Mokhtar v Piscopo - Case Update

The Federal Court of Australia has awarded costs against a trustee in bankruptcy after removing him as trustee of the bankrupt estate due to a breakdown in his relationship with the bankrupt, despite no allegations of misconduct being made.

The trustee was appointed as trustee of the bankrupt’s estate in 2018. In 2022, the bankrupt sought to have the trustee removed on the basis that the relationship between the parties had irretrievably broken down. The bankrupt argued that the trustee had not acted independently and with reasonable diligence in administering the bankrupt estate. The trustee had also filed about 17 objection to discharge notices, which the bankrupt alleged were an improper response to an AFSA complaint lodged by the bankrupt against the trustee in 2021.

Correspondence between the trustee and the bankrupt adduced in the application demonstrated the breakdown of the relationship between the parties. The bankrupt accused the trustee of bullying him for four years, said the trustee had been a nightmare to deal with, and called him a “smooth talker” who was “full of shit”. The trustee responded that the only reason the bankrupt was in his current situation was his own actions, stated that “the slanging match” between the trustee and the bankrupt had imploded, and said he was ready to take the bankrupt on at his own game.

The Court found that it was in the best interests of the bankruptcy that the trustee be removed, not because the trustee was guilty of misconduct, but because he had reached a point where he was unable to bring an objective and dispassionate mind to bear upon the administration of the bankruptcy. The Court also concluded that the bankrupt was not the sole cause of the breakdown, notwithstanding his “uncooperative, irresponsible, and at times abusive” conduct in the bankruptcy.

Now, the Court has also awarded costs against the trustee. The Court determined that the trustee's lack of objectivity during the administration of the estate, coupled with serious deficiencies in judgment, justified holding him personally liable for costs. While no misconduct was found, the trustee’s actions, including filing numerous objection notices, exacerbated the breakdown in his relationship with the bankrupt and adversely affected the administration. The Court rejected the trustee's argument that costs should not be awarded because he had acted reasonably in defending the proceedings.

Additionally, the Court highlighted the trustee’s failure to seek judicial advice before defending the proceedings as a factor in its decision to deny him an indemnity from the bankrupt estate. Ultimately, the Court ordered the trustee to personally bear the bankrupt’s costs, emphasizing that cost awards are compensatory, not punitive.

Read the decision here.

Professionals involved:

• Counsel for the bankrupt: Matt Karam and Michael Noakhtar of New Chambers

• Counsel for the trustee: Steven Sher of Drayton Sher Lawyers