Barry John Cheesman & Ors v Robert Arthur Waters [1997] FCA 90 (21 February 1997)

CATCHWORDS

Bankruptcy - Application by discharged bankrupts seeking relief for alleged breaches of duty against trustee who has ceased to act - Whether a discharged bankrupt is a bankrupt for the purpose of ss.178 or 179 of the Bankruptcy Act - Whether the statutory definition of "bankrupt" in s.5 is displaced by a contrary intention in ss.178 or 179 - Whether the Court has jurisdiction under ss.178 or 179 of the Act to grant relief - Consideration of factors relevant to the discretion conferred under ss.178 and 179 - Whether the Court should decline to grant relief in exercise of its discretion under ss.178 and 179.

Bankruptcy - trustee offered to assign choses in action to the discharged bankrupts rather than bring action as trustee - Consideration of factors relevant to trustee's obligation to realise estate of bankrupts in relation to choses in action - Whether the trustee acted in breach of duty in not bringing action against a secured creditor based on allegations of the bankrupts.

Bankruptcy - bankrupts require trustee to furnish information under s.170(2) - whether information required to be given is information in possession of or available to the trustee - whether trustee required to exercise power under the Act or issue proceeding to obtain information required by the bankrupt.

Constitutional Law - Ch. 111 - Whether delegation to Registrars in Bankruptcy of the judicial power to make a sequestration order under s.31A(n) of the Bankruptcy Act is inconsistent with the requirement under Ch. 111 that judicial power be exercised by a Court or judges appointed under Ch. 111 - Whether judges of the Court bear the major responsibility for the exercise of the judicial power in relation to sequestration orders.

Legislation

Bankruptcy Act 1966 (Cth) ss.5, 31A, 172, 178 and 179

Cases

Reg v. Davison [1954] HCA 46; (1954) 90 CLR 353

Harris v. Caladine [1991] HCA 9; (1991) 172 CLR 84

Re Kwiatek Ex parte Big J Ltd v. Pattison (1989) 21 FCR 374

Re Brindle: Ex parte F B and F A McMahon Pty Ltd (1992) 35 FCR 506

Re M J Watson v. Healey and Others, Lee J unreported, 28 February 1996

Official Receiver in Bankruptcy v. Todd & Others (1986) 70 ALR 119

Re Quinn: Ex parte Queen v. Official Trustee in Bankruptcy (1995) 63 FCR 129

Adsett v. Berlouis (1992) 37 FCR 201

Citicorp Australia Ltd. & Others v. Official Trustee in Bankruptcy and Cirillo Full Court (Foster, von Doussa & Sundberg JJ) unreported, 16 December 1996

Re O'Leary: Ex parte Bayne (1985) 61 ALR 674

Re Bankrupt Estate of Cirillo (1996) 136 ALR 607

Re Wheeler: Ex parte Wheeler v. Halse [1994] FCA 1348; (1994) 54 FCR 166

Re Peter Leslie Challen (a bankrupt): Ex parte Andrew Edward Brown Federal Court of Australia Beaumont J unreported, 23 April 1996

Neville Loeskow v. Avokah Irrigation Pty. Ltd. (Receiver and Manager Appointed) and Commonwealth Bank of Australia Full Court (Lockhart, Ryan and Foster JJ) unreported, 24 April 1996

NB770\1987 BARRY JOHN CHEESMAN & ORS. V. ROBERT ARTHUR WATERS

COURT: MERKEL J

PLACE: MELBOURNE

DATE: 21 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION

BANKRUPTCY DISTRICT OF THE STATE

OF NEW SOUTH WALES No. NB 770 of 1987

(Transferred to Victoria)

BETWEEN:

BARRY JOHN CHEESMAN

ALICE MAY CHEESMAN

ROSS CHEESMAN

BRONWYN JOY CHEESMAN

GRAEME WALTER CHEESMAN

JEANETTE LOIS CHEESMAN

Bankrupts

BARRY JOHN CHEESMAN

ALICE MAY CHEESMAN

GRAEME WALTER CHEESMAN

JEANETTE LOIS CHEESMAN

Applicants

AND: ROBERT ARTHUR WATERS

Respondent

COURT: MERKEL J

PLACE: MELBOURNE

DATE: 21 FEBRUARY 1997

MINUTES OF ORDERS

1. The Application dated 20 July 1994 be dismissed.

2. The applicants pay the respondent's costs of and incidental to the Application.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION

BANKRUPTCY DISTRICT OF THE STATE

OF NEW SOUTH WALES No. NB 770 of 1987

(Transferred to Victoria)

BETWEEN:

BARRY JOHN CHEESMAN

ALICE MAY CHEESMAN

ROSS CHEESMAN

BRONWYN JOY CHEESMAN

GRAEME WALTER CHEESMAN

JEANETTE LOIS CHEESMAN

Bankrupts

BARRY JOHN CHEESMAN

ALICE MAY CHEESMAN

GRAEME WALTER CHEESMAN

JEANETTE LOIS CHEESMAN

Applicants

AND: ROBERT ARTHUR WATERS

Respondent

COURT: MERKEL J

PLACE: MELBOURNE

DATE: 21 FEBRUARY 1997

REASONS FOR JUDGMENT

INDEX

Page

1.0 INTRODUCTION 2

2.0 CONSTITUTIONAL VALIDITY OF THE SEQUESTRATION

ORDERS MADE BY A REGISTRAR IN BANKRUPTCY

UNDER S. 31A OF THE ACT 8

2.1 Harris v. Caladine 8

2.2 The Bankruptcy Act 1966 14

2.3 Are Registrars within the Court's organisational

structure? 16

2.4 Do Judges of the Court continue to bear the major

responsibility for the exercise of the judicial

power in bankruptcy? 17

2.5 Is the exercise of power by the Registrars

consistent with the requirements of judicial

process under Ch III? 17

2.6 Is the review of the exercise of delegated

judicial power by way of hearing de novo? 18

2.7 Conclusion 18

3.0 SECTIONS 178 AND 179 OF THE ACT 19

4.0 DUTIES OF A TRUSTEE IN BANKRUPTCY 29

5.0 THE FACTS 31

5.1 Background 31

5.2 The Elders loans 32

5.3 The bankruptcy of the partners 39

5.4 The bankrupts' Statement of Affairs of 7 July

1987 45

6.0 THE TRUSTEE'S STATUTORY FUNCTIONS 50

7.0 WATERS DEFENCE 66

8.0 BREACH OF DUTY BY ELDERS 70

9.0 THE DISCRETION UNDER SECTION 178 AND 179 72

10.0 CONCLUSION 78

1.0 INTRODUCTION

This proceeding was commenced on 20 July 1994. The applicants are Barry John Cheesman ("B.J. Cheesman"), Alice May Cheesman ("A.M. Cheesman") Graeme Walter Cheesman ("G.W. Cheesman") and Jeanette Lois Cheesman ("J.L. Cheesman"). They claim certain relief, primarily under ss.178 and 179 of the Bankruptcy Act 1966 ("the Act"), against their former trustee in bankruptcy, Robert Arthur Waters ("Waters").

The Application, as amended from time to time, extends over 29 pages and is supported by a number of voluminous affidavits and a very large number of exhibits. Several of the deponents were cross-examined. B.J. Cheesman, the main spokesperson for the applicants in Court, was involved in most of the events leading up to the Court proceeding but did not give evidence.

In the hearing before me, which occurred over 5 days, the applicants did not have legal representation. However, it is apparent that they have received legal assistance in the matter from time to time. Further, their spokesperson, B.J. Cheesman, had obviously acquired considerable knowledge about the Act and the Court's procedures in order to prosecute the application.

Waters was represented by Mr. Bigmore Q.C. who had acted for and advised Waters since at least mid 1991. Two affidavits of Waters were relied upon in response to the allegations made against him. Waters was cross-examined. In his affidavits Waters referred to his reliance upon legal advice. Prior to Water's cross-examination his counsel stated that Waters waived legal professional privilege in respect of the legal advice he received while acting as trustee. The applicants were informed of their entitlement to ask questions about the advice, if they chose to do so.

The applicants' claims against Waters were summarised by them as follows:

1 (a)

Respondent failed to notify unsecured creditors of Fact of Bankruptcy.

1 (b)

Respondent failed to provide each creditor with a summary of the Statements of Affairs.

1 (c)

Respondent failed to call a first meeting of creditors within the prescribed period.

1 (d)

Respondent failed to notify the creditors that he did not consider it desirable to call a first meeting of creditors.

1 (d/1)

Respondent deliberately and intentionally afforded preferential treatment to the secured mortgages, Elders Pastoral and Mr. James in respect to paragraph's 1 (a) (b) and (d) of the Amended Application.

1 (d/2)

The Respondent's failures in respect of paragraph's 1 (a), (b), (c) and (c), deliberately and intentionally denied the majority in number of unsecured creditors any rights or opportunity to control or otherwise guide the trustee in the diligent and prudent administration of the estate, to maximise the return from assets of the estate for the benefit of the creditors and the bankrupts.

1 (e)

The Respondent failed in his duty to ensure the property of the bankrupt was not lost by negligence, breach of trust or wilful default.

1 (e/1)

The Respondent deliberately and intentionally failed in his duty to avail the creditors of the opportunity to control the assets and business of the bankrupts' estates by the many means available to them under the Act.

1 (e/2)

The Respondent deliberately and intentionally failed in his duty to protect the estates' interests and claims for damages in relation to the Supreme Court proceedings No. 6581/1986.

1 (e/3)

The Respondent caused consequential damage to Walter Francis Cheesman as a guarantor of the estate, by wrongfully authorising Walter Francis Cheesman's land to be sold by auction through Elders Real Estate Ballarat on 12 February 1988.

1 (e/4)

The Respondent failed to avail the trust estate of substantial monies for the benefit of and management of trust estate affairs, and legal protection of estate assets, for the benefit of the creditors in general and bankrupts.

1 (e/5)

The Respondent failed in his duty to question the claimed shortfall of Elders Rural Finance Limited as sworn by G.R. James and A.N. Snape on 04.06.1987, when basic calculations should have alerted the Respondent that the estimates of land values sworn by the above testators bore no close relationship to reality, resulting in Elders Rural Finance unjustly obtaining a Sequestration Order on 04.04.1987, without following the process of the Court.

1 (e/6)

The Respondent improperly intervened in the preparations of the bankrupts' Statements of Affairs sworn under protest on the 07.07.1987, by requiring unrealistically low valuations of assets and exclusion of assets belonging to the Bankrupts estates.

1 (e/7)

The Respondent failed to protect the estate assets, legal rights and business interests from loss, even after the respondent was made fully aware of false and misleading conduct by certain mortgagees and their appointees.

1 (e/8)

Respondent failed in his duty to act in a prudent and diligent manner upon the issues raised by the Applicants, re allegations and supporting documentation alleging deceptive conduct by mortgagees and others, and by so doing the respondent afforded preferential treatment and protection to certain mortgagees and others, to the substantial detriment of the creditors in general and the bankrupts.

1 (e/9)

The Respondent failed to afford the Applicants their rights under the Act to comply with a written request to ascertain full and accurate details of realisations of securities and disbursements of proceeds by the Mortgagees.

1 (e/10)

The Respondent deliberately and intentionally condoned a Conflict of Interest situation by continuing to seek and accept legal advice from Madgwicks, Solicitors for Elders Rural Finance Limited and Mr. James re matters in direct conflict with the interests and legal rights of the trust estate.

1 (e/11)

The Respondent continued a Conflict of Interest situation by seeking and accepting advice as trustee of the estates from a Solicitors firm that has Mr. Robert Thomas Hinton as a partner.

1 (e/12)

The Respondent failed to require Elders Rural Finance to prove their claimed Proof of Debt of $369,491.00 and allowed this claimed Proof of Debt to be used by way of value to overrule the re-convened first meeting of creditors.

1 (f)

The Respondent failed to manage the sale of the secured properties so as to maximise their value for the benefit of all creditors and the debtors.

Although the claims against Waters were extensive and related to events from 1987 to 1993 the substantive claims actively pursued by the applicants before me fell into 5 broad categories -

* claims relating to the failure of Waters to challenge the bankruptcy orders made against the applicants;

* claims relating to the failure of Waters to prosecute various alleged breaches of duty by Elders Rural Finance Pty. Ltd. ("Elders") as a secured creditor of the applicants;

* claims arising out of an alleged failure by Elders to properly account for its realisation, as a secured creditor, of the property of the applicants;

* claims relating to the failure of Waters to comply with his statutory obligations to unsecured creditors;

* alleged mismanagement of the bankrupt estates of the applicants.

The applicants sought declaratory relief on the basis that each of their claims constituted or arose out of a breach of duty by Waters. The substantive relief sought was an order that by reason of the alleged breaches of duty, the trustee be liable for all losses occasioned to the applicants, their bankrupt estates and their parents, who were guarantors of the indebtedness of the applicants' to Elders.

Three main issues emerged. The first was a challenge by the applicants to the constitutional validity of the power conferred on a Registrar in Bankruptcy to make a sequestration order against the estates of the applicants. It was submitted by the applicants that the hearing and determination of a bankruptcy petition and the making of a sequestration order against their estates on 4 June 1987, was an exercise of the judicial power of the Commonwealth which may not be exercised by a Registrar who is not a judicial officer of the Commonwealth appointed under Ch 111 of the Constitution. Notices under s.78B of the Judiciary Act 1903 were duly given in respect of the constitutional issue.

The second issue related to the standing of the applicants to bring their application under ss.178 and 179 of the Act. It was submitted by Mr. Bigmore Q.C. that at the date of the Application, the applicants were discharged bankrupts under the Act with the consequence that they were not entitled to make an application as a "bankrupt" under either section.

The third issue was whether the Court should grant the relief sought under ss.178 and 179. An important aspect in determining whether to exercise the power conferred by those sections in the present case, was whether the applicants have established that Waters acted in breach of his duties as a trustee thereby occasioning loss to the applicants, their bankrupt estates or others.

