The recent decision of Lewis v Nortex Pty Limited (in liquidation)1 highlights potential issues that may arise for liquidators when issuing a bankruptcy notice.

Facts

Nortex Pty Ltd (Nortex) was the trustee of the Nortex Unit Trust (Trust) pursuant to a deed. Under the terms of the trust deed, Nortex ceased to be trustee when the company went into liquidation. The beneficiaries of the trust were Kation Pty Ltd (Kation) which was controlled by the appellant (Lewis) and Lamru Pty Ltd (Lamru).

Nortex brought proceedings against Lewis alleging he had misappropriated money and assets of the trust. The matter was appealed to the New South Wales Court of Appeal and both Nortex and the liquidator were parties to the proceedings. In the first instance, Hamilton J ordered that Lewis reconstitute the trust fund and pay the liquidator. The court ordered that the funds be placed in an interest account if both Lamru and the liquidator consented or into court if they did not consent.

Consent was not provided and neither the company nor the liquidator lodged an application with the court seeking moneys be paid out to them. The court proceeded on the basis that Lamru had agreed that the funds be paid to the liquidator to be held in accordance with the terms set out in the order. Lewis then failed to make payments to the liquidator as required by the order.

Lewis was served with a bankruptcy notice alleging that he was indebted to both Nortex and the liquidator of Nortex. Lewis contested the bankruptcy notice before a single judge of the Federal Court of Australia but his claim failed. Lewis then appealed the decision.

Decision

The Full Court of the Federal Court of Australia had two issues for determination:

  1. whether the bankruptcy notice was invalid because the amounts claimed were owed to the liquidator in different capacities; and
  2. whether the order for monies to be paid into the court constituted a final order for the purposes of ss 40(1)(g) or 41 of the Bankruptcy Act 1966 (Cth) (Act).

Was the bankruptcy notice invalid because it claimed debts owed in multiple capacities?

The primary contention of Lewis’ appeal was that the bankruptcy notice was invalid as it breached a fundamental condition of the Act. Specifically, he submitted that any proceedings to enforce the order to reconstitute the trust fund be brought by the liquidator in the name of Nortex, whereas any proceedings to enforce the order to pay money into court be brought by the liquidator in his own name.

With reference to this distinction, Lewis submitted that the amounts were owed to the liquidator on “separate accounts” and in different capacities. On this construction, Lewis submitted that there were multiple creditors for the purposes of the Act and the notice was therefore invalid.

Jagot and Yates JJ in the majority dismissed this argument, finding that the relevant orders related to a direction to pay money to essentially the same person; namely, the liquidator. Although the liquidator had failed to place money into an interest bearing account, this did not change the fact that Lewis owed a debt. Further, the court held that the debt was still owed despite the fact applications could be made to the court to determine how the money might be disbursed.

In dissent, Dowsett J held that the bankruptcy notice was invalid because it contained debts owed to the liquidator in multiple capacities. He justified this finding by citing a potential conflict of interest that could arise when a liquidator is forced to negotiate with a bankrupt both in their personal capacity and in the name of the company in liquidation. Further, Dowsett J found that money in respect of the orders could not be held by the liquidator as a single creditor as it related to differing rights.

Ultimately, the two judgments diverged on their characterisation of the debt and in what capacity the liquidator was to receive monies as a result of the order. Further, Dowsett J (who remained uncontested on this point) highlighted that a bankruptcy notice regarding multiple debts owed to a liquidator would likely be held invalid by the courts. This is because the debts are owed to the liquidator in different capacities.

Was the order that monies be paid into Court a final order?

Lewis submitted that the bankruptcy notice issued by the liquidator was not a “final judgment or final order” pursuant to ss 40(1)(g) or 41 of the Act.

The court found that this ground had been abandoned and proceeded on the basis that the decision from the Lamru litigation had resolved the issue.

The majority of the Court dismissed the appeal with costs. The bankruptcy notice was upheld and the orders of the Supreme Court were characterised as giving rise to a single right held by the liquidator of Nortex.

Implications

This decision highlights the need for insolvency practitioners to be conscious of rights and actions open to them when acting in multiple capacities in bankruptcy proceedings.

In situations where there are multiple debts, the risk free solution is to issue multiple bankruptcy notices treating each judgment debt separately. Although the Court on the present facts determined that the liquidator was acting in one capacity and as a single “creditor”, there are situations where this would not be the case. For example, it is unlikely that a single bankruptcy notice issued in respect of two separate debts by a liquidator of two separate trusts would be valid.

As such, where a liquidator assumes multiple ‘hats’ it is important to remember that each should be considered separately.