The Federal Court of Australia has dismissed an application by Salim Mehajer, the high profile former Deputy Mayor of Auburn City Council, NSW, to replace his trustee in bankruptcy.^[1] The Court’s judgment furthers the authority that courts are reluctant to replace trustees absent clear evidence of maladministration.

Key takeaways

• Courts tend not to interfere with a trustee’s discretion to exercise reasonable commercial decisions, let alone order their replacement. This holds as long as the trustee’s decisions align with the trustee’s duties provided at s 19 of the Bankruptcy Act 1966 (Cth) (Act) and the dominant duty of handling the assets of the bankrupt estate 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.
  
  
• Trustees should always take seriously a bankrupt’s application to review their conduct or replace them. The court will look to the reasonableness and commerciality of trustee decisions, and trustees should always ensure they keep accurate files, records and notes of their decisions and accompanying reasons should the need arise to provide evidence to a court.
  
  
• Trustees should strive to maintain a professional and responsive dialogue with bankrupts. Although the trustee of Mr Mehajer’s estate was found to have taken reasonable steps, trustees should always keep in mind that breakdowns in communication can lead to costly and complicated administrations. Recalcitrant bankrupts, such as Mr Mehajer, can be difficult for trustees to communicate with and trustees are encouraged to reach out to experienced insolvency lawyers should breakdown in communications arise.

Background

Salim Mehajer is the high profile former Deputy Mayor of Auburn City Council, NSW. Between 2014 and 2018, Mr Mehajer attracted significant media attention regarding allegations of misusing his Council position. He was eventually criminally convicted in April 2018 for electoral fraud. He served 11 months of a 27 month sentence and was released from prison on 11 May 2019.

Mr Mehajer was declared bankrupt on 20 March 2018 by way of a sequestration order, following a creditor’s petition brought by a construction company and supported by other creditors including the Deputy Commissioner of Taxation.^[2]

Following the sequestration order, Mr Mehajer twice sought to annul his bankruptcy. The Federal Court of Australia found that while it has discretion to annul bankruptcies, “Mr Mehajer’s current insolvency is so stark that it would overwhelm any discretionary considerations”,^[3] and dismissed both of Mr Mehajer’s annulment applications. The Federal Court has regarded Mr Mehajer’s bankruptcy as having a,

“lamentable history”, made complex by “a tsunami of material [filed by Mr Mehajer]… much of which… is irrelevant”.^[4]

Mr Mehajer’s bankruptcy was further complicated when he failed to pay an income contribution under s 139ZG of the Act, which led to his bankruptcy extending to an 8-year period currently scheduled to finish on 3 May 2026.

On 1 May 2020, Mr Mehajer filed a further application with the Federal Court of Australia, this time attempting to replace his trustee in bankruptcy.

Relevant principles

The Court has power to replace a trustee in bankruptcy under s 90-15 and 90-20 of the Insolvency Practice Schedule (Bankruptcy) (IPS(B)), being Schedule 2 to the Act. These provisions broadly empower the Court, following the application of a person with a financial interest in the bankrupt estate, to make orders in relation to the administration of bankrupt estates, which extends to ordering the cessation of a current trustee and the appointment of a new trustee.^[5]

Section 179 of the Act previously provided similar powers to the Court before it was repealed in 2016, and required the Court to firstly consider whether an inquiry in the conduct of the trustee is warranted. Although the Court is no longer bound by this requirement, the Court is still inclined to undertake an inquiry where there are broad allegations of misfeasance, neglect or other error in the conduct of the administration of the estate by the trustee, particularly where those allegations effectively encompass almost every aspect of the administration of the estate.^[6]

In firstly considering whether an inquiry into the conduct of the trustee for Mr Mehajar’s bankrupt estate was warranted, the Court had regard to the duties and minimum standards expected of a trustee as provided by the Act and the general law.

Section 19 of the Act provides a non-exhaustive list of duties that require a trustee to:

1. determine whether the bankrupt estate includes property that can be realised to pay a dividend to creditors;
2. take appropriate steps to recover property for the benefit of the bankrupt estate;
3. administer the bankrupt estate as efficiently as possible by avoiding unnecessary expense; and
4. exercise powers and perform functions in a commercially sound way.

