FEDERAL COURT OF AUSTRALIA Dare v Doolan [2004] FCA 461 Bankruptcy Act 1966 (Cth) Adsett v Berlouis (1992) 109 ALR 100 Re Crawford Ex parte The Trustee (1943) 13 ABC 201 Macks v Ardalich [1999] FCA 679 Jefferson v Official Trustee in Bankruptcy (2000) 175 ALR 671 Mayne v Jaques (1960) 101 CLR 169 TRACY JOY DARE v WILLIAM EDWARD DOOLAN, WARWICK MCDONALD, ROMAN POLLACH, DOMINIC GUINEA, AND SOUTHBANK PROPERTY PTY LTD ACN 058 053 384 TRADING AS REMAX SOUTHBANK PROPERTY Q71 OF 2004 COOPER J BRISBANE 20 APRIL 2004 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q71 OF 2004 BETWEEN: TRACY JOY DARE APPLICANT AND: WILLIAM EDWARD DOOLAN FIRST RESPONDENT WARWICK MCDONALD, ROMAN POLLACH AND DOMINIC GUINEA SECOND RESPONDENTS SOUTHBANK PROPERTY PTY LTD ACN 058 053 384 TRADING AS REMAX SOUTHBANK PROPERTY THIRD RESPONDENT JUDGE: JUSTICE COOPER DATE OF ORDER: 20 APRIL 2004 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The application for interlocutory relief is dismissed. 2. The applicant pay the second and third respondents' costs of and incidental to the application to be taxed if not agreed. 3. The applicant bear her own costs of the application without recourse to the bankrupt's estate. 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 Q71 OF 2004 BETWEEN: TRACY JOY DARE APPLICANT AND: WILLIAM EDWARD DOOLAN FIRST RESPONDENT WARWICK MCDONALD, ROMAN POLLACH AND DOMINIC GUINEA SECOND RESPONDENTS SOUTHBANK PROPERTY PTY LTD ACN 058 053 384 TRADING AS REMAX SOUTHBANK PROPERTY THIRD RESPONDENT JUDGE: JUSTICE COOPER DATE: 20 APRIL 2004 PLACE: BRISBANE REASONS FOR JUDGMENT 1 The applicant is the trustee of the bankrupt estate of William Edward Doolan. She was appointed on 2 June 1999. Doolan ceased to be a bankrupt when he was automatically discharged under the provisions of the Bankruptcy Act 1966 (Cth) ('the Act') on 24 June 2002. 2 The creditors of the bankrupt estate, on 29 and 30 March 2004, requisitioned the applicant to call a meeting of creditors which would consider a resolution pursuant to s 181 of the Act for the removal of the applicant as trustee and the appointment of another trustee in her stead. That meeting is to be held today. 3 The applicant has sought interlocutory and permanent injunctive relief restraining the first, second and third respondents 'from putting to any meeting of creditors a proposal for a resolution to remove the applicant as trustee of the estate of the first respondent' and further 'from voting in favour of any resolution put to a creditors' meeting to remove the applicant as trustee of the estate of the first respondent.' 4 In support of her application, the applicant filed an affidavit of 121 pages, together with 95 annexures totalling approximately 750 papers. This material is cross-referenced to 14 volumes of material filed in proceedings instituted in the bankruptcy. The material purports to set out and justify the applicant's conduct of her trusteeship and the incurring of costs and expenses in the administration in an amount of $477 627.41, including trustee's remuneration to date of $327 721.32. Subsequently she filed an affidavit dealing with the declaration by her of a first and final dividend under s 140 of the Act on 16 April 2004. 5 The remaining unsecured creditors of the bankrupt are, or include, the first, second and third respondents. The first respondent is the former bankrupt and he and the second respondent became creditors of the bankrupt estate by taking an assignment of debts from other creditors. The third respondent is an original creditor. In total, the unsecured creditors in respect of which the applicant has admitted proofs of debt are owed $14 187.45. 6 The estate is almost fully administered. All that remains to be done is to sell a residential property at 10 Sankey Street, Highgate Hill (where the first respondent resides) and to pay out the priority debts in the administration together with the costs and charges incurred in selling the residential property. 7 The applicant deposed that there was no money presently available in the estate from which to pay rates outstanding on the Sankey Street property or to pay any of the priority debts. She further deposed (in par 5(g) of her affidavit) that there was no benefit to the creditors in replacing her as trustee as 'my remuneration, costs, charges and expenses exceed the estimated value of the remaining asset by an amount of $49,248.76, and it would be inequitable for me to be removed as trustee.' 8 It is clear that relations between the creditors and the applicant have totally broken down. Proceedings in respect of the applicant's costs, charges and expenses are presently in this Court (Q7004 of 2003 and Q7005 of 2003) and in the Federal Magistrates court (BZ107 of 2004). The applicant alleges that the creditors seek her removal and replacement in order that the first respondent can avoid the sale of his home and deny the applicant her remuneration. 