Tag Archives: Bankruptcy Act

Cross Vesting Legislation and the Bankruptcy Act

It is not uncommon that after a Trustee in Bankruptcy has been appointed to an estate, that they become involved in litigation relating to real property either in the bankrupt estate or which might be available to the bankrupt estate. Practitioners need to be wary of the proper jurisdiction in which to litigate disputes relating to bankrupt estates.

For example, a frequent type of claim that is made is about the nature or extent of a bankrupt’s interest in jointly held real property. Frequently husbands, wifes, de facto partners and/or children of a bankrupt to claim that the bankrupt’s interest in a property is held on trust for them.

These types of claims are often brought in the Supreme Court, likely because of the equitable nature of the relief sought. However, it is important to remember that these types of claims effectively challenge the title of the Trustee in Bankruptcy. That title is derived from the Commonwealth Bankruptcy Act.

In Turner v Gorkowski, Justice Vickery refused, at first instance, to transfer a claim based on a common intention constructive trust to the Federal Court.  Justice Vickery decided that the claim was not a ‘special federal matter’ under the Jurisdiction of Courts (Cross Vesting) Act 1987 (Cth) (‘Cross Vesting Legislation‘) and could be heard in the Supreme Court of Victoria.

Section 6 of the Cross Vesting Legislation provides that a Supreme Court must transfer special federal matters to the Federal Court.

In his reasons, at paragraph 47, Justice Vickery observed:

“In the present case, although the outcome of the proceeding will affect the property of the Trustee in Bankruptcy, the proceeding does not owe its existence to the Bankruptcy Act in the relevant sense. The issue in question in this proceeding does not owe its existence to any Federal law or nor will the outcome depend upon Federal law for its enforcement. No provision of the Bankruptcy Act is relied upon by either the Plaintiff or the Defendant in the pleadings either to found the Plaintiff’s causes of action or to provide a defence to the Defendant, other than paragraph [16] of the defence which pleads that this Court does not have jurisdiction to hear this dispute, founded upon s 27 of the Bankruptcy Act.”

The Trustee in Bankruptcy appealed that decision.

Noting that there was no direct authority on point, the Court of Appeal decided that the claim was a ‘special federal matter’ and warranted a transfer to the Federal Court. It supported that conclusion by the fact that in the proceedings the Trustee in Bankruptcy would have to rely on the sequestration made and the title derived from it. The Court of Appeal pointed out that the Trustee in Bankruptcy’s title was central to the proceedings and that the bankruptcy was not merely “lurking in the background“.

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The effect of bankruptcy on current proceedings – and a quick thought on the costs thereof

This is a quick note on Duckworth v Water Corporation [2012] WASC 30 was published today and deals with the effect of a bankruptcy order on current proceedings.

This is a judgement of Edelman J, who is fast becoming one of my favourite Justices. It  explains and/or servers to clarify the effect of section 60(2) of the Bankruptcy Act 1996 (Cth).

Briefly, the case involved an action by Mr Duckworth, purportedly  as trustee of a trust. Whether the claim should have been brought in that capacity or by Mr Duckworth personally was a matter in dispute. At the commencement of the trial, the parties provided a statement of agreed facts to the Court. Edelman J took particular interest with an agreed fact which provided  “45. Neil James Duckworth became bankrupt on 27 September 2011”. His Honour promptly raised section 60(2) with both parties.  Section 60(2) is reproduced below.

(2) An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.

Rather than dealing with any substantive merits of the case, it became an argument as to whether section 60(2) includes an action brought in Mr Duckworth’s capacity as trustee. The only authority directly on point was a judgement of the Federal Court in Re Lofthouse [2001] FCA 25. Re Lofthouse provides that section 60(2) operates to stay proceedings regardless of whether they are brought as a trustee.

The judgement provides an interesting history of the common law doctrine of precedent as it operates between co-ordinate Courts in Australia and overseas. His Honour concludes with the High Court authority of Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 which reiterated  that ‘intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong’.

Justice Edelman then proceeds to give seven reasons why he is satisfied Re Lofthouse is not plainly wrong, which were:

  1. The essence of the reasoning of Gray J has been referred to with approval by the Victorian Court of Appeal (albeit not on the issue of trusteeship).
  2. The plain words of section 60(2) encompass all actions of a bankrupt
  3. The context of the whole of section 60 supports the conclusion that it applies to all actions commenced by a bankrupt; chiefly amongst these was that a bankrupt can continue an action ‘in his or her own name’ in relation to personal injury matters for example.
  4. That this approach is consistent with the approach of the Bankruptcy Act as a whole. The Bankruptcy Act makes specific reference to excluding property held by a bankrupt person on trust from the estate. Therefore the situation where a bankrupt acts in other capacities was clearly considered by Parliament.
  5. That it is consistent with the broad approach taken to s 60(2) where an action by a bankrupt (personally) is stayed even if the bankrupt concerned was ‘only one of several plaintiffs, whose claim was separate from those of other plaintiffs, although raising common questions of law and fact.
  6. The purpose of section 60(2) was to protect those whom the bankrupt has been suing, for example being unable to satisfy a costs order.
  7. One of the issues in this case is whether Mr Duckworth was suing as a trustee or personally.


Edelman J also referred to a decision of the Administrative Appeals Tribunal which ‘cast doubt’ on the correctness of Re Lofthouse. His Honour dealt with the Deputy President’s concerns and gave reasons why those concerns were unjustified and Re Lofthouse should be followed and the action is to be stayed.

It is worth noting that the wording of the section is ‘[a]n action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action‘. (my emphasis added).

The section does not provide that the proceedings must be stayed or is liable to be stayed. Rather any proceedings are automatically stayed upon the making of the sequestration order. Therefore, as a matter of fact, the proceedings in this case have technically been stayed since 27 September 2011.

Assuming the proceedings are not revived by the trustee in bankruptcy they will then be deemed to have been abandoned. Mr Duckworth will likely then be greeted with an adverse costs order to pay the Water Corporations costs to be taxed if not agreed.

One of the principles of taxation is that costs recoverable on a party and party basis must be necessary and reasonably incurred to properly advance the proceedings. As the proceedings were stayed between 27 September 2011 to date, any costs incurred during this period could, arguably, be considered unreasonably and unnecessarily incurred and disallowed on taxation. This is notwithstanding that the issue was raised by the Judge at the trial and not before.

***Interestingly this matter was heard over 30-31 January 2012 and the 24 page written judgement was handed down on 2 February 2012, presumably less than 48 hours days after the hearing concluded. Very impressive.***

I welcome any comments as to what people think would happen with the costs of this matter. Can you properly incur party-party costs whilst an action is stayed?

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