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By Jacob Reardon, a solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group

One of the most entrenched distinctions between the personal and corporate insolvency regimes in Australia is the manner in which the property of the insolvent individual is treated. In a liquidation, for example, the title to the company’s property remains with the company upon the appointment of a liquidator, who is only an agent for the company. However, the position is fundamentally different under the Bankruptcy Act 1966 (Cth) (“the Act”).

Under s 5 of the Act, “Property” is defined broadly to include any present or future real or personal interest that is either vested or contingent. Conceivably, this definition could attach to any interest obtained at any time in any form of property, anywhere in the world. Pursuant to s 58 of the Act, the “property of the bankrupt” (whether already owned or acquired during bankruptcy) will immediately vest in his or her trustee. That is, title to the property, as opposed to mere control, passes from the bankrupt to the trustee in order for that property to be realised for the benefit of creditors.

At first blush, it would seem that, given the broad definition of property in s 5 of the Act, all property of a bankrupt will vest in his or her trustee. However, this is not so, and the extent to which the property of the bankrupt vests has been recently considered in Official Trustee in Bankruptcy v Kent [2023] FCA 1211 (“Kent”).

Kent concerned the question of whether the right of a bankrupt to be compensated under a statutory compensation scheme could vest in a trustee in bankruptcy. The purpose of the compensation scheme was to provide redress to retail banking customers where they had suffered loss as a result of misconduct by their bank. Mr Kent had filed a debtor’s petition in 2017 after having entered into credit contracts with various lenders and granting security over his family home. After his discharge from bankruptcy in 2020, Mr Kent sought to recover compensation from one of his pre-bankruptcy lenders on the basis that the monies lent to him were done so irresponsibly. However, Mr Kent’s trustee in bankruptcy entered into a deed with the lender to purportedly settle his claim under the statutory compensation scheme without his involvement or consent.

Section 116 of the Act creates a concept of divisible and non-divisible property of a bankrupt, which is separate from vesting under s 58. It distinguishes a bankrupt’s ‘property’ into that which may be divided amongst creditors, and that which the bankrupt may retain. Section 116(2) contains a number of categories of non-divisible property, and which are not available to creditors.

In Kent, the Court confirmed a line of authority starting with the High Court’s 1935 test in Cox v Journeaux (No 2) (1935) 52 CLR 713, and followed Kiefel J’s (as the former High Court Chief Justice then was) 1995 decision in Re Dosanjh; Ex part Duus [1995] 56 FCR 521that the proper characterisation of a single cause of action involving both financial and personal claims “…depended on whether the claim to damages is assessed by immediate reference to the bankrupt’s rights of property or his or her mind, body or character.”

Rares ACJ held that where a single claim involved different heads of damage the question is therefore measured principally by reference to the person of the bankrupt as opposed his or her property, then the claim will not vest. In undertaking such a characterisation the Court found Mr Kent’s claim ultimately constituted non-divisible property pursuant to s 116(2)(g)(i), which enables a bankrupt to recover compensation for a personal injury or wrong done to them.

In a separate blog, we will consider Mr Kent’s claim in more detail and exactly why the Court reached this conclusion in the context of an AFCA complaint for compensation.

Kent shows that the concept of the property of the bankrupt, as distinct from the general definition of property under the Act, is layered and ultimately turns on analysis of whether the asset or asset class in question is capable of being divisible amongst unsecured creditors under s 116. Therefore, trustees should ensure before taking steps to realise any asset that they first turn their mind to whether it is a form of property capable of vesting, and where appropriate, obtain necessary advice.

If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:

Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au

Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.