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S.60 of the Bankruptcy Act means that (in most cases) a
Plaintiff who becomes bankrupt after issuing proceedings loses
control of that action to his trustee in bankruptcy. But what if
the Plaintiff has taken action as trustee of a trust,
where the benefit would not be available to creditors in his
bankruptcy?
The Supreme Court of Western Australia recently determined this
issue as a preliminary matter in the case of Duckworth v Water
Corporation [2012] WASC 30.
The Plaintiff, Mr Duckworth, issued proceedings in December 2010
as "trustee of the Ocean Farms (OF) Trust", in which
capacity he said he entered into contractual arrangements with the
Defendant. The Defendant disputed that Mr Duckworth was acting as
trustee of the OF trust and argued that Mr Duckworth had entered
into those contractual obligations in his personal capacity.
A sequestration order was made against Mr Duckworth in September
2011. The effect of s.60(2) is that any actions brought by a
bankrupt vest in the trustee in bankruptcy and are stayed pending
that trustee's election to continue or abandon the action.
Mr Duckworth argued that because he was acting as trustee of the
OF Trust, any damages awarded would not go to the bankrupt estate
by reason of s.116(2)(a). Did s.60(2) then operate to stay such an
action?
An earlier decision of Gray J in the Federal Court in Re:
Lofthouse [2001] FCA 25 found that s.60(2) operated to stay
proceedings brought by a trustee of a trust who subsequently became
bankrupt. Having considered the history of the law of bankruptcy
dating back to 1604, Justice Edelman in Duckworth
concluded that the decision in Re: Lofthouse should be
followed.
Accordingly, the claim brought by Mr Duckworth "as trustee
of the OF trust" was stayed by operation of s60(2) of the Act,
pending an election by Mr Duckworth's bankruptcy trustee
whether to continue or abandon the action. If abandoned, although
that particular action may end, the cause of action itself may yet
survive to be assigned at a later date by the bankruptcy
trustee.
Whilst it might be questioned whether the operation of s.60(2)
of the Act could have been intended to affect actions
brought by bankrupts as trustees, particularly when s.116(2)(a)
expressly excludes trust property from sequestration, legal and
insolvency practitioners should be aware of the implications of the
decision and the potential for a legislative review of the
Act in light of it.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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