FEDERAL COURT OF AUSTRALIA Lane (Trustee), in the matter of Lee (Bankrupt) v Commissioner of Taxation (No 2) [2017] FCA 1112 File number(s): QUD 198 of 2017 Judge(s): DERRINGTON J Date of judgment: 14 September 2017 Catchwords: BANKRUPTCY AND INSOLVENCY – Commencement of the Insolvency Practice Schedule (Bankruptcy) – Where application purportedly brought under the Insolvency Practice Schedule prior to the Schedule commencing BANKRUPTCY AND INSOLVENCY – Insolvency practitioners' remuneration – Method of apportionment of costs between personal and 'trust' estate COSTS – Consideration of whether an insolvency practitioner's costs of an application for directions should be paid from the trust funds COSTS – Whether the Commissioner of Taxation is entitled to recover costs when advancing the priority claims of employees under s 109(1)(e) of the Bankruptcy Act Legislation: Bankruptcy Act 1966 (Cth), ss 109(1)(e), 134(4), Sch 2 s 90-15(1) and 90-20 Insolvency Law Reform Act 2016 (Cth), Sch 1 Pt 2 items 163, 164 Insolvency Law Reform (Transitional Provisions) Regulation 2016 Cases cited: Re Berkeley Applegate [1989] Ch 32 Re Universal Distributing (1933) 48 CLR 171 Date of hearing: 14 September 2017 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 27 Counsel for the Applicants: Mr M Eade Solicitor for the Applicants: Cooper Grace Ward Counsel for the First Respondent: Ms A Wheatley Solicitor for the First Respondent: Australian Taxation Office Dispute Services Counsel for the Second to Fifth Respondents: The Second to Fifth Respondents did not appear ORDERS QUD 198 of 2017 IN THE MATTER OF THE BANKRUPT ESTATE OF WARWICK GORDON LEE BETWEEN: MORGAN GERARD JAMES LANE First Applicant RAJENDRA KUMAR KHATRI Second Applicant AND: COMMISSIONER OF TAXATION First Respondent JANET MAY LEE Second Respondent WESTPAC BANKING CORPORATION (and others named in the Schedule) Third Respondent JUDGE: DERRINGTON J DATE OF ORDER: 19 SEPTEMBER 2017 THE COURT ORDERS THAT: 1. Pursuant to r 8.21(1)(a) of the Federal Court Rules 2011 (Cth), the Applicants be granted leave nunc pro tunc to amend the Application to read: On the grounds stated in the accompanying affidavit and outline of submissions, the Applicants seek directions and relief pursuant to s 90-15(1) of the Insolvency Practice Schedule (Bankruptcy) (Bankruptcy Act 1966 (Cth) sch 2) pursuant to s 134(4) of the Bankruptcy Act 1966 (Cth): 2. That the name of the Respondent be amended to "Commissioner of Taxation" and that the matter shall continue as if the action were started against that office holder. 3. The Applicants are entitled to the following directions: (a) The proceeds of the sale of the assets of the Warwick Lee Family Trust ("the Funds") in the amount determined in accordance with Order 10, are subject to Mr Lee's right of exoneration out of the trust assets and, subject to the following orders herein, are available to be distributed to trust creditors to the exclusion of non-trust creditors. (b) The Applicants are entitled to distribute the Funds prior to the payment of any dividend from the bankrupt's estate. (c) The Commissioner of Taxation is not entitled to priority out of the Funds pursuant to s 109(1)(e) of the Bankruptcy Act 1966 (Cth). (d) The provisions of ss 108 and 109 of the Bankruptcy Act 1966 (Cth) do not apply in relation to the distribution of the Funds which are to be paid to the trust creditors pari passu. (e) In the distribution of the personal estate of the bankrupt amongst all creditors, the trust creditors must bring into "hotchpot" the amount which they have received from the Funds as trust creditors. (f) The Applicants are entitled to be paid from the Funds (prior to any payment to any creditors) the amount of $202,722.95 for their remuneration relating to work undertaken in respect of causing the trust creditors to be paid by the application of the trustee's right of exoneration. (g) The Applicants are entitled to be paid from the Funds (prior to any payment to any creditors) the amount of $66,786.57 for their costs and expenses relating to work undertaken in respect of causing the trust creditors to be paid by the application of the trustee's right of exoneration. (h) The Applicants quarantine and hold from the Funds, until further order, the amount of $15,390.04, comprising the remuneration sought by the Applicants relating to work undertaken in respect of the recovery of an unfair preference from the Australian Taxation Office. 4. It is declared that, pursuant to s 76 of the Trusts Act 1973 (Qld) that the Applicants, in their capacity as trustees in bankruptcy of the estate of Mr Warwick Gordon Lee, acted honestly and reasonably and ought fairly to be excused for any breaches, failures or omissions relating to the administration of the bankrupt estate, arising from the payment of $139,137.04 for their remuneration from the right of indemnity funds. 5. The Commissioner of Taxation file and serve on the Applicants his Outline of Submissions with respect to the characterisation of the proceeds received by the Bankruptcy Trustees from the Australian Taxation Office as an unfair preference ("the issue") by 4.00 pm on 29 September 2017. 6. The Applicants file and serve on the Commissioner of Taxation their Outline of Submissions with respect to the issue by 4.00 pm on 13 October 2017. 