Proper performance of duties of a bankruptcy trustee

Inspector-General Practice Direction 14 explains the proper performance of duties of a bankruptcy trustee.

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  1. Introduction

    1. Mr Robert Sanderson, Past President of INSOL International, in launching the IPA Code of Professional Conduct (now called the ARITA Code of Professional Conduct) stated:[1]

    2. This coincides with a belief by some practitioners that the Inspector-General in Bankruptcy,[2] in undertaking the regulatory function, is only entitled to focus on compliance by personal insolvency trustees (trustee) with the Bankruptcy Act 1966, the Bankruptcy Regulations 2021 and the Insolvency Practice Rules (Bankruptcy) 2016 (“the Rules”), along with undertaking the duties of a trustee as set out in the Bankruptcy Act.  While this is part of the Inspector-General’s role, it is only one aspect.

    3. In a 2006 disciplinary hearing,[3] the Federal Court said it will have regard to professional standards and codes of conduct in determining whether the standard of performance of an insolvency practitioner is proper and adequate.  In his defence, the practitioner argued that the Regulator (that is, the Companies Auditors and Liquidators Disciplinary Board had to:

      1. The Court rejected this, saying at [26]:

    4. The Inspector-General will therefore expect compliance with not only the Bankruptcy Act, Regulations and the Rules but also with professional standards, including:
      • APES 330 Insolvency Services
      • Codes of Professional Conduct (e.g. ARITA Code of Professional Practice)
      • AFSA practice documents.
    5. Section 40-40 of the Insolvency Practice Schedule (Bankruptcy) (Schedule 2 of the Bankruptcy Act; “the Schedule”) empowers the Inspector-General to issue a show cause letter to a trustee who has, for example, failed to exercise powers of a registered trustee properly or has failed to carry out the duties of a registered trustee properly.
    6. Therefore, in making an assessment under section 40-40 of the Schedule, the Inspector-General will consider not only whether the trustee has exercised powers and carried out duties, but whether such action was undertaken properly.
    7. This paper outlines the existing legislation that guides a trustee, explores the meaning of “properly” with reference to the common law covering the fiduciary duties of a trustee and clarifies the expectations of both the Court and the Inspector-General in this regard.  Annexure A lists the cases referred to in this paper with internet links to most of them.

  2. The legislative framework

    1. Section 40-40 of the Schedule

    2. Section 40-40 is the basis on which the Inspector-General can decide to convene a committee to consider whether a trustee is in breach and whether these breaches warrant the cancellation of the trustee’s registration, the imposition of conditions, or other action as the legislation allows.

    3. Section 40-40 provides as follows, with emphasis added:

    4. Section 12 of the Bankruptcy Act

    5. While this section essentially provides certain powers to the Inspector-General, it also imposes a duty on trustees (and debt agreement administrators).  The relevant provision is subsection 12(1A) of the Bankruptcy Act, which provides:

    6. The term “for the purposes of subsection (1), to provide a report as to the operation of this Act” is to be read broadly to apply to situations where a registered trustee or a debt agreement administrator has been formally requested under subsection 12(1) of the Bankruptcy Act to provide a report, irrespective of whether it relates to a particular estate, their personal insolvency administration practice as a whole or any other purpose under the Bankruptcy Act, including in particular the provision of the annual administration return information.
    7. The duty imposed on registered trustees and debt agreement administrators by virtue of this provision also necessarily infers an obligation to provide a timely and accurate report.

    8. Subsection 12(2) of the Bankruptcy Act states that:

    9. Hence the trustee has a duty to assist the Inspector-General by allowing reasonable access to books and records and accurately answering any enquiry within a reasonable time frame.

    10. Section 75-30 of the Schedule

    11. Section 75-30 of the Schedule states:

    12. It is implicit in section 75-30 of the Schedule that a trustee should not engage in conduct that prevents or attempts to prevent the Inspector-General from attending and participating in a meeting of creditors (subject to rule 75-85 of the Rules – refer particularly to rule 75-85(1):

    13. AFSA staff will comply with its published protocols when attending such meetings.[5]

    14. Section 19 of the Bankruptcy Act

    15. Specific duties of a trustee of the estate of a bankrupt are set out in subsection 19(1):

    16. It is important to understand that these duties relate to individual estates rather than broader responsibilities or duties of a trustee.  Clearly, failing in respect of any of these is a fundamental breach of duty, although allowance needs to be made for what is reasonable in the particular circumstances, the seriousness of the breach, its impact and the trustee’s history of compliance.