9 The respondents, for their part, submit that the administration has been extravagantly expensive and the sale of the house immediately incurs an eight per cent realisation charge payable to the Commonwealth of Australia, which fee would satisfy their debts. They also submit that the trustee has unreasonably refused to put before a creditors' meeting a proposed Deed of Arrangement or composition on the part of the first respondent, which provided for the securing and payment of the proper fees and expenses of the applicant out of the proceeds of a sale of the property outside of the bankruptcy administration or out of funds raised against the property to pay out the proper priority payments. 10 The creditors seek the appointment of David John Cranstoun as trustee. Mr Cranstoun is a registered trustee. 11 Section 181 of the Act provides: '181 The creditors may, by resolution, at a meeting of which not less than 7 days' notice has been given, remove a registered trustee appointed by them, or a registered trustee who is, by virtue of subsection 156A(3), the trustee of the estate of the bankrupt concerned, and may at the same or a subsequent meeting appoint another registered trustee to be trustee in his or her place.' 12 Prima facie, the Act empowers the creditors to remove a trustee in circumstances which appear to the creditors to justify such a removal. The power to remove is not preconditioned upon there being any misconduct on the part of the trustee. If, for example, relations between the trustee and the creditors have broken down for whatever reason, that will be sufficient. Where a trustee has lost the confidence of creditors and those creditors seek the removal of the trustee, he or she should not resist removal unless there are proper reasons to do so: Adsett v Berlouis (1992) 109 ALR 100 at 112. 13 Ordinarily, the Court would not interfere with an exercise of the power under s 181 to remove a trustee unless a good cause is shown for its interference: Re Crawford Ex parte The Trustee (1943) 13 ABC 201 at 202; Macks v Ardalich [1999] FCA 679 at [22] - [23]. 14 In the present case, the applicant submits that the creditors are proposing to act for an improper purpose, namely to deny her payment of the remuneration she claims and the indemnity she claims in relation to costs and expenses incurred by her as trustee. 15 In order to demonstrate the impropriety of the creditors' proposed action, and to demonstrate that they had no interest in removing her as trustee, on the hearing of the application and for the first time, she offered to undertake: '... to pay the debts in the estate of the first, second and third respondents as specified in Exhibit "TDJR-41" of her affidavit in priority to the payment of her remuneration and expenses.' 16 She further offered by her counsel to pay by way of cheque drawn on KPMG (the accounting firm of which the applicant is a partner) the sum of $14 115.45 to the account of the solicitors for the second and third respondents' by 5.00 pm on 16 April 2004 and by cheque drawn on KPMG to pay the sum of $72.00 to the first respondent by delivering it to 10 Sankey Street, Highgate Hill by 5.00 pm on 16 April 2004. 17 The undertaking to pay the cheques drawn on KPMG was withdrawn, when it became clear that in exchange for payment, KPMG was expecting an assignment to it of the creditors' debts. 18 In lieu of an undertaking to procure KPMG to pay, an undertaking was made to declare dividends in the amounts of $14 115.45 and $72.00 and to pay the same to the respondents before 5.00 pm on 16 April 2004. In fact, dividends were declared and cheques paid in these amounts on 16 April 2004, after the hearing of the application had concluded. 19 When asked how it was contended that the creditors would be able, by removing the applicant as trustee, to deny her entitlement to be paid her remuneration out of the property of the bankrupt, counsel referred me to s 164 of the Act. That section provides: '164(1)If one person acts as a trustee of the estate of a bankrupt after another person has acted as the trustee, their remuneration and expenses are to be divided between them, if necessary, on a basis: (a) that they agree on; and (b) that is endorsed by a resolution passed at a meeting of the creditors. (2) When a person (the earlier trustee) ceases to be the trustee of the estate of a bankrupt because another person (the later trustee) has become trustee, the earlier trustee must: (a) prepare an account of his or her receipts and payments (including remuneration and expenses) for the period that he or she was trustee; and (b) keep a copy of the account; and (c) give each creditor a copy of the account; and (d) give the later trustee a copy of the account and any other accounts the earlier trustee has received from a person who was the trustee before the earlier trustee. (3) The later trustee must allow an authorised employee to inspect at any reasonable time an account received from the earlier trustee.' (Original emphasis) 20 It was said that the entitlement to remuneration thereafter became subject to agreement of the new trustee and agreement of the creditors and that the applicant was thereby subjected to a disadvantage which she would not otherwise confront. 