In the recent case of Vitek v Taheri & Ors [2012] FMCA 536, Federal Magistrate Raphael observed that a Summons for the examination of a former bankruptcy trustee for the purposes of examining the trustee’s actions is as rare as the sighting of a Tasmanian tiger!

Background

The Applicants for the Summons, Mr. & Mrs. Vitek, were the major creditors of the bankrupt.

The Applicants obtained Summonses for Examination issued to:

• The bankrupt;
• The estranged wife of the bankrupt;
• The former trustees of the bankrupt estate.

At the time that the Summons were issued the bankruptcy was current, the former trustees having been removed from office by the vote of the Applicants at a meeting convened on their requisition pursuant to section 181 of the Bankruptcy Act 1966 (Cth.) (“the Act”).

Prior to their removal the former trustees reached a settlement with the estranged wife of the bankrupt in relation to property she held jointly with the bankrupt.

ERA Legal appeared for the former trustees at the hearing.

The affidavit filed in support of the application for the Summonses stated the purpose of conducting the examinations was:

• to determine the circumstances in which the settlement came into existence;
• to determine whether there is a basis for challenging the Settlement Deed;
• to obtain a copy of the Settlement Deed; and
• to determine the circumstances that led to the creation of the Settlement Deed and the information available to the former trustees that caused them to form the view that the settlement sum was an appropriate settlement figure in all of the circumstances.

The legislation

The power to examine persons involved in a bankruptcy is found in section 81 of the Act, which allows a creditor to summon a relevant person to be examined about the bankrupt and the bankrupt’s examinable affairs.

In 1990 there was inserted into the the Act a provision that allowed a creditor to apply to the Registrar for a Summons to examine the trustee of the bankrupt estate. That provision was repealed in 1995.

There was no alternative procedure inserted into the act to replace the repealed provision. The explanatory memorandum for the Bill removing the provision noted that it was considered that the revised supervisory and registration mechanisms regarding trustees (which was being implemented at the time the section was repealed) would adequately safeguard against misconduct by trustees.

Decision

In his judgment, Raphael FM considered what constitutes the true “examinable affairs” of a bankrupt. His Honour described section 81 as intended to assist creditors in the following ways:

• to confirm the accuracy of the bankrupt’s statement of affairs;
• to discover the whereabouts of any assets of the bankrupt not previously disclosed or the true value of the assets disclosed;
• to investigate the dealings of the bankrupt for the purposes of clawing back payments which may have been made in the circumstances outlined in sections 120 and 121 of the Act;
• to enquire into the conduct of the bankrupt and other persons, usually prior to the bankruptcy, that have a direct or indirect bearing upon the value of the bankrupt’s estate;
• to aid in ascertaining the nature, extent and whereabouts of the property of the bankrupt.

His Honour noted that:

• It is the duty of the tribunal before whom the examination is conducted to see that questions under section 81 are restricted to those which are put bona fide for the benefit of creditors and not for any indirect purpose.
• An examination conducted with the object of discovering whether there was anything in the conduct of the trusteeship that would found an application for an order that the trustee make restitution to the estate would be an examination for an “indirect purpose”.
• An examination to elicit information for the edification of creditors is not in itself a proper purpose.
• Questions are not to be put unless they are bona fide for the benefit of the creditors and not for any indirect purpose.
• A fishing enquiry which is based on the hope to build up a case as to which there is no information showing that the person being examined is implicated ought not to be permitted.
• Clyne J in, Re H. J Price (No 4) 14 ABC 142, stated that examination powers relating to the production of documents are to be used to elicit documents which impugn or tend to impugn the conduct of the bankrupt; or relate or might relate to property which the bankrupt is entitled or which he may have disposed of or concealed; or touch and concern the dealings of the bankrupt in his trade, business or occupation.

Importantly in the context of the present case Clyne J in Re H. J Price stated that he would find it difficult to understand how documents which have come into existence after the bankruptcy of a debtor could be regarded as documents relating to the bankrupt’s examinable affairs.

Raphael FM made it clear that there is a public interest in ensuring that trustees are allowed to get on with their job in as efficient a manner as possible and that their decisions are not subject to the whims of dissatisfied creditors. His Honour stated that where there is a genuine cause for dissatisfaction there are various avenues open to creditors including sections 176 and 178 of the Act, however where creditors do not avail themselves of this path, they should not be able to agitate those concerns via the examination procedure.

In noting that the issue of a Summons under section 81 against former trustees for the purposes of examining their actions is as rare as the sighting of a Tasmanian tiger, His Honour confirmed that there is only one recorded case on the matter in Australia being Re Alafaci; Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262.

His Honour concluded that Summonses for Examination against the former trustees were not properly issued for the purposes of section 81 and set them aside.

Consequences

The decision, coupled with what the Federal Court of Australia had to say in Re Alafaci, is a warning to creditors who may wish to examine a trustee or former trustee pursuant to section 81 that, even if they manage to persuade a Registrar to issue a Summons, they may be hard pressed to resist an application to set aside the Summons unless there are cogent reasons for the examination, relating solely to the examinable affairs of the bankrupt. If the Summons is set aside the creditor will usually be liable for the costs of the examinees having the Summons set aside.

As noted by Raphael FM there is a public interest in ensuring that trustees are allowed to get on with their job in as efficient a manner as possible and that their decisions are not subject to the whims of dissatisfied creditors.