2.0 CONSTITUTIONAL VALIDITY OF THE SEQUESTRATION ORDERS MADE BY A REGISTRAR IN BANKRUPTCY UNDER S.31A OF THE ACT

In a carefully constructed and well argued written submission the applicants contended that -

* the making of a sequestration order is an exercise of judicial power which can only be invested in or conferred on a Court or judicial officers of a Court appointed in accordance with Ch III of the Constitution;

* in Reg v. Davison [1954] HCA 46; (1954) 90 CLR 353 the High Court held that the Registrar of Bankruptcy, not being an officer of the Bankruptcy Court but a person standing outside its organisational structure, could not validly be invested under Ch III with the power to make a sequestration order on a debtor's petition: see Dixon CJ and McTiernan J at 363,370 Fullagar J at 378, Kitto J at 380,384-5 and Taylor J at 390;

* although it was established in Harris v. Caladine [1991] HCA 9; (1991) 172 CLR 84 that federal judicial power may be delegated by a Ch III Court and its judges to a Registrar of the Court, the power to delegate does not extend to the jurisdiction, powers and functions of the Court in respect "of the more important matters [which] are to be reserved to the Judges of the Court and not delegated to its officers";

* the jurisdiction, power and function of the Court under the Act to make a sequestration order is fundamental to the Court's jurisdiction in bankruptcy. When the power is delegated, the Court is no longer exercising the jurisdiction, power and function conferred on it under Ch III. As a consequence that jurisdiction, power and function falls within a category of non-delegable judicial power;

* accordingly, the sequestration orders made by Registrar Murray on 4 June 1987 were made without jurisdiction or power as s 31A(1)(n) of the Act, which enabled the delegation of the jurisdiction and power to make the orders, was invalid.

In substance the applicants' submission is that the power to delegate involves questions of degree. Although it might include matters that are not merely incidental to the Court's bankruptcy jurisdiction it was said that it does not extend to the jurisdiction to make sequestration orders which is the foundation for the jurisdiction and power conferred on the Court under the Act.

The premise that a sequestration order is a fundamental and important aspect of the judicial power conferred under the Act can be accepted. Further, such an order carries consequences that go far beyond the resolution of a controversy inter partes. As was stated by the Full Court in Ahern v. Deputy Commissioner of Taxation (Qld) [1987] FCA 312; (1987) 76 ALR 137 at 148:

"Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences."

However, it does not follow that the constitutional validity of a delegation of the power to make a sequestration order is to be determined other than in accordance with the principles enunciated in Harris v. Caladine.

2.1 Harris v. Caladine

Although Harris v Caladine concerned the delegation of judicial power under the Family Law Act 1975 to registrars of the Family Court, the principles enunciated in the majority judgments are directly applicable to the analogous power under s 31A of the Act to delegate judicial power to Registrars of the Federal Court. In Harris v. Caladine Mason CJ and Deane J said at 94-5 -

"The legislative power of Parliament to authorise the exercise by officers of the Family Court of part of its jurisdiction, powers and functions is subject to some limitation, as is the power of the Court to delegate some part of its jurisdiction, powers and functions, whether in the exercise of its rule-making power under s. 123 of the Family Law Act 1975 (Cth) ("the Act") or in the exercise of its inherent jurisdiction. The limitation is that the legislative power and the power of delegation cannot be exercised in a manner that is inconsistent with the continued existence of the Family Court as a federal court constituted under Ch. III. In other words, both the legislative power and the power of delegation must be exercised in conformity with the requirement that the Court's federal jurisdiction, powers and functions are to be exercised by a court whose members are judges appointed pursuant to s. 72 of the Constitution. Because a federal court, in common with other courts, may be organised or structured in a variety of ways for the purpose of the exercise of its jurisdiction, it does not follow that all the jurisdiction, powers and functions of the Family Court must be exercised by a judge or judges of that Court. But the requirement does mean that the judges of the Court do effectively control and supervise the exercise of its jurisdiction, powers and functions by participating in the hearing and determination of cases and otherwise by having the capacity to review the decisions of officers of the Court and other persons to whom jurisdiction, powers and functions may be delegated. We must emphasize that the role of the officers of the Court such as Judicial Registrars and Registrars is secondary to that of the judges. The role of the officers is to assist the judges in the exercise of the jurisdiction, powers and functions of the Court. Although it is a commonplace characteristic of modern courts that officers such as masters and registrars exercise jurisdiction, powers and functions in a wide variety of matters, those matters are, generally speaking, subsidiary in importance to matters which are heard and determined by judges.

It seems to us that, so long as two conditions are observed, the delegation of some part of the jurisdiction, powers and functions of the Family Court as a federal court to its officers is permissible and consistent with the control and supervision of the Family Court's jurisdiction by its judges. The first condition is that the delegation must not be to an extent where it can no longer properly be said that, as a practical as well as a theoretical matter, the judges constitute the court. This means that the judges must continue to bear the major responsibility for the exercise of judicial power at least in relation to the more important aspects of contested matters. The second condition is that the delegation must not be inconsistent with the obligation of a court to act judicially and that the decisions of the officers of the court in the exercise of their delegated jurisdiction, powers and functions must be subject to review or appeal by a judge or judges of the court. For present purposes it is sufficient for us to say that, if the exercise of delegated jurisdiction, powers and functions by a court officer is subject to review or appeal by a judge or judges of the court on questions of both fact and law, we consider that the delegation will be valid. Certainly, if the review is by way of hearing de novo, the delegation will be valid. The importance of insisting on the existence of review by a judge or an appeal to a judge is that this procedure guarantees that a litigant may have recourse to a hearing and a determination by a judge. In other words, a litigant can avail him or herself of the judicial independence which is the hallmark of the class of court presently under consideration."

Dawson J said at 121-2 -

".... the Court may, subject to any restrictions imposed upon it by Parliament, delegate to such of its officers as are suitable such of its functions as it thinks fit. It may do so pursuant to express powers given to it, pursuant to its rule-making power or pursuant to an inherent power to order its own affairs. No doubt it is beyond the power of Parliament to compel a federal court to exercise any of its judicial functions through an officer of the court. The exercise of those functions by that officer would not then be as a delegate of the court and that would be inconsistent with the requirement that the court consist only of judges. For the same reason a federal court must retain effective supervision and control over the exercise of its functions by its officers. If it does not do so, those functions may be seen to be exercised by an officer of the court, not as a delegate, but as a person of independent authority. A federal court must be able to exercise a real choice for itself over those matters, if any, which are to be delegated. Effective supervision and control will not be maintained if there are insufficient judges for the purpose or if for any other reason the court lacks the necessary capacity. Where the judicial power of the Commonwealth is vested in a federal court, the exercise of that power must be by or on behalf of the court itself, that is, the court consisting of judges, notwithstanding that the court may employ for that purpose an organisation extending beyond the judges themselves. Whether or not the exercise of judicial power is by or through the court itself will be a matter of practical as much as of theoretical judgment."

Gaudron J said at 150-151 -

"The constitutional requirement that judicial power be vested in courts also necessarily carries an implication that delegation can be effected also necessarily carries an implication that delegation can be effected only in a manner that is consistent with the structure and organisation of a court and with the power having been vested in a court. It was on the former of these implications that the decision in Davison was rested. It is convenient to note that it does not follow from Davison that a power or function can be delegated only to a person who is part of the organisational structure of the court. Indeed, the taking of evidence on commission outside the jurisdiction is a familiar example of a function that is delegated to a person who is not part of the organisation of a court. Whether a power or function may be delegated to a person outside the court structure is a matter to be determined by a number of considerations, the most important of which are the subject matter and the nature of the power or function. Other relevant considerations include the status of the delegate and the relationship between the delegate and the court. Questions of status and relationship are relevant even if the delegate is an officer of the court. Thus, for example, it would not be consistent with the structure and organisation of a court for there to be delegated to a registrar or master the power to hear appeals from judges of the court.

The requirement that delegation be consistent with the power being vested in a court directs considerations of both substance and degree. As a matter of substance it is necessary that appropriate procedures exist for supervision by the court, both as to observance of the limits attached to delegated powers and as to the exercise of those powers. This aspect was adverted to by Mason J and Murphy J in the H.C.F. Case (86), their Honours there expressing the view that such supervision could be effected by means of review or appeal. And, as earlier pointed out, it is necessary to inquire whether powers and functions have been delegated to the extent that their judicial character is lost or to the extent that the body on whom they are conferred is no longer properly described as a court."

McHugh J said at 164 -

"It follows, in my opinion, that this Court or a federal court created under s. 71 of the Constitution may be authorised to delegate the exercise of its judicial powers to an officer of that court provided that the exercise of the power is subject to review by way of a de novo hearing by a justice or judge of that court who has been appointed in accordance with s. 72 of the Constitution. It goes without saying that the Parliament cannot require the court to delegate any of its powers. Nor, in my opinion, will anything less than a hearing de novo to review the exercise of the power by the officer be sufficient. That is to say, appellate review is an insufficient condition of the delegation of the exercise of the power; there must be a complete rehearing of the facts and the law as they exist when the Justice or judge reviews the order made by the officer. Otherwise, the officer and not the Justices or judges of the court would be exercising the original jurisdiction of the court."

Harris v. Caladine was recently considered by the High Court in Harrington v. Lowe [1996] HCA 8; (1996) 70 ALJR 495. Kirby J at 504 observed that:

"Important to the determination of the majority on the point was the consideration that judges would continue to carry the principal responsibility for the exercise of judicial power in contested matters and that the delegation was subject to review by, or appeal to, a judge or judges. In this sense, the provision affording a review by a judge of a decision of a registrar was identified as an essential pre- condition to the constitutional validity of the delegation provided for in the Act and carried into effect by the Rules."

Although the majority judgments differ in emphasis, they all require consideration of whether, in a practical and theoretical sense, -

* the Registrars in Bankruptcy were officers of the Court and within its organisational structure;

* judges of the Court continued to bear the major responsibility for the exercise of judicial power including the making of sequestration orders under the Act;

* the exercise of power by the Registrars was consistent with the requirements of judicial process under Ch. III and;

* the powers of the Court delegated to the Registrars were subject to a review de novo by a judge or judges of the Court.

If each of these matters is answered in the affirmative then the fact that the power delegated relates to a matter which is basic to the Court's jurisdiction under the Act, of itself, cannot have the result that that power is non-delegable.

2.2 The Bankruptcy Act 1966

Under Part III of the Act, jurisdiction in bankruptcy matters is conferred on the Court. Section 31A provides for certain powers to be delegated.

Insofar as is relevant, as at 4 June 1987, s.31A of the Act provided -

"(1) Subject to sub-section (2), the following powers of the Court under this Act may, if a Judge of the Court, in writing directs, be exercised by a Registrar of the Court in relation to a proceeding:

(a) the power to make orders or give directions in relation to the service of a notice or other document under this Act;

(b) the power to make orders in relation to discovery, inspection and production of documents in the possession, power or custody of a party to the proceeding or of any other person;

(c) the power to make orders in relation to interrogatories;

(d) the power to allow the amendment of any written process, proceeding or notice under this Act;

(e) a power referred to in paragraph 33(1)(c);

(f) the power to make an order adjourning the hearing of the proceeding;

(g) the power to make an order as to costs;

(h) the power to set aside a bankruptcy notice;

(j) the power under sub-section 47(2) to grant leave to withdraw a creditor's petition after presentation;

(k) the power under section 49 to substitute another creditor or other creditors for a creditor in relation to a petition;

(m) the power under sub-section 52(5) to extend the period at the expiration of which a creditor's petition will lapse;

(n) the power to make a sequestration order against the estate of a debtor under sub-section 52(1) and the power under sub-section 52(2) to dismiss a creditor's petition;

(p) the power to make an order under sub-section 244(9), (10), (11) or (12) in relation to a petition;

(q) the power to grant leave to present a petition under sub-section 244(123);

(r) the power under sub-section 247(1A) in relation to a petition;

(s) a power of the Court prescribed by the rules.

........

(4) The provisions of this Act and the rules that relate to the exercise by the Court of a power that is, by virtue of sub-section (1), exercisable by a Registrar apply in relation to the exercise of the power by a Registrar under this section as if the references in those provisions to the Court were references to the Registrar.

(5) Notwithstanding any other provision of this Act and any provision of the Public Service Act 1922 or of any other law, a Registrar is not subject to the direction or control of any person or body in relation to the manner in which the Registrar exercises the powers pursuant to sub-section (1).

(6) A party to a proceeding in which a Registrar has exercised any of the powers of the Court under sub-section (1) may, within the time prescribed by the rules, or within any further time allowed in accordance with the rules, apply to the Court to review that exercise of power.

(7) The Court may, on application under sub-section (6) or of its own motion, review an exercise of power by a Registrar pursuant to this section and may make such order or orders as it thinks fit with respect to the matter with respect to which the power was exercised.

(8) Where at a hearing of a proceeding that involves the exercise of a power referred to in paragraph (1)(n) in relation to a sequestration order or in paragraph (1)(p) to make an order for the administration of the estate of a deceased debtor under Part XI, a person opposes the making of that order, the Registrar shall not hear, or continue to hear, the proceeding and shall make appropriate arrangements for the proceeding to be heard by the Court.

(9) Where at any time before or during the hearing of a proceeding that involves the exercise of a power referred to in sub-section (1) by a Registrar -

(a) the Registrar considers that it is not appropriate for the proceeding to be heard by the Registrar under this section; or

(b) an application is made to the Registrar for the proceeding to be heard by a Court, the Registrar shall not hear, or continue to hear, the proceeding to be heard by a Court,

the Registrar shall not hear, or continue to hear, the proceeding and shall make appropriate arrangements for the proceeding to be heard by the Court.

(10) In this section -

"Registrar" means the Registrar, a Deputy Registrar, District Registrar or a Deputy District Registrar, of the Court;

"the Court" means the Federal Court of Australia when exercising jurisdiction under this Act."

2.3 Are Registrars within the Court's organisational structure?

Registrars, as defined in s.31A(10), are appointed as officers of the Court under s.35 of the Federal Court of Australia Act 1976 (Cth) and as such are within its organisational structure. In both a practical and a theoretical sense the Registrars have been incorporated into the hierarchical structure of the Court.

2.4 Do Judges of the Court continue to bear the major responsibility for the exercise of the judicial power in bankruptcy?

