PIR Newsletter - March 2023

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The Personal Insolvency Regulator (PIR) is a quarterly newsletter from AFSA.

Personal insolvency numbers expected to rise

Personal insolvencies are expected to rise towards pre-COVID levels over the next two years, according to new insights released by the Australian Financial Security Authority (AFSA).

The State of the Personal Insolvency System report shows a total of 9,545 personal insolvencies recorded in the 2021-22 financial year – well below half the 10-year average of 25,300 insolvencies annually.

Rising costs of living and wider economic uncertainty are expected to see personal insolvency numbers increase from current historic lows.

Factors including debt agreement reforms and the economic response to the COVID-19 pandemic stimulus have influenced falling insolvencies since the last peak in 2017-18.

Most people who entered personal insolvency during 2021-22 had low levels of debt, with 52.7% of insolvencies in the last financial year involving less than $50,000 in liabilities. Just over a quarter of insolvencies had debts totalling more than $100,000.

Read more

AFSA attends Attorney-General’s personal insolvency roundtable

On 2 March 2023 key stakeholders joined Attorney General, The Hon Mark Dreyfus KC MP for a roundtable event to discuss reform opportunities in the personal insolvency system.

The event brought together the credit, finance, accounting and legal sectors as well as consumer groups to discuss how the Australian Government can ensure the Bankruptcy Act remains fit for purpose.

AFSA was pleased to be one of a number of organisations represented at the event – further information is available on the Attorney-General's Department website.

A summary of the discussion will be made available in the coming weeks.

Tip-offs

To ensure fairness and equity in Australia’s insolvency system, it is a legal requirement that all assets are reported when a person or business is declared bankrupt.

Not declaring all assets is a breach of the law and failures to comply can be penalised including fines being issued or even jail.

If you have information relating to any wrongdoings, reports can be confidentially made to:

Anyone came make a report and they can be made anonymously.

When making a report, it is important that you provide as many details as possible. This helps the investigation and ensures the system is equitable for everyone.

All tip-off reports are checked, and if required further action is taken, however due to privacy laws AFSA may not be able to provide updates.

Learn more

AFSA farewells retiring leader Paul Shaw

AFSA would like to farewell and thank Paul Shaw, National Manager Enforcement & Practitioner Surveillance, who has recently retired after 35 years in the Australian Public Service.

Paul has made a significant contribution since joining the agency in 2013. He has led our practitioner supervision program and regulation strategies, helping us increase our efficiency. He has also played a key role in ensuring we use our technology and insights more effectively.

Thank you for your dedication, Paul – we wish you all the best for the next chapter.

Priority claims when bankrupt is a former trustee of a trust

 

 

Anne Wardell

BA/LLB, DipDemCare, Lecturer, UTS Law – ARITA Academic Member

Editor’s note: interpretation of the case is a matter for the author and AFSA have not considered substantive legal aspects.

A recent decision of the Federal Court has considered whether creditors of a bankrupt person who was a trustee of a trust before bankruptcy, have any right to a claim on the trust – the result being that they did have a right to make a claim.

Background:

Matters involving trusts are always complex. This is exacerbated when insolvency events occur. A trustee in bankruptcy must pursue all claims of the bankrupt to increase the return to creditors, subject to the considerations in section 19(k) of the Bankruptcy Act 1966 relating to commerciality.

In Francis (Trustee), re Fotios (Bankrupt) v Helios Corporation Pty Ltd [2022] FCA 199 Mr Fotios (the bankrupt person), was the trustee of a trust and was declared bankrupt. Ms Fotios, (the bankrupt person’s wife), had entered into a loan Deed with the trust and this was registered on the Personal Property Securities Register (PPSR).

Helios Corporation Pty Ltd (Helios) was appointed as the new trustee. Helios subsequently entered voluntary administration and the voluntary administrators were appointed as receivers over the trust property.

The trustee of Mr Fotios’ bankrupt estate made application to the court on the basis that the creditors of the estate were subrogated to the right of the bankrupt person to seek exoneration from the assets of the Trust (and could pursue his associated right of indemnity).

