Misconduct Is Not Required To Remove A Trustee In Bankruptcy

The case of Mokhtar v Piscopo [2024] FCA 493 (“M v P”) evidences that misconduct is not required to remove a Trustee in Bankruptcy. This was a case in which relations between the Trustee and the Bankruptcy plummeted to such depths the Bankrupt it seems said to the Trustee:

… you would make the movie the Horrors of Elm Street look like a beautiful romance.

Whilst it is the norm that removal of a Trustee in Bankruptcy will usually involve some findings where the Insolvency Practitioner has perhaps not lived up to certain expectations, the case law on such removals of officeholders is replete with the suggestion that misconduct is not a necessary ingredient. Better for the administration of the case is how it turned in M v P.

In M v P misconduct was neither alleged nor found.

The judge’s summary referred to a breakdown in relations with the Trustee of the Bankruptcy estate and the Bankrupt. This was said to be sufficient reason for a trustee to be removed provided this has not been engineered by the bankrupt.

Trustee In Bankruptcy’s File Notes

The judge here had something to say about the Trustee’s file notes of conversations with the Bankrupt:

In the body of the affidavits on which he relied, the Trustee included lengthy accounts of conversations that he had purportedly had with the applicant, to which the applicant objected. The accounts were said to be corroborated by independent file notes kept by the Trustee, which purported to record the conversations he had with Mr Mokhtar. The Trustee did not keep individual electronic file notes but a single electronic word document. That document included a mix of non-privileged material and material apparently subject to legal professional privilege. With respect, this is a highly unsatisfactory practice as I observed at the hearing and the Trustee’s counsel accepted. It was also impossible to determine from the single electronic file when individual entries were made and therefore whether the notes of conversations were contemporaneous.

At trial, the applicant’s objections to the alleged conversations and file notes were resolved on the basis that the parties would make submissions as to the weight I could ascribe that evidence. The applicant submitted that no weight could be given to the account of the conversations contained in the body of the Trustee’s affidavits. This was because they were reconstructions of events made well after the purported conversations took place, and were often not corroborated by, and at times were inconsistent with, the typed file notes kept by the Trustee. I agree that the word-for-word accounts of conversations in the body of the affidavits cannot generally be given any weight save where, for example, they are corroborated by other evidence for the following reasons. I had a particular concern that the alleged verbatim accounts frequently contained what appear on their face to be self-serving statements by the Trustee which, as I explain below, did not generally find support in the attached file notes.

Breakdown In Relations Between Trustee And The Bankrupt

Relations between the Banrkupt and Trustee did indeed appear to suffer as the extract from the following in an attachment to an email of the Trustee on 29 November 2021 suggested:

[the Trustee] As was explained to you multiple times, the agreement was that you buy the interest in the property from the bankrupt estate and it only would become yours on discharge, not before. The statement you signed in your bankruptcy paperwork acknowledged that you lose your assets on becoming a bankrupt. Your email appears to suggest that you retained some interest in the property which is not the case.

[Mr Mokhtar] I am perplexed at what you are saying. I think you are suggesting that you had the interest in the property in which case if that is correct I could never have sold the property because as you rightly claimed you had a caveat on the property and the property could not be sold without your consent which you did consent. So, stop this nonsense about me committing criminal offence and threatening me as to whether you should report it or not. You talk nonsense half the time. If you think you are going continue bullying me like you have for the past 4 years or so forget it. You have been a nightmare to deal with and your ethics are certainly questionable. To be frank you would make the movie the Horrors of Elm Street look like a beautiful romance. Smooth talker – full of shit.

…

[the Trustee] In summary, I have always acted fairly with you and in fact made allowances in your case which other bankrupts may not have had the benefit of. Unfortunately, the reason why you are in your current situation is because of your own actions.

[Mr Mokhtar] The only truth in the above statement is that I am in my current situation because of my actions. You never acted fairly with me. You just saw an opportunity to milk the cow from a fragile person who was down and out and shamefully is attempting to continue with the charade.

[the Trustee] I think the horse may have bolted in resolving this issue between ourselves. I believe that the slanging match between ourselves has now imploded and it is – bring it on – I have a good backer – ready to take you on at your own game- but based on the collated evidence that we have not embellishing the truth like you constantly do

(Emphasis added.)

