Question 1: did the trustees have the power to acquire the causes of action from the liquidator?
15 The trustees argued that they had the power to acquire the assigned claims from the liquidator and the company pursuant to s 134 of the Act. The trustees relied specifically on the powers under subparas (1)(a), (j), (k), (n), (o) and (3).
16 Section 134 provides as follows:
Powers exercisable at discretion of trustee
(1) Subject to this Act, the trustee may do all or any of the following things:
(a) sell all or any part of the property of the bankrupt;
(aa) accept, without terms or conditions, or subject to terms and conditions, a sum of money payable at a future time as the consideration or part of the consideration for the sale of any property of the bankrupt;
(ab) lease any property of the bankrupt;
(ac) divide among the creditors, in its existing form and according to its estimated value, property that, by reason of its peculiar nature or other special circumstances, cannot readily or advantageously be sold;
(b) carry on a business of the bankrupt so far as may be necessary to dispose of it or wind it up for the benefit of creditors;
(c) postpone the winding-up of the estate;
(d) prove in respect of any debt due to the bankrupt;
(da) mortgage or charge any of the property of the bankrupt for the purpose of raising money for the payment of the debts provable in the bankruptcy;
(e) compromise any debt claimed to be due to the bankrupt or any claim by the bankrupt;
(f) make a compromise with a creditor or a person claiming to be a creditor in respect of a debt provable, or claimed to be provable, in the bankruptcy;
(g) make a compromise in respect of any claim arising out of the administration of the estate of the bankrupt, whether the claim is made by or against the trustee;
(h) deal with property to which the bankrupt is beneficially entitled as tenant in tail in the same manner as the bankrupt could deal with it if he or she were not a bankrupt;
(i) obtain such advice or assistance as he or she considers desirable relating to the administration of the estate or to the conduct or affairs of the bankrupt;
(ia) refer any dispute to arbitration;
(j) bring, institute or defend any action or other legal proceeding relating to the administration of the estate;
(k) execute powers of attorney, deeds or other instruments for the purpose of carrying the provisions of this Act into effect; and
(m) employ the bankrupt:
(i) to superintend the management of the whole, or a part, of the property of the bankrupt;
(ii) to carry on the bankrupt's trade or business for the benefit of the bankrupt's creditors; or
(iii) to assist in any other way in administering the property of the bankrupt;
and, in consideration of the bankrupt's services, make such allowance to the bankrupt out of the estate as the trustee considers reasonable;
(ma) make such allowance out of the estate as he or she thinks just to the bankrupt, the spouse or de facto partner of the bankrupt or the family of the bankrupt;
Note: See also subsection 5(6).
(n) superintend the management of the whole, or a part, of the property of the bankrupt;
(o) administer the property of the bankrupt in any other way.
(1A) An allowance made to the bankrupt in pursuance of paragraph (1)(m) may be reduced by the Court upon the application of an interested person.
(3) Subject to this Act, the trustee may use his or her own discretion in the administration of the estate.
17 The third and fourth defendants argued that the assigned claims are rights of action of the company derived from wrongdoings to it and are not, and never have been, "property of the bankrupt" as that expression is defined in s 5 of the Act and that any damages or compensation recovered from the claims against the first to fourth defendants will not be divisible amongst the creditors of the bankrupt pursuant to s 116 of the Act. The acquisition, therefore, was said to be wholly foreign to the operation and purposes of the Act and, it was argued, there is no basis for reading into the powers in s 134 a right to acquire property which will not confer a direct benefit on the administration of the bankrupt estate.
