PIR Newsletter - December 2021

On this page
""

The Personal Insolvency Regulator (PIR) is a quarterly newsletter from AFSA.

AFSA’s Personal Insolvency Compliance Report 2020–2021

AFSA has published the Personal Insolvency Compliance Report (PICR) for 2020–2021, showcasing the outcomes from the Personal Insolvency Compliance Program and providing a summary of our compliance activities across the personal insolvency system.

The period was significantly impacted by the COVID-19 pandemic and associated government responses. Despite the challenges of 2020-2021, AFSA inspected almost 200 administrations, reviewed 191 personal insolvency proposals and finalised 280 complaints. More than 800 offence referrals were received, with almost 500 Official Receiver notices issued and served. During the year, 123 briefs were sent to the Commonwealth Director of Public Prosecutions (CDPP) and 69 people were prosecuted.

AFSA remains focused on addressing misconduct in the personal insolvency system and ensuring that the Official Trustee’s work is primarily geared towards activities that help to support the overall confidence in the system.

The full report can be downloaded from our website.

AFSA website experience survey

Next year the AFSA website will be developed and redesigned with the new site live by the end of 2022. To better understand how visitors use the site and improvements we can make, a survey is now live, and your feedback is requested. The data collected will inform the development of the new website and help us improve the services and information we provide.

The survey is open until 1 February 2022 and will only take 5 minutes to complete. All submissions are anonymous.

To complete the survey, visit AFSA Sandpit.

Update to creditor meeting notices

AFSA has changed the current creditor meeting process for Registered Trustees. The change specifically relates to submitting creditor meeting advertising requests and complying with the filing requirements set by s75-40 of the IPRs.

From December 2021, creditor meeting notices will be submitted online through AFSA’s Online Services portal. This change has been implemented as part of AFSA’s focus on streamlining our online service delivery processes.

With the change now in place, you can expect the following:

  • the online submission will pre-populate with your information, saving you time
  • data validation will be enabled to help ensure the information displayed on the advertisement is accurate
  • meetings will be immediately published on the website
  • pay-as-you-go facilities and credit card payment options will be available for fees and charges.

Please also note that the default payment option will be credit card. If the credit facility (‘on account’) method is required, practitioners are strongly advised to lodge a credit application with AFSA as soon as possible.

If you have any questions about the change, please email rpo@afsa.gov.au.

Publishing benchmarks for the profession

As part of AFSA’s key focus to drive willing compliance and engagement, as outlined in the Insolvency Compliance Program 2021-22, we will publish case studies and benchmarks for the profession to recognise industry leaders.

We want to hear from you about case studies where practitioners and industry bodies have demonstrated best practice in culture, integrity, and moral compass. The aim is to promote excellence and good behaviour and share stories with the industry.

Your case studies can be submitted to PractitionerSupervision@afsa.gov.au with the subject line ‘Exemplar behaviour case study’.

Please note that you and your firm’s name can remain anonymous. The names of stakeholders (including those who are bankrupt or creditors) involved in administrations will also not be named for privacy reasons.

We may approach you for verification before publishing on the AFSA website.

AFSA practitioner survey findings

Thank you to everyone who participated in AFSA’s survey of personal insolvency practitioners, conducted in October 2021.

This was the third survey with previous ones being completed in June and November 2020. 96 practitioners participated in the latest survey, including 87 trustees and 9 debt agreement administrators, up from 76 in the November 2020 survey.

Since 1 January 2021:

  • 23% of respondents had made redundancies (compared to 42% in November 2020)
  • 62% of respondents had seen staff leave of their own accord (not asked in previous surveys)
  • 23% of respondents had asked staff to take leave (compared to 45% in November 2020)

The majority of respondents (52%) are expecting a decrease in realisations this financial year compared with the 2020-21 year.

Most of the firms that took costs reduction measures did so in 2020 and to a lesser degree in 2021. If there is a significant upturn, some recruitment activity may be necessary.

97% of practitioners are confident they will remain solvent in the next 12 months. Although 20 of these (i.e. 22%) qualified their response on insolvency activity increasing. This compares with 97% in November 2020, with 36% qualifying their response. The vast majority of practitioners (91%) have had no problems complying with legislation while working remotely.

There were mixed responses to the question about expectations of the timing of a significant increase in new personal insolvency work.

survey findings

If you are facing difficulties due to the COVID-19 pandemic, please contact AFSA for support. You can call 1300 364 785 (and select the menu options 5 and then 3). Alternatively, you can email practitionersupervision@afsa.gov.au

Section 139ZQ notice evidence for a section 121 claim

The Official Receiver (OR) Notices Team has seen an increase in trustee’s using s 139ZQ notices as an effective tool in the recovery of antecedent transactions. These notices are an effective compliance tool for trustees and often lead to a recovery without costly court applications and legal fees.

For the OR to issue such a notice, the trustee must satisfy the OR that a transfer of property is prima facie void. This includes obtaining evidence based on the facts and circumstances of the transfer. Recently, the OR has seen an increase in the number of applications returned to trustees asking for further evidence. This is particularly so for s 121 claims or transfers made with the intention to defeat creditors. For the OR to issue the notice, the trustee must provide evidence of a void transfer sufficient to allow the exercise of the discretion to issue a notice, and for s 121 in particular, having regard to these elements:

  • the property would probably have become part of the transferor’s bankrupt estate if it had not been transferred.
  • the transferor’s main purpose in making the transfer was to prevent, hinder or delay the transferred property becoming divisible among the transferor’s creditors; and
  • the transfer is not caught by an exemption stated in s 121 including whether the transferor was insolvent at the time of the transfer.

The OR is unlikely to issue a notice in relation to a transfer claimed to be void under s 121 if the trustee cannot provide evidence that the person who was bankrupt was insolvent at the time of the transfer but claims that the transfer was made with the intention to defeat creditors.

Accordingly, the OR will require a detailed analysis and evidence of these points to issue a s 139ZQ notice with a s 121 claim.

For more information about what trustees must establish to issue Official Receiver Notices, please refer to Official Receiver Practice Statement 7 or contact the Official Receiver Notices Team at or.notices@afsa.gov.au.

Have your say on draft Bill supporting regulator best practice

Consultation is now open on the draft Regulator Performance Omnibus Bill, which includes proposed amendments to the Bankruptcy Act 1966. The Australian Government is consulting publicly on the Bill to ensure it is informed by business and community expectations of regulators.

The Bill updates or removes outdated administrative provisions across Commonwealth legislation that impose unnecessary regulatory burden and prevent regulators from engaging with business and supporting compliance in a modern and flexible way. 

The Department of the Prime Minister and Cabinet has worked closely with Commonwealth departments and regulators to identify suitable provisions for inclusion in the Bill. The Bill is the first of its kind to take a whole-of-Australian Government approach to regulator best practice and performance. 

If enacted, the Bill will progress 46 amendments across 17 Commonwealth Acts which improve or streamline administrative processes, repeal provisions which serve no current purpose, or remove legal uncertainty. It will benefit 13 Commonwealth regulators or regulatory functions.

Proposed amendments to the Bankruptcy Act are intended to improve or streamline administrative processes or remove legal uncertainty. These proposed amendments can be found in Schedule 1 of the Omnibus Bill, and the relevant draft explanatory material can be found at pp 12-15 of the Explanatory Memorandum.

More information on the Bill and how to submit feedback on it is available on the Regulator Performance Omnibus Bill consultation page. You can also read Minister Morton’s media release.

Submissions on the exposure draft close 14 January 2022.

The proposed key changes to the Bankruptcy Act 1966 included in the Bill are as follows:

1 Paragraph 12(1)(c) – enhanced power to request reports

Includes a reference to ‘registered debt agreement administrators’ and ‘the Official Trustee’. This aligns with current paragraph 12(1A) which provides that both registered trustees and registered debt agreement administrators must provide a report to the Inspector-General where requested. 

2 Subsection 50(1B) – mandatory remuneration order

A new requirement so that if a Court directs a trustee to take control of the debtor’s property, the Court must, in addition to specifying when the control is to end (new subparagraph 50(1B)(a)), make orders in relation to the trustee’s remuneration 

3 Section 139K (paragraph (a) annual indexation

Replaces bi-annual indexation to move to an annual indexation method on 1 July each year.

