The full version of this article was originally published in the Lexis Nexis Insolvency Law Bulletin
By Jacob Reardon, solicitor, and Stephen Mullette, Principal, Matthews Folbigg Lawyers
How long does a bankruptcy trustee have to sell a bankrupt’s home? What if the Trustee allows the bankrupt to live in the property, and pay the mortgage, council, and water rates, and repair the property for almost 5 years? Or for 8 years? More? Will the Trustee eventually become estopped from selling the property after such a long period? The answer may surprise.
For at least 20 years bankruptcy trustees have been cautious to avoid any estoppel arising because they have allowed the bankrupt and any family members to remain in the property and treat the property as their own.
This is because of the 2002 Federal Court decision in Sheahan v. O’Brien[1]. Trustees sometimes even call their post-bankruptcy correspondence to the occupiers of the property the ‘Sheahan letter’. However, in a recent decision the Federal Court has found that it is not possible for such an estoppel to arise under the Bankruptcy Act 1966 (Cth) (“the Act”).
This sounds like a great win for bankruptcy trustees, but it begs at least the following questions –
- What are the boundaries now on Trustees’ dealings with bankrupts (or others) who are continuing to use or deal with vested bankruptcy property?
- Should Trustees now change their communications with bankrupts (or others) occupying vested bankruptcy property, and
- If so, in what way?
Estoppel Espoused – O’Brien v Sheahan (“O’Brien”)
It is useful to begin by reviewing the law as we thought we knew it.
In O’Brien, the Federal Court considered the operation of estoppel in the context of the Bankruptcy Act 1966 (Cth) (“the Act”). In that case, the Court held that certain express statements and conduct on behalf of the trustee (which included inaction and silence) gave rise to an estoppel which prevented the trustee from being able to realise the vested interest in real estate. A full analysis of O’Brien is contained in the original version of this article.
O’Brien concerned a joint bankruptcy of a husband and wife, Mr and Mrs O’Brien, who became bankrupt in 1996 and who jointly owned their family home in Adelaide. The Official Trustee’s staff met with the bankrupts and obtained valuations from them “in order to decide whether to sell” the bankrupts’ interest[2], and which suggested there was no equity in the property. The Official Trustee took no further steps to realise the property. The O’Brien’s continued to make principal and interest payments to the mortgagee as well as paying property rates and expenses[3]. They also undertook refurbishment works[4].
Four years later, and following transfer of the bankruptcy estate to Mr Sheahan, a property valuation indicated there was now substantial equity in the property[5]. This was in part due to the increasing property market but also due to the O’Brien’s paying down the mortgage. The trustee commenced proceedings for possession, and the O’Brien’s filed their own application seeking equitable relief preventing the Trustee from realising the property.
The Federal Court considered that there were representations made by the Trustees’ “conduct, including inaction and silence”[6].
The failure of the Official Trustee to inform the bankrupts of the intention to realise the property was held to be a representation that the trustees “did not propose to assert any entitlement to any net proceeds from the realisation of the property”[7].
In reaching this conclusion the court relied upon the following factors[8]:
- The request and direction to the O’Brien’s to obtain valuations;
- The finding by the primary judge that the initial case officer had led the O’Brien’s to believe that they could remain in the property whilst they continued to pay the mortgage;
- The finding of the primary judge that the trustee knew that the appellants were making payments of the mortgage which had the effect of preserving the property; and
- The very long period which expired before the respondent eventually decided to sell.
This representation induced the bankrupts to “adopt the assumption or expectation that neither of [the trustees] was interested in selling the property and they had abandoned it to the appellants”[9], and the O’Brien’s acted in reliance on this assumption by:
- continuing to make principal and interest mortgage, rates and taxes payments,
- declining at least two offers of free accommodation; and
- effecting improvements to the property.
The Court further found that it would be unconscionable for the trustee “after so many years, to step in and unconditionally assert his legal rights”[10].
The Court made orders to the effect that the O’Brien’s were able to keep their property.
The Trustee unsuccessfully subsequently applied for special leave to appeal to the High Court of Australia, even though one of the High Court judges raised the “real question” of the availability of general law doctrines (such as estoppel) to bankruptcy.
Following O’Brien, Trustees have been at pains to send correspondence to bankrupts regarding properties with little or no equity, making it clear that the Trustee does not abandon any rights or interest in respect of the property, including to sell it at some later stage. This correspondence is intended to preserve the Trustee’s rights to pursue equity in the property that may arise in the future and avoid giving rise to an equitable estoppel.
But is such correspondence necessary at all?
