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Right of indemnity for the remuneration and expenses of controllers appointed under s50 of the Bankruptcy Act

On 16 June 2015 the Federal Court of Australia handed down its decision in Taylor (Trustee), in the matter of Jarvie (Bankrupt) v Jarvie [2015] FCA 590.

The decision confirms that a trustee appointed pursuant to section 50 of the Bankruptcy Act 1966 (Cth) (“Act”) by the Court to take control of a debtor’s property after a bankruptcy notice is issued and expires but prior to a sequestration order being made has a right of indemnity secured by an equitable lien over the debtor’s property for the purpose of securing recovery of his or her remuneration and expenses incurred in connection with the appointment.

Background

On 14 May 2014 a sequestration order was made against the estate of Patricia Anne Jarvie (“Bankrupt”). A registered trustee, Barry Anthony Taylor (“Trustee”) provided a consent to act as the Bankrupt’s trustee in bankruptcy.

Prior to the making of the sequestration order, the Trustee was appointed by the Court as controller of two properties owned by the Bankrupt as a consequence of an application made by the petitioning creditor. The appointment occurred pursuant to section 50(1) of the Act which states:

  1. At any time after a bankruptcy notice is issued, or a creditor’s petition is presented, in relation to a debtor, but before the debtor becomes bankrupt, the Court may:
    1. direct the Official Trustee or a specified registered trustee to take control of the debtor’s property; and
    2. make any other orders in relation to the property.

The application must be made by a creditor of the debtor and the Court will only grant an order if the Court is satisfied that it is in the interests of the creditors to do so and the debtor has not complied with the bankruptcy notice.

The Court’s order appointing the Trustee as controller was initially made for a limited period and was later extended on three occasions, with the final extension being “until further order”.

During his appointment as controller the Trustee undertook various tasks connected with preserving the properties including lodging caveats and attending to insurance. The Trustee sought a declaration from the Court to the effect that he be justified, in his capacity as trustee in bankruptcy, in admitting a proof under section 82 of the Act in relation to his remuneration and expenses incurred in the period whilst he acted as controller.

The decision

The main question before the Court was whether the Trustee had a right of indemnity for his remuneration and expenses incurred before the sequestration order was made.

The Court identified that, in contrast with the provisions which apply to a trustee in bankruptcy or a controlling trustee, the Act does not expressly deal with the payment of amounts on account of remuneration of, or expenses incurred by, a controller appointed under section 50.

The Court drew an analogy with the appointment by a Court of a receiver to assets of a company and observed that a controller appointed under section 50, like a receiver, is an officer of the Court. It is well established that a Court appointed receiver has a right of indemnity supported by an equitable lien over the assets over which he or she is appointed for his or her remuneration and expenses.

The Court held, following the same reasoning, that a registered trustee appointed under section 50 to take control of a debtor’s property has a right of indemnity secured by an equitable lien over the debtor’s property for his or her remuneration and expenses.

The amount of the Trustee’s remuneration and expenses incurred whilst controller was not determined by the Court. That question was referred by the Judge to a Registrar.

Conclusion

The Court’s power to appoint a registered trustee as controller of some or all of a debtor’s assets is a useful weapon which a creditor may seek to rely on before the final hearing of a creditor’s petition, particularly if there is evidence that suggests the debtor is likely to dissipate his or her assets to prejudice the interests of creditors.

A registered trustee appointed by the Court as a controller under section 50 is not, however, expressly entitled under the Act to be indemnified on account of his or her remuneration or for expenses incurred in connection with the appointment.

The decision in Jarvie appears to have confirmed that based on general principles a registered trustee appointed as controller does have a right of indemnity on account of remuneration and expenses, and that this is secured by an equitable lien against the debtor’s property. Now that this matter of principle has been confirmed it may open the door to more creditors seeking the appointment of a controller under section 50 as registered trustees will be more likely to accept appointments.

It should be noted, however, that the Act includes no provisions setting out a method for creditor approval of a controller’s remuneration. As a consequence it will be necessary at the end of an appointment for a controller to seek approval of his or her remuneration from a registrar of the Court. For the purpose of making such an application it will be important for a controller to keep detailed records of work done, time spent and expenses incurred and to be ready to justify these charges in the same type of manner which would apply in a court appointed receivership.

Cowell Clarke has significant expertise and experience in all aspects of bankruptcy law. If you need any assistance concerning this area or have any insolvency related queries, do not hesitate to contact us.

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