Re Tracy Joy Dare; Ex Parte Tracy Joy Dare Art [1992] FCA 509; (1992) 110 ALR 659 (1992) 38 FCR 356 (21 October 1992)

FEDERAL COURT OF AUSTRALIA

Re: TRACY JOY DARE; Ex Parte TRACY JOY DARE
ART No. 2 of 1992
FED No. 786
Bankruptcy
[1992] FCA 509; (1992) 110 ALR 659
(1992) 38 FCR 356

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Drummond J.(1)

CATCHWORDS

Bankruptcy - registration as trustee - applicant employed by firm of accountants - court to be satisfied that arrangements as to fees and access to employer's facilities ensure independence - s. 165(1)(b) of Bankruptcy Act 1966 not necessarily infringed where trustee's fees paid over to employer.

Bankruptcy Act 1966 (Cth) - ss. 155 and 165

Re Hurt; Ex parte Hurt (1988) 80 ALR 236

Lamb v Registrar in Bankruptcy (Vic) (1984) 56 ALR 521

HEARING

BRISBANE 21:10:1992

Counsel for the applicant: J.F. Curran

Solicitors for the applicant: Cleary and Hoare

ORDER

The Court orders that:
1. The applicant, Tracy Joy Dare, be registered as a trustee in bankruptcy upon the applicant entering into a bond in the amount prescribed for the purposes of s. 155(3) of the Bankruptcy Act 1966 (Cth) and Rule 61(1) of the Bankruptcy Rules with such surety or sureties as is or are approved by the Registrar.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

The applicant applies under s. 155(2) of the Bankruptcy Act 1966 (Cth) for registration as a trustee in bankruptcy.

2. I am satisfied that she is well-qualified for registration.

3. The applicant has tertiary, including post-graduate, qualifications in accountancy and has completed the Insolvency Practitioners Association of Australia Advanced Insolvency Course; she is an associate member of the Institute of Chartered Accountants.

4. In February 1982 the applicant commenced employment with a firm of chartered accountants and has remained in the employ of that firm or the firms with which it and its successors have merged. She is presently a senior manager in the Reconstruction and Insolvency Division of Messrs. KPMG Peat Marwick.

5. Over the last ten years she has had very extensive involvement in a wide range of insolvency and other administrations, including numerous administrations in bankruptcy. While she herself has not had personal responsibility for any such administration, her involvement has, over recent years at least, been at a senior level.

6. The Official Receiver has reported that he is satisfied, after having interviewed the applicant, that she has a good knowledge of the Act and a good understanding of the responsibilities of a trustee in bankruptcy and that generally, she is a proper person to be registered as a trustee.

7. It is the fact that she is in employment that requires further consideration to be given to her application.

8. It was held in Lamb v Registrar in Bankruptcy (Vic) (1984) 56 ALR 521 that the fact that a person is an employee is not necessarily incompatible with her being registered as a trustee in bankruptcy, a construction of the relevant provisions of the Act which is confirmed by subsequent amendments to the Bankruptcy Rules: see rule 59(1)(c).

9. But where an applicant for registration as a trustee is an employee that requires careful consideration to be given to the arrangements proposed by the applicant's employer to see if the employee will, as trustee, enjoy that independence from external control which is essential to the proper discharge of the duties of a trustee in bankruptcy.

10. In Re Hurt; Ex parte Hurt (1988) 80 ALR 236, French J., at page 238, identified the factors that the court should consider in deciding whether in a particular case the circumstances of an applicant's employment are compatible with the independence that a registered trustee must have, saying:
"(1) That the proposed trustee will not be subject to

direction from his employer as to the performance of
his work as a trustee - including directions as to the
manner in which the work will be done and decisions to
be taken in the exercise of discretion as a trustee.
(2) That the employer understands and accepts the
requirement for the trustee's independence and
undertakes to respect it.
(3) That the arrangements in respect of disposition of the
trustee's fees should be such as to reflect his
independence - an arrangement under which trusteeship
fees are paid by the trustee to his employers, may be
evidence of loss of independence and raise questions
of the propriety of his conduct as a trustee.
(4) That both trustee and employer are aware of possible
conflicts of interests between the duties of the
trustee as such and his duties as an employee."

11. I have affidavits from both the applicant and Mr Hennessy, a partner of her employers to whom she is directly responsible who is himself a registered trustee in bankruptcy and an official liquidator, which satisfy me that, if she is granted registration, the applicant will, in the performance of her work as a trustee in bankruptcy, be free from any direction from her employer, the partners of the firm, touching on the performance of her work as trustee which would not be compatible with the performance of her duties as trustee.

