Recovery of abandoned property in the event of bankruptcy – Insolvency/Bankruptcy

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I made a new law!

It was a rare privilege to be the plaintiff in a case setting a new legal precedent in the estate of Christopher Williams to acquire assets previously claimed by the former trustee in bankruptcy.

The facts in this case are extremely unusual, and while we may never see a similar factual matrix in other cases, the decision in my case established that a trustee in bankruptcy can “claim an interest” in property claimed under section 133(9) of the Bankruptcy Act 1966 and that the court has the discretion to make an order entrusting the claimed property to the trustee in bankruptcy.

Background

In 1994, Mr. Williams and his wife purchased a mortgaged property from NAB. In 2006, NAB obtained restraining orders and in 2009 Mr Williams filed for bankruptcy. Mr. Williams never filed a business statement and therefore remains bankrupt to this day.

My former business partner, Nick Malanos, was appointed trustee in bankruptcy and determined that the value of the property would not discharge the obligations to the mortgagee and therefore waived the estate’s interest in the property pursuant to the Section 133 of the Bankruptcy Act.

Fast forward several years to 2017 and the bankrupt’s spouse and co-owner of the property also went bankrupt.

My colleague and dear friend Mr. Malanos retired in 2020 and sadly passed away a few months later in November 2020.

On January 11, 2021, NAB notified the parties that its repossession order had expired and that it intended to discharge its mortgage. Thus the property became free and Mr Williams’ interest in the property, having been relinquished, vested in the State of NSW.

I became the trustee of the estate on April 30, 2021.

Requirement

As the new estate trustee, I found myself considering a disavowed and unsecured asset – now of significant value – which, if realized, would likely result in a great outcome for creditors. I have determined that I have an obligation under Section 19 of the Bankruptcy Act to take all reasonable steps to determine whether I can realize on this asset. Accordingly, I made an application under Section 133(9) for the vesting of the property relinquished to me.

At paragraph 22 of his judgment, his honor stated:

“Section 133(9) gives the Court the discretion to make various orders regarding the vesting or delivery of claimed property. Several conditions must be met before the discretion is activated:

1) there must be a disavowed good;

2) there must be a claim by a person either: (a) claiming an interest in the disavowed property; or (b) under any undischarged liability under the Bankruptcy Act in respect of the abandoned property; and

(3) the Court must have heard such persons as it deems appropriate.”

There was no debate on conditions one and three above. With respect to the second condition, his honor considered whether the new trustee could “claim an interest” in circumstances where the former trustee had relinquished ownership. He concluded that the jurisdiction conferred by section 133(9) of the Bankruptcy Act is satisfied by a person claiming an interest, not by the justification of the interest.

After determining that the conditions were met to enliven the discretion of the Court, His Honor concluded that it was just and equitable to make an order that one-half of the tenant’s share of the commons vest in me in my capacity as trustee of the estate of the bankrupt.

The circumstances of this case are unique, and for that reason, I don’t think there will be a great rush of demands from bankruptcy trustees trying to recover previously relinquished assets, nor do I think they will should give up and then recover property for convenience. . It clarifies, however, that if circumstances change and previously non-commercial property becomes commercially viable, then if the Court is satisfied that it is fair and equitable, it has the discretion to acquire previously renounced property.

Case reference: Lucan (Trustee) v State of New South Wales, in the matter of the Bankrupt Estate of Williams [2022] FCA 751 (June 29, 2022)

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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