Rough bankruptcy justice all round …?

Where a person has wrongly been made bankrupt, the court will usually remedy the problem by setting aside or annulling the bankruptcy.  While the inevitable legal costs are divided up by the Court between the creditor and the debtor, depending on their degrees of responsibility, the remuneration and legal costs and other expenses of the trustee are often left unpaid.   

The bankruptcy trustee of a couple from Humpty Doo, who had been made bankrupt at a hearing by video link from Adelaide, suffered this outcome.

Rubock & Wilkins v Cooper [2017] FCCA 1355

Debtors from Humpty Doo on the rural outskirts of Darwin were made bankrupt at a hearing on 30 November 2015 by a Federal Circuit Court registrar conducting the hearing by video link from Adelaide. 

Their debt was around $6,370.  They had the capacity to pay, but when the male debtor was asked at the hearing if they could pay the debt today he said they could not because it was late afternoon and he was at home in Humpty Doo and unable to get to a bank. Their later evidence was that they could have put more evidence to the Court about this but assumed they would get an adjournment. That was not the case.  They were made bankrupt and a trustee in bankruptcy took over their assets and affairs.  They were not legally represented.

The debtors then filed their application to review the registrar’s decisions within time on 21 December 2015.  On that day they also paid the creditor. 

Six months later

Six months later, on 6 May 2016, the Federal Circuit Court listed the matter, for directions only, and then adjourned the application to be heard on 10 November 2016, and then on 6 December.

Twelve months later

The trustee in bankruptcy prepared a detailed statement of the applicants’ financial position, upon which the Court relied, referring to various assets including a pearl lugger, which the trustee disclaimed and which then sank; two properties; a fishing licence and a tax refund. There were various secured liabilities.

Eighteen months later

Although finely balanced, the Court decided the applicants were solvent at the time the sequestration order was made and it set aside the bankruptcies.

Who pays?

The trustee’s remuneration to 4 November 2016 was over $50,000, with another $35,000 to finalise the estates, and another $7,000 or so for disbursements. AFSA realisations charges were expected to be upwards of $37,000.

While the Court did

“not suggest that any of these charges are other than proper, the comparison of this amount with the amount of the debt, $6,371.40, illustrates one aspect of the serious consequences of bankruptcy”.

The debtors and the creditor

As to legal costs of each of the debtor and the creditor, they were to pay their own.

The trustee

As to the costs and remuneration of the trustee, the Court said that the application to set aside the sequestration order was made within time, in December 2015, and

“the trustee was thus on notice that the sequestration order might be set aside. In the circumstances it would have been prudent to avoid incurring fees until the matter was resolved”. 

The Court made “no order for the trustee to recover any part of his fees”. The Court chose not to annul the bankruptcy, which would have protected the trustee’s fees.

Rough justice?

If that seems rough it is because it probably is.

The outcome distinguishes insolvency practitioners from other professionals who have a client or patient or customer against whom they can claim. Insolvency practitioners have no clients, indeed an insolvency practitioner acting on behalf of a debtor, bankrupt or director is anathema to what insolvency is about. Practitioners are also subject to judicial discretion as to whether they are denied their fees.

What to do?

There are some mechanisms that insolvency practitioners can adopt to try to deal with this:

  • their charge out rates can be higher to reflect the unpaid work they do: see Inspector-General Practice Direction (IGPD) 14 – Proper performance of duties of a bankruptcy trustee; IGPD 6 – Remuneration entitlements of a registered bankruptcy trustee.
  • they can apply for directions from the court, early on, if that is possible, as to what level of work they should do. In Calia v Cicio [2010] FMCA 385 the Court made an order restraining the trustee from further administering the estate pending the hearing of the application to set aside the bankruptcy, with the bankrupt debtor being required to give an undertaking as to damages.
  • trustees can, as the judge with hindsight said in this case, avoid doing work until the matter is resolved, certainly where the debt is small.

Outcome

This matter took a long time to “resolve”. The application was filed with the Federal Circuit Court in December 2015, with judgment given on 21 June 2017.  That is a long time that a trustee might avoid working on an estate.  While the trustee could have sought directions, the Court itself might have assisted its “officer” with some judicial guidance and directions.  The Court in Austral Brick v Daskalovsk [1998] FCA 782 said that the power to set aside a bankruptcy order, as opposed to annulling it, is generally to be exercised where the application to set aside is made to the court very soon after the order has been made, as here, and before there has been any significant administration of the bankruptcy.  And while it does not appear that the Court formally directed the trustee to prepare a rule 7.06 report on the financial position of the bankrupts, the reality is that one was done, at some expense, and without which the Court may not have been able to come to the decision it did.

Apart from the unfair position of the trustee, it is a long time for two people to remain bankrupt when they should not be.

Next

Costs certificates, and Wu v Li (No 2) [2017] FCA 501.

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