JUDGMENT Nov cSt Sonal «Ze CATCHWORDS DEED OF ARRANGEMENT .- decision of trustee to close debtor's business - hostility of actions - business operating at a profit - decision not justifiable on a commercial basis. ankruptcy Act - sections 162, 178, 212A, 235(b) Re Tyndall [1977] 30 FLR 6 Adsett v. Berlouis & Ors (1992) 47 FCR 201 Re Cjunies-Ross, ex parte Totterdell (1991) 31 FCR 143 Denise Beryl Fischle Ex Parte Denise Beryl Fischle y Hugh David Ramsay Part X No. 75 of 1993 Kiefel J: Brisbane: 4 November 1994 16 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL COURT OF AUSTRALIA ) CY DIVISIO ) BANKRUPTCY DISTRICT OF THE ) STATE OF QUEENSLAND ) Part o. 75 of 199 RE: ENIS EX PARTE: DENISE BER Applicant GH DAV. es t INU OF ORDERS J ORDER: Koefel J DATE OF ORDER: 4 November 1994 WHERE MADE: Bnisbane THE COURT ORDERS THAT: 1. The decision of the respondent, Hugh David Ramsay as trustee of the Deed of Arrangement made on 10 August 1993 pursuant to Part X of the Bankruptcy Act 1966 to forthwith close the business namely FISCHLE'S SMASH REPAIRS and situated at 69 Kempster Street, Sandgate be set aside. 2. The decision of the respondent to terminate the employment of the employees of FISCHLE'S SMASH REPAIRS be set aside. 3. The decision to refuse to convene a meeting of creditors be set aside and that in lieu thereof IT IS ORDERED that the respondent forthwith convene a meeting of creditors of the debtor, such meeting to take place as soon as reasonably practicable. 4. I adjourn further hearing as to the balance of the application to a date to be fixed by the Registrar after consultation with the parties. NOTE: Settlement and entry of orders 1s dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) BANKRUPTCY DIVISION ) BANKRUPTCY DISTRICT OF THE ) STATE OF QUEENSLAND ) RE: DENISE BERYL FISCHLE EX PARTE: DENISE BERYL FISCHLE Applicant HUGH DAV Respondent CORAM: _Kiefel J DATE: 4 November 1994 PLACE: Brisbane REASONS FOR JUDGMENT On 10 August 1993 a Deed of Arrangement was entered into between the debtor and the trustee, the respondent to these proceedings, following resolution by her creditors and pursuant to which her property was conveyed to the trustee for the purpose of realising her assets as soon as reasonably practicable. The debtor was to be released upon full payment of all such debts. The Minutes of that meeting signed by the Chairman and the Minutes Secretary fixed the remuneration of the Trustee m the following terms: "It was resolved on the voices of the motion of Mr Spencer de Vere, Attomey for the Australian Taxation Office that the remuneration of the trustee, his partners and staff from 10 August 1993 to the conclusion of this administration be hereby fixed at an amount calculated by reference to hourly rates recommended by the Insolvency Practitioners Association of Australia from time to time, subject to an overall limit of $15,000.00 plus disbursements beyond which the trustee must seek creditors' further permissions; such remuneration to be subject to a view by the Registrar in Bankruptcy at the ustance of any creditor or the trustee in accordance with the Act." The realisation of those assets, which included some real property and the smash repair business operated by the debtor and her husband (whose estate was sequestrated in June 1993) was delayed. Whilst the trustee later points to the debtor's overstatement of the value of her assets, in his Notice to Creditors of 16 March 1994 he refers only to the delay occasioned by problems encountered with the Titles Office and he advises creditors that the business was being conducted in conjunction with the debtor but that no firm offers for its purchase had been received. The debtor has in fact conducted the busmess under the control of the trustee and this was confirmed in a document entitled "Deed of Variation to Deed of Arrangement". It seems tolerably clear that all present at the meeting in August 1993 proceeded upon the basis that the assets would be realised in a relatrvely short period of time and that all creditors were likely to be paid in full. Whilst the sale of real estate was achieved at a somewhat lesser price than first advised, and marketing of the business occurred through late 1993 and early 1994 a sale was not achieved. By April 1994 the trustee met with Mr and Mrs Fischle and sought directions. It is from this point, and without reference to creditors, that the complexion of the matter altered. I shall refer later to communications, between June 1994 and the present time. On 28 October 1994 the controlling trustee informed the debtor, the creditors and the employees of the business that he had determined to cease the business forthwith and to proceed to realise its assets. 