4 Subsections 139T(2) and (4) – evidence standard for hardship applications

Makes clear that a hardship application by a bankrupt must include the satisfactory evidence required for the trustee to properly assess the application, and that the 30-day timeframe to assess the application only begins once the trustee has received an application that includes all the satisfactory evidence. The 30-day timeframe will not commence until the applicant has provided satisfactory evidence to the trustee. 

5 Subsection 139W(4) – Contribution assessment notice only if liability

Repeals the requirement that a trustee must provide a bankrupt written notice setting out particulars of the assessment in all cases, and replaces it with a requirement that this only needs to occur in circumstances when the bankrupt has a contribution liability in the contribution assessment period that has been assessed.

6 Subsection 185C(5) - definition of threshold amount

Amends the definition of ‘threshold amount’ at paragraph 185C(5) to move from bi‑annual indexation to an annual indexation basis.

Establishes a new method for indexation under the Act that will enable the indexable amounts specified at paragraph 304A(1) to be indexed on an annual basis, from 1 July 2022, using the Consumer Price Index for the preceding March quarter.

7 Subsection 304A(1) – indexation amounts to facilitate annual indexation

Repeals outdated indexation amounts referenced in subsection 304A(1) of the Act and substitute those amounts with the current indexed amounts. Substitutes amounts with the current indexed amounts as at 20 September 2021.

Beyond Blue mental health coaching program available for small business owners

Contributed by Mel Novak, Small Business Engagement Manager – Beyond Blue

In March this year, Beyond Blue launched a mental health coaching program to support small business owners across Australia. This program was funded in response to research commissioned by the Department of Treasury in 2020 that reported almost one in three small business owners said they had a diagnosis of stress, anxiety or depression.

A wellbeing survey conducted by Xero in 2020 reported that mental health has become increasing worry for small business owners with two thirds of employing businesses and almost half of sole traders reporting concerns about mental health.

New Access for Small Business Owners (NASBO) is a six-week coaching program that offers support by trained mental health coaches who have a background in small business themselves. The program is free, confidential and no doctor’s referral is required. Coaching can be delivered via phone or video call between 8am to 8pm AEST Monday to Friday.

To find out more visit Beyond Blue. If you know a small business owner or sole trader, please tell them about the new program.

Cryptocurrency and Bankruptcy Administration

The following article deals with a number of issues trustees face when dealing with cryptocurrency. AFSA has the following on-line resource Dealing with cryptocurrency in a bankrupt estate

Contributed by JT Johnson, Barrister, Frederick Jordan Chambers

More people are being persuaded to open and use crypto currency transactional accounts which raises issues for trustees trying to fulfil their role under section 19 of the Bankruptcy Act 1966, to take control of any such accounts and the underlying value.

Recently, Justice Derrington in the Federal Court of Australia in Australian Securities and Investments Commission v A One Multi Services Pty Ltd [2021] FCA 1297 considered the making of a freeze and disclosure order concerning crypto accounts. Unfortunately, the full reasons for the way in which the disclosure provisions were intended had not been articulated in the judgement.

From the trustee’s viewpoint of a regulated debtor’s estate, it illustrates the type of information and records that a trustee should request from a regulated debtor. Digital currency is property under section 5 of the Act and a trustee can take possession, to the extent possible of such property, and require information from a regulated debtor concerning that property (see s 77 (1) (ba), (e), (f) and (g)).

The information that can be requested from a regulated debtor is:

  1. all relevant credentials and passwords for access to any crypto currency held by the regulated debtor, including the public and private keys and/or seed string for any soft or cold wallet
  2. authentication devices required to facilitate access, operation or control of any crypto currency
  3. all relevant credentials and passwords for access to the authentication devices or systems, including email, SMS or mobile apps, that facilitate access, operation or control of crypto currency
  4. any cold wallet device containing crypto currency together with the access code.

Consideration should be given to include a request for such information in the ‘day one letter’ issued by the trustee and said at any face-to-face, audio-only or audio-visual interview with an appropriate record being kept.

There may be a tendency for people to conceal this type of data. If suspicions arise, the following actions could be taken:

(a) a s 130 search warrant

(b) via OR access obtained under s 77AA.

There would also need to be consideration of the matters outlined in s 19 (1) (j), (k) and (l) of the Act.

So far as access rights, electronic information would be a book as defined in s 5 (1) as:

“Books includes any account, deed, paper, writing or document and any record of information however compiled, recorded or stored, whether in writing, on microfilm, by electronic process or otherwise.”

Therefore, information kept on a mobile phone, tablet, laptop or any other form of electronic media would be considered a book.

Section 139U – providing evidence of income

AFSA receives a considerable number of offence referrals relating to non-compliance of section 139U of the Bankruptcy Act 1966. The intent[1] behind the s 139U provisions is to require a bankrupt individual who is earning an income to provide the trustee with information[2] about their earnings. This is required so that a fair and reasonable income contribution assessment can be made to determine whether the bankrupt individual must contribute towards their bankrupt estate.

Non-compliance with s 139U is an offence punishable by 6 months in prison. However, this is a complex area where several legislative nuances must be considered in relation to enforcement action for non-compliance. Failure to do so has resulted in the significant rejection rate of s 139U offence referrals, as demonstrated in this chart

 

Common errors

Contribution Assessment Period (CAP): 21-day legislated compliance timeframe

Section 139U legislates that a bankrupt individual must give the trustee a statement setting out their particulars[3] and books to confirm the income earned during that CAP as well as expected income in the next CAP. They must do so as soon as possible and no later than 21 days after their CAP.

The most common error relating to s 139U is where a trustee purports to stipulate a bankrupt individual give a statement and the necessary books within a compliance timeframe which is not in accordance with the legislation.

CAP is calculated on the day of bankruptcy or on the anniversary of that day during bankruptcy.[4] For example, where the date of bankruptcy occurred on 18 October 2018, then the CAPs would be:

  • CAP 1 – 18 October 2018 to 17 October 2019
  • CAP 2 – 18 October 2019 to 17 October 2020
  • CAP 3 – 18 October 2020 to 17 October 2021

In terms of a compliance timeframe a bankrupt individual has 21 days after the end of the CAP to comply with their s 139U obligations and non-compliance would occur on day 22. Using the above example, compliance and non-compliance is outlined below:

CAP

Dates

21-day compliance due

Non-compliance

1

18 October 2018 to 17 October 2019

7 November 2019

8 November 2019

2

18 October 2019 to 17 October 2020

7 November 2020

8 November 2020

3

18 October 2020 to 17 October 2021

7 November 2021

8 November 2021

In any requirement, notice, reminder, or notification made to the bankrupt individual about s 139U compliance, trustees must provide the correct compliance time frame as per the legislation. Any time frame outside of that requirement, either shorter or longer, is not compliant with the legislation and is unenforceable.

Proof of service: knowledge of s 139U obligations

As with most offences in the Act, there must be sufficient evidence to prove beyond a reasonable doubt that the bankrupt individual knew about their s 139U obligations for the relevant CAP. In particular, enforcement action cannot occur without proof of service that the bankrupt individual is aware of their s 139U obligations. Most importantly, the evidence relied upon must relate to a date before the end of that specific CAP.

The best evidence is an acknowledgement by the bankrupt individual that they have received the trustee’s communications explaining their s 139U obligations to provide a statement, the particulars and books, and the correct timeframe in which to comply. The Inspector-General Practice Statement 14 ( IGPS14 ) provides examples of what proof of service can include.

It is highly recommended that trustees engage with the bankrupt individual a few months before the end of the CAP.

Trustee correspondence: Mixing section 139U and other matters

Any correspondence related to a s 139U obligation must not be mixed with any other estate administration requirements or directions. This reasoning has come from court decisions and is centred on the specific authority of the s 139U provisions.

It can be confusing for bankrupt individuals when s 139U obligations are mixed with other requirements such as s 77(1) (ba) where compliance timeframes may be different. It is important to remember that s 139U is specific to income contributions and must be separate from all other requirements. Any correspondence that contains a mix of s 139U requirements and other matters cannot be enforced. This includes reminders and/or attachments to other or previous correspondence related to other matters.

It is best practice to issue separate requests to the bankrupt individual.

