The recent decision of Rambaldi v Meletsis1 in the Federal Court of Australia provides important guidance to bankruptcy trustees as to their power under the Bankruptcy Act2 to acquire assignable claims and to insolvency practitioners generally as to the right to seek judicial direction.3
In this case, the plaintiff trustees were found to have power to acquire certain litigation claims and the Court granted the judicial direction they sought.
The relevant facts of this matter included that the bankrupt, Mr Karas (Bankrupt), obtained a mortgage (the Mortgage) over certain real property (the Property) formerly owned by 70 Nicholson Street Pty Ltd (in liquidation) (the Company) prior to his bankruptcy.
Steps were then taken by the Company to sell the Property as part of what the Court described as a ‘concerted plan’ to discharge the Karas Mortgage for nil consideration.
After the plaintiffs were appointed joint and several trustees of the Bankrupt in February 2016 (Trustees) they took steps to investigate whether the Mortgage secured any obligations and conducted various investigations including examinations under section 81 of the Act and conferrals with the liquidator of the Company (Liquidator).
The Trustees also took legal advice in respect of any claims that the Liquidator might have in relation to the sale of the Property.
In July 2017 the Trustees and the Liquidator met and discussed the potential of an assignment of litigation claims in relation to the conduct of the Company’s director at the time of the sale, the purchaser of the Property, a related entity which allegedly took the benefit of the proceeds of sale of the Property and another individual allegedly involved in the transaction (Defendants). At the time, according to the evidence of the Trustees:
- the Liquidator indicated he would not take any litigation action in respect of those potential claims;
- there was a significant debt owing to the Deputy Commissioner of Taxation in the bankruptcy of the Bankrupt; and
- there appeared to be considerable monies owing by the Company to the Bankrupt’s estate.
The Trustees subsequently offered $25,000 for the assignment of the claims which the Liquidator and subsequently creditors approved. By Deed of Assignment in September 2017 those claims were assigned.
In November 2017 the Trustees commenced these proceedings seeking (variously and among other things) equitable compensation and claims under sections 120 and 121 of the Act against the Defendants.
The decision concerned two substantive questions. One, whether the Trustees had the power to acquire the assigned claims from the Liquidator and two, if the Trustees had that power, whether the Court should give the judicial guidance sought.
The Trustees argued that the powers exercisable at the discretion of a bankruptcy trustee under section 134 of the Act were sufficiently broad to provide for the power to acquire the assigned claims.4
A counter-argument was put that the claims were rights of actions of the Company and were not the property of the bankrupt estate such that damages or compensation would not be divisible property under section 116 of the Act. The Defendants also said that the causes of action were not ‘property’ as defined under section 5 of the Act as they did not arise out of or as an incident of the Bankrupt’s property.
The Court found that but for the question of what constituted property of the Bankrupt the Court would certainly have decided that the Trustees had the requisite power in section 134 of the Act. It found (and the Defendants conceded) those powers were expressed widely and in general terms and broadly enough to include the power to acquire property. If the Trustees had formed the view that it was appropriate to do so in the best interests of the Bankrupt’s creditors and with a view to maximising the return to the Bankrupt’s creditors then in principle they could rely on section 134 of the Act.
The Court took the view that the Trustees acquired the claims using funds from the Bankrupt’s estate for the benefit of the Bankrupt’s creditors and thus not only were the causes of action ‘after-acquired’ property of the Bankrupt for the purpose of section 116 of the Act, but they were clearly ‘property’ within section 5 of the Act.
In light of these matters the Court found that yes, the Trustees had such power, and yes, the Court should give the judicial guidance sought.
This decision helpfully dovetails with the recent changes to the law concerning the assignment of claims under the Insolvency Practice Schedule (Bankruptcy) and Insolvency Practice Schedule (Corporations). This recent legislative change provides a process both for the assignor of legitimate causes of action5 and the assignee (as discussed above), in the case of both bankruptcy trustees and external administrators in corporate matters. Practitioners should, in appropriate cases, acquit themselves of the court approval processes, but they should generally seek appropriate legal advice on the merits of any assignable claims before doing so.