The judge said this was:

The tone of Mr Mokhtar’s correspondence is disrespectful, discourteous, completely inappropriate, and abusive. However, that does not justify the tone of the Trustee’s response as emphasised above which was likely only to inflame tensions and did not reflect his professional obligations of objectivity.

No Higher Than A Conspicuous Coincidence

The Trustee appears to have filed a series of 17 objection to discharge notices about which the Court had this to say:

Bearing in mind the gravity of the allegation, the evidence falls well short of establishing a sufficient basis on which I could infer that the objection notices were filed by the Trustee as some kind of improper response to Mr Mokhtar’s complaint against the Trustee to AFSA lodged on 30 November 2021. Ultimately, the basis on which the applicant alleges an improper purpose rises no higher than the allegedly “conspicuous coincidence” of the Trustee’s objection notices being filed within days of Mr Mokhtar lodging his complaint with AFSA and their volume and frequency (ASC, [64]). That notwithstanding, it is possible that the pursuit of the complaint by Mr Mokhtar might have contributed to the Trustee’s sense of aggrievement and loss of objectivity, but again, this can rise no higher than speculation and therefore I have not taken it into account.

The more likely inference is that the filing of the notices of objection were the Trustee’s response to the very considerable difficulties and frustration which he was confronting in getting Mr Mokhtar to understand and comply with his obligations as a bankrupt. The evidence also indicates that in some cases, Mr Mokhtar complied with his obligations after the filing of certain objection notices, supporting the Trustee’s view, to some extent, that the objection notices may operate as an impetus for Mr Mokhtar to cooperate.

That said, however, I regard the sheer number and timing of the objection notices as a further indication of a loss of objectivity by the Trustee. In some cases, objection notices were filed within a day, or a few days, of each other. Two were even filed on the same day. No explanation for why he adopted this approach was given by the Trustee. Nor was there an adequate or reasonable explanation for why some of the notices which related to longstanding issues with Mr Mokhtar’s lack of cooperation should not have been filed earlier. It is also clear that, while Mr Mokhtar complied with his obligations following the filing of some of the notices of objection leading to their withdrawal, this flood of objection notices further inflamed tensions with Mr Mokhtar. This was evident from his correspondence with the Trustee and the number of challenges to the notices taken by Mr Mokhtar.

…

It is also evident from the Trustee’s evidence, submissions and conduct since December 2021 that he had no trust in Mr Mokhtar’s truthfulness or his ability to comply with his obligations as a bankrupt. Indeed, the evidence has established that there is substantial justification for those views. What is more relevant, however, is the question of whether the Trustee has lost the objectivity demanded of him as a trustee in bankruptcy. I accept the applicant’s submission that the evidence establishes that objectivity has been lost. The impression which the Trustee’s evidence conveyed was that he felt betrayed by Mr Mokhtar to whom he believes that he extended an unusual degree of latitude in the first three years of the bankruptcy. As an aspect of this, when challenged on aspects of his conduct of the bankruptcy, the Trustee was defensive and categorical. He did not admit to any possibility of misjudgement or misunderstanding. An illustration of this is his position with respect to the possibility that the calculator, accompanying email, and 3 May letter might have been misunderstood. This is also evidenced by the tone of some of the correspondence from the Trustee to Mr Mokhtar, Mr E Seyfarth and Mr Mokhtar’s former spouse, to which I have already referred.

Best Interests Of The Bankruptcy Estate Leading To Removal Of Trustee

The judge said there was a loss of objectivity by the Trustee and said he should be removed:

For the reasons set out above, I have reached the conclusion that it is in the best interests of the bankruptcy that the Trustee be removed. I reiterate that this decision is not based upon misconduct on the part of the Trustee but because the present Trustee has reached a point where he is unable to bring an objective and dispassionate mind to bear upon the administration of this bankruptcy. Nor, and as an aspect of this, can it be said that the irreparable breakdown in the relationship between the Trustee and Mr Mokhtar was engineered by Mr Mokhtar so that the Trustee might be removed. Nor was Mr Mokhtar the sole cause of the breakdown, notwithstanding his uncooperative, irresponsible, and at times abusive, conduct in the course of the bankruptcy. It is to be hoped that Mr Mokhtar’s attitude towards his responsibilities as a bankrupt will change and that he will fully cooperate with the new trustee. Absent that level of cooperation by him, the bankruptcy will almost certainly run to the statutory maximum of 8 years.