Case summary: Boensch v Pascoe [2019] HCA 49 (13 December 2019)

Background

Mr Boensch claimed that he held a house in Rydalmere (the property) as a trustee for his two children. He claimed that Mr Pascoe, as his trustee in bankruptcy, held no vested interest in the property. Mr Pascoe disputed the claim that a trust existed at general law and argued the alleged trust was void as it fell within the terms of s120 or s121, or both, of the Bankruptcy Act 1966 (Cth).

Mr Pascoe (the trustee) lodged a caveat over the property in 2005. The trustee was ultimately unsuccessful in establishing his claims that there was no valid trust over the property. Subsequently Mr Boensch (the bankrupt) brought a claim under s74P of the Real Property Act 1900 (NSW) for compensation from his trustee in relation to the lodging and maintenance of the caveat over the property. 

During the trustee’s investigations of the trust there was reference to the bankrupt’s "mutually beneficial arrangement" which was claimed to relate to the room that the bankrupt occupied in the property. The bankrupt explained that the room was not of a standard that would enable it to be let and that the mutual benefit was that he had a roof over his head and the property appeared to be occupied. This was to assume significance in later deliberations concerning whether this asserted arrangement prejudiced the trustee's right of indemnity wholly or in part (by way of set-off).

Given the fact that in this matter the bankrupt claimed to hold an estate in land under the Torrens system on trust, the High Court considered whether property held by a bankrupt on trust was capable of vesting in a trustee in bankruptcy. After an appeal as to whether there was a trust was dismissed by the Full Court of the Federal Court and special leave to appeal to the High Court was dismissed, the caveat was allowed to lapse in September 2009.

In 2012, the bankrupt commenced compensation proceedings pursuant to s74P(1) of the Real Property Act 1900 (NSW) alleging that the trustee had lodged, and later refused or failed to withdraw, the caveat without reasonable cause. At first instance the court rejected the claims.

The Full Court of the Federal Court of Australia subsequently dismissed the bankrupt’s appeal. They upheld the finding that the trustee acted with "reasonable cause" in lodging and not withdrawing a caveat.

Analysis

The bench of seven judges delivered two judgments with the first and pithy one being delivered by Kiefel CJ, Gagaler and Keane JJ. The more detailed judgment was from Bell, Nettle, Gordon and Edelman JJ (the ‘second judgment’). The seven judges unanimously dismissed the appeal. The second judgment set out their summary conclusion as follows:

Provided the bankrupt has a valid beneficial interest in the trust property, the trust property will vest in the trustee in bankruptcy subject to the equities to which it is subject in the hands of the bankrupt. For these purposes, a valid beneficial interest means a vested or (subject to applicable laws as to remoteness of vesting) contingent right or power to obtain some personal benefit from the trust property [15]

This judgment began by considering the general principles to be applied when considering the vesting of property held by a bankrupt on trust for another. The judges endorsed the ‘broad and general principle’ that a "trustee in a bankruptcy takes only the property of the bankrupt, and takes it subject to all the liabilities and equities which affect it in the bankrupt's hands".

Turning to the situation where land subject to the Real Property Act had been held by a bankrupt on trust for others, the fact that a trustee in bankruptcy was registered as proprietor under s90 of the Real Property Act by operation of statutory vesting would not destroy any trust of which the bankrupt was formerly a trustee. Section 116(2)(a) of the Bankruptcy Act 1966 excludes from vesting any property held by the bankrupt solely in trust for another person.

The court emphasised one qualification to those principles - that property held by a bankrupt on trust for another will not vest in the bankrupt's trustee in bankruptcy if the bankrupt does not have any interest in the property, whether vested or contingent, and subject to applicable laws as to remoteness of vesting.

The issue then is to distinguish what interest is sufficient to constitute property that would vest with the trustee upon bankruptcy. The Court’s useful formulation was that it would need to be a contingent beneficial interest which is extant and valid; and that such an interest is capable of being immediately realised for the benefit of a bankrupt's creditors, even if it is likely to vest after the period of bankruptcy [91]. The court went on to observe that if a bankrupt's vested or contingent beneficial interest in trust property arose either:

  • under the express terms of the trust, or
  • from outside (including due to the trustee's right to be indemnified out of the trust property for obligations incurred in the bankrupt's capacity as trustee)

Then that would be sufficient for the property to pass to the trustee in bankruptcy.

In summary, while the ‘property of the bankrupt’ does not include property held by the bankrupt on trust for any other person, it does include property held by the bankrupt on any trust for his own benefit, and this includes property held to secure his own right of indemnity in priority to all claims of any beneficiary.

If the retention of such property is necessary to give full effect to such right, it follows that the property, ie, the legal estate, and right to possession vest in the trustee in bankruptcy to the extent to which they were vested in the bankrupt. In the context of registering as legal proprietor in accordance with the Real Property Act (or equivalent), after the trustee in bankruptcy is so registered as proprietor, the trustee will hold the estate or interest subject to the equities to which it was subject in the hands of the bankrupt.

In this matter the trustee’s caveatable interest arose due to the bankrupt’s right of indemnity. The bankrupt had admitted incurring significant expenses in his capacity as trustee of the Boensch Trust. The bankrupt sought to offset the effect of the right of indemnity by relying on the bankrupt’s so-called "mutually beneficial arrangement" with the Boensch Trust (referred to above) but the court concluded the claim was without merit.

The court summarised the position concerning the interest held by the bankrupt as being:

  1. The bankrupt had a beneficial interest in the property.
  2. The interest was the bankrupt’s right to retain the property as security for satisfaction of his right of indemnity as trustee of the Boensch Trust.
  3. That beneficial interest, being an estate in the property, vested forthwith in equity pursuant to s58 of the Bankruptcy Act 1966.
  4. The vesting was subject to a sub-trust on the terms of the Boensch Trust, but permitting Mr Pascoe to exercise the right of indemnity.
  5. On that basis, the trustee in bankruptcy was entitled to be registered as proprietor of the property in accordance with s90 of the Real Property Act, and that was a sufficient basis to sustain his caveat [102]

Departing from the Full Court, the four High Court judges:

  • held that the possibility that the trust might have been set aside under s120 or s121 of the Bankruptcy Act 1966 would not have been sufficient to sustain the caveat. This was because only a legal or equitable interest in land can sustain a caveat and a mere statutory right to take steps to avoid a transaction does not confer such an interest.
  • observed that the expression "Legal Interest pursuant to the Bankruptcy Act 1966" in a caveat to describe an equitable estate vested in a trustee is not only apt to mislead; but more to the point, it did not afford sufficient information to determine whether any other dealing with the property would adversely affect the interest claimed. However, they added that this would not of itself ground a claim for compensation as ‘a mere technical deficiency in the statement of the interest claimed does not of itself demonstrate the absence of a "reasonable cause’”, and on the facts of this matter if anything, the description used in the trustee’s caveat understated the extent of his interest.

Decision

The court concluded that:

  1. Upon the making of the sequestration order, the property vested in equity in the trustee by reason of the bankrupt’s right of indemnity and, therefore,
  2. The trustee had a caveatable interest in the property.
  3. The trustee honestly believed on reasonable grounds that the property so vested, either on the basis that the trust was void or on the basis of the bankrupt’s right of indemnity.
  4. The trustee did not lodge or refuse to withdraw the caveat without reasonable cause. The High Court accepted that to establish the absence of reasonable cause, the bankrupt had to establish two matters. First, that the trustee did not have a caveatable interest and secondly, that the trustee did not have an honest belief based on reasonable grounds that he had a caveatable interest. The Court found the bankrupt had not discharged this onus.

The appeal was dismissed with costs.