INSPECTOR-GENERAL PRACTICE STATEMENT 8
INVOLUNTARY CANCELLATION OF TRUSTEE REGISTRATION Released January 2009
Updated 1 February 2013 If
you have any comments, suggestions or queries on a matter referred to
in this Practice Statement, please contact us on 1300 364 785 or at
regulation@itsa.gov.au or by mail addressed to:
Practice Manager – Regulation
Insolvency and Trustee Service Australia
PO Box 10443
Adelaide Street
BRISBANE QLD 4000 Inspector-General Practice Statement 8 – Involuntary cancellation of trustee registration 2 CONTENTS 1. INTRODUCTION 3
2. OVERVIEW OF BANKRUPTCY TRUSTEES’ DUTIES 3
3. DISCIPLINARY SANCTIONS 3
Classification of non-compliance 4
4. DISCIPLINARY AND COMMITTEE PROCESS 5
Legislative basis 5
Committee process 6
The interview process and natural justice 6
5. THE DECISION 7
6. RIGHT OF REVIEW 8 Inspector-General Practice Statement 8 – Involuntary cancellation of trustee registration 3 1. INTRODUCTION 1.1.
In the past, courts decided on whether to cancel a trustee’s
registration. On 16 December 1996 this became an administrative decision
made by a committee convened by the Inspector-General in Bankruptcy.
1.2. This document outlines the process involved when the
Inspector-General considers taking steps that may lead to cancellation
of the registration of a registered trustee under the Bankruptcy Act 1966 ("the
Act"). This document also outlines the independent committee processes
and the basis of the Inspector-General’s decision making. 2. OVERVIEW OF BANKRUPTCY TRUSTEES’ DUTIES 2.1.
Registered trustees are required to maintain the utmost
professionalism, independence, impartiality, honesty and ethics in their
dealings. They are considered 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. They play a central role in
the administration of estates and are under a general duty to exercise
the powers in such a fashion that the objects of the Act, including
those of equality between creditors and fairness to bankrupts and
debtors, are served.
2.2. Registered trustees also have statutory duties set out in the Act.
They have a fundamental duty when administering an estate to carry out
certain investigations and undertake certain tasks and functions as set
out in section 19 of the Act. Trustees are also required to maintain
proper accounts and records, have proper money handling processes and
assist the Inspector-General in her investigations when required.
2.3. Registered trustees are also required to comply with the
legislative standards set out in Schedule 4A of the Bankruptcy
Regulations 1996. 3. DISCIPLINARY SANCTIONS 3.1.
As described in the Schedule 4A performance standards for trustees,
there is an expectation that trustees who, without reasonable
explanation, regularly fail to comply with the Act and Regulations, who
diverge from acceptable standards of practice or whose behaviour or
conduct brings the integrity of the insolvency system into disrepute
will be subject to disciplinary action.
3.2. Disciplinary action may be taken where a breach of the Act or a
performance standard is identified. In deciding what action is
appropriate, ITSA Regulation takes into account:
a. the nature of the breach
b. the seriousness of the effect of a failure to comply, including the impact on a particular estate or individual
c. a trustee's performance history and whether the trustee has previously failed to comply when able to. Inspector-General Practice Statement 8 – Involuntary cancellation of trustee registration 4 3.3.
There is a range of sanctions or actions which Bankruptcy Regulation
can take when it considers breaches of duty or non-compliance have
occurred. Involuntary cancellation of registration is generally a
sanction of last resort. Sanctions that Bankruptcy Regulation may
consider prior to initiating action to de-register a trustee include:
a. education – making trustees aware of problem areas and the correct practice or law individually and collectively
b. individual counselling – by far the most effective means to achieve timely remedial action
c. changing in the risk classification of a trustee. This will lead to a
larger sample of files being selected for future annual inspections and
a more detailed inspection being undertaken, particularly in areas of
prior non-compliance
d. formal investigation and reporting under section 12 of the Act. Such
reports may be supplied to creditors, police and other regulator or
disciplinary bodies such as ICAA, CPA or Law Councils and Societies
e. audit of a trustees accounts under section 175 of the Act
f. imposition of penalties for realisations and interest charge breaches
g. issue of "show cause" letters requiring a trustee to explain both
their actions and why they should continue to be registered
h. referral to other investigation units or law enforcement bodies. Classification of non-compliance 3.3.
ITSA Regulation utilises a classification system to describe areas of
non-compliance and assist it to decide on the appropriate action to take
subject to the seriousness and impact. Category A Fundamental
breaches and lack of controls that are likely to bring into question
the integrity of the system. This includes cases where there are repeat
non-compliance occurrences of Category B type previously identified and
reported on.
