Mango Boulevard Pty Ltd & Anor v Whitton & Ors [2015] FCA 1169

A bankruptcy trustee’s notice objecting to discharge on one of the special grounds specified in the Bankruptcy Act 1966 can be valid even if based on additional unstated reasons, so long as those reasons are directed to the achievement of a purpose of the law of bankruptcy.

In a recent decision of the Federal Court, Rangiah J considered the bases upon which a trustee is entitled to object to a bankrupt’s discharge from bankruptcy.  In doing so, he held that a notice objecting to discharge on one of the special grounds specified in the Bankruptcy Act 1966[1] can be valid even if based on additional unstated reasons, so long as those reasons were directed to the achievement of a purpose of the law of bankruptcy.

Background

Interestingly, in this case it was not the bankrupts themselves seeking the discharge, but a creditor of their estates.  The creditor’s apparent motivation was to ensure a key asset of the bankruptcy would vest in the trustee upon discharge, rather than be capable of compromise by a s73 proposal.

The asset in question was the bankrupts’ shareholding in a joint venture in which the creditor applicant held a 50% stake.  If the bankrupts’ shares vested in the trustee (which they would upon discharge), the creditor applicant would be left to negotiate settlement of a significant ancillary dispute regarding the JV with the trustee.  Conversely, if the trustee’s objection to discharge was upheld and the s73 proposal accepted, the shareholding would revert to the bankrupts, leaving the applicant with a potentially less amenable counterparty with whom to negotiate settlement of the dispute.

Sequestration orders had been made against the bankrupts in August 2007, and their estates administered by their trustees for the following three years. As they neared automatic discharge in November 2010, the bankrupts proposed a s73 composition.

The trustees requested further information about the proposal and payment of their estimated costs of considering the proposal and calling a meeting.  But rather than paying the fee and providing the further information, the bankrupts instead lobbied creditors to call for a meeting to seek replacement of the trustees.

At the meeting, the creditors resolved to appoint a new trustee, who then lodged an objection to the bankrupts’ discharge under s149B.  This had the effect of extending their bankruptcies until November 2015 and allowing creditors to consider the proposals for compromise.

The new trustee relied upon the ground specified in s149D(1)(d) in his notice of objection – namely that the bankrupts had failed to comply with a request for their financial information.

The Bankruptcy Act relevantly provides:

Section 149B

(1)      … the trustee may file … a written notice of objection to the discharge.

(2)      The trustee … must file a notice of objection to the discharge if the trustee believes:

(a)      that doing so will help make the bankrupt discharge a duty that the bankrupt has not discharged; and

(b)      that there is no other way for the trustee to induce the bankrupt to discharge …

Section 149C 

(1)      A notice of objection must:

(a)      set out the ground or each of the grounds of objection, being a ground or grounds set out in subsection 149D(1) …; and

(b)      refer to the evidence or other material that, in the opinion of the trustee, establishes that ground or each of those grounds; and

(c)      state the reasons of the trustee for objecting to the discharge on that ground or those grounds.

(1A)    Paragraph (1)(c) does not apply to [the specified grounds listed in s149D(1)]

Decision

Despite the new trustee’s evidence to the contrary, Rangiah J found that one of his reasons for lodging the objection to discharge was to allow the creditors to consider the bankrupts’ compromise proposal.

His Honour held that whilst section 149C(1)(c) does not require the trustee to state reasons for objecting to a discharge where a special ground exists, (s) he must nevertheless have reasons.  The applicant submitted those reasons must involve inducing the bankrupt to comply with his or her obligations.  However, Rangiah J held that the only limitation on the exercise of the trustee’s power was that it be directed to achieving a purpose of the law of bankruptcy.

His Honour held that amendments to the Bankruptcy Act in 2002 did not remove the necessity for the trustee to have reasons for the decision to object where one of the special grounds exists, merely that the notice of objection need not state those reasons.  His Honour considered that if it had been the legislature’s intention to remove the need for reasons, the broad discretion under s149B(1) would have been removed, along with the entitlement for court review of the trustee’s decision under s178(1).

In this case, the trustee’s reasons were “ascertainable” by the evidence given at trial, and were found to be twofold: to induce the bankrupts to provide information about their income and to allow the bankrupts to put forward proposals for compromise.  These were not “mutually exclusive”, and the latter was a proper purpose as it was directed to the achievement of a lawful purpose of bankruptcy – namely allowing the bankrupts to propose a composition to creditors.

In reaching this conclusion, his Honour distinguished the Full Court’s decision in Prentice v Wood (2002) 119 FCR 296, which has been accepted authority for the proposition that the trustee’s reasons must relate to the stated grounds in accordance with s149C(1)(c).  However, s149C is qualified and expressly excludes the need to state reasons where one of the prescribed special grounds exists.

The decision in Mango Boulevard in this way expands the breadth of the trustee’s discretion and narrows the scope of the formal requirements of a notice of objection by accepting that a trustee may have multiple grounds for objecting to discharge.  Where one of those grounds is a special ground, it need not be stated.  Reliance upon other grounds will not be fatal to the notice so long as they are directed to the achievement of a purpose of the law of bankruptcy.  In this case the purpose of allowing the creditors to consider the bankrupts’ compromise proposals was found to be directed to such a purpose.