12. The applicant deposes to her keen awareness of the need to maintain her independence should she be registered as a trustee, as does Mr Hennessy, on behalf of the partners. But there is one matter that gives me some concern about whether the applicant and her employers have a proper understanding of what is involved in the notion of an employee being in a position of true independence in relation to work done as a trustee in bankruptcy, should the applicant become so registered.

13. The only evidence concerning how the matter of fees earned by the applicant as a trustee will be regulated comprises a statement by the applicant, confirmed by Mr Hennessy, which is as follows:

"It is intended that my terms of employment with Messrs.
KPMG Peat Marwick will permit me to render fees in any
particular bankruptcy administration to which I am appointed
as a trustee in bankruptcy in my own name."

14. This statement appears, superficially at least, to meet the concern in relation to the arrangements as to fees between an employer and an employee seeking registration as a trustee which is mentioned by French J. in Re Hurt. But it is the existence of actual independence in the exercise of an employee's duties as trustee that is the critical matter, not the mere appearance of independence, which is all that is created by the applicant being permitted to render accounts for fees earned as a trustee in her own name, rather than in that of the firm.

15. I think it is essential for the court to be informed not just how the appearance of independence in this regard will be maintained, but how it is proposed to assure to the applicant her independence in fact.

16. I would not be prepared to grant this application without information as to the arrangements that will regulate what happens to the trustee's fees that are received by the applicant and as to the arrangements, if any, that are to be made for giving her access to the firm's staff and equipment which may be necessary to enable her to carry out her duties as trustee and also as to the arrangements that will be made for any payment that she might have to make to the firm for access to such facilities.

17. In Lamb, after making some general comments about the incompatibility with the role of trustee of the status of an employee who is subject to direction as to when and how she performs her duties as trustee, Smithers A.C.J., with whom Northrop J. agreed, said at page 528:

"But it is not essential to the relationship of employer and
employee that it should involve such a surrender (of
independence) ... The evidence is that the firm would not
interfere in the performance of those duties against the
wishes of the appellant. If this is thought less of a
declaration of his independence than is desirable, it has to
be recognised that the trustee has the advantage of the use
of the premises of his employers and of members of the staff
and of their office equipment. These factors must be
allowed for in the financial terms of the trustee's
employment. They assist him to run his affairs as trustee.
At one stage of this hearing the court was informed by
counsel that the agreement between the appellant and his
employers was that remuneration earned by him as a trustee
was payed directly to his employers ... An arrangement under
which the employee's trusteeship fees were paid by him to
his employers would appear to me to be evidence of loss of
independence and accordingly likely to raise questions as to
the propriety of his conduct as a trustee."

18. In Re Hurt, the evidence was that the employee would continue to receive a fixed salary which would not be affected by any fees he might earn as trustee in bankruptcy; it was proposed that fees for his work as trustee would be charged as an account for professional services by his employer, calculated by reference to the number of hours spent by, and hourly rates applicable to, each member of staff involved in the work, including the employee-trustee himself. French J. said at page 240:

"The charging arrangements do give cause for concern. The
remuneration of a registered trustee is fixed pursuant to s.
162 of the Act ...
The statutory source of the trustee's entitlement to
remuneration makes it difficult to see how his employer
would have any right to render in the employer's name an
account for the trustee's remuneration.
When a trustee is appointed to administer a bankruptcy or
for other purposes contemplated by the Act, he is appointed
in his own right, not as an agent for his employer."

19. For these reasons, his Honour held that the proposal for the employer to charge in its own name in respect of the employee's work as trustee was objectionable.

20. However, of more relevance to the present application, since it is intended, as I have said, that the applicant will render accounts for her work as trustee in her own name, is the consideration that his Honour gave to that part of the proposal which involved the employee handing over to his employer the fees he earned as trustee. At page 241, French J. said:

"A further difficulty arises from the provisions of s.
165(1)(b) of the Act, which provides that a trustee of the
estate of a bankrupt shall not 'make an arrangement for
giving up or give up, a part of his remuneration to the
bankrupt or any other person'. No doubt the scope of that
provision must be read somewhat less than literally to avoid
absurdity. But it could well be infringed by an arrangement
under which the trustee in effect seeks to alienate his
remuneration at source by abdicating to his employer the
right to charge for his services."