These matters will give rise to either legal action, referral to fraud
investigators or section 155H action concerning deregistration. Category B Serious and systemic issues that will have a material impact on the administration and require timely action.
In these cases the trustee will be counselled and timely remedial action
is expected to be taken. Failure to take timely remedial action will
give rise to reclassification to a Category A and appropriate action. Category C One-off
practice or procedural non-compliance is not systemic and doesn’t have a
significant impact on the administration, dividends or creditors,
debtors’ rights or system integrity but should be brought to the
attention of the trustee.
Further identification of errors of this nature through complaints or
later inspections would see the escalation of the error to a Category B
and counselling of the trustee. Inspector-General Practice Statement 8 – Involuntary cancellation of trustee registration 5 3.4.
This provides a structured process that will see the escalation of a
matter if it is not resolved by the trustee. Most matters are resolved
quickly and amicably upon intervention by ITSA Regulation.
3.5. Hence breaches or non-compliance with the Act or a performance
standard may give rise to a simple query by ITSA Regulation on the
reasons why there has been a deviation and where repetitive breaches
occur or, in the case of a serious breach, result in action to cancel a
trustee’s registration. 4. DISCIPLINARY AND COMMITTEE PROCESS 4.1.
Usually a trustee will be well informed of issues of concern raised by
ITSA Regulation, as delegate for the Inspector-General in Bankruptcy,
during investigations or inspections and will have been provided the
opportunity to state their position. Legislative basis 4.2.
Section 155H provides that the Inspector-General may ask a registered
trustee to give the Inspector-General a written explanation why the
trustee should continue to be registered, if the Inspector-General
believes that: "(a)
the trustee no longer has a qualification or ability that is prescribed
by the regulations made for the purposes of paragraph 155A(2)(a); or
(aa) the trustee no longer has the ability (including knowledge) to
perform satisfactorily the duties of a registered trustee; or
(b) the trustee has been convicted of an offence involving fraud or dishonesty since registration as a trustee; or
(c) the trustee is not insured against liabilities that the trustee may
incur, or has incurred, working as a registered trustee; or
(d) the trustee is no longer practising as a registered trustee; or
(e) the trustee has contravened any conditions imposed by the committee on the trustee’s practice; or
(f) the trustee has failed to exercise powers of a registered trustee
properly or has failed to carry out the duties of a registered trustee
properly; or
(fa) if the trustee is or was the administrator of a debt agreement—the
trustee has failed to properly carry out the duties of an administrator
in relation to a debt agreement; or
(g) the trustee has failed to comply with a standard prescribed for the purposes of subsection (5)." 4.3.
If ITSA Regulation, as delegate of the Inspector-General, then forms
the belief that a ground set out in section 155H is established and
other sanctions are either inappropriate or have had no positive effect,
Regulation will formally write to the trustee outlining the breaches in
detail, seeking the trustee’s formal response as to why their
registration should not be cancelled. The trustee is given 28 days to
respond in writing.
4.4. If the Inspector-General or delegate does not receive an
explanation within a reasonable time, or is not satisfied by the
explanation, the Inspector-General or delegate must convene a committee
to consider whether the trustee should continue to be registered. Inspector-General Practice Statement 8 – Involuntary cancellation of trustee registration 6 Committee process 4.5.
The committee must consist of the Inspector-General in Bankruptcy or
delegate, an officer of the Australian Public Service ("APS") and a
registered trustee, registered for more than five years, nominated by
the Insolvency Practitioners Association ("IPA"). To ensure impartiality
no delegate involved in decisions to this point will act as delegate of
the Inspector-General on the committee.
4.6. The committee is required to make inquiries that are reasonable for
the purpose of making an informed decision or that the chairperson
believes are appropriate in order for the committee to have sufficient
information to make the decision.
4.7. A committee must observe natural justice. This is explained in more detail below.
4.8. A committee is not bound by any rules of evidence but may inform
itself on any matter as it sees fit. This means that the committee will
not hear submissions on whether information provided is admissible in a
court of law or not. Similarly there is no right of "objection" to the
questions being asked by the committee. Questions will be asked of the
trustee and the trustee can choose either to answer or not. The
committee may proceed with its consideration of the matter irrespective
of any refusal to answer.
4.9. Whilst it will usually consider all the supporting documents that
formed the basis of ITSA Regulation’s decisions and the trustee’s
responses, the committee is not limited to just that information or the
information that formed the basis of the prior decision to issue a show
cause letter. The committee can consider any information and form its
own view in the matter.