21 Section 164 of the Act is to cover the working out between the old and the new trustee, of arrangements with respect to payment for past work and payment for work in the future. Where, for example, there has been an agreement with the creditors for a lump sum for remuneration or payment of a commission based on a percentage of the property of the bankrupt recovered and realised, performance of part only of the work agreed to earn the sum requires an agreement with the new trustee as to how the sum is to be divided. However, that problem does not arise where the payment is to be made in accordance with the Bankruptcy Regulations 1996 for work actually and properly done and outgoings properly incurred. In the instant case, Kiefel J has determined that the applicant is to be paid in accordance with the Bankruptcy Regulations 1996. 22 The applicant's right to remuneration does not depend upon, nor can it be taken away by, a resolution of creditors made under s 162 of the Act: Jefferson v Official Trustee in Bankruptcy (2000) 175 ALR 671 at [18] - [21], [25]. 23 As was said in Adsett v Berlouis at 109, and Mayne v Jaques (1960) 101 CLR 169 at 171, 173 and 180, the Act assumes the existence of a right of a trustee to be remunerated unless the trustee has agreed to act without remuneration or has not done the work or no work needed to be done or the trustee has for some reason (for example misconduct) become disqualified to have the remuneration. So too a trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred by the trustee: Adsett v Berlouis at 109, and cases cited therein; Jefferson v Official Trustee at [19]. 24 When the applicant made further submissions today in respect of the perceived prejudice from the operation of s 164 of the Act, it became clear that it was not s 164 which gave rise to any disadvantage to the applicant. Rather, it was the disadvantage of having to share the presently available property of the bankrupt with a second trustee. The applicant submits that because there will be a shortfall, she will be required to share the available funds rateably with the new trustee: s 109(11) and (12). 25 A number of things can be said in respect of this submission. Firstly, it is by no means certain that there will be a deficit; that depends upon the final entitlement of the applicant to remuneration and indemnity which is presently before the Court for determination. Secondly, if there is substance in the contention of the first respondent that there is $210 000 payable to his bankrupt estate from the liquidation of Doolan Properties Pty Ltd (in liquidation), then there will be no deficit. Thirdly, the basis of any new trustee's remuneration is unknown and it cannot be said that it will impact in any significantly adverse manner upon the applicant's right to remuneration and indemnity, particularly when the applicant is relieved of the burden of undertaking any further work to finalise the estate. Fourthly, a new trustee may be able, with agreement of the first respondent, to put forward a compromise or deed of arrangement which provides for the payment out in full of the applicant's proper remuneration and discharge in full her indemnity in respect of costs and outlays properly incurred in the administration of the estate. The applicant, once appointed as trustee, had no inalienable right to earn all of the available remuneration to be earned in the administration of the estate nor the right to exclude the appointment of a new trustee to complete the work of finalising the estate where the second trustee would acquire a right to be remunerated under the Act for the subsequent work he or she performs which would rank equally with the right of the applicant to be paid under s 109(1) of the Act. 26 No composition or deed of arrangement put forward by the first respondent which did not make adequate provision for payment of the trustees accrued fees at the time the proposal was lodged, would be allowed by the Court to stand, notwithstanding agreement of the creditors to its terms. Section 73 of the Act makes clear that the entitlement of the trustee to be remunerated and indemnified is not to be lost by a composition or scheme which does not make adequate provision for payment of these amounts. 27 Further, any new trustee is bound to exercise his powers in accordance with and for the purposes of the Act. That means that he is obliged to get in all of the bankrupt's estate and to distribute it in accordance with the Act. Thus, if the house property has to be sold to enable payments to be made in the priority provided for in s 109 of the Act, the new trustee will be obliged to cause the house to be sold. There is nothing to suggest that the proposed new trustee would do anything other than discharge his duty as trustee in accordance with the Act and make payments in accordance with the priority laid out in s 109. 