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Full Federal Court confirms reach of section 109(10)

Caseflash 13 April 2017

In April 2016, our article published in the Personal Insolvency Regulator newsletter reported on a decision of Foster J in Low v Barnett (Trustee); in the matter of Mathai (2015) FCA 1386, a case in which the only creditor of a bankrupt estate (Ms Low) sought to recover from the bankrupt estate what she regarded as a ‘just and equitable’ amount as a reward for the assistance (both personal and financial); which she had provided to the Trustee for the purposes of recovery proceedings. 

Ms Low was unsuccessful at first instance.  She was not able to satisfy Foster J that the phrase in section 109(10) of the Bankruptcy Act ‘over others’ extended to conferring an advantage ‘over all others, including the bankrupt’.

Ms Low appealed to the Full Federal Court and judgment was delivered on 13 April 2017.

Background

The Bankrupt was made bankrupt on 18 May 2004.  He was discharged from that bankruptcy on 21 April 2008. The Trustee retained, as vested bankruptcy property, substantial cash as well as a piece of real estate in Victoria.

That property has been recovered in litigation taken by a former trustee of the estate against the Bankrupt’s son challenging certain pre-bankruptcy transfers of property. That litigation had been conducted with the benefit of funding and indemnities provided by Ms Low.  

The total amount recovered in that litigation was sufficient to enable the repayment, in full, of all amounts advanced to the former trustee by Ms Low in connection with the litigation as well as the payment of all other costs and expenses incurred in the administration of the bankrupt estate (including trustee remuneration claims) and payment in full of the debt owed to Ms Low, plus interest.

In the ordinary course, the substantial surplus that remained in the Trustee’s hands would, ultimately, either revert to the bankrupt or be payable to the bankrupt’s son.

Ms Low claimed the surplus pursuant to s109(10).

First Instance decision

Foster J rejected Ms Low’s claim on two bases:

  1. as a matter of statutory construction, section 109(10) was confined to circumstances in which there were competing creditors and not where there was only one creditor; and
  2. as a matter of discretion, the claim should be rejected.

Full Federal Court decision

The Full Federal Court (comprised of Flick, Jagot and Gleeson JJ) dismissed the appeal. 

Meaning of s109(10)

In so doing, the Full Court confirmed that the correct interpretation of the words ‘over others’ in section 109(10) is confined to mean ‘over other creditors’.  Amongst other reasons, the Full Court held that to construe the section otherwise would permit the use of the Act to punish the Bankrupt. Punishment of the bankrupt is a purpose found nowhere in the Act and is in fact contrary to its object of allowing a discharge from future liability for existing debts, enabling debtors to start afresh.

Exercise of discretion

The Full Court also agreed with Foster J that, although the construction of s109(10) meant they did not have to decide the issue by exercising the discretion conferred by the section, if they were required to exercise that discretion they too would have rejected Ms Low’s claim.

The Full Court’s reasons for finding that a payment to Ms Low of more than her proven debt, interest and costs by way of an order under section 109(10), thereby giving her an ‘advantage over’ the bankrupt would not be ‘just and equitable’ were:

  1. the only person who ever lodged a proof of debt was Ms Low.  As such, the only likelihood always was (and remained) that she alone was to be the beneficiary of the risks she took.  Accordingly, it must be inferred that she acted in her own interest at all times.
  2. the purpose of section 109(10) cannot be to compensate a creditor for incurring costs in pursuing a debt that are not otherwise recoverable under the Bankruptcy Act.
  3. it was not in dispute that Ms Low would obtain not only 100% of the proven debt, but also interest and costs. 
  4. Ms Low was, and is, only an unsecured creditor of the bankrupt estate.  It is not a purpose of the Bankruptcy Act to enable a creditor to make a profit out of bankruptcy, in return for ‘investing funds’ and ‘taking risks’.
  5. the exercise of discretion would be contrary to the purpose disclosed by section 107 of the Bankruptcy Act which provides that a creditor is not entitled to receive, in respect of a provable debt, more than the amount of a debt and any interest payable to him or her under this Act.
  6. the ‘advantage’ sought by Ms Low would neither be ‘just and equitable’ nor consistent with the legislative objective ensuring that the ‘remainder’ of the bankrupt’s estate, after payment of all debts and expenses and any ‘advantage’ to be ordered, revert to the Bankrupt.
  7. the purpose of the Bankruptcy Act is not best served by construing section 109(10) in a manner which discourages a bankrupt from attempting to defraud creditors by exposing the entirety of the bankrupt estate to an order under that section.
  8. nothing in the scheme of the Bankruptcy Act indicates that a creditor has any right to obtain more than a proven debt plus interest and costs, let alone a windfall which is not quantified by reference to any ‘risk assumed’.

Comment

Whilst this case has a unique set of facts very rarely found in Bankruptcy cases - a solvent estate and a sole creditor determined to expend significant funds over two decades to overturn antecedent transactions - it does clarify the reach of section 109(10) (and the equivalent provision in section 564 of the Corporations Act).

TressCox Lawyers acted for the Trustee.


Kirsten Farmer, Partner
Sydney

Guy Moloney, Senior Associate
Sydney

Caseflash 13 April 2017
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