A number of aspects of the delegated power ensure that judges of the Court continue to bear the major responsibility for the exercise of the judicial power conferred under the Act, at least in relation to the more important aspects of its jurisdiction. They are -

* the delegation of power to a Registrar only occurs in relation to a proceeding if a Judge in writing so directs (s.31A(1));

* the exercise of power by a Registrar is subject to review by judges of the Court on the application of the parties (s.31A(6)) or by the Court of its own motion (s.31A(7));

* opposed applications for sequestration orders, matters considered by the Registrar to be inappropriate for determination by a Registrar and matters in which an application is made to the Registrar for the proceeding to be heard by the Court must be determined by the Court and not a Registrar (s.31A(8) and (9)).

2.5 Is the exercise of power by the Registrars consistent with the requirements of judicial process under Ch III ?

Section 31A(4) provides that the relevant provisions of the Act and the Rules that apply to the Court apply to Registrars when exercising delegated judicial power. Section 31A(5) ensures the independence of the Registrars in their exercise of delegated judicial power.

These provisions, combined with the implicit obligation that those exercising judicial power of the Commonwealth act judicially, ensure that the delegated power is not exercised in a manner which is inconsistent with the requirements of judicial process under Ch III of the Constitution.

2.6 Is the review of the exercise of delegated judicial power by way of hearing de novo ?

Sections 31A(6) and (7) confer a wide power of review by the Court in respect of all delegated judicial power. Decisions of the Court have accepted that the review is by way of hearing de novo rather than appeal: see Re Kwiatek; Ex parte Big J Ltd v. Pattison (1989) 21 FCR 374, 381, Re Brindle: Ex parte F B and F A McMahon Pty Ltd (1992) 35 FCR 506 and Liati v. Fitzsimons, Finn J, unreported, 13 June 1996. In any event, if there had been any doubt in that regard, the doubt would be required to be resolved in favour of a construction that ensured the review provided for, satisfied the constitutional requirements of Ch III: see s.15A of the Acts Interpretation Act 1901 (Cth).

2.7 Conclusion

Accordingly, I am satisfied that the delegation of judicial power provided for by s.31A(1)(n) of the Act is valid and the sequestration orders made by Registrar Murray on 4 June 1987 were validly made.

I would add that s.31A(8) was repealed by s.9 of the Law and Justice Legislation Amendment Act 1968 (1990). Whilst that is not relevant to the issue arising before me it is desirable that any doubt about the consequences of that repeal be dispelled. Whilst the sub-section was relevant to my conclusion that Judges of the Court continue to bear the major responsibility for the exercise of judicial power, I would have reached the same conclusion in the absence of s.31A(8). It seems to me that the requisite measure of responsibility is retained by judges of the Court by reason of s.31A(1), (6), (7) and (9).

3.0 SECTIONS 178 AND 179 OF THE ACT

Division 4 of Part VIII of the Act provides for control over trustees by the Court. In particular -

s.178 provides:

"If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable."

s.179 provides:

"(1) The Court may, on the application of the Registrar, the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy and may do one or both of the following:-

(a) remove the trustee from office; and

(b) make such order as it thinks proper.

(2) The Registrar, the Inspector-General or creditor may at any time require a trustee to answer an inquiry in relation to the bankrupt's estate or affairs.

(3) The Registrar, the Inspector-General or a creditor may apply to the Court to examine a trustee or any other person in relation to the bankruptcy.

(4) Without limiting the generality of sub-section (3), where the Official Trustee is, or has been, the trustee of the estate of a bankrupt, application may be made to the Court under that sub-section to examine the Official Receiver."

The respondent submitted that the Court has no jurisdiction in the present matter as when the Application was lodged on 2 July 1994, primarily in reliance upon ss.178 and 179, the applicants were discharged bankrupts and were no longer "bankrupts" able to make an application to the Court under either section.

The submission was a difficult one to make good under s.178 as application under that section may be made by a "bankrupt, a creditor or any other person" with the consequence that if a discharged bankrupt was not a "bankrupt" within s.178 the discharged bankrupt could nevertheless make application as "any other person".

However reliance was placed by the respondent on the decision in Re M J Watson v. Healey and Others, Lee J unreported, 28 February 1996, in which his Honour concluded at 7-9 that -

"... if a discharged bankrupt, the trustee of whose estate has completed the duties imposed by the Act, seeks resolution at law of a controversy in respect of an act of the trustee carried out in the course of the trustee's administration of the estate, there is no jurisdiction in bankruptcy conferred on this Court by ss.99 and 178 of the Act to allow the Court to deal with the matter. If a discharged bankrupt, the trustee of whose estate has completed his duties, alleges that the trustee's administration of the bankruptcy provides a right to a remedy at common law or relief in equity, that right must be pursued in a court with such jurisdiction.

........

As far as the Act is concerned the right to commence litigation in bankruptcy ends, at least, when the bankrupt has been discharged and the trustee of the bankrupt's estate has fulfilled the duties imposed on the trustee by the Act. As Spender J. said in Re Morton; Ex parte Morton v. Westpac Banking Corporation (1987) 77 A.L.R. 520 at 525:

"Quite simply, it is still, as it always was, in the public interest that there be an end to litigation. There must, in my view, be a time when the process of insolvency comes to an end, and the subject of it can start anew. If the conclusion at which I have arrived is wrong, a composition involving one or more secured creditors might well be a never ending story, to the detriment of not only the debtor but of the public generally. Mistakes or incorrect estimate ought to be susceptible of correction, but not for eternity." "

The Application was commenced by the applicants as discharged bankrupts after the respondent had ceased to act as trustee of the bankrupts' estates under the Act. Accordingly, so it was said, the Court has no jurisdiction to determine the Application under s.178 or s.179.

The starting point in dealing with the submission must be s 5 which provides that in the Act "unless the contrary intention appears":

" "bankrupt" means a person -

(a) against whose estate a sequestration order has been made; or

(b) who has become a bankrupt by virtue of the presentation of a debtor's petition;"

The definition was considered by the Full Court in Official Receiver in Bankruptcy v. Todd & Others (1986) 70 ALR 119. Fisher and Lockhart JJ, with Spender J dissenting, held that the definition of "bankrupt" in s.5(1) of the Act was not subject to any temporal restraint. Consequently the majority held that once a sequestration order had been made against the estate of a person or once a person had become a bankrupt by virtue of the presentation of a debtor's petition, that person fulfilled the description required by the statutory definition notwithstanding a later discharge from bankruptcy or an annulment of the bankruptcy.

Their Honours concluded that, notwithstanding their discharge in 1981, the bankrupts were still able to be summoned in 1986 under s.81 of the Act to give evidence relating to "the bankrupt or his trade dealings, property or affairs".

In Re Quinn: Ex parte Queen v. Official Trustee in Bankruptcy (1995) 63 FCR 129 at 131 Tamberlin J observed that the view expressed by the majority in Todd was that the statutory definition of a "bankrupt", which was not subject to a temporal limitation, applied throughout the Act:

"subject of course to a contrary intention in the context of the particular provision in question."

At 134 Tamberlin J also observed that:

"In each case, it is necessary to consider the nature, context and purpose of the provision."

However, it is important to bear in mind that the considerations referred to by his Honour are for the purpose of discerning whether there is a contrary intention that the statutory definition in s 5 is not to apply to the particular provision in question. Absent such an intention the statutory definition is to apply.

The issue arising is therefore whether, having regard to the nature, context and purpose of ss.178 and 179, there is an intention that the statutory definition not apply.

Dealing first with s.178 I cannot discern any such intention. As expressed already its ambulatory nature entitling "any other person" to apply does not suggest that a temporal limitation should be imposed on a person who is a "bankrupt" for the purpose of the section.

In any event there is a simpler answer. It is clear that the legislative intent is that the jurisdiction of the Court to control a trustee is at the least, to be co-extensive with the power of a trustee to engage or omit to engage, in conduct under the Act that might affect a "bankrupt". Other provisions of the Act demonstrate explicitly or implicitly, that a trustee may be liable for, or may engage or omit to engage in, conduct which affects a "bankrupt" well after the bankrupt's discharge.

As at the date of bankruptcy, being 4 June 1987, those provisions included -

* s.184, which provided that a trustee may be released from trusteeship up to 7 years after furnishing a final account, which will be well after the usual date of the bankrupt's discharge;

* s.152, which required a discharged bankrupt to give such assistance as the trustee reasonably required in the realisation and distribution of property vested in the trustee;

* s.81, which empowered a trustee to decide to summon a bankrupt after discharge: see Todd;

* ss.134 and 135, which conferred wide powers on a trustee that may be exercised during the trusteeship and after discharge from the bankruptcy;

* s.148, which entitled a "bankrupt" to the surplus; the entitlement will often arise after discharge;

* s.170(2), which provided that the trustee shall furnish information reasonably required by the bankrupt concerning "his property or affairs";

* s.171, which required the trustee to keep certain financial records in respect of the estate.

It is sufficient to say that, in these circumstances, a consideration of the nature, context and purpose of s.178 demonstrates that there is no basis for discerning an intention to exclude a discharged bankrupt from the class of persons entitled to make application under the section.

A similar analysis can be applied to s.179. Whilst application under that section cannot be made by "any other person" the section confers jurisdiction to inquire into "conduct of a trustee in relation to a bankruptcy". In a sense the section's subject matter is as broad, and possibly broader, than s.178 which limits application to persons "affected" by particular conduct of the trustee. It seems to me that the jurisdiction conferred by s.179 is intended, at the least, to be co-extensive with the capacity of a trustee to engage in conduct in relation to a bankruptcy. As that can occur both before and after discharge, as with s.178, there is no basis for discerning an intention to exclude a discharged bankrupt from the class of persons entitled to make application under the section.

There is a further reason for declining to read down the class of persons entitled to make application under ss.178 and 179. As I later observe in considering the discretion conferred under each section, the Court may make such orders as it "thinks just and equitable" (s.178) or "proper" (s.179). Such criteria ensure that the Court has fairly wide discretionary powers in relation to the orders it might make and the considerations it might take into account in determining whether, and if so how, it will exercise its jurisdiction under either section. The legislative purpose of conferring a broad jurisdiction in relation to the conduct of trustees in exercising the power conferred upon them under the Act and the width and nature of the Court's jurisdiction under each section affords good reason for not being restrictive in the interpretation of the categories of persons entitled to make application to the Court under either section.

For these reasons I have concluded that to the extent that in Watson Lee J decided that a discharged bankrupt has no entitlement to make an application under s 178, I ought not to follow or apply his Honour's decision. I appreciate that, in the usual course, a judge of the Court ought to follow an indistinguishable decision of another judge of the Court unless of the opinion that the decision was clearly wrong: see Bank of Western Australia v FCT (1994) 55 FCR 233 at 255. For the reasons I have set out above, if necessary, I am satisfied that the decision was clearly wrong. However I would add that in Watson the applicant appeared in person, his Honour made no reference to the entitlement of "any other person" to make application under s.178 and did not appear to have had his attention drawn to the matters that have led me to conclude that the applicants, as discharged bankrupts, are entitled to make application under s.178 of the Act and, insofar as it might be relevant to this issue, s.179 of the Act. Also, his Honour was clearly influenced by public policy considerations which can be dealt with adequately as a matter of discretion rather than jurisdiction.

An additional basis for the conclusion of Lee J that the discharged bankrupts were not entitled to bring an application under s.178 was that the trustee had ceased to act as a trustee at the date of the application. Section 5 defines a "trustee" as meaning -

"(a) in relation to a bankrupt - the trustee of the estate of the bankrupt;

(b) ......"

For the reasons I have already set out a trustee's duties and functions under the Act can continue after the bankrupts discharge from bankruptcy. Accordingly the trustee remains a trustee, and liable as such under the Act, until released under ss.183 or 184. It is only after release that a trustee is discharged from liability in respect of his or her conduct as trustee (ss.183(4)(b) and 184(2)). The release may occur after resignation or removal of a trustee under s.180 or s.181: see s.183(4)(b).

In these circumstances there is no reason to conclude that a court's jurisdiction under ss.178 or 179 should cease at any time prior to a trustee being released from liability for his conduct under the Act. As this may occur after the trusteeship has ceased the trustee ought to remain subject to the Court's jurisdiction under ss.178 and 179.

My conclusion is supported by the wording of the sections. Jurisdiction arises in relation to "any act, omission or decision" (s.178) or "conduct" (s.179) of a trustee. As long as the conduct in question falls within the statutory description the fact that a person has since ceased to be the trustee is irrelevant.

The mere fact that a person has ceased to act as a trustee, whether by resignation, removal or otherwise, should not result in the Court losing its jurisdiction in relation to conduct engaged in prior to the date of cessation. Indeed there might be very good reason why such a jurisdiction is appropriate after removal, particularly if the removal might have come about as a result of wrongful conduct by a trustee.

In my view the discernible legislative policy under the Act is that the Court should have a broad jurisdiction in relation to the conduct of a trustee which might be exercised whenever it is "just and equitable" or "proper" to do so. If any policy considerations arise in relation to a person who has ceased to be a trustee then, as with a discharged bankrupt, the cessation is not relevant to jurisdiction although it may be relevant to discretion.

For these reasons I have concluded that the Court has jurisdiction to hear and determine the Application notwithstanding that at the date it was lodged with the Court the applicants were discharged bankrupts and the trustee had ceased to act as trustee of their bankrupt estates.

As I have concluded that the sequestration orders made under s.31A of the Act were within power and the applicants have standing to bring their application under ss.178 and 179, it is necessary to consider the remaining issues relating to whether relief should be granted or refused under ss.178 and 179 of the Act. Those issues require consideration of the duties of a Trustee in bankruptcy in the context of the facts of the present case and the claims made by the applicants against Waters.

4.0 DUTIES OF A TRUSTEE IN BANKRUPTCY

The duties of a trustee in bankruptcy were summarised in Adsett v. Berlouis (1992) 37 FCR 201 at 208-9 per Northrop, Wilcox and Cooper JJ-

The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules (Cth). The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act: see Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 at 329. The conduct of the trustee is subject to the supervision of the court (eg Div 4 of Pt VIII of the Act) and a trustee in bankruptcy has historically been regarded as an officer of the relevant court; see Ex parte James, Re Condon (1874) 9 Ch App 609 at 614; Scranton's Trustee v. Pearce [1922] 2 Ch 87; Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In liq) [1948] HCA 14; (1948) 76 CLR 463 at 482; Re Henderson; Ex parte Tonkin (1934) 7 ABC 273 at 277-278. A trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee: see re Silver Valley Mines (supra) at 392; Re Alafaci; Registrar in Bankruptcy v. Hardwick (1976) 9 ALR 262 at 284.

