Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Bankrupt trustees coming before the High Court

While the focus of the High Court’s trust law decision in Carter Holt[1] is in the context of corporate insolvency, many of the principles applied came from the law of bankruptcy. As the High Court pointed out, property held on trust by a bankrupt is specifically excluded as divisible property, under s 116(2) Bankruptcy Act; and although there is no such exclusion in the Corporations Act, as a matter of legal principle, the same applies.

Boensch v Pascoe

The High Court has again taken on, by way of a grant of special leave to appeal, an issue of the intersection of trust law, and in this case, bankruptcy law: Franz Boensch as trustee of the Boensch Trust v Pascoe [2019] HCATrans 133.

The trustee in bankruptcy, Pascoe, lodged a caveat in respect of his claimed interest in real property of the bankrupt, Boensch, originally not knowing but subsequently being made aware of a trust arrangement whereby Boensch held the property on trust for family members. Pascoe claimed he had a reasonable basis for thinking that the trust may not have been valid or may have been voidable; but later proceedings found against him as trustee on these points.

Boensch then brought a claim under s 74P of the NSW Real Property Act 1900 for compensation in relation to the caveat lodged on the title to the property in question. A defendant may claim they had a reasonable cause to lodge a caveat even if it transpires the interest was not maintained.[2] Similar rights of compensation exist in all state land laws.

The NSW Supreme Court held that Pascoe had a caveatable interest and had reasonable cause to lodge the caveat. The Full Federal Court[3] dismissed the bankrupt’s appeal, finding that Pascoe was entitled to be registered as proprietor of the land pursuant to the vesting effected by s 58(2) of the Bankruptcy Act subject to any trust of which the bankrupt was a trustee.

High Court special leave hearing

At the High Court hearing last month, counsel for Boensch submitted that this was

“completely contrary to the terms of the definition of the property of the bankrupt in 5(1)(a)(i) and 5(1)(a)(ii) of the Bankruptcy Act” as well as being “contrary to what this Court decided two days ago in” Carter Holt Harvey.

He referred to the High Court in Carter Holt saying that

“it has been established for centuries in bankruptcy law that rights held by a bankrupt on trust do not generally form part of the bankrupt’s estate that is available for general distribution amongst creditors … Despite Australian bankruptcy legislation having adopted a broad definition of “property”…, it also expressly adopted this principle by excluding from the property divisible among creditors all property held by the bankrupt on trust for another person”

and that

“nothing vests in the trustee in bankruptcy where the property is held solely for the benefit of other persons”.

It was argued that Pascoe knew that the property

“was owned by Mr Boensch solely for the benefit of his two children and he had no right of indemnity in the property. So that, on any view of it, there is simply nothing to vest in Mr Pascoe. And that is the only consistent outcome on the primary point of principle in this case in order for this decision to be consistent with what was determined two days ago in Carter Holt Harvey”.

A factual complication appears to be whether there was any right of indemnity in fact available to Boensch as the trustee, in light of the facts of the trust arrangement, an issue not determined by the lower courts. It was accepted that if the trustee had a right of indemnity that would have provided a sufficient basis to lodge the caveat, under the second limb of 5(1)(a)(ii) and based on Carter Holt Harvey.

Bankruptcy

In Carter Holt, Justice Gordon made some concluding comments that the findings of the Court likewise applied to bankruptcy.

“The right of exoneration and the proprietary interest generated in the fund means that the “trust property” in which the trustee has an interest ceases to be aptly described as property “held on trust” but instead is property of the trustee subject to limitations as to use. … It follows that there is no apparent inconsistency between the corporate insolvency priority regime and s 116(2)(a) of the Bankruptcy Act … which provides that property held by a bankrupt in trust for another person is not property divisible amongst the creditors of the bankrupt”.

 The other and usual trust issues

The complications that have arisen in corporate insolvency do not generally arise in personal insolvency; although it is conceivable that a person may operate a business as trustee. The typical trust law issues that arise for trustees in bankruptcy involve a claim to a trust existing in favour of a third party over domestic or such property held in the name of the bankrupt. The trustee takes any assets subject to such prior claims. Identification and substantiation of those claims can take time and cost, in particular where claimed family agreements are involved.

Trust ‘document’ was “handwritten in Italian on a tissue”

As one example, in McVeigh v Zanella [2000] FCA 1890, the claimed trust arrangement, in favour of Italian parents of the bankrupts, was “handwritten in Italian on a tissue, was dated 16 March 1989 and was signed by the parents and the two sons”. The Judge said he had “serious reservations about the authenticity” of this claimed agreement but in the end he did not need to decide.

A bankrupt trustee as litigant

Trusts also throw up some odd outcomes in bankruptcy law. One is that litigation taken by a person who then becomes bankrupt is stayed under s 60(2), even if brought in their capacity as trustee, in the same way as if they were bringing the litigation in their personal capacity: Duckworth v Water Corporation (No 1) [2012] WASC 30, Edelman J. The bankruptcy trustee may then elect to discontinue the proceedings.

Edelman J later explained that his decision “may not be free from doubt”. He then went on to say:

“One concern, based on history and purpose, was that any rights which Mr Duckworth did hold on trust did not vest in his trustee in bankruptcy; it was only any beneficial interest which Mr Duckworth had, or any rights of indemnity against the alleged trust property, which vested in his trustee in bankruptcy: Octavo Investments Pty Ltd v Knight [1979] HCA 61 …

“Perhaps more importantly, as I explained in my reasons in Duckworth (No 1), in ‘exceptional circumstances’ a beneficiary or beneficiaries can institute fresh proceedings in their own right to enforce a trustee’s legal rights. The trustee would almost always be joined as a defendant along with all other beneficiaries who are not plaintiffs. One established ‘exceptional circumstance’ is the insolvency or bankruptcy of the trustee …”.

We await the allocation of a hearing date for the appeal.

[1] Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20

[2] A trustee in bankruptcy obtained such compensation for unwarranted caveats in Sijabat v Cussen [2018] NSWSC 847.

[3] Cross-vested.

 

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