Trustee correspondence: requirement v request

Any correspondence related to a s 139U obligation must be clear. The legislation indicates that a bankrupt individual must provide certain material to the trustee. Correspondence must outline this legal requirement rather than making a request. The use of the word ‘request’ suggests that the need to comply is non-binding rather than a compulsory requirement in accordance with the law. The language used in correspondence can lead to a reasonable defence being raised against the obligations and enforcement cannot then occur.

Section 139U Non-compliance: alternative actions

Offence referral rejected

As shown in the table above, s 139U offence referrals have an extremely high rejection rate. When this occurs, trustees will be informed of the reason for rejection so these may be addressed before the next CAP obligations.

The trustee can use their s 77(1) (ba) authority to seek information related to the examinable affairs of a bankrupt individual. This authority can help when seeking the required information in relation to expired CAPs. When using this provision, requests for financial information can be made but must not imply that it is based on s 139U or will be used to assess an income contribution. Specifically, this can be done where any such a request:

· is expressly based upon the trustee's power in section s 77(1) (ba)

· specifically requests financial information for a tax year (not a CAP)

· makes express reference to the offence in s 265(1) (ca)

· any combination of the above three dot points.

This is also a valid mechanism to seek financial information that can help trustees make a determination at the start of a bankruptcy or during that first CAP.

Objection to discharge

In accordance with IGPS14 , an objection to discharge [5] may be a far more suitable and more efficient way to maximise the likelihood that a bankrupt individual will comply with their s 139U obligations.

Limitation period for prosecution

Commencing prosecution action for s 139U non-compliance is subject to a statutory limitation period. This is because the offence has a maximum penalty of imprisonment for 6 months. Paragraph 15B(1) (b) of the Crimes Act 1914 states that for matters where the penalty is less than 12 months imprisonment, a prosecution must start within one year from the commission date of that offence. Using the examples above, if non-compliance occurred on 8 November 2021, a prosecution must commence by 7 November 2022. If not, no enforcement action can occur. In accordance with IGPS14 , AFSA is unable to accept a referral when statutory limitation period will expire within 4 months.

Section 139U tips for best practice

  1. Send out the s 139U requirement 1 to 2 months before end of the CAP
  2. Follow up to confirm receipt before the end of the CAP
  3. The bankrupt individual must be given 21 days after the end of the CAP to comply
  4. Never combine s 139U with other requests for information
  5. Section 265(1) (ca) does not equate to s 139U and notices are unenforceable if mixed. If you are seeking CAP, do so clearly under s 139U

 


[1] See s139J

[2] See s139U (3)

[3] See s139U (2)

[4] See s139K

[5] See s149D(1)(e)

Case notes

In Harrison in his capacity as Trustee of the property of Beck, a Bankrupt v Beck (No 2) [2021] FedCFamC2G 315 Cameron J set aside Order 3 of the orders made on 21 September 2021 which denied an application for further remuneration (see Harrison in his capacity as Trustee of the property of Beck, a Bankrupt v Beck [2021] FedCFamC2G 59). The Judge held that the finding at first instance that the Trustee was not entitled to claim his related costs from the estate on the ground that he did not have standing was mistaken. The Judge accepted the Trustee’s submission that s5-30 of Schedule 2 of the Bankruptcy Act meant that the Trustee did have standing. His Honour concluded that:

“7 The Trustee, therefore, did have standing to make the application for additional remuneration and so the finding that he was not entitled to claim his related costs from the estate was mistaken. In those circumstances, I accept the Trustee’s submission that it was reasonable of him to have made the application at the same time as he applied for other orders concerning the bankrupt estate and that was an efficient use of resources.

8 It was, therefore, reasonable of the Trustee to have exercised the liberty granted on 21 September 2021.

9 In those circumstances, I set aside order 3 made on 21 September 2021 and instead now order that the costs of this proceeding be part of the costs of the Trustee’s administration of the respondent’s estate.”

Harrison in his capacity as Trustee of the property of Beck, a Bankrupt v Beck [2021] FedCFamC2G 59

Issues

(1) Whether a court exercising jurisdiction under the Bankruptcy Act 1966 (Cth) (the Act) has power to make orders about a trustee’s remuneration

(2) Whether the trustee should be released from the trusteeship of the estate in accordance with section 183(1) of the Act.

Background

The trustee of the bankrupt estate of Marianne Rose Beck filed an application under s.183 of the Act seeking relief by way of several orders, specifically under section 153A(1) that the bankruptcy be annulled; the costs be part of the trustee's administration; the remuneration of the trustee be approved by the Court for $93,714.47 (excluding GST); and that upon finalising the administration the bankrupt individual be released from the trusteeship of the estate in accordance with section 183(1).

The evidence indicated that complex matters had arisen during the administration including issues concerning a deceased estate of the bankrupt individual’s mother, litigation in the Supreme Court, probate issues, consideration of an appeal against the sequestration order, and proofs of debt and payment of creditors. There were additional difficulties in the administration of the bankrupt estate including a lack of cooperation from the bankrupt individual, an annulment application, unsubstantiated complaints, and attempts to locate the bankrupt individual (11).

The application sought approval of further fees of $10,000, which would bring the total of approved fees to $93,714.47 (excluding GST).

A dividend of 100 cents in the dollar had been declared and there was a surplus of funds. A letter to AFSA relevantly canvassed the process by which surplus funds could be paid to the Commonwealth under s 254. Based on the trustee’s concerns about the possible actions and proceedings that the bankrupt individual may pursue, the trustee tried to have the bankrupt individual execute a deed of release. This did not occur and the trustee lost contact with the bankrupt individual.

Consideration

Approval of fees

The Court noted that the trustee had not identified which work remained to be done or by whom and why the sum sought was reasonable and appropriate. However, the Court identified a more significant issue: the fact that although a trustee has the right to be reimbursed for costs and expenses properly incurred in administering the trust, the trustee has no general law right to remuneration. Trustees in bankruptcy do have an entitlement to remuneration but it is provided by the Act in sch.2 to the Act, the Insolvency Practice Schedule (Bankruptcy). Section 60-5 of the Schedule outlines that a trustee is:

(1) …entitled to receive remuneration for necessary work properly performed by the trustee in relation to the administration of the regulated debtor’s estate, in accordance with the remuneration determinations (if any) ...

(2) if no remuneration determination is made in relation to necessary work properly performed by a trustee in relation to the administration of the regulated debtor’s estate, the trustee is entitled to receive reasonable remuneration for the work. However, that remuneration must not exceed the maximum default amount.

The Insolvency Practice Rules (Bankruptcy) 2016 (Cth), at ss.60-5, 60-10 and 60-15, describe the circumstances in which the Inspector-General may determine remuneration. However, if no remuneration determination is made, the trustee may be remunerated up to the maximum default amount calculated in accordance with s 60-15.

However, seeking to avoid that outcome, the trustee submitted that the court had power to make an order for his remuneration. This could be provided by the general powers set out in s 30 of the Act or by s 90-15 of the Schedule. This provides (in s 90-15) that court may make orders in relation to estate administration, specifically that the ‘the court may make such orders as it thinks fit in relation to the administration of a regulated debtor’s estate’.

Whether a court exercising jurisdiction under the Act has power to make orders about a trustee’s remuneration

The court accepted that although it could resolve disputes about the remuneration of a trustee, it had no power to fix that remuneration citingPattison v Bellin (2000) 103 FCR 590 at 598 [32], 599 [378],Doolan v Dare (2005) 142 FCR 287 at 292 [19]-[21] and Re Macryannis (2010) ABC(NS) 407 at 442-447 [146]-[167].

The court noted that Re Macryannis cited with approval a decision dealing with a liquidator’s remuneration in support of the idea that the court’s general power should only be used in exceptional cases ‘where the prescribed statutory mechanism for deciding quantum proves unworkable in practice’. And in that case it was noted that:

While I do not exclude the possibility that there may be circumstances in which those powers might be used, in my view the structure of the legislation that applies to the present claim contemplates that the trustee will follow the procedures laid down in the Act and regulations. It is not for the court to adopt some other procedure when the statutory procedure is open to the trustee. (at 477 [167])

Applying those authorities to the matter at hand the court observed that similar considerations apply and that:

The Schedule provides a clear mechanism by which the trustee may seek further remuneration and states equally clearly in s 60-5(1) that that is what should be used in the present circumstances. Resort to the court is to be reserved for the resolution of difficulties that may arise from doing so. (19)

The court added that the Schedule makes no provision for a trustee to seek an order in relation to remuneration under s.90-15 of the Schedule. The court concluded that the trustee’s application for a remuneration determination was misconceived and should have been made to the Inspector-General instead. It was refused on that basis.