A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money: see Re Grimthorpe (Dec'd) [1958] 1 Ch 615 at 623; Re Whitley; Lloyds Bank Ltd. v. Whitley [1962] 1 WLR 922 at 931; [1962] 3 All ER 45 at 53. A trustee in bankruptcy is in no different position. The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee's obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt. We adopt, as a correct statement of the duty of a trustee and in the proper manner of its performance, the words of Smithers J in Mannigel v. Aitken [1983] FCA 183; (1983) 77 FLR 406 at 408-409:

"In the case of bankruptcy the trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the Trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the Trustee. It was said by Rogerson J in Re Ladyman (1981) 55 FLR 383 at 394- 396 that the standard of conduct required of the trustee will ordinarily be the standard required of a professional man and perhaps higher. The learned judge referred to "the high standard of conduct required of trustees".

In Re Brogden; Billing v. Brogden (1888) 38 Ch D 546 Lord Justice Fry said (at 571):

"A trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion is never an absolute one. It is always limited by - the dominant duty - the guiding duty of recovering, securing and duly applying the trust fund; and no Trustee can claim any right of discretion which does not agree with that paramount obligation."

Where an order is sought that the trustee be removed and to make good the losses suffered by the estate, it must be established that the trustee has been guilty of a breach of duty to act "diligently and prudently in regard to that business of the Trust". See Riley J in Re Alafaci; Registrar in Bankruptcy v. Hardwick (1976) 9 ALR 262 at 285.

According to Halsbury's Laws of England (3rd ed), Vol 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. The Trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs. But beyond this he is not bound to adopt further precautions. It was said by their Honours dixon CJ, McTiernan and Windeyer JJ in Elder's Trustee and Executor Co. Ltd. v. Commissioner of Taxation (Cth) (Higgins' case) ... (1963) 113 CLR 42 that:

"We are not to judge what the trustee then did or failed to do by the light of later events... The duty of the trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital on the Testators estate ... The argument that the trustee having, it was said, exercised a discretion, its conduct is now unchallengeable is sufficiently answered by a passage from the judgment of Fry LJ in Re Brogden ... Whether or not one calls [the trustee's action] an exercise of discretion, the question remains was it the act of a prudent trustee.""

As trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act 1924 or Rules: see Re Ladyman (1981) 55 FLR 383 at 394-396.

My discussion of the role of Waters in the course of my reasons for judgment is based upon the application of the principles set out above to the facts of the present case. In particular, when I have concluded that it was reasonable or proper for Waters to follow a particular course of action or to take or omit to take a particular step I have reached that conclusion on the basis of these principles.

5.0 THE FACTS

5.1 Background

Several generations of the Cheesman family had owned a large central Victorian landholding which was used to conduct the family farming business. Prior to 1956 the business was conducted by Isobel J. Cheesman and her husband the late Walter F. Cheesman ("the Cheesman parents"). As from 1956 the business was conducted by their three sons B.J. Cheesman, Ross Cheesman ("R. Cheesman") and G.W. Cheesman. The wives of each of the sons eventually became partners in the business, with the consequence that by the 1980's the partnership consisted of B.J. Cheesman, his wife A.M. Cheesman, R. Cheesman, his wife Bronwyn Joy Cheesman and G.W. Cheesman and his wife J.L. Cheesman ("the partners"). Since the 1950's the partnership business expanded into a successful farming business specialising in wool, beef, pigmeats, fat lambs, hay and grain.

The difficulties which gave rise to the present litigation are complex. It is sufficient to say that the liquidity of the partnership business was severely affected by a series of bush fires and speculative, but unsuccessful, trading by the partnership on the futures market in the mid 1980's. The difficulties led to the events which resulted in the bankruptcy of each of the partners.

The first of the events was the need, during the first half of 1985, for the partners to borrow amounts in excess of $500,000 from Elders as secured loans. The second was the inability of the partners, during 1986, to repay an amount of $1.2M owing to the National Australia Bank ("NAB"), approximately $580,000 owing to Elders and approximately $270,000 which had become due to Jackson Commodities Pty. Ltd. ("Jackson") after certain futures contracts of the partners had been closed out. The third event was the inability of the partners to secure a refinancing of their existing loans to enable payment of these debts. Consequently, in 1996 the partners were unable to meet the specific demands for repayment of the debts owing to Elders and Jackson.

5.2 The Elders loans

Loans exceeding $500,000 were made in 1985 to the partners by Elders. Repayment of the loans was secured by mortgages, dated 12 March 1985 and 17 July 1985, granted by the partners to Elders over the partnership farming properties. On 2 September 1985 a livestock mortgage was also granted by the partners to Elders. The livestock mortgage, inter alia, mortgaged present and future clips of wool of the sheep the subject of the mortgage. Repayment of the loans and interest thereon, which was secured by the mortgages, was guaranteed by the Cheesman parents who mortgaged their own farming property to secure amounts owing under the guarantee.

On 22 August 1986, after the partners failed to meet the demands for payment by Elders in respect of all of the amounts due as at 16 June 1986, Elders appointed G.R. James ("James") as its receiver under the property mortgages. On 19 September 1986, in reliance upon the same default, Elders appointed James as its agent under the livestock mortgage. The amount certified by Elders to be due under the mortgages as at 16 June 1986 was $645,446.50.

The partners disputed James' appointment as receiver and agent and his entitlement to take possession of the properties and the livestock the subject of the mortgages. On 26 November 1986 a writ was issued in the Supreme Court of Victoria by Elders against the partners and the Cheesman parents. The writ sought declarations as to the validity of James' appointment and his entitlement to take possession of the properties and the livestock the subject of the mortgages. Injunctions restraining the applicants from preventing James from taking possession of the mortgaged property were also sought. Madgwicks acted as solicitors for Elders and James in the Supreme Court proceeding.

The partners filed affidavits challenging the amount claimed to be due, the alleged date for repayment and Elders' entitlement to appoint James as a receiver and agent of the mortgaged property. In an affidavit of G.W. Cheesman, filed in these proceedings on behalf of the applicants, he stated that the following issues were the "main issues" in the Supreme Court proceedings:

(a) Parents unwittingly signing different mortgages to those agreed between ERF's representative and the mortgagors.

(b) Parents unwittingly signing an unlimited guarantee when a guarantee limited to $200,000.00 had been agreed between ERF's representative and the guarantors.

(c) No copies of any documentation signed supplied by ERF to the mortgagors and guarantors, namely mortgages, guarantee, letter of facility and memorandum of common provisions AA15. Copies were supplied by ERF in mid 1986 to Cuthberts, solicitors for the Partnership and Parents.

(d) No briefing by ERF to the Parents re the guarantors potential liability in the event of default by the borrowers, or ERF investigation as to the Parents incapacity to service the loans in the event of default by the borrowers.

(e) Dispute over authenticity of discovered Facility Letter as Acceptance page had no page numbering or "Facility Letter" heading as the remainder of the document had, and no initialling of pages on discovered document.

(f) Premature withdrawal of loan in breach of agreed two year term with provision for extension of time if required.

(g) Dispute over two technical defaults of interest being paid late. Agreement had been reached each time between both parties to defer sale of livestock and product until a more opportune time to increase returns.

(h) Misappropriation of Partnership livestock proceeds.

(i) Failure by Elders Pastoral to accurately record sales proceeds to the Partnership account on the correct dates. Deferral of account credits were used as a ploy by ERF and James to infer default at given dates.

(j) False claims of mortgage over wool and produce by ERF and James without any Wool liens or Crop liens ever being given by the partnership or Parents, or requested by ERF or James.

(k) Defamation of business enterprises against Partnership by ERF.

(l) Rejection of validity of James appointment as Receiver/Manager by ERF.

(m) Refusal by James and Broadhead representing ERF on 7 November 1986 to accept Partnership offer of repayment of ERF loans in full.

(n) Sale of entire properties and assets as planned by ERF and James totally unnecessary and constituted oppressive use of superior economic power by the mortgagee.

(o) Restriction of trade in relation to ERF stocking bans on properties.

(p) Potential damages that would flow from many of the above issues via counter claims.

(q) ERF and James were on notice that the Partnership intended to issue proceedings in the Federal Court of Australia for damages under the Trade Practices Act for false and misleading conduct.

These issues are in substance, the same as or overlap with many of the issues the applicants contend are issues Waters, acting as their trustee in bankruptcy, was obliged to pursue against Elders.

Interim terms of settlement, dated 26 March 1987, were signed by the legal representatives of the parties. The terms appeared to resolve the disputes at that stage. Consent orders, which were made by Gobbo J in the Supreme Court of Victoria on 27 March 1986, provided for the sale of the mortgaged property for the benefit of, inter alia, Elders, as a secured creditor. As a result of the settlement, a number of sales of partnership land occurred at prices which the partners have maintained were well below the value of the property sold.

Nothing further occurred in relation to the Supreme Court proceeding until 19 January 1988 when Crockett J, on a motion for judgment by Elders, as firstnamed plaintiff and James, as secondnamed plaintiff, ordered that there be judgment in default of defence in the Supreme Court proceeding for certain declarations and injunctions. The declarations and injunctions against the defendants, being the partners and the Cheesman parents, were as follows:

1. A declaration that the secondnamed plaintiff has been validly appointed by the firstnamed plaintiff to exercise all powers of the firstnamed plaintiff in respect of the livestock subject to the livestock mortgage.

2. A declaration that the secondnamed plaintiff has been validly appointed by the firstnamed plaintiff as receiver of the income of the land subject to the real property mortgages.

3. A declaration that the secondnamed plaintiff is entitled to occupy the lands used by the partners for the purpose of depasturing livestock and the manage the business of the partners with respect to the mortgaged property referred to in the livestock mortgage upon those lands or any part or parts thereof.

4. A declaration that the secondnamed plaintiff is entitled to enter the land subject to the real property mortgages to examine the state of repair order and condition thereof.

5. A declaration that the secondnamed plaintiff is entitled to carry on and manage on the lands subject to the real property mortgages any business being conducted on such lands and to preserve the goodwill thereof and to sell the goodwill either separately or together with the lands.

6. An injunction, both interlocutory and permanent, restraining the partners and each of them from preventing the secondnamed plaintiff occupying the lands used by the partners for depasturing livestock or managing the business of the partners with respect to the mortgaged property referred to in the livestock mortgage on those lands or any part or parts thereof.

7. An injunction, both interlocutory and permanent, restraining the defendants from preventing the secondnamed plaintiff entering upon the lands subject to the real property mortgages for the purpose of examining the state of repair order and condition thereof.

8. An injunction, both interlocutory and permanent, restraining the defendants from preventing the secondnamed plaintiff carrying on and managing on the lands subject to the real property mortgages any business being conducted on such lands and preserving the goodwill thereof and selling the goodwill either separately or together with the lands.

In the meantime, the partners had been made bankrupt by sequestration orders made on the application of Elders on 4 June 1987.

Waters, as trustee in bankruptcy for the partners, was made aware of the judgment on 20 January 1988 but decided that he would not take any steps to set it aside. As far as Waters was concerned, Elders was entitled to exercise its powers as mortgagee in respect of all of the mortgaged property. Given the consent orders made on 27 March 1986, the absence of any challenge by the partners to their bankruptcy on the application of Elders as an unsecured creditor for the deficiency in the value of its security and the paucity of funds and evidence available to Waters to contest the proceedings it was quite proper and reasonable for Waters to arrive at that conclusion: see Citicorp Australia Ltd. & Others v. Official Trustee in Bankruptcy and Cirillo Full Court (Foster, von Doussa and Sundberg JJ) unreported, 16 December 1996 at 24-26.

In February 1988, the Cheesman parents applied to set aside the judgment in default of defence against them. The Cheesman parents also sought injunctions restraining Elders and James from proceeding with the sale of property under the mortgage granted by the Cheesman parents to secure their guarantee of the indebtedness of the partners to Elders. Affidavits were filed in support of and in opposition to the application. The parties contesting the application had legal representation.

Kaye J delivered judgment in the Supreme Court on 11 February 1988. After referring to the evidence of the Cheesman parents and the history of the matter Kaye J said:

It seems to me that notwithstanding all the circumstances of this case, including whatever rights the applicants might have against Cuthberts or Krogers in relation to the manner in which the solicitors conducted their affairs, those matters cannot be taken into account or ought not to be taken into account in connection with the plaintiff's rights in the present action. It is significant that the sale of the properties took place on 27th March, 1987, and in conformity with orders made by consent of their then solicitors. Having regard to that circumstance it seems to me that it would not be just and equitable to deny to the plaintiffs their right to enforce the terms of the order made by Gobbo J. If I were to accede to the application for an interlocutory injunction at this stage it would be in conflict with the orders that were made by consent. The defendants, in the persons of Mr. and Mrs. Cheesman in particular, having consented to the sales of the property at that time, and nothing having been put to me to show that they were unaware of the orders so made, or that the orders were made by fraud, or made by deceit, any basis for an interlocutory injunction restraining the plaintiffs from selling the two properties by auction tomorrow has not been made out. Accordingly, the summons is dismissed with costs.

The reference in the judgment to Cuthberts and Krogers is a reference to two firms of solicitors which had acted for the partners and the Cheesman parents. It appears to be a response to the tendency of the Cheesmans, as a fall-back position, to hold their lawyers responsible for their woes.

Although, in her affidavit, I.J. Cheesman also made numerous accusations against Elders, her counsel when asked by Kaye J, did not contend that fraud was being alleged. In these proceedings criticism was made by I.J. Cheesman of her legal representatives for taking that course. However, in the absence of evidence of fraud it was clearly a proper course for the representatives to take. Kaye J did not accept that the evidence filed in the Supreme Court proceeding established improper conduct by Elders or James in relation to the sale of the mortgaged property or the absence of a right on the part of Elders and James to proceed with sales of the mortgaged property. Accordingly, the judgment was not set aside and the injunctions sought were refused.

