the agreement desire the revocation of the approval; (c) the agreement 18 void, voidable or unenforceable; or (da) in the circumstances that have arisen since the agreement was approved it is impracticable for the agreement to be carried out or impracticable for a part of the agreement to be carried out. In the facts of this case it is not alleged that the approval of the agreement was obtained by fraud nor is it the case that all of the parties to the agreement desire the revocation of the approval. No evidence has been advanced to suggest any basis upon which it could be found that the agreement is void, voidable or unenforceable. The only ground upon which the Court could order revocation of the approval is that contained in paragraph 87 (8)(d). Whilst it is true that circumstances arose after the agreement was approved that impacted upon the practicality of carrying =-22— out the agreement, those circumstances related entirely to the conduct and attitude of one of the parties to the agreement. The agreement itself was not one which was lacking in practicality. There were clearly options open to the parties other than Mrs Arthur-Lennox to compel her to accept her responsibilities under the agreement. If the approval of the agreement is revoked any residual interest that the debtor's estate may have and any rights of enforcement may be affected. Just what those interests and rights may be, if they exist at all, is not something that requires consideration in these proceedings but in the circumstances of the case it is not appropriate that any order be made which could prejudice the estate's interests. And this is particularly so in circumstances where it has not been demonstrated that any practical benefit would be achieved by the revocation. The Inspector-General's cross-application seeks the exercise of the Court's power under s 176 of the Bankruptcy Act. Section 176 applies in relation to the trustee of a deed of arrangement as if the debtor by whom the deed was executed were a bankrupt and the trustee of the deed were the trustee in his bankruptcy (s 237(4)). The section provides: 176(1) Where, on application by the Inspector-General or by a creditor who has or had a debt provable in the bankruptcy, the Court is satisfied that a person who is or has been a trustee of a bankrupt's estate has been guilty (whether before or after the commencement of this section) of breach of duty in relation to the bankrupt's estate or affairs, subsection (2) applies. 176(2) The Court may make any one or more of the following orders: (a) an order directing the person to make good any loss that the bankrupt's estate has sustained because of the person's breach of duty; (b) if the person is registered under section 155 - an -23- order cancelling the person's registration under that section; (c) any other order that the Court considers just and equitable in the circumstances. To the extent that the trustee sold his interest in the St Ives property by private contract without the permission of the creditors or the leave of the Court, I have found that he has been guilty of a breach of duty in relation to the debtor's estate or affairs. Accordingly s 176(2) applies. The debtor's estate has not sustained any loss because of the trustee's breach of duty. There is therefore no occasion for any order to be made pursuant to s 176(2)(a). No order has been sought pursuant to s 176(2)(b). In the circumstances of the case it is obvious that even if cancellation of the trustee's registration had been sought, the breach of duty found is not of such gravity as to warrant any such response. Presumably, the Inspector-General considers that it is just and equitable in the circumstances that the Court order the trustee to make good to the estate of the debtor the sum which the estate would have received pursuant to the s 87 agreement had its terms been given full effect to. In my opinion, the Court's power pursuant to s 176(2)(c) should be exercised as a remedy for a breach of duty by a trustee in his capacity as a trustee under the Bankruptcy Act. In this case the breach of duty found to have occurred had no —-24- bearing upon the consequences that flowed to the estate of the debtor by reason of the s 87 agreement not being given effect to. Furthermore, the amount of any loss sustained by the estate of the debtor is entirely speculative. The fact is that the property was not sold at auction. It is conceivable, and indeed in the circumstances quite possible, that ultimately the property may have been sold at auction pursuant to clause 6 of the agreement, without any reserve. In those circumstances it is not fanciful to speculate that the return from the sale would be considerably less than was in fact achieved. No basis for the exercise of power under s 176(2)(c) has been demonstrated and no order will be made. CONCLUSIONS On the trustee's amended application there will be an order directing the trustee to distribute all moneys presently held by him as trustee pursuant to the Part X deed in accordance with the terms of the deed and the Bankruptcy Act. The Inspector-General's cross-application and the trustee's application to the Family Court will be dismissed. Although it was proper that the creditors be served with the application they have had no real interest in the outcome. Their interests as creditors have not been at risk, and in any event, it is unquestionable that they acquiesced in all that the trustee did concerning the sale to Mrs Arthur-Lennox. There will be no order for costs in favour of the creditors. The trustee's application and the Inspector-General's cross-— application both had their origins in Mrs Kendall's complaint to the Official Receiver, although the complaint was misdirected in that it was not the trustee's conduct as trustee of the Part X scheme which gave rise to Mrs Kendall's interest and concern. The Inspector-General's cross- application was in my opinion misconceived and as it gave rise to an unreasonable expectation on the part of Mrs Kendall that the proceedings could provide a vehicle for her to obtain some redress, the Inspector-General should pay Mrs Kendall's costs. It is not appropriate that any order for costs be made either in favour or against the trustee. He was in effect forced into making the application by the attitude of the Official Receiver. In my view the application was unnecessary as was the application to revoke the approval of the s 87 agreement. The justice of the case dictates that no order for costs be made. I certify that this and the preceding 24 pages are a true copy of the Reasons for Judgment of the Honourable Mr Justice Olney Associate: (deebue (I YI Dated: 7 (Cacwerew tet -26- Heard: 18 and 19 August 1994 Place: Sydney Judgment: 7 October 1994 (delivered in Melbourne). Appearances: Mr B. Skinner (instructed by Gye Perkes & Stone) appeared for the applicant/cross respondent. Mr G.C. Lindsay (instructed by Lobban McNally & Harvey) appeared for the first respondent/cross-claimant. Mr N. Perram (instructed by Stacks) appeared for the third respondent. Mr S.J. Gageler (instructed by Australian Government Solicitor) appeared for the fourth respondent. The second and fifth respondent did not appear.