JUDGMENT No, west! Dp FQ CATCHWORDS BANKRUPTCY - Priority - remuneration and expenses of controlling trustee - controlling trustee terminated prior to debtor entering into a deed of arrangement Bankruptcy Act 1966 s 109(1)(b) EILEEN ANN VOWELL EX PARTE: PETER ROBERT VINCE V DAVID JAMES LOFTHOUSE (AS TRUSTEE OF THE PROPERTY OF EILEEN ANN VOWELL) NO VX 210 OF 1993 NORTHROP J MELBOURNE 28 NOVEMBER 1994 & A> RECNED -1 DEC 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL J 57 REGISTRY "2 IN THE FEDERAL COURT OF AUSTRALIA EXERCISING FEDERAL JURISDICTION No VX 210 of 1993 IN BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA RE: EILEEN ANN VOWELL Debtor EX PARTE: PETER ROBERT VINCE Applicant AND: DAVID JAMES LOFTHOUSE (AS TRUSTEE OF THE PROPERTY OF EILEEN ANN VOWELL) Respondent COURT: NORTHROP J PLACE: MELBOURNE DATE: 28 NOVEMBER 1994 REASONS FOR JUDGMENT On 12 October 1994, at the conclusion of the hearing of this application, the Court made orders and announced that the reasons for making the substantive order sought in the application would be published later. These are those reasons. The application raises a narrow, but important, issue relating to the priority to be given to the payment of a debt owed by a debtor to a controlling trustee named in an authority signed by the debtor under section 188 of the Bankruptcy Act 1966 in circumstances where the meeting of creditors does not pass any resolution dealing with those costs. The relevant facts can be stated shortly. On 20 December 1991, Eileen Ann Vowell, ("the debtor") signed an authority under section 188 of the Bankruptcy Act authorizing Peter Robert Vince ("the applicant"), a registered trustee, to call a meeting of her creditors and to take over control of her property. The applicant consented to exercise the powers conferred upon him. As a result, the applicant became the controlling trustee in relation to the debtor and her property. He was to continue to be the controlling trustee under section 188 until the happening of one of the events specified in subsection 189(1). This occurred on 14 July 1992. On 8 July 1992 a meeting of creditors, called by a solicitor pursuant to an authority under section 188, by special resolution, required the debtor to execute a Deed of Arrangement under Part X of the Bankruptcy Act and appointed the applicant as trustee of that Deed. The debtor executed the Deed on 14 July 1992. Thereupon, under paragraph 189(1)(b) of the Bankruptcy Act, the applicant ceased to be the controlling trustee under section 188 in relation to the debtor and her property. The present claim by the debtor relates to the remuneration of the trustee and the costs, changes and expenses properly and reasonably incurred by him during the period 20 December 1991 to 14 July 1992 including any debts incurred by him that are debts provable in bankruptcy. In those reasons ail these matters will be referred to as "the remuneration and expenses of the applicant". In order to understand the issue raised by the application, further facts must be stated. Pursuant to the authority conferred upon him on 20 December, the applicant called a meeting of creditors of the debtor. The meeting was held on 23 January 1992 but was adjourned from time to time. The final adjourned meeting was held on 23 April 1992. At no time was there a resolution passed with respect to the affairs of the debtor. The Deed of Arrangement executed by the debtor on 14 July 1992 was terminated on 9 October 1992 pursuant to a special resolution to that effect passed by a meeting of creditors called for that purpose, see paragraph 235(a) of the Bankruptcy Act. On 27 May 1993 the debtor signed a further authority under section 188 of the Bankruptcy Act authorizing the solicitor to call a meeting of creditors. An authority so conferred upon a solicitor does not constitute the solicitor a controlling trustee. Pursuant to this authority, a meeting of creditors was held on 30 June 1993 at which a _ special resolution was passed requiring the debtor to execute a Deed of Arrangement. The Deed appointed David James Lofthouse ("the respondent") as trustee of the Deed. The debtor executed the Deed on the same day, namely 30 June 1993. Neither the Deed executed on 14 July 1992 nor the Deed executed on 18 June 1993 made provision for the payment of the remuneration and expenses of the applicant. The applicant lodged a proof of debt with the respondent for his remuneration and expenses. The parties agree that the amount of the debt claimed by the applicant can only be determined by the Registrar in Bankruptcy under section 162 of the Bankruptcy Act. The respondent, quite properly in my opinion, accepted the applicant as a creditor, the amount of the debt to be determined by the Registrar. The applicant claimed priority of payment of the debt under paragraph 109(1)(b)(i) of the Bankruptcy Act. The respondent denies the applicant, on the facts of this case, is entitled to that