By Stephen Mullette a Principal of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
Oh, you don’t know the shape I’m in
I just spent 60 days in the jailhouse
For the crime of having no dough
— The Band, The Shape I’m In, 1970
The Insolvency Law Reform Act 2016 (Cth) (“ILRA”) has missed the opportunity to clarify an important question regarding the time limit for challenge to the conduct of trustees in bankruptcy under the Bankruptcy Act. The 60 day time limit under section 178 for reviews of a trustee’s actions has been preserved (if made harder to find) yet no clarification has been given as to whether this 60 day limit is absolute or may be extended by the Court, in particular after it has expired.
The ILRA amendments have also removed the requirement for there to be an ‘act, omission or decision’ of a trustee before a review can be sought, and changes in wording also make it uncertain to what extent previous decision in relation to section 178 will be applied to the new provisions.
Given an equivalent provision now also applies in relation to corporations matters, these issues are live ones for all insolvency practitioners.
Section 178 Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”)
The old section held:
178 Appeal to Court against trustee’s decision etc.
- If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.
- The application must be made not later than 60 days after the day on which the person became aware of the trustee’s act, omission or decision.
The section is notable for its simplicity and has been held to be extremely broad – involving the “widest possible discretion as to the appropriate order which should be made” . It arises from the Court’s supervisory jurisdiction over the administration of bankrupt estates and in the context of trustees as the court’s officer . Decisions of trustees can be reviewed by the Court even though they are not “absurd, unreasonable, or taken in bad faith” and even where they are “commercially sound”.
60 Day Limit
There are limited restraints on the scope of the section, however one significant limitation is that section 178(2) imposed a 60 day limit on the person aggrieved by the trustee’s conduct to take action.
This limit was not always treated as significant, in particular given that section 33(1)(c) Bankruptcy Act allows the extension of time limits in the Bankruptcy Act even after they have expired, if there is no express prohibition on such an extension.
Later cases however, particularly in the Federal Circuit Court, focussed on the fact that a limit is imposed at all as evidence of an outer limit on the opportunity of stakeholders to complain. In Heshmati, Driver FM (as his Honour then was) held that section 178(2)
“discloses a parliamentary intention that the 60 day time limit is an absolute one which cannot be extended by the Court” .
This movement grew until in McIntosh Burnett J held that:
“It is now well settled that in respect of s.178(2) of the Act, the 60 day time limit is an absolute one.”
Notwithstanding these comments the Federal Court took a different view in Bechara , although no authority was cited in respect of the argument, including any of the preceding Federal Circuit Court cases on point:
“Section 178(2) does not provide to the contrary of s 33(1). Section 178(2) merely provides a time limit of 60 days which is then amenable to extension under s 33(1). The submissions for Mr Kerr did not point to any authority to support the proposition that s 178(2) provides to the contrary for the purposes of s 33(1) and I am unable to see how the provisions can be construed in this manner.”
The most recent decision on this issue, Taffs, noticed the discrepancy between the Federal Circuit Court cases and the decision of Justice Jagot in Kerr. In Taffs, Judge Nicholls in the Federal Circuit Court held (referring to Bechara):
“I must note however, that I disagree with the respondent’s submissions that the proposition that there is no extension to the sixty day time limit is “well settled” .
60 Days to Go?
However, under the ILRA, section 178 has been repealed and replaced with Subdivision B of Division 90 of the Insolvency Practice Schedule (which is a new schedule 2 to the Bankruptcy Act).
The removal of section 178 is explained (if that is the word) on the basis that the “right to make an application to the Court to appeal against a trustee’s decision is contained in section 90-20” . Unfortunately, this is confusing or incorrect. Section 90-20 sets out who may “apply for an order under 90-15”. Section 90-15(1) provides that a Court make such order “as it thinks fit” but itself refers (in s 90-15(2)(b)) to “an application under section 90-20” (emphasis added). Instead, this should perhaps have referred to an application “by one of the applicants listed in” section 90-20.
In any event, the only guidance given in the explanatory memorandum is to suggest that the provisions in section 178 have been relocated, not amended. Whether this is the way the new Subdivision B of Division 90 will be interpreted, remains to be seen.
The new section 90-15 is at the very least substantially longer:
“90 15 Court may make orders in relation to estate administration
Court may make orders
(1) The Court may make such orders as it thinks fit in relation to the administration of a regulated debtor’s estate.
Orders on own initiative or on application
(2) The Court may exercise the power under subsection (1):
(a) on its own initiative, during proceedings before the Court; or
(b) on application under section 90 20.
