Precedent set: No estoppel against the vesting provisions of the Bankruptcy Act

Lander & Rogers acted for the winning trustees in bankruptcy in Jess v McNiven, in the matter of McNiven (No2) [2022] FCA 446. The decision handed down by Anastassiou J (one of his last decisions before retiring from the bench) has created legal precedent ─ finding that there could be no estoppel against the vesting provisions of the Bankruptcy Act 1996 (Cth) (Bankruptcy Act).

This case provides much-needed clarity to bankruptcy trustees and lawyers. It sought to clarify the legal commentary made in O’Brien v Sheahan [2002] FCA 1292, in which Carr J held that certain representations gave rise to an estoppel against the trustee in that case and that the trustee was estopped from realising a property registered in the name of the bankrupt.

Whilst the High Court later dismissed an application for special leave in Sheahan v O'Brien & Anor [2003] HCATrans 308, it left open the question of whether the law of estoppel could be applied against provisions of the Bankruptcy Act.

The case

Mrs McNiven and Mr McNiven filed separate debtor's petitions declaring themselves bankrupt in late 2010. At the time of the proceeding, they had both been discharged from bankruptcy. As at the date of bankruptcy the McNivens owned two properties, residing in one and renting out the other. These properties vested in the trustees under s 58 of the Bankruptcy Act.

Initially, the trustees determined that there was limited equity in the properties and took no steps to realise them. However, in March 2016, a secured creditor (a company of which Mr John Voitin was sole director, secretary and shareholder) with a second ranking mortgage over the properties withdrew its claims in the bankrupt estates following the public examinations conducted by the liquidators of Timbercorp of Mr Voitin and the McNivens (as well as others). The secured creditor's withdrawal of its security resulted in substantial equity in the properties being available.

The trustees took transmission of the properties and, after negotiations failed, issued proceedings against the McNivens seeking various orders, including for vacant possession and powers of sale by reason of the vesting provisions of sections 58 and 116 of the Bankruptcy Act.

The McNivens defended the claim and crossclaimed, contending that the trustees were estopped from realising the properties or, alternatively, that they were entitled to an "equitable accounting" in relation to the financial and personal contributions they had made to the properties.

In his decision, His Honour Justice Anastassiou determined that there can be no estoppel, as a matter of principle, against the operation of the relevant provisions of the Bankruptcy Act, because it would have the "effect of contradicting what the Bankruptcy Act specifically requires a trustee to do; namely to realise the assets of the bankrupt estate for the benefit of unsecured creditors". His Honour also found that as a matter of fact there could be no estoppel primarily because there were no representations and no reliance on any representations.

His Honour found that the McNivens were entitled to restitution based on an unjust enrichment claim:

• for some interest repayments on the loans secured by the properties, rates, taxes and outgoings which were paid by the McNivens; and
• for capital improvements, maintenance and repairs totalling $11,500 (a stark reduction from the $193,499 claimed by the McNivens)

However, His Honour concluded that those amounts were offset by the rent received by the McNivens from the rental property and that the trustees are not required to make any contribution to the McNivens out of the sale proceeds of the properties. The trustees were declared the legal owners of the properties and granted orders for vacant possession and sale, with costs in favour of the trustees.

The full judgment can be read here.

For more information on the implications of this decision, please contact a member of our team.