FEDERAL COURT OF AUSTRALIA Dunwoody v Jefferson; In the matter of Dunwoody [2000] FCA 456 PRACTICE AND PROCEDURE - costs - whether the Trustees' application was reasonable - were the Trustees' costs "properly incurred" - should the Trustees retain the benefit of the indemnity out of the estate - was there a basis for indemnity costs. Bankruptcy Act 1966 (Cth) ss 64, 181 Re Beddoe; Downes v Colfam [1893] 1 Ch 547 Appl Re Bryant; Ex parte Gordon (1889) 6 Morrell 262 Cited Re Dusseck; Ex parte The Trustee v Australian Mosaic Flooring Ltd (1964) 20 ABC 159 Cited Adsett v Berlouis (1992) 37 FCR 201 Appl Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 Cited Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 Cited IN THE MATTER OF JOHN ERNEST DUNWOODY; EX PARTE PHILIP GREGORY JEFFERSON AND JAY ARSCOTT STEVENSON Q7218 OF 1999 IN THE MATTER OF JOHN ERNEST DUNWOODY; PETER DUNWOODY AND McDONALD MURPHY MACHINERY PTY LTD v PHILIP GREGORY JEFFERSON AND JAY ARSCOTT STEVENSON Q7218 OF 1999 COOPER J BRISBANE 11 APRIL 2000 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 7218 OF 1999 IN THE MATTER OF: JOHN ERNEST DUNWOODY (A BANKRUPT) EX PARTE: PHILIP GREGORY JEFFERSON AND JAY ARSCOTT STEVENSON APPLICANTS IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 7233 OF 1999 IN THE MATTER OF: JOHN ERNEST DUNWOODY (A BANKRUPT) BETWEEN: PETER DUNWOODY FIRST APPLICANT McDONALD MURPHY MACHINERY PTY LTD ACN 054 059 522 SECOND APPLICANT AND: PHILIP GREGORY JEFFERSON AND JAY ARSCOTT STEVENSON RESPONDENTS JUDGE: COOPER J DATE: 11 APRIL 2000 PLACE: BRISBANE THE COURT ORDERS THAT: 1. Philip Gregory Jefferson and Jay Arscott Stevenson pay the costs of Peter Dunwoody and McDonald Murphy Machinery Pty Ltd of and incidental to Q7218 of 1999 and Q7233 of 1999, including reserved costs, if any, to be taxed on an indemnity basis as between solicitor and client, if not agreed. 2. The costs, expenses and liabilities of Philip Gregory Jefferson and Jay Arscott Stevenson as Trustees of the estate of John Ernest Dunwoody, of and incidental to Q7218 of 1999 and Q7233 of 1999, not be paid out of the said estate as Trustees' costs, expenses and liabilities of the administration of the estate and that the Trustees not be indemnified in respect of such costs, expenses and liabilities. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 7218 OF 1999 IN THE MATTER OF: JOHN ERNEST DUNWOODY (A BANKRUPT) EX PARTE: PHILIP GREGORY JEFFERSON AND JAY ARSCOTT STEVENSON APPLICANTS IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 7233 OF 1999 IN THE MATTER OF: JOHN ERNEST DUNWOODY (A BANKRUPT) BETWEEN: PETER DUNWOODY FIRST APPLICANT McDONALD MURPHY MACHINERY PTY LTD ACN 054 059 522 SECOND APPLICANT AND: PHILIP GREGORY JEFFERSON AND JAY ARSCOTT STEVENSON RESPONDENTS JUDGE: COOPER J DATE: 11 APRIL 2000 PLACE: BRISBANE REASONS FOR JUDGMENT Background 1 Messrs Jefferson and Stevenson ("the Trustees") were, at all material times, the trustees of the bankrupt estate of John Ernest Dunwoody. Mr Peter Dunwoody is a creditor of the estate and a member of the Committee of Inspection. McDonald Murphy Machinery Pty Ltd ("McDonald Murphy") is also a creditor and Mr Andrew McDonald, a director of that company, is also a member of the Committee of Inspection. 2 On 1 July 1999 Heerey J, in application Q7218 of 1999, made orders directing the Trustees to give a notice of meeting of creditors to be held pursuant to s 64(1) of the Bankruptcy Act 1966 (Cth) ("the Act"). His Honour also ordered that any application by the trustee to restrain the holding of the meeting or the passing of any resolution thereat be filed by 8 July 1999. The costs of the proceedings before Heerey J on 1 July 1999, and the costs of the applicants in application Q7233 of 1999 were reserved. This application concerns the resolution of the outstanding costs issues. Material Facts 3 The material before the Court establishes that before 17 May 1999 ten creditors with proven debts totalling $288,511.30, had requested the Trustees pursuant to s 64(1) of the Act to call a meeting of creditors to consider a resolution under s 181 of the Act, that the Trustees be removed. Those creditors represented 40 per cent of the value of the creditors of the estate. It was submitted on behalf of Mr Peter Dunwoody and McDonald Murphy, and it appears from the affidavit of Jay Arscott Stevenson, filed on 22 September 1999, that in fact by 19 May 1999 requisitions from twenty-three creditors representing 69 per cent of the value of the creditors of the estate, were received by the Trustees. 