18 But for the contention of the third and fourth defendants that the assigned claims do not form part of the "property of the bankrupt", I would otherwise have no hesitation in holding that the trustees were acting within the scope of their powers under s 134 in taking an assignment of the causes of action on which they now sue the defendants. Whilst s 134 does not prescribe a specific power to acquire property, the powers contained in s 134 are wide and expressed in general terms. In my view, they are of sufficiently broad compass to include the power to acquire property where the trustee has formed the view that the acquisition is in the best interests of creditors and likely to maximise the return to creditors, conformable with the duties on trustees imposed by s 19 of the Act and general law. In Adsett v Berlouis (1992) 37 FCR 201 at 208 the Full Federal Court (Northrop, Wilcox and Cooper JJ) described the functions of a trustee and adopted, as a correct statement of the duties of a trustee and the proper manner of their performance, the following passage from Mannigel v Aitken (1983) 77 FLR 406 (Smithers J at 408-9):
In the case of bankruptcy the trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the [t]rustee. It was said by Rogerson J in Re Ladyman (1981) 55 FLR 383 at 394-396 that the standard of conduct required of the trustee will ordinarily be the standard required of a professional man and perhaps higher.
These duties, and the proper manner of their performance, are reflected in the breadth of the powers contained in s 134 and the discretion given to the trustee in the administration of the estate under s 134(3).
19 The decisions in Re Skender; ex parte Trevor (1996) 67 FCR 441 ("Re Skender") and Re Bairnsdale Food Products Ltd [1948] VLR 264 ("Re Bairnsdale") further support the trustees' case. Re Bairnsdale concerned a cognate provision under s 191(2) of the Companies Act 1938 (Vic). In that case, the company leased a property from which it carried on a business and had first option to purchase. After the company had gone into liquidation, the landlord offered the liquidator the opportunity to purchase land and the liquidator sought directions that he had the power to buy the property from the landlord and sell it to a third party. Fullagar J held that the liquidator had the power to buy and sell the property, reasoning that the purchase was only for the purpose of resale and the liquidator was "really doing no more than selling an asset of the company". In Re Skender, Hill J followed and applied Re Bairnsdale to hold that the trustees of a bankrupt estate had the power under s 134(1)(a) of the Act to purchase an adjoining property to the bankrupt's land, financed by a bank loan, and to amalgamate and sell the properties, reasoning that the case was analogous with Re Bairnsdale.
20 The third and fourth defendants accepted on the strength of these authorities that there is a power derived from, or contained within the limitations of, the express powers in s 134 to acquire assets using the property of the bankrupt. However, the third and fourth defendants distinguished both cases from the present case on the basis that, in each case, the asset acquired became part of the property divisible amongst the creditors whereas in this case, it was argued, the assigned claims never became "the property of the bankrupt" with the consequence that any proceeds of the assigned claims will never be property that forms part of the divisible property of the bankrupt's estate under s 116(1) of the Act.
21 The expression "the property of the bankrupt" is defined in s 5 to mean, relevantly, "the property divisible among the bankrupt's creditors" and "any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt".
22 Section 116(1) of the Act prescribes that "property divisible amongst the creditors of the bankrupt" is:
(1) Subject to this Act:
(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge.
23 Under s 58(1) of the Act, where a debtor becomes bankrupt, "the property of the bankrupt" at the time of becoming bankrupt vests forthwith in the trustee of the bankrupt's estate and "after-acquired property of the bankrupt" vests, as soon as it is acquired by, or devolves on, the bankrupt, in the trustee as the trustee of the bankrupt's estate. "After-acquired property, in relation to a bankrupt" is defined in s 58(6) to mean:
… property that is acquired by, or devolves on, the bankrupt on or after the date of bankruptcy, being property that is divisible amongst the creditors of the bankrupt.
24 The word "property" is also defined in s 5 of the Act and means:
… real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.
25 The definition of "property" is very broad and applies both to the property of the bankrupt at the date of bankruptcy and any after-acquired property of the bankrupt.
