FEDERAL COURT OF AUSTRALIA Donnelly (Trustee), in the matter of Keddie (Bankrupt) [2012] FCA 1485 Citation: Donnelly (Trustee), in the matter of Keddie (Bankrupt) [2012] FCA 1485 Parties: MARK CHRISTOPHER DONNELLY THE TRUSTEE OF THE PROPERTY OF RUSSELL WALTER KEDDIE, A BANKRUPT v GREG ABEL-LYNDON AND OTHERS LISTED IN SCHEDULE A, SCOTT DARREN PASCOE, THE TRUSTEE OF THE BANKRUPT ESTATE OF TONY BARAKAT, ANDREW SCOTT, THE TRUSTEE OF THE BANKRUPT ESTATE OF TONY BARAKAT and RODERICK MACKAY SUTHERLAND, THE TRUSTEE OF THE BANKRUPT ESTATE OF SCOTT JOHN ROULSTONE File number(s): NSD 1948 of 2012 Judge: JAGOT J Date of judgment: 19 December 2012 Legislation: Bankruptcy Act 1966 (Cth) Partnership Act 1892 (NSW) Date of hearing: 19 December 2012 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 11 Counsel for the Applicant: Mr J Baird Solicitor for the Applicant: Church & Grace Counsel for the First Respondent: Mr J A Hogan-Doran Solicitor for the First Respondent: Firths the Compensation Lawyers Counsel for the Second and Third Respondents: Mr A P Spencer Solicitor for the Second and Third Respondents: Gadens Lawyers Counsel for the Fourth Respondent: Mr M Petrucco of Argyle Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1948 of 2012 IN THE MATTER OF KEDDIE (BANKRUPT) BETWEEN: MAX CHRISTOPHER DONNELLY THE TRUSTEE OF THE PROPERTY OF RUSSELL WALTER KEDDIE, A BANKRUPT Applicant AND: GREG ABEL-LYNDON AND OTHERS LISTED IN SCHEDULE A First Respondent SCOTT DARREN PASCOE, THE TRUSTEE OF THE BANKRUPT ESTATE OF TONY BARAKAT Second Respondent ANDREW SCOTT, THE TRUSTEE OF THE BANKRUPT ESTATE OF TONY BARAKAT Third Respondent RODERICK MACKAY SUTHERLAND, THE TRUSTEE OF THE BANKRUPT ESTATE OF SCOTT JOHN ROULSTONE Fourth Respondent JUDGE: JAGOT J DATE OF ORDER: 19 DECEMBER 2012 WHERE MADE: SYDNEY THE COURT DIRECTS THE APPLICANT THAT: 1. He is justified in admitting to proof against both the joint and separate estates of Russell Walter Keddie, a Bankrupt (the Bankrupt) those creditors of the Keddies Law Partnership listed in the First Schedule hereto who have lodged proofs of debt with the Applicant where the Applicant is satisfied that their claims fall within Sections 10 or 11 and 12 of the Partnership Act 1892 (NSW). 2. He distribute the joint and separate estates respectively of the Bankrupt in the manner prescribed by section 110 of the Bankruptcy Act 1966 (Cth). AND THE COURT DIRECTS THAT: 3. Scott Pascoe and Andrew Scott, in the event that they propose to administer the estate of Anthony Barakat conformably with direction 1 herein to notify each of the creditors of Mr Barakat's estate before doing so. 4. Roderick Sutherland, in the event that he proposes to administer the estate of Scott Roulstone conformably with direction 1 herein to notify each of the creditors of Mr Roulstone's estate before doing so. THE COURT ORDERS THAT: 5. The costs of this application be paid out of the assets of the joint and separate estates of the Bankrupt. 6. Scott Pascoe and Andrew Scott's costs of this application be paid from the joint and separate estate of Anthony Barakat. 7. Roderick Sutherland's costs of this application be paid from the joint and separate estate of Scott Roulstone. 8. The costs of Greg Abel-Lyndon and the other 79 creditors represented by Firths The Compensation Lawyers be paid out of the separate estate of Russell Keddie. 9. These orders may be entered forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1948 of 2012 IN THE MATTER OF KEDDIE (BANKRUPT) BETWEEN: MAX CHRISTOPHER DONNELLY THE TRUSTEE OF THE PROPERTY OF RUSSELL WALTER KEDDIE, A BANKRUPT Applicant AND: GREG ABEL-LYNDON AND OTHERS LISTED IN SCHEDULE A First Respondent SCOTT DARREN PASCOE, THE TRUSTEE OF THE BANKRUPT ESTATE OF TONY BARAKAT Second Respondent ANDREW SCOTT, THE TRUSTEE OF THE BANKRUPT ESTATE OF TONY BARAKAT Third Respondent RODERICK MACKAY SUTHERLAND, THE TRUSTEE OF THE BANKRUPT ESTATE OF SCOTT JOHN ROULSTONE Fourth Respondent JUDGE: JAGOT J DATE: 19 DECEMBER 2012 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an application by Max Christopher Donnelly, the trustee of the property of Russell Walter Keddie, a bankrupt. By the application filed on 29 November 2012 Mr Donnelly seeks a direction pursuant to s 134(4) of the Bankruptcy Act 1966 (Cth) (the Act) that, in effect, he is justified in admitting to proof against both the joint and separate estates of the bankrupt all those creditors of the Keddies Law Partnership listed in the first schedule to the application who have lodged proofs of debt or made claims against the bankrupt with the applicant, as well as a consequential direction for the distribution of the joint and separate estates respectively of the bankrupt in the manner prescribed by s 110 of the Act. 2 The application is supported by an affidavit of Mr Donnelly sworn on 29 November 2012. It is also supported by an affidavit of service of Alexandra Louise Campbell, accountant, employed in the office of Ferrier Hodgson of which Mr Donnelly is a member. Ms Campbell deposes to the fact that on 3 December 2012 she forwarded copies of the application with notice of the proposed listing of this matter at 10.15 am this morning to each of the creditors of the estate of the bankrupt (being Mr Keddie) as well as to Firths Compensation Lawyers, Scott Pascoe and Andrew Scott, who are the trustees of the property of Tony Barakat, a bankrupt and a former partner in the Keddies Law Partnership, Roderick Mackay Sutherland, who is the trustee of the property of Scott John Roulstone, a bankrupt and also a former partner of the Keddies Law Partnership, and to the Insolvency and Trustee Service Australia. Today there appears Mr Spencer of counsel on behalf of Messrs Pascoe and Scott, Mr Petrucco, solicitor, for Mr Sutherland, and Mr Hogan-Doran of counsel on behalf of the creditors of the bankrupt estate of Mr Keddie. 