Setting aside the bankruptcy trustee’s notice of objection to discharge

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Setting aside the bankruptcy trustee’s notice of objection to discharge

In a recent case, a bankrupt had a history of not co-operating with the trustee’s investigations and had obstructed them to a substantial degree. Moreover, the trustee’s investigations were ongoing and had not been completed. The trustee filed objections to the bankrupt’s discharge. If not overturned, then they would have extended the bankruptcy period for an additional 5 years (to 2015) from the due date of discharge from bankruptcy (2010).

The bankrupt then made numerous applications against his trustee seeking to set aside the trustee’s Notices of Objection to discharge. The bankrupt initially sought review of the trustee’s decisions by the Inspector General, but the Inspector General confirmed the trustee’s decisions. The bankrupt could then have applied to the Administrative Appeals Tribunal to seek a further review of the trustee’s decisions, but he applied to the Court instead, seeking that the Notices of Objection to discharge be set aside.

At Court (Kneipp and Jonsson) the bankrupt’s solicitors asserted that there was no further utility in maintaining the objections and after considering the age and health of the bankrupt, argued that the trustee should withdraw his objections.

But the trustee refused to withdraw his objections, for the reasons mentioned at the beginning of this article.

The Court agreed to exercise its discretion to review the decisions not to withdraw the Notices of Objection.

The Court said that a Notice of Objection can be revoked by the Court if it is not lodged in compliance with the Bankruptcy Act. In this case, they had all been lodged in compliance with the Act.

The bankrupt then argued that the Notices of Objection had persuaded him to comply with the trustee’s outstanding requests, and that the notices were therefore irrelevant.

The trustee disagreed, arguing that the information had been obtained by the trustee from third parties and not from the bankrupt. But this only got the trustee so far: the Court said that his allegation that the bankrupt had failed to disclose the bankrupt’s potential beneficial interest in the bankrupt’s deceased partner’s estate was inappropriate because the bankrupt had made no application to the Court in relation to the estate, and had received advice that such an application was unlikely to succeed. In any event, the bankrupt’s trustee had entered into an agreement with the executor of the deceased partner’s estate, and the Court said that having regard to all these matters, the trustee should have withdrawn the Notice of Objection relying on this ground.

The Court then said that the bankrupt’s non-compliance with the trustee’s request for this information was so trivial in the circumstances that it could not support the trustee’s Notice of Objection, and could not justify a continuation of the administration of the bankrupt’s estate.

The Court also pointed out that a decision of the trustee (or of any trustee) not to withdraw a valid Notice of Objection is itself valid if the trustee genuinely believes that there may be utility in continuing the administration of the estate, and of recovering further funds for the benefit of creditors. Here, the trustee genuinely believed that there was a good reason to continue with the bankruptcy – as he believed he was not far from discovering the whereabouts of substantial funds. The Court accepted that there was a benefit in maintaining the bankruptcy for further examinations to be carried out.

Another reason for the trustee to issue a Notice of Objection was that the bankrupt had failed to disclose loan details and bank accounts. The Inspector General had upheld the Notices of Objection on these grounds for several reasons, including that the bankrupt either had not disclosed, or had only partially disclosed relevant information requested by Trustee, and in any event in insufficient detail and in a manner which did not adequately explain what was sought. Furthermore, the bankrupt denied knowledge of having signed a cheque.

Moreover, the bankrupt had failed to disclose travel expenses and legal fees paid on his behalf. This information had not been provided fully and promptly. They had been provided reluctantly and only after considerable correspondence had been entered into. The Court took these matters into account when reviewing the trustee’s decision to extend the bankruptcy by reason of failure of disclosure.

Ultimately, the Court concluded that the trustee’s decision would not be reversed – and this was based on the conduct of the bankrupt and evidence that the continuation of the bankruptcy had the purpose of enabling the trustee to recover further monies.

The Phillips Case and Notices of Objection

This is another recent case. Phillips’s trustee in bankruptcy filed a Notice of Objection to discharge. Phillips unsuccessfully appealed to the AAT and then (also unsuccessfully) to the Court.

The story was that after Phillips became a bankrupt, he was alleged to have been involved in managing a corporation – which bankrupts are forbidden to do. Section 206A of the Corporations Act says that a bankrupt must not ‘make or participate in making, decisions that affect the whole or a substantial part of the business of the corporation’, or ‘exercise the capacity to affect significantly the corporation’s financial standing’.

The bankrupt argued that whilst he signed and engaged in correspondence on behalf of the corporation, he thought that he was doing so in a non-director capacity. He argued that he did not intend to affect the corporation’s financial standing. The Court held that these arguments do not fall within the defences available to him under s 206A of the Corporations Act – and the Notice of Objection was upheld.

So what and who cares?

Bankrupts should be aware that they can challenge a trustee’s decision under either s 178 of the Bankruptcy Act (i.e. by going to Court), or by approaching the Inspector General under s 149K. They can also challenge the Inspector General’s decision by either going to Court under s 178 or by going to the Administrative Appeal’s Tribunal under s 149Q. However, the Courts will be reluctant to act unless the administrative path has been considered or attempted.

A trustee should be careful when extending the period of administration of a bankruptcy, and ensure that the grounds for their Notice(s) of Objection are not insubstantial.

Nevertheless, a bankrupt cannot simply point to the fact that information is within a Trustee’s possession as the reason for withdrawing a Notice of Objection, particularly where the Trustee only eventually obtains the information from third parties, and over the Bankrupt’s resistance.

Notices of Objection are amenable to review by the Court. Where a Notice of Objection is not lodged in compliance with the Bankruptcy Act, it may be cancelled by the Court. A Court will look primarily at the reason given for filing the Notice of Objection and if there was no basis for the filing, then a subsequent additional reason will not save the Notice of Objection from cancellation by the Court, because s149D requires the grounds to be set out in the Notice of Objection.

The decision of a Trustee not to withdraw a valid Notice of Objection is itself valid where the trustee genuinely believes that there may be utility in continuing the administration of the estate, and of recovering further funds for the benefit of creditors. If there are good reasons to continue the bankruptcy, then it is not necessary to enquire into the utility of the continuation of the Notices of Objection. The Court will take into account the manner in which the Trustee has dealt with all of the notices.

If a bankrupt manages a corporation in breach of the Corporations Act, then they will have to have a very clear defence available to them to avoid their bankruptcy being extended.

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