    17. Division 42 of the Rules – Standards for trustees

    18. Division 42 of the Rules sets out standards for the minimum level of acceptable conduct and performance for registered trustees.

    19. The purpose of the Standards, stated in subsection 42-4(2), is:

    20. This practice document does not set out all of the Standards, but focuses on those that are not prescriptive.  It uses subjective terms to describe conduct expected of trustees.
    21. The terms highlighted in the Standards set out above set the context for the following paragraphs of this practice document.  The duties and responsibilities of trustees as fiduciaries and officers of the Court are often couched in very subjective terms, making it a challenging aspect of personal insolvency law.  Notwithstanding this, practitioners can obtain guidance from the Standards and case law precedents led by Ex parte James (detailed below) and the other cases listed in annexure A.

  3. Trustees as fiduciaries and officers of the court

    1. A trustee in bankruptcy is classed as a fiduciary.  “Fiduciary” is a term that may be defined in various ways but, essentially, it involves a person who has an obligation to act on behalf of another, subject to certain duties.
    2. A person who is a fiduciary generally owes two types of duties to those with whom they are in professional contact.  These are:
      • duty to use care and skill
      • a duty to act in good faith.
    3. The duty to use care and skill is allied to common law obligations.  A person may be under a contract whose terms, express or implied, require that person to use skill and care.  Furthermore, such a person may owe a duty of care under the law of negligence.  The way in which the common law duties are vindicated are by an award of damages to the person damaged by the conduct.  With the breach of a statutory duty in the nature of a fiduciary duty, the remedy may be set out in the relevant statute or it may be an order that the defaulting fiduciary restore the fund or person to the state it or they would have been in but for the breach.

    4. The rule in Ex parte James

    5. A trustee must act justly.  A trustee is considered an officer of the Court and, in exercising powers and discretions and making decisions, no lesser standard is to be expected of them than of a court or judge.  This principle is referred to as the rule in Ex parte James.[6]
    6. The rule requiring a trustee to act justly or fairly can apply even in situations where this may not otherwise be strictly required by law – for example, where some property has come into the hands of the bankrupt that was never intended to be property of the bankrupt but, in law, is their property.[7]
    7. In such circumstances, for the rule in Ex parte James to operate, it has been suggested that four requirements must be met.  These are:
      1. that the bankrupt estate has been enriched by the relevant transaction
      2. that the claimant is unable to submit a proof of debt in the ordinary way
      3. an honest person would consider it unfair for the trustee to retain the money in question
      4. the rule only operates so as to nullify an enrichment of the bankrupt estate.
    8. The rule in Ex parte James was referred to in two cases, Re Houston (Bankrupt)[8] and Foyster v Prentice.[9]
    9. In Houston, the trustees sought the Court’s directions pursuant to the old subsection 134(4) of the Bankruptcy Act in order to call upon the executors of a deceased estate, of which the bankrupt was a beneficiary, to make an in specie distribution.  It was held that it was not unfair nor unconscionable conduct of the trustees, in the sense of Ex parte James, to call upon and receive the in specie distribution notwithstanding the consequences of leaving the bankrupt with a post-bankruptcy capital gains tax liability and the Australian Taxation Office with a fresh claim.  It can be concluded that the trustees acted prudently in seeking the Court’s directions so that the full impact and negative consequences on all parties could be considered.  See also Re Hamilton.[10]

    10. In Foyster, the bankrupt made an unsuccessful application for review of the trustee’s conduct and sought orders that the trustee had not acted impartially and had breached the fiduciary duty owed to him during the conduct of his duties and administration of the bankrupt estate.  At [185], Wilson FM stated:

      1. And at [202]:

    11. The Ex parte James principle received further airing in:
      • Thomas v Donnelly (John Robert Thomas v Max Christopher Donnelly[13]
      • Nguyen v Pattison[14]
      • Draper v Official Trustee.[15]

    12. In Nguyen, Weinberg J stated that in trustees making decisions:

    13. In Muir v Bradley,[16] the court stated:

    14. If a trustee has a situation where they are considering whether Ex Parte James applies, unless the answer is obvious or all the creditors agree, the trustee would be wise to take legal advice or seek the direction of the court under section 90-15 of the Schedule.