3 The evidence in support of the application establishes that Mr Keddie became a bankrupt on 15 June 2012 at which time Mr Donnelly was appointed as the trustee of the bankrupt's estate. Since his appointment four reports to creditors have been prepared. According to his affidavit, which has been updated by information made available today, Mr Donnelly is holding in relation to the bankrupt's separate estate a sum of about $4.75 million which is available for an interim distribution to creditors, subject to the costs of the administration. In addition to this, the affidavit evidence explains that at this time there appears to be only one asset of the joint estate of the bankrupt (that is, the estate held jointly with the former partners of the Keddies Law Partnership), that asset being whatever the bankrupt's entitlement to a portion of a GST refund of some $43,000 which was received by the accountants for the Keddies Law Partnership. 4 Separately from this, the trustee has received some 95 proofs of debt for claims totalling over $13 million from people described as clients or former clients of the Keddies Law Partnership, each of which has as its central complaint an allegation of overcharging for legal services provided in relation to claims for damages or compensation for personal injuries. There is in evidence a schedule identifying each of those persons who have lodged a proof of debt, the amount that the person has claimed in their proof of debt and a characterisation of the factual context underlying the claim. The factual context falls into one of the following circumstances: – (i) the person has obtained a judgment in their favour for a defined sum from the partnership, (ii) proceedings have been commenced by the person claiming a certain sum but the proceedings have not come to judgment, (ii) an out of court settlement has been negotiated and agreed between the person and the Keddies Law Partnership in relation to their claim, or (iv) no action has been taken in relation to any claim but a proof of debt has been lodged, apparently on the general basis of overcharging. There is in evidence at least one judgment in the District Court of New South Wales involving a claim of one former client of the Keddies Law Partnership, a Mr Bazdarov, and it is apparent from the judgment that the claim was upheld on the basis that the defendants to the claim, being the partners trading as Keddies Lawyers, breached their contract by reason of overcharging Mr Bazdarov for their legal services, as a consequence of which judgment was entered for Mr Bazdarov in a defined amount as well as a costs order in his favour. 5 In this application there has been an acceptance by the trustee that the order sought in the general terms in the application does not adequately reflect the need that each and every individual proof of debt must be considered in order to determine whether the trustee is satisfied that on the facts of the particular proof of debt the claim falls within sections 10, 11 or 12 of the Partnership Act 1892 (NSW) (the Partnership Act). Those provisions are relevant to the direction which is sought in a slightly amended form from that which appeared in the application as filed. The general position as between partners is set out in s 9 of the Partnership Act. Section 9(1) relevantly provides that "[e]very partner in a firm other than an incorporated limited partnership is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner". However, there are certain exceptions to this general principle which are set out in sections 10 and 11 of the Partnership Act. By s 10(1): …where by any wrongful act or omission of any partner in a firm other than an incorporated limited partnership acting in the ordinary course of the business of the firm, or with the authority of the partner's co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act. 6 Further, by s 11(1)(b), when a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm, the firm is liable to make good the loss. Section 12(1) then provides that "[e]very partner in a firm other than an incorporated limited partnership is liable jointly with the partner's co-partners and also severally for everything for which the firm while the partner is a partner therein becomes liable under either of the two last preceding sections". The last two preceding sections are clearly sections 10 and 11. 