4.10. The committee will interview the trustee. Details of the interview process are provided below.
4.11. Once the committee has considered all the information it needs it
will decide firstly whether there was a breach set out in section 155H,
and if so whether that breach or breaches were serious enough to either
impose conditions on the registration or to cancel the trustee’s
registration.
4.12. It must provide reasons for its decision to both the trustee and
the Inspector-General. The Inspector-General must accept the committee’s
decision and give effect to the decision.
4.13. Pursuant to regulation 8.32, a committee must take all reasonable
measures to protect from unauthorised use or disclosure information
given to it in confidence in, or in connection with the performance of
its functions or the exercise of its powers. The interview process and natural justice 4.14.
Once the Inspector-General or delegate has determined the makeup of the
committee, the committee will convene to consider the matter. The date
of convening will usually be the first time the committee meets and as
timeframes commence from this date, the trustee will be advised. Inspector-General Practice Statement 8 – Involuntary cancellation of trustee registration 7 4.15. The interview date, time and place will be arranged to meet the needs of the committee and the trustee.
4.16. Should the trustee fail to attend the interview and fail to give a
reasonable excuse for non-attendance within seven days, the committee
may proceed with its consideration of the matter. If a reasonable excuse
for failure to attend is provided within seven days, the committee must
arrange another interview date, time and place.
4.17. The trustee may choose to have legal representation at any point in the process.
4.18. The interview is an inquisitorial process, not an adversarial one.
The process is both to provide the trustee with an opportunity to
further rebut or comment on the issues raised previously by the ITSA
Regulation delegate and to allow the committee to seek clarification on
issues and ask questions concerning the administrations and practices.
4.19. The trustee may make submissions both on the issue of the prior
delegates decision concerning breaches set out in subsection 155H(1) of
the Act and on appropriate sanctions that should be imposed by the
committee, in the event that the committee also finds breaches occurred.
4.20. Time will be allowed for such submissions and the trustee may
introduce any further information either in writing or orally and this
includes any other parties who would like to put submissions on the
trustee’s behalf. The trustee should advise the committee prior to the
interview if there are any other people s/he wishes to call to put
information to the committee at that time.
4.21. Usually prior to the interview, the trustee will be provided with
all the information the committee has been provided with and may rely
upon, to allow the trustee to prepare a response. However, as some
information may not become available until the interview or afterwards
this will not always be possible.
4.22. The committee will before making its decision provide advice on
the information it will rely upon and provide any subsequent information
to the trustee obtained during or after interview and allow a
reasonable time for the trustee to consider and respond.
4.23. Should assertions be made as to the character of the trustee by
any party and the assertions form part of the information on which the
committee will rely, the trustee will have a right under natural justice
principles to cross examine the person who made the assertion. 5. THE DECISION 5.1.
The committee is required to keep minutes recording their meetings and
decisions made and must make a decision within 60 days of first
convening, which is usually the day of the interview. Inspector-General Practice Statement 8 – Involuntary cancellation of trustee registration 8 5.2.
The committee has 14 days from the date of reaching a decision to
provide a report of its decision to the trustee and the
Inspector-General.
5.3. The committee has three decision options: cancel the trustee’s registration allow the trustee to remain registered unconditionally allow the trustee to remain registered but with conditions imposed. 5.4.
It is important to note that the decision on whether to remove a
trustee’s registration lies with the committee and not the
Inspector-General. The committee decision is also independent to ITSA
Regulation’s investigations and decisions.
5.5. The courts have
historically held trustees’ registrations in high regard and have been
reluctant to de-register trustees unless the most serious breaches have
occurred. Committees, whose decisions are reviewable in the AAT, will
consider any legal precedents which may provide guidance, in arriving at
their decision.
5.6. Committees cannot suspend a trustee’s
registration. However, a conditional registration could be made where
the trustee remains registered but may be restricted from practicing for
a certain period or restricted in some other way.
5.7. The
committee report, to be provided to the trustee and Inspector-General in
Bankruptcy within 14 days of reaching its decision, will outline the
basis of the decision, detail the issues considered and the information
and law relied upon.
5.8. If the decision is to cancel
registration, the trustee will be required to return their certificate
of registration unless they have a reasonable excuse not to do so. The
trustee will not be entitled to a refund of all or part of any
registration fee that has been paid. The trustee would not be entitled
to re-apply for registration for a period of 10 years.
5.9. The
Inspector-General is required by law to record the cancellation of the
trustee’s registration on the National Personal Insolvency Index, a
publicly-accessible database. The Inspector-General is also required to
report to Parliament on activities under the Bankruptcy Act. This means
that, while the decision in detail is not made publically available, the
name of the trustee whose registration has been cancelled will be made
public as will the general nature of the breaches involved.