Whether the trustee should be released from the trusteeship of the estate in accordance with section 183(1) of the Act

The court concluded that in all the circumstances, particularly as all the creditors had been paid, because there was a surplus of funds and the trustee could secure a release from the respondent, it was appropriate and necessary that the court grant his application for release under s 183 of the Act. (26)

Application for costs

The Court noted this aspect of the application involved two questions:

(1) whether the trustee should be awarded the costs he incurred in this proceeding

(2) whether any costs awarded should be reimbursed by the estate.

The Court cited the well-known dicta from Adsett v Berlouis:

the trustee’s right to remuneration is limited to work properly undertaken. In this context, ‘properly’ means work reasonably and bona fide undertaken for the purpose of administering the estate or performing any public duty imposed by the Act, conformably with the trustee's duty to perform the work with reasonable care and skill and in an efficient and economical way.

The court noted that the trustee was unsuccessful in his pursuit of a remuneration determination in circumstances where there was a statutory procedure in place and one he had already used. His application to the court on this matter was misconceived and he should not be awarded costs. The court went on to note that the trustee was not entitled to recover from, or retain out of the estate, any costs, charges and expenses incurred in relation to that aspect of the application (30).

The court noted different considerations applied to the s 183 application. Evidence was gathered about the efforts the trustee had made to have the bankrupt individual agree to a deed of release and AFSA had indicated to the trustee that it was reasonable that, in the circumstances, the bankruptcy would not be annulled.

The court accepted that the trustee’s position was reasonable. The court concluded those considerations supported an order for costs in the trustee’s favour for that part of the proceeding. It added that although an application under s 183 of the Act for release from potential liability might be a private concern of the trustee and a cost of doing business, a submission to similar effect was made in Hacker v Weston (No 2) and rejected.

Accordingly, the court ordered that as they deal with winding up and with the management of the remaining funds in circumstances where the alternative would seem to be a lengthy and indeterminate delay, the trustee should have his costs of that aspect paid out of the estate.

Decision

The court concluded that the trustee’s application to the Court for a remuneration determination was misconceived and should have been made to the Inspector-General instead. It was refused on that basis.

Once the trustee finalised the bankruptcy administration in accordance with the orders made, he could be released from the trusteeship of that estate in accordance with section 183(1) of the Act. 

Kiddle v Nguyen [2021] FedCFamC2G 53

Issues

This case addresses whether a claim made for compensation under s 545 of the Fair Work Act 2009 (Cth) (FW Act) and a claim made for the payment of a pecuniary penalty under s 546(1) of the FW Act is a proceeding in respect of a provable debt within the meaning of s 229(2) (c) of the Bankruptcy Act 1966 (Cth).

The keys issues were:

1. whether s 229(2) (c) of the Bankruptcy Act relating to a personal insolvency agreement (PIA) applies to prevent four former employees from taking any fresh step in proceedings they separately commenced against Mr Nguyen under the Fair Work Act 2009 (Cth).

2. whether any one or more of the claims the employees made in the proceedings is a provable debt for the purpose of s 229(2)(c) of the Act.

Background

The employees claimed the employer breached a number of provisions of the Fitness Industry Award 2010 and that Mr Nguyen contravened s 45, s 345, and s 45 of the Fair Work Act. The employees sought the payment of pecuniary penalties and compensation. Mr Nguyen filed a response and crossclaim in the proceeding commenced by Mr Kiddle, and that proceeding was referred to mediation. After mediation did not proceed, Mr Nguyen executed an authority under s 188 of the Act.

Mr Nguyen subsequently signed a PIA [1]. His trustee said he was aware that four proceedings had started against Mr Nguyen, that s 229(2)(c) of the Act provided that all creditors are bound by the PIA and submitted that the employees should not be able to take fresh steps in the proceedings they had started. The trustee requested the court stay each of the proceedings.

Consideration

The court started by comparing and contrasting a bankruptcy under Part IV of the Act with the alternative scheme provided in Part X. It noted that the latter differs from the Part IV scheme in 3 principal ways:

1. the process by which the Part X trustee assumes control of the debtor’s property

2. the legal basis on which the Part X trustee holds the debtor’s property

3. and the terms on which a Part X trustee administers the debtor’s property [2].

Focusing on the third factor, the Court noted that in contrast with a trustee applying provisions under Part IV a Part X trustee is a trustee of a personal insolvency agreement between the debtor and the Part X trustee execute. As long as this is validly entered into and complies with the requirements of Part X of the Act, subsection 229(1) provides that it is “binding on all the creditors of the debtor”. Subsection 229(1) of the Act is reinforced by s 229(2) of the Act, which provides:

If a personal insolvency agreement has become binding on the creditors of the debtor, it is not competent for a creditor, so long as the agreement remains valid:

(c) to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

Subsection 187(2) of the Act provides that the expression ‘provable debt’, when used in relation to a personal insolvency agreement executed by a debtor under Part X of the Act:

…shall be read as a reference to a debt or liability that would have been a provable debt in the debtor’s bankruptcy if the debtor had become a bankrupt on the day on which he or she executed the personal insolvency agreement.

The Court noted that counsel for the employees accepted that each of the compensation claims is a provable debt and, for that reason, s 229(2) (c) of the Act applies to each of the proceedings. Counsel for the employees submitted, however, that the penalty claims were not provable debts because they fall within s 82(3) of the Act which provides that penalties or fines imposed by a court are not provable in bankruptcy.

The court considered the meaning of provable debt, noting that it is reasonably clear that provable debt, as it appears in s 229(2) of the Act, is intended to have the meaning that is derivable from s 82 of the Act i.e., a provision that specifies debts and liabilities that are provable in a person’s bankruptcy (24). It went on to note that while s 82 does not use the expression provable debt, that expression is used in s 229 of the Act and other provisions of the Act as shorthand to describe debts and liabilities provable in the bankruptcy. Section 82 separately defines particular classes of debts or liabilities that are not provable in a person’s bankruptcy.

S 82(2) Unliquidated damages not arising from a contract, promise or breach of trust

The first of these classes considered by the court was s 82(2) which demands the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust. The court noted that even when a claim is made for a liquidated amount of money that does not necessarily mean the claim is not a demand in the nature of unliquidated damages. That point was made inCornelius v Barewa Oil & Mining (NL) (in liq) [3] which considered the import of the word ‘nature’ in the phrase ‘nature of the demand’:

…the question raised … in any particular case is: what is the essential quality of the demand made? …The answer to that question does not depend upon the whim of the pleader…. To quantify the damage in a pleading cannot, in my opinion, change the “nature” of the demand or the “nature” of the cause of action. It remains a demand “in the nature of unliquidated damages” and it arises “otherwise than by reason of a contract, promise or breach of trust” and hence it is a demand not provable in bankruptcy.

The court explained that a liquidated money obligation is one that binds one person (the debtor) to pay to another person (the creditor) an agreed amount of money. An unliquidated money obligation is also one that binds the debtor to pay to the creditor an amount assessed by a court or other lawfully constituted body (30). It went on to add that while the former is capable of being discharged by performance (i.e. payment), that is not so with the latter because the amount the debtor is liable to pay remains to be ascertained. However, an unliquidated money obligation is capable of being discharged in other ways. One is by accord and satisfaction and another is when a court assesses the amount the debtor must pay the creditor.

The court concluded that s 82(2) of the Act provides that unliquidated money obligations are not provable in a person’s bankruptcy unless they arise from a contract, promise, or breach of trust (39). Later the court noted that each of the penalty claims was a demand in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust. A claim under s 546 of the Fair Work Act for the payment of a penalty is equivalent to a claim for exemplary or punitive damages in certain classes of torts. The court held that those penalty claims did not arise under a contract promise or breach of trust (42).

s 82(3) Penalties or fines imposed by a court for an offence

The trustee submitted that s 82(3) can apply only where a court has made an order that a pecuniary penalty be paid or where a court has made findings on the basis of which an order for the payment of a pecuniary penalty may be made.

