How to Take Someone To Court Once they have been declared bankrupt – Lessons from Tse v Evans as Trustee in Bankruptcy for Ngo [2024] FCA 787
Many people understandably think that once someone has been declared a bankrupt, any unsecured money that the bankrupt owed them will be diminished significantly or disappear altogether. This is understandable, as the bankrupt loses control of their own assets and a third-party steps in to distribute those assets between all the people the bankrupt owed before they were declared bankrupt.
However, the Court does not entirely close the option of bringing or continuing legal proceedings against a bankrupt in person. The advantage of this is that if the proceedings are successful, the litigant will recover more of their money back than if they joined the queue of unsecured parties waiting for the Trustee in Bankruptcy to distribute whatever is left after their fees are paid.
So how and when will the Court grant a debtor the right to pursue litigation against a bankrupt? The Court recently answered this question in the case of Tse v Evans as Trustee in Bankruptcy for Ngo [2024] FCA 787.
Case Background
This case involves ongoing Supreme Court proceedings in which Mr Tse and Mr Chen (‘the applicants’) allege they were part of a partnership with Mr Ngo that commenced in 2012. The applicants allege that pursuant to this partnership, the applicants would ship car accessories to Australia where Mr Ngo would sell them on eBay and similar websites. The applicants were responsible for paying part of the rent for a warehouse in Chester Hill from which Mr Ngo operated, and Mr Ngo was required to send an agreed portion of the profits of sale back to the applicants in China.
Apparently, Mr Ngo did not hold up his end of the partnership agreement. Not only is there evidence Mr Ngo underreported the partnership’s earnings by at least $640,000, but he also bought the Chester Hill warehouse in 2015, without telling the applicants, and continued to charge them lease money.
Upon discovering this, the applicants commenced the Supreme Court proceedings. If they successfully establish the partnership exists, assets including the Warehouse in Chester Hill will be declared property of the partnership, rather than Mr Ngo solely. The Supreme Court case was well on its way when Mr Ngo, ‘no doubt seeing that the noose was tightening’, filed a petition for bankruptcy on 7 March 2024.
The question before the Court in this case was whether the applicants should be allowed to continue their litigation against Mr Ngo, or whether the proceedings should instead continue against his estate. This application was made pursuant to section 58(3)(b) of the Bankruptcy Act 1966 (Cth) (‘the Act’).
The Court’s Findings
After reviewing recent authorities that dealt with similar applications, the Court found that it was clear that leave should be granted and the applicants should be permitted to continue to pursue their case against Mr Ngo, rather than his bankrupt estate. The Court found the following reasons were persuasive in coming to this conclusion:
- The claim involved relatively complicated legal and factual issues. This meant that a contested trial in the Supreme Court was best suited to determine the answers to these issues.
- The claim brought against Mr Ngo was sufficiently serious to warrant the granting of leave.
- The proceedings in the Supreme Court were commenced well before Mr Ngo was declared bankrupt.
- Similarly, the proceedings had been ongoing for some time before the bankruptcy.
- The resolution of the issues in question would be greatly assisted by the Court’s ability to order production of evidence through things like discovery.
- If the applicants were not granted leave, it is possible that they would suffer irreparable prejudice. This is because some of the questions in the Supreme Court proceedings related to ownership of valuable assets, like the Chester Hill Warehouse and large amounts of money. If the Supreme Court proceedings do not go ahead, the trustees in bankruptcy could distribute these assets to other creditors as though they belonged to the bankrupt estate, when in fact, the applicants are the true owners.
Conclusion
With this ruling in their favour, the applicants can continue their litigation against Mr Ngo with promising prospects of recovering their assets. This case provides a contemporary example of how the Courts can be flexible and allow litigation against someone who has been declared bankrupt. The reasons outlined above are by no means exhaustive and the judgment stresses how each application for leave under s 58(3)(b) of the Act will vary from case to case. If you are in a position that may entitle you to leave under this section, contact an insolvency lawyer for the best chances of recovering money from a bankrupt.
Read the decision here.
Matthews Folbigg Lawyers has a specialist team dedicated to Insolvency, Restructuring and Debt Recovery.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