6. RIGHT OF REVIEW 6.1.
If the trustee is dissatisfied with the committee’s decision, they may
appeal to the Administrative Appeals Tribunal ("the AAT"). An
application to the AAT for a review of the committee’s decision must be
in writing, set out the reasons for the application and must be made
within 28 days of the date the committee’s report is received by the
trustee. Full information about applications to the AAT can be obtained
from the local AAT Registry or from the internet at www.aat.gov.au.
Showing posts with label commonwealth ombudsmans misconduct. Show all posts
Showing posts with label commonwealth ombudsmans misconduct. Show all posts
Thursday, 28 February 2013
Saturday, 23 February 2013
Spicer V Andrew Wily/ Federal Court
FEDERAL COURT OF AUSTRALIA
bankruptcy – part X Composition with creditors – whether composition should be set aside or declared void – where the controlling trustee had not adequately investigated the claims of creditors – where the controlling trustee failed to inform all known creditors of the Part X meeting – where the controlling trustee’s report failed to list all the debtor’s shareholdings and directorships
LEGAL PRACTITIONERS – conflict of interest – a debtor entered into a composition with creditors under Part X of the Bankruptcy Act 1966 – solicitor who had recently and regularly acted for the debtor was the controlling trustee of the composition – solicitor also a creditor of the debtor
Bankruptcy Act 1966 (Cth) Part X, ss 239 and 221(1)
Re Mills: Ex parte Lloyd’s (1997) 73 FCR 551 followed
Stedman v Deputy Commissioner of Taxation [2000] FCA 336 followed
IN THE MATTER OF JOHN FRENCH
JOHN SPICER, BIRGITTA SPICER AND ROSSANA WILCOX v
ANDREW WILY AS THE CONTROLLING TRUSTEE OF THE COMPOSITION OF JOHN FRENCH AND JOHN FRENCH
N 7054 OF 2000
IN THE MATTER OF JOHN FRENCH
GRAHAM WILCOX, ROSSANA WILCOX AND JOHN SPICER AND BIRGITTA SPICER v JOHN FRENCH
N 8095 OF 1999
TAMBERLIN J
SYDNEY
30 AUGUST 2000
IN THE FEDERAL COURT OF AUSTRALIA
| |
IN THE MATTER OF JOHN FRENCH
BETWEEN:
|
JOHN SPICER, BIRGITTA SPICER
AND ROSSANA WILCOX
APPLICANTS
|
AND:
|
ANDREW WILY AS THE CONTROLLING TRUSTEE OF THE COMPOSITION OF JOHN FRENCH
FIRST RESPONDENT
JOHN FRENCH
SECOND RESPONDENT
|
IN THE MATTER OF JOHN FRENCH N 8095 OF 1999
| |
BETWEEN:
|
GRAHAM WILCOX, ROSSANA WILCOX, AND JOHN SPICER AND BIRGITTA SPICER
APPLICANTS
|
AND:
|
JOHN FRENCH
RESPONDENT
|
DATE OF ORDER:
| |
WHERE MADE:
| |
THE COURT ORDERS THAT:
In matter No 7054 of 2000
1. The composition entered into by the second respondent on 4 January 2000 is set aside.
2. The second respondent is to pay the costs of the applicants on the application.
In matter No 8095 of 1999
1. A sequestration order is made against the estate of John Desmond French.
2. The applicant creditors’ costs (including reserved costs, if any) be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
AND ROSSANA WILCOX
APPLICANTS
AND:
FIRST RESPONDENT
JOHN FRENCH
SECOND RESPONDENT
IN THE MATTER OF JOHN FRENCH: N 8095 OF 1999
BETWEEN:
GRAHAM WILCOX, ROSSANA WILCOX,
JOHN SPICER AND BIRGITTA SPICER
APPLICANTS
AND:
JOHN FRENCH
RESPONDENT
JUDGE:
| |
DATE:
| |
PLACE:
|
REASONS FOR JUDGMENT
1 Before me are two matters. In matter No 7054 of 2000 the applicants, by application dated 24 January 2000, seek an order that the Composition with creditors entered into by the second respondent (“French”) on 4 January 2000 be set aside pursuant to s 239(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) or, alternatively, an order that the Composition be declared void pursuant to s 221(1) of the Act. The second matter, No 8095 of 1999, is an application for a sequestration order against French. Both matters were heard together. For convenience I will generally refer to the applicants collectively as “the applicants”.