Estoppel Estopped: Jess v McNiven
In a recent judgment of the Federal Court of Australia has held that no equitable estoppel can arise in respect of the vesting of a property in a Trustee pursuant to the Act.
In Jess v McNiven, in the matter of McNiven[11] (“McNiven”), the Federal Court declined to find that a trustee was estopped from realising the substantial equity in the properties of two former bankrupts.
Relying upon O’Brien the former bankrupts argued that the trustees were estopped from realising their properties because their failure to do so constituted a representation that the properties would not be realised.
Facts
Mr and Mrs McNiven jointly owned two properties in Victoria. One property was lived in by the McNiven’s and the other was rented out as an investment.
In November 2007, the McNiven’s financial planner recommended a joint venture with an entity called Anylock Pty Ltd (“Anylock”) to develop land. Eventually, Anylock provided a loan to the McNiven’s and in return was granted a mortgage over both the McNivens’ properties. Anylock registered caveats over both properties[12].
In late 2010 Mr McNiven and Mrs McNiven both became bankrupt, with trustees from separate insolvency firms (together “the Trustees”).
Upon their appointment, the Trustees lodged caveats over the properties, but the transactions with Anylock created the appearance that there was no equity in the properties[13] and so no steps were taken to sell the properties during the McNiven’s’ bankruptcies and for several years after their discharge from bankruptcy. The Trustees issued various reports to creditors advising that there was little or no equity in the properties and that they accordingly did not intend to realise them. The McNiven’s alleged they relied upon these representations to believe the Trustees would not realise their properties. A report to Mr McNiven’s creditors included a statement that the trustees had “finalised all outstanding matters in the bankrupt estate” and that “[t]his estate has come to an end and our file is being closed”[14] .
However separate investigations by an unrelated liquidator led to a settlement in which Anylock withdrew its caveats and agreed not to claim in the McNiven’s bankruptcies. The McNiven’s claimed to have no knowledge of the settlement. The removal of Anylock’s caveat unlocked approximately $1.45 million in equity in the properties for each bankrupt estate.
During the period from March 2016 to December 2017, various settlement discussions occurred between the McNivens’ solicitor and the Trustees regarding the Bankrupts’ interest in the Properties. The settlement discussions were unsuccessful and the McNiven’s subsequently claimed to have had no knowledge of them. This in turn led the Trustees to seek to adduce evidence of these communications, and a separate judgment that this was permissible, notwithstanding they were ‘without prejudice’[15].
In December 2017, the McNivens’ trustees applied for transmission of the title to the properties and became the registered proprietors of the properties. In March 2018, the trustees issued notices to vacate which the McNiven’s did not comply with.
The McNiven’s alleged that the trustees had made various representations to them over the years that induced them to assume that the trustees had abandoned their interests in the properties to them. The trustees were therefore said to be estopped from exercising their powers under the Act.
Issues
The key issues for the court regarding the estoppel claim were[16]:
- Whether an estoppel can operate to prevent a trustee from realising a vested interest in property in accordance with the Act (and if so whether such an estoppel arose in the facts of the case);
- Whether the McNiven’s were beneficiaries of a constructive trust in all the circumstances;
- Whether pursuant to the doctrine of unjust enrichment the McNiven’s could claim an interest in the proceeds of sale, having regard to their mortgage payments and maintenance of the properties (and whether they needed to account for a notional occupation fee).
Can an Estoppel Claim arise against the operation of the Bankruptcy Act?
As a threshold matter, the Court asked the query raised by Justice Gummow in the High Court almost 20 years earlier – can an estoppel prevent a trustee from realising vested bankruptcy property in accordance with the trustee’s duties under the Bankruptcy Act?
Justice Anastassiou considered previous authorities dealing with this issue in relation to other statutes. He cited[17] Maritime Electric Company Ltd v General Dairies Ltd[18] in relation to very different legislation, but where the Court said:
“… where, as here, the statute imposes a duty of a positive kind, not avoidable by the performance of any formality, for the doing of the very act which the plaintiff seeks to do, it is not open to the defendant to set up an estoppel to prevent it.”
And in working out whether a statute imposed such a duty the same case held:
“the Court should first of all determine the nature of the obligation imposed by the statute, and then consider whether the admission of an estoppel would nullify the statutory provisions.”
Justice Anastassiou noted that this authority had been cited with approval in the High Court[19] and subsequently in the Federal Court and Full Federal Court[20] before endorsing[21] the qualification set out by Hargrave J in Equuscorp Pty Ltd v Belperio[22] where his Honour said that the question of whether a statute precludes the establishment of an estoppel is a question of statutory construction.