These matters are significant. Although the application before Kaye J was made by the Cheesman parents, I am in no doubt that the applicants were aware of and supported the application. Since July 1987 the applicants had been making serious allegations to Waters about improper conduct on the part of Elders and James. Any evidence supporting those allegations would have been highly relevant to the application being made by the Cheesman parents. Any defence of the principal debtors to Elders' claims against them, could afford to the Cheesman parents a defence to the claims of Elders against them as guarantors. Such evidence as was adduced before Kaye J in relation to alleged improper or indeed any other conduct on the part of Elders or James, was not sufficient to persuade his Honour to set aside the judgment in default of defence obtained against the Cheesman parents.

In these circumstances as at February 1988 Waters was entitled to form the view that, notwithstanding the allegations continually being made to him by the applicants, he had no proper basis for challenging the conduct of Elders or James. Little emerged after that date, in that regard, which was not suspected or alleged prior to that date. As from February 1988 Waters had the benefit of a judicial determination after a contested hearing on the issues raised in the Supreme Court proceeding to assist him in determining the course, if any, he should take in relation to Elders.

5.3 The bankruptcy of the partners

On 16 September 1986 bankruptcy notices were served on each partner on behalf of Jackson in respect of a judgment in the sum of $270,585.56 entered against the partners on 16 May 1986 in the Supreme Court of New South Wales. The amount, the subject of the notice was not paid, with the consequence that acts of bankruptcy were committed by the partners on 14 October 1986.

A creditors petition in respect of the judgment debt, which was then $290,338.30, was presented by Jackson in the Federal Court, New South Wales Registry, on 24 October 1986. The partners applied for a transfer of the petition to Melbourne but it appears that the application was not pursued by the partners or determined by the Court.

On 15 May 1987 Elders applied to be substituted as the petitioning creditor. On 18 May that application and the petition were adjourned to 28 May 1987. On the same day Cuthberts, the firm of solicitors acting for the partners, advised the partners that the firm could not act further in the matter until its costs had been paid and legal aid was granted.

By 28 May 1987, although the judgment debt was still outstanding, Jackson no longer wished to prosecute the petition. The evidence is that the Cheesmans had sought to persuade Jackson that prosecution of the petition would be to no avail as the Cheesemans' predicted that there would be a deficiency, or at least no surplus, after payment of the amounts due to secured creditors. The prediction proved to be correct. However, it is inconsistent with the later statements of the Cheesmans to Waters that there should have been a substantial surplus.

On or about 28 May 1987, by order of the Court, Elders was substituted as the petitioning creditor. The hearing of the petition was adjourned to 4 June 1987. In the affidavit filed on behalf of Elders as at 4 June 1987 the amount claimed to be owing to it was $583,436.49. It was estimated that, as at that date, the proceeds from the sale of secured property and livestock would total $240,128.33, leaving a deficiency of $343,308.16. The latter sum was the amount relied upon as justifying the application for sequestration orders made by Elders, as an unsecured creditor on 4 June 1987. The estimate was never disputed in any proceedings between Elders and the partners.

Elders was entitled to make a bona fide estimate of the value of its security and to petition as an unsecured creditor for the deficiency without surrendering its security: see s.44(2) of the Act. In Re O'Leary: Ex parte Bayne (1985) 61 ALR 674 at 682 Sheppard J said:

It is the fact that the petitioning creditor is not bound by the estimate when he comes to prove his debt in the bankruptcy of the debtor (see ss 90-94 earlier mentioned) that leads me to think that a petitioning creditor is obliged to do no more than make the best estimate he can of the value of his security when he presents his petition. As I have earlier said, what must be shown is that he has an unsecured indebtedness which amounts to more than $1000. That is the only purpose of the provision. But his estimate must bear a close relationship to the realities of the matter. If must certainly not be arbitrary or capricious. There is nothing of that kind in this case. The estimate made by the petitioning creditors here may turn out to be wrong, but in my opinion, as matters are looked at at the moment, it is a perfectly reasonable estimate for them to make. If they be wrong about it, the probabilities are that they will be unsecured creditors for a sum of money which will substantially exceed the $1000 which a petitioning creditor must be owed before he may present a petition.

The same comments may be made of the estimate made by Elders in the present case.

On 4 June 1987 a sequestration order was made by Registrar Murray in respect of the estates of each of the partners. The partners first became aware of the sequestration orders on about 11 June 1987. Shortly after that date each of them received a notice from Waters, acting as their trustee, requiring a statement of their affairs. A copy of the order of the Court made on 4 June was sent by Waters to A.M. Cheesman on 17 June 1987. Waters' evidence, which I accept, was that he acted on the assumption that the bankruptcy orders were properly made. In my view he was entitled to make that assumption on the basis of the facts known to him and in the light of the failure of the partners, after receiving legal advice, to apply to set aside the orders.

Cuthberts, and Minter Ellison acting as its Sydney agents, were the solicitors on the record for the partners in the bankruptcy proceedings. Although it is likely that the solicitors had notice of the hearing on 4 June 1987 it is also likely that, as at that date, they regarded themselves as having ceased to act for the partners. It is unlikely that the partners became aware of Elders becoming the petitioning creditor or of the hearing of the petition on 4 June 1987 until after the making of the sequestration orders on that date.

The partners' allegations as to Elders misconduct and the true value of their land and livestock provided the substratum for a real dispute between the partners and Elders as to Elders' entitlement to be substituted as an unsecured creditor and to the sequestration orders obtained on 4 June 1987. The partners had standing to apply to set aside the sequestration orders made in their absence. I am satisfied that in June 1987 or shortly thereafter the partners were aware of the availability of grounds, and of the facts entitling them to apply, to set aside the sequestration orders. I infer that, after receiving legal advice, the partners accepted that they were unable to pay their debts and decided that little would be achieved, other than further expense, in applying to set aside the sequestration orders. No other satisfactory or acceptable explanation has been provided to me as to their inaction at the time.

The partners had new solicitors acting for and advising them by the middle of 1987. They had numerous solicitors acting for them at different stages between 1987 and 1995. However the partners never applied to the Court to set aside the orders or to issue any other proceedings against Elders, which was regarded by them as primarily responsible for all their woes. The applicants' evidence was that many different solicitors represented them for the purpose of taking action on their behalf at one stage or another from late 1986 until August 1995. However, the evidence from the applicants was that, with the possible exception of the last solicitor acting (who ceased to act because of lack of funds), after being "fully briefed and ready to take action the solicitors would suddenly, without giving reason, withdraw and refuse to accept further briefing". Although it was alleged that the solicitors let the applicants down I do not accept that allegation.

In my view the probability was that the failure to meet legal costs, the legal and factual complexity of the claims and the absence of sufficient admissible evidence led to the withdrawal from the matter of solicitor after solicitor. It was also alleged that the solicitors "feared" Elders. I also do not accept that allegation. The probability is that, recognising that serious allegations were being made against Elders, after receiving legal advice, the partners accepted that any proceedings would be strongly contested, required admissible evidence and would be expensive to conduct.

The same difficulties confronted Waters. He had no funding for the legal costs of a proceeding or admissible evidence yet was expected by the applicants to do that which they had desisted from doing.

In February 1991 the solicitors then acting for the applicants prepared a draft application to the Court. Elders and Waters were the proposed respondents. The draft application challenged the original sequestration orders on the grounds that the bankrupts were able to pay their debts, were unrepresented and had been denied natural justice. It also alleged that Elders exercised its "rights oppressively" and abused the processes of the Court. The proceeding was never issued.

It was said on behalf of the applicants that their path was impeded by lack of resources and information. The same situation confronted Waters. But there was an important difference; the applicants, rather than Waters, were making the accusations. Waters' evidence, which I accept, was that he did not regard Elders or James as having acted improperly. In my view Waters was entitled to treat the accusations, without clear and cogent evidence to support them, with considerable apprehension. It was quite proper for Waters to not pursue the accusations, without evidence, made by the applicants.

5.4 The bankrupts' Statement of Affairs of 7 July 1987

Between 19 June and 7 July 1987 extensive discussions took place between the partners, Waters and his staff concerning the preparation of the Statement of Affairs. On 7 July 1987 the partners prepared their Statement of Affairs and the affidavit of verification was sworn to on the same day.

Written accusations were first handed to Waters by the partners on 7 July 1987. They alleged improper conduct by Elders. Evidence to establish the accusations made was not provided at that time or, it appears, at any later time. The allegations and such information as the partners had in relation to Elders' conduct was in their possession prior to their bankruptcy. The allegations were stated as follows:

CHEESMAN CLAIM FOR DAMAGES AGAINST ELDERS RURAL FINANCE

1. $400,000 for actions which stopped Cheesman Bros. appealing against Jackson/Cheesman judgment in 1986.

2. $300,000 for restrictions on stocking of property for 1985 through 1986 to projected losses in early 1987.

3. $90,000 for restrictions on cash flow plus unnecessary waste of time attempting to re-finance loans causing substantial reduction in cropping acreages.

4. $90,000 for similar restrictions and unnecessary waste of manpower resources causing Cheesmans to have no hay harvest.

5. Unspecified Damages - for attempts to appoint an interstate receiver to increase costs and sell property by tender.

6. Unspecified - for unnecessary legal costs and travelling/accommodation.

7. Unspecified - interest on above losses @ 20%.

8. Unspecified - letters ruining Cheesman families business credibility.

9. Unspecified - action to close bank accounts unnecessarily to ruin business credibility.

10. Unspecified - unnecessary stress and strain caused by Elders actions.

The allegations largely overlap with the issues stated by the applicants as having arisen in the Supreme Court proceedings. The Statement of Affairs showed assets of $77,422, liabilities of $1,427,847 with a total deficiency of $1,350,405. Unsecured creditors totalled $454,388; they included Jackson, in a sum of about $327,000 and other unsecured creditors for relatively small amounts. Secured creditors totalled $1,857,280 with the largest being NAB (about $713,000) and Elders (about $623,000). The NAB debt of $1.2 million had been reduced by its receipts as first mortgagee from the March 1987 sales.

The Statement of Affairs deposed to by the partners demonstrated their insolvency. The partners protested at the low valuations given to their farming properties which they claim were "forced" upon them by Waters or his staff. They required that a note be incorporated in the Statement of Affairs that the values were "unrealistically low and tendered under protest". The Note stated:

ESTIMATED VALUE OF SECURITY AT PRESENT are unrealistically low, and are tendered under protest. These values are not to be used in any way to prejudice any legal proceedings which may eventuate re unspecified damages for unscrupulous actions taken by numerous companies, culminating in deliberate bankruptcy of the three Cheesman families.

Supporting evidence of the true land values is supplied by reference to Mr. Geoff Shady's letter of 7.12.1986; Denis M. Foley and Associates statement of 4.12.1986; and Mr. W.A. Wood's letter of 16.2.1987.

Elders stock valuation of 12.6.1984, showing total value of $710,000.00 is more realistic for size of property and business - Prior to deliberate unstocking and "cut out their cash flow and we'll bring them to their knees" policy by mortgagees.

Plant and hay valuations prior to freezing of business activities were valued at approx. $250,000.00 by Mr. Ian McLachlan of the Commonwealth Development Bank.

Summary of realistic values prior to deliberate interference in business operation and forced "fire sale" actions:

Land:- Average Price - $750.00 per acre( basis: $625.00 farming/$1,000.00 hobby/farms.

Stock:- Normal Level - $600,000.00 to $800,000.00.

Plant & Hay:- Normal Level - $250,000.00.

The allegations referred, inter alia, to the existing dispute between the partners and Elders. They also referred to the fact that NAB had entered into an arrangement with Elders in relation to the sale of the farming properties thereby enabling Elders to be involved in the realisation of those properties for the benefit of NAB and Elders as first and second mortgagees respectively.

The Note reflected the ongoing bitterness, anger, distrust and resentment of the partners in relation to Elders. These proceedings, in large part, resulted from the applicants' view that Waters was under an obligation to dispute Elders' entitlement to bankrupt the partners, to sell their property (including wool clips) at allegedly "low" values or at all and to challenge the accounting given by Elders.

The steadfast view of the applicants has been that their property was sold by Elders at a gross undervalue and Elders thereby breached its duties to them and their trustee in that regard. The basis for that view as presented to the Court appears to have been the material prepared late in 1986 to establish the solvency of the Cheesmans. That material has been in the Cheesmans' possession since that date.

Mr. G.R. Shady, a regional manager with Dalgety Farmers Ltd. in December 1986, prepared a letter for the Cheesmans which stated:

Re: Cheesman Family - Talbot

I have today inspected the various properties belonging to the Cheesman family in the Talbot district, comprising in total some 5610 acres.

Without having completed a full valuation it is my opinion that if properly marketed and promoted in a professional and orderly manner, it would be reasonable to expect that the valuations attributed to them in the Statement of Assets & Liabilities prepared by Dennis M. Foley and Associates and dated 4th December, 1986 should be attainable to within 10%.

The statement of assets and liabilities referred to, based on Shady's "opinion" rather than a "full valuation", valued the properties at about $3.4 million giving total partnership assets of $3.86 million and a net surplus of assets of $908,215.

The "opinion" appears to have both fuelled and maintained, until the present time, the partners' case that the partnership was not insolvent, that the value of the secured assets greatly exceeded any indebtedness the partners had to secured creditors and that any deficiency has resulted from the sale of secured assets at a gross undervalue of those assets.

Putting aside, for the moment, the absence of a "full valuation" based on appropriate comparable sales (if any existed) a valuation of property of the magnitude of that owned by the partners, based on a voluntary, orderly and unpressured sale in the usual course of business may bear no relationship whatsoever to the market value of that property realised during March 1987 and later at a mortgagee sale.

The difficult economic times for farmers, the magnitude of the property being sold and the known fact of a forced mortgagee sale, were likely to result in substantially lower prices than one might expect to find stated as the "market" value, even in a proper valuation based on comparable sales.

Late in 1986 the partners were themselves putting forward that very conclusion as an outcome. In an affidavit filed on behalf of the partners in the bankruptcy proceedings Mr. D.M. Foley, the accountant who prepared the statement of their financial position as at 4 December 1980, expressed the opinion that a forced liquidation sale may result in a shortfall. The same outcome was put by the partners to Jackson in an endeavour to persuade it to desist from bankrupting them. That predicted outcome became the reality.

In my view there was no valid reason for Waters to suspect that Elders had acted unlawfully and in breach of its duties as a mortgagee in proceeding with its "forced liquidation sale" which in fact resulted in a significant shortfall to Elders itself as a mortgagee.