The court cited the analysis in Australian Competition and Consumer Commission v Smart Corporation Pty Ltd (No 3 ) [2021] FCA 347 in which the corporation applied for orders for pecuniary penalties against a bankrupt individual because of their alleged contravention of civil remedy provisions under Australian Consumer Law. The question arose whether the ACCC required an order under s 58(3) of the Act before it could take start proceedings. The judge expressed doubts about whether s 82(3) of the Act applied to the claim for pecuniary penalties because any liability that would attach to the bankrupt individual under an order for the payment of a pecuniary penalty would not have accrued before the day of the act of bankruptcy as required by s 82.

The court applied the decision in Smart Corporation and held that none of the penalty claims was a provable debt. This was because any penalties would not be:

· debts/liabilities to which the bankrupt individual was subject at the time of bankruptcy

· debts/liabilities to which he may have become subject before his discharge by reason of an obligation incurred before the date of his bankruptcy as required under s 82.

Decision

No part of the proceeding is a provable debt within the meaning of s 229(2) (c) of the Bankruptcy Act. 

Cvitanovic [2021] FedCFamC2G 47

An application for leave to be heard in a proceeding was brought by a trustee requesting approval to assign causes of action propounded against those seeking leave to be heard.

Background

Two proceedings commenced by Mr Macks, the former trustee in bankruptcy of the estate of Unju Lee were pending before the Federal Circuit and Family Court of Australia (FCFC). These proceedings were about relief based on causes of action under ss 120 and 121 of the Bankruptcy Act 1966 (Cth) (the Act).

At the time of the application, Mr Macks had ceased to be trustee, and on 1 April 2021, new trustees were appointed.

On 30 June 2021, the new trustees started a separate proceeding in the FCFC for approval of an assignment of the causes of action to Mr Macks under cl 100-5 of Schedule 2 of the Act.

The trustees proposed to assign the cause of action in accordance with a deed between the trustees and Mr Macks. Under the deed, the trustees assigned to Mr Macks all rights, title and interest ‘in and under the [ss 120 and 121 proceedings] and all claims forming the subject of the [ss 120 and 121 proceedings], including but limited to all rights to sue accruing under the Bankruptcy Act and in any way relating to the transfer by the bankrupt of the properties located at… Croydon Park NSW.’

On 3 August 2021, the respondents in the 120/121 proceedings filed an interim application in the approval proceedings for an order under r 2.03 of the Federal Circuit Court (Bankruptcy) Rules 2016 that they be granted leave to be heard in the appeal proceeding. The trustees oppose the application.

This judgment considers whether the respondents in the 120/121 proceedings should be granted leave to be heard at the hearing of the approval proceeding.

Consideration

Nature of cl 100-5 of Schedule 2

The court noted that the submissions of both parties failed to reference the purpose of cl 100-5, which is that it regulates the trustee’s assignment of a cause of action when the trustee has already started a proceeding.

The court found that an assignment of a cause of action, if allowed, ‘would effect a change in the constitution of the proceeding’ [11] and that cl 100-5(2) of Schedule 2 contemplates that an assignment would require the court to make procedural orders about the ‘substitution of the assignee for the trustee as the plaintiff or applicant’ and permitting an ‘assignee to plead the material facts or otherwise file an affidavit deposing to the facts’ [11]-[12].

Citing Seear v Lawson (1880) 16 Ch. D. 121, the court confirmed that a statement of claim should be amended to reflect the procedural changes such as an assignment [13], and per Read v Brown (1888) 22 QBD 128, an assignment constitutes a material fact in a case that ‘a defendant might traverse; and if that be so, the plaintiff would be bound to prove it’ [14].

The inevitability of the defendant/ respondent’s rights to oppose the application

The court also found that cl 100-5 of Schedule 2 contemplates that the defendant or respondent in which the cause of action is maintained would have the right to oppose… Mr Macks’ application for leave to file an amended application naming the assignee as applicant or oppose the filing of an amended statement of claim pleading the material facts on which the assignee relies for title to maintain the cause of action. The respondent or defendant would also have the right to challenge the assignment’s validity [12].

In this case, the court found that had the trustees applied for permission to assign the cause of action in the proceeding in which the cause of action was maintained, i.e. the 120/121 Proceedings, the respondents would have had the right to be heard on the trustees’ application for approval. This is because Mr Macks would have been required to apply for leave to amend the application and statement of claim to reflect the assignment [15].

Similarly, the court noted that even if it denied the respondents the right to be heard and approve the assignment, Mr Macks would still be required to file for leave to amend the application and statement of claim in the 120/121 proceedings. In that circumstance, respondents in the ss 120/121 proceedings would be entitled to oppose the application to amend [16].

Recognising the inevitability of the respondents’ right to be heard against the application to assign, the court granted their application [17].

Decision

Leave granted for the respondents to be heard under r 2.03 of the Federal Circuit and Family Court (Bankruptcy) Rules 2021 (Cth).

Robson as former trustee of the estate of Samsakopoulos v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143

Issues

The key issues were:

1. The proper approach to be adopted where a sequestration order has been made by a registrar in the exercise of delegated judicial power but, on hearing the matter de novo on review, the court is persuaded that a sequestration order should not be made.

2. The nature of the orders that can be made upon the dismissal of the creditor’s petition by the judge upon de novo review of the earlier making of a sequestration order by a registrar.

The issues involved a reconsideration of previous decisions of the Full Court concerning the power of the court to make orders that are convenient and just in the administration of the bankruptcy jurisdiction.

Five judges sat on the appeal bench (Allsop CJ, Markovic, Derrington, Colvin and Anastassiou jj).

Background

On 10 June 2018, Ms Samsakopoulos was served with a bankruptcy notice. It referred to a debt of $5,079.01. Ms Samsakopoulos stated that she paid $80.00 but the Body Corporate reported they received $77.25. [4]

On 1 November 2018, a sequestration order was made by a registrar of the Federal Circuit Court against the estate of Ms Samsakopoulos. The creditor's petition was brought by the Body Corporate for Sanderling. The Body Corporate relied on an affidavit stating that Ms Samsakopoulos was indebted to the Body Corporate in an amount of $5,001.76. Mr Robson, the trustee assumed the conduct of the administration of the estate under the sequestration order.

The trustee became aware that there was a substantial surplus in the estate. In addition to the unit in Kings Beach (Queensland), there was an investment property being rented and a residential unit in Mooney Ponds (Victoria) with a combined value of $720,000 and $850,000, and a parcel of shares. The claims of creditors were found to total about $70,000. Ms Samsakopoulos disputed two claims.

The trustee provided an initial report to creditors sought approval for the trustee’s remuneration of an amount not exceeding $30,000 (plus GST). On 12 December 2018, the Kings Beach unit was transmitted to the trustee.

On 11 April 2019, after a period when Ms Samsakopoulos was hospitalised, an application for review of the registrar's decision was accepted for filing by the Circuit Court. Her affidavit was critical of legal fees of $17,000 charged by the Body Corporate in connection with the creditor’s petition. Her affidavit made it clear that the bankruptcy should never have been ordered (noting the annual body corporate fees were $2,600).

On 12 July 2019, the primary judge heard the review application brought by Ms Samsakopoulos and dismissed the creditor's petition on 17 July 2019. The primary judge found that the Body Corporate had not discharged its onus to demonstrate that Ms Samsakopoulos owed more than $5,000.

On 11 December 2019, the trustee sought orders for payment of their remuneration in the sum of $53,104.98 (including GST), an order for an indemnity out of the assets of Ms Samsakopoulos, and order for assets held by the trustee to be transferred to Ms Samsakopoulos.

The Body Corporate made a submission to the effect that notwithstanding the dismissal of the creditor's petition, Ms Samsakopoulos should bear the costs of the administration.

On 15 July 2020, the trustee's application was dismissed, the primary judge noting that in the event that a sequestration order is set aside, the former trustee in bankruptcy has no entitlement to the recovery of remuneration and costs, charges and expenses incurred by the trustee and in such circumstances is left to rights of recovery at general law. A submission that there was such a power conferred by s 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth) was not accepted.

