FEDERAL COURT OF AUSTRALIA Maxwell-Smith v Donnelly [2005] FCA 332 BANKRUPTCY – Application byformer bankrupts for an inquiry into the conduct of their trustee in bankruptcy – Sequestration order annulled but continuing liability of former bankrupts for costs of administration – Reasonableness of certain actions taken by trustee – Application refused. Bankruptcy Act 1966 (Cth) ss 154(1)(b), 179(1) EUGENE MAXWELL-SMITH AND INGE MAXWELL-SMITH v MAX CHRISTOPHER DONNELLY NSD 1672 of 2004 WILCOX J 21 MARCH 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1672 of 2004 BETWEEN: EUGENE MAXWELL-SMITH AND INGE MAXWELL-SMITH APPLICANTS AND: MAX CHRISTOPHER DONNELLY RESPONDENT JUDGE: WILCOX J DATE OF ORDER: 21 MARCH 2005 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The costs of the application be trustee's costs in the administration of the former bankrupts' estates. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1672 of 2004 BETWEEN: EUGENE MAXWELL-SMITH AND INGE MAXWELL-SMITH APPLICANTS AND: MAX CHRISTOPHER DONNELLY RESPONDENT JUDGE: WILCOX J DATE: 21 MARCH 2005 PLACE: SYDNEY REASONS FOR JUDGMENT WILCOX J: 1 This is an application by two former bankrupts, Eugene Maxwell-Smith and Inge Maxwell-Smith. The respondent to the application is Max Christopher Donnelly, who was the trustee of their estates. Mr Donnelly was appointed by a sequestration order made by a Registrar of the Court on 15 September 2003. 2 On 2 July 2004, Moore J made an order annulling each of the bankruptcies. His Honour held the sequestration orders should not have been made because there was a denial of procedural fairness. It appears there was a misunderstanding about the hearing of the matter. Moore J held that the bankrupts had not received due notice of the hearing. I need not go into detail about the relevant circumstances. His Honour's order stands, with the result that the bankruptcies terminated on the date of the order. 3 However, termination of the bankruptcies does not affect the former bankrupts' liability to pay the costs, charges and expenses of the administration of the bankruptcies, including the remuneration and expenses of the trustee, provided they were properly incurred: see s 154(1)(b) of the Bankruptcy Act 1966 (Cth) ('the Act'). The trustee has prepared accounts setting out the amount claimed by him for remuneration and expenses, including amounts paid or payable by way of legal costs. The total account exceeds $92,000. This sum is greater than the claim made by the petitioning creditor, who is apparently the only creditor of the former bankrupts. The sum is a large one, having regard to the fact that the bankruptcies subsisted for a period of only 10 months. However, it is probably correct, as stated by Mr B. Skinner, counsel for the trustee, that this was an unusually difficult administration. There appears to have been an absence of good communication between the bankrupts and the trustee. 4 The filed application does not specify the order sought by the applicants. However, it appears the applicants are relying on s 179(1) of the Act. That subsection reads: 'The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following: (a) remove the trustee from office; and (b) make such other order as it thinks proper.' 5 The power given to the Court under s 179(1) of the Act is a wide one. However, the context of the subsection indicates the power is limited to orders consequential upon the trustee's conduct. Consequently it is necessary for the Court, in considering an application under s 179(1), to focus on the conduct of the trustee that is said to activate the power given by the subsection. 6 With this in mind, I invited Mrs Maxwell-Smith, who appeared on behalf of her husband and herself at the hearing of the application, to identify the relevant conduct. She did this by reference to various documents. The process of identification proved to be a lengthy one. It was a difficult process, from Mrs Maxwell-Smith's point of view. She feels very strongly about the experience of being a bankrupt. I have sympathy for her about that. It appears the judgment debt, upon which the petition was based, arose out of a decision of the Consumer Credit Tribunal of New South Wales about which Moore J was extremely critical. However, his Honour held that, because of a subsequent decision in the Supreme Court of New South Wales, there was nothing he could do about the Tribunal's decision. Having regard to Moore J's criticisms, it is understandable that Mrs Maxwell-Smith resents the fact that the judgment led to her and her husband being made bankrupt and that they are now left to pay costs incurred by the trustee consequential on their bankruptcies. However, it is the policy of the Act that former bankrupts have that burden, even after annulment. 