31 Aug 2016

Right, Right...Wrong! Wait, what just happened?


5 min

When your decision was right, the court says your decision was right...but your decision is still overturned!

Bankrupts, creditors or other stakeholders are not always happy with bankruptcy trustees' decisions or conduct during the administration of a bankrupt estate. One avenue available for them is to apply to court for a review of the trustee's decision or conduct.

Section 178 of the Bankruptcy Act 1966 provides for bankrupts, creditors, or other affected people to have a trustee's "act, omission, or decision" reviewed by the court within 60 days of becoming aware of it. This section gives the court "a general power of review" of a decision of a trustee, and confers on the court a very wide discretion as shown in McGoldrick v Official Trustee. Also this discretion is wide enough to permit the court to consider matters not raised before the trustee as shown in Frost v Sheahan.

Alternatively, section 179 of the Bankruptcy Act allows creditors or the Inspector General to have the trustee's conduct reviewed by the court, and can remove the trustee if serious enough, and can make further orders as deemed 'proper'.

Recently, one of our bankrupts applied to court to review a decision that affected the votes on his proposal to creditors (under section 73 of the Bankruptcy Act). The application was made pursuant to section 178 regarding our decision (not our conduct under section 179).

Raj Khatri, as trustee, adjudicated on several Proofs of Debt and proxies lodged by friendly/related creditors of the bankrupt, for the purposes of voting at a meeting of creditors called to consider the bankrupt's proposal to annul his bankruptcy (section 73). He determined that many of these creditors were not entitled to vote and accordingly excluded them from participating in the meeting. This resulted in a deadlock in the voting (i.e. no majority in number) and therefore the necessary special resolution to annul the bankruptcy did not pass.

Before the meeting, these 'excluded' creditors provided minimal evidence to support their Proofs of Debt and we considered it insufficient to prove they were a creditor of the bankrupt and therefore not entitled to vote. We requested additional information, however, very little was provided further and therefore Raj had to adjudicate based on what he had in front of him at the meeting.

Within 60 days of the meeting (as required under section 178), the bankrupt applied to court requesting it to reconsider our decision to exclude the friendly/related creditors from voting. Further if our decision was overturned by the court, to order these creditors be entitled to vote and recalculate the resolution results—which would pass the special resolution and annul the bankruptcy.

The matter proceeded through the normal court process to trial (almost 12 months to the day after the creditor's meeting). We did not directly oppose the application, but our approach was simply helping the court in reaching the correct determination.

On the morning of the trial, the bankrupt submitted to the court additional evidence by way of an affidavit with more detail from one of the excluded creditors. When considering this fresh evidence, the Federal Court Judge made the following remarks:

I have to look at what the situation is now rather than what the situation was then and it’s not that I’m, as it were, looking at whether Mr Khatri was correct or not.

I’m satisfied now. I have no doubt that [sic] Mr Khatri did was correct…at that time on the material that he had, but, of course, that’s not the issue...this affidavit...shows a lot more detail. And it’s the sort of detail that if Mr Khatri had that at that time, I would think that Mr Khatri...would have found that [sic] was a creditor because I think Mr Khatri has really taken his position as trustee [sic] and acted accordingly. And I think that he would have come to that conclusion, if that’s the sort of detail that had been given.

The Judge then exercised the court's discretion to permit the new evidence not available to us at the meeting and when the initial decision (to exclude creditors from voting) was made. He made orders that the creditor be entitled to vote at the meeting, that this creditor's 'for' vote be counted into a new special resolution calculation, and the bankruptcy's annulment be passed (effective as at the time of the meeting—12 months earlier).

In other words, we were right to ask for more information (which did not avail), we were right to make the decision we made, and we were right to exclude the creditors at the relevant time—but only through the discretion of the court to allow fresh evidence was the decision overturned.

We fully support all stakeholders taking an active role in the administration of insolvency appointments, including asking questions, and where necessary scrutinising insolvency practitioner's decisions. We are also always pleased to be found to have made the appropriate decision in the circumstances, but as the above shows, we can be found to be both right and wrong at the same time!

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