Consideration

The judgment of Colvin J sets out a comprehensive framework for understanding what a court does when it deals with commonly encountered applications in its bankruptcy jurisdiction. It provides guidance about the orders that a court can make and the relevant powers that may be invoked to underpin its orders in the various circumstances encountered in bankruptcy matters [5]. His reasoning and conclusions were endorsed by the sitting judges except for his view about when an order to set aside the sequestration order can and should be made in a de novo review (see below).

The length of the judgment means that a summary necessarily omits a great deal of the careful reasoning provided, but with that reservation key points have been distilled dealing with:

1. the differences between an application for annulment and an application for review of a decision of a registrar to make a sequestration order

2. whether when reviewing a decision of a registrar to make a sequestration order the Circuit Court has a discretionary power to annul the bankruptcy

3. whether the exercise of the review power affects the past operation of the order of the registrar

4. the powers that may be exercised on review of a decision of a registrar to make a sequestration order

5. whether the powers that may be exercised on review to make consequential orders extend to an order setting aside the sequestration order.

An application for annulment versus an application for review of a decision by a registrar exercising delegated judicial power to make a sequestration order – their different legal characters

An application for an annulment is not an application for review of the decision by the registrar. It takes as its foundation the valid exercise of delegated judicial power by the registrar in making the sequestration order and then seeks an order annulling the bankruptcy. In dealing with this application the court decides whether the sequestration order should have been made and whether the bankruptcy should be annulled. It does not seek to undo past events or set aside the sequestration order (147).

In contrast, to appreciate the legal ramifications of an application for review of a registrar’s decision, the court explained the nature of the delegated federal judicial power. In the case of delegated judicial power, for the delegation of judicial power to be consistent with the constitutional character of federal courts, the review provided for must be a de novo review by a judge [6].

Case law has laid down the need for such delegations to be attended by (in the sense of being a necessary corollary) a judge to reverse or otherwise correct on review. This is different from the statutory rights of appeal. In other words, ‘the right to seek review attaches to the delegation and is an attribute of the nature of the delegated authority.’ [7] Colvin J also noted that ‘the prospect of review by a judge inheres in the order made by the registrar as an incident of the extent of the delegated authority… the registrar's order speaks as an order of the court but only on the basis that it is subject to the prospect of subsequent review de novo by a judge’ (62).

The consequences that follow are that the approach is not that of an appellate hearing. Instead, it proceeds as if what has gone before has no effect so the court can entertain new arguments, receive new evidence, or adjourn as it would have been able to do if the matter was being heard for the first time. In keeping with this conceptual framework, the same onus is on the applicant (the creditor) as if the matter was being heard for the first time (63). Hence the court, on review of the exercise of delegated judicial power, does not decide that the delegate's exercise of power was made in error and should be set aside; rather it makes its own determination unaffected by the delegate's decision (68).

Colvin J considered what other consequences arise from the character of the review which he agreed was a 'procedure sui generis'. [8] The judge explained what happens when on review the judge reaches a different decision to the delegate using a variety of formulas and expressions; for example:

• ‘the operation of the earlier, valid and operative, exercise of delegated judicial power com[es] to an end’

• ‘the act of the delegate is replaced by an exercise of judicial power by the judge’

• ‘the earlier order would be overtaken on review’

• the authority of the delegate to exercise judicial power may be withdrawn (65-66)

• the court on review of the exercise of delegated judicial power brings to an end the delegated authority (68)

• it is a complete re-exercise of the power (72)

• the decision of the delegate may be overtaken (72)

• the review decision speaks as a judicial decision made with operative effect at that point in time (84)

• an order on review can be made which changes the effect of what has gone before (84) [9]

• the review is the completion of the exercise of the judicial power in the particular matter… where the exercise of the judicial power has been extended over a period of time (234). [10]

Whether the court has a discretionary power to annul the bankruptcy on review of a decision made by a registrar in the exercise of delegated judicial power to make a sequestration order

Colvin J, having noted the difference between annulment and a decision on review not to make a sequestration order, added that if there is an annulment then the statutory provisions deal with the consequences for the vesting of property and remuneration of the trustee. This means that the appropriateness of trustees' remuneration, costs and expenses will be subject to approval in accordance with those requirements (83). There was an argument that as annulment would provide for a trustee’s remuneration costs and expenses, that might influence in favour of making that order instead of or in addition to an order dismissing the creditor’s petition (87). However, Colvin J held that there is no power to annul or set aside the sequestration order made by the registrar. Rather, the bankruptcy itself is ended by the dismissal of the creditor's petition on review [11]. His reasoning was that:

It would be fundamentally inconsistent with the making of an order on review to treat the bankruptcy that has been administered pursuant to the delegate's sequestration order up until that point as if it were a bankruptcy that should be annulled… On review, the first order to be made is a dismissal of the creditor's petition. From that point on there is no sequestration order that continues to speak… There is therefore no ongoing bankruptcy and no annulment to operate as to that bankruptcy. (262) [12]

Whether the exercise of the review power affects the past operation of the order of the registrar

Having explained the reason for the delegation of judicial power, Colvin J noted that ‘it would be strange if … on review the court lacked any authority to make consequential orders addressing what has occurred between the exercise of the delegated judicial power and the completion of a review’. (78)

The issue is how to deal with the past operation of a valid exercise of delegated judicial power when a judge makes an overtaking order on review. What is the appropriate form of consequential relief when the court dismisses an application where the delegate allowed the application? What should the court do about the steps that have been taken in the interim in reliance upon the delegated judicial power? In other words, what follows when the court on review determines that a sequestration order should not be made?

The judge noted the general power to make an order that takes effect from a date that is earlier than the date on which the order is made by the judge on review; an order can be made which speaks now for then by changing the effect of what has gone before (orders nunc pro tunc). However, the judge concluded that without express statutory power, an order affecting substantive rights that takes effect from an earlier date could not be supported on the basis of an inherent jurisdiction (86). [13]

The judge found that express statutory power in s 104(3) of the Federal Circuit Court of Australia Act and held that it was able to be invoked to deal with the consequences that ensue when a creditor's petition is dismissed on review. This means that power could be exercised to deal with the ongoing consequences of past events (264).

Powers that may be exercised on review: s 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth) and s 37(2) of the Bankruptcy Act 1966 (Cth)

The general power of the court under the Bankruptcy Act to rescind, vary or discharge an order or suspend the operation of an order does not extend to a sequestration order s 37(2) of the Bankruptcy Act [14]. A sequestration order could not be undone by an order of that character. However, appellate powers of the court enable the court to set aside a judgment appealed from and that power extends to a judgment in which a sequestration order is made. Orders could result in the person the subject of the order that has been set aside never having the status of a bankrupt (89).

Section 104 of the Federal Circuit Court of Australia Act provides:

(3) The Federal Circuit Court of Australia may, on application under subsection (2) or on its own initiative, review an exercise of power by a Registrar under subsection 102(2) or under a delegation under subsection 103(1), and may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised .[15]

Colvin J stated that the nature and extent of the power conferred by s 104(3) is a question of statutory construction. The judge suggested that there would be no need for the additional language if the intention was to say that the court on review not exercise the same power as was exercised by the registrar as delegate (231). Hence, he argued, these ‘additional words’ confer a wider authority than would otherwise exist if the matter came before the court without any order having been made by a delegate. And the judge deduced that wider authority ‘is conferred for the purpose of dealing with any aspect of the matter that arises because there is a review of an exercise of delegated judicial power. Its terms confer such power as may be needed to do justice… where the parties may have acted based on an order made’ (232).

Colvin J also drew attention to the word 'matter' in s 104(3) noting it is a term of wide conception [16]; it refers to ‘the whole of the underlying controversy to which the issues raised upon a particular court application relate or from which the issues agitated in a particular proceeding arise’ (233). The conclusion is that the remit of the court on review is the exercise of judicial power in the particular matter (in the present case, the whole controversy as to whether the estate of Ms Samsakopoulos should be sequestrated and administered in bankruptcy). (234).

To account for the possibility that steps might have been taken by one or other of the parties on the basis that the decision is to one effect, only to find on review that it is actually to the opposite effect, the court may deal with that aspect of the matter by making any order that it thinks fit, including an order to deal in a just way with the consequences of the intervening period between the decision of the registrar and the de novo decision on review (235). In other words, the court is not confined to making the dismissal order. It can make such consequential orders as it thinks fit (235).

