Ordinarily, a creditor that has a "provable debt" will proceed against a debtor who has been made bankrupt via the proof of debt process in the bankrupt estate. However, in certain circumstances, leave may be granted to a creditor to commence proceedings against the bankrupt debtor pursuant to section 58(3) of the Bankruptcy Act 1966 (Cth) (BA).

In Mableson v Tarbotton, in the matter of the bankrupt estate of Tarbotton [2022] FCA 1433, the Liquidator of ACN 050 019 960 Pty Ltd (in liq) (Company), successfully applied for leave to commence proceedings against the directors of the Company, Mr Tarbotton and Mr Vieceli, who had each become bankrupt, for