When bankruptcy trustees seek to realise a bankrupt’s interest in real property many years after the bankruptcy has been discharged, it will often give rise to a ‘hornets’ nest’ of issues and a slew of complaints by the owners of the property about the dilatory conduct of the trustee.

In Jess v McNiven, in the matter of McNiven (No 2) (FCA 2022) trustees sought to realise properties jointly owned by two former bankrupts some eight years after the commencement of their bankruptcy.

The former bankrupts argued that the trustees’ were estopped from realising the properties because their failure to do so during their bankruptcy constituted a representation that they would not do so. They also argued that if the estoppel claim failed, the court should give them credit for their contributions to the upkeep and maintenance of the properties and the capital growth of the properties.

Key Takeaways

1. You cannot set up an estoppel against the operation of the Bankruptcy Act 1966 (Cth) (the Act) because it contradicts what the Act requires a trustee to do; which is to realise assets for the benefit of unsecured creditors.
2. Trustees should not take the benefit of an increase in the value of a property without making an allowance for expenses incurred by the other owners in order to achieve that outcome.
3. The principles of equitable accounting are only available to the non-bankrupt co-owner of property who has a legal or beneficial interest to the property. The juridical basis for a former bankrupt to seek similar relief is a claim for restitution to avoid unjust enrichment to the trustee.

Brief Facts

Mr & Mrs McNiven (collectively, the McNivens) jointly owned two properties. They lived in one and rented out the other. Their financial problems began when they borrowed money to invest in a Timbercorp project and then invested in a failed joint venture to develop land with a company called Anylock.

The McNivens defaulted on the Anylock joint venture agreement and their other investments. The McNivens then entered into a further agreement with Anylock whereby they agreed to borrow $750,000 from Anylock secured by a mortgage over their two properties. Anylock registered a caveat over the two properties.

The McNiven’s financial situation deteriorated further. A creditor served Mrs McNiven with a bankruptcy notice. Two months later, Anylock threatened legal action to enforce the Anylock loan agreement. The McNivens remained ‘up to their eyeballs’ in debt. They each lodged a debtor’s petition which was accepted on 25 November 2010 and 24 December 2010. Their trustees registered caveats over their properties.

The Anylock transactions created the appearance that there was no equity in the properties.

During the period of their bankruptcy, the trustees investigated the Anylock transactions. No creditor was willing to fund further investigations. The trustees issued reports to creditors, prior to their discharge, which the McNivens alleged contained representations that induced them to believe that the trustees would not realise the properties because there was little or no equity in them. Mr McNiven was discharged from his bankruptcy on 25 December 2013. Mrs McNiven was discharged from her bankruptcy on 6 March 2014.

In October and November 2015, the McNivens were examined as part of public examinations conducted by the liquidators of Timbercorp during which the Anylock mortgage was investigated.

Following the public examinations, in 2016, Anylock withdrew its caveats over the properties as part of a settlement agreement and also agreed not to prove in the McNivens’ bankruptcies. This unlocked equity in the properties of approximately $564,940 for each bankrupt estate.

Between 31 March 2016 and 6 December 2017, settlement discussions occurred between the trustees and the McNivens’ representatives concerning the realisation of the trustees’ interests in the properties. They proved unsuccessful. The McNivens denied they had any knowledge of those negotiations. The Trustees became registered proprietors of the properties on 21 December 2017. On 8 March 2018, the trustees gave the McNivens notice that they would be selling the properties and that they were required to vacate them by 4 May 2018. The McNivens refused to comply with the trustees’ request.

Judgment

Estoppel

In determining whether estoppel could prevent the trustees from realising the properties, Anastassiou J adopted the approach taken by Hargrave J in Equuscorp Pty Ltd v Belperio (VSC 2006) which requires a consideration of the nature of the statute, its purpose and underlying social policy against which the estoppel purports to operate. Applying this approach, his Honour observed that the scheme established by the Act provides a comprehensive scheme for the administration of bankrupt estates and working out the rights, interests and obligations between the different classes of interest governed by the Act and concluded that estoppel is inimical to the Act and could not, therefore, apply.

Anastasiou J also considered whether the McNivens had established an estoppel on the evidence. His Honour concluded that their claim was unsupported by the evidence and was ‘analytically flawed’.  

Unjust Enrichment

In assessing and calculating the unjust enrichment claim, Anastassou J said that any allowable contributions should be offset by a credit to the trustees for rental income for the rented property and notional rent on the property the bankrupts lived in. In assessing the various expense claims, his Honour:

• Allowed the interest paid on the mortgages after they were discharged from bankruptcy.
• Excluded the interest paid prior to and during bankruptcy and after the date they refused to vacate the properties.
• Excluded expenditure which included a consumption component (electricity, water and gas).
• Included expenditure for municipal rates and land tax but applied a 50% discount because the McNivens enjoyed exclusive occupation of the properties for many years.
• Consistent with Draper¹, said that the McNiven’s were entitled to the lesser of the cost of improvements or the increase in the value of the properties as a result of the improvements.
• Excluded the claim relating to the growth capital of the properties because the mortgage payments only reduced the interest and not the principal debt.

In the wash up, the trustees were not unjustly enriched and were not required to account to the McNivens for anything.

Implications

This case reinforces the supremacy of the Act in dealing with the rights and obligations of creditors, trustees and bankrupts under the Act. It also provides a very useful guidance note for practically assessing the inevitable claims for contribution that arise when trustees take steps to realise real property.