7 Focusing on the relevant conduct, so far as I have been able to distil from the documents and what Mrs Maxwell-Smith has said to me, the applicants' complaints fall into six categories. 8 The first matter is that the trustee carried out work, and incurred expense, in advertising for creditors in May 2004. At that time, the trustee was aware that applications for annulment had been made to the Court. It was put to me by Mrs Maxwell-Smith that the advertising was unnecessary. She called it 'a fishing expedition', because she and her husband had made statutory declarations that there were no other creditors. She said the trustee was simply looking for other creditors in order to impede their applications for annulment. 9 It seems to me this is not a fair criticism. As was pointed out in evidence by Ms Angela Gallucci, the manager in the trustee's office who had the main carriage of administration of the bankruptcies, it is necessary for a trustee to provide a report to the Court upon the hearing of any annulment application. The Court would expect to have information about the number and identity of creditors. Although I understand Ms Maxwell-Smith feels the trustee should have taken her and her husband's word for the fact that there were no other creditors, experience indicates that information bankrupts give to their trustee is often inadequate or incorrect. 10 The second matter mentioned to me was the fact that the trustee carried out work, and incurred some expense, in connection with a property at Jindabyne. Ownership of this property is shared between the two bankrupts and two adult children of Mrs Maxwell-Smith from a former marriage. Mrs Maxwell-Smith said it was unnecessary for the trustee to worry about the Jindabyne property; the former bankrupts owned the home in which they lived at Tura Beach. This was unencumbered and worth more than the amount of the judgment creditor's debt. 11 Once again, I can understand the complaint. However, I think Mr Skinner is correct, in saying it was both normal and proper for the trustee to seek to have the bankrupts' interests in the Jindabyne property put in his name. The reason for a trustee putting assets into his or her own name is to ensure control of all assets in the interests of creditors. It is true that Mr Donnelly took title to the Jindabyne interests at about the same time as the applications for annulment was filed. However, it seems he instigated the application for registration prior to learning of the applications for an annulment. He made the application for registration at the same time as making a similar application in relation to Tura Beach. It does not appear to me it would then have been obvious to him that he need not do any work in connection with Jindabyne. 12 The next matter that is mentioned is that work was done in connection with the issue of warrants for the arrest of the former bankrupts. The warrants were issued because of their failure to attend public examinations that had been appointed in February 2004. There was apparently a good explanation of their failure to attend. However, Ms Gallucci pointed out in her evidence that the usual course is to provide a form of warrant to the Registrar, even if there is then a decision by the Registrar to adjourn the public examination. This is done so as to ensure that, if the bankrupt does not turn up on the subsequent occasion, a warrant can immediately issue. I think it is difficult to criticise the trustee for issuing the warrants, even though, in the event, it was not necessary for the warrants to be executed. 13 The fourth matter is that the trustee took out an insurance policy over each of the properties, notwithstanding that they were already insured in the names of the relevant owners. As Mr Skinner pointed out, it is normal for a trustee to take out a policy to cover his or her interests. It would thereafter be open to the bankrupt to cancel the existing policy and obtain a refund of premiums paid. Probably this did not happen in the present case. That is unfortunate, because there was a duplication of expense and money was wasted. But it is difficult for me to say this was the fault of the trustee. As I said earlier, communications in this case were extremely poor. 14 The next matter mentioned is the fact that, as a result of the Tura Beach property being placed in the name of the trustee, the local council issued a rate assessment which did not allow the aged person's rebate that would otherwise have been available and which previously had been allowed to the bankrupts. There is some confusion, in the evidence, as to exactly what happened. Apparently, the council officer concerned with collection of rates was prepared to allow the rebate if he was provided with evidence that the bankrupts lived in the property. Mrs Maxwell-Smith says that she spoke to Ms Gallucci about this and asked her to provide the evidence. Ms Gallucci does not recall what she did in connection with that matter. 