    15. Independence and avoiding conflicts of interest

    16. A trustee is precluded from having a personal interest or a duty to a third party which conflicts with their fiduciary duty and duty as a trustee.[17]

    17. In Re Lamb[18] at [24], Sweeney J said:

    18. In carrying out their duties, a trustee must not only act independently, but must be seen to act independently.  Therefore, if a conflict of interest arises the trustee must avoid or remove that conflict if it raises any perception of partiality.  The test is whether there might be, in the eyes of a reasonable person, a perception of conflict.  Where there is an actual or potential conflict of interest the trustee must notify the relevant parties and take appropriate steps to avoid the conflict of interest.  See:
      • Southern Hotels[19]
      • Pascoe v Deltawiz[20]
      • Starkey v Rondo.[21]
      1. See also section 42-20 of the Rules and the ARITA Code of Professional Practice for Insolvency Practitioners, section 6, for further guidance.

    19. In Re Partridge,[22] cited in the Southern Hotels, Starkey and Boral Montoro v McLachlan[23] cases, Lockhart J stated at [38] that a trustee:

    20. In Boral Montoro Pty Ltd v McLachlan, the proposed trustee was a partner of a firm that was a creditor of the debtor.  The debtor was applying to persuade the Court not to appoint that trustee.  At paragraph 15, Wilson FM concluded:

    21. Section 60-21 of the Schedule states that it will constitute an offence for a trustee (the first person) to:

    22. This highlights the severity of a perceived or actual conflict of interest where a financial inducement has been offered or given to another to obtain an appointment as trustee or prevent someone else’s appointment.

    23. Impartial and fair

    24. As per section 42-10 of the Rules, a trustee must act honestly and impartially in relation to each administration.
    25. A trustee plays a central role in the administration of estates under the Bankruptcy Act and is under a general duty to exercise the powers committed to them in such a fashion that the objects of the Bankruptcy Act, including those of equality between creditors and fairness to bankrupts and debtors, are served (see Re Lamb).
    26. The minimum standard required of the trustee is that they shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt (see Mannigel v Aitken[24]).

    27. The trustee’s responsibility to the bankrupt of fairness and equality of interests between the bankrupt and their creditors and providing the best surplus possible are sometimes forgotten.  On occasion, trustees have only focused on providing the maximum return to creditors.  The fact that a trustee has to consider more than the interests of the creditors was reaffirmed in Adsett v Berlouis[25] where Northrop J concluded:

    28. Justice Spender in Doolan v Dare[27] at paragraph 37 provided a summary of relevant case law and commentary on the duties of a trustee as follows:

    29. The High Court approved the following statement of principle in Attorney- General (Cth) v Breckler[28] at [99]:

    30. This statement of principle was applied by Spender J in Doolan v Dare at [38]:

    31. In Hughes Aircraft Systems International v Airservices Australia,[29] Finn J referred to the standard required of a trustee and said at [81]:

    32. In Hospital Products Limited v United States Surgical Corporation,[30] a judgment of the High Court, Mason J (as he then was) said at [103]:

      1. His Honour continued at 107:

    33. A trustee will not be allowed to retain monies for distribution where it would be contrary to fair dealing to do so (see Re Tyler[31]).

    34. Efficient and commercial

    35. In accordance with paragraph 19(1)(j) of the Bankruptcy Act, a trustee has a specific duty to “administer the estate as efficiently as possible...”.  Further, and pursuant to paragraph 19(1)(k) of the Bankruptcy Act, a trustee also has a specific duty to act “… in a commercially sound way.”

    36. At paragraph 74 of the decision in Growden v Committee under Part VIII of the Bankruptcy Act,[32] it is stated:

    37. The trustee is not obliged to take steps which would be unrealistic or expensive (see Citicorp Australia Ltd v Official Trustee in Bankruptcy[33]).