28 Whether or not the applicant has acted properly in the conduct of her trusteeship, whether or not she is entitled to the remuneration and indemnity in the amount claimed, and whether or not there is further property of the bankrupt which the applicant has failed to pursue (namely $210 000 in Doolan Properties Pty Ltd (in liquidation) of which the applicant is a co-liquidator), which she should have sought to recover for the benefit of the bankrupt's estate, are not matters to be determined in these proceedings. The issue on this application is solely one of whether there exists some sound reason for the Court to intervene to prevent the creditors doing what the Act provides they can do if they comply with s 181 and any other relevant provision. 29 I am not satisfied that there is anything improper in what the creditors proposed. Nothing they do can disentitle the trustee to her remuneration and to her indemnity. If she is not entitled to the full amount claimed, then it will be because of conduct on her part disentitling her to recover. That question will be decided in proceedings presently in train in this Court and the Federal Magistrates Court. 30 Nor did the offer of undertakings of the type foreshadowed by the applicant convert the proposed conduct of the creditors into improper conduct. The offers were designed solely to maintain the trustee in place to protect her claim for the remuneration and indemnity which she says she is entitled to in the quantum claimed. The offers to pay out the creditors when there are no funds to pay the rates to protect the remaining asset of the estate and the declaration of a dividend when there is no property of the bankrupt from which to declare a dividend, other than money borrowed from KPMG for that purpose, are not rational responses from a trustee acting objectively in the matter. They disadvantage the applicant to the extent of the monies borrowed when she predicts that there will be a deficit by giving the creditors an advantage that they are otherwise denied by the operation of s 109 of the Act. 31 I am not satisfied that there is a serious question to be tried that circumstances exist which would induce the Court to intervene to prevent the meeting or to prevent the creditors voting to remove the trustee. Further, as dividends have been declared and paid on 16 April 2004, I am not satisfied that there remains any utility in granting the relief sought even if I was otherwise satisfied that there existed a serious case to be tried on the question of Court intervention. The applicant contends that having declared and paid the dividend, there are now no creditors to pass a resolution removing her as trustee. That is, in consequence of the actions taken by her on 16 April 2004 after the hearing of the application, she has secured her position from challenge. This application is not the occasion to determine whether a dividend has been properly declared pursuant to s 140 of the Act or to declare the rights of any person to attend and vote at the scheduled meeting and I refrain from doing so. 32 The application for interlocutory relief is dismissed. 33 The second and third respondents are entitled to their costs to be taxed if not agreed. Relief was sought against them and they were entitled to resist. The apparent resolution of the matter by declaration of a dividend was not something previously offered. The material as filed sought relief on the basis that the creditors would gain nothing out of the estate because there would be a deficit. The second and third respondents have incurred legal costs in defending the proceedings as originally brought by the applicant. 34 The application has been brought to protect the applicant's personal interests when in my view they were never at risk, and will not be at risk even if she is removed as trustee. The applicant has and will receive the rights and benefits to which she is entitled under the Act and the general law. 35 The voluminous materials prepared and filed in support of the claim were unnecessary and did not address the simple issue of whether what was proposed was improper in that it sought wrongly to avoid an administration in bankruptcy to the detriment of the creditors or to defeat some public purpose underlying the Act. At the end of the day, the only basis advanced for intervention of the Court was to protect the trustee's remuneration and indemnity and to prevent a new trustee concerning himself with the administration of the estate. 36 The trustee should bear her own costs of this application for interlocutory relief without recourse to the bankrupt estate. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper. Associate: Dated: 20 April 2004 Counsel for the Applicant: P Davis Solicitor for the Applicant: Hewlett and Company Counsel for the First Respondent: The First Respondent appeared in person Counsel for the Second and Third Respondents: R Bain QC with P Tucker Solicitor for the Second and Third Respondents: Hollingworth & Spencer Dates of Hearing: 16 April 2004, 20 April 2004 Date of Judgment: 20 April 2004