The Federal Court has recently issued a stark warning about the need for insolvency practitioners to do their homework, thoroughly, before approaching the court for directions – and to use the court only to clarify points that remain unclear after proper investigation and research.

In Mitchell and White v. Lee [2012] FCA 1046, the facts were fairly simple: Mr. Lee was a barrister who became bankrupt (and, sadly, later passed away) but, before becoming bankrupt, became entitled to fees, some of which were paid after the date of his bankruptcy.

The trustees of Mr. Lee’s bankrupt estate ended up in dispute with the administrator of his deceased estate as to who was entitled to these fees. The trustees said they were divisible property, whereas the administrator of the deceased estate said they were “income” and therefore exempt from division amongst creditors.

Against this background, the trustees approached the Federal Court for a direction that they would be justified in treating the fees as divisible property.

The court immediately pointed out that there was a case about this already – in fact, it was “directly in point”. It even involved a barrister, and fees: in Re Sharpe; Ex parte Donnelly (1998) 80 FCR 536, the court had held that fees owing to a barrister at the date of his bankruptcy, and paid after that date, belonged to the barrister, not to the bankrupt estate, because the fees were “income”.

The trustees tried to distinguish Sharpe from their present case by reference to matters ultimately described by the court as “supposed inconsistency with other decided cases, an irrelevant distinction about the introduction of the right to sue for fees in New South Wales, and quibbles about the terminology used in judgments”.  Needless to say, the court refused to grant the trustees the relief they sought, instead deciding – consistently with the authorities – that the deceased estate was entitled to the fees on the basis that they were “income”, and therefore not divisible amongst creditors.

The court then turned to the question of costs, and it is the court’s remarks and decision in this regard that make this case noteworthy. Rather than purport to summarise the court’s decision on costs, here it is verbatim (emphasis added): –

The [trustees] also sought a direction that the costs of the application be costs in the administration of the bankrupt estate.

By s 43(2) of the Federal Court of Australia Act 1976 (Cth), the award of costs is in the discretion of the Court. The ordinary principle is that costs follow the event, ie the losing party should pay the costs of the successful party. The [administrator of Mr. Lee’s deceased estate] has been vindicated in her refusal to accept that the amounts received by way of outstanding fees due to Mr Lee at the date of bankruptcy were vested in the applicants and available for distribution amongst Mr Lee’s creditors. The applicants should therefore be ordered to pay the respondent’s costs of the proceeding.

The real question is whether the applicants should be entitled to receive out of the bankrupt estate of Mr Lee their own costs of bringing this proceeding and the costs they will be obliged to pay the respondent.

As I have said, it was unnecessary for the applicants to bring this proceeding. They were not only entitled, but bound, to act in accordance with the judgment in Sharpe and the line of authority of which it is part.

To seek to overturn that authority by reference to supposed inconsistency with other decided cases, an irrelevant distinction about the introduction of the right to sue for fees in New South Wales, and quibbles about the terminology used in judgments, was entirely inappropriate.

Counsel for the applicants argued that a trustee in bankruptcy is an officer of the Court, who is entitled by s 134(4) of the Bankruptcy Act to seek the guidance and the protection of the Court. This is certainly the case, but does not justify the trustee, at the expense of the creditors, applying to the Court for specific directions when it is perfectly clear on the authorities that the trustee should not act as he or she seeks to be directed to act.

Counsel for the applicants also argued that the question raised in this case is one of general application. This is also perfectly true. The answer to the question is readily apparent from the authorities, however. There is also no particular reason why Mr Lee’s creditors ought to suffer a diminution of any dividends they might receive from Mr Lee’s estate so that the applicants can establish a precedent for use in subsequent cases by themselves and other trustees in bankruptcy.

The creditors of Mr Lee’s bankrupt estate ought not to have to pay for the applicants’ waste of money in making this application. The applicants ought to bear personally both their own costs of the application and those they are ordered to pay to the respondent.

The trustees were therefore disallowed their indemnity from the bankrupt estate, and consequently ended up paying for the whole exercise – including the costs incurred by the deceased estate – themselves, from their own personal funds.

Conclusion

Although this matter was decided in the context of personal insolvency, there is no reason to think the same reasoning would not apply to similar applications by liquidators and administrators for directions pursuant to sections 447D (administrations), 479 (court-ordered windings up) and 511 (voluntary windings up) of the Corporations Act 2001 (Cth.).

This decision serves as a salient reminder that the ability of insolvency practitioners to apply to the court for directions is a privilege that should be enlivened only if there remains a genuine doubt as to the correct way to proceed after undertaking proper research – or preferably instructing a firm of specialist insolvency lawyers to do so on one’s behalf.