2 Section 222 of the Act provides that:
“(1) Where there is a doubt, on a specific ground, whether … a composition has been accepted by a special resolution of a meeting of creditors under section 204 … a creditor … may apply to the Court for an order under subsection (2)
(2) Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:
(a) declaring that the … composition is void … on the ground specified in the application;
…
(4) Where the Court, on the application of … a creditor, is satisfied that the debtor:
(a) has given false or misleading information in answer to a question put to him or her with respect to any of his or her conduct or examinable affairs at the meeting of creditors at which the resolution requiring him or her to execute the deed or accepting the composition was passed; or
(b) has omitted a material particular from the statement of the debtor’s affairs given under subsection 188(2) or included an incorrect and material particular in that statement;
the Court may make an order declaring the deed or composition … to be void.
(5) The Court shall not make an order declaring a … composition … to be void on a ground specified in subsection (4) unless it is satisfied that it would in the interests of the creditors to do so.
(7) [A]creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, … makes an order … declaring the … composition to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.” (Emphasis added)
3 Section 239 is in these terms:
“239(1) A creditor may, within 21 days from the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.
(2) If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.” (Emphasis added)
4 The s 239 application was made within the 21 day period.
5 Briefly stated, the applicant relies on non-disclosure of share holdings, suspicious transactions and the treatment given to some creditors. Reliance is also placed on the alleged inadequacy of the investigation of the affairs of French by his Controlling Trustee (“Knaggs”), who had also been, at relevant times, French’s solicitor. Further, it is said that the public interest and the interest of creditors demands an investigation by an impartial person such as a trustee in bankruptcy of a number of matters raised on the evidence. The particulars of the grounds relied on are given in a letter from the applicants’ solicitors, Kemp Strang, to Knaggs of 11 April 2000.
background
6 As a result of unsuccessful litigation against the applicants, French experienced financial problems. The applicants presented a Creditors’ Petition in matter No 8095 on 30 September 1999. On 24 November 1999 French signed a non-revocable authority under s 188(1) of the Act appointing Knaggs as his Controlling Trustee to call a meeting of his creditors and to take control of his property.
7 On 26 November Knaggs signed and sent a Circular to Creditors accompanied by a Notice of a Meeting to be held on 21 December 1999 in order to consider a proposal from French for a Composition. Included in the material sent was a statement of alternative courses of action. The Circular and accompanying documents indicated that the Meeting would consider French’s Statement of Affairs together with comments regarding his trade dealings, property and financial affairs. Knaggs also sent a summary of French’s proposal, the Report of Knaggs as Controlling Trustee pursuant to s 189A, and a Statement under s 189B of the Act. He furnished a statement pointing out that the expression “Special Resolution” meant a resolution passed by a majority in number and at least three fourths in value of the creditors present either personally or by proxy. French furnished a Statement of Affairs which was signed on 18 December 1999. There was also a proxy form sent to creditors enabling them to appoint a representative to attend the meeting. A proof of debt form to be completed was also sent to creditors.
8 The Controlling Trustee’s Report prepared by Knaggs summarised French’s Statement of Affairs as follows. Assets were $1,525 and liabilities were $885,950. There was also a contingent liability of $60,000. French’s monthly income was stated to be $740, by way of pension, and his outgoings were said to be $850 per month. The proposal was that there would be a once only $20,000 payment to creditors within three weeks of acceptance. This represented a payment to creditors in the order of only two cents in the dollar. There followed a short summary of the business dealings of French stating that since 1997 he had been operating a company, Kiama Development Co Pty Limited (in liquidation) (“KDC”) at Kiama Wharf. That company’s main activity was described as being the operation of a fish and chip shop, subletting another fish and chip shop, and developing a restaurant. The report asserts that French had a forty per cent shareholding in, and was the Managing Director of KDC. This was said to represent his sole business dealings as far as Knaggs could ascertain. The report then summarised assets available to creditors as being practically nil and noted that searches were to be provided at or prior to the meeting. Knaggs expressed the belief that the offer of $20,000 “was $20,000 more” than the creditors would receive if French were to become a bankrupt. He stated that from his investigations there would appear to be no transaction in relation to which sections 120, 121 and 122 of the Act would apply.
9 The meeting was convened on 21 December 1999 but substantive determinations were adjourned to 4 January 2000.
10 On 30 December 1999 a Supplementary Report to Creditors was sent by Knaggs. This said that a report had been obtained from the Credit Reference Association of Australia which showed that French appeared to have defaulted under a guarantee to Credit Corp Australia NSW (“Credit Corp”) on an overdue account of $16,412. The Supplementary Report stated that French had signed a Statutory Declaration claiming that he did not owe that money and that Knaggs had written to Credit Corp (prior to 30 December) telling them that they could “approve (sic) the debt” for the purpose of the adjourned meeting of 4 January 2000. Knaggs stated in the Supplementary Report that he had asked Credit Corp to let him know urgently whether they claimed such a debt. This Supplementary Report confirmed that French’s only income was by way of social security payments and Knaggs confirmed his earlier opinion that the creditors’ interest would be best served by acceptance of the proposal.