Waters' evidence, which I accept, was that he relied upon the fact that the sales were achieved at or after auction and in general reflected his view of the market value at the time. He also said that those values generally accorded with offers he was receiving in 1987 and with information he was receiving from NAB.

6.0 THE TRUSTEE'S STATUTORY FUNCTIONS

The trustee filed statutory reports with the Registrar from time to time which showed the results of his investigations.

Waters filed his first trustee's report on 11 March 1988. It sets out the results of his investigations to that date and also his understanding of the financial circumstances of the bankrupts. The report was as follows:

TRUSTEE'S REPORT TO CREDITORS

The abovenamed became bankrupt on 4th June, 1987 having carried on business as "Cheesman Bros" as Primary Producers and Traders in Commodities on the Sydney Futures Exchange Market. I have held personal interviews with the Bankrupts and report as follows -

CONDUCT DEALINGS AND TRANSACTIONS OF THE BANKRUPTS

Barry John Cheesman Ross Cheesman and Graeme Walter Cheesman (who are brothers) have carried on business as farmers in the Talbot area of Victoria having taken over from their parents, Walter Francis and Isabel Jean Cheesman. Several years ago the Talbot area was struck by a series of bushfires which Barry John Cheesman claimed were deliberately lit causing considerable damage to the farming properties particularly fencing and stock. Such compensation was received by the partnership from the authorities for fencing replacements. Mr. Barry John Cheesman who is the main spokesman for the partnership has explained that the financial problems were exacerbated after the bushfires. Additional finance was granted by Elders Rural Finance Limited and Freehold and Stock Mortgages were given by the partnership to secure the borrowings. Barry Cheesman has indicated in or about 1982 he began trading (on behalf of the partnership) on the Futures Market and up to early 1987 traded through Jackson Commodities Pty. Ltd., Jackson Securities Limited, Edgeley Mutual & General, Ord Minnet (Commodities) Ltd. and Elders Drexel (Aust.) Ltd. In addition to finance granted by Elders Rural Finance Limited, secured advances were received from National Australia Bank Australia Bank Limited, Cuthberts Nominees Pty. Ltd. and Mr. Ian H. Leys. It appears that Barry John Cheesman, with the consent of the other partners traded heavily in the Futures Market in an attempt to recover the poor situation in the farming side of the business and incurred considerable losses. Trading on the Futures Exchange in 1984 and 1985 resulted in further losses and a number of brokers closed out the contracts with the partnership. In November 1986 Jacksons Commodities Pty. Ltd. issued a Creditor's Petition which was set down for hearing on 8th December, 1985. An Affidavit sworn on 5th December, 1986 by Mr. Barry John Cheesman disclosed an Exhibit thereto showing total assets of the partnership as $3,860,854 and liabilities of $2,952,639.00. This statement appears to have overvalued the assets and either understated or excluded liabilities as the deficiency shown on the partnership Statement of Affairs filed herein totals $1,350,405.00 as at 4th June 1987.

It appears that the partnership operating through Barry John Cheesman made attempts to recover its financial position by continuing to trade in the Futures Market through to March or April 1987. Allegations have been made to me by Detective Sergeant Dever of the Victoria Police Fraud Squad that Barry John Cheesman had been trading on the exchange under an alias shortly prior to the date of bankruptcy and that further losses have been incurred. I have not been able to test the accuracy of these allegations.

Barry John Cheesman was arrested on 15th February 1988 and charged in that it is alleged that he obtained financial advantage by deception - he was released on bail on his own undertaking.

CAUSE OF BANKRUPTCY

The cause of bankruptcy are the losses incurred in trading on the Futures Market. It may be said that these losses resulted from the down turn in the farming partnership following the fires referred to earlier in this report.

BOOKS, ACCOUNTS AND RECORDS

The books, accounts and records of the partnership and the individual books, accounts and records are satisfactory and in no way contributed to the failure of the business undertakings.

The cash at bank from realisations as at June 1987 was $7,544. Later trustee's reports consistently disclose the paucity of funds available to Waters at all times during his trusteeship.

Somewhat belatedly Waters summoned a creditors meeting on 28 June 1990 to receive his reports and to pass resolutions approving his remuneration. At that time Waters' administration was divided between the bankrupt estate of B.J. Cheesman and the bankrupt estate of the partners. He prepared two reports prior to the meeting.

TRUSTEE'S REPORT TO CREDITORS

The abovenamed became bankrupt on 4th June, 1987 on the Application of Elders Rural Finance Ltd. and my Certificate of Trusteeship was issued on 11th June, 1987.

My staff and I held interviews with the bankrupts and Statements of Affairs for the joint and separate estates were executed on 7th July, 1987. The joint Statement of Affairs disclosed liabilities of $1,427,847.00 with a total deficiency of $1,350,405.00.

The major asset of the estate consisted of a series of properties located near Talbot. Together with a member of my staff, I inspected all the properties on 17 July, 1987 being conducted around the area of Mr. Barry Cheesman. All the properties were subject to mortgages and were subsequently sold by the mortgagees with no surpluses available for the estate. Prior to the sale of the properties, I continued agistment of stock on several of the properties as arranged through Dalgety Farmers. Proceeds from agistment fees totalled $4,274.68.

Other receipts included cash at two bank accounts, $3,534.03, wool rebate $210.23 and interest earned on funds on deposit $2,644.59.

During 1989 a Public Examination of Mr. Barry John Cheesman was held although no subsequent action has been taken following the examination. In May, 1989, Mr. Barry John Cheesman was found guilty in the Melbourne County Court of obtaining a financial advantage by deception and was sentenced by Judge Nixon to 12 months imprisonment which was suspended for 12 months. In relation to the matter of a John Holt, I refer to my separate report relating to the estate of Barry John Cheesman.

I also refer to my report pursuant to Section 19 dated 11th March, 1988 filed with the Deputy Registrar in Bankruptcy.

TRUSTEE'S REPORT TO CREDITORS

Mr. Barry John Cheesman together with his two brothers and their respective wives became bankrupt on 4th June, 1987.

A Public Examination of the bankrupt was held in 1989 and I am unaware of any action taken or to be taken following the examination.

Mr. Cheesman was charged with obtaining a financial advantage by deception under Section 28 of the Crimes Act and on 2nd August, 1988 at the Melbourne Magistrates Court was committed to stand trial in the Melbourne County Court. On 15th May, 1989 Barry John Cheesman was found guilty at the Melbourne County Court by a jury and was sentenced by Judge Nixon to 12 months imprisonment which was suspended for 12 months. During the course of the trial, evidence was submitted relating to documents completed by one John Holt. At the trial Barry Cheesman was identified by two witnesses who had introduced himself to them as John Holt. At the conclusion of the trial and in passing sentence Judge Nixon expressed his belief that the accused, Barry John Cheesman, was the person who represented himself to be John Holt.

Following the trial, it came to my notice that John Holt had applied to the Receivers of G.H. Shintoh (Aust.) Pty. Ltd. for monies held to the credit of John Holt.

Following my submissions to the Receivers of G.H. Shintoh (Aust.) Pty. Ltd., the sum of $18,846.53 was released to me as shown on the attached Statement of my Receipts and Payments.

Any surplus funds in this estate will be transferred to the joint Estates of R., B.J., G.W., B.J., A.M., and J.L. Cheesman

At that date cash on hand totalled $9,239.

The "John Holt" issue was of significance to Waters. It led him to treat the main spokesperson for the applicant, B.J. Cheesman with some apprehension. He certainly held, and was entitled to hold, doubts as to the honesty of B.J. Cheesman. Those doubts provided a backdrop to his dealings with the applicants, which were mainly with B.J. Cheesman and his wife A.M. Cheesman. I do not regard any of the conduct of Waters in relation to the applicants as improperly or wrongly influenced by those matters.

The public examination referred to in the reports was held between 5- 8 September 1989. Due to the lack of funds available to Waters, he only agreed to proceed with the examination after being indemnified by Elders in respect of the costs involved. Evidence was adduced on behalf of the applicants to the effect that after the examination the Registrar informed A.M. and B.J. Cheesman that the partners had substantial grounds to apply to annul their bankruptcy. Assuming without deciding, that some such comment was made, I doubt that it was any different to the views held by the applicants after they received advice from their solicitors.

The meeting of creditors was summoned by a notice dated 14 June 1990. The notice stated that the purpose of the meeting was to receive the trustee's report, a copy of the Statement of Affairs and to fix the trustee's remuneration.

The meeting was held on 28 June 1990 and a creditor, Mr. K.W. Cumming ("Cumming") was elected chairman. Waters was challenged about his failure to summon the meeting of creditors at an earlier date. However, the main matter raised at the meeting related to the alleged failure of Waters to obtain a full explanation from Elders in relation to its dealings with the secured properties. The meeting was adjourned to 23 August 1990 to enable Waters to consider and deal with the matters raised.

At the initial meeting Elders was recorded as being an unsecured creditor in the sum of $36,949.00. However, at the adjourned meeting on 23 August 1990 Elders claimed that the amount recorded was erroneous and that it was an unsecured creditor in the sum of $369,491.00. Cumming, the chairman acting on the legal advice of Mr. Bigmore the solicitor for Waters, accepted that voting was to be by value and treated the value of Elders' claim as an unsecured creditor as in the sum of $369,491.00. The procedure followed appeared to be in accordance with ss.66(4) and 68 of the Act. As a consequence Elders could effectively "control" the business transacted at the meeting as the total value of all other unsecured creditors was significantly less than that amount.

The adjourned meeting was acrimonious. Waters was again challenged on his failure to obtain a satisfactory accounting from Elders. The meeting was advised by Mr. Bigmore, acting as solicitor for Waters, that Waters was satisfied that Elders had not exercised its power of sale over any property which it did not hold as security for debts due to it by the bankrupt partners.

After the sequestration orders made on 4 June 1987 Waters engaged Madgwicks to act for and advise him in his capacity as trustee. It appears that Waters did receive advice from Madgwicks as to the validity of James' appointment. Madgwicks had acted and was still acting as the solicitors for Elders and James. In view of the potential conflict in relation to Elders, Waters ought not to have engaged Madgwicks to act for or advise him.

However, the significance of Waters' conduct has been overstated by the applicants. In substance, the dispute between the Cheesmans and Elders and James had been resolved, in part, by the consent orders made in March 1987 and finally in 1988 by the Court granting final declaratory and injunctive relief. Waters had no reason for arriving at a view which was contrary to the legal advice he received. Any other legal advice would probably have been to the same effect. In any event, by the time the creditors meeting was held and the question of Waters suing Elders had become the subject of legal advice, Waters had instructed Mr. Bigmore of Smith & Emmerton to act for and advise him in his capacity as trustee.

In these circumstances I am not satisfied that the engagement of Madgwicks resulted in any loss to anyone. Mr. Bigmore's advice was that it was not appropriate for Waters to proceed against Elders. Waters acted in accordance with that advice. It has not been established that it was other than proper and reasonable for him to do so. Further, I have no reason to find that any solicitor acting for and advising Waters at any earlier point of time would have given him advice that differed in any relevant respect from that proffered by Mr. Bigmore. It was reasonable and proper for Waters to form the view, after advice to that effect, that in the absence of both evidence and resources he was not obliged to take action against Elders.

A motion was put at the meeting that application be made under s.179 of the Act to determine whether Waters was guilty of "malfeasance, misfeasance, negligence, wilful default or breach of trust" in relation to the bankrupts' property. The motion required that the costs of the application be met out of the funds in the bankrupt estate. On any view the funds available from the bankrupt estate for an application of the kind proposed were hopelessly inadequate. The motion was passed on a show of hands but defeated on a vote based on value.

The evidence establishes that the unsecured creditors did not provide, and did not appear to be prepared to provide, funds to pursue a claim against Waters or funds which would enable Waters to pursue a claim against Elders. As with the Cheesmans, it was easier for the unsecured creditors to make the allegations than to incur the cost involved in pursuing or proving them.

A resolution providing for remuneration of $14,026.60 for the trustee and his staff was defeated on a show of hands but passed on value.

At the meeting Waters was questioned at length on the steps taken by him in relation to Elders. Waters indicated that he was taking steps to preserve the interests of all creditors. Mr. Bigmore said the simple fact was that the trustee did not have the funds to investigate the claims being made against Elders. He also said in relation to Elders:

"In short on legal advice my client says that whatever suspicions people might have there is not evidence, there is no case and he will not raise it".

There was no challenge to or questioning of Waters by the applicants in relation to the legal advice given by Mr. Bigmore notwithstanding that Waters waived all rights to legal professional privilege in respect of the advice.

During 1991 Cumming had sought, but did not obtain, further information from Waters.

By letter dated 18 April 1993 Waters advised Cumming that:

"I will not be taking any action against Elders Rural Finance Ltd.

I have advised Mr B J Cheesman that I am prepared to sell to him or others the prospective cause of action against Elders. Subject to his reply, it is my intention to finalise the administration of the bankrupt estate."

After the meeting of creditors numerous letters were also sent by or on behalf of the partners to Elders and Waters requesting an accounting for the property sold by Elders as mortgagee. For reasons which were not made apparent by Elders, it was reluctant to supply the accounting information sought. Undoubtedly its recalcitrance in that regard fuelled the suspicions of the partners and Cumming. Finally, on 20 October 1991 Madgwicks, the solicitors acting for Elders, provided information including details of the sales of four properties. As was known by the bankrupts, the gross sales price was considerably less than the values placed on the properties by the bankrupts.

Notwithstanding his limited funds Waters had obtained some of the information the partners had been seeking from Elders. After considering the information made available to him, on 31 October 1991 Waters provided the bankrupts with the information he had received from Elders and certain other information requested by the applicants. Although the information provided was limited nothing in it, of itself, provided a basis for Waters to suspect improper or unlawful conduct on the part of Elders. Waters' evidence, which I accept, was that notwithstanding the difficulty he had with Elders concerning the provision of the information he requested, he regarded the responses he received as providing a satisfactory answer, even if it did not provide the detail he would have wished. Waters did not believe that there was anything "untoward" about Elders' conduct.

Requests were made by or on behalf of the bankrupts for further information from Elders. Waters requested the further information but Elders did not provide it. It is relevant to observe that although Elders filed a proof of debt for its deficiency it appears that Waters did not have to make a decision admitting it as no dividend was declared by him.