His Honour held that in most cases the scope to estop the operation of an act is limited and will ultimately depend on the nature of the statute, its underlying social policy and the purpose of the relevant provisions sought to be estopped.[23]
His Honour held that O’Brien did not establish any “generally applicable principle of law relating to the availability of a claim in estoppel in the face of the statutory provisions concerning the administration of bankrupt estates. Accordingly, that question remains open for determination.”[24]
Next, having reviewed the duties of bankruptcy trustees and effects of bankruptcy under the Act, including the fact that Trustees have up to 20 years to realise assets in certain circumstances, his Honour held, principally, that estoppel directly contradicts the obligations of the trustee to realise assets for the benefit of unsecured creditors. This reason on its own was sufficient to preclude the doctrine of estoppel [25]. His Honour continued by stating:
[189] … In my view, it matters not for present purposes whether the assumption floated downstream upon a raft bound together by a common assumption of the parties or comes from water drawn from the well of representations. The fundamental tension which precludes an estoppel against the Bankruptcy Act is that whensoever an estoppel is established, it is for a remedy that precludes the person who induced, or shared, the assumption from resiling from it, if to do so would be unconscionable. That is the essence of estoppel, and that is inimical to the scheme established by the Bankruptcy Act for the administration of bankrupt estates.”
On its face, the implications of this colourful conclusion are extraordinary. Even a direct promise by the Trustee, or an explicit representation that the Trustee would not take steps to realise a bankrupt’s property, would not be enough to give rise to an estoppel that would prevent the Trustee from later taking steps to do exactly what he or she had said would not be done[26].
Application of O’Brien to McNiven
Curiously, in light of the clear finding that estoppel was not applicable to trustees in bankruptcy, Justice Anastassiou refused to find that O’Brien was clearly wrong. Rather, his Honour held that O’Brien “should be confined to its own facts, and distinguished, without needing to embark on analysis as to whether that decision was plainly wrong”[27].
However, if his Honour’s picturesque reference to the “well of representations” and the floating raft of common assumptions is accepted, then it is difficult to understand how there could possibly be any scope to conclude otherwise than that O’Brien was, indeed, plainly wrong[28].
Representations by the Trustees
In case he was wrong about the unavailability of estoppel as an argument on which the McNiven’s could rely, Justice Anastassiou considered the basis for the claimed estoppel, the alleged “express written and oral representations, as well as representations by silence and inaction”[29], concluding that “the alleged representations consist of a cacophony of indirect and qualified statements”[30] insufficient to give rise to an equitable estoppel, and based upon an assumption that the Anylock mortgage was valid – an assumption which proved to be incorrect[31].
Usefully for Trustees, in considering the Trustees’ inaction, his Honour endorsed the appropriateness of Trustees (consistent with their statutory duties) not taking steps to realise properties without apparent equity.
The suggestion that inaction or silence could give rise to a representation was inconsistent with the context in which “the Trustees were subject to duties to administer the bankrupt estate properly and efficiently”[32] but in any event in the context of this particular matter, the suggestion the Trustees failed to take any steps to realise the properties was “borderline risible”[33].
His Honour then found that in the circumstances of their matter if was not reasonable for the McNivens to rely upon the representations which they alleged had been made to them[34] and that focussing on amounts expended by the McNivens on the properties was a “red herring” as the McNivens “have enjoyed a commensurate benefit from the exclusive use, and rent derived from, the Properties during that very same period”[35]. The Trustees had acted promptly once the Anylock mortgage was removed and so no unconscionability arose[36].
Where does this leave us?
McNiven is a clear (albeit first instance) rejection of the operation of estoppel to the duties of Trustees in bankruptcy under the Act.
However, there are still a number of unanswered questions:
- Whether the rationale will be upheld in subsequent, and particularly appellate courts. Having regard to the history and previous judicial consideration of the proposition in relation to other statutes and the short but well-reasoned analysis of Justice Anastassiou, this would seem likely.
- On its face, however McNiven would seem to mean that in spite of an explicit promise by a bankruptcy trustee that the bankrupts’ property will not be sold, a trustee may later on nevertheless do exactly that. This does not sit easily with a trustee’s fiduciary, professional and ethical obligations.
- A likely remedy may be found in respect of the trustee’s duties under the Act[37] and at law, and even if a trustee is not prevented by estoppel from later recanting on a promise not to sell a property, whether a Court may nevertheless find the trustee liable for breaches of duties in a manner and amount which would address the extent of injustice (and no doubt also impose an appropriate sanction on the trustee professionally).
- Is there life left in O’Brien? Stopping short of finding O’Brien plainly wrong, McNiven confined it to its facts. But surely this cannot mean that if an identical case occurred again, O’Brien would not be decidedly differently, if indeed there can be no estoppel in respect of a Trustee realising a bankrupt’s property under the Act?