11 By letter dated 14 January 2000 Credit Corp wrote to Knaggs referring to his “letter dated 7th January 1999 and to recent discussions” (emphasis added). Credit Corp confirmed that French had a debt with Credit Corp and requested details of the Part X arrangement, and a proof of debt. (I am satisfied that the reference to 7 January 1999 should be to 7 January 2000). This letter, on its face, indicates that Knaggs may, in fact, not have written to Credit Corp until 7 January 2000 which was of course three days after the meeting on 4 January when the Composition was accepted.
12 The Minutes of the adjourned creditors’ meeting of 4 January lists the attendance as follows:
“PRESENT: John French, debtor
PROXIES: Name of Creditor Proxy Amount
Garry W Day Douglas Knaggs 7,800,00 Daylin Pty Limited Douglas Knaggs 425,600.00
Lynda Knappman Douglas Knaggs 158,250,44
R Tosalini & P BaltinsDouglas Knaggs 110,500.00 Douglas Knaggs 124,000.00
J & B Spicer 206,336.00
Graham Wilcox John Spicer 4,800.00
ALSO IN
ATTENDANCE: Douglas Knaggs – Controlling Trustee
David Gorney – ITSA Observer
Andrew Wily – President of previous meeting
Marcc Galler – Minute Secretary of previous meeting”
13 The meeting opened at 11.05 am. There was considerable discussion recorded in the Minutes. The meeting terminated at 1.00 pm.
14 The applicant, John Spicer (“Spicer”), is recorded in the Minutes as having made numerous challenges and as having participated extensively in questioning and discussion in relation to the debts of various creditors. The Minutes record, among other things, that Spicer noted that the debt owing to Linda Knappman (“Knappman”), French’s wife of $158,000 appeared to be an amount vastly different to the previously listed debts which had been $49,000. In response to this Knaggs is recorded as having advised that this was because he had conducted an investigation into her debt of $59,000 and that there had been a number of errors in his previous summary of debts. There was questioning of Knaggs in relation to his legal fees. The Minutes record that Spicer asked Knaggs whether being a legal adviser and creditor to French created a conflict of interest and Knaggs is recorded as having stated that there was no conflict, and that anyone was welcome to inspect the documents, including his own proof of debt. Knaggs did not chair the meeting. Mr Wily (“Wily”)presided. Spicer proposed a Motion (on his own behalf and as proxy for Wilcox), for an adjournment in order to determine the proof of debt but this was lost. A special resolution in favour of the Composition was approved by five creditors whose debts totalled $826,150, or 79.64% of the value of the total debts proved. Voting against the special resolution were the applicants whose debts represented 20.36% of the total debts proved.
Relevant principles
15 The principles in relation to the setting aside of compositions or declaring them void are well settled. In relation to s 222 and 239 they are summarised in Re Mills: Ex parte Lloyd’s (1997) 73 FCR 551 at 559-561. Those considerations which are relevant to the present case can be summarised as follows:
(a) Whether there should be further inquiry into the debtor’s affairs and greater details provided by the debtor. In these circumstances the interests of unsecured creditors, and the public interest, would be served by the investigation being conducted by a trustee in bankruptcy armed with the coercive power provided by the Act.
(b) Whether there is cause for a suspicion or an arguable cause of action which may benefit creditors which has not been taken into account or properly considered. In this respect it is not necessary to establish that the creditors are more likely to be advantaged by bankruptcy but it is sufficient if bankruptcy will afford a “prospect or possibility of economic advantage to creditors sufficient to justify the conclusion that it is in their interest to make the declaration”: Augustyn v Putnin (1988) 83 ALR 514 at 515
(c) Whether the amount offered under the composition is trivial.
(d) Whether payments to creditors have been made pursuant to the composition.
(e) Whether material placed before creditors in the form of reports, or conduct at the meeting, was misleading.
(f) Whether there is any reasonable basis for a conclusion that the controlling trustee may not have acted with diligence or impartiality.