Finally, in a letter dated 11 March 1993 from Waters to B.J. Cheesman, Waters stated:

As you are aware, I have been unable to obtain answers from Elders Finance Ltd. to all the matters raised by you.

I have given considerable thought to the merits of taking action against Elders either in the Court or pursuing answers using the provisions of Section 77C or Section 81 of the Bankruptcy Act and have decided not to proceed under either of the courses. In addition, there are no funds at all with which to prosecute an action, the costs of which in pursuing the claims outlined by you would be very substantial. I am advised that there would be very little prospect of me succeeding in a potential claim against Elders.

If you and others consider that the cause of action against Elders is valuable, I am prepared to sell to you and or others the prospective cause of action.

Subject to your reply to my offer to sell the cause of action, I intend to proceed to finalise the administration of the bankrupt estate.

Waters waived legal professional privilege in respect of the legal advice referred to in the letter. Once again Waters was not challenged or cross-examined in relation to his evidence that he acted in accordance with the legal advice he received.

The offer set out in the letter was never responded to by the bankrupts. At that time they were discharged bankrupts and were competent to take an assignment of any cause of action against Elders. Clearly, such a course was open as a matter of law: see Re Bankrupt Estate of Cirillo (1996) 136 ALR 607 at 614-6 and on appeal Citicorp at 12-13. Indeed the contrary was not contended by the applicants.

The applicants preferred to attack Waters for not doing that which the partners had not been prepared to do. G.W. and A.M. Cheesman were cross-examined on why they chose to pursue Waters rather than Elders. Their response to the questions asked was unconvincing. I am satisfied that their lack of financial resources, the obvious costs involved in pursuing Elders and the lack of admissible or other evidence led them to decide, after legal advice, not to respond to the offer. Instead they elected to proceed against Waters who, for substantially the same reasons, after receiving legal advice, had decided not to pursue Elders.

In Citicorp the Full Court carefully considered the obligations of a trustee in determining whether to pursue proceedings or claims by a bankrupt or to assign the chose in action. The Court considered the many and varied practical difficulties confronting a trustee in such a situation and emphasised that the Court must adopt a practical approach in authorising an assignment of a chose in action by a trustee. For present purposes it is sufficient to refer to passages from two English cases cited with approval by the Court.

In Seear v. Lawson (1880) 15 Ch D 426 at 433 Jessel MR said:

If the trustee gets a right of action, why is he not to realise it? The proper office of the trustee is to realise the property for the sake of distributing the proceeds amongst the creditors. Why should we hold as a matter of policy that it is necessary for him to sue in his own name? He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding-up of the bankruptcy until the end of the litigation. Considering these things, it seems to me to be a priori probable that he would be entitled to sell it........

More than 100 years later in Stein v. Blake [1995] UKHL 11; (1996) 1 AC 243 Lord Hoffmann, in whose speech the other members of the House of Lords agreed, said at 260:

It is a matter of common occurrence for an individual to become insolvent while attempting to pursue a claim against someone else. In some cases, the bankruptcy will itself have been caused by the failure of the other party to meet his obligations. In many more cases, this will be the view of the bankrupt. It is not unusual in such circumstances for there to be a difference of opinion between the trustee and the bankrupt over whether a claim should be pursued. The trustee may have noting in his hands with which to fund litigation. Even if he has, he must act in the interests of creditors generally and the creditors will often prefer to receive an immediate distribution rather than see the bankrupt's assets ventured on the costs of litigation which may or may not yield a larger distribution at some future date. The bankrupt, with nothing more to lose, tends to make a more sanguine view of the prospects of success. In such a case the trustee may decide, as in this case, that the practical course in the interests of all concerned (apart from the defendant) is to assign the claim to the bankrupt and let him pursue it for himself, on terms that he accounts to the trustee for some proportion of the proceeds.

In my view in declining to pursue proceedings against Elders and offering the chose in action to the Cheesmans, Waters adopted a proper, reasonable and practical approach which was consistent with the Full Court decision and the passages to which I have referred. Indeed given the paucity of funds and evidence available to Waters he had no other realistic alternative.

On 19 September 1991 the applicants had threatened Waters with action for failing to obtain from Elders the information required by them. No action was taken at the time. I note that as late as 23 February 1996 the applicants were still reserving rights against Elders. On that day they wrote to Elders:

We hereby formally reserve our legal rights to both require full accounting direct from your Company if insufficient facts are supplied by the Trustee in Bankruptcy, and instigate legal action against your Company if all sales of assets and distributions of proceeds were not authorised by law.

The letter confirms my view that, notwithstanding the many accusations and allegations, even as at February 1996 the Cheesmans still had no clear basis for contending that Elders' sales of secured assets and accounting for the proceeds were not in accordance with law.

One of the odd features of the present case was that, rather than directly challenging Elders, the alleged source of all of the partners difficulties, in and since 1993 the partners elected to proceed only against Waters. Eventually that led to the present proceeding by the applicants being issued in the Court on 20 July 1994.

Waters ceased to be a registered trustee after 30 June 1994 as he did not file a notice of extension under s.155A of the Act. As from 30 June 1994, to the extent that he had not already done so, he ceased to act as trustee of the bankrupts' estates.

By 30 June 1994 Waters had already filed his final reports. The final report for B.J. Cheesman's estate was dated 5 July 1992 and showed total receipts of $22,410.41. Total payments were $22,410.41 which included trustee's remuneration of $5,716.60, payment of a $2,685.00 dividend being 100 cents in the dollar to a creditor and a transfer of $13,043.33 to the bankrupt estate of the partners.

The final report of the bankrupt estates of the partners dated 2 September 1993 showed total realisations of $26,031.60 which included the sum of $13,043.33 transferred from B.J. Cheesman's estate. Total payments were $26,031.66 and included $4,983 being petitioning creditors costs and $16,163.44 trustees remuneration. No dividend was available for creditors.

The total net realisations of about $35,400.00 may be contrasted with the "fire sale" estimated value of $269,255 placed by the partners on their assets "under protest" in their statement of affairs.

The final report contained the following statement by the trustee:

Having given considerable thought to the merits of taking action against Elders Finance Ltd. either in the Court or pursuing answers using the provisions of Section 77C or Section 81 of the Act, I have decided not to proceed under either of the courses. There are no funds available to prosecute an action and my legal advice is that there would be little prospect of succeeding in a potential claim against Elders Finance Ltd. Accordingly, I have decided to close this administration.

Legal professional privilege was waived in respect of the legal advice referred to in the report but there was no challenge or cross- examination by the applicants in relation to the advice given,

Waters was also said to have failed to comply with s.170(2) of the Act which provided:

The trustee shall, at the request of the bankrupt, furnish to the bankrupt information reasonably required by the bankrupt concerning his property or affairs.

I am satisfied that at all times Waters complied with s.170(2). The section relates to an obligation to "furnish" information. However, it could not have been intended by the legislature that the information required to be furnished could extend to information which is not in the possession of or available to the trustee. For example, it would not be consistent with the policy or scheme of the Act for the bankrupts to be able to require the trustee to issue and contest legal proceedings to obtain information sought by the bankrupt in reliance on s.170(2) merely because the information was "reasonably required by the bankrupt". It is appropriate to interpret the section in a manner which gives effect to and is not inconsistent with the legislative intention: see Cooper Brookes (Wollongong) Pty. Ltd. v. Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 at 320-1 per Mason and Wilson J and Saraswati v. The Queen [1991] HCA 21; (1991) 172 CLR 1 at 22 per McHugh J.

In my view it is implicit that the information referred to in s.170(2) will be in the possession of, or available to the trustee and therefore within his power to furnish. It has not been demonstrated that Waters failed to provide to the bankrupts information which was in his possession or available to him.

The applicants regarded s.170(2) as imposing an obligation on the trustee to obtain information requested by them concerning their property and affairs in the possession of a third party, such as Elders, notwithstanding that it was not in the possession of, or available to Waters. The information sought could only become available to Waters if he took legal steps, in the exercise of his statutory powers, to obtain it. In his final report, which I have set out above, Waters explained that on the basis of the legal advice he received he did not take that course. I am satisfied that he was not obliged to do so under s.170(2).

An alternative construction of s.170(2) is that, as a general rule, a requirement that a trustee furnish information that is not in the trustee's possession or power is not a "reasonable requirement". For the reasons set out above I am satisfied that as the information sought by the bankrupts from Waters would have necessitated the taking of legal steps against Elders to obtain the information that requirement was not reasonable.

I would add that it has not been established that any loss has been suffered as a result of the failure by Waters to provide the information requested by the applicants.

7.0 WATERS DEFENCE

Waters relied upon two affidavits sworn by him in response to the voluminous material relied upon by the applicants. He referred to his final report dated 2 September 1993 in which he stated:

Having given considerable thought to the merits of taking action against Elders Finance Limited either in the Court or pursuing answers using the provisions of Section 77C or Section 81 of the Act, I have decided not to proceed under either of the courses. There are no funds available to prosecute an action and my legal advice is that there would be little prospect of succeeding in a potential claim against Elders Finance Limited. Accordingly, I have decided to close this administration.

Waters' evidence was that:

Each of those assertions is, and was at all times material, true.

He was not challenged on that evidence. Waters conceded that he had breached Bankruptcy Rules 27(3) and 92(2). His evidence was:

Regrettably, in respect of the administration of the estates of the bankrupt, the relevant provisions of Bankruptcy Rule 27(3) were not observed, in that I failed, within 28 days of the making of the sequestration order on 4 June 1987, to cause notice of the fact of the bankruptcy to be served on each creditor of the bankrupts, being a creditor whose address was known to me. However, there was no failure to forward to creditors a summary of the statement of affairs (that is to say the joint statement of affairs of all the bankrupts and the separate statement of affairs of Barry John Cheesman, the only statements of affairs) because neither of those statements of affairs was made within 28 days of the date of the making of the sequestration order. In fact, both statements of affairs were made on 7 July 1987.

The failure to observe the provisions of bankruptcy rule 27(3) referred to in the preceding paragraph hereof resulted entirely from inadvertence on my part and on the part of my staff.

In respect of Rule 92(2) Waters' evidence was:

During the whole of the period between the date of the making of the sequestration order on 4 June 1987 and Tuesday 11 August 1987 (the end of the period of 28 days immediately succeeding the date of the filing on 13 July 1987 of both statements of affairs) and for over two years thereafter:

(a) I was not of the opinion that it was desirable that I should cause a meeting of the creditors of the bankrupts or any of them to be held;

(b) no creditor requested me to cause a meeting of the creditors of the bankrupts or any of them to be held.

Regrettably, however, the requirement of Bankruptcy Rule 92(2) were not observed in that, although I was not of the opinion that it was desirable that I should cause a first meeting of creditors to be held, I failed to inform each of the creditors whose address was known to me at the time that I did not propose to call such a meeting. This failure was entirely due to inadvertence on my part and on the part of my staff.

I convened a meeting of creditors for 28 June 1990. The account of that meeting and its adjournment contained in the affidavit of Isabelle Jean Cheesman sworn 18 July 1994 and filed herein (to which affidavit I crave leave to refer) is, to the best of my recollection, accurate, save that the reference to "the first Creditors' Meeting" is ambiguous in that, although 28 June 1990 was the first time that the creditors had met at a formal meeting, it was not a meeting pursuant to by Section 64 of the Bankruptcy Act 1966.

I am satisfied that no loss or harm was occasioned by the breaches conceded by Waters. It is difficult to see how any earlier action by him in relation to the unsecured creditors would have made any difference to the bankrupt estates or the amounts realised or realisable by Waters for the benefit of creditors or the bankrupts. I am satisfied that the unsecured creditors, or some of them, were prepared to call for action but not to put their hands in their pockets to provide any finance to enable the action they requested. That was the actual situation in 1991. I have no reason to conclude that it would have been any different at any earlier point of time.

Further, I have no reason to conclude that any earlier action by the trustee would have led to any benefit to the bankrupt estates. The unsecured creditors, although aware of the bankruptcies of the partners, had not taken any steps to exercise their statutory rights or powers, including the power to request a meeting of creditors under s.64(1)(a).

In respect of the other allegations against Waters his evidence, which I accept, was:

I and my staff have carried out a considerable amount of work in relation to the administration of the estates of the bankrupts. I have never failed to ascertain the property of the bankrupts or any of them. I have never failed to take possession of property of the bankrupts capable of manual delivery. I have realised so much of the property of the bankrupts and each of them as could, in my opinion, be realised without needlessly protracting the trusteeship and I have declared and distributed a final dividend in respect of the separate estates of Barry John Cheesman. I believe I have properly administered the estates of the bankrupts notwithstanding my aforementioned failures to observe the requirements of rules 27(3) and 92(2).

As my final accounts show, I realised $22,410.41 in respect of the separate estate of Barry John Cheesman and a further $12,989.27 in respect of the joint estate. As mentioned above, I paid a final dividend of 100 cents in the dollar in respect of the separate estate of Barry John Cheesman, but in respect of the joint estate, I have sustained a shortfall (as of 2 September 1993) of $7,277.26 in respect of my remuneration, and there are no funds left in either the said separate estate or the said joint estate.

In the premises, there has never been sufficient money available to fund an investigation of the conduct of any secured creditor generally or specifically in respect of the realisation of allegedly secured assets of the bankrupts or any of them.

I have never become aware of any reliable evidence to support the bankrupts' allegation that their secured creditors dealt with them harshly. The bankrupts' affidavit material in opposition to the bankruptcy proceedings which resulted in the sequestration order made on 4 June 1987 suggests that the bankrupts were at pains to re-finance their various properties with a view to paying out their secured creditors in full. Further, the principal secured creditor concerned, Elders Rural Finance Ltd., has proved in the administration of the estates in the sum of $369,491.00, being the shortfall sustained by it upon realisation of all securities over the property of the bankrupts. At no time have I had any basis to suspect that Elders Rural Finance Ltd. would have dealt with the relevant securities so recklessly or improperly as to have depreciated the proper value of those securities by an amount exceeding the sum of $369,491 or at all.