    38. In Boensch v Pascoe,[34] the Court said:

    39. It has been recognised by the Courts that a trustee cannot expect to recover all their costs and remuneration in every bankruptcy and that the scale of fees set by a trustee for themselves and their staff reflect this risk.  In Vaucluse Hospital Pty Ltd v Phillips,[35] Riethmuller FM said:

    40. The result is that a lack of remuneration “may be an incident of the risk associated with the performance of the trustee's duties in the period between the sequestration order and the expiry of the 21 days”: see Garrett v Deputy Commissioner of Taxation[36] at [34] per Lindsay FM.  It is consequently a well-accepted incident of the risk inherent in the performance of the trustee’s duties in assetless estates.

    41. Sequestration orders being challenged

    42. The trustee’s duty to act in a commercially sound way should be given increased attention when there is an appeal against the making of a sequestration order.
    43. Trustees are faced with the challenge of securing the bankrupt’s assets and administering the estate, while being cognisant of the fact that there have been cases where the court has not made provision for trustees fees to be paid where the sequestration order has been set aside (as opposed to the order being annulled by the Court, which is dealt with in section 154 of the Bankruptcy Act).

    44. In Kyriackou v Shield Mercantile Pty Ltd (No 2)[37], in the Federal Court, a bankruptcy notice that had led to the making of a sequestration order was later declared invalid, and therefore set aside.  Because the sequestration order had been wrongly made in the first place, Weinberg J stated at [40]:

    45. Weinberg J concluded at paragraph 42:

    46. In Pattison v Hadjimouratis,[38] which was decided by the Full Federal Court, a sequestration order was also set aside.  The key factors in this decision were, first, that the trustee was on notice at a very early stage that the bankrupt disputed his bankrupt status and intended to make an application to the court.  This early notice meant that the trustee was '“required to exercise caution in incurring expenses”.  The second factor was that the debtor was solvent and wished to pay his debts.  As such, it was thought to be “unfair” to burden the debtor with the costs of administering the estate and the trustee in bankruptcy was left to pursue his remedies at general law.  However, Jacobson J noted that, where a sequestration order is “on foot”, it is open to the court to annul it rather than setting it aside.

  4. Principles that can be concluded

    1. General fiduciary principles

    2. In summarising these cases we can determine some basic principles on what is proper performance of duties and proper exercise of powers.
    3. A trustee must act justly.  Trustees are officers of the Court and in exercising powers and discretions and making decisions no lesser standard is to be expected of them than of a court or judge.  This is referred to as the rule in Ex parte James.  Trustees have a general duty to exercise the powers committed to them in such a fashion that the objects of the Bankruptcy Act, including those of equality between creditors and fairness to bankrupts and debtors, are served.
    4. A trustee must act with a high duty of care, reasonable prudence and diligence, demonstrating competence of a high order, honesty, independence and impartiality to a standard that commands and retains the confidence of the Court, of the creditors and debtors in personal insolvency proceedings and of the general community.
    5. A trustee needs to have regard to the interests of the creditors, the bankrupt and the community.
    6. A trustee must not act in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the interests of the creditors or without giving a real or genuine consideration to the exercise of the discretion.
    7. A trustee is precluded from having a personal interest or a duty to a third party which conflicts with their duty – irrespective of whether that interest or duty actually deflects the trustee from the loyal performance of that duty.  The test is whether there might be, in the eyes of a reasonable person, a perception of conflict.  Where there is an actual or potential conflict of interest the trustee must notify the relevant parties and take appropriate steps to avoid the conflict of interest.

    8. Specific principles

    9. We can now overlay some of these general principles with the Standards in Division 42 of the Rules and the specific roles undertaken by a trustee in bankruptcy:

    10. When delegating matters to staff

    11. Pursuant to section 42-4A of the Rules, the trustee must ensure that their employees comply with the Standards.
    12. Trustees need to consider when they should act personally, and when and how far they may delegate matters to staff.  Generally speaking, where an important or material decision has to be made or policy needs to be set, the trustee must do so personally.  That is not to say that they should not get advice from others or receive reports from members of staff, but the decision must be made personally.
    13. However, with administrative, routine or mechanical tasks, the trustee is expected to use common sense in having the task performed as economically as practicable.