priority. That is the issue raised by this application. Under subsection 237(2) of the Bankruptcy Act, sections 108 and 109, among others, apply in relation to a deed of arrangement as if a sequestration order had been made against the debtor on the day on which the debtor executed the deed and the trustee of the deed were the trustee in bankruptcy. Applying those provisions to the facts of this case sections 108 and 109 apply as if the debtor was made bankrupt on 30 June 1993 and as if the respondent was her trustee in bankruptcy. Under section 108 of the Bankruptcy Act, except as otherwise provided by the Act, all debts of the debtor, including the remuneration and expenses of the applicant, rank equally and, if the proceeds of her property are insufficient to meet them in full, they are to be paid proportionally. In the present case, it is accepted that the proceeds of the property of the debtor form but a very small amount when compared with debts proved against her. In other words, each creditor will receive a very small dividend pursuant to the Deed of Arrangement. Section 109 otherwise provides. It contains provisions relating to priority of payments of debts owed by a bankrupt. Paragraph 109(1)(b) is set out in full: "109(1) Subject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following orders (a)... (b) second, in the case of a bankrupt who had, before the date of the bankruptcy, signed an authority under section 188, in payment of: (i) if the authority was given to a registered trustee - the remuneration of the trustee and the costs, charges and expenses properly and reasonably incurred by the trustee during the period in which the authority is in force, including any debts incurred by the trustee that are provable in the bankruptcy; or (ii) if the authority was given to a solicitor - any taxed costs due to the solicitor in respect of services rendered by him in relation to the authority; " The submission made by counsel for the applicant was very simple. He contended that the words of paragraph 109(1)(b)(i) applied exactly to the facts of this application and so the applicant was entitled to the priority thus afforded to him. Counsel referred to sections 162 and 237. Section 162 contains provisions relating to the remuneration of trustees in bankruptcy. Subsection 162(4) provides: "Where the remuneration of the trustee is not fixed by the creditors or the committee of inspection, the Registrar may fix the remuneration." Subsection 237(4) provides: "Subsections 157(6) and (7) and sections 162 to 184 (inclusive) apply, with the prescribed modifications (if any), in relation to a 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." In answer, counsel for the respondent relied upon a number of submissions. Initially, he relied upon views expressed by Lavan J in Re Reynolds Ex parte Horlick v Evans (1976) 12 ALR 439 to the effect that a controlling trustee, unlike a trustee appointed under a deed of arrangement, acts by virtue of the authority signed by a debtor and that his remuneration, unlike that of a trustee of a deed of arrangement could only be determined by a resolution of the creditors, see page 441. It followed, so it was submitted, that in the absence of any such resolution, there could be no determination of the amount of the remuneration and expenses of the applicant. The opinion of Lavan J depended upon section 193 of the Bankruptcy Act in its then form which was as follows: "The remuneration to be paid to the controlling trustee in respect of his services as such shall be such as is determined by resolution of the creditors." Since that judgment section 193 has been amended. At all times relevant for this application section 193 provided: "Sections 162 to 167 (inclusive) apply, with the prescribed modifications (if any), in relation to the controlling trustee as if the debtor who gave the authority under section 168 were a bankrupt and the controlling trustee were the trustee in his bankruptcy." It follows that Re Reynolds can have no application to this application. As a result, it was accepted by the parties, correctly in my opinion, that the provisions contained in sections 162 and 109 applied with respect to the present application and the only issue related to priority. On the issue of priority, counsel for the respondent contended that sections 108 and 109 applied, for relevant purposes, only when a debtor executed a deed of arrangement pursuant to a special resolution passed at a meeting called by a controlling trustee under section 188 of the Bankruptcy Act. This followed by reason of the provisions of subsection 237(2). It was submitted, therefore, that the provisions of sections 108, 109 and 162 apply with respect to a controlling trustee under section 188 only where the deed of arrangement was entered into as a result of a special resolution passed at a meeting held pursuant to the action taken by the controlling trustee pursuant to the authority