When can a trustee in bankruptcy recover debts in a state court?

Liquidation-books

Often, it will be difficult for a trustee to determine where proceedings should be commenced in order to recover monies or property that form part of a bankrupt estate.  The differences in filing fees and the efficiency or procedure of different courts can also affect a trustee’s decision when considering the most cost-effective way to proceed.  Choosing the wrong court to commence an action can be costly for a trustee, however, as a recent decision of the Queensland District Court shows.

Background

In Cunningham v Gapes [2015] QDC 5, the plaintiff was a trustee of a bankrupt estate and the defendant was the relevant bankrupt’s wife.  The bankrupt paid a sum of money into his wife’s bank account, which the plaintiff claimed as part of the bankrupt’s estate.  Although no determination had been made as to its entitlement to the money, the plaintiff nonetheless commenced debt recovery proceedings in the District Court (the Claim).  The defendant successfully applied for a permanent stay of proceedings and obtained their costs from the plaintiff trustee on the indemnity basis.

Issues

The main issue in contention between the parties was whether the determination of a trustee’s entitlement fell into the exclusive jurisdiction vested in the Federal Court of Australia and the Federal Circuit Court of Australia by ss 27 and 31 of the Bankruptcy Act 1966 (Cth) (the Act).  Those sections of the Act provide, in part, as follows:

31 Exercise of jurisdiction

(1)    In exercising jurisdiction under this Act, the Court shall hear and determine the following matters in open Court:

(e) applications to set aside or avoid a charge, charging order, settlement, disposition, conveyance, transfer security or payment;

(ea) applications under section 139A;

(ff) applications to declare for or against the title of the trustee to any property; …

27 Bankruptcy courts

(1)    The Federal Court and the Federal Circuit Court have concurrent jurisdiction in bankruptcy, and that jurisdiction is exclusive of the jurisdiction of all courts other than:

 

(a)   the jurisdiction of the High Court under section 75 of the Constitution;  or

(b)   the jurisdiction of the Family Court under section 35 or 35A of this Act.

The decision of the court

Rackemann DCJ acknowledged that the Claim in this case was expressed as a money, or debt recovery, claim rather than an application to set aside a disposition or payment or to make a declaration for or against the title of the trustee.

Despite this, in order to establish the plaintiff’s right to recover the money, the court was called upon to determine whether the plaintiff trustee was entitled to the money in question as part of the bankrupt estate.  As such findings fall within the exclusive jurisdiction of the federal courts, Rackemann DCJ found in favour of the defendant, noting at [4]:

What is important is not so much the form of the relief sought, but whether the proceeding would have the effect of determining one of the matters falling within the concept of jurisdiction in bankrupt.  In this case, the effect of determining the proceeding would be to make a determination about a matter of bankruptcy jurisdiction involving the extent of the bankrupt’s estate and, in particular, the entitlement of the trustee to the money in question and whether the payment made to the defendant is able to be recovered by the trustee… That is not to say a trustee will never be able to bring a debt recovery action in a State court.

Furthermore, his Honour noted that the plaintiff knew that its entitlement to the monies was in dispute well before bringing the action in the District Court.  Accordingly, and as the plaintiff ought to have known that the basis of the claim was one that fell within the exclusive jurisdiction provisions, his Honour ordered that the plaintiff trustee pay the defendant’s costs on the indemnity basis.

Important points for trustees to consider

  • In commencing court proceedings to recover monies or property forming part of a bankrupt estate, a trustee should be careful to file proceedings in the correct jurisdiction.
  • Although routine recovery matters can be filed in the state courts, any matter which requires a determination of matters outlined in s 31 of the Act should be commenced in either the Federal Circuit Court or the Federal Court of Australia.
  • Just because a claim does not make reference to the Bankruptcy Act 1966 (Cth), this does not necessarily mean it doesn’t require the exercise of bankruptcy jurisdiction.
  • As commencing proceedings in the incorrect jurisdiction may result in adverse indemnity costs orders, trustees should seek detailed legal advice before commencing proceedings.

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