NON-DIVISIBLE PROPERTY AND THE BANKRUPTCY TRUSTEE’S RIGHTS
By Mark Madsen, Partner and Adam Hamrey, Solicitor Mullins Lawyers
The Full Federal Court in McDonald v Young  FCAFC 137 recently considered whether a trustee in bankruptcy can have recourse to the non-divisible property of a bankrupt for the payment of his or her reasonable remuneration and outlays in relation to the care, preservation, realisation and distribution of such non-divisible property; for example, where a trustee is requested by a bankrupt or personal representative to deal with certain non-divisible property for the sake of convenience or otherwise.
The appeal to the Full Federal Court arose out of the bankrupt estate of Mr Christopher Macryannis (the Deceased) under Part XI of the Bankruptcy Act 1966 (Cth) (the Act).
The facts presented to the Court showed that the administration by the trustee, Mr McDonald (the Trustee), had led to significant animosity between the Trustee and the Deceased’s sister, Ms Young. In order to avoid any potential issues as to standing, the Court proceeded on the basis that Ms Young represented all persons interested in the proceeds of certain non-divisible property (discussed below).
Having regard to the fact that probate or administration had not been granted in respect of the Deceased’s estate, any property that did not vest in the Trustee was deemed to vest in the NSW Trustee and Guardian under NSW law. As is the case with a living bankrupt:
1. the divisible property of the Deceased’s estate vested in the Trustee upon the making of the order that the estate be administered in bankruptcy; and
2. any after-acquired property would vest in the Trustee as soon as it was acquired by, or devolved on, the Deceased’s estate.
The dispute between the Trustee and Ms Young largely concerned the non-divisible property of the Deceased (the Exempt Assets) and the Trustee’s claims for remuneration and outlays in dealing with such Exempt Assets. The Exempt Assets included two life assurance policies, a superannuation account and funds raised as a result of the issue of units in a unit trust to the Deceased as trustee of a family trust.
In accordance with the terms of the Act, such property did not vest in the Trustee.
THE QUESTION TO BE DETERMINED
One question to be determined by the Full Court on appeal was “whether the primary judge erred in concluding that the costs incurred by the Trustee in, and the Trustee’s remuneration in relation to, the care, preservation and realisation of, and the distribution of the proceeds of the realisation of, the Exempt Assets cannot be paid out of those proceeds.”
At first instance, the primary judge made orders to the effect that the Trustee was to account for the total amount of the Exempt Assets recovered, without deduction for costs, expenses or remuneration, and that it be declared that any payment to the Trustee of costs incurred and remuneration in respect of dealing with the Exempt Assets be paid only out of the divisible assets of the estate of the Deceased.
On appeal, the Full Court:
1. confirmed that “upon the making of an order for an estate to be administered under Part XI, the trustee does not have any powers or duties in relation to property of the deceased other than divisible property. The powers and duties of a trustee appointed under Part XI are no more extensive than those of a trustee appointed…in relation to a living bankrupt”; and
2. determined that “In principle…the Trustee has a general equitable right to be paid, out of the proceeds of the realisation of the Exempt Assets, reasonable remuneration and reimbursement of costs and expenses incurred in connection with that realisation. Further, as a matter of principle, the creditors of the estate of the Deceased should not be disadvantaged by having the costs and remuneration of the Trustee’s dealings with the Exempt Assets paid out of the divisible property.”
In summary, the Full Court held that the Trustee was entitled to be paid out of the proceeds of the realisation of the Exempt Assets, his reasonable costs and expenses associated with the dealing of those assets.
This case offers a measure of comfort to trustees in bankruptcy in circumstances where they are requested to deal with certain non-divisible property of a bankrupt during the course of the administration of a bankrupt estate.