The receivers sought advice from the Court as to the priority between the claim by the trustee of the bankrupt estate and the claim by the receivers for remuneration.

Justice Colvin noted that any proceeds received from the trust are to be administered by the trustee in bankruptcy in accordance with the statutory bankruptcy framework. The consequence of this is that when it comes to exoneration, it is only creditors in respect of trust liabilities who are entitled to share in the trust property recovered by an insolvency administrator on the basis of being subrogated to the trustee's power to exonerate those liabilities from the property of the trust (at [8]).

The right of exoneration held by Mr Fotios, and subsequently held by his trustee in bankruptcy, had priority over the claims of the receivers as it occurred first in time. The Judge applied Re Application by Hughes; Richardson v Aileen Pty Ltd [2007] VSC 104 and held that claims against the assets of the Trust arising from the time when Mr Fotios was trustee have priority over claims against those assets arising from the time when the second trustee became trustee on the basis of the principle that the former trustee's rights have priority over a new trustee in the absence of some vitiating factor.

The first issue to be determined was whether the Court was permitted to provide advice to the receivers. The Judge held that the Court is permitted to provide judicial advice to a receiver appointed by the Court. Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 6) [2020] FCA 1172 at [23]–[28], Preston, in the matter of Sandalwood Properties Ltd [2018] FCA 547.

During the period when Mr Fotios was the trustee of the trust, a property was purchased in the name of he and his wife. The property was then used by the Mr Fotios to secure borrowings he made in his capacity as Trustee of the trust. Both Mr Fotios and his wife provided personal guarantees for the debt. Upon his bankruptcy, the joint tenancy was severed, and the property was sold by the Trustee in bankruptcy. The mortgage was paid out and the balance was divided between Mr Fotios’ wife and the bankrupt estate.

The Court held that the payment to the mortgagee by Mr Fotios was paid to satisfy his debt as guarantor and not as trustee of the trust. Therefore, the bankrupt did not make this payment in his capacity as trustee and therefore no right of exoneration attached to it.

The Judge, at [42], further noted that “As has been noted, the statutory priority regimes apply in dealing with competing claims to the property that is recovered by the Trustees in Bankruptcy or an insolvent administration of Helios in the exercise of the subrogated right of creditors to the charge or lien over the assets of the Trust that support the right to indemnity for exoneration. Therefore, the Receiver is justified in dealing with the trust assets on that basis. It may be noted that trust assets recovered to exonerate creditors must be applied to meet claims by trust creditors. However, trust assets recovered by way of recoupment are the trustee's personal property for distribution to creditors generally: Carter Holt [2019] HCA 20 at [155].

A further issue was what priority was to be afforded to the rights of Mr Fotios’ wife under the loan Deed which had been registered on the PPSA. In particular, the Receivers sought advice concerning the priority over the security interest in the Trust property created by the loan Deed. The interest in the property of the Trust arose by reason of the rights of exoneration or recoupment of the bankrupt as trustee of the Trust prior to the appointment of Helios as trustee.

This involved a consideration of s 73(1) of the Personal Property Securities Act 2009 (Cth). In order to determine the application of s 73, the Judge needed to consider the effect of a term in the trust deed that provided the trustee with an indemnity. On this point the Judge noted, at [50], that “an issue arises as to whether, having regard to the terms of the deed, the right to indemnity arises 'by operation of general law' for the purposes of s 73(1)(a)(ii) of the PPSA or whether it is conferred by the terms of the Trust instrument. The issue has two aspects:

  • The first concerns whether the terms of the deed operate so as to comprehensively express the nature and extent of the trustee's indemnity with the consequence that the rights at general law do not remain. If so;
  • The second concerns whether rights conferred solely by the deed arise by operation of law for the purposes of s 73(1) or whether they are a security interest conferred by the instrument that must be registered if it is to be afforded priority”.

