The High Court of Australia has provided practical guidance for trustees in cases of bankruptcy and the presumptions of the Court in regards to the lodging of caveats.

In the matter of Boensch v Pascoe [2019] HCA 49, the High Court of Australia considered the question of whether a property held by a bankrupt on trust was capable of vesting in the trustee in bankruptcy, pursuant to s 58 and the exclusion provided in s 116(2)(a) of the Bankruptcy Act 1966 (Cth).

Background

Mr Boensch claimed that he set up a trust of a house in Rydalmere (the property/Boensch Trust) which he held beneficially on trust for his children. In 2003 Mr Boensch (the bankrupt) was served with a bankruptcy notice and in 2005 was served with a sequestration order by the Court.

Mr Pascoe was assigned as his trustee in bankruptcy and immediately lodged a caveat over the property as was his usual practice to protect the title and interest of creditors. Mr Pascoe sought legal advice which declared he had a good and valid claim to the interest claimed therein.

The bankrupt brought proceedings to the Supreme Court of NSW alleging Mr Pascoe had lodged a caveat without reasonable cause, therefore entitling Mr Boensch to compensation pursuant to s 74P(1) of the Real Property Act.

Proceedings

The Supreme Court of NSW did not have jurisdiction to deal with the bankruptcy matters, thus the matter went to the Full Court of the Federal Court which dismissed the former bankrupt’s claim for damages, finding that the trustee in bankruptcy did act with reasonable cause in lodging and not withdrawing the caveat. The matter was then brought on appeal to the High Court which was dismissed with costs.

Issues

The High Court unanimously dismissed the appeal, focusing on the bankrupt’s interest in the trust property. A valid beneficial interest would provide him with entitlement in equity to be indemnified out of the Trust property, thus causing the property to vest in the trustee in bankruptcy.

  1. Valid beneficial interest

The issue to address was whether Mr Boensch had a valid beneficial interest in the Trust property. S 116(2)(a) of the Bankruptcy Act 1966 (Cth) excluded property held by the bankrupt in trust for another person from vesting in the trustee in bankruptcy. However the Court clarified that provided that the bankrupt has a valid beneficial interest in the Trust property, the property will be vested in the trustee in bankruptcy, pursuant to s 58(1) of the Act.

A valid beneficial interest means a ‘vested or contingent right or power to obtain some personal benefit from the trust property’ [15]. The beneficial interest must be ‘extant and valid’, recognising that the interest is capable of being immediately realised for the benefit of the bankrupt’s creditors [91].

It was found that Mr Boensch was mutually benefiting from the arrangement as he was able to use the room in the property. He had also incurred significant expenses in his capacity as a trustee of the Trust in the form of “bank payments, loan payments, the council rates, [and] every other cost … required” for the trust.

This gave rise to an equitable interest of a right to be indemnified out of the trust property and established that he had a beneficial interest in the property. Mr Boensch had an equitable interest in the trust property which took it out of the exclusion in s 116(2)(a), meaning the trust property would vest in the trustee in bankruptcy.

  1. Permissible grounds to lodge a caveat

The Court emphasised the conclusion in Beca Developments that in order for a caveat to be lodged without reasonable cause, it must be established that “the caveator neither had a caveatable interest nor an honest belief, based on reasonable grounds, that he had one”1.

At the time Mr Pascoe lodged the caveat, he had no reason not to honestly believe on reasonable grounds that he had a caveatable interest, even having sought legal advice that supported this belief.

Mr Pascoe’s caveatable interest arose due to the bankrupt’s right of indemnity, however even if a caveatable interest at the time of lodging the caveat did not exist, he would have had reasonable grounds due to his honest belief that it did exist.

Given that the bankrupt’s right of indemnity gave the trustee in bankruptcy a caveatable interest in the property and that the bankrupt had a valid beneficial interest in the property, sufficient grounds were established for Mr Pascoe to have lodged the caveat.

Takeaways

This case supports the proactive approach of trustees in bankruptcy in the prompt lodgement of caveats at early stages of administering bankrupt estates to protect the interests of creditors, even where trustees in bankruptcy may have limited information. In cases where a bankrupt trustee has a valid beneficial interest in the trust property, the property will vest in the trustee in bankruptcy.