FEDERAL COURT OF AUSTRALIA Orr, in the matter of Tettis (Bankrupt) v Tettis [2013] FCA 785 Citation: Orr, in the matter of Tettis (Bankrupt) v Tettis [2013] FCA 785 Parties: HILLARY ELIZABETH ORR AS TRUSTEE OF THE BANKRUPT ESTATE OF JUSTIN MARK TETTIS v JUSTIN MARK TETTIS File number: SAD 8 of 2013 Judge: LANDER J Date of judgment: 28 March 2013 Date of hearing: 28 March 2013 Place: Adelaide Division: GENERAL DIVISION Category: No Catchwords Number of paragraphs: 21 Counsel for the Applicant: Mr D Crocker Solicitor for the Applicant: Lynch Meyer Lawyers Counsel for the Respondent: The Respondent did not appear IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 8 of 2013 IN THE MATTER OF TETTIS (BANKRUPT) BETWEEN: HILLARY ELIZABETH ORR AS TRUSTEE OF THE BANKRUPT ESTATE OF JUSTIN MARK TETTIS Applicant AND: JUSTIN MARK TETTIS Respondent JUDGE: LANDER J DATE OF ORDER: 28 MARCH 2013 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. The applicant have leave to amend the application filed 11 February 2013 in terms of paragraphs 1 of the interim application filed 27 March 2013. 2. The applicant have the costs of this application paid out of the assets of the JMT Trust. THE COURT DIRECTS THAT: 3. The applicant would be justified in identifying the assets and liabilities of the JMT Trust and getting in those assets and, after deducting her reasonable costs and expenses including remuneration in accordance with the rates contemplated under the Bankruptcy Act 1966 (Cth) and Regulations associated with carrying out those tasks, and her costs on this application, in subsequently distributing the surplus on a pari passu basis to the creditors of the JMT Trading Trust operation. 4. The applicant would be justified in treating the written lease for Shop 4, 38 Gawler Place, Adelaide, South Australia executed by Karymall Pty Ltd as lessor and Justin Mark Tettis as lessee as having been executed by Justin Mark Tettis as trustee of the JMT Trust. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 8 of 2013 IN THE MATTER OF TETTIS (BANKRUPT) BETWEEN: HILLARY ELIZABETH ORR AS TRUSTEE OF THE BANKRUPT ESTATE OF JUSTIN MARK TETTIS Applicant AND: JUSTIN MARK TETTIS Respondent JUDGE: LANDER J DATE: 28 MARCH 2013 PLACE: ADELAIDE REASONS FOR JUDGMENT 1 This is an application by Hillary Orr, the trustee of the bankrupt estate of Justin Mark Tettis for directions pursuant to s 134(4) of the Bankruptcy Act 1966 (Cth) (the Act). Section 134 (4) provides: The trustee may, at any time, apply to the Court for directions in respect of a matter arising in connection with the administration of the estate. 2 On 11 February 2013, the trustee in bankruptcy commenced this proceeding seeking nine separate directions in relation to the JMT Trust of which the bankrupt was trustee at the time of his bankruptcy. That application was supported by an affidavit sworn on the same day by the applicant. Subsequently, Ms Orr has filed two further affidavits sworn 25 March 2013 and 27 March 2013. 3 On 27 March 2013, she also filed an application seeking to amend the originating application by deleting all of the relief sought in the originating application and substituting the relief sought in the interlocutory application. That application and the supporting affidavit for that application sworn on 27 March 2013 was served on Mr Tettis by email at 2.42 pm on 27 March and, again, at 3.32 pm on 27 March. The email address to which the documents were sent was an email address that Mr Tettis had provided Ms Orr shortly before the affidavit was sworn. I have no doubt that Mr Tettis has received the interlocutory application, the supporting affidavit and that he knew that the matter was to be heard today at 9 o'clock and that he has elected not to attend. 4 The JMT Trust is a discretionary trust of which Mr Tettis was the trustee. It is not clear as to the date upon which the trust was settled because the deed of trust is silent on that issue, but the trust deed was stamped on 13 October 2004. Because Mr Tettis was made a bankrupt on his own petition on 28 August 2012, he ceased to be the trustee of the JMT Trust because of the operation of clause 21 of the deed of trust, which provides: The Trustee shall be disqualified from holding office if such Trustee being an individual shall be found to be a lunatic or of unsound mind or if he shall become subject to any bankruptcy law or if such Trustee being a company shall enter into liquidation whether compulsory or voluntary (not being merely a voluntary liquidation for the purpose of amalgamation or reconstruction). 