16 These principles were recently applied by the Full Court in Stedman v Deputy Commissioner of Taxation [2000] FCA 336. That case concerned the setting aside of a Composition in light of alleged sham transactions. Einfeld J, with whom Whitlam and Weinberg JJ agreed, said at par 14:
“Naturally to find that a series of transactions was artificially manufactured so as to provide an appearance which was not the substantive reality is a major conclusion which cannot be reached easily or on suspicion alone. And her Honour did not do so. What she said was that the evidence raised serious doubts about the documentation and evidence on the transactions such as to provide sufficient cause to set aside the composition. In my view, it would have prejudged, and would prejudge now, the conclusions to be reached by the trustee in bankruptcy to find as a fact that [the series of transactions] was a sham. It is not necessary on an application to set aside a composition to go so far. It is only necessary to conclude, on the basis of evidence, that there is a real prospect that further investigation will so demonstrate: Re Mills at 560. I reject the appellants’ submission that Re Mills is wrong or relevantly distinguishable on the facts.”
17 The first important circumstance raised concerns the position and conduct of Knaggs as Controlling Trustee. Knaggs, in addition to his role as trustee, was French’s solicitor and had been closely involved in many transactions referred to in the evidence, acting both for French and for companies in which French and his wife held an interest or were directors. Knaggs was also a claimant in his own right for a substantial amount, namely $124,000 in respect of legal fees, which represented about 11% of the debts accepted as proved.
18 The Minutes indicate that Knaggs did not see his position as legal adviser to French and as a creditor of French giving rise to a conflict of interest. He said that his Proof of Debt was available for inspection, and that he had earlier stated in his Supplementary Report of 30 December 1999 that he would leave acceptance of his Statement of Debt to the President of the meeting, Wily. It is not suggested that Wily was in any sense partial to either side. In my view these circumstances do not justify an assertion that there was no conflict of interest.
19 There are further matters in relation to Knaggs’ behaviour which call for explanation. To be valid, Knaggs’ claim for $124,000 must relate to debts owed by French. However the annexures to his Proof of Debt includes an account for $44,542.00 addressed: “Attn. Mr French, Kiama Developments Pty Limited”. The costs claimed are stated to be Knagg’s costs of acting “on the company’s behalf in claim (sic) against sub-tenants for damages and possession” (emphasis added). This wording indicates that this claim may be the responsibility of the company and not of French personally. Moreover, there is no breakdown as to the way in which any of the costs claimed by Knaggs are constituted apart from the assertion of an hourly rate of a number of hours in the accounts. These matters are significant enough to warrant impartial investigation in the interest of creditors.
20 Surprisingly, Knaggs was not called on behalf of French to give evidence to meet the claims made as to the performance of his office as Controlling Trustee. I say “surprisingly” in view of the fact that Kemp Strang’s letter of 11 April 2000 made it clear that the essential basis of the application squarely raised serious allegations as to shortcomings in Knaggs’ performance as Trustee. There is no suggestion that Knaggs was unavailable. French says that he could not be expected to call Knaggs. I disagree. French appointed him and he was the legal adviser to French. He appeared on directions hearings in this Court in these matters. French further says that no determination should be made as to the conduct of Knaggs because he is not a party and has not been called as a witness. Again, I disagree. The conduct of Knaggs as Controlling Trustee is central to the case although no relief is sought personally against him. No satisfactory explanation was given for French’s failure to call Knaggs. This omission in my view serves to reinforce the conclusion that there are grounds for carrying out further investigations.
21 Further, I am not satisfied that Knaggs drew to the attention of Credit Corp, prior to the Creditors’ Meeting, the fact that there was to be an adjourned meeting on 4 January 2000. No document or letter from Knaggs has been put in evidence to support the assertion, in his Supplementary Report, that notification had been given to Credit Corp before the meeting. Further, the letter of 14 January 2000 from Credit Corp refers to Knaggs’ letter of 7 January 1999. I am prepared on the present state of the evidence to infer that the letter to Custom Credit was dated 7 January and not 4 January. It seems that Credit Corp was not given an opportunity to participate at the meeting. Mr French asserts that there was a defence to Credit Corp’s claim, and so any omission is immaterial. However in my view, that is not sufficient reason for Knaggs not to notify Credit Corp of the scheduled meeting.
22 In addition to the irregularities regarding Knagg’s claim there are other questions raised on the evidence. In evidence there are Terms of Settlement dated 19 April 2000 in respect of proceeding No 27374/99 before the Local Court. Those proceedings involved a liquidated claim by Coca Cola Amatil (NSW) Pty Ltd (“Coca Cola”) against French and Knappman. In the terms of settlement Knappman consented to a verdict and Judgment for Coca Cola against her without admission of liability, in the sum of $8,000, but with a provision that Coca Cola would accept $5,500 by way of full and final settlement if payment was made before 22 May 2000. It is clear that at 4 January 2000 Coca Cola was claiming that French was indebted to it. French argued that he had a defence to Coca Cola’s original claim. Be that as it may this claim should have been disclosed to the Creditors’ Meeting. Non-disclosure of it was significant.