7 In other words, there is not only joint but also several liability in terms of the position of the partner of a firm in cases of wrongful act or omission or misappropriation which falls within the circumstances specified in either section 10 or section 11 of the Partnership Act. This forms the basis for the direction which is sought to the effect that the trustee is justified in admitting to proof against both the joint and the separate estates of Mr Keddie, being the bankrupt, those creditors who have lodged proofs of debt where the trustee is satisfied that their claims fall within sections 10 or 11 and 12 of the Partnership Act. It seems to me that this direction is appropriate in the circumstances of the case and should be made in order to enable the interim distribution provided that it is a distribution to those persons where the trustee is satisfied that the requisite requirements of sections 10 or 11 and then section 12 have been satisfied. 8 The order is not opposed by any of the other interested parties who have appeared today. However, the representatives of the trustees of the estates of each of Mr Barakat and Mr Roulstone have drawn my attention to the fact that there is a potential consequential effect on the creditors of the separate estates of both Mr Barakat and Mr Roulstone. Given the circumstances of this application, the trustees of those estates, not inappropriately, have not notified the creditors of those estates of this application. When this issue was raised the parties gave further consideration to it and further directions have been proposed by the trustees of each of those estates that, in the event that they propose to administer their respective estates conformably with the direction which is proposed to be made, notice be given to each of the creditors of those estates before doing so. It seems to me that this is an appropriate way to ensure that the creditors of those estates have adequate opportunity to consider their position if those estates are subject to any distribution. Otherwise, orders are sought by the trustees of each respective estate and by the creditors for payment out of the relevant estates with which they are concerned. 9 I should also note that I have been provided with two confidential exhibits. The exhibits are confidential because they constitute legal advice over which privilege is not intended to be waived. They constitute advice to the trustee from both counsel and a solicitor about issues relevant to the administration, in effect the availability of sections 10 or 11 and 12 and the potential application of the limitation periods applying to various claims. What those matters confirm is that there is a proper basis upon which the trustee makes this application and could, in an individual case, be satisfied that a claim might fall within sections 10 or 11 and 12 of the Partnership Act, depending on the available material in respect of the particular proof of debt. 10 I have also been greatly assisted by written submissions from Mr Baird, counsel for the applicant, which identifies the basis upon which the application is brought, including that it appears that each of the 95 proofs of debt with which I am currently concerned involve circumstances where the Keddies Law Partnership acted on a claim for damages or compensation in a personal injury matter. The claim was settled for an amount inclusive of costs. Settlement monies were received and banked into the firm's trust account. The firm then issued an account which was not in itemised form as required and then withdrew its fees and disbursements from the trust account, paying only the balance in the account to the client and the client subsequently claiming that they had been overcharged. 11 Directions will be made accordingly. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 16 January 2013 Schedule A 1. ARTHUR ALEPEDIS 2. SNEZANA BAZDAROVA 3. STAVRE BAZDAROVA 4. PATRICIA BLACKMAN 5. RICHARD BLOCH 6. WILLIAM BREAKSPEAR 7. CAI RONG CAI 8. RICARDO CASQUITE 9. CISSY CHEN 10. MEI FANG CHEN 11. MAGGIE CHOUEIRI 12. ROKSANA CHOWDHURY 13. WU LONG DAI 14. YAO JIAO DENG 15. YI BING DING 16. MARCELA DUNDOVIC 17. DIANE FERGUSON 18. MATTHEW GILBERT 19. BASIL GORITAS 20. MARIA GORITAS 21. IAN HAWKINS 22. PATRICIA HOOKER 23. SANDOR HORVATH 24. PAMELA HOWLETT 25. LI CHING HSU 26. NAJWA HUSSEIN 27. ROY KIMPTON 28. VLADIMIR KNEZEVIC 29. ANDRONIKI KOUTROMBAS 30. SPYIDON KOUTROMBAS 31. VIMAL KUMAR 32. JIN XIONG LI 33. XI LI 34. RONG LI 35. MU ZHEN LI 36. XUE ZHEN LI 37. YUE ZHEN LI 38. LUCY LI 39. ANNA LIPCYNSKI 40. SHAO LAN LIU 41. BO LIU 42. EILEEN LIU 43. PETER LU 44. ZHI MING LU 45. YUAN HUA MA 46. SCOTT MACDOUGALL 47. LUKUS MACINTOSH 48. JEFFREY NEALE 49. RAMBIN NI 50. LEONARD PAWLEY 51. ROBERT PETERS 52. ELINA PODGOETSKY 53. TRENT REID 54. MARIO SANTANGELO 55. MARK SCANNELL 56. LIN SHEN 57. WEN QUAN SHEN 58. YONG LIN SHI 59. MARGARET SHUETRIM 60. MARLENE SHUETRIM 61. PHANNY SIENG 62. MITCHELL SMITH 63. CHANTELLE MAFRA SOUSA 64. BAO LIN SUN 65. LESLIE SUTTON 66. YUKI THEN 67. WAYNE TREGEAR 68. GEORGE UZELAC 69. BONNIE WU 70. LI NA WU 71. ZI CHONG WU 72. MICHELLE XERRI 73. LAN ZHEN YU 74. YUAN YUAN 75. SHENG BANG ZHANG 76. PEI ZHEN ZHAO 77. KE PING ZHOU 78. MAHMOUD ZOULFIKAR 79. XIAO TAO ZU