conferred by the debtor under section 188. It was submitted that the provisions of sections 108, 109 and 162 could not apply to every controlling trustee that happened to be in existence at the time a deed of arrangement was entered into. There had to be a direct link between the controlling trustee under section 188 and the execution of the deed of arrangement. In the present application, the facts show there is no such link. Counsel contended that the wording of paragraph 109(1)(b) of the Act supported this contention. Reference was made to the word "an" before the word "authority" and argued that only one authority under section 188 could be afforded priority. Thus, if one authority had been given and the controlling trustee had done work entitling the payment of remuneration and incurred expenses entitling reimbursement, but no deed of arrangement was executed by the debtor, that controlling trustee could not claim priority. If, subsequently, a solicitor obtained an authority under section 188 or, assuming the first controlling trustee had ceased to be a controlling trustee, another registered trustee obtained an authority under section 188, and in either case the creditors at a meeting called by that solicitor or trustee passed the necessary resolution, that solicitor or trustee would be entitled to the priority granted by subsection 109(1)(b) but the first controlling trustee's right to priority would not and could not be revived by the execution of the deed of arrangement of the debtor. There is much force in this submission. As put in submission in relation to the facts of this case: "Under subsection 109(1) "the trustee" in the preamble to that section can only mean the trustee under the first deed. To construe it otherwise would be to entitle the applicant to make a claim in priority under any subsequent bankruptcy (administration) of the debtor without limitation as to time." It should be noted that a debt of this kind would be subject to any relevant limitation of actions provision or might lapse for some reason, but subject to that, if the provisions of paragraph 109(1)(b) are clear, they should be applied. In my opinion the provisions are clear. The use of the word "an" is grammatically correct. The provisions of paragraph 109(1)(b) are not limited to cases where a deed of arrangement is entered into. They have equal application to a case where, for whatever reason, nothing comes from the authority under section 188 conferred on a registered trustee but thereafter the debtor becomes a bankrupt. This would be so even if, within a limitation period, a number of such authorities had been given but with no result. Each controlling trustee would be entitled to priority. The word "an" before the word "authority" is directed to action taken by the debtor. It refers to an indefinite "authority" not to a particular "authority" relating to the particular bankruptcy. Once that action, being the giving of an "authority", is taken, the consequences provided for, follow. Each controlling trustee, or each solicitor, who comes within paragraph (i) or (ii) is entitled to priority with respect to any authority so given. The submissions put on behalf of the applicant are accepted. Accordingly, the following declaration was made on 12 October 1994: "A declaration that the controlling trustee's remuneration claimed in the applicant's proof of debt dated 19 July 1993 and lodged on or about that date by the applicant with the respondent is, in such amount as may be fixed pursuant to section 162, entitled to priority pursuant to subsection 237(2) and paragraph 109(1)(b)(i) of the Bankruptcy Act 1966." I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment of The Honourable Mr Justice R.M. Northrop. Associate: Date: 8 No er 1994 eee ATTACHMENT Counsel for the Applicant: Solicitors for the Applicant: Counsel for the Respondent: Solicitors for the Respondent: Mr G.T. Bigmore Smith (J.M.) & Emmerton Mr S.P. Gardiner Cornwall Stodart * JUDGES' CHAMBERS FEDERAL COURT OF AUSTRALIA 450 LITTLE BOURKE STREET 4s AUSTRALIA MELBOURNE, 3000 30 November 1994 Ms Sonia Cornale Records Clerk Library and Information Services Principal Registry Federal Court of Australia Level 16 Law Courts Building Queens Square SYDNEY NSW 2000 Dear Sonia Re: Computerized Legal Information Retrieval System I enclose the following judgments for inclusion in the data base of Federal Court Judgments: 1. Kathleen McLaren v Marti Zucco No TG 20 of 1994 Eileen Ann Vowell Ex Parte: Peter Robert Vine v David ames Lofthouse (As Trustee of the Property of Eileen An: Vowell) No VX 210 of 1993 atricia Williams Also Known as Aileen Patricia Di Pietro) Ex Parte: Official Trustee in Bankruptcy as stee _o the Estate of Patricia Williams v Elio Di Pietro No NB 3348 of 1991 The word processing disks containing the above judgments are enclosed. Please return the disks to the me when appropriate. Enc ecretary to he Hon Mr Justice Northrop Thank you