21. The term "arrangement" in s. 165(1)(b) is a word of wide import. Its ordinary dictionary meeting connotes the act of coming to an agreement or understanding; the term does not refer only to a legally binding agreement, but also encompasses understandings, formal or informal, oral or written, which the parties intend to govern their relationships, even though they may not be intended to have legal force. But as French J. said, it is necessary to read down s. 165(1)(b) so as to avoid absurdity. If it was given its literal meaning, it might be wide enough to prevent a trustee who is a partner in a firm of accountants bringing his earnings as trustee into the pool of partnership income, despite the special nature of the interest a partner has in partnership property, including the income he earns which is partnership income. Given the fact that for very many years members of partnerships have commonly been appointed as trustees in bankruptcy and the fact that their trustees' remuneration would commonly be partnership income, that cannot be the legislative intent. Moreover, it is hard to identify any policy of the Bankruptcy Act that would be served by reading s. 165(1)(b) as imposing such a restriction on a trustee who is in partnership with others, just as it is difficult to identify any policy in the Act that would be served by reading the sub-section as preventing a trustee dealing howsoever he chooses with his remuneration, so long as the dealing was for his own benefit.

22. A guide to the limitations that should be placed on s. 165(1)(b) is I think provided by its precursor, s. 134(1)(b) of the Bankruptcy Act 1924, which provided:

"(1) A trustee shall not, under any circumstances whatever -
(a) ... or
(b) make any arrangement for giving up, or give up,
any part of his remuneration, either as
receiver, manager, or trustee to the bankrupt,
or any solicitor or other person employed about
the bankruptcy or to any creditor; or
(c) ..."

23. The old s. 134(1)(b) struck at a number of things. First, it prohibited, for obvious reasons, the trustee making an arrangement to hand over part of his fees to the bankrupt. Secondly, it prohibited the entry by a trustee into an arrangement to share his fees with any person such as a solicitor, accountant or auctioneer who was employed by the trustee to provide professional services in connection with the trustee's administration of the bankrupt's estate which might result in that professional obtaining remuneration for his services in excess of that fixed pursuant to s. 136 of the old Act; s. 136 limited such a professional's remuneration to that fixed by taxation. Thirdly, it prohibited the making by the trustee of an arrangement with a creditor of the bankrupt which might result in the creditor receiving a larger dividend through his share in the trustee's remuneration than other creditor's in the bankruptcy would receive. (An example of such an illegal arrangement was discussed in Farmers' Mart Ltd. v Milne (1915) AC 106.)

24. If s. 165(1)(b) is read as covering much the same ground as the old s. 134(1)(b), as I think it probably should be, it does not strike at the simple case of a trustee who is a partner in a firm bringing his earnings as trustee into the pool of partnership income; nor would it strike at an employee-trustee paying over or arranging to have paid to his employer his fees earned as trustee. However, while the arrangement in the latter case would not involve any infringement of s. 165(1)(b) as so understood, it would still leave unanswered a real question whether the employee-trustee who hands over his fees to his employer is sufficiently independent of the employer to be a proper person to act as a trustee.

25. French J., in Re Hurt, recognised that if an employee-trustee makes an arrangement with his employer whereby the employer will receive the fees earned as trustee, this does not necessarily involve an infringement of s. 165(1)(b) of the Act. He said at page 241:

"... provided internal arrangements are made to properly
protect the trustee's independence, he can dispose of the
remuneration which he has earned to his employer without
being compromised."

26. His Honour, however, did not give any guidance as to what "proper internal arrangements" might comprise.

27. So long as the arrangements between the employer and the employee-trustee were such as to ensure that the employee would never act as trustee for a bankrupt of whom her employer was a creditor and so long as they were such as to ensure that the trustee's employer would not be in a position to earn as an adviser in a particular administration in excess of that allowed by s. 167(1) of the Bankruptcy Act by taking in addition to such remuneration the whole or part of the employee-trustee's own remuneration and so long as there was nothing else in the overall arrangements between the employer and the employee including the arrangements for access to the employer's facilities that would result in the employee-trustee's independence being compromised, I do not think there would be anything inappropriate in an arrangement involving the employee-trustee passing over to her employer the whole or a part of her trustee's remuneration.

28. There is one other matter that requires consideration.
I am satisfied that both the applicant and her employer are aware of the need for her to avoid conflicts of interest between her duty as a trustee and her duties as an employee. However, it is not possible to be satisfied on the material before me that, apart from having an awareness of this need, the applicant's employer intends to put her in a position in which she will have full capacity to take such action as is necessary to avoid such conflicts, even if that means that her duties as trustee take precedence, as they must, over her duties as employee. In paragraph 6 of his second affidavit, Mr Hennessy deals with the extent to which the applicant, as a trustee, will be subject to directions from the firm when questions arise as to how conflicts of interest are to be avoided. The position is not made clear. If what Mr Hennessy intends to convey is that, in this respect, the applicant will be subject only to the same limitations that apply to partners of the firm who are themselves registered trustees and if the limitations in question can be seen to be designed solely for the purpose of ensuring adherence to proper professional standards and solely for acceptable ethical and work quality reasons, then they would very likely be compatible with the applicant nevertheless having the independence she must have if she is to be a proper person for appointment as a trustee. Clarification of these matters is necessary if the applicant is to be granted registration.

