A bankrupt trustee has been unsuccessful in trying to recover property of a former bankrupt more than 20 years after the date of bankruptcy. The decision of the Federal Court reinforces the limitation period in which a trustee can make a claim on any property of the bankrupt as outlined in Section 127(1) of the Bankruptcy Act 1966 (Cth) (Act)
The Law Section 127(1) of the Act states that, after the expiration of 20 years from the date on which the person becomes a bankrupt, a claim shall not be made by the trustee in bankruptcy to any property of the bankrupt, and that property shall, subject to the rights, if any, of a person other than the trustee in respect of the property, be deemed to be vested in the bankrupt.
The following provides a brief synopsis of the background to this proceeding:
- Bill Madden (Madden) was declared bankrupt in 1990 with the Official Trustee (Trustee) being the registered trustee of the bankrupt estate.
- Margaret Fallon (Fallon), who was in a de facto relationship with Madden at the time, purchased a property in Burraneer, New South Wales in 1995 (Property).
- Madden was discharged from bankruptcy on 6 December 1998.
- Madden and Fallon married in 1999 with Fallon passing away in 2000.
- The question of who owned the Property was the subject of proceedings issued by Madden in 2010. The matter was determined by Stevenson J in the Supreme Court of New South Wales in 2012 with His Honour finding that Madden had contributed slightly more than half of the purchase price of the Property. As such His Honour held that the estate of Fallon holds a 50.5% interest in the Property on resulting trust for Madden (Judgment).
- His Honour said that the likely explanation of Madden's contribution to the Property was that he wanted to "park" his interest in the Property in Fallon's name in order to avoid the Property becoming part of the bankrupt estate and, inturn, divisible amongst the creditors.
- The Judgment also recorded that Madden's interest in the Property was "after-acquired property" for the purpose of Section 58(1)(b) of the Act and therefore remained vested in the Trustee, notwithstanding Madden's subsequent discharge from bankruptcy.
- The Trustee only became aware of Madden's interest in the Property when the Judgement was handed down. Upon being aware of Madden's interest, the Official Trustee wrote to him advising that the bankrupt matter was being re-activated with Maxwell Prentice to act as trustee to administer the bankrupt estate (Appointment).
- As a result of the Judgment and Appointment, Madden issued proceedings in the Federal Court seeking a declaration, inter alia, that his interest in the Property be vested to him pursuant to Section 127(1) of the Act and that the Trustee be restrained from taking any step to be registered as a proprietor of the Property.
It was argued that Madden breached his fiduciary obligation to the Trustee by failing to disclose the nature of his interest in the Property. Furthermore the Trustee claimed that, because Madden breached his equitable (as well as statutory (Section 77(1)(f) of the Act)) obligations to it, the Court ought not to act in a manner to advantage Madden to the detriment of the creditors of the bankrupt estate.
Farrell J said that Madden's failure to give notice to the Trustee of his interest in the Property made it tempting, as a matter of justice to unpaid proven creditors, to lean towards an interpretation that the Trustee has a vested interest in the Property. However, on balance, she formed the view that if such a decision was made then no bankrupt could, after 20 years, rely on Section 127(1) to establish his or her title to property. Her Honour was of the view that this was inconsistent with the nature of Section 127(1) as a limitation provision and, as such, she was minded to make an order declaring that Madden's interest in the Property is revested to him (subject to the rights of any person other than the Trustee).
As part of the decision, Her Honour noted that, by prescribing the offences set out in section 263 and 265, the Act deals with the consequences of the failure to disclose property of the bankrupt. Her Honour went on to comment that she would commend consideration of pursuing Madden in relation to any offences which he may have committed under the Act.
Takeout from the Federal Court decision The Federal Court has undertaken a strict interpretation of the limitation period espoused in Section 127(1) of the Act. This is despite the fact that the interest of the creditors supported a finding in favour of the Official Trustee and Prentice. It would appear from this case that, no matter the surrounding circumstances which prevented it from doing so, the trustee of a bankrupt estate will be precluded from making a claim over the bankrupt's property after 20 years from the date of bankruptcy.
References: Bankruptcy Act 1966 (Cth); Madden v Official Trustee and Prentice  FCA 446