Having considered the relevant authorities, the Judge concluded that the provision in the trust deed did not alter or abandon any equitable right to an indemnity. In those circumstances the second aspect did not need to be considered.

Outcome:

After considering the other parts of s 73(1) the Judge concluded that that the bankrupt’s rights at general law right as the previous trustee remained. The priority provided by s 73(1) therefore applied and the right of indemnity of Mr Fotios as trustee had priority over the registered interests created by the loan Deed. Therefore, the trustee of the bankrupt estate would have priority over the claim of Mr Fotios’ wife.

The Judge made consent orders agreed by the parties and listed the matter for further hearing if the orders needed to be changed. The parties returned to Court to clarify two issues;

  • First, the priority to be afforded the costs of the external administration of Helios,
  • Second, the priority as between parties claiming against the assets of the Trust based upon rights of exoneration and recoupment.

The trustee of the bankrupt estate argued that the rights of recoupment trumped the rights of exoneration. The issue for determination by the Judge was whether the assets of the Trust in the hands of the Receivers should be applied first to meet claims based upon the trustee's right to reimbursement and then to meet claims by creditors based upon subrogation to the trustee's right of exoneration. 

The parties ultimately agreed that if the order of priorities was not to give preference to reimbursing creditors, then it ought to reimburse the trustee for any liabilities satisfied such that they would rank against the trust assets in the same way that the right of exoneration would have ranked had the liability remained unsatisfied. See Francis (Trustee), in the matter of Fotios (Bankrupt) v Helios Corporation Pty Ltd (No 2) [2022] FCA 652. The final orders made are contained in this judgment.

The trustee of the bankrupt estate was able to establish a right for the estate to make a claim out of the trust and therefore increase the return to creditors.

It is important for trustees in bankruptcy to understand the rights they have when a bankrupt has been a trustee of a trust, particularly with the large number of bankrupts who have family trusts which appear out of reach of the bankruptcy trustee.

AFSA plays a vital role in supporting people experiencing vulnerability. Many people who access our services are already in financial distress and we want to ensure people who use our services receive the information that’s right for their situation.

Please note that the views expressed in articles sourced from outside AFSA are not necessarily endorsed by, or reflect the views of AFSA, the Inspector-General in Bankruptcy, Official Trustee, the Official Receiver, or the PPS Registrar.

Please Don’t Ask as Refusal Often Offends: Do Creditors Have a Right to Access Company Books & Records?

 

 

Liam Bailey - Partner - O’Brien Palmer

Editor’s Note: While this article is not in the Personal Insolvency space, the article maybe of general interest to some of the PIR audience. While there are some similar concepts and the broad rationale as set out in the respective Explanatory Memoranda are comparable, the information scheme relating to creditors accessing/providing information by trustees as set out in the IPS and IPRs differs from that applying to liquidators.

Registered Liquidators regularly receive requests for access to the books and records of the companies to which they have been appointed. Often these are presented as demands from creditors framed as an assertion of their perceived rights.

When these demands are denied, as they often must be, creditors can interpret refusal as evidence of unsatisfactory conduct by the liquidator or bias in favour of a director.

A common misconception conflates the legal regime providing creditors with a qualified right to access an external administrator’s files with a perceived right of access to company records.

These misconceptions are not limited to creditors, whose allegations of wrongdoing are often promoted by professional advisors who similarly misunderstand the law in this area.

So, what are the parameters of a liquidator’s obligation to provide documents to stakeholders relevant to the companies they administer?

The analysis of the law guiding the conduct of external administrators starts with section 486 of the Corporations Act 2001 (the Act), which provides that;

The Court may make such order for inspection of the books of the company by creditors and contributories as the Court thinks just, and any books in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise.”

The decision in Commissioner of Taxation v Warner [2015] FCA 659 clarifies that the operation of section 486 of the Act restricts access to the books and records of a company in both court ordered and voluntary liquidations.

