What started out as a minor dispute over plumbing work for $2,880 descended into the plumber obtaining a judgment for $11,190 against the customer – Mr Warren – including over $7,700 in costs. A bankruptcy notice was issued leading to Warren’s bankruptcy before a registrar by way of a sequestration order. A review of a registrar’s decision must go before a Judge on a de novo hearing. Justice McElwaine of the Federal Court ‘went behind’ the judgment debt obtained against Warren and found a flawed process in the judgment being obtained and set the sequestration order aside. Efficient Pure Plumbing Pty Ltd v Warren [2023] FCA 1301 (30 October 2023) (austlii.edu.au)
As to those flaws:
- Warren’s bankruptcy relied on a judgment of the Magistrates’ Court of Victoria (MCV) given on 15 February 2022 in the sum of $2,880, though the Court erroneously issued judgment for $3,880;
- Costs of $7,732.57 were ordered by the MCV, despite that amount exceeding a costs cap under the relevant Victorian law; and
- The creditor in fact held security for the debt.
Given the excessive costs that were ordered by the MCV, and as a threshold point, the Federal Court found there was no debt owing by Warren to the creditor for over $10,000 as required by s 44 of the Bankruptcy Act. It was no answer that Warren had not adduced evidence that he was solvent. That may have been an important consideration if the creditor had established an entitlement to present the creditor’s petition, based on a debt at or exceeding the statutory minimum.
The Court set aside the sequestration order and dismissed the petition.
The ‘large question’ about costs
As the Judge then said, this leaves “a large question about the costs of the creditor’s petition and the costs of the administration thus far incurred by the trustee”, referring in particular to Bechara v Bates [2021] FCAFC 34; 286 FCR 166 and Porter v Ghasemi [2021] FCAFC 144; 286 FCR 556. Costs will be determined by the Judge ‘on the papers’, following submissions by the relevant parties.
The broad issue about costs is to assess who, if anyone, was ‘at fault’ in this flawed process. It appears to have been the Magistrates Court, which issued the excessive judgment against Warren at the request of the creditor.
In these sorts of cases, the one person not at fault would be the bankruptcy trustee, although they often bear a financial loss. The courts have recently given more consideration to this issue, although not necessarily satisfactorily.
According to the courts, time is important, during which period the trustee is incurring remuneration and expenses. Applications for review of sequestration orders under delegated power by registrars should be reheard by judges de novo as soon as reasonably practicable. There should be appropriate recognition that the trustee has nevertheless acted to give effect to the sequestration order and that the trustee must perform their statutory obligations once appointed. At the same time, the courts say that once the trustee is informed of the bankrupt’s application for review, the trustee should ‘exercise caution’ in undertaking further work and incurring costs and expenses. The trustee may seek an extension of time to comply with statutory obligations such as providing a report to creditors or may seek court directions – both expensive. While an annulment under s 153B will protect the trustee’s remuneration and expenses, setting aside will not.
The legislature has not addressed the problem despite its long-standing nature. The limited guidance from AFSA extends only to say that the courts have recognised 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”.[1]
Imposing costs on the debtor or the creditor would often be unfair, in particular if the court is at fault. An order for a costs certificate under the Federal Proceedings (Costs) Act is an option in particular cases.[2]
As to Mr Warren, one small but significant remedy is to have his bankruptcy removed from the National Personal Insolvency Index under s 315(2) of the Bankruptcy Act by way of an application to the Official Receiver under reg 80.[3]
In an article in the Insolvency Law Bulletin – Reviews of Sequestration Orders – Part One – Bechara and the Constitutional Imperative – Stephen Mullette, an insolvency law expert and writer from Matthews Folbigg Lawyers, provides a deep analysis of the constitutional and legal issues concerning the setting aside of sequestration orders in the federal courts: (2023) 22(8) INSLB 120. The same law and limitations apply in relation to the winding up of companies in the Federal Court. Such mistakes in relation to the making of sequestration orders are particularly serious, given the legal and practical consequences of a debtor going into bankruptcy.
His article – part one – considers the full Federal Court’s initial decision in Bechara[4]. In his next article, part two, he indicates he will review the decisions of the five-Judge full Federal Courts in Samsakopoulos[5], and Ghasemi/Khakasz[6] and others that deal with the trustee’s remuneration and costs, and issues regarding the annulment of the bankruptcy. As he explains, the questions are whether the Court hearing the review can instead or also annul the bankruptcy under s 153B of the Bankruptcy Act, the issue which divided the full Federal Court in Hadjimouratis, and whether the Court has power to apportion responsibility for the trustee’s costs, as the Full Federal Court did in Flint.
The outcome of the Warren matter will be instructive but the legislature or the regulator should be the ones providing some rules or guidance. In the meantime, trustees may consider setting their rates accordingly.
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[1] Inspector-General Practice Direction 6 – remuneration entitlements of a registered bankruptcy trustee at [8.4].
[2] Discussed in FZF18 v Minister for Immigration, Citizenship and Multicultural Affairs (No 2) [2023] FCA 1242.
[3] Robson as former trustee of the estate of Samsakopoulos v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143 (12 August 2021) (austlii.edu.au) at [291].
[4] Bechara v Bates [2021] FCAFC 34 (Allsop CJ; Markovic & Colvin JJ)
[5] Robson – see fn 3.
[6] Porter as former trustee of the estates of Ghasemi and Kakhsaz v Ghasemi [2021] FCAFC 144; 286 FCR 556