4 On 21 May 1999 Messrs Bennett & Philp, solicitors, wrote to the solicitor for the Trustees seeking confirmation that the Trustees would proceed to call a meeting of creditors pursuant to s 64(1) of the Act. 5 The Trustees by their solicitor's letter of 24 May 1999 did not give the confirmation sought, but referred to a range of matters which are not presently relevant and concluded : "In the circumstances, and having obtained legal advice, my clients have decided to approach the Federal Court for directions in relation to this issue. It is not proposed to serve the application on any party. However, my clients propose to issue a circular to creditors and any creditor interested in intervening and having their say on the application, can appear at the first directions hearing and inform the Court accordingly." 6 By facsimile of 25 May 1999 Mr Peter Dunwoody and Mr Andrew McDonald, as the Committee of Inspection, wrote to the Trustees. The letter said : "Dear Sir, RE: BANKRUPT ESTATE OF JOHN ERNEST DUNWOODY / COMMITTEE OF CREDITORS Recently, many creditors wrote to you requesting that you convene a meeting of Creditors to consider a motion for your removal. This was our perogative [sic] under Section 64(1) of the Bankruptcy Act. We outlined our reasons for this in our letters to you. I am now informed that your solicitor Mr James Conomos advises that 'you won't convene the requested meeting'. This request on behalf of the Committee of Inspection is for you to fortwith [sic] set the time date and place for the meeting, to so advise the creditors and to make all reasonable arrangements for the holding of the meeting. Your prompt reply would be appreciated. Failing this we will exercise our other options under the Act. Yours faithfully," 7 On 25 May 1999 the Trustees filed an application, purportedly pursuant to s 134(4) of the Act. The relief sought was "for directions as to the calling of a meeting of creditors requisitioned by creditors of the estate pursuant to s 64 of the Bankruptcy Act". The application was made ex parte and was returnable on 11 June 1999. On 10 June 1999 the Trustees sought that the application be heard in Chambers and that nobody other than the Trustees be permitted to be present. The Trustees did not serve or give notice of the application to anyone, including the Committee of Inspection. 8 On 31 May 1999 Mr Peter Dunwoody and McDonald Murphy filed application Q7233 of 1999. They claimed the following relief : "1. An order that, pursuant to Section 64(1) of the Bankruptcy Act 1966, the Respondents forthwith convene a meeting of the creditors of the abovenamed bankrupt to consider a resolution that the respondents be removed from their position as trustee of the estate of the abovenamed bankrupt. 2. An order that the Applicants' costs of and incidental to this application be paid by the Respondents, such costs to be taxed on an indemnity basis. 3. A declaration that the Respondents are not entitled to be indemnified out of the bankrupt estate for the said costs. 4. Such further or other order as the Court considers appropriate." 9 This application was served on the Trustees and was listed for directions on 25 June 1999. On that date a District Registrar ordered that the application stand over to a date to be fixed after the determination of Q7218 of 1999. 10 On 1 July 1999 the matter was heard before Heerey J. Application Q7233 of 1999 was also before his Honour. 