Case note: The annulment of a bankruptcy when a bankrupt’s tax affairs are not up to date

The Federal Circuit Court handed down its decision on 29 April 2020 in Yeo & Rambaldi as Trustees of the Bankrupt Estate of Sandles v Sandles [2020] FCCA 988 (29 April 2020)

The trustees Messrs Yeo and Rambaldi had approached the Court for guidance as to when to annul the bankruptcy, in the context of a tax audit being underway; and for directions and orders that they were acting reasonably in choosing to sell particular assets of the bankrupt.

On the question of when to annul the bankruptcy in the context of a tax audit the decision confirmed the Inspector-General’s well-publicised stance that trustees in bankruptcy should not unnecessarily delay the annulment of a bankruptcy because the bankrupt’s tax affairs are not up to date. The Court said:

 [the Bankruptcy Act] provides a mechanism by which the trustees may ascertain whether all of the bankrupt’s debts have been proved, including debt owed to the ATO, prior to annulling the bankruptcy.

63. The trustees have placed considerable evidence of their dealings with the ATO in order to ascertain whether quantum of the tax liabilities have been fixed. If it is still the case that there is no final response from the ATO, then, as submitted, the appropriate course is to follow the legislative pathway outlined in section 145 of the Act.

64. As to whether there is a delay in the annulment depends on the response by the ATO to the notice sent by the trustees in accordance with the Act. The question of what is a reasonable time for the response to the notice is a matter for the trustees.

The court accepted the Inspector-General’s submissions that seeking directions concerning the sale of assets was not warranted, stating that:

Trustees are in the best position to make enquiries to ascertain the best approach to take regarding the realisation of the bankrupt’s assets. If the Court was to review the question and seek evidence, it would have to seek evidence from an agronomist or some other qualified person. This would have to occur in the context of a Court hearing with all the attendant costs and expenses. It also strikes the Court that these questions are ones for the trustees to investigate and answer and if the question is complex… they are paid to answer difficult questions.

The trustees’ application for directions was dismissed.

The Inspector-General’s submission that the trustees had not made ‘full and fair disclosure to the Court’ was rejected by the Court. The Court stated that the trustees placed such information and evidence as was available to them at the time the application was made.

The Inspector-General did not seek to have the trustees pay the Inspector-General’s costs but did seek that the trustees personally meet the trustees’ own costs of the application.

The Court dismissed the trustees’ application to have their costs met by the estate and ordered that parties would bear their own costs. The trustees’ own costs will be met by the trustees personally, not by the estate.