7. The Commissioner of Taxation file and serve on the Applicants any Outline of Submissions in reply, by 4.00 pm on 20 October 2017. 8. By 4.00 pm on 25 October 2017, the Applicants serve, by email, on the following persons (to the same email address as utilised by the Applicants' solicitors in the Affidavit of Mr Roberts filed 1 June 2017 and 3 May 2017 for each person): (a) the Bankrupt, Warwick Gordon Lee; (b) Bevmont Pty Ltd as trustee for the Lee Family Trust; (c) the Estate of Janet May Lee (deceased); and (d) Westpac Bank; a copy of the Commissioner of Taxation's Supplementary Submissions dated 18 July 2017, the Applicants' Further Supplementary Submissions dated 28 July 2017, and all Submissions filed and served in accordance with Orders 5 to 7, noting the issue and requesting that those persons advise the Applicants by 4pm on 3 November 2017 whether they seek to be heard on the issue. 9. In default of any person identified in Order 8(a)-(d) advising by 4.00 pm on 3 November 2017 that they wish to be heard on the issue, the Applicants file an Affidavit of Service carrying out the requirements of Order 8, which will also provide any response of those persons. 10. Upon the filing of the Affidavit of Service in accordance with Order 9, the Court will reserve consideration of the issue and the Applicants' entitlement to be paid the amount in Order 3(h) from the Funds, and advise the parties in the usual way of delivery of judgment on the issue. 11. Liberty to apply. 12. The Bankruptcy Trustees pay the Commissioner of Taxation's costs of the application. 13. The Bankruptcy Trustees' reasonable costs of the application (including the costs which the Bankruptcy Trustees are required to pay to the Commissioner of Taxation) be paid from the Funds. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DERRINGTON J: Introduction 1 The principal reasons for judgment in this matter were handed down on 18 August 2017. At the time of the delivery of those reasons the terms of the orders which were proposed to be made pursuant to the reasons were identified. An opportunity was afforded to the parties to make submissions about the precise terms of the final orders. The parties have now returned to Court and made submissions as to the appropriate terms of the orders which flow from the reasons for judgment. 2 In one respect a slight alteration needs to be made to the reasoning in the original judgment. That relates to the quantum of the entitlements of the Bankruptcy Trustees in respect of their costs, expenses and remuneration. Power to make the orders sought in the application 3 The application by the Bankruptcy Trustees to this Court purported to rely upon the operation of s 90-15(1) and 90-20 of the Insolvency Practice Schedule (Bankruptcy) (Bankruptcy Act 1966 (Cth), Schedule 2). Unfortunately, those sections were not in force when the application was filed. As originally enacted, those provisions were to come into force on 1 March 2017 which was prior to the filing of the application. However, on 8 December 2016, by the making of the Insolvency Law Reform (Transitional Provisions) Regulation 2016, the commencement date of the Schedule was extended to 1 September 2017. This was overlooked by the applicants although they are not alone in this, and there have been a number of cases where the change in the commencement date of the new provisions went unnoticed. 4 Although the Schedule is now in force, and has been since 1 September 2017, it does not control the determination of the present application. That is because of the operation of items 163 and 164 of Part 2 of Schedule 1 to the Insolvency Law Reform Act 2016 (Cth). The effect of those sections is that, in circumstances such as the present, the provisions of the old Act, being the provisions of the Bankruptcy Act as in force immediately before 1 September 2017, continue to apply on and after 1 September 2017 in relation to these proceedings which were commenced before the schedule came into force. 5 The consequence of the above is that the only power to make the orders sought arises under s 134(4) of the Bankruptcy Act which is the court's power to give directions to the Bankruptcy Trustees. All of the parties who appeared before the court acknowledge that the scope of the directions intended to be made would fall within that section. Title of the first respondent 6 The original application identified the Australian Taxation Office as the first respondent. The legal representatives appearing for the first respondent asked that the Court amend the description of the first respondent to the "Deputy Commissioner of Taxation". That was acceded to and the judgment of this court was issued identifying the Deputy Commissioner of Taxation as the first respondent. After the delivery of the reasons for judgment, the legal representatives for the Deputy Commissioner of Taxation have requested that the title of the first respondent be further altered to "Commissioner of Taxation". The applicant did not oppose that amendment and an order will be made to facilitate this. Bankruptcy Trustees' claims for costs, expenses and remuneration 7 In the principal reasons delivered in this matter the quantum of the remuneration of the Bankruptcy Trustees was calculated on the basis that the sum identified in the affidavit material represented the total of the claims for remuneration. To that, the percentage identified by the trustees as representing the proportion of work done for the trust was applied. On that basis the amount of remuneration identified as being recoverable by the Bankruptcy Trustees from the funds (representing those funds generated for the purposes of exercising the right of exoneration (the Funds)) was 46.76% of $191,032, or $89,326.56. However, it appears that the amount of remuneration identified in the material as being $191,032 was, in fact, 46.76% of the total claim for remuneration. 