Tide turns for creditors chasing
bankrupts
Creditors have generally faced an uphill
battle in enforcing remedies against bankrupts, without the involvement of the
trustee.
It seems that the tide may be turning, to
the extent that creditors may commence proceedings against bankrupts, with
leave of the Court, under certain circumstances.
The Federal Court case of Macquarie Bank
Limited v Bardetta (April 2005) examined the
question of whether creditors could commence legal proceedings against a
bankrupt in respect of a provable debt.
Background
Macquarie Bank made a loan facility
available to Mr Bardetta and a number of other parties.
Following default, the bank commenced
Supreme Court proceedings against Mr Bardetta in May 2004 to recover the
outstanding debt.
A year into the proceedings, the bank
discovered that Mr Bardetta’s properties and assets had been transferred to his
wife, pursuant to Family Court Orders (Transfer Orders).
Soon after the Transfer Orders were made,
Mr Bardetta became bankrupt and a trustee was appointed.
The bank wished to commence proceedings in
the Family Court to vary or set aside the Transfer Orders and pursue the
Supreme Court proceedings.
Traditionally the application to set aside
the Transfer Orders would have been made by the trustee in bankruptcy. However,
for reasons not apparent from the judgment, the bank wished to commence these
proceedings in its own right rather than indemnifying the trustee for the costs
of the legal proceedings.
Leave given to commence Family Court
proceedings
In the Federal Court, Justice Conti gave
leave for the bank to pursue Family Court proceedings against Mr Bardetta and
his wife, pursuant to s79A of the Family Law Act.
Section 79A allows "persons
affected" by an order of the Family Court, with respect to property of the
parties to a marriage, to vary or set aside those orders if there has been a
"miscarriage of justice" by reasons, including the failure of the
parties to disclose relevant information.
In this case, the bank submitted that Mr
Bardetta and Mrs Bardetta had failed to disclose to the bank, that Mr Bardetta
had been ordered to transfer his assets to Mrs Bardetta.
Conti J asserted that Mr Bardetta and his
wife had to disclose such information to the bank, and the "failure to do
so in particular cases can severely impinge upon the legitimate interests of
third parties and may almost inevitably in many cases be a ‘miscarriage of
justice’."
The
following factors were taken into account by Conti J:
·
The trustee had insufficient funds to
litigate on behalf of the bankrupt estate of Mr Bardetta in the Family Court.
·
The bank’s undertaking to hold the
benefit of any order made in the Family Court proceedings on behalf of the
bankrupt estate.
Leave granted to continue proceedings in
Supreme Court
Conti J also allowed the bank to continue
proceedings in the Supreme Court, without the involvement of the trustee,
pursuant to s58(3) of the Bankruptcy Act.
Section 58(3) requires all creditors to
obtain the leave of the Court prior to commencing legal proceedings or prior to
taking any fresh steps in proceedings against a bankrupt in respect of a
provable debt.
In deciding that the Bank should be granted
leave to continue its proceedings against Mr Bardetta in the Supreme Court
without the trustee’s participation, Conti J considered the following factors:
·
The Supreme Court proceedings would
involve complex and disputed issues of fact and law.
·
The proceedings comprised of several
parties.
·
Further claims by the bank would be
made against other parties to the proceedings, which were inseparable from
those made by the bank against Mr Bardetta.
Implications for creditors
This could be the start of a new trend in
favour of creditors (at least in the Family Court) commencing proceedings in
their own capacity. However, creditors are likely to continue to claim
predominantly through the trustee as a trustee is often able to bring valuable
expertise to the table for the benefit of all creditors.
