When Will a Court Replace a Trustee of a Bankrupt Estate?

Recently, the Federal Court of Australia (Justice Perry) in Yan v Spyrakis (Trustee), in the matter of the bankrupt estate of Liu [2024] FCA 768 considered when a Court may make an order to replace a trustee of a bankrupt estate under section 90-15 of Schedule 2 to the Bankruptcy Act 1966 (Cth) (“the Schedule”).

Facts

In December 2017, Mr Yan loaned $10 million to Mr Liu and GR Capital. In November 2021, Mr Liu became bankrupt, and Mr Spyrakis (“the Trustee”) was appointed as his trustee in bankruptcy. In March 2022, the Trustee published a report to the creditors of the bankrupt estate of Mr Liu (“the Estate”) stating approximately $64 million was owed to creditors and that Mr Yan, Ruifa Wang, and Yuqing Liu and Xingfeng Australia International Investment Pty Ltd (“Xingfeng”), were the unsecured creditors owed the largest debts.

Mr Yan’s request for meeting of the creditors:

As a creditor holding more than 25% of the value of the creditors, Mr Yan’s solicitors sent a letter in August 2023 to the Trustee requesting a meeting of the creditors to vote on the following two resolutions:

1. The removal of the Trustee; and
2. The appointment of Mr Robinson as the replacement trustee.

Mr Yan also wished to notify creditors that if the resolutions passed, he would provide funding for the investigation of Mr Liu’s bankrupt affairs. In September 2023, the Trustee responded to the letter stating that he would “provide a formal response in due course” and that it is “unlikely” that the replacement of the trustee would be supported by the creditors. No formal response was sent.

The appointment of Mrs Liu as the director of The Won Capital Pty Ltd:

On 24th August 2023, Mr Yan’s solicitors notified Mr and Ms Liu’s solicitors of their intention to apply to wind up The Won Capital Pty Ltd (“The Won”) because the company had no director, and it was unlikely that a director would be appointed. On 31st August 2023, the Trustee appointed Ms Liu as the sole director of The Won and notified Mr Yan’s solicitors of the appointment.

 Orders sought:

Mr Yan sought orders under section 90-15 of the Schedule to remove the Trustee and appoint Mr Robinson as the replacement trustee.

Decision

In considering the application under section 90-15 of the Schedule, the Court firstly needed to consider whether Mr Yan had the authority to make the application to remove the Trustee, and secondly needed to determine whether removing the Trustee would be in the “best interests of the bankruptcy”.

Authority to apply for a section 90-15 order:

Under section 90-20(1)(a) of the Schedule, “a person with a financial interest in the administration of the regulated debtor’s estate may apply for an order under section 90-15”. Under section 5-15(a) of the Schedule, a “regulated debtor” includes a bankrupt and under section 5-30(a)(ii), a person has a “financial interest” if they are a creditor. Therefore, the Court was satisfied that Mr Yan had authority to apply for a section 90-15 order.

 Whether the removal of the Trustee is in the best interests of the bankruptcy:

Before the Court considered the removal of the Trustee, it emphasised two important principles that apply when evoking jurisdiction under section 90-15 of the Schedule:

With the above in mind, the Court determined that it was in the best interests of the bankruptcy that the Trustee be replaced with Mr Robinson for four main reasons.

Firstly, there were three issues identified that the Court deemed beneficial for a trustee to investigate.

1. The first issue to be investigated was any overseas assets Mr Liu may have been holding as there was a “real possibility” that those assets could be realised for the benefit of the bankrupt estate.
2. The second issue to be investigated was the inconsistency in the evidence about the amount of the debt owed to the Estate by GR Capital. The Trustee had reported that $678,000 was owed, but Mr Liu reported that he was owed approximately $6.6 million.
3. The third issue to be investigated was whether the Estate held equity in a property in Sylvania, New South Wales that could be realised.

Secondly, Mr Yan was willing to fund the trustee’s investigations if Mr Robinson was appointed – but not if the incumbent remained in office. The Court determined that it would be in the best interests of the bankruptcy to receive funding for investigations that could lead to the potential recovery of assets. It was noted that Ms Liu also offered to provide funding between $20,000 to $40,000 to the Trustee to undertake investigations. However, the Court determined that because Ms Liu was the director of GR Capital when Mr Yan provided the $10 million loan to Mr Liu and GR Capital, she had a “vested interest in minimising the proposed investigations”.

 Thirdly, the majority of creditors in value, Ruifa Wang and Y Liu and Xinfeng, supported the replacement of the Trustee on the basis that Mr Yan would provide funding for the trustee’s investigations.

Lastly, although not sufficient of themselves to substantiate the Trustee’s removal if considered in isolation, and even though there was no suggestion they were beyond the power of the Trustee, the Court considered that the Trustee had made “unusual decisions” which were “not necessarily” in the best interests of the bankruptcy. The specific decisions of concern for the Court were:

1. The appointment of Ms Liu as director of The Won where (in the circumstances at the time) the creditor suggested a different appointment would have been made if creditors had been consulted. Although the Court pointed out that the Trustee was not under a “legal obligation to consult the creditors”, the process undertaken by the Trustee was viewed by the Court as not necessarily being in the best interests of the bankruptcy (though her Honour did not expand on this comment).
2. The failure to call a meeting of the creditors when directed by Mr Yan. The Court agreed that the Trustee prejudged the outcome of the creditors meeting “without a clear basis” and that was also not necessarily in the best interests of the bankruptcy.

It is important to note that the Trustee did not file an appearance and did not seek to be heard on the application or respond to the matters raised in the application.

Based on the above reasoning, the Court granted orders in favour of Mr Yan for the replacement of the Trustee with Mr Robinson.

Key Takeaways

• A creditor who has an interest in a bankrupt estate may apply to remove a trustee under section 90-15 of the Schedule.
• The Court will not unduly interfere with a trustee’s administration of a bankrupt estate. However, it is also not necessary to establish a trustee’s error, misfeasance, negligence, or poor conduct when seeking a section 90-15 order to remove them.
• The Court will assess the best interests of the bankruptcy when determining whether to grant a section 90-15 order. This may involve consideration of numerous factors, such as, beneficial trustee investigations, funding for the investigations, and the views of creditors.
• While the Trustee’s decisions were considered as a factor in this case, it is not a sufficient reason on its own to substantiate the removal of a trustee under section 90-15.