11 On 9 August 1999 by a unanimous resolution of those creditors attending personally or by proxy, the Trustees were removed as Trustees of the bankrupt's estate, pursuant to s 181 of the Act. 12 On 29 September 1999 the Trustees by their solicitors wrote to the solicitors for Mr Peter Dunwoody and McDonald Murphy : "J E DUNWOODY (A BANKRUPT) APPLICATION NOS Q7218 OF 1999 & Q7233 OF 1999 We refer to the above Applications. Our clients hereby offer to resolve all questions of costs in both Application No Q7218 of 1999 & Application No 7233 of 1999 on the basis that the costs of each party be taxed and paid out of the assets of the estate. The offer is made on an open basis and a copy of the offer has been provided to the solicitors for the present Trustee." Submissions 13 Mr Peter Dunwoody and McDonald Murphy submit : (a) the Trustees were obliged under s 64(1) of the Act to call a meeting of creditors when the required number of creditors requisitioned a meeting; (b) having regard to the mandatory nature of s 64(1), the application for directions was totally unwarranted; (c) Heerey J directed that a meeting be called unless the Trustees obtained an injunction to restrain the holding of the meeting; (d) the Trustees were removed at the meeting of creditors when it was ultimately held; (e) the conduct of the Trustees was not reasonable and they ought to be denied their costs and indemnity out of the bankrupt's estate; (f) application Q7233 of 1999 was necessary because of the conduct of the Trustees and their attempt to proceed ex parte, in private and without notice to the creditors that an application, Q7218 of 1999 had in fact been made by the Trustees; (g) they submit that the Trustees should pay their costs of Q7233 of 1999, their appearance before Heerey J on 1 July 1999 and also their costs of this application for costs on an indemnity basis because the conduct of the Trustees was in clear breach of s 64(1) of the Act and was contumelious. 14 The Trustees submit : (a) they were justified in seeking directions because the creditors were acting in concert with the bankrupt to seek their removal, in the Trustees' belief, to avoid the proper investigation and pursuit of the bankrupt's property. This they stated was not in the best interests of the creditors; (b) the offer of settlement was reasonable and should have been accepted by Mr Peter Dunwoody and McDonald Murphy to avoid the costs of a further hearing; (c) application Q7233 of 1999 was unnecessary because the creditors were aware that the Trustees intended to seek directions from the Court and the creditors should have awaited the outcome of that application when it was made; (d) no circumstances had been made out to deprive the Trustees of their costs or their indemnity from the bankrupt's estate and no basis had been shown to justify the making of an order against them for costs. Conclusion 15 Section 64 of the Act provides : "SECTION 64 TRUSTEE TO CONVENE MEETINGS 64(1) The trustee must convene a meeting of the creditors of a bankrupt: (a) whenever the creditors so direct by resolution; and (b) whenever so requested in writing by at least one-fourth in value of the creditors; and (c) whenever so requested in writing by less than one-fourth in value of the creditors, being a creditor who has, or creditors who together have, lodged with the trustee sufficient security for the cost of holding the meeting. 64(2) The trustee may convene at any time a meeting of the creditors of a bankrupt." 16 The obligation cast on the Trustees by s 64(1) of the Act was mandatory. It is to be contrasted with s 64(2), which is permissive. 17 The ability of a trustee under s 134(4) of the Act to approach the Court for directions is not a section designed to alleviate the obligation of a trustee to make decisions which he or she ought to make in the proper administration of a bankrupt's estate, or to do acts which the Act requires the trustee to do. The creditors are given a statutory right under s 64(1) to requisition a meeting of creditors if the statutory number requisition such a meeting. 18 Absent some compelling reason that the calling of the meeting would be improper or against the public interest, application Q7233 of 1999 would inevitably have led to the Trustees being directed to call the meeting. Indeed, Heerey J appears to have made the order on that application. The transcript indicates as follows : "MR CONOMOS: Well, if the Court - given what your Honour said, if it is that the application for directions will not lead to directions because it is too hypothetical, then my friend has made an application for an order compelling the trustees to convene the meeting. If necessary, the trustees can file an application for an injunction restraining the holding of the meeting, and the very same issues as my friend may have to argue on his application factually, will need to be raised in that application. ..... HIS