It also affirms that the effect of section 486 of the Act is to make permission to inspect a company’s books and records the purview of the Court so that it may determine whether access ought to be granted, and any conditions imposed on that access, in order to ensure such requests are just and made in pursuit of legitimate interests in the winding up.

In Zoll Medical Australia, in the matter of Cardiac Defibrillators Australia Pty Ltd (In Liq) [2022], a liquidator refused to provide access to the books and records of the Company without a court order and was not criticised by the Court for not doing so, despite access being granted by way of mandatory injunction.

However, the obligation imposed on liquidators under section 70-45 of the Insolvency Practice Schedule (IPS) is often misunderstood to include a requirement to provide access to the books and records of the Company.

In Hewson v Gothard; Re Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liquidation) [2014] FCA 320, it was held that in section 486 of the Act, the “books of the company” means books in the possession of the company at the commencement of the winding up and not books created or retained during the course of the winding up by the liquidator as required by the now repealed section 531 of the Act (now required by section 70-10 of the IPS), although it was noted that copies of records of a company made after the company is placed into liquidation, although being of records which were in existence at the time the company was wound up, would be ‘books of the company’ within the meaning of s 486 of the Act.

Section 70-45 of the IPS states;

  1. “A creditor may request the external administratorof a company to:

    1. give information; or
    2. providea report; or
    3. produce a document;

to the creditor.

  1. The external administrator must comply with the request unless:

    1. the information, report or document is not relevant to the external administrationof the company; or
    2. the external administratorwould breach his or her duties in relation to the external administration of the company if the external administrator complied with the request; or
    3. it is otherwise not reasonable for the external administratorto comply with the request.”

The IPSwas inserted into the Actby the Insolvency Law Reform Act 2016 (Cth)(“ILRA”) in part to provide greater transparency for creditors in assessing the conduct of insolvency practitioners. The Explanatory Memorandum to the ILRA notes that;

  • Information asymmetry interferes with the efficiency of the insolvency market and contributes to the risk of misconduct by market participants. The current regulatory barriers to creditors obtaining information entrenches the inherent problems creditors face in assessing the quality of the insolvency services provided. (Paragraph 6.12)
  • Creditors will be able to request information from a corporate insolvency practitioner and request that a creditors’ meeting be held during an external administration. (Paragraph 6.18)
  • An external administrator of a company is expected to maintain proper books including minutes and entries of meetings relating to the external administration process, including other necessary entries to give a complete and correct record of the company’s administration. (Paragraph 6.66)
  • The books must also be made available by the external administrator for inspection by a creditor, contributory or their representative. (Paragraph 6.67)

It is clear that the imposition of Section 70-45 of the IPS was intended to create greater transparency for creditors in reviewing a liquidator’s files and, as a corollary, his or her conduct. Since coming into effect this provision has provided creditors with increased access to the files maintained by external administrators.

Section 70-15 of the Insolvency Practice Rules defines what requests by creditors may be considered unreasonable. The IPS and the accompanying IPR seeks to strike a balance between the interests of stakeholders with respect to an external administrator’s transparency and accountability, with the efficient administration of a winding up in order to bring about best outcomes for stakeholders. In Secatore, In the mater of Last Lap Pty Ltd (In Liq)[2020] FCA 627 the court considered the limitations on a liquidator’s determination that a request made under Section 70-45 of the IPS was unreasonable and ensured the onus was placed on the practitioner to support their determinations.

However, a request for access to the books and records of a company cannot be granted where provision of documents would require the external administrator to breach his or her duty to comply with section 486 of the Act, no matter how seemingly reasonable such a request might appear.

It can be reasonably inferred that, with so many other sections of the Act being repealed by the ILRA, the fact that section 486 of the Act was not repealed is evidence of intention by legislators to not overrule the Court’s discretion to determine who may access the books and records of a company in liquidation.

The decision in 1st Fleet (2019) NSWC confirms that section 70-55 of the IPS gives the Commonwealth in the relevant circumstances even broader powers to request information from an external administrator and that section is not subject to the same exceptions or limitations as the general creditor power under section 70-45 of the IPS.