In his second affidavit Waters denied any impropriety in engaging Madgwicks in 1987 and 1988. His account details disclose that fees totalling $718.33 were paid by him to Madgwicks for advice concerning "John Holt", the "purchase from Cameron" and "the trustees report pursuant to s.19 of the Act" in 1987 and 1988. Although two later accounts totalling less than $500.00 were paid in 1992-3 they related to the provision of information, rather than to advice given to him. It has not been demonstrated before me that, save for advice he received as to the validity of James' appointment to which I have referred earlier, the advice Waters received from Madgwicks involved him in any conflict between interest and duty or that by instructing Madgwicks any loss resulted. As indicated by me earlier in these reasons, the James' advice was of little moment as the issue of the validity of his appointment was largely settled by the Supreme Court proceedings and Waters had no proper basis for challenging the appointment.

In his evidence, which I accept, Waters also stated that on the basis of the material before him, which he identified, he had no reason to challenge Elders claims to be an unsecured creditor of the bankrupts, by reason of the shortfall between the security held and the debt due.

Finally, Waters clarified the position of NAB as first mortgagee as at 26 June 1987. NAB informed him of the "realisation sale" of the partnership property conducted in March 1987 and of its modest expectations concerning realisation of the remaining mortgaged property to meet the partners' total liability to NAB, which was then stated to be $713,000.00.

Waters was cross-examined at length on a range of matters including his affidavits. Quite understandably, he had difficulty in recalling the detail of many of the events which had occurred so long ago. However, in my view Waters was an honest witness. He endeavoured to recall with accuracy the events the subject of his evidence and was quite frank and honest in the concessions he made against his own interest. In particular he conceded his error in using Madgwicks and in failing to call an earlier meeting of creditors. I have no hesitation in accepting as truthful the facts Waters deposed to in his affidavits and the evidence he gave under cross-examination.

8.0 BREACH OF DUTY BY ELDERS

Voluminous material was filed in an endeavour to satisfy the Court that Elders breached its duties as a secured creditor. In particular it was alleged it breached its duties as a mortgagee in selling property at a gross undervalue: see Forsyth v. Blundell [1973] HCA 20; (1973) 129 CLR 477, failed to account properly for the proceeds of sale and sold property, such as the wool clip, which was not its to sell. The material relied upon is complex and is as confused as the claims it is said to support.

In the final analysis the applicants' case failed to confront the fact that the applicants were not seeking, and were not entitled to seek, relief against Elders in its absence. The applicants were seeking relief against Waters based on his alleged breach of duty in failing to investigate and pursue the claims which the bankrupts themselves had desisted from pursuing against Elders. Much of the material relied upon to establish wrongdoing or default by Elders was new material which was not in the possession of or made available to Waters during his trusteeship. Any breach of duty alleged against Waters for not pursuing Elders must be established on the basis of the material and information in his possession or made available to him during his trusteeship. The new material therefore does not assist the applicants in establishing that Waters breached his duties as a trustee. For the reasons which I have already set out I am satisfied that Waters acted reasonably and properly in not further investigating or pursuing the claims made by the applicants against Elders.

Further, even if I found a breach of duty to investigate or pursue the claims against Elders on the basis of all of the evidence, including the new material, I am not satisfied that the breach resulted in loss to the applicants. On the balance of probabilities, the evidence does not satisfy me that -

* the failure to investigate led to any loss;

* even if the investigation resulted in reasonably arguable claims against Elders, Waters had funding or access to funding which would have enabled the claims to be pursued;

* it was likely that any of the unsecured creditors would have provided funds to Waters which would have enabled him to pursue the claims;

* if the claims were pursued they would have resulted in any benefit to the applicants or to any person other than the members of the legal profession prosecuting or defending the claims.

As a result of these findings I do not find it necessary to deal separately with each of the many and varied allegations or claims made against Elders.

9.0 THE DISCRETION UNDER SECTION 178 AND 179

These sections confer a discretionary power to make orders that the Court "thinks just and equitable" (s.178) or "proper" (s.179). The discretion is one which must be exercised judicially but is otherwise limited only by the scope, subject matter and purpose of the two statutory provisions.

In Re Wheeler: Ex parte Wheeler v. Halse [1994] FCA 1348; (1994) 54 FCR 166 at 169-170 Lee J discussed the power conferred by s.178:

In Re Tyndall [1977] FCA 15; (1977) 30 FLR 6 Deane J, as he then was, undertook a detailed examination of the nature of an application under s.178 and noted that the terms of that section differed significantly from its precursor, s.148 of the Bankruptcy Act (Cth), which corresponded closely with the comparable provisions of English bankruptcy legislation, and provided for a person "aggrieved" to make application to the Court. Deane J noted that traditionally the Courts would only interfere with the decision of a trustee if it appeared that the trustee was acting unreasonably or in bad faith. With regard to s.178 his Honour stated (at 9-10):

"Once the matter is properly before the court, the court is empowered - and obliged - to make such order in this matter "as it thinks just and equitable".

It was strongly submitted by Mr. Urquhart for the official receiver that, notwithstanding the variation in wording, the authorities on the English legislation and the statements by Clyne J to the effect that those authorities were applicable to the provisions of s.148 of the Bankruptcy Act 1924 ,should lead me to conclude that, in an application under s.178, the court should only interfere with the relevant act, omission or decision of the trustee if it appeared that the trustee had acted absurdly or unreasonably or in bad faith. I have reached the conclusion that this submission cannot be accepted. In my view, the wording of s.178 of the Act is such as to confer upon the court the widest possible discretion as to the appropriate order which should be made in the particular case and is quite inconsistent with the approach that, upon an application made pursuant to the section by a bankrupt, creditor or other person affected by an act, omission or decision of the trustee, the court is only empowered to interfere with the trustee's act omission or decision if it is of the view that the trustee has acted absurdly or unreasonably or in bad faith. Once the matter is properly before the court, the court is, by the express words of s.178, empowered (and, as I have said, obliged) to make such order in the matter as it thinks just and equitable."

His Honour was not persuaded that the exercise of the jurisdiction provided by s.178 was limited to redress of conduct of the trustee performed absurdly, unreasonably or in bad faith. With respect, I agree with his Honour that by use of the word "affected" rather than "aggrieved" the parliament intended to enlarge the supervisory jurisdiction conferred on the Court with a regard to the exercise of powers by a trustee. That jurisdiction permits a person affected by the trustee's administration of an estate to challenge that administration or the conduct of the trustee and seek a remedy from the Court. That is, a person so affected may apply to the Court for redress according to law. The discretion of the Court to make orders thought to be just and equitable depends upon the Court's determination of the justiciable issue raised in the application.

As the Full Court said in McGoldrick v. Official Trustee in Bankruptcy [1993] FCA 636; (1993) 47 FCR 547, in substance s.178 entitles a person affected to seek review by the Court of the trustee's decision.

Accordingly, the applicant must show a ground on which the trustee's administration of the affairs of the bankrupt is to be reviewed.

See also In the Bankrupt Estate of Cirillo (1996) 136 ALR 607 at 614 per Branson J.

In relation to the application under s.179 the situation before me is similar to that which confronted Beaumont J in Re Peter Leslie Challen (a bankrupt): Ex parte Andrew Edward Brown, Federal Court of Australia, Beaumont J unreported, 23 April 1996 in which his Honour said at 1-2:

This is an application by a creditor under s.179 of the Bankruptcy Act 1966 ("the Act") seeking several orders, including an order that an inquiry be made into the conduct of Graham Ros Bendeich, the trustee of the estate of Peter Leslie Challen, and an order that the trustee of the estate of Peter Leslie Challen, and an order that the trustee be removed from that position. The whole matter has been fully argued, and in these circumstances, it is my view that I should proceed now to examine the question of removal, rather than to proceed along the two- stage process which is often encountered in applications under s.179, that process usually being (1) deciding whether there are indeed sufficient grounds in support of an application to hold an inquiry; and then (2) proceeding with the inquiry itself (cf. Re Alafaci; Registrar in Bankruptcy v Hardware (1976) 9 ALR 262; see also Re Gault; Gault v. Law [1981] FCA 167; (1981) 57 FLR 165 (per Ellicott J at 173) where the broad character of the Court's discretion in this area is discussed; and see Registrar in Bankruptcy v. Bradley [1983] FCA 304; (1983) 72 FLR 231).

It is well established that, although the Court is given a broad discretion under s.179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt's estate.

The applicants have had the opportunity to adduce such evidence as they saw fit and have had the benefit of a 5 day hearing on the basis of that evidence. In these circumstances it seems to me that essentially the same principles operate in relation to ss.178 and 179. In the present case these principles require consideration of three issues -

* whether breach of duty has been established;

* whether loss has been occasioned by a breach of duty;

* whether the Court thinks that it is "just and equitable" or "proper" to make the orders sought.

I have determined the first two issues against the applicants. However, in my view there are strong considerations for also determining the third issue against the applicants in any event. They may be summarised as follows:

* a general, inexcusable and inordinate delay on the part of the applicants in bringing the claims the subject of these proceedings;

* the delay, which relates to claims in respect of events occurring primarily in 1986-1988, is inherently likely to prejudice the fair conduct of the matter;

* the election on the part of the applicants, after receiving legal advice, to desist from bringing many of the claims, the subject of these proceedings, against Elders or joining Elders as a party to the proceeding;

* the obvious desirability, if not necessity, of Elders being a party to the proceeding if the Court is to determine whether Elders acted in breach of duty which resulted in loss to the bankrupts' estates;

* the unreality of the applicants' case, that contrary to legal advice, Waters ought to have pursued claims he had no funds to pursue and no evidence to support;

* the absence of clear and cogent evidence establishing breaches of duty by Waters occasioning loss to the applicants;

* the undesirability of the Court condoning and thereby encouraging omnibus claims of the kind brought in the present case.

At an earlier point of time an application for relief, under ss.178 or 179, requiring that Waters take steps to obtain a proper accounting from Elders might have been taken. But that claim, in the present proceeding, is tainted by it being brought as merely one aspect of a series of omnibus claims brought against the trustee without regard to the ability of the applicants to establish a case for the grant of relief in respect of those claims. A litigant taking that course runs the serious risk that a Court will decline to make orders under either section.

The failure to join Elders is of particular significance in the present case. It has resulted in the Court being required to determine serious allegations in the absence of the party against whom the allegations are made and which is best able to respond to those allegations. These matters are exacerbated by the fact that if loss was suffered then Elders was the party directly liable for causing it.

For the reasons set out above I have also arrived at the conclusion that in the present case on discretionary grounds it is not "just and equitable", "proper" or otherwise appropriate to make any of the orders sought under ss.178 or 179.

I would make a further observation. I was not satisfied that the breaches alleged occasioned loss to the applicants or to any other person. I add "any other person" for the sake of completeness but no "other person" is an applicant for relief. That is significant as, in the present case, I would have no hesitation in declining to exercise the Court's power under ss.178 and 179 without an application by the person seeking the benefit of such an order. If the creditors or the Cheesman parents, desired relief it was open to them at any stage to make application for it. They have not done so. Save in special or exceptional circumstances, in a case such as the present I would be reluctant to countenance an approach that enables relief to be granted on the application of a "bankrupt" for the benefit of other persons who are not before, or parties to the proceeding, in the Court. There are no circumstances that warrant that course in the present case.

The case put by the applicants in respect of the livestock mortgage affords a good example of the problem confronting the "bankrupts". It was submitted that in so far as the mortgage was of future wool clips it was void as between the partners and Elders as it was not registered in accordance with the Instruments Act 1958 (Vic). I do not accept that submission. Section 76 provides for invalidity in the absence of registration against a bona fide purchaser for valuable consideration or a subsequent registered mortgagee. However, even if the mortgage was invalid it would be of no assistance or benefit whatsoever to the applicants. All that would have been likely to occur is that Elders may have had to disgorge the proceeds to the trustee and claim those proceeds with other unsecured creditors. Its claim as an unsecured creditor would no doubt be increased by the amount it was required to disgorge.

I would add that in arriving at my conclusions I have accepted that it is likely that breaches of duty have been established in relation to breaches of Bankruptcy Rules 27(3) and 92(3) and taking advice from Madgwicks on James' appointment. However, for the reasons set out earlier I am not satisfied that these breaches occasioned any loss or that they ought to give rise to relief in favour of the applicants under ss.178 or 179.

There is an additional reason for refusing relief for the benefit of the Cheesman parents, who it is said, were creditors of the bankrupt estates by reason of their right as guarantors to be subrogated to the rights of Elders as a secured creditor. The parents' right of subrogation is limited by the rule against double proof: see Neville Loeskow v. Avokah Irrigation Pty. Ltd. (Receiver and Manager Appointed) and Commonwealth Bank of Australia Full Court (Lockhart, Ryan and Foster JJ) unreported, 24 April 1996. Accordingly, to the extent the parents claim as a creditor doubles up or competes with the outstanding claims of Elders, as an unsecured creditor, the parents may not be entitled to be subrogated to the rights of Elders. However, in view of my other findings it is unnecessary to further explore this aspect of the matter.

10.0 CONCLUSION

In summary I have found that the applicants have not made out their claims to be entitled to relief in respect of any of the matters set out in the applicants' summary of claims or Application. In so far as the omissions of the trustee in paragraph 1(a), (b), (c) and (d) of the summary occurred I am satisfied that no loss was suffered by the applicants or any other person by reason of these omissions. The other claims, which allege in one form or another, misconduct or breaches of duty by the trustee in his administration of the affairs of the bankrupts have also not been made out. Importantly, even if any of them had been made out I am not satisfied that any loss has been occasioned to the applicants by any conduct of the respondent. It appears to be quite clear from the evidence before me that since 4 June 1987, there was never any real prospect of a surplus left over for the applicants after payment of their secured and unsecured debts.

For the reasons I have set out the Application of the applicants is to be dismissed with costs.

I certify that this and the preceding 78 pages are a true copy of the Reasons for Judgment of the Honourable Justice Merkel.

Associate:

Date:

Heard: 13 - 17 May 1996

Place: Melbourne

Judgment: 21 February 1997

Appearances: Mr. B. Cheesman, Mr. G. Cheesman and Ms. A Cheesman appeared on behalf of the applicants.

Mr. G. Bigmore instructed by J.M. Smith & Emmerton appeared on behalf of the respondent.

Written submissions dated 19 June 1996 were made by the Attorney- General of the Commonwealth on the constitutional issue.