HONOUR: What is your application? Do you say there should be a date fixed for the meeting now? MR LYONS: Yes, your Honour." The reason given by the Trustees for failing to call a meeting was that many of the requisitions were in similar form and therefore indicative that the creditors were acting in concert with the bankrupt to procure their removal. This reason was rejected in argument by Heerey J : "I was told by the solicitor for the trustee that he was reluctant to call the meeting because of doubts as to the bona fides of the creditors. He said that creditors had - the request for the meeting had been 'manoeuvred or created' by the bankrupt himself. It was said that the requests were on identical forms and contained the bankrupt's fax number and that some of the - at least some of the creditors are represented by the bankrupt's solicitors. I do not doubt that under the general power conferred by section 30 the Court has power to restrain meetings of creditors or to prevent the removal of a trustee if that would be in any way improper or contrary to the public interest. See generally re Crawford (1943) 13 ABC 201 at 201 and the Carse cases therein cited. However, apart from what I was told from the Bar Table there is, at the moment, no evidence at all to support the concerns advanced by the trustee. It is important, particularly in the light of the delay which has occurred to date, that the process mandated by the Act be complied with, reserving the right of the trustee to make such application on proper material as he sees fit. So I will direct that not early [sic] than 15 July 1999 the trustee give notice of the meeting of creditors to be held pursuant to section 64.1 of the Bankruptcy Act and I order that any application by the trustee to restrain the holding of the meeting or the passing of any resolution thereat be filed together with affidavits in support on or before 8 July . ..." 19 The form of the letter to which the Trustees referred was : "I am a creditor in the estate of Mr Dunwoody and my details appear below. In early February I wrote to you and expressed my concern about your administration of Mr Dunwoody's estate. I asked you to convene a meeting of creditors to consider a motion whether or not you should continue as trustees of his estate. Following reassurances from you that you would promptly attend to administering the bankrupt's estate, I agreed to rescind my request for the meeting to consider your continued management of the estate. Your third report to creditors claimed fees of $145,990. Your latest statement to the 30th of April claims additional fees of $37,530.30 bringing your total claimed fees to $183,520.30. In addition you have incurred legal fees in excess of $79,650 to March 7, bringing the total charges in the administration to over $263,170.03. It is apparent to me that there is no clear end to your administration and your charges and legal fees. The Committee of Inspection also expressed its concern to you about the cost of your administration and the level of fees. I am particularly concerned that you have not been prepared to negotiate a fixed fee and that these costs continue to accumulate at a rate of more than $37,595.75 /month. It is now quite clear that under your administration my position as a creditor has been severely eroded. There will be no funds available for dividends whether Mr Dunwoody's current Section 73 proposition is approved or you continue to pursue Mr Dunwoody. Pursuant to Section 64(1) of the Bankruptcy Act I now call upon you to convene a meeting of creditors to consider a resolution that you be removed forthwith from your position as trustee of this estate. The minimum period of notice under Section 181 is seven days and consequently there seems to be no reason why the meeting could not be convened by Friday 21 May or Monday 24 May at the latest. I request immediate confirmation from you that you will promptly arrange this meeting failing which we will have to apply to the Federal Court for an injunction to compel you to comply with your obligations under the Act. Your early response in writing is requested." 