1 granted an myunction on the debtor's application until the hearing of this apphcation. The debtor seeks orders setting aside that decision and requiring the trustee to convene a meeting of creditors (the application is said to be brought under s.178 Bankruptcy Act though it seems to me s.212A is applicable. In any event the sections are in the same terms). In this course the debtor has the support of a significant proportion of creditors, in value $179,034.00 of a total value of outstanding creditors at the date of the meeting of $223,821.00. The creditors supporting the application include the Commissioner of Taxation, the priority creditor. As I have outlined above, by mid this year the course which the trustee ought to take was unclear. In June the debtor consulted solicitors and a meeting was then held with the controlling trustee who advised that he was shortly to prepare the accounts of the business for the financial year 30 June ended 1994 and that Mrs Fischle ought to make a new proposal to creditors <fter receipt of them. On 4 August 1994 Mrs Fischie's solicitors received a copy of the draft accounts which showed some small profit earned by the business and notes for discussion prepared by the trustee, putting forwarded alterative bases for consideration. The trustee noted that the present position was unsatisfactory but that one of the options was to have an intensive campaign to sell the busmmess itself (together with plant and equipment associated with it) for its maximum value. After a meeting between Mrs Fischle's solicitors and the trustee, the trustee wrote on 14 August 1994 to Mrs Fischle advising that the resolution of her future was drawing closer and that discussions had been fruitful and concluded: "I will assist you in every way possible with your forthcoming negotiations with creduors. The trustee fees, which will form part of your proposal, will be negotiated to the satisfaction of all parties." and the following day wrote to her solicitor noting that a question had been raised over his fees (then said to be in the order of $50,000.00): "We appreciate that for any proposal from Mr and Mrs Fischle for the determination of the present administration to be accepted by the creditors, then my claim for fees over and above the figure approved by creditors will need to be reviewed." On 16 August Mrs Fischle's solicitor wrote to the trustee outlining her proposal which included a payment of the priority creditor over a period of time. and after dealing with the return to creditors noted that this left the question of the trustee's remuneration and contended that he had no nght to fees not approved but that Mrs Fischle would in any event pay them over a three year period. On 25 August the trustee wrote advising as to the procedure involved in calling a meeting and asserting that the resolution of the meeting enabled him to seek approval from the creditors or the Registrar in Bankruptcy which he had done. He noted that at this point that the creditors would not, under the proposal, achieve the predicted 100 cents in the dollar. He proposed that the Commussioner of Taxation and himself be paid in full and the balance of creditors paid in annual instalments. To the suggestion that the trustee apply for approval of his remuneration to the Registrar, the debtor's sohcitor responded that it was appropriate to raise the matter with the creditors. The solicitor wrote to the Registrar in similar terms. At this point the trustee appointed solicitors and it 1s noteworthy that the level of conflict has regrettably escalated from this point. The last letter from the trustee himself, that of 24 August, contains the advice that he would be convening a meeting of creditors. His solicitors' following letter of 26 August however adopted a different approach. It commenced by outlining the information upon which the meeting of August 1993 had acted; advised that 1t was within the trustee's discretion to call another meeting and took issue with the accuracy of the minutes of August 1993, asserting that there had been a mistake and that the requirement was only that he "may seek" the creditors' approval. How this, in any event, would overcome a requirement for approval of the creditors was not the subject of submission before me, and in any event is not critical to a determination of this application. Of note in the contents of that letter (having regard to a matter now asserted) was the trustee's comment that he was unsure that the resolution to terminate the Deed would be passed at such a meeting. When Mrs Fischle's solicitors wrote enquiring as to any approval given by the Registrar and asking to view relevant timesheets and other documentation the trustee's solicitors replied on 5 September that the Deputy Registrar had m February 1994 approved an amount of $5,850.00 as a payment to the trustee's own firm. By 30 September a meeting had been held between the debtor, the trustee and thei solicitors as to Mrs Fischle's proposal. The trustee's solicitors then advised that it was unlikely that the trustee would accept the payment of his fees by three instalments but concluded that if the debtor's solicitors were confident that the creditors would accept the proposal of a three year period then the creditors should have no difficulty in