In exercising their functions, trustees in bankruptcy are regarded as officers of the Court and are subject to the general control of the Court.^[7] The general law also imposes a minimum standard on trustees to “handle the assets [of the bankrupt estate] 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”.^[8] This minimum standard has historically been expressed as the “dominant duty” of “recovering, securing and duly applying the trust fund”. Whilst trustees are permitted a reasonable degree of discretion in performance of their duties, they must never breach this minimum standard.^[9] More recently the courts have acknowledged that a trustee during the course of an administration must make various business and commercial decisions, and courts may be reluctant to interfere with the discretion of a trustee absent clear evidence of maladministration.^[10]

If a court determines that an inquiry into the conduct of a trustee in bankruptcy is warranted, it will then consider whether there are any findings of fact upon with to base the removal of the trustee.

Grounds of replacement

Mr Mehajer made a series of specific complaints with which he submitted were grounds upon which an order should be made to replace the trustee. Generally, they concerned Mr Mehajer’s claim that his trustee had neglected his bankrupt estate, had been dilatory in the performance of his functions, had done little other than incur fees, and had acted with dishonest and sinister motives. Mr Mehajer also claimed that his trustee had financially and mentally abused him, and that their relationship had broken down irretrievably. The Court found that these claims were not supported by evidence, and accordingly gave them little weight.

The focus of the Court’s attention was on the following specific grounds claimed by Mr Mehajer. The Federal Court was not satisfied that any of the specific grounds raised by Mr Mehajer were sufficient to warrant an inquiry into the conduct of the trustee in bankruptcy. The Court dismissed Mr Mehajer’s application to replace his trustee in bankruptcy.

1. Did the trustee err in not objecting, and not giving consent to the bankrupt to object, to ATO notices of income tax assessment?

No. It was open to the trustee to consider whether challenging notices of income tax assessment would be an exercise advantageous to the bankrupt estate. It was also open to the trustee to request further information from Mr Mehajer in order to consider the notices, and ultimately decide not to file an objection. The Court also found that there was no evidence that the trustee’s initial refusal to provide the consent (absent provision of the requested information) was because the ATO had provided funding to the trustee for investigations and examinations. Finally, the Court noted that the trustee, in the face of continued threats of litigation had ultimately provided consent from Mr Mehajer to file an objection.

2. Did the trustee err in not adjudicating proofs of debt lodged against the bankrupt estate?

No. Although the trustee had not adjudicated any proofs of debt, the Court found he was not required to do so where there were insufficient funds and the trustee had formed the view that payment of dividends to creditors was unlikely. The Court viewed the trustee’s approach as “orthodox” involving an exercise of judgement by the trustee.

3. Did the trustees sell a proof of debt to a creditor against whom Mr Mehajer had an alleged counter-claim?

There was no evidence that the trustees sold a proof of debt. The debt had been assigned between creditors but the trustee was not a party to that assignment, nor had the trustee been “dodgy” or in collusion with the creditor as was alleged by Mr Mehajer.

4. Was the trustee obliged to consider an offer to purchase a cause of action against one of Mr Mehajer’s creditors from the Estate?

Mr Mehajer claimed that his bankrupt estate had a cause of action against SC Lowy (a Hong Kong based lender) in excess of $35 million and that the trustee failed to consider an offer from his sister and brother-in-law for the purchase of that cause of action.

The Court found that the trustee acted in accordance with his duties in considering various offers made by the prospective purchasers, which ranged from $10,000 to $100,000, and pressing for information allowed him to assess the commerciality of the offer. It was open to the trustee to decline the offer.

5. Did the trustee err in including certain creditors of the bankrupt in reports to creditors?

No. Mr Mehajer claimed that the trustee improperly included three parties in a list of creditors in the trustee’s report to creditors. The Court found, with the assistance of findings of fact in prior proceedings involving Mr Mehajer and Mr Mehajer’s own contradictory evidence, that the bankrupt estate owed money to at least one of the parties. The Court held that Mr Mehajer’s complaint in this regard was premature given that the trustee had not yet called for proofs of debt, let alone adjudicated on any proofs of debt.

6. Has the trustee caused the bankrupt extreme hardship, mental distress, severe anxiety, pressure from family members, or unjustified discomfitures?

No. Although the Court noted that there is clear tension in the relationship between Mr Mehajer and the trustee, there was no evidentiary basis from which to conclude that the trustee is the cause of such tension much less that there has been conduct of the trustee which warrants an inquiry.

7. Is the trustee affected by a conflict of interest?

Mr Mehajer alleged that the trustee was conflicted because during the course of the bankruptcy he moved to a new firm at which one of the principals was someone who had previously advised Mr Mehajer.

However, Mr Mehajer refused to provide the Court with details as to his prior involvement with that person, leaving the Court to find that there was insufficient evidence to support this ground.