    14. When dealing with information

    15. A trustee must comply with section 15 of the Privacy Act 1988 when dealing with information relating to an administration.  Section 15 of the Privacy Act provides that an APP entity (an agency or organisation) must not do an act, or engage in a practice, that breaches an Australian Privacy Principle.  “APP entity” is defined in section 6 of the Privacy Act and the Australian Privacy Principles are set out in Schedule 1 of the Privacy Act.

    16. The resolution to the Privacy Commissioner’s investigation in Own Motion Investigation v Bankruptcy Trustee Firm[39] was as follows:

    17. The trustee firm agreed to these recommendations and, once satisfied that they had been implemented, the Commissioner closed the own motion investigation on the basis that the trustee firm had adequately dealt with the matter.

    18. When claiming property

    19. A trustee must act independently and impartially in undertaking transactions and dealings relating to the disposal of the property of a bankrupt, debtor or deceased person and when claiming assets must act reasonably and claim only the amount
    20. A trustee must realise only the divisible property/assets that:
      1. will give a cost-effective return to creditors
      2. contribute to the payment of the costs of the administration, or
      3. may be realised in accordance with a personal insolvency agreement[40] and, in doing so, needs to maximise the return both to creditors, maximise any possible surplus to the bankrupt and demonstrate fairness.

    21. Contributions

    22. A trustee must:[41]
      1. act fairly and reasonably in determining the time for payment of any contributions liability
      2. if full payment within the contribution assessment period or before discharge would cause hardship to the bankrupt, consider giving the bankrupt an extension of the time for payment of contributions liability
      3. give the regulated debtor a copy of the assessment of income and contributions liability, setting out and explaining the basis on which the amount of any contributions liability has been calculated and
      4. notify the regulated debtor of the effect of section 139ZA of the Bankruptcy Act (about internal review of assessment).

    23. Remuneration, costs and dividends

    24. In conducting an administration, a trustee must:
      • incur only those costs that are necessary and reasonable
      • before deciding whether it is appropriate to incur a cost, compare the amount of the cost likely to be incurred with the value and complexity of the administration
      • consider the views of creditors in relation to whether money held by the trustee should be applied to conduct further investigations in relation to the administration or distributed as a dividend.[42]

    25. As stated in part 8 of Remuneration entitlements of a registered bankruptcy trustee:

    26. A fundamental principle in bankruptcy administration is that a trustee is entitled to be indemnified for their reasonable costs and expenses from trust money.[43]

    27. Remuneration entitlements of a registered bankruptcy trustee goes on to say at paragraphs 8.6 and 8.7 that:

    28. Filing objections

    29. The discretion to object to the bankrupt’s discharge must be applied sensibly and not oppressively.  Misuse of this power would occur when it is used to punish the bankrupt.[44]

    30. In Frost v Sheahan,[45] it was decided that it was unacceptable for a trustee to extend a bankruptcy on the basis the bankrupt was a high income earner and an extension would realise more income contributions.  It was stated at [35]:

  5. Conclusion

    1. This paper outlines a broad principles-based framework which is aimed at clarifying the conduct that the Inspector-General expects of trustees, including the Official Trustee. Annexure A lists the cases referred to in this paper with hyperlinks to most of them.
    2. When it is found that a trustee has erred and not properly performed their duties or exercised their powers, the principles embodied in both the AFSA error category system[46] and the Rules serve as a guide as to what the Inspector-General will consider, namely:
      1. the importance of the duty or power exercised incorrectly
      2. the seriousness and impact of the action, including the impact the failure to comply has on a particular estate or related parties and on the integrity of the personal insolvency system
      3. a trustee’s performance history – whether the trustee has previously failed to comply, been advised and continues to make the same errors.
    3. The action that may be taken depends upon the seriousness of the breach.  One-off errors in judgment of little importance or impact, breaches that are minor and temporary and technical errors that have little or no impact on the quality of the administration or parties are to be dealt with through reporting, discussion, persuasion, guidance, education and training.
    4. In the most serious matters where the trustee’s conduct demonstrates a pattern of indifference to the legislative requirements, a lack of knowledge of the law or a disregard for standards published as a guide to practitioners, such conduct is inconsistent with the high standard expected of a trustee and would not be tolerated by the Court, nor should the Inspector-General tolerate such conduct.  This is so even where there is no bad faith or dishonesty on the trustee’s part.  In such cases strong disciplinary action will be taken.

