Call in the experts: Bankrupt’s attempts to sell charged assets through CommSec rejected by the Federal Court in favour of liquidator appointment

Bankruptcy litigation can stem well beyond the primary bankruptcy proceedings. Continued litigation may be born out of disputes between bankrupts, bankruptcy trustees and other interested parties in respect of methods of asset liquidation.

Consequently, the Court will often appoint a qualified person such as a liquidator to ensure bankrupt estate assets obtain their value when sold, maximising satisfaction of any judgement debt. In some instances, as demonstrated by the subject of this article, Scott (Trustee) v Stolyar (2023) in the matter of Stolyar (Bankrupt) [2023] FCA 1671 (Stolyar), the bankrupt party may dispute appointment of a liquidator or receiver, leading to subsequent litigation beyond the primary bankruptcy proceedings.

Background

• The bankruptcy trustee of the Respondent (Ms Stolyar) on behalf of the Respondent’s son and his wife brought bankruptcy proceedings against the Respondent in 2019 to recover various assets for the bankrupt estates.
• Substantially all of the Applicant’s claims were upheld and orders were made in favour of the Applicant for the payment of the sum of $5,544,782.46.
• The Respondent had all avenues of her appeal of the primary judgement rejected by the Court.
• The orders given by the Court included a charging order over the Respondent’s shares in CTP (Shares) to secure payment of the debt to the respondent pursuant to Section 106(1)(c) of the Civil Procedure Act 2005 (NSW).
• Notably, these shares were relatively illiquid and gradually diminishing in value.
• Section 126(1)(a) of the Act enables such a charge to be placed over shares in public companies, while section 126(5) enables the judgement creditor to claim relief to which it would have been entitled had the charge been made in the judgement creditor’s favour. In application, this means the Applicant in this case has the same rights as any other equitable chargee, including the ability to sell the charged assets, being the Shares.
• The Shares were assessed as being relatively illiquid and declining in value.
• The charging order enabled the Applicant to secure the judgement debt made in its favour in the primary proceedings by selling the Shares.
• In the secondary proceedings, the Applicant sought to have a receiver from Deloitte who was a qualified accountant, registered liquidator and registered trustee in bankruptcy appointed to attend to sale of the Shares.
• The Respondent and Applicant agreed the Shares needed to be sold to satisfy the judgement debt, but they disagreed on the appointment of the liquidator for their sale, leading to these secondary proceedings.

The Application

In September 2023, the Applicant brought fresh proceedings against Ms Stolyar for enforcement of its charge upon the Shares.

The Applicant sought an order for judicial sale of the Shares. Pursuant to Galbally’s remarks in Mathison Nominees v Aero Developments, special circumstances do not need to be shown by the Applicant for the Court to grant this remedy. Judicial sale is generally achieved through appointment of a liquidator.

Ms Stolyar opposed the application, contending that the Shares ought to be sold through CommSec, and that she would arrange the sale. Ms Stolyar argued CommSec could sell the Shares faster and for lower fees than a receiver or liquidator like that the Applicant sought to have appointed. She claimed that any delay in sale of the Shares would cause unnecessary diminishment of their value.

In the alternative, Ms Stolyar claimed her lawyers would sell the Shares at no cost, but there was no evidence to support this claim and it was given little weight by the Court in its deliberations.

Notably, CommSec had effectively stated to Ms Stolyar that they were not willing to take any further instructions from her, so would be unable to sell the Shares.

Further, Ms Stolyar had failed to comply with asset preservation orders in the past.

The Order

The Court rejected Ms Stolyar’s arguments on the basis:

1. CommSec had refused to sell the shares on Ms Stolyar’s behalf;
2. Notwithstanding CommSec’s refusal to sell the Shares, the illiquid nature of the Shares made them more suited to a qualified person such as a receiver or liquidator as they were likely to be difficult to sell as a large parcel of shares; and
3. The purported time-saving associated with use of CommSec over a liquidator to sell the Shares may be unfounded as the illiquid nature of the Shares would make a quick sale by CommSec difficult and unlikely.

The Court ordered appointment of the receiver to sell the Shares, notwithstanding the additional costs of the receivership.

Key Takeaway

The Court will carefully consider the nature of the charged assets being sold when appointing a party to conduct their sale. They will refuse to appoint a party which they are not certain is capable and qualified to liquidate the specific charged assets and maximise the return for their sale in satisfaction of judgement debts. The Court will not risk de-valuing assets in liquidation to hasten sale or minimise fees associated with their liquidation.

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Authored by:

Susan Forrest, Partner
Matthew Shackleton, Solicitor