Recovering a Trustee’s costs when a sequestration order is set aside

A bankruptcy trustee’s prospects of recovering his or her costs, incurred in the early stages of an administration where a sequestration order has ultimately been set aside, have been considered in recent judgments handed down in the Federal Court of Australia.

Sequestration orders against the estate of a debtor are commonly made by a Registrar (in lieu of a judge) exercising a judicial power, on a petition presented by a creditor, where the Registrar is satisfied as to the basis of matters on which the petition is presented.[1]   A debtor then has a period of 21 days to seek a “judicial review” of the Registrar’s making of the sequestration order. [2]

Once the sequestration order is made, the petitioning creditor must provide a copy of the order to the Official Receiver within two days beginning on the day the orders was made. [3]  Following their appointment, a trustee be it a registered trustee or the Official Trustee, has certain statutory tasks and duties to perform, including taking steps to locate, identify and protect the bankrupt’s divisible property.

A trustee’s charges and expenses, incurred in administering a bankrupt estate, are granted a priority under the Act and are generally recovered from the proceeds of a bankrupt’s property. [4]

Section 153B of the Bankruptcy Act provides that the Court may make orders annulling a bankruptcy where it is satisfied that a sequestration order ought not to have been made or a debtor’s petition should not have accepted by the Official Receiver.  With regard to settling the trustee’s expenses and charges incurred up to the time when such orders are made, section 154(1)(b) of the Act provides that the “trustee may apply the property of the former bankrupt still vested in the trustee”.

Where the bankrupt makes an application for a judicial review of the making of a sequestration order and the Judge finds that the Registrar erred when exercising a judicial power, the Judge will normally set aside the sequestration order and in turn, the Official Receiver will remove the record of the sequestration order and creditor’s petition from the National Personal Insolvency Index.

In most cases, the Judge will find that the debtor should not be burdened with the cost of the trustee’s remuneration and expenses in which case, the trustee misses out.

So the decision by a Court to either set aside a sequestration order or annul the bankruptcy is critical to the trustee’s chances of being paid for their efforts in administering the estate for the short period. This issue and the issue of a trustee’s statutory priority for costs were considered by Justice Weinberg in Kyriackou v Shield Mercantile Pty Ltd (No 2).[5]

The Official Trustee, the respondent in the proceedings, submitted to His Honour that it would be more appropriate to annul the bankruptcy in lieu of setting aside the sequestration because he was entitled to be recompensed for the costs and expenses incurred in undertaking his statutory obligations and responsibilities in administering the estate. Furthermore, setting aside the sequestration order would deny him the statutory protection provided by section 154 to recover his expenses and charges.

Weinberg J acknowledged the Official Trustee’s “legitimate sense of grievance” to be left “out of pocket” however, added that it would also be wrong to burden the successful appellant “with the costs of administering a bankrupt estate that should never have been made the subject of a sequestration order.”  Weinberg J observed that the “bankruptcy notice failed to meet a requirement made essential by the [Act]” and accordingly, the sequestration order ought to be set aside.

The resultant outcome for costs in the Kyriakcou[6] matter was that the petitioning creditor bore the debtor’s costs of litigation and the expenses and charges arising from the bankruptcy period were left with the Official Trustee to pursue, under whatever remedies were available.

The Kyriakcou[7]decision was referred to in Flint v Richard Busuttil & Co Pty Limited [2013] by the full Federal Court.  In this case, whilst the sequestration order was set aside, the registered trustee successfully argued that it would be would be a gross injustice if he was not recompensed for administering the estate

Accordingly, the trustee was entitled to take 75% of his remuneration from Ms Flint’s share of the net sale proceeds on the basis that whilst she was solvent at all times, she ignored the petitioning creditor and then failed to appeal the sequestration order within the 21 day period.

The petitioning creditor was required to meet the remaining 25% of the trustee’s remuneration with the Court finding no fault with the trustee’s conduct in the matter.

The cautionary note for trustees is to proceed with a light touch in new bankruptcy administrations during the 21 day period following the making of sequestration orders, lest the orders are challenged and especially where the sequestration order was made by a Registrar.

 

 

[1] Sections 43 & 52, Bankruptcy Act 1966.

[2] Section 52(3), Bankruptcy Act 1966.

[3] Section 52(1A), Bankruptcy Act 1966.

[4] Section 109, Bankruptcy Act 1966.

[5] [2004] FCA 1338

[6] Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004]

[7] Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004]