Colvin J then turned to the question of whether there were constraints upon the scope of the power conferred. The judge noted the court is not confined to making the dismissal order. It can make such consequential orders as it thinks fit but cannot take the form of setting aside or recalling the valid exercise of judicial power by the delegate (248):

to set aside the sequestration order would be to deprive it of any legal effect or legal consequences. It would treat a valid exercise of judicial power as if it had not occurred. It would denude the exercise of the judicial power of its fundamental incident of finality and burden it with the prospect of being set aside by a process other than appeal in which error in the making of the order was required to be demonstrated. It would do so irrespective of the effects upon third parties who have had dealings with the trustee.

251 Section 104(3) contains no express conferral of power to set aside an order made in the exercise of delegated judicial power.

As to the scope of the orders that are permitted, acknowledging that the sequestration order made by the registrar remains both an historical fact and an exercise of judicial power and the administration undertaken in the meantime remains an administration undertaken pursuant to the sequestration order:

255 Orders which may be considered include orders as to the remuneration, costs and expenses of the trustee, orders validating for future purposes actions of the trustee undertaken pursuant to the sequestration order and orders to effect the re-vesting of property in the debtor. An order may also be made to the effect that the debtor does not have the status of a former bankrupt.

Section 37(2) of the Bankruptcy Act provides that:

(1) Subject to subsection (2), the Court may rescind, vary or discharge an order made by it under this Act or may suspend the operation of such an order

(2) The Court does not have power to rescind or discharge, or to suspend the operation of:

(a) a sequestration order

Colvin J posed the question whether s 37 confines the extent of the power to make consequential orders under s 104(3) where the matter the subject of the review concerns whether there should be the sequestration of the estate of a debtor (259). The answer is s 37 should be construed in a manner that contemplates the possibility that a sequestration order may be made in the exercise of delegated judicial power and so:

261 A consequential order made under s 104(3) which gives effect to a determination on review that a creditor's petition should be dismissed is not directed to rescinding, discharging or suspending the operation of an earlier sequestration order made in the exercise of delegated judicial power. It proceeds based on the historical fact that there was a sequestration order and makes orders to give effect to the determination on review. Therefore, s 37 of the Bankruptcy Act is no barrier to the making of such an order.

Whether the powers that may be exercised on review to make consequential orders extend to an order setting aside the sequestration order

Allsop CJ’s view was that whilst no error may have been involved in the registrar’s order, if a judge on review dismisses the creditor’s petition, the setting aside of the sequestration order made by the registrar is the appropriate consequential order in that proceeding [17]. A majority agreed that the consequential orders that can be made upon the dismissal of a creditor’s petition by a judge following a de novo review extends to an order setting aside the sequestration order for the reasons given by Allsop CJ (Derrington and Markovic JJ adopting this view; Colvin and Anastassiou JJ dissenting).

To explain the rationale for this view, Allsop CJ described the existence on the record of a sequestration order as ‘fundamentally inconsistent with the (one) exercise of judicial power by the court in respect of the creditor’s petition’ (3). He characterised the nature of a set aside order as a consequential order recognising that the one petition can only have one outcome if it be dismissed by the judge as the court on review [18].

Allsop J agreed that the terms of s 104(3) and s 35A(6) should be interpreted as ample and sufficient to untangle and unravel the rights and positions of the parties involved (23). But the concern was that ‘the proper analysis of the superseding or overtaking of the registrar’s order by the order of the judge cannot simply mark the end of the existence of a temporary bankruptcy in which the debtor was, for a limited time, a bankrupt’. He couched it in terms of a constitutional imperative that ‘the consequence of the dismissal of the petition must include the eradication of the status of the debtor as a bankrupt’ (24).

In practical terms Allsop CJ wanted to ensure the order would not remain on the court record, potentially causing confusion. This meant setting aside the sequestration order as a consequential order to ensure that the court record has one result in respect of the one petition, not two diametrically opposed orders of the court potentially affecting the status of the debtor. This would ensure the elimination of the status of bankrupt. The judge also allowed that other consequential orders might be made under the same statutory powers referred to by Colvin J to protect the position of the trustee and third parties (24).

The Chief Justice argued that a debtor, in respect of whom a creditor’s petition has been dismissed by a judge on de novo rehearing, should not be burdened in status, nor generally with financial liability, as that outcome would substantially diminish the necessary protection of the de novo hearing (26) [19]. That protection in the form of a set aside order should, in the Chief Justice’s view, ensure that there would be no ‘legacy of a financial stain’ (28). In his view s 104(3) is broad enough to find an order setting aside the sequestration order is a necessary consequential order of the overtaking or superseding of the registrar’s order. This ensures the debtor never has the status of a bankrupt (29).

Markovic J adopted the reasons of Allsop CJ, observing that an order to set aside the sequestration order in the given circumstances is ‘the appropriate way to vindicate the protection of the debtor and ensures the eradication of the status of the debtor as a bankrupt as well as removing any confusion as to the status of the debtor for the purpose of, among other things, his or her future dealings.’ (39).

Decision

The appeal was allowed and the orders of the primary judge in the Federal Circuit Court set aside. Other significant orders were that:

1. the Body Corporate as petitioning creditor pay the reasonable remuneration of the trustee up to 17 July 2019 (when the registrar’s orders ceased to have effect), capped in the amount of $30,000 plus GST

2. the Body Corporate pay costs and expenses reasonably and properly incurred by the trustee in the administration before 17 July 2019

3. all acts done before 17 July 2019 by the trustee are taken to have been validly done

4. all property that vested in the trustee vest in Ms Samsakopoulos

5. the Body Corporate shall not by any means seek to recover any contribution from Ms Samsakopoulos in respect of any amount they must pay pursuant to these orders

6. declared that Ms Samsakopoulos shall not have the status of a former bankrupt individual

7. the trustee and Body Corporate bear their own costs of the appeal

8. trustee to file an affidavit about actions following the dismissal order and reasons why the court should not appoint a registrar as a referee to inquire into any loss or damage to Ms Samsakopoulos

9. no orders as to the costs of the trustee’s application filed on 11 December 2019

10. the question whether there should be any further orders in the appeal be reserved.

The main lessons are that:

· dismissal of a creditor’s petition upon review prevents an annulment being ordered because there is no bankruptcy to be annulled.

· even if the creditor’s petition is dismissed and the sequestration order is set aside, orders can be made consequentially under s 104(3) of the FCCA Act or, s 35A(6) of the FCA Act which protect the position of the trustee and third parties.

Commissioner of Taxation v Bosanac [2021] FCAFC 158

Issue

This case looks at the purchase of property by a husband and wife where the title is registered in only the wife’s name. The case examines whether presumption of advancement is qualified by statements in Trustees of Property of Cummins (a bankrupt individual) v Cummins (2006) 227 CLR 278, or whether presumption of advancement is rebutted.

The case considers whether Mr Bosanac held an equitable interest in residential property purchased only in the name of Ms Bosanac.

Background

In 2006 Ms Bosanac and Mr Bosanac paid a deposit of $250,000 on a Dalkeith property with funds from a joint loan account. Mr and Ms Bosanac then jointly borrowed $4.5 million from Westpac and this was used to pay the balance of the purchase price.

The primary judge found that at the time of the purchase of the Dalkeith Property:

1. Mr and Ms Bosanac had been married to one another for eight years

2. the purpose of the purchase of the Dalkeith Property was to acquire their matrimonial home. Both moved into the Dalkeith Property not long after the purchase in late 2006 and that they remained there together until 2015.

By way of background on 29 April 2016, the Court entered summary judgment against Mr Bosanac in the sum of $9,344,111 plus costs: Commissioner of Taxation v Bosanac [2016] FCA 448. At first instance a declaration was sought to facilitate recovery of part of the judgment sum by the Commissioner broadly to the effect that Mr Bosanac had an equitable interest to the extent of 50% of the available equity in the property. The court held that that the presumption of advancement arose in Ms Bosanac’s favour and the Commissioner had not cited sufficient evidence to rebut the presumption either directly or supporting an inference that Mr Bosanac intended to retain a beneficial interest in the property.

