Australian ruling underscores bankruptcy trustees’ need to maintain objectivity

In a case between bankrupt Ahmad Mokhtar and his trustee Samuel Piscopo, the bankrupt sought to remove the bankruptcy trustee on the basis that he had not acted independently and with reasonable diligence, and that there had been a breakdown of trust in their relationship.

The case did not rest on whether the bankruptcy trustee had engaged in misconduct. Instead, the issues raised were given as evidence of the breakdown in their relationship. This included the fact that, during the bankruptcy trustee’s administration of the bankruptcy, he had filed 17 ‘objection to discharge’ notices within a 10-month period.

The court found that the bankruptcy trustee also did not take steps from the start of the bankruptcy towards protecting the bankrupt estate’s assets - despite being aware of the bankrupt’s issues with gambling and drinking which had led to the bankruptcy – and instead waited four years into the bankruptcy before issuing a garnishee notice on the bankrupt’s bank accounts.

The Federal Court of Australia ultimately found that both parties had contributed to the irretrievable breakdown in the relationship and that it was in the best interests of the bankruptcy administration for the bankruptcy trustee to be removed because he was unable to act in an objective manner in his statutory role of bankruptcy trustee. 

Practical considerations for bankruptcy trustees

There are several important takeaways from this case for bankruptcy trustees to keep in mind, which underscore the need for bankruptcy trustees being able to demonstrate their objectivity when administering a bankrupt’s estate.

Firstly, bankruptcy trustees should investigate and take steps to protect the assets of the bankrupt’s estate, particularly in situations where there are obvious ‘red flags’, such as if the bankrupt is known to have issues with gambling, heavy drinking, or an inability to control their spending.

In situations where correspondence from the bankruptcy trustee to the bankrupt has not been sufficiently clear and could potentially affect a bankruptcy trustee’s obligations, the bankruptcy trustee may want to consider whether it is appropriate to make suitable concessions to maintain their objectivity and effectively administer the bankrupt estate.

Where there has been a delay in issuing garnishee notices – and especially where these were issued at a significantly late stage after the bankruptcy had commenced – the bankruptcy trustee must provide an explanation for the delay.

If a bankrupt is not cooperating with the bankruptcy trustee, a notice of objection should be issued to the bankrupt sooner rather than later, to help avoid the potential allegation that the bankruptcy trustee has not acted objectively. The timing of this is particularly important as other issues may later arise which could then weaken the bankruptcy trustee’s argument that they were acting in good faith.

Depending on the stage of the administration of the bankrupt estate, if a bankruptcy trustee has issued several notices of objection to discharge within a short period of time, evidence must be provided which can readily demonstrate that the bankruptcy trustee has acted objectively. Reasonable explanations as to the approach taken and why the notices were issued - particularly if there are long standing issues – are also required.

In addition, where a bankruptcy trustee is challenged on aspects of their conduct during cross-examination, they should provide clear evidence which is not defensive or categorical in its delivery.

It is also important to keep in mind that the court will consider the interests of the beneficiaries, the security of the trust property and whether the trustee has acted in a faithful and sound manner. In deciding to remove a bankruptcy trustee, the court will form a judgment based on a large and varied number of considerations which when combined, focus on the welfare of the beneficiaries of the bankrupt estate rather than the trustee’s continued occupation of their statutory role.

Ultimately, even though a bankrupt may have contributed to a breakdown in the relationship between themselves and their bankruptcy trustee, a court can decide that it is in the best interests of the bankrupt administration for the bankruptcy trustee to be removed from office.