Boensch v Pascoe - court inquiries, remuneration, independence ...
by IPA | Dec 18, 2007
Boensch v Pascoe [2007] FCA 1977 is a Federal Court decision that raises issues concerning:
- court inquiries into insolvency practitioners’ conduct;
- pursuing recoveries for remuneration; and
- independence and conflicts of interest, arising out of tensions in the trustee-bankrupt relationship, and conflicts involving the retainer of lawyers.
The decision is relevant to standards of conduct of insolvency practitioners generally and to the IPA’s new Code Of Professional Practice,
which comes inot effect on 31 December 2007. Other issues including
abandonment of the bankrupt’s proceedings (s 60 BA), communications with
the bankrupt, meetings of creditors, objections to discharge and
proxies are covered in the judgment.
The Court was asked by the bankrupt to pursue an inquiry under s 179 of theBankruptcy Act into the conduct of the trustee; the equivalent section in theCorporations Act is s 536: see Maxwell-Smith v Donnelly and Hall v Poolman. The Court refused the application.
The judgment should be read in its entirety but these issues and comments are extracted for the benefit of IPA members.
Standards of trustee conduct
The
Court referred to the standards of trustee conduct prescribed by
Schedule 4A of the Bankruptcy Regulations. Amongst other things the
Regulations impose a duty to act honestly and impartially (Sched 4A cl
2.2) and to disclose and avoid actual and potential conflicts of
interest (Sched 4A cl 2.3). The Court saw these standards as
“consistent ... with the standards of prudent administration upon which the Court would normally insist”.
See now Chapters 5 and 6 of the IPA Code.
Recovery of assets for payment of remuneration
The Court said that a trustee can legitimately pursue assets for the benefit of the trustee’s remuneration, saying that
“[the
bankrupt] relied heavily upon the fact that recovery of additional
property would also provide the only source of funds from which the
trustee’s fees might be paid. As Mr Pascoe said in his evidence, that
is not an exceptional circumstance. It may readily be the case that the
very circumstance of bankruptcy presents a trustee with a circumstance
in which insufficient funds are, or will ultimately be, available to pay
creditors in full and where the trustee’s remuneration also may depend
upon recovery of funds into the estate. A trustee does not thereby
become disabled from an efficient and, if necessary robust,
administration of an estate because his own fees may depend on the
outcome.
Recovery
of a trustee’s fees is guaranteed by the Act if funds are available in
the estate. Payment of ‘the costs, charges and expenses of the
administration of the bankruptcy, including the remuneration and
expenses of the trustee’ is given a substantial priority (s 109(1)(a)).
It is the Act itself which orders the priorities of payments out of the
estate. The fact that the trustee’s fees would be met before creditors
were paid did not disqualify Mr Pascoe from making the necessary
decisions or taint them with self-interest.
In
my view there is no substance [to the challenge] that Mr Pascoe was
motivated by pecuniary self-interest at the expense of a proper and
even-handed evaluation of creditor’s interests. If the fact that Mr
Pascoe’s remuneration might come eventually from the recovery of
property against the wishes of some claimed creditors was a
disqualifying factor then it would disable him completely from the
administration of the estate as soon as opposition arose. It would
disqualify every trustee in a similar position. The difficulty could
not be cured by treating creditors more ‘even handedly’.
This issue has recently been raised in the Hall v Poolman decision, and other decisions referred to on the IPA website.
Legal advice
The
Federal Court raised issues about the solicitor for the trustee also
acting as solicitor for a creditor at a meeting of creditors and the
trustee being
“seen
to take advice from the representative of a creditor who was clearly in
conflict with other persons at the meeting about the question whether
Mr Pascoe should continue as trustee ...”.
Conflict based on a break down in relations
There
was no basis for removal of the trustee because of the poor
relationship between the trustee and the bankrupt, which the Judge
described as “not a smooth one”.
“Obviously
enough, a bankrupt should not be allowed, by an assiduous pattern of
resistance to the trustee of his estate, to generate and then rely upon a
suggested reason for removal thereby created. No doubt there are many
instances in which disagreement may arise about the way a trustee is
administering an estate or exercising his powers. ... It is clearly an
insufficient ground for removal of a trustee that a bankrupt resists the
proper administration of his estate or sets out to frustrate a trustee
in the proper performance of his duties”.
In
this case, “the apparently marked lack of trust” between the trustee
and the bankrupt did not indicate any failing by the trustee in the
administration of the estate. See the IPA Code at Chapter 6.12.4.
Objections to discharge
The
court upheld objections to discharge that were lodged by the trustee.
Issues concerning the use of objections to punish the bankrupt, or to
achieve some collateral purpose, were raised in the judgment. See also Lockwood v Vince [2007] FCA 1946 for a recent decision on this law.
Michael Murray
Legal Director, Insolvency Practitioners Association
E-mail: mmurray@ipaa.com.au
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