20 It is clear from the terms of the letter what the principal concern of the creditors was in requisitioning the meeting; it was the costs and expenses incurred to date in the administration of the estate and the question of whether, with fees being incurred at such a rate, there was going to be anything left by way of dividend to the creditors. 21 The response of the Trustees to these concerns was contained in their solicitor's letter to Bennett and Philp of 24 May 1999. They said : "As to your advice that the intentions of creditors in the estate clearly appear from the enclosed requisitions, my clients have instructed me to make the following comments : · The comments made by creditors in their requisitions are identical; · The comments relating to fees are identical; · The comments, insofar as they relate to my clients' last statement to 30 April 1999, were not provided to creditors or to the committee. That information was provided to your Mr Bennett in representing the bankrupt with a view to my clients negotiating an outcome in relation to fees; · The comments are misleading in that they state that my clients are not prepared to negotiate a fixed fee. My clients note the wishes of creditors and are clearly concerned by the comments the creditors have made." 22 Heerey J left it open to the Trustees to seek injunctive relief if they wished to make good their allegations. However this did not occur. The creditors were unanimous in their resolution to remove the Trustees. 23 In my view, the application for directions by the Trustees was totally unnecessary and was unreasonable. In these circumstances the Trustees must bear the costs of it personally and without entitlement to be indemnified out of the bankrupt's estate because the costs, charges and liabilities referrable to the application were not properly incurred: Re Beddoe; Downes v Colfam [1893] 1 Ch 547 at 560; Re Bryant; Ex parte Gordon (1889) 6 Morrell 262 at 266; Re Dusseck; Ex parte The Trustee v Australian Mosaic Flooring Ltd (1964) 20 ABC 159; Adsett v Berlouis (1992) 37 FCR 201 at 211. 24 Application Q7233 of 1999 was the direct result of the conduct of the Trustees, although it was later in time than the Trustees' application for directions. Contrary to what was said in the letter of 24 May 1999, the Trustees did not take steps to enable any creditor who was interested to intervene and be heard on the application. To the contrary, the Trustees attempted to have the matter dealt with in Chambers, privately, and to the exclusion of the creditors. Ultimately, Heerey J made orders for the calling of the meeting in terms of the relief sought by Mr Peter Dunwoody and McDonald Murphy. 25 The Trustees were respondents to Q7233 of 1999. After service of the application on them, they persisted in their refusal to call a meeting as required by s 64(1) of the Act. The grounds of their refusal were found to be without substance. In my view the Trustees must pay the costs of Mr Peter Dunwoody and McDonald Murphy of and incidental to Q7233 of 1999 and of their intervention and appearance in Q7218 of 1999 to be taxed if not agreed. 26 I am not persuaded that the offer of settlement in any way alters the situation. The object of the offer was to protect the position of the Trustees, by preserving their right to costs and indemnity, and by avoiding a personal liability for costs to Mr Peter Dunwoody and McDonald Murphy. In any event, in the circumstances I have found, the offer was neither reasonable nor proper, in the interests of the creditors. 27 The refusal of the Trustees to call the requisitioned meeting was unjustified and was to seek to maintain their position as Trustees of the estate, in the face of substantial support for a meeting to remove them. To fail to call the meeting when proceedings were initiated by application Q7233 of 1999 and to thereafter resist such a course was so unreasonable, that it warrants the making of an order that the costs of Mr Peter Dunwoody and McDonald Murphy Machinery Pty Ltd be taxed on an indemnity basis: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401; Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper. Associate: Dated: 11 April 2000 Counsel for the Applicant: A Lyons Solicitor for the Applicant: Bennett & Philp as town agents for Barry Beaverson & Stenson Counsel for the Respondent: D Savage Solicitor for the Respondent: Bowdens Date of Hearing: 1 October 1999 Date of Judgment: 11 April 2000