8 From the submissions made at the 14 September hearing, it is apparent that the figure of $191,032 was calculated by the Bankruptcy Trustees by adopting the following method. The work for which remuneration is claimed to be paid from the Funds is in respect of work broadly aligned to those categories of work to which the principles in Re Berkeley Applegate [1989] Ch 32 and Re Universal Distributing (1933) 48 CLR 171 apply. Those categories are referred to in paragraph 194 of the principal reasons. For convenience I will simply refer to that type of work as "trust related work". 9 Work which did not involve trust related work is not claimed within the figure of $191,032. 10 Where work was undertaken by the Bankruptcy Trustees which was both for the benefit of the personal estate of Mr Lee and furthered the "trust related work", but any apportionment was impossible to determine, the claim for remuneration was apportioned equally between trust related work and personal estate work. 11 Where the work undertaken by the Bankruptcy Trustees was referable solely to the exercise of the right of exoneration, ie only trust related work, all of the remuneration is sought to be taken from the Funds. 12 Remuneration for work which was related to the recovery of the unfair preference from the ATO was apportioned in a manner equal to the manner in which the funds received were apportioned between the personal estate and the trust estate. That apportionment is presently the subject of dispute as between the Commissioner of Taxation and the Bankruptcy Trustees. A final figure cannot be ascertained at this point in time. Consequently, the orders which are made reflect that a sum of money is set aside such that it will be paid in accordance with the reasons of this Court upon the determination of the remaining issue. 13 The Bankruptcy Trustees have, in Exhibit 1, identified the nature and extent of the trust related work and its value according to the rates charged and the hours of work performed. Whilst those figures are high in the context of the size of the estate, there is no doubt that the estate was not easy to administer and the issues surrounding the trust were complex. 14 In the circumstances the Bankruptcy Trustees are entitled to recover remuneration for the "trust related work" in the sum of $202,722.95 in accordance with the principles in Re Berkerley Applegate and Re Universal Distributing. The increase in the amount above the $191,034 referred to in the principal reasons is a consequence of the additional work that was required to be done by the Bankruptcy Trustees since the matter was last before the Court. Costs and expenses associated with the exercise of the right of exoneration 15 The Bankruptcy Trustees have adduced evidence that, in the course of undertaking the trust related work for the purposes of exercising the right of exoneration, they have incurred out of pocket expenses in the sum of $66,786.57. Exhibit 1 also identifies those out of pocket expenses and describes the reason for the expenditure. 16 Out of pocket expenses incurred while undertaking the trust related work must necessarily also fall within the scope of the principles in Re Universal Distributing and Re Berkeley Applegate. Those expenses are necessarily incurred for the benefit of the trust creditors as, without it, those trust creditors would not be paid their debts or a proportion thereof. 17 Accordingly, it is appropriate to direct that the Bankruptcy Trustees are entitled to recover the sum of $66,786.57 in respect of their costs and expenses relating to the work undertaken for causing the trust creditors to be paid by the application of the trustee's right of exoneration. Bankruptcy Trustees' costs of the application 18 The Bankruptcy Trustees seek an order that they be entitled to their costs of the application out of the Funds. This order was not opposed by the Commissioner of Taxation who also sought his costs from the Funds. 19 Despite the lack of any detailed submissions in relation to this question, it would appear that the principles in Re Berkeley Applegate and in Re Universal Distributing would extend to cover the Bankruptcy Trustees' costs of this application. 