01 Dec 2014

Creditor backing Trustee in litigation for substantial return


4 min

Sometimes it is worth a punt!!!

Sometimes there is a pot of gold at the end of the rainbow for creditors willing to go the extra mile, as shown in the recent case of Filsee Pty Ltd & Ors v Horne & Anor [2014] FCCA 2269.

The case involved the following basic points.

  • In 2011, a Sequestration Order was made against the estate of Robert Andrew Tebb (‘the bankrupt’)
  • The applicants were unsecured creditors of the bankrupt estate for around $1.2 million.
  • The applicants gave the bankruptcy trustees an indemnity for any litigation costs, to recover funds for the benefit of creditors.
  • As a direct result of this indemnity the trustees brought/participated in the following proceedings:

a) Public examinations of the bankrupt and his wife, Mrs Tebb, pursuant to Section 81 of the Bankruptcy Act (‘the Act’)

b) Federal Court of Australia proceedings against Mrs Tebb, pursuant to various antecede provisions of the Act, as well as s.44 of the Partnership Act 1892 (NSW) and ss.21 and 32 of the Federal Court of Australia Act 1976 (Cth) (‘proceedings’).

c) Such proceedings were transferred to the Family Court of Australia; and

d) Separate proceedings were commenced by Mrs Tebb against the trustees in the Family Court, seeking financial orders in relation to sale or alteration of property interests concerning a number of properties (‘the Family Court proceedings’).

  • Proceedings in the Federal Court of Australia and Family Court of Australia included:

    a) Whether properties registered in the name of the bankrupt and Mrs Tebb were held as assets of a purported partnership;

b) Whether certain adjustments made to the partnership’s accounts were valid, proper, and supported by evidence;

c) Whether certain transfers of the bankrupt’s interests should be set aside;

d) Whether the wife’s claim against the bankrupt estate was valid and she be allowed to lodge a further Proof of Debt.

e) Whether the Family Court of Australia should provide Mrs Tebb with ownership of various assets, as part of a property settlement with the bankrupt.

  • In late 2013, extensive negotiations between the parties resulted in the execution of a Deed of Settlement and a Release.

  • The basic terms of the Deed provided payments/transfers to the trustee of the following:

    a) Payment of $100,000;

b) Transfer of Mrs Tebb’s interest in a property in Campbelltown NSW

c) Withdrawal of Proofs of Debt totaling approximately $85,000; and

d) Payment by Mrs Tebb to the Australian Taxation Office of $378,466.64.

  • In 2014, the Campbelltown property was sold and the proceeds of over $1.7m were received into the bankrupt estate.

Following recovery of the monies, the applicants applied to the Court for a priority to these monies under Section 109(10) of the Bankruptcy Act.

(10) Where in any bankruptcy:

(a) property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or

(b) expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;

the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors

Section 109 of the Bankruptcy Act was introduced for two reasons. One was to encourage creditors to indemnify bankruptcy trustees in relation to proceedings for recovery of property. And secondly to reward creditors who take the risks and bear the burden of litigation.

The Court found that the recovery proceeds would not have occurred without the indemnity funding, the high costs exposure to the applicants and the complexity of the proceedings. As a reward for funding the trustee, it was determined that the net amount recovered be paid to the applicants in full in priority to all other creditors. This provided the applicants with a return of 76.26% of their principal debt.

It is pleasing to see a trustee supported by creditors to take action that otherwise would not be taken, and even more pleasing to see creditors being rewarded for taking the punt!

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