26 There is a wealth of authority that the word "property" as defined in s 5 of the Act includes rights of action and any recoveries from the litigation. The oft cited decision is Re Movitor Pty Ltd (in liquidation) (1996) 64 FCR 380, where Drummond J stated at 391-392:
The expression in ss 134 and 135 of [the Act], "the property of a bankrupt", is defined in s 5(1) of the Act to mean the property divisible among the bankrupt's creditors pursuant to s 116 of the Bankruptcy Act 1966 (Cth) and, in addition, "any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt". The term "property" is defined in s 5(1) to include "any estate interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property". The term "the property of a bankrupt", which the trustee in bankruptcy is given statutory power to sell, thus has an extremely wide reach. It includes a chose in action, although that term is not expressly referred to in any of the definition sections: cf Re Nguyen, supra, at 325. It also includes, by express definition, "any ... interest or profit, whether present or future, vested or contingent arising out of or incident to any such" chose in action. In my opinion, the expression "the property of a bankrupt", which the trustee has power to sell under [the Act], includes not only a chose in action regarded as the right to litigate, but also the whole or a share of the expected fruits of that chose in action: cf Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 314. In Grovewood Holdings Plc v James Capel and Co. Ltd., supra, it was, in my respectful opinion, correctly acknowledged (at 87) that recoveries from an action are property distinct from the cause of action itself.
Thus, any recoveries from the assigned claims will form part of the divisible property of the bankrupt if the assigned claims vested in the trustees pursuant to s 58(1). The third and fourth defendants did not put a contrary argument. Their argument was that the assigned claims, however, never became "property of the bankrupt".
27 This argument was put in three ways. It was submitted that:
(a) the causes of action, the subject of the later assignment, were not "the property of the bankrupt" at the date of bankruptcy within the terms of s 58(1) and s 116(1)(a) because they were not causes of action in which the bankrupt had any interest but were causes of action of the company/liquidator derived from alleged wrongdoings to the company, not to the bankrupt;
(b) the assigned claims are not after-acquired property of the bankrupt within the terms of s 58(1) and s 116(1)(a) because the causes of action were acquired by the trustees, not the bankrupt; and
(c) the assigned claims are not "property" within the meaning of that term as defined in s 5 of the Act because the causes of action assigned to the trustees did not "arise out of" and were not an "incident" of the property of the bankrupt.
28 The first proposition can be accepted as correct.
29 I do not accept the second proposition which does not take into account the position of the trustees as trustees of the bankrupt's estate. As the terms of the deed of assignment make clear, the assigned claims were acquired by the trustees in their capacity as trustees of the bankrupt's estate, and because they acquired the claims in that capacity, the right to sue on those claims is a chose in action of the bankrupt's estate and the trustees are accountable to the estate and the creditors for any fruits of the litigation: CGU Insurance Limited v One.Tel Limited (in liquidation) and Others (2010) 242 CLR 174, [34]-[39].
30 The argument supporting the third proposition was that the causes of action assigned to the trustees did not "arise out of" and were not an "incident" of property of the bankrupt because the assigned claims have no connection with the bankrupt or the claims which the trustees have against the bankrupt under s 120 and/or s 121 of the Act in respect of the discharge of the Karas mortgage. That argument gives a restrictive interpretation to the phrase "arising out of" which is not warranted by the statutory context. As a matter of language, the expression "arising out of" connotes or imports the requirement of a causal connection (Roncevich v Repatriation Commission (2005) 222 CLR 115, [23], [27], [55]), and here there is a causal connection provided by the use of the bankrupt's property to pay for the assigned claims, being the $25,000 standing to the bankrupt's credit in his estate, which was the purpose for which those funds were deployed. The assigned claims were acquired by the trustees out of funds in the bankrupt's estate for the benefit of the bankrupt's estate and that causal connection is sufficient, in my opinion, to satisfy the terms of the provision.
31 Accordingly I reject the contentions advanced by the third and fourth defendants.
32 Mr Yeo has filed an affidavit in which he gave a detailed explanation for the trustees' decision to acquire the assigned claims and for the opinion he formed that the trustees properly exercised their discretion to acquire the assigned claims with a view to recovering funds for the benefit of creditors of the bankrupt estate. There is no reason to doubt the reliability of Mr Yeo's evidence, which I accept. Furthermore, contrary to the third and fourth defendant's contention, the assigned claims are connected with the trustees' claim against the bankrupt under s 120 and/or s 121 of the Act as the claims all arise out of the same factual substratum, of which the discharge of the Karas mortgage forms part. It was not suggested that the claims were acquired for a colourable purpose.
33 I am therefore satisfied that the acquisition of the assigned claims fell within the scope of the trustees' powers under s 134 and the answer to this question is accordingly "yes".