The seven member bench of the High Court which heard Boensch v Pascoe on 11 October 2019 has unanimously dismissed Boensch’s appeal [Boensch v Pascoe [2019] HCA 49] finding that on the making of the sequestration order, the debtor’s right of indemnity in the Rydalmere property held on trust by him for his family vested in the bankruptcy trustee, giving the trustee a caveatable interest in that property.
The Full Federal Court had decided to the effect that a trustee in bankruptcy – Pascoe – had a right to lodge a caveat over real property at Rydalmere NSW of the former bankrupt – Boensch – held by him under a family trust. The property had vested under s 58(2) of the Bankruptcy Act subject to the family trust. The Full Federal Court dismissed the former bankrupt’s claim for damages under NSW property law on the basis that Pascoe lodged or refused to withdraw the caveat without reasonable cause.
The High Court concluded that:
“116. … there is no reason to doubt that, upon the making of the sequestration order, the Rydalmere property vested in equity in Mr Pascoe by reason of Mr Boensch’s right of indemnity and, therefore, that Mr Pascoe had a caveatable interest in the property. Nor is there any reason to doubt that Mr Pascoe honestly believed on reasonable grounds that the property so vested, either on the basis that the trust was void or on the basis of Mr Boensch’s right of indemnity. On the facts as found, Mr Pascoe did not lodge or refuse to withdraw the caveat without reasonable cause”.
That is, where a person who goes bankrupt holds property on trust for third parties – say under a family trust – then the person’s right of indemnity (to be paid out of trust assets for costs incurred in administering that trust) is a sufficient interest to cause the trust property to vest in the trustee in bankruptcy [92] and to give the bankruptcy trustee a caveatable interest in the property.
But a mere possibility or hope of the person obtaining an interest in the trust property is not enough.
When would nothing vest?
The circumstances of the person as trustee going bankrupt having no interest in the property might arise where there are no trust debts or expenses accrued but unpaid, and the trustee is to be unremunerated or has been fully paid their remuneration.
The trustee in bankruptcy would consequently have no claim against the trust assets that equity would recognise as giving the trustee an equitable interest in those assets, and hence no caveatable interest.
Other issues
Other issues were discussed in the High Court’s judgment, including as to the adequacy of factual findings at trial and that that an appellate court ordinarily only needs to deal with grounds of appeal that are dispositive: James Legal v Milanos as trustee of the property of Attard: [2019] FCA 2130.
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