8. Did the trustee fail to convene a creditor’s meeting?

Mr Mehajer claimed that the trustee failed to convene a creditors meeting (at his request), with the alleged support of several creditors who did not themselves contact the trustee to ask for a meeting to be called.

Pursuant to s 75-15 of the IPS(B), the trustee explained to Mr Mehajer that a trustee is required to convene a meeting if:

• the majority of creditors in number and dollar value direct the trustee to do so by resolution;
• at least 25% in dollar value of the creditors direct the trustee to do so in writing; or
• if less than 25% but more than 10% in dollar value of the creditors direct the trustee to do so in writing, security for the cost of holding the meeting is given to the trustee before the meeting is convened.

The Court held that none of the above conditions were met, and that this ground was baseless.

9. Did the trustee fail to sell property in accordance with Mr Mehajer’s wishes?

Mr Mehajer owned a heavily encumbered property which he wanted the trustee to sell.

The trustee was prepared to sell property provided that the mortgagee and caveators of the property agreed to certain conditions, which they did not. The Court found that these conditions were reasonable, and in any event was not satisfied that this ground established any basis for an inquiry into the trustee’s conduct.

10. Did the trustee wrongfully file a notice objecting to Mr Mehajer’s discharge from bankruptcy?

Mr Mehajer was liable to pay approximately $15,000 in assessed income contributions and the trustee had issued a Section 139ZG Notice to that effect. Mr Mehajer failed to pay, alleging the trustee was driven by a “sinister motive”. The trustee had also made repeated requests for the provision of supporting documentation in relation to the Statement of Affairs which had not been complied with.

The trustee consequently lodged a Notice of Objection to Discharge with AFSA. Mr Mehajer applied to both the Inspector-General and the AAT for a review of the Notice, but was unsuccessful.

The Court found that it was open to the trustee to lodge the Notice because Mr Mehajer failed to provide required information and pay the required amount, even after being given multiple opportunities to do so. Further, because the AAT had already found an evidentiary basis for the trustee lodging the Notice, no inquiry was warranted by the Court.

In addition to dismissing Mr Mehajer’s application, the Court ordered Mr Mehajer to pay the trustee’s costs of the proceeding on a lump-sum basis, without prejudice to the right of the trustee to claim those costs as a cost of the administration of Mr Mehajer’s bankrupt estate.

Conclusion

The Federal Court ultimately upheld the trustee’s decisions as being founded on the exercise of their reasonable commercial judgement. This was critically supported by evidence provided by the trustee to show the Court how and why certain decisions were made. While trustees are free to make reasonable commercial decisions provided they uphold their minimum duties, trustees should always take seriously a bankrupt’s application to remove and replace them. Accurate records are essential as trustee decisions may be scrutinised by a court. We encourage trustees to seek assistance from experienced insolvency lawyers when dealing with recalcitrant bankrupts.

^{[1] Mehajer v Weston in his capacity as trustee of the bankrupt estate of Mehajer [2023] FCA 1230.
[2] SM Project Developments Pty Ltd (in liquidation) ACN 130 968 811 & Anor v Salim Mehajer (SYG3540/2017).
[3] Mehajer v Weston in his Capacity as Trustee of the Bankrupt Estate of Salim Mehajer [2019] FCA 1713 at [70].
[4] Mehajer v Weston in his Capacity as Trustee of the Bankrupt Estate of Salim Mehajer [2019] FCA 1713 at [1]-[2].
[5] s 90-15(3)(b)-(c) of the Insolvency Practice Schedule (Bankruptcy), being Schedule 2 to the Bankruptcy Act 1966 (Cth).
[6] Mehajer v Weston in his capacity as trustee of the bankrupt estate of Mehajer [2023] FCA 1230 at [6]; Shaw v The Official Trustee in Bankruptcy of the Australian Financial Security Authority (No 3) [2021] FCA 1569 at [19] to [23].
[7] Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619, at [12] to [20]; Adsett v Berlouis (1992) 37
FCR 201 at 208; Wilson v Commonwealth of Australia [1999] FCA 219 at [44].
[8] Adsett v Berlouis (1992) 37 FCR 201 at 208; Mannigel v Aitken (1983) 77 FLR 406 at 408 to 409.
[9] Re Brogden [1888] All ER 927 at 935.
[10] Shaw v The Official Trustee in Bankruptcy of the Australian Financial Security Authority (No 3) [2021] FCA 1569 at [28] to [30]; Re Tyndall (1977) 30 FLR 6 at [10]; Patel v Ruhe [2016] FCA 520 at [33].}