- Critically, is there a way in which the Trustee can mitigate the need for, and costs of, an expensive accounting exercise in relation to the amounts paid by bankrupts during their occupation of the property? McNiven involved expert evidence and an accounting in respect of hundreds of thousands of dollars, before determining there was no amount payable to the bankrupts. What steps can be taken by the Trustee to avoid this? Although it is beyond the scope of this article, McNiven bears careful consideration as to some steps which the Trustee might take in the nature, tone and language used in correspondence with the bankrupts regarding their ongoing occupation of the property.
McNiven is a welcome clarification of bankruptcy law in relation to no-equity properties. Trustees may take some comfort that they will not accidentally be estopped from realising vested bankruptcy property. However, bankruptcy trustees would not be wise to cease sending their ‘Sheahan letter’ and in fact would be best served by paying careful attention to the McNiven decision to consider how such correspondence and conduct with their bankrupts might avoid the scope of litigation regarding ongoing occupation in non-equity properties.
[1] [2002] FCA 1292 per Carr J.
[2] Id. at [6], [44].
[3] Id. at [12].
[4] Id. at [14].
[5] Id. at [9]. The property had increased in value to $370,000 and the mortgage reduced to around $185,000.
[6] Id.at [43].
[7] Id. at [46].
[8] Ibid.
[9] Id. at [50].
[10] Id. at [56] citing Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 406-408, 428-429; The Commonwealth v Verwayen (1990) 170 CLR 394 at 410-414, 440-446, 453-455.
[11] Jess v McNiven, in the matter of McNiven (No 2) [2022] FCA 446, per Anastassiou J.
[12] Id. at [41]
[13] Id. at [5], leading to what the judge described (at [47]) as “a critical factual assumption in this matter” that there was, in fact, no equity in the properties.
[14] Id. at [94]. Although not sent to Mr McNiven, one of the creditors was the trustee of the Bankrupts’ family trust, and so it appears the bankrupts received this report at their home address – see at [95].
[15] Id. at [113]-[114] and see the separate decision of McKerracher J in Jess v McNiven, in the matter of McNiven [2021] FCA 53 dealing with the privilege issue, holding that the use of these communications was permissible where it was the bankrupts who were asserting that the Trustees had made representations by silence and inaction, and refusing their admissibility would allow the Court to be misled.
[16] Id. at [16]
[17] Id. at [151].
[18] [1937] AC 610, per Lord Maugham said at 618-620.
[19] Federal Commissioner of Taxation v Wade [1951] HCA 66; 84 CLR 105, per Kitto J at 117.
[20] Smith v Bone [2015] FCA 319; 104 ACSR 528 per Gleeson J at [44]; Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5; 379 ALR 593 at [527] (Besanko, Markovic and Banks-Smith JJ) and Minister for Health v Nicholl Holdings Pty Ltd [2015] FCAFC 73; 231 FCR 539 at [50] (Greenwood and Logan JJ).
[21] Jess v McNiven, in the matter of McNiven (No 2) [2022] FCA 446, per Anastassiou J at [156].
[22] [2006] VSC 14, at [272].
[23] Jess v McNiven, in the matter of McNiven (No 2) [2022] FCA 446, per Anastassiou J at [156].
[24] Jess v McNiven, in the matter of McNiven (No 2) [2022] FCA 446, per Anastassiou J at [166].
[25] Id. at [188]-[189].
[26] An estoppel is of course not the only argument or remedy available to a bankrupt; and a Trustee is of course bound by duties under s 19 of the Act and as a trustee. There may be other significant implications of such statements, but according to Justice Anastassiou, an estoppel preventing the Trustee from realising the Bankrupt’s interest in the property is not one of them.
[27] Ibid.
[28] One reason for the Court’s reticence may no doubt have been that although O’Brien was also a judgment of a single Federal Court judge, it was in the Federal Court’s appellate jurisdiction, being an appeal from the (then) Federal Magistrate’s Court (See McNiven at [159]).
[29] Jess v McNiven, in the matter of McNiven (No 2) [2022] FCA 446, per Anastassiou J at [205].
[30] Id. at [208].
[31] Id. at [209].
[32] Id.at [231].
[33] Id. at [226].
[34] Id. at [238].
[35] Id. at [252].
[36] Ibid.
[37] Eg s19(1)(f) ‘taking appropriate steps to recover property’; s19(1)(j) administering the estate ‘as efficiently as possible’ or s19(1)(k) ‘performing functions in a commercially sound way’.