However, this section should not be read to provide Commonwealth agencies with unfettered access to the books and records of a company.

In Commissioner of Taxation v Warner [2015] FCA 659, the Court determined that the provisions of the Taxation Administration Act (1953) Cth and other legislation empowering the Australian Taxation Office (“ATO”) to administer taxation in Australia provide the ATO with a right to access books and records overrides section 486 of the Act.

As such, it seems clear that in the absence of an overriding statutory authority, the prohibition in section 486 stands.

It therefore falls to insolvency practitioners to educate stakeholders who hold misconceptions about their rights to access books and records of the companies in which they have an interest.

Importantly, the distinction between documents that are books and records of a company, and documents that form part of an external administrator’s file, must be considered by both the creditor making the request (and its advisors) and by the insolvency practitioner receiving the request.

The performance standards set out in the ARITA Code of Professional Standards to act diligently, communicatively and in a timely way, require that practitioners explain the operation and purpose of the law as it pertains to prescribing access to a liquidator’s files and company records, rather than merely quoting legislation as a shield against criticism or compliance. In doing so, practitioners have the best prospects of avoiding the negative consequences of offence that might be taken in denying creditors requests.

Please note that the views expressed in articles sourced from outside AFSA are not necessarily endorsed by, or reflect the views of AFSA, the Inspector-General in Bankruptcy, Official Trustee, the Official Receiver, or the PPS Registrar.

Updates from the ATO

The latest practitioner news from the Australian Taxation Office (ATO).

Corresponding with the ATO

There are several ways insolvency practitioners can contact the ATO about insolvency matters. You can submit your information by:

  • secure mail message in Online services for business
  • fax or mail

Secure mail message in Online services for business is the ATO’s preferred means of communication. This function is accessed via the Mail option in Online services for business.

When sending correspondence by fax or mail, you should complete the Debt Insolvency Cover Sheet NAT 14588 and send this with your request by either:

  • fax to 1300 726 594
  • mail to:

Australian Taxation Office
PO Box 9003
Penrith NSW 2740.

You must complete a separate cover sheet for each unrelated taxpayer request.

In cases where the correspondence concerns a group of related taxpayers, complete one cover sheet with details of the principal or holding taxpayer.

Insolvency Subject selection

It is important to use the correct insolvency subject selection to classify your correspondence, as an incorrect insolvency subject selection may result in a delayed response. Using the correct insolvency subject selection will ensure your correspondence is actioned by the correct area and allow priority requests to be escalated promptly.

The insolvency subject selections are arranged in alphabetical order for ease of use. Options available for Trustees in Bankruptcy are listed below:

  • Bankruptcy
  • Finalisations – notification of all finalisations of insolvency (appointments)
  • Indemnities
  • New insolvency advice
  • Notice of meeting of creditors
  • Part IX
  • Part X
  • Preferences
  • Request for documents (applies only to documents and information relating to the incapacitated entity you represent)
  • Section 129 demand
     

More information

If you would like to find out more about using the ATO Online services for business, please email your contact details to InsolvencyPractitionerServices@ato.gov.au.

For general information refer to the insolvency practitioners’ section on ato.gov.au/insolvency

Case note

NOTE: Case notes are necessarily incomplete. The only authoritative pronouncement of the Court's reasons and conclusions is that contained in the published reasons for judgment. 

Bianco (Trustee), in the matter of the bankrupt estate of Jones (Deceased) [2022] FCA 1470

BANKRUPTCY AND INSOLVENCY - Application by Trustees in bankruptcy pursuant to s 30(1) of the Bankruptcy Act 1966 (Cth) and s 90-15 of the Insolvency Practice Schedule (Bankruptcy) being Schedule 2 to the Bankruptcy Act – where Trustees entered into a funding agreement to fund the costs of litigation – where retrospective approval and relief from personal liability for breach of trust is sought – where application is opposed by creditors to the bankrupt estate – where delay in seeking approval – application for approval granted

Issue

The considerations relevant to determining whether: (1) Trustees were justified in entering into a funding agreement with a litigation funder; and (2) a Court should provide the Trustees with retrospective approval and relief from personal liability.