Consideration

The Court noted that two presumptions were of particular relevance in the determination of this appeal:

(1) The first presumption concerns resulting or presumptive trusts. A declaration of trust may be presumed where two parties contribute to the purchase price of property, but legal title to the property is put only in the name of one person. Equity presumes there was a declaration of trust because it presumes it was intended that the person holding legal title would do so for both contributors (or that the purchaser did not intend to gift his or her contribution to the other person).

(2) The second is the presumption of advancement. Where it applies, the presumption of advancement operates to prevent a resulting trust from arising because the relationship between the relevant parties provides a reason against presuming a trust. The presumption operates on the hypothesis that because a certain relationship exists between two parties, a benefit provided by one party to the other at the cost of the first was intended to be provided by way of advancement. Absent evidence to the contrary, the relationship supplies a reason for why a gift was intended. (3)

The court noted that the presumption of advancement developed because of courts of equity drawing an inference, from the type of relationship, that the gift was intended as an advancement. The court’s pithy summary was that the ‘presumption of advancement arises on proof of the existence of a relationship to which the presumption applies. It applies to a purchase by a husband of property which is put in his wife’s name… but it is…important to assess the particular transaction in respect of which the presumption is said to operate’ (11).

The court also cited the description of the presumption operating ‘to place the burden of proof, if there be a paucity of evidence bearing upon such a relevant matter as the intention of the party who provided the funds for the purchase’. The centrality of evidence to such a consideration was noted:

the presumption of advancement does not preclude an examination of the actual relationship between the parties, or of other facts relevant to the intention at the time of the transaction when it comes to the question whether the evidence rebuts the presumption. (6)

The presumption of advancement and its connection with resulting trusts was referred to by the High Court in The Trustees of the Property of Cummins (a bankrupt) v Cummins (2006) 227 CLR 278, citing as the generally accepted principles from Calverley v Green, as follows:

“[I]f two persons have contributed the purchase money in unequal shares, and the property is purchased in their joint names, there is, again in the absence of a relationship that gives rise to a presumption of advancement, a presumption that the property is held by the purchasers in trust for themselves as tenants in common in the proportions in which they contributed the purchase money”.

On appeal, the court noted that its task was to review the inferences drawn from the facts as found by the primary judge. More generally it sought to determine whether the evidence showed the presumption to be inconsistent with what was intended (16). It noted as significant the fact that the property was the matrimonial home and that Mr Bosanac assumed a very substantial liability by signing on to the loan documents. It did not agree with the primary judge that the fact that Mr Bosanac assumed a substantial liability without the benefit of acquiring any beneficial interest should have been excluded.

The court noted that neither Mr nor Mrs Bosanac sought to give direct evidence about the purchase of the property but considered that ‘did not preclude a finding that the facts …rebutted the application of the presumption of advancement in this case’ (18). Based on the facts concerning the purchase, the court inferred that the property would be for joint use and for the benefit of them both, even though the property was registered in the wife’s name alone (19). The court found the circumstance that the two loans to purchase the property were mortgages ‘tends strongly against the presumption of advancement applying in this case. We consider less probable than not in the circumstances just described that Mr Bosanac would take on a very substantial liability in respect of the Dalkeith Property without at the same time acquiring a corresponding beneficial interest’ (21). The correct inference from the facts was that both Mr and Ms Bosanac intended that Mr Bosanac would have a 50% beneficial interest in the property.

Reviewing these fundamental facts, the court was led to the conclusion that Mr Bosanac did not intend that his contribution to the purchase of their matrimonial home at Dalkeith be by way of gift to Ms Bosanac for her advancement. (22).

The court rejected the weight given by the primary judge to ‘considerable evidence of separate ownership of property’, noting it did not weaken the conclusion they had reached. Similarly, the court did not agree with the primary judge that an inference could be drawn that as Mr Bosanac was a ‘sophisticated businessman’ or a “self-styled venture capitalist” he must have appreciated that ‘the name in which real property is held is of significant consequence in almost all situations”. (26).

Decision

While the fact that, at the time of purchase, the Dalkeith Property was put into Ms Bosanac’s name was in favour of the operation of the presumption of advancement, the evidence and the facts as found by the primary judge rebutted the presumption. The court inferred from these facts that at the time of the purchase Mr Bosanac and Ms Bosanac intended that Mr Bosanac would have a 50% beneficial interest in the property that was to be their matrimonial home.


[1] A “personal insolvency agreement” is defined in s 188A(1) of the Act to mean a deed that is expressed to be entered into under Part X of the Act, and which complies with s 188A(2) of the Act.

[2] The court noting that “many of the provisions that comprise the Part IV scheme are made to apply in relation to a personal insolvency agreement and in relation to the Part X trustee, except to the extent those provisions are incapable of applying to a personal insolvency agreement or to a Part X trustee, or to the extent they are inconsistent with Part X of the Act. That is the effect of s 231(3), (4), and (6) of the Act (15)”

[3] Cornelius v Barewa Oil & Mining (NL) (in liq) (1982) 64 FLR 287

[4] At the relevant time the statutory minimum was $5000. Colvin J noted proceeding with the creditor’s petition in the circumstances was ‘redolent of sharp practice’ on the part of the Body Corporate’ (277)

[5] The judgment of Colvin J is set out at pp15-79 (paras 41-297). The judgment also contains detailed discussion as to why the authority and power of the Court on a de novo review is different to that which it has on appeal.

[6] Harris v Caladine (1991) 172 CLR 84

[7] Bechara v Bates [2021] FCAFC 34

[8] Lander J in Pattison [156] (sui generis meaning ‘one-of-a-kind’; like only to itself)

[9] A nunc pro tunc order

[10] Emphasis added

[11] Adding that ‘the reasoning of the majority in Pattison to the effect that there is power to annul the bankruptcy that arises when the creditor's petition is dismissed on review in accordance with s 104(3) (or an equivalent review to give effect to the constitutional imperative where there is a delegation of judicial power to hear and determine a creditor's petition) is plainly wrong (263).

[12] Colvin J provided a comprehensive review of authorities, noting that in relation to The Austral Brick Company Pty Ltd v Daskalovski [1998] FCA 782, Symons v Bateman [1999] FCA 658, Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 and Rangott v Marshall [2004] FCA 961 ‘all those cases must be distinguished’ (212). In relation to Pattison v Hadjimouratis [2006] FCAFC 153; (189). Colvin J commended the view of Lander J that an annulment could not be ordered as the outcome of a successful review due to the fact that if the Court on review determined that the creditor's petition must be dismissed it follows that there has not been a bankruptcy to annul.

[13] The judge noted the uncertain state of case law as to the extent to which orders might be made with past effect upon the review of an exercise of delegated judicial power to make a sequestration order.

[14] This prohibition has not always been operative: Allsop CJ rehearses the changes in 1980 and 1992 (and see Colvin J at 159).

[15] Emphasis added.

[16] McHugh v Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2020] FCAFC 223

[17] If an order is set aside the order ceases to have any effect; it is cancelled or vacated.

[18] While also accepting that intervening events and statutory consequences are to be dealt with by consequential orders authorised by statutory provision (here s 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth) (FCCA Act) and in another case s 35A(6) of the Federal Court of Australia Act 1976 (Cth) (FCA Act)) (3)

[19] Allsop CJ distinguished the principles involved in the de novo review situation from setting aside a sequestration order on appeal to correct a demonstrated error, describing it as ‘a necessary substantive order on appeal, clearing the way to dismiss the petition as the order that should have been made by the court below.’ (27).

AFSA’s fortnightly statistics

Due to the uncertainty of the economic impacts of the COVID-19 pandemic, we started publishing fortnightly statistics. These give you the most up-to-date information available about insolvencies and bankruptcies. This release is in addition to AFSA’s existing statistical releases.

We will release our final fortnightly statistics for 2021 on 16 December 2021. We will recommence these statistics on 28 January 2022 and will include the full time series in the January release.

To subscribe to these updates, please visit our website.

AFSA’s Christmas closure

AFSA will be closed from close of business Friday 24 December 2021 and will reopen on Tuesday 4 January 2022.

If you intend to lodge an application or document, it is recommended that you submit it as soon as possible to allow sufficient time for processing.

During this time, limited emergency services will be available by calling 1300 364 785.

More information can be found on the AFSA website.