agreeing to satisfy the trustee's fees by immediately paying $30,000.00. They then confirmed that the trustee planned to convene a meeting. It is clear, at this point, that any consideration of the debtor's proposal had now become intertwined with a satisfactory settlement of the trustee's claim for fees. On 11 October the trustee's solicitors agam confirmed that he proposed to call a meeting or meetings (in this respect there is a suggestion that Mr Fischle would at the same time call a meeting of his creditors, who are the same as Mrs Fischie's). On 13 October Mrs Fischie's proposal was forwarded and at the same time her solicitors alleged the receipt by the trustee's firm of the sum of $5,850.00 was in breach of the Bankruptcy Act and formally required him to repay that sum. Given the gap which appears in the communications between the parties at this pomt an inference which may be drawn 1s that that demand precipitated or was at least an important factor in the subsequent actions of the trustee. On 28 October the trustee informed Mrs Fischle and the creditors that he did not now believe it was in the best interests of creditors to accede to the calling of a meeting. He had determined that the objectives of the Deed of Arrangement had been frustrated and considered he had no option but to exercise his powers under Section 134(1). Consequently the business was to be closed forthwith and an auction of equipment would follow. It was his expressed intention to apply to the Court to terminate the Deed and seek an order for the sequestration of the debtor's estate. The trustee in his affidavit has sted a number of reasons underlying his decision. Some of them, including an allegation that the debtor may have been guilty of misleading conduct in the initial statement as the value of the assets and an allegation that the debtor has previously acted to prefer or secure the position of the Mymarends whilst evidencing the level to which the parties' relationship has descended are not, I consider likely to have been real considerations in the decision arnved at. The trustee, were he seriously concerned about these matters, was in a Position at an early time to call a meeting of the creditors to terminate the arrangement forthwith. His following communications with the debtor tell against any real concerns in this respect. It was argued, strenuously, on the trustee's behalf, that the position he took in deciding as he had was one to protect the minority of creditors against the actions of the debtor in concert with the Miymarends, although Counsel for the trustee was driven to concede that the highest this could be put was that it was "likely" that they might have such voting power. I do not see that that necessarily follows given that a special resolution (see s.235(b) and s.5 of the Act) requires both a majority in number and three-quarters of the value of those present or by proxy at the meeting. Whilst 1t has been said that m the exercise of the Court's discretion under s.178 (and thus 212A) it would be careful not to interfere in the day-to-day administration by a trustee and would, where decisions were of a business or commercial nature, normally require that a strong basis be shown for interference with that decision, the discretion is wide: Re Tyndall [1977] 30 FLR 6, 10. In any event this is not such a decision and 1s one which would likely result in the sequestration of the debtor's estate and would affect the interests of creditors in the realisation of the only remaining assets. In this respect the creditors who have sworn affidavits in these proceedings have all expressed the view that it is not in their interests that the business cease. If it 1s to be sold it would be to their benefit to have it maintained as a going concern. In this, they are supported by statements made by the trustee himself who earlier was of the view that there was an item of goodwill associated with the business and that it was, for the financial year just ended, operating at a profit. The point the trustee now makes is that it could be said to be running at a loss if one takes full account of the sums he claims were due to him. Further, the return to creditors recently predicted by the trustee on a sale of the business was premised on its sale as a going concern, if it were able to be sold promptly (although how it could be achieved, given that the Fischles and the staff employed were to be immediately dismissed, that vehicles upon which work had been completed were to be impounded and that the business would not be able to fulfil orders which it had taken, was not made clear). It was also argued on behalf of the trustee that the proposal put forward by the debtor could not be achieved at one meeting and so much is conceded by Mrs Mullins, Counsel for the debtor. They are however in a position to resolve to terminate the arrangement currently m place (and from that point the debtor may recommence the Part X procedure) or make other decisions bringing the matter to