15 Once again, there may have been an omission that caused unnecessary expense. However, I have difficulty in concluding that I should stigmatise this as being misconduct by the trustee. Apparently, the problem has now been solved. An appropriate document has been given to the council. 16 Finally, Mrs Maxwell-Smith feels extremely strongly about the fact that the trustee failed to give permission for her to depart, with her disabled grandchild, on an overseas cruise on 20 May 2004. 17 Apparently, Mrs Maxwell‑Smith intended to speak to the trustee about this matter on 18 May. Although she saw Mr Donnelly on that day, she omitted to do so. She saw him again on 19 May, but again failed to raise the matter with him. She then apparently assumed there would not be a problem, because of something said to her by Ms Gallucci. So she presented herself and her grandson to the ship on 20 May but was denied entry. Despite an attempt by the captain of the ship to resolve the matter, Mrs Maxwell-Smith eventually had to be excluded from the ship because of the fact that she was on a Portwatch list maintained by the Australian Federal Police. 18 I understand the embarrassment and anguish of Mrs Maxwell-Smith over this matter. Perhaps it could have been better handled by Mr Donnelly, but I have to say it seems to me the fault lay at least as much on the side of Mrs Maxwell-Smith, as on the trustee. She ought to have taken up the matter with Mr Donnelly well before the cruise was due to depart. In any event, this particular complaint has no financial aspect. There would be no point in having an inquiry in relation to that matter. 19 In considering the application for an inquiry, a relevant consideration is that the Inspector-General in Bankruptcy has already received, and considered, several written complaints made by the present applicants in regard to Mr Donnelly's administration of their estates. He carried out an inquiry into these complaints, including by questioning Ms Gallucci and perusing the trustee's file. He gave consideration to the amounts claimed in respect of particular items. He was unable to discern any basis for saying that unnecessary expenses had been incurred. 20 Leaving aside the complaint about the cruise, the essence of the applicants' case in this Court is that unnecessary expenses have been incurred. I am unpersuaded about that. My view is, I think, supported by the conclusion of the Inspector-General. 21 As Mr Skinner has pointed out, the trustee will need to prepare a detailed account of his remuneration and expenses, if he is to recover those monies by sale of the properties, or one of them. It seems to me the appropriate course is for this process to go ahead and for the account to be taxed by an appropriate officer of the Court. It may also be appropriate for the legal costs, which are significant, to be the subject of an itemised and taxed bill of costs. 22 The situation confronting Mr and Mrs Maxwell-Smith is most unfortunate. In saying that, I have in mind both the unsatisfactory Tribunal decision and the circumstances that led Moore J to annul the bankruptcy orders made against the applicants. Nonetheless, unless Mr Donnelly can be shown to have acted improperly in some way, or to have incurred unnecessary expense, or to be charging an unnecessary or excessive amount, he is entitled to his remuneration and to reimbursement of his expenses. 23 I see no basis for ordering an inquiry into Mr Donnelly's administration of the former bankrupts' estates. There has been full discussion today about each of the complaints made by Mrs Maxwell-Smith. There is no point in a fuller inquiry in relation to them. 24 As I say, the appropriate course now is for a detailed account of costs to be prepared and taxed. I hope it will then be possible for some arrangement to be made whereby that amount is paid out, perhaps by the former bankrupts obtaining a loan secured over the Tura Beach property. It would be a further misfortune if their unwillingness or inability to do this led to their home, or the Jindabyne property, being sold up. I hope that, even at this late stage, cooperation and commonsense will prevail. 25 The orders I make are that the application be dismissed and that the costs of the application be trustee's costs in the administration of the former bankruptcies. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox. Associate: Dated: 4 April 2005 Mrs Maxwell-Smith appeared for both applicants. Counsel for the Respondent: Mr B Skinner Solicitor for the Respondent: Church & Grace Date of Hearing: 21 March 2005 Date of Judgment: 21 March 2005