Background

The joint trustees of a deceased bankrupt estate (‘the trustees’) entered into an agreement in 2020 to fund litigation relating to Family Court proceedings Funder ‘(the Funding Agreement’). A key issue was the validity of a Deed and Declaration of Trust (‘the Deed’) between the deceased, a successful business owner (“the bankrupt”), and his son. The Deed purported to have transferred to the son the father’s main business assets in 2006 by way of units in a Unit Trust which was prior to a 2009 Family Court settlement between the bankrupt and his wife. The settlement assumed that the units had been validly transferred to the son. The Trustees believed the units had a value in excess of $71 million.

In 2010 the bankrupt recanted his claims the Deed was genuine. On that basis the Trustee and the wife alleged the Deed was a sham and invalid. If valid the transfer of the units would have removed this property from the asset pool available for disposition by orders made by the Family Court. If accepted as a sham the property settlement was liable to be set aside and the value of the units available for further consequential Family Court orders.

In April 2014, the wife filed an application in the Family Court (supported by the former husband) seeking to:

  1. set aside the deed of settlement and binding financial agreement;
  2. set aside the Deed and Declaration of Trust and/or have it declared a sham;
  3. make property orders in her favour by including the value of the units as part of the matrimonial pool of assets.

The son opposed the application and sought to have the validity of the Deed determined. The trial ran from 2014-2017 with the Court concluding that the Deed was fraudulent. The Trustees had been joined as interveners in 2016 but did not at that stage take an active role in the matter. An appeal by the son was dismissed in 2021. The trustees supported the wife in the appeal.

Although a condition precedent of the 2020 Funding Agreement required the Trustees to obtain approval of their entry into it from either the Court, a committee of inspection, or by a resolution of creditors, no such approval was sought by the Trustees. Instead part performance by the Funder and the Trustees occurred so that as at 30 September 2021, the Funder had paid to the Trustees or their appointed lawyers approximately $974,000. It was estimated that likely future legal costs of the Trustees, together with administration costs, would total in excess of $2 million.

The trustees application was brought pursuant to s 30(1) of the Bankruptcy Act 1966 (Cth), s 90-15 of the Insolvency Practice Schedule (Bankruptcy) being Schedule 2 to the Bankruptcy Act (Insolvency Practice Schedule) and s 67 of the Trustee Act 1958 (Vic) (Trustee Act) and sought the following relief:

  1. a declaration that they were and are justified in entering into and implementing a litigation funding agreement with [AFC Pty Ltd as Trustee for the AFC Discretionary Trust] (the Funder) dated 14 April 2020 (the Funding Agreement); and
  2. an order that, insofar as their entry into the Funding Agreement involved a breach of trust, they are relieved from personal liability for any such breach.

The Court intimated that the reason why the Trustees brought this application was that ’as trustees they are concerned about claims that they have breached their duties or have acted to take advantage of a conflict of interest’.

The Court noted that it was only the Trustees who were parties explaining that:

 Ordinarily, an application by a trustee for judicial advice invokes a summary procedure and is made ex parte. Analogous provisions have been described as “an exception to the Court’s ordinary function of deciding disputes between competing litigants. An application for judicial advice… is in nature essentially a request for private advice”: Application of Macedonian Orthodox Community Church St Petka Inc (No2) (2005) 63 NSWLR 441

Consideration

The Court began by accepting that:

The Trustees have a keen and legitimate interest in the Family Court proceedings. If the Deed and Declaration of Trust is set aside as a sham or a fraud, then it is open to [thee bankrupt’s wife] and the Trustees to claim that the units are property of the bankrupt estate subject to s 116(2)(q) of the Bankruptcy Act, the effect of which is that the divisible property of the estate does not include any property that under Part VIII of the Family Law Act the trustee is required to pay to [the bankrupt’s wife] as a former spouse of the bankrupt. The Trustees believe the units to be substantially valuable and that after the making of any further provision in favour of [the bankrupt’s wife], the estate is likely to be solvent and is open to being annulled pursuant to s 153A of the Bankruptcy Act

The Court observed that the trustees held a reasonable belief that if the Deed was found to be a sham then the ATO would withdraw a proof of debt for an amount of approximately $115 million for the capital gains tax liability. Total proofs of debt were approximately $120 million.