conclusion. I do not consider that the trustee's decision can be seen to be justifiable on a commercial basis. The creditors have received no notification of events from March of this year and have not had the opportunity to consider their position. The committee of inspection has not even been called to a meeting by the trustee. All these matters point to the need for a meeting of creditors to be convened. There is however one other aspect of the trustee's decision which would by itself justify setting it aside. The trustee's remuneration now claimed is in the order of $73,813.07 and there 1s said to be some $58,029.97 outstanding after the payment of just over $15,000.00 to him. This appears to be in addition to the receipt of $5,850.00 by his firm upon which I have not received detailed submissions, and shall not then determine. Submissions for the trustee to a large extent depended upon his entitlement to remuneration. A Trustee in Bankruptcy is governed by the general law relating to trustees save where it 1s modified by the Bankruptcy Act or Rules and that Act confers no mght to be reimbursed in relation to all costs, charges and expenses incurred in the administration of the case of the estate. Whilst under the general law a trustee 1s entitled to an indemnity out of the trust estate against all costs, charges and expenses properly incurred by him, the right to remuneration for his or her own efforts (as distinct from remmbursement of outgoings) is not conferred by the general law: Adsett v. Berloms & Ors (1992) 47 FCR 201, 210. The mechanisms provided in the Act (Section 162) for the fixing of the quantum of remuneration have here been undertaken and I do not think it could be said that, presently, the trustee has a right to anything m excess of $15,000.00 although the creditors may amend the sum initially fixed (Re Clumes-Ross, ex parte Totterdel] (1991) 31 FCR 143). Whilst I can appreciate that the trustee became involved in a lengthier administration than was originally predicted and as a result may have, in good faith, incurred some additional expenses, 1t must have been obvious to hum and later to his legal advisors that he was faced with some difficulties and the debtor's proposals compounded those difficulties. Given the extent of the debtor's assets and the amount which might become available from the business, there was little if any margin for meeting his extra claims and, if they were paid in priority, there would be only a small dividend to be paid to the creditors. The trustee and his legal advisors then it seems to me became embroiled in a process whereby a resolution of his position was necessary. The debtor's proposals did not address that or indeed accept his entitlement. In the background of these facts I consider that his decision is tainted and could not be regarded as one reached independently and with a view to the interests of the creditors (and of the debtor to any surplus, although such a position might not realistically be achieved). Indeed the actions of the trustee from that point unfortunately require some further comment. The sudden decision to cease the business was accompanied by a level of hostility entirely out of proportion to the action necessary to be taken. The trustee, it is alleged and not denied, attended at the premises in the company of six Or seven security guards with guard dogs to serve the notice on the debtor. The conduct of the hearing before me was only slightly less hostile and involved making personal allegations against the debtor and a creditor when it must have been obvious that, whatever be the truth of these matters, they were not really the basis upon which he had proceeded. In these circumstances, I consider the trustee has disentitled himself to the costs of this application. THE ORDERS OF THE COURT WILL BE: That the decision of the respondent, Hugh David Ramsay as trustee of the Deed of Arrangement made on 10 August 1993 pursuant to Part X of the Bankruptcy Act 1966 to forthwith close the business namely FISCHLE'S SMASH REPAIRS and situated at 69 Kempster Street, Sandgate be set aside. That the decision of the respondent to terminate the employment of the employees of FISCHLE'S SMASH REPAIRS be set aside. That the decision to refuse to convene a meeting of creditors be set aside and that in lieu thereof IT IS ORDERED that the respondent forthwith convene a meeting of creditors of the debtor, such meeting to take place as soon as reasonably practicable. I adjourn further hearing as to the balance of the application to a date to be fixed by the Registrar after consultation with the parties. I certify that this and the preceding ten (10) pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel. Date: 4 November 1994 MM Yodlforck Associate Counsel for the applicant: Solicitors for the applicant: Counsel for the respondents: Solicitors for the respondents: Date of Hearing: Mrs D A Mullins Bennett & Philp Mr R Lilley Cartwright Richardson & Stringer 28 October November 1994 1994 and 2