23 The evidence before the Court does not warrant a conclusion that Knaggs carried out any satisfactory investigation in relation to the large claim by French’s wife referred to in his Report of 26 November 1999. Knappman is recorded there as having a claim for $58,250 which was said to be an unsecured loan. In the Statement of Affairs of 18 December that claim is recorded as $158,250. It may be that the reference to $58,250 was a typographical error. However, there is no evidence that there were any satisfactory steps taken to verify the terms of the Knappman loan to French; the interest rate on the loan; or to obtain supporting documentation. The assertions were accepted at face value. There is a Statutory Declaration given by Knappman dated 16 December 1999 which sets out the amount of three loans and interest accrued but there is little in the way of independent documentary backup.
24 It is also significant that there does not appear to have been any investigation as to the large debts claimed by Mr Day (“Day”) and his company Daylin Pty Ltd (“Daylin”). A company search dated 19 January 2000 indicated that with Day, Knappman was a director of Daylin. Day had for some time been French’s accountant. Failure to investigate debts allegedly owing to parties connected to French is another significant omission.
25 A further matter relied on by the applicants was the statement in the documents placed before the Creditors on 4 January 2000 that French’s interest in KDC was worthless. Seven days before the appointment of Knaggs by French an elaborate, documented arrangement was put in place which appears to have been designed to ensure that a Head Lease previously held by KDC, but mortgaged to St George Bank (“the Bank”), was dealt with in such a way that it remained under the control of Knappman and Day. KDC’s debt to the Bank was paid by Terralong Estates Pty Ltd (“Terralong”), a company controlled by French and parties related to him. Terralong then received a transfer of the mortgage from the Bank before again transferring the mortgage to Daylin. This tends to indicate that the shares in KDC may not have been “worthless” as claimed.
26 Another important consideration is that Knaggs must have been well aware of these transactions in relation to the lease because he is named as Solicitor for three of the parties in some of the documentation, yet the transactions were not disclosed to the general body of creditors. I express no concluded view on these matters, but in my opinion the circumstances clearly give rise to the need for further investigation of this series of transactions to determine whether there may be additional funds available to creditors.
conclusion
27 Generally, although it is not possible on the material before me to form any final view, I consider that the cumulative effect of the matters referred to above raises such a level of suspicion as to warrant the Composition being set aside. In my view, this conclusion is reinforced by the fact that at the meeting of 4 January 2000 the Composition was supported by creditors who could be said to be “friendly” towards French or in his camp, and it was opposed by creditors at arm’s length, and because the amount payable to creditors under the Composition can properly be described as “trivial”. I consider that it is in the best interests of the creditors to set the Composition aside. It is not necessary to make a determination in relation to s 221.
28 I am satisfied that the applicants have established the matters required under s 239 of the Act and I therefore set the Composition aside. The costs of the application to set aside the Composition should be paid by the second respondent.
29 In relation to the proceedings on the creditors’ petition in matter number 8095 of 1999 I am satisfied that French committed the act of bankruptcy alleged in the petition. I am satisfied as to the other matters on which s 52(1) of the act requires proof. I make a Sequestration Order against the estate of the debtor on the basis of that petition. I order that costs, including reserved costs, be taxed and paid according to the Act in relation to the sequestration proceedings. I direct that a draft of this Order be delivered to the Registrar within seven days in accordance with sub-rule 124(2).
I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.
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Associate:
Dated: 30 August 2000
Counsel for the Applicants:
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R Newlands
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Solicitor for the Applicants:
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Kemp Strang
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Counsel for the First Respondent in N7054 of 2000:
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No appearance
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Mr French appeared in person
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Date of Hearing:
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21 July 2000
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Date of Judgment:
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30 August 2000
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Commonwealth Ombudsmans complaint handling procedures
Following is the Commonwealth Ombudsman complaint handling procedures.
The Commonwealth Ombudsman has no investigation policy or standards so any difficult complaints are fucked over.
If you can supply the Commonwealth Ombudsman extensive evidence of systemic corrupt conduct in a department you can be sure you will be fucked over. This could only be to protect the Government Agency.
In my case it was reviewed by Alison Larkin who was acting Commonwealth Ombudsman. At no time did this fat mong misunderstand my evidence. It was clear that she wanted the position of Commonwealth Ombudsman and was prepared to cover up the conduct by senior managers at ITSA. Both Alison Larkins and Veronique Ingram should be fucked up the arse
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