20 One countervailing argument might well be that the application for directions by the Bankruptcy Trustees is for their own personal benefit in that it protects them, to some degree, from future allegations that they did not act reasonably. For that reason, on one view it might be thought that the Bankruptcy Trustees should bear the costs themselves. That may well be so in certain circumstances. However, in the present case, the issues involved were extraordinarily complex and orbited around the manner in which the right of exoneration might be applied. Without the making of the application, the Bankruptcy Trustees would be in an invidious position which is attenuated with substantial risk. That risk arises because of the lack of clarity in the existing law as to how the right of exoneration might be properly applied. In those circumstances, the application to the court for directions was closely associated with the scope of the trust related work which is within the scope of the principles to which I have referred. 21 It should not be thought that the costs of all applications for directions made by bankruptcy trustees (or liquidators of corporate trustees) might be met from the pool of funds created for the purposes of exercising the right of exoneration. Only directions concerning the proprietary of action relating to the trust related work would fall within the principles of Re Berkeley Applegate and Re Universal Distributing. For instance, an application for directions which concerned work performed by the bankruptcy trustees in respect of the personal estate of the bankrupt would not be covered and the costs of any such application would have to be borne by that estate or the bankruptcy trustees personally. Additionally, even where directions are sought in relation to the use of funds which are available for use by the exercise of the right of exoneration, it is not necessarily the case that a bankruptcy trustee will be entitled to their costs. However, in the exceptional circumstances in this case an order should be made allowing the Bankruptcy Trustees their costs from the Funds. Commissioner of Taxation's claim for costs 22 The Commissioner of Taxation also seeks an order that his costs be paid from the Funds. That is so despite the fact that most of the Commissioner's arguments were not accepted and, to a degree, some of them were misguided. Nevertheless, the submissions made on behalf of the Commissioner had, to some extent the ultimate purpose of advancing the priority claims of employees under s 109(1)(e) of the Bankruptcy Act. To that extent it can be said that the Commissioner's participation was in the public interest. 23 The Bankruptcy Trustees do not oppose the making of an order for costs in favour of the Commissioner. That failure to oppose is important in circumstances where they are charged with the proper and due administration of the estate. No doubt they have turned their mind to the appropriateness of not opposing this further impost upon the Funds. On that assumption it is unfortunate that the Bankruptcy Trustees did not identify any legal foundation for justifying payment of the Commissioner's costs out of the Funds. 24 Similarly, it is unfortunate that the Commissioner did not seek to agitate any juridical basis for justifying the payment of his costs out of the Funds. 25 It must be remembered that the Funds have been amassed for the purposes of exercising the right of exoneration. That right only permits the trustee to meet the claims of trust creditors. The principles in Re Berkeley Applegate and Re Universal Distributing impose a condition on the distribution of those funds that the cost, charges and expenses which have been incurred for the purposes of causing the Funds to be amassed must be paid to the person who does that work. Merely because such funds are the subject of the directions sought by the Bankruptcy Trustees does not mean that the court is entitled to otherwise interfere in the ownership rights associated with them. 26 Were it not for the fact that the Bankruptcy Trustees, who have responsibility for the administration of the estate and the assets within their control, do not oppose the Commissioner being reimbursed for his expenses out of the Funds, I would not have exercised my discretion in favour of the Commissioner. However, given the Bankruptcy Trustees' non-opposition to the making of the order it is not inappropriate to make the order. However, there is no basis for making an order which directly takes money from the Funds for payment of the Commissioner's fees. It would appear that the only legitimate juridical basis for the order is that the Bankruptcy Trustees pay the Commissioner of Taxation's costs of and incidental to the application and that the Bankruptcy Trustees be entitled to include those costs as part of their costs of the application. Further hearing of this matter 27 Otherwise it is appropriate to make directions as to the further agitation of issues arising under the application. In particular the Commissioner of Taxation seeks to agitate the issue of the nature of the funds in the hands of the Bankruptcy Trustees consequent upon the recovery of funds from the ATO as an unfair preference. Orders should be made to facilitate the expeditious hearing of that matter. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington. Associate: Dated: 19 September 2017 SCHEDULE OF PARTIES QUD 198 of 2017 Respondents Fourth Respondent: BEVMONT PTY LTD AS TRUSTEE FOR THE LEE FAMILY TRUST Fifth Respondent: WARWICK GORDON LEE