Examples of orders that may be made
(3) Without limiting subsection (1), those orders may include any one or more of the following:
(a) an order determining any question arising in the administration of the estate;
(b) an order that a person cease to be the trustee of the estate;
(c) an order that another person be appointed as the trustee of the estate;
(d) an order in relation to the costs of an action (including court action) taken by the trustee of the estate or another person in relation to the administration of the estate;
(e) an order in relation to any loss that the estate has sustained because of a breach of duty by the trustee;
(f) an order in relation to remuneration, including an order requiring a person to repay to the estate of a regulated debtor, or the creditors of a regulated debtor, remuneration paid to the person as trustee.
Matters that may be taken into account
(4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account:
(a) whether the trustee has faithfully performed, or is faithfully performing, the trustee’s duties; and
(b) whether an action or failure to act by the trustee is in compliance with this Act and the Insolvency Practice Rules; and
(c) whether an action or failure to act by the trustee is in compliance with an order of the Court; and
(d) whether the regulated debtor’s estate or any person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the trustee; and
(e) the seriousness of the consequences of any action or failure to act by the trustee, including the effect of that action or failure to act on public confidence in registered trustees as a group.
Costs orders
(5) Without limiting subsection (1), an order mentioned in paragraph (3)(d) in relation to the costs of an action may include an order that:
(a) the trustee or another person is personally liable for some or all of those costs; and
(b) the trustee or another person is not entitled to be reimbursed by the regulated debtor’s estate or creditors in relation to some or all of those costs.
Orders to make good loss sustained because of a breach of duty
(6) Without limiting subsection (1), an order mentioned in paragraph (3)(e) in relation to a loss may include an order that:
(a) the trustee is personally liable to make good some or all of the loss; and
(b) the trustee is not entitled to be reimbursed by the regulated debtor’s estate or creditors in relation to the amount made good.
Section does not limit Court’s powers
(7) This section does not limit the Court’s powers under any other provision of this Act, or under any other law.”
It will be necessary to understand in due course the extent to which the decisions of courts under the previous 178 will be applied when interpreting the new legislative powers to review Trustee’s decisions. As seems to be the way with modern legislation, no useful guidance is provided by the Explanatory Memorandum.
Coming Soon?
As best as can be determined in relation to labyrinthine transitional provisions, this new section will apply to all conduct of trustees, even conduct prior to the commencement of the act where there is to be a review of the conduct.
Section 161 of Subdivision H, of Division 3 of Part 3 of Dchedule 1 to the ILRA
161 Application of Division 90 of the Insolvency Practice Schedule (Bankruptcy)—general rule
Division 90 of the Insolvency Practice Schedule (Bankruptcy) applies in relation to an ongoing administration of a regulated debtor’s estate whether or not the matter to be reviewed occurred before, on or after the commencement day.
Act, Omission, or Decision – or Not
Abolishing section 178 and focussing instead on the orders which the Court may make in section 90-15 also removes any need to consider the words “act, omission or decision”. Often courts have struggled to determine whether in the absence of clear conduct there has in fact been a decision, or even an omission if the opportunity to take action has not obviously arisen.
In Taffs & Anor v Porter & Anor [2016] FCCA 1875, Judge Nicholls in the Federal Circuit Court of Australia attempted to distinguish between the 3 words:
“[39] In my view, it may have been possible to argue that there is a difference between the three words. An “act” is relevantly defined as “a thing done; a deed”, “the process of doing; action, operation” (Shorter Oxford English Dictionary, 6th edition).
[40] It may be allowed that an “omission” can be understood as providing the mirror image to an “act”. That is, “the action or an act of neglecting or failing to perform something” (Shorter Oxford English Dictionary, 6th edition). Therefore broadly an “act” is the doing of something, and an “omission” is the not doing of something.
[41] However, it may have been available to the applicants to argue that a “decision”, as the Trustee has sought to characterise his conduct, to connote something narrower than an “act”. Relevantly, “decision” is defined as “the action of coming to a determination or resolution with regard to any point or course of action; a resolution or conclusion arrived at” (Shorter Oxford English Dictionary, 6th edition).”
Notwithstanding this analysis, and unassisted by the applicants who did not do so, Judge Nicholls went on to conclude (highlighting the artificiality of attempting to distinguish between the 3 terms in section 178(1)):
“[74] In my view, there was one “act, omission or decision” (to use the approach of the parties in their submissions) by the Trustee. That was his refusal to give consent as communicated by the letter of 27 April 2015, and confirmed in the letter of 1 June 2015.”