5 When he ceased to be the trustee of the JMT Trust, the appointer of that trust was entitled to appoint a further trustee. The appointer is also Mr Tettis. He has not made a further appointment and has advised Ms Orr that he is not able to find anyone who is prepared to accept the appointment as trustee of the JMT Trust. I accept that evidence because it is clear on the evidence before me, the JMT Trust is insolvent and that, in those circumstances, it would be unlikely that anyone would assume the responsibility as trustee for the trust. 6 The trustee of a trading trust, like the trustee of any other trust, is entitled to indemnity out of the assets of the trust for liabilities incurred by the trustee in the course of carrying out the provisions of the trust. 7 On 1 July 2005, the JMT Trust commenced a jewellery retail business from leased premises at Shop 4, 38 Gawler Place, Adelaide. The lease was entered into by Mr Tettis without reference to the capacity in which he became the lessee, that is to say without reference as to whether he was leasing the premises in his own right or as trustee for the JMT Trust. I am satisfied, on the evidence that has been adduced, however, that he entered into the lease as trustee of the JMT Trust for the purpose of carrying on the jewellery retail business from those premises. 8 As I have said, on 28 August 2012, Mr Tettis became bankrupt when ITSA accepted his debtor's petition. 9 On 4 September 2012, the landlord's solicitor issued a notice of re-entry that required the lessee, Mr Tettis, to remove all property and make good any damage at the leased premises by 7 September 2012. On 9 September 2012, Mr Tettis attended the shop premises and removed the computer and collected the mail. On 10 September, he contacted the ITSA office in Perth inquiring as to what should happen in relation to the stock on the premises. As a result of that inquiry, on 11 September 2012 ITSA authorised Ms Orr to act as ITSA's agent in relation to the bankrupt's estate. On 12 and 13 September 2012, Ms Orr arranged for all items of stock and plant and equipment to be removed and placed in safe custody with Pickles Auction House. 10 On 24 September 2012, ITSA appointed Ms Orr as a trustee in bankruptcy of the bankrupt estate of Justin Mark Tettis. Subsequently, Mr Tettis delivered the computer which he had taken from the store on 9 September 2012 to Ms Orr. In November 2012, on Ms Orr's instructions, the computer was interrogated and it was discovered that it contained a record of a 155 page stock inventory. Ms Orr's inquiries have identified assets which she believes are assets of the trust and liabilities which she also believes are liabilities of the trust. She has also identified the personal liabilities of Mr Tettis. 11 The purpose of s 134(4) is to give effect to s 30(1), which provides that the Court has full power to decide all questions, whether of law or of fact, in any case of bankruptcy and may make such orders as the Court considers necessary for the purposes of carrying out or giving effect to the Act. 12 Section 134(4) allows a trustee to obtain directions from the Court as to how the trustee should act so as to avoid the trustee incurring any personal liability to any persons who may be affected by any action taken by the trustee: Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674. Section 134(4) does not empower the Court to make commercial decisions that are to be made by the trustee at any given time but to give the trustee instruction and guidance in relation to legal issues or matters of substance which may affect the trustee in the course of administering the bankrupt estate. In Macks (trustee), Re Weber (bankrupt) (2006) 154 FCR 80, Finn J said that: The proper subject of directions, in my view, is the manner in which a trustee should act in carrying out his or her functions as such. 13 The Court is not obliged to give the directions sought but will do so where it considers that the directions are proper and appropriate and are necessary for the protection of the trustee in going about the trustee's obligations. The directions that are sought in the application to amend the originating application, which I indicate I shall grant, are: (1) Directs that the applicant would be justified in identifying and securing assets of the JMT Trust, in identifying the liabilities of the JMT Trust, in realising trust assets and after having deducted her reasonable costs and expenses, including remuneration (in accordance with the rates contemplated under the Bankruptcy Act and Regulations) associated with carrying out those tasks and in respect of Application SAD8/2013 in subsequently distributing the surplus on a pari passu basis to the creditors of the JMT Trading Trust operation. (2) Directs that the applicant would be justified in treating the written lease for Shop 4, 38 Gawler Place, Adelaide, South Australia, executed by Karymall Pty Ltd (as lessor) and Justin Mark Tettis (as lessee), as having been