In the recent decision of Tayar v Feldman & Anor  FCA 1432, the Federal Court of Australia considered an application by two bankrupts seeking orders pursuant to section 153B of the Bankruptcy Act 1966 (Cth) (Act) that their bankruptcies be annulled or, in the alternative, that the sequestration orders be reviewed. At the heart of the application was an argument by the applicants that, on their interpretation of the operation of orthodox Jewish law, the underlying debt that grounded the sequestration orders was not presently owing as it was subject to a Mesadrin, being an investigative process and repayment plan effected by a rabbinic tribunal.
There are several decisions which traverse the intersection of secular and orthodox law. However, this decision was the first in Australia to do so in the bankruptcy context. Gilchrist Connell acted for the bankruptcy trustees who were granted leave to appear as an "interested person" pursuant to rule 2.13 of the Federal Court Rules 2011 (Cth). The role of the bankruptcy trustees in this case was limited to advancing submissions in relation to the operation of the Act and, if the sequestration orders were set aside, seeking orders for the bankruptcy trustees' costs to be paid. At the time of writing this article, an appeal has been filed by the bankrupts.
During 2010, the parties entered a series of complicated commercial transactions connected with the Yeshiva Centre in Bondi, NSW. As part of the arrangement to advance funds, five parcels of land owned by the bankrupts and others were pledged to the petitioning creditor. That land was to be returned if the advances were repaid1. Several disputes arose between the parties. Central to the dispute was the petitioning creditor's claim that the advances he had made had not been repaid by the bankrupts2.
On or about 4 March 2013, the petitioning creditor and the bankrupts entered into an agreement to refer the disputes to arbitration3. Both the petitioning creditor and bankrupts are orthodox Jews, specifically part of the Chabad Lubavitch movement. Those that adhere to this movement typically elect to have commercial disputes first determined by arbitration in the Beth Din4 having regard to principles of Jewish law.5. This occurred here, and the Beth Din concluded that the bankrupts owed the petitioning creditor a debt of over $1.5million, and delivered written reasons supporting that conclusion (Debt).
Various (failed) attempts were made by the petitioning creditor to secure payment of the Debt from the bankrupts. The petitioning creditor then received permission, a common step in the orthodox Jewish community, to enforce the Debt, which ultimately led to the sequestration orders being obtained against the bankrupts. At the hearing "de novo" of the sequestration orders, the bankrupts argued that a Mesadrin6 was entered to deal with what they contended was a "disputed" Debt. The petitioning creditors argued that no such Mesadrin existed.
The Court observed that "[t]he question of whether the parties had agreed to and subsequently engaged in a Mesadrin [was] at the heart of the grounds of opposition."7 The Court was not satisfied that a Mesadrin existed.
This was informed by a number of findings:
- there was no evidence about who constituted the tribunal for the purpose of determining the Mesadrin8;
- advice was provided by another rabbi, on an anonymous basis, to one of the bankrupts that a Mesadrin had been reached; however, that was advice only provided to the bankrupts and not communicated to the petitioning creditor. The Court accepted the evidence of the petitioning creditor that he was not aware that a tribunal was ever appointed for the purpose of a Mesadrin9; and
- any irregular payments made by the bankrupts to the petitioning creditor's wife, from time to time, did not lead to a conclusion that there was a Mesadrin. There was no evidence of the payments adduced by the bankrupts to enable the Court to draw a conclusion that the payments were made pursuant to a Mesadrin10.
The Court concluded that, whilst the Mesadrin process may be favoured by members of the Orthodox Jewish community, it was not obligatory. The Court observed that there was no bar or barrier to a creditor approaching a secular Court for the purposes of enforcing and pursuing the payment of an award given by a Beth Din11.
Bankruptcy trustees are often forced to navigate the relevance of underlying disputes in the administration of bankrupt estates particularly where their appointment follows a lengthy historical dispute matrix between the bankrupt and the petitioning creditor. This is compounded where that dispute is overlaid by an interplay between the operation of secular and religious laws.
There are a few implications that emerge from this decision that will be useful for Bankruptcy Trustees navigating any challenge made to the sequestration orders or applications to annul bankruptcy. These include:
- Seeking early insolvency specialist advice to ascertain what preservation steps are necessary or appropriate in the context of a challenge to the sequestration order (of which the Bankruptcy Trustee is not necessarily a party);
- Exercising caution in incurring ongoing professional fees in the administration of the bankrupt estates whilst legal proceedings are "on foot" seeking to set aside the sequestration orders or annul the bankruptcy;
- Considering the bankrupt/s compliance with the Act and arrange for statutory notifications to AFSA in respect of any non-compliance;
- In conjunction with your legal representatives, considering the extent of your role in the legal proceedings seeking to set aside the sequestration orders/annul the bankruptcy; and
- In conjunction with your legal representatives, considering the most prudent approach to deal with incurred remuneration in the context of the legal proceedings.
1 Tayar v Feldman & Anor 
FCA 1432 at  per Markovic J
2 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J
3 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J
4 A Jewish arbitral tribunal (or Court) comprised of three rabbis.
5 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J
6 A process by which a Beth Din investigates the assets and liabilities of a debtor to determine how the amount owed should be paid and what assets the debtor can retain, a form of "repayment plan" or "instalment plan": Tayar v Feldman & Anor  FCA 1432 at  and  per Markovic J.
7 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J.
8 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J.
9 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J.
10 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J.
11 Tayar v Feldman & Anor  FCA 1432 at  per Markovic J.
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.