It can be seen from the way in which section 90-15 is drafted that there is no longer any reference to any act, omission or decision of the trustee. Rather, the focus is on the powers of the Court to make any order it thinks fit. The premise for engaging the supervisory jurisdiction of the Court has been removed.
Limits to Reviews Under the New Section
There are some limits under the new section. And in some ways it is narrower than section 178.
Firstly, an application under s 178 could be brought by the bankrupt, a creditor or “any other person” who was “affected” – the broadest possible scope of persons connected with the administration of a bankrupt estate.
Following the amendments in the ILRA, the category of persons who can apply for an order under 90-15 is reduced:
90 20 Application for Court order
(1) Each of the following persons may apply for an order under section 90 15:
(a) a person with a financial interest in the administration of the regulated debtor’s estate;
(b) if the committee of inspection (if any) so resolves—a creditor, on behalf of the committee;
(c) the Inspector General.
(2) If an application is made by a person referred to in paragraph (1)(b), the reasonable expenses associated with the application are to be taken to be expenses of the administration of the estate.
Now, a person must have ‘a financial interest’ in the administration of the debtor’s estate. It might be thought this would exclude most bankrupts who are not expecting to have their bankruptcies annulled. However section 5-30 of the Insolvency Practice Schedule (remember, schedule 2 to the Bankruptcy Act) defines the term ‘person with a financial interest’ to include regulated debtors (a terms which includes bankrupts and debtors under administration).
However it will be much harder for third parties, or “any other person” in section 178, which has in the past included spouses of bankrupts, for instance, in decisions by trustees on whether or not to allow a bankrupt to travel overseas ) to bring an application for review of a trustee’s conduct, unless prescribed by the regulations (5-30(b)).
Where’s My 60 Days Gone?
It can also be seen that section 90-15 makes no reference to any time limit. Nor is there any in subdivision B of Division 90 of Part 3 of Schedule 2 to the Bankruptcy Act – the Insolvency Practice Schedule.
If one has regard to section 90-22 reference is made to the Insolvency Practice Rules which can make provision for reviews under that subdivision, however that is in subdivision C, not subdivision B.
Nevertheless if one were to search the Insolvency Practice Rules, one would come across rule 90-80 which operates in relation to applications for orders under section 90-15, and which provides
90 80 Time limit on certain applications to Court for review
(1) This section applies in relation to an application for an order under section 90 15 of the Insolvency Practice Schedule (Bankruptcy) if the application:
(a) is made other than by the Inspector General; and
(b) relates to an act, omission or decision of the trustee.
(2) The application must be made no later than 60 days after the day on which the person making the application became aware of the trustee’s act, omission or decision.
Thus it would seem the 60 day time limit is preserved, separated from the review provisions in the depths of the Insolvency Practice Rules.
Another point of note is that whilst the reference to an “act, omission or decision” of the trustee might have been removed from section 90-15, and the scope of the Court broadened to make “such orders as it thinks fit” on any application before it, the phrase has been kept in terms of the timing provision in section 90-80 of the Insolvency Practice Rules. In effect what was thrown out the front door appears to have crept back in through the back.
So does 60 Mean 60?
Unfortunately, there is nothing in the ILRA, the amendments to the Bankruptcy Act, the Schedules to the Bankrupt Act including the Insolvency Practice Schedule (Bankruptcy) or the Insolvency Practice Rules (Bankruptcy) to clarify whether the time limit of 60 days may be extended by section 33 (which has not been altered.
Nor is there anything to assist in interpreting the time limit in the reforms themselves – no outline of the appropriate approach to time limits, or guidance as to what time limits are strict and which are susceptible to amendment.
No doubt much can (and will) be made of the separation of the time limit away from the operative provision and into the depths of the Insolvency Practice Rules, and what significance should be drawn from this.
Nevertheless, this controversy will be ongoing and will ultimately need to be resolved by the Court. What was a fairly straightforward section has now been scattered amongst the act, the schedules and the Insolvency Practice Rules, and it remains to be seen how the court will reassemble all the pieces.
In the meantime, liquidators should dust off the section 178 cases and consider their relevance to the new section 90-15 of subdivision B of Division 90 of the Insolvency Practice Schedule, which is schedule 2 to the Corporations Act 2001 (Cth). And there is no equivalent of section 90-80 imposing a time limit of 60 days – this suggests greater uncertainty as to time limits for those seeking to review the decisions of external administrators in corporations matters.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