executed by Justin Mark Tettis as trustee of the JMT Trust. (3) Directs that the applicant would be justified in treating as debts of the JMT Trust those credit card debts that remain unpaid as at the date of bankruptcy which, in the applicant's opinion, relate to payments for expenses of the JMT Trading Trust operation or purchases of assets for the JMT Trading Trust operation. (4) Such further and/or other directions or orders as this Honourable Court deems fit. 14 Ms Orr, of course, is not the trustee of the JMT Trust and does not become so because she is trustee of Mr Tettis' bankrupt estate. As I have mentioned, there is presently no trustee of the JMT Trust and nor is it likely in all probability that anyone will be appointed. Mr Tettis was, as I have said, entitled to be indemnified out of the trust assets in respect of any liabilities incurred in carrying on the trust's business. That right of indemnity passes to Ms Orr as trustee of his bankrupt estate and she is entitled to pursue the indemnity given to Mr Tettis for any liabilities he has incurred as trustee of the JMT Trust: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. 15 She is therefore entitled in the absence of a trustee, to get in the assets and identify the liabilities of the trust for the purpose of securing the indemnity to which Mr Tettis is entitled or was entitled as trustee of the JMT Trust. King CJ said in In Re Suco Gold Pty Ltd (In Liquidation) (1984) 33 SASR 99 at 108: If the trustee is bankrupt, or being a company is in liquidation, the trustee in bankruptcy or liquidator can exercise the right of indemnity which vests in him as part of the property of the bankrupt or insolvent company. If the trust liabilities have been discharged, the trustee in bankruptcy or liquidator is entitled to recoup the bankrupt estate out of the trust property and the proceeds of the right of indemnity become part of the property divisible among the creditors. If the liabilities have not been discharged, the trustee in bankruptcy or liquidator may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities, thereby exonerating the bankrupt estate to the extent of the value of the available trust assets. 16 That is exactly what Ms Orr is intending to do and why she is seeking a direction to protect herself against any claim by any creditors of the JMT Trust. 17 For those reasons, in my opinion, this is a proper application for directions and the appropriate directions should be made to protect Ms Orr against any future claims. 18 The first direction sought seems to me to be appropriate because it would allow her to get in all of the assets of the JMT Trust, identify the liabilities of the trust and pay out after deducting her reasonable costs and expenses the excess of assets over liabilities and payout to the creditors in pari passu that amount which remains available. I intend to make a direction of the kind sought in paragraph 1. 19 The second direction also seems to me to be appropriate because I think it recognises as a matter of fact that Mr Tettis leased the shop premises for the purpose of carrying on the business of the trust and leased those premises as trustee of the trust even though the lease itself does not record that. I am prepared to make the second direction. 20 The third direction, however, is one that I am not prepared to make because it seems to me it is covered by the first direction. If the first direction is made which, as I have said, I intend to make, there is no need to make the third direction and so I decline to do so. The fourth matter relates to any other orders and is unnecessary. I, therefore, make the following directions: 1. Directs that the applicant would be justified in identifying the assets and liabilities of the JMT Trust and getting in those assets and after deducting her reasonable costs and expenses including remuneration in accordance with the rates contemplated under the Bankruptcy Act and Regulations associated with carrying out those tasks and her costs on this application in subsequently distributing this surplus on a pari passu basis to the creditors of the JMT Trading Trust operation. 2. Directs that the applicant would be justified in treating the written lease for Shop 4, 38 Gawler Place, Adelaide, South Australia executed by Karymall Pty Ltd as lessor and Justin Mark Tettis as lessee as having been executed by Justin Mark Tettis as trustee of the JMT Trust. 21 I would also order: 1. The applicant have leave to amend the application filed 11 February 2013 in terms of paragraphs 1 of the interim application filed 27 March 2013. 2. The applicant have the costs of this application paid out of the assets of the JMT Trust. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander. Associate: Dated: 28 March 2013