Does property held by a bankrupt on trust for another vest in the bankruptcy trustee?

On 13 December 2019, in Franz Boensch as Trustee of the Boensch Trust v Scott Darren Pascoe[1] the High Court unanimously dismissed an appeal from a judgment of the Full Court of the Federal Court of Australia, in which the appellant sought compensation from his former trustee in bankruptcy pursuant to section 74P of the Real Property Act 1900 (NSW) (RPA). The decision has clarified the position for trustees.

The proceedings were brought by Franz Boensch (Mr Boensch) as trustee of the Boensch Trust against his former trustee in bankruptcy, Mr Pascoe.

Background

Mr Boensch was the registered owner of a property in Rydalmere, New South Wales (the Property), which he claimed was held by him on trust for his children. Following the making of a sequestration order against Mr Boensch in August 2005, Mr Pascoe was appointed as Mr Boensch’s trustee in bankruptcy.

Upon his appointment, Mr Pascoe sought advice from Counsel and, acting on that advice, immediately lodged a caveat over the Property. He believed that there were strong prospects of defeating the trust claim as either a sham, or a transfer of property to defeat creditors.

Mr Pascoe then commenced proceedings for relief under section 120 (undervalued transactions) or in the alternative, section 121 (transfers to defeat creditors) of the Bankruptcy Act 1966 (Cth) (the BA). However, those proceedings were ultimately dismissed on appeal, and in a special leave application to the High Court, with the Court’s ruling that the trust was validly constituted.

Supreme Court decision

Following his discharge from bankruptcy, Mr Boensch commenced proceedings, alleging Mr Pascoe had lodged, and later refused or failed to withdraw the caveat without reasonable cause, and therefore claimed an entitlement to compensation pursuant to section 74P of the RPA.

At first instance, Justice Darke ruled in favour of Mr Pascoe on the basis that section 58(1) of the BA operates in equity to vest such property in the trustee in bankruptcy subject to the trust, and that the trustee thereby acquires a caveatable interest in the Property.

In reaching his conclusion, His Honour considered the fact that Mr Pascoe honestly believed—

• as Mr Boensch’s trustee in bankruptcy, he acquired an interest in the Property, being property registered in the name of the bankrupt;
• on the basis of legal advice and his own investigations there were reasonable prospects that the trust alleged by Mr Boensch in respect of the Property would be held invalid, or alternatively declared void as against him under the BA; and
• even if Mr Boensch held the Property on trust for others, Mr Boensch may have a right of indemnity in relation to the Property giving him a beneficial interest in the Property that, upon the making of the sequestration order, had vested in Mr Pascoe as trustee in bankruptcy and so supported a caveat.

His Honour also considered the two-step test established by Beca Developments Pty Ltd v Idemoneo (No 92) Pty Ltd[2], and determined that, because Mr Boensch had not proven Mr Pascoe lacked a caveatable interest (the first step), it could not be said that Mr Pascoe had lodged or maintained the caveat without “reasonable cause” (second step) within the meaning of section 74P(1) of the RPA. Further, even if Mr Pascoe did not have a caveatable interest, he nevertheless held an honest belief based on reasonable grounds that he had a caveatable interest.

Mr Boensch appealed to the Full Court of the Federal Court, after the Court of Appeal of the Supreme Court of NSW dismissed an earlier appeal as incompetent for want of jurisdiction.

Full Court decision

The Full Court dismissed Mr Boensch’s appeal, stating that the primary judge was right to conclude the Property vested in Mr Pascoe upon the making of the sequestration order and conferred on Mr Pascoe a caveatable interest in the Property. It further held that there was no reason to depart from the Beca Developments two-step test of reasonable cause.

High Court decision

By grant of special leave, Mr Boensch appealed to the High Court.

After examining a string of common law authorities, the High Court unanimously held that, where property is held by a bankrupt on trust for another, then, upon the making of a sequestration order, the property will pass to the bankrupt’s trustee in bankruptcy (subject to the trust), unless the bankrupt has no valid beneficial interest in the property.

The Court once again saw no reason to depart from the Beca Developments test of reasonable cause. It stated that, regardless of the position of fact (Mr Pascoe indeed having a caveatable interest), it was also apparent that Mr Pascoe had an honest belief on reasonable grounds that Mr Boensch had a beneficial interest in the property. Consequently, Mr Pascoe was thereby warranted in lodging his caveat.

Ultimately, the High Court concluded that Mr Pascoe did not lodge or refuse to withdraw the caveat without reasonable cause, because—

• there was no reason to doubt that, upon the making of the sequestration order, the Property vested in equity in Mr Pascoe by reason of Mr Boensch’s right of indemnity and, therefore, that Mr Pascoe had a caveatable interest in the property; and
• there was no reason to doubt Mr Pascoe honestly believed on reasonable grounds that the Property so vested, either on the basis that the trust was void or on the basis of Mr Boensch’s right of indemnity.

Accordingly, Mr Boensch’s Appeal was dismissed with costs.

Key takeaway

This case provides useful guidance to bankruptcy trustees considering the circumstances under which they can lodge a caveat over real property held by a bankrupt. In particular:

Authored by:

Scott Couper, Partner
Laura Fraser, Solicitor

[2] (1990) 21 NSWLR 459 at 474-475 per Clarke JA, 479-480 per Waddell A-JA, see also at 463 per Kirby P.