  6. Acknowledgements

    1. Sections of this practice document are based on papers presented by well-known and widely-respected persons in the area of insolvency law and practice at AFSA’s 7th Bankruptcy Congress in Sydney in October 2008.  These individuals are shown below.  Their papers were delivered as part of a Congress panel that discussed the topic “Understanding your Responsibilities and performance standards: are trustees and practitioners in the firing line?”.
      • Justice Peter W Young AO
      • Michael Murray
      • Andrew Robinson.
    2. The content of these papers has been instrumental to the development of this practice document.

Annexure A – Case Law on Trustee Duties

  1. Dean-Willcocks v Companies Auditors and Liquidators Disciplinary Board [2006] FCA 1438
  2. Ex parte James, Re Condon (1874) LR 9 Ch App 609 at 614
  3. The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd [2007] NSWSC 676
  4. Rambaldi, In the Matter of Houston (Bankrupt) [2008] FCA 1519
  5. Foyster v Prentice [2008] FMCA 757
  6. John Robert Thomas v Max Christopher Donnelly (In the matter of John Robert Thomas) (No. 2) [1997] FCA 1142
  7. Nguyen v Pattison [2005] FCA 650
  8. Draper v Official Trustee in Bankruptcy [2006] FCAFC 157
  9. Re Brian Muir, Registrar In Bankruptcy v David Geoffrey Bradley [1984] FCA 324
  10. Wong and Inspector-General in Bankruptcy and Ors [2008] AATA 487
  11. Re Lamb; Ex Parte Registrar In Bankruptcy [1984] FCA 133
  12. Southern Hotels Pty Ltd, in the matter of Temple [2000] FCA 1406
  13. Pascoe (Trustee) v Deltawiz Pty Ltd, in the matter of Deltawiz Pty Ltd [2003] FCA 1100
  14. Starkey as Trustee of the Estate of Peter John Dance v Rondo Building Services Pty Ltd [2005] FCA 1081
  15. Boral Montoro Pty Ltd v McLachlan [2007] FMCA 533
  16. Re Tyler; Ex parte Official Receiver [1907] 1 KB 865
  17. Citicorp Australia Ltd & Ors v Official Trustee in Bankruptcy & Anor [1996] FCA 1115
  18. Boensch v Pascoe [2007] FCA 1977
  19. Kyriackou v Shield Mercantile Pty Ltd [No 2] [2004] FCA 1338
  20. Pattison v Hadjimouratis [2006] FCAFC 153
  21. Vaucluse Hospital Pty Ltd v Phillips & Anor [2006] FMCA 44
  22. Mannigel v Aitken [1983] FCA 183
  23. Adsett v Berlouis [1992] FCA 368
  24. Doolan v Dare [2004] FCA 682
  25. Own Motion Investigation v Bankruptcy Trustee Firm [2007] PrivCmrA 5

Notes and disclaimer

  1. Cases may be an authority for more than one broad principle.
  2. The above table is not an exhaustive list of relevant cases and is offered as a guide only.
  3. Practitioners must consider the individual circumstances and differences of estates they are administering when referring to the above.

Footnotes

[1] IPA National Conference 2008

[2] Officers in AFSA’s Enforcement and Practitioner Surveillance division act as delegates of the Inspector-General in Bankruptcy

[4] The standards are prescribed by Division 42 of the Rules

[6] Ex parte James [1874] LR 9 Ch 609.  Ex parte James also discussed in Re David Hurt; Ex Parte David Hurt [1988] FCA 85

[11] Re Ladyman (1981) 55 FLR 383

[22] Re Partridge (unreported, FCA Lockhart J 22 September 1982)

[30] Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41

[31] Re Tyler; Ex parte Official Receiver [1907] 1 KB 865

[36] Garrett v Deputy Commissioner of Taxation [2005] FMCA 19

[40] Section 42-40 of the Rules

[41] Section 42-185 of the Rules

[42] Sections 42-60 and 42-130 of the Rules