29. It is for the applicant to satisfy the court that the arrangements that will be made, including the arrangements concerning what is to happen to the remuneration she earns as trustee and concerning her access to the firm's facilities for the purpose of carrying out her duties as trustee, will be such that she will, as a matter of practical fact, be in a position to discharge the duties of her office as trustee with true independence or, as it has been put, without fear, favour or affection. Clarification on the matters I have referred to is required. In the absence of further information on the proposed arrangements in relation to the applicant's remuneration as trustee and associated matters, I would not be prepared to make the order for registration that is sought. However, I propose to give the applicant an opportunity to adduce further evidence on the matters of concern to which I have referred.

EX TEMPORE REASONS FOR JUDGMENT - 21 OCTOBER, 1992
30. This matter has been before me on a prior occasion and, on 18 September, 1992, I gave certain reasons for not being prepared, on the material then before me, to make the order sought. However, on that occasion I indicated that I would give the applicant a further opportunity to provide clarification on a number of matters that concerned me. That has now been done and I am satisfied that there is no reason why the applicant should not be registered as a trustee, notwithstanding the fact that she will remain in employment with the firm of accountants for whom she has worked for quite some time.

31. The particular matters that concerned me are answered effectively in the affidavit of Mr Hennessy, a member of the firm that employs the applicant, which affidavit was filed on 16 October last. In paragraph 5 of this affidavit Mr Hennessy deals with the question of what is to be done with the fees earned by the applicant, it already having been affirmed in paragraph 3 that the applicant will be allowed by her employer to render accounts for work done as a trustee in her own name.

32. In paragraph 5 of his most recent affidavit, Mr Hennessy says:

"The fees earned by the applicant by way of remuneration as
trustee shall belong to her and be her sole property, save
that the applicant will pay over to the firm sufficient
monies earned from such fees to reimburse the firm for her
salary. Further any such fees in excess of her salary (as
reviewed from time to time) shall be assigned to the firm
and held on her behalf and credited against future salary,
or paid on termination."

33. It is thus apparent that to the extent the applicant will receive fees for her work as a trustee, the firm will be relieved of the burden of having to pay her salary from its own funds. Since the firm will receive no benefit from her own work as a trustee, it is reasonable that it should not have to find from its own moneys her salary for the time she performs work on her own account in that capacity.

34. In paragraph 7 of the same affidavit, Mr Hennessy (among other things) says:

"... the applicant would not be required or expected to act
as trustee of a bankrupt or debtor of whom the firm was a
creditor."

35. These matters satisfy me that there is no likelihood of s. 165(1)(b) of the Bankruptcy Act being infringed if registration is granted.

36. It is also apparent from what Mr Hennessy says that the intended arrangements are such that the employer firm will receive no benefits from the provision of services to the trustee other than those the Bankruptcy Act allows. Mr Hennessy, in paragraph 4 of his most recent affidavit, says:

"Further, the applicant's terms of employment will allow her
as a trustee the use of the firm's premises, equipment and
other staff as necessary to enable her to discharge her
duties as a trustee. My firm will render to the applicant
an account for use of these facilities and staff."

37. The firm's charges for such services provided to the applicant as trustee will be subject to taxation under s. 167, so the arrangement proposed will not infringe the policy of the Act in that regard either.

38. Mr Hennessy also deals with the way in which the firm and the applicant will be able to ensure that the applicant avoids any conflict of interest that might arise from her being both trustee and employee. In paragraph 9 of his affidavit he deals at some length with this matter and he confirms that in her role as a trustee the applicant will only be subject to the same limitations that apply to partners of the firm who are themselves registered trustees, which limitations are designed solely for the purpose of ensuring adherence to proper professional, ethical and work quality standards. In paragraph 7 of his affidavit, he also says:

"The applicant will have the right to refuse and/or
relinquish any appointment or trusteeship."
(That is, should circumstances show that there would be a
conflict between her role as employee and her duties as
trustee if she were to take on a trusteeship in those
circumstances).
...
"The applicant will have the right to seek the advice of
other professional advisors as she may determine as
appropriate from time to time."

39. These various matters satisfy me that proper arrangements will be in place to ensure that the applicant will be able to avoid any conflicts of interest flowing from her dual capacity as trustee and employee. For those reasons I am now prepared to make an order in terms of the draft that has been submitted to me.