S.60 of the Bankruptcy Act means that (in most cases) a Plaintiff who becomes bankrupt after issuing proceedings loses control of that action to his trustee in bankruptcy. But what if the Plaintiff has taken action as trustee of a trust, where the benefit would not be available to creditors in his bankruptcy?

The Supreme Court of Western Australia recently determined this issue as a preliminary matter in the case of Duckworth v Water Corporation [2012] WASC 30.

The Plaintiff, Mr Duckworth, issued proceedings in December 2010 as "trustee of the Ocean Farms (OF) Trust", in which capacity he said he entered into contractual arrangements with the Defendant. The Defendant disputed that Mr Duckworth was acting as trustee of the OF trust and argued that Mr Duckworth had entered into those contractual obligations in his personal capacity.

A sequestration order was made against Mr Duckworth in September 2011. The effect of s.60(2) is that any actions brought by a bankrupt vest in the trustee in bankruptcy and are stayed pending that trustee's election to continue or abandon the action.

Mr Duckworth argued that because he was acting as trustee of the OF Trust, any damages awarded would not go to the bankrupt estate by reason of s.116(2)(a). Did s.60(2) then operate to stay such an action?

An earlier decision of Gray J in the Federal Court in Re: Lofthouse [2001] FCA 25 found that s.60(2) operated to stay proceedings brought by a trustee of a trust who subsequently became bankrupt. Having considered the history of the law of bankruptcy dating back to 1604, Justice Edelman in Duckworth concluded that the decision in Re: Lofthouse should be followed.

Accordingly, the claim brought by Mr Duckworth "as trustee of the OF trust" was stayed by operation of s60(2) of the Act, pending an election by Mr Duckworth's bankruptcy trustee whether to continue or abandon the action. If abandoned, although that particular action may end, the cause of action itself may yet survive to be assigned at a later date by the bankruptcy trustee.

Whilst it might be questioned whether the operation of s.60(2) of the Act could have been intended to affect actions brought by bankrupts as trustees, particularly when s.116(2)(a) expressly excludes trust property from sequestration, legal and insolvency practitioners should be aware of the implications of the decision and the potential for a legislative review of the Act in light of it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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