The Court accepted that:

  • the trustees had made reasonable but ultimately unsuccessfully attempts to source alternative funding (the trustees concluding their proposed terms excessive)
  • the Funder’s return on investment was “fair and reasonable”
  • no matter the outcome of the Family Court proceedings, the creditors as a whole of the bankrupt estate would be better off overall by reason of the Funding Agreement.
  • it was open to seek directions under s 90-15 of the Insolvency Practice Schedule (Bankruptcy) and for the Court to make orders in relation to past conduct
  • “useful guidance” in the consideration of the exercise of the powers at s 90-15 and s 63 of the Trustee Act 1925 (NSW) is to be found in judicial advice line of authority.
  • it is “unlikely to be appropriate for advice to be given which affects the rights of third parties”, in contrast to binding “the Trustees and the persons entitled to participate in the administration of the bankrupt estate.”
  • delay was a relevant matter to consider, particularly as the 17 month delay from entering into the Funding Agreement and making this application was unexplained
  • the Court needs to be positively persuaded as to the propriety of the Trustees’ conduct.

The Court rejected submissions that:

  • the Trustees “squandered a certain distribution” by their active involvement in the Family Court proceeding by drawing on estate funds from the sale of a property of the bankrupt in 2017. The Court drew attention to the fact that the trustees had not taken an active role in proceedings until after the first decision concerning the validity of the Deed in 2018.
  • an actual or perceived conflict of interest arose in virtue of the Trustees personally benefiting from the Funding Agreement and in consequence the Court should refuse to exercise the discretion to grant the relief sought. It explained that “a conflict of this character is inherent in any litigation funding agreement that a trustee enters into in order to pursue claims”
  • the effect of a successful application would be that “every step [the Trustee] take going forward in the litigation in the Family Court would be insulated”. The Court clarified its reasoning noting that “The important distinction is that this application seeks advice concerning the decision to enter into the Funding Agreement: it is not an application to exonerate the Trustees for all future conduct in the litigation or the administration of the bankrupt estate and for events, facts and circumstances which have not yet arisen.”
  • the Court should refuse to grant relief because of a claimed inconsistency between the Funding Agreement and s 116(2)(q) of the Bankruptcy Act. The Court was satisfied that nothing in the application would prejudice arguments that the bankrupt’s former wife may seek to make in the Family Court proceeding about how the Funding Agreement may operate to her prejudice and if so, what orders should be made by that court so as to protect her position pursuant to s 79(1)(b) of the Family Law Act.

In summary the Court’s balancing exercise was to consider the adverse factors relating to the conduct of the Trustees who had:

  1. resolved to enter into the Funding Agreement without seeking judicial advice,
  2. ignored the condition precedent to obtain approval from this Court (and chose not to seek it from the creditors) and
  3. not explained the significant period of delay between April 2020 and October 2021.

And then to weigh these against the factors in favour of granting the relief:

  1. the Trustees would not have been able to actively participate in the Family Court proceeding without litigation funding,
  2. the Funding Agreement was commercially realistic and,
  3. the entire risk of the Trustees’ costs of the Family Court proceeding was thrown upon the Funder, including any adverse costs order that may be made against the Trustees.

Decision

The Court was satisfied that limited relief ought to be given to the Trustees in the form of a declaration that they were justified in entering into the litigation funding agreement.

The Court declined to grant additional relief to the trustees by way of an order that to the extent that entry into the Funding Agreement “involved a breach of trust” that they be relieved from personal liability pursuant to s 67 of the Trustee Act 1958 (Vic)