Funding bankruptcy trustees: not always a risky business

On 13 April 2017 the Full Court of the Federal Court of Australia delivered judgment in Low v Barnet (Trustee) [2017] FCAFC 60 where a creditor sought payment of a “risk premium” from the trustee in bankruptcy after successfully funding litigation with respect to a voidable transaction.

Background

Ms Low was the only creditor in the bankrupt estate. One of the issues which arose during the administration of the bankruptcy concerned the recoverability of two properties located in Kew, Victoria. Ms Low agreed to indemnify and fund the trustee’s pursuit of those properties which successfully resulted in Ms Low being paid the entirety of her provable debts with interest. She was also fully reimbursed for the monies she advanced to the trustee to pursue those properties.

Subsequently, Ms Low sought to recover from the trustee a further payment in the form of a ‘risk premium’ on account of the assistance she gave in funding the litigation. The trustee refused to make any such payment.

The decision

Section 109(10) of the Bankruptcy Act 1996 (Cth) (Act) provides that where, in any bankruptcy, property has been recovered under an indemnity for costs of litigation given by a creditor, the court may make “such orders as it thinks just and equitable” in relation to the distribution of property with a view to giving the indemnifying creditor an advantage “over others” in consideration for the risk assumed.

The Full Court refused Ms Low’s claim to a risk premium notwithstanding that she had clearly accepted significant risk in funding the litigation and expended significant monies (in excess of $700,000) in pursuing the bankrupt.

In reaching its decision the Full Court held that:

1. Ms Low was the only creditor of the estate and she alone was to be the beneficiary of the risks she took.
2. Ms Low had already been sufficiently rewarded by succeeding in her claims to be paid her proven debts plus interest. Creditors should not be able to make a profit out of the bankruptcy in return for “investing” funds and “taking risks”.
3. Ms Low’s claim did not fall within section 109(10) because, as a matter of statutory construction, that subsection was confined to circumstances where creditors were competing for funds. In the case of Ms Low, there were no other competing creditors.
4. The exercise of the Full Court’s discretion would nevertheless be contrary to purpose of the Act, which provides that a creditor is not entitled to receive, in respect of a provable debt, more than the amount of the debt and any interest payable.

The fact that Ms Low was the only creditor and made a full recovery of her proven debts were of significant relevance to the Full Court’s decision in refusing to order the payment of any “risk premium” out of the estate’s surplus funds.

If a creditor out of a pool of creditors seeks to indemnify a trustee but makes only a partial recovery then their prospects of succeeding in a similar application could be much greater.