By Aritree Barua, Solicitor at Matthews Folbigg Lawyers.
In Yan v Spyrakis as trustee in bankruptcy for Liu [2022] FCA 872 (“Yan v Spyrakis”), the Federal Court of Australia (“FCA”) re-stated the principles to be applied when considering whether to continue litigation against a party that has been declared bankrupt.
Background
Mr Liu (“the Bankrupt”) was made bankrupt on 11 November 2011 on his own petition. At the time of his bankruptcy, there were proceedings pending in the Supreme Court of New South Wales (“the Supreme Court proceedings”) in which the Bankrupt and a number of related companies were the defendants and Mr Yan was the plaintiff.
On 3 June 2022, Mr Yan applied to the FCA for leave to continue the Supreme Court proceedings against the Bankrupt. The application for leave could not be brought in the Supreme Court of New South Wales, as section 27 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) identified that the FCA and the Federal Circuit and Family Court of Australia (“FCFCoA”) (Div 2) have concurrent jurisdiction in bankruptcy and that jurisdiction is exclusive of the jurisdiction of all other courts, except the High Court and the FCFCoA (Div 1) in certain circumstances.
The respondent of the current proceedings, Mr Liu’s trustee in bankruptcy, neither objected nor consented to the application.
The FCA Decision
The FCA considered section 58(3)(b) of the Bankruptcy Act, which provides the following:
(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
…
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
On face value, the FCA found the Supreme Court proceedings to be a “proceeding in respect of a provable debt”. However, the FCA recognised that the Bankruptcy Act does not specify any factors to take into account when considering whether leave should be granted to continue proceedings. Therefore, the FCA had wide discretion to determine whether to grant leave. After a detailed review of caselaw dealing with section 58(3)(b) of the Bankruptcy Act, the FCA considered the following matters would favour a grant of leave:
- the proceeding involves parties other than the bankrupt and it might be necessary for the bankrupt to become a party;
- it is in the interests of justice that the claims made against the bankrupt are determined at the same time as the court determines the claims against the other parties;
- the facts are complex and the issues would be better and more comprehensively dealt with in a contested trial than if the creditor were required to lodge a proof of debt against the debtor alone;
- there is no opposition from the trustee in bankruptcy;
- the proceeding was commenced well before the date of the bankruptcy and there is no evidence to suggest that the application was made to gain an advantage over other creditors;
- the proceeding is otherwise ready for hearing such that the interests of unsecured creditors were unlikely to be prejudiced.
The FCA found that all these circumstances were present in Yan v Spyrakis.
Accordingly, the FCA held that Mr Yan was to be granted leave to continue the Supreme Court proceedings against the Bankrupt.
Key Takeaway
Leave to continue proceedings against a bankrupt may be sought under section 58(3)(b) of the Bankruptcy Act. The application will need to be made to either the Federal Court or the FCFCoA. The Court has wide discretion under section 58(3)(b) of the Bankruptcy Act to grant leave, but anyone considering making an application should consider the six principles re-stated in Yan v Spyrakis.
If you would like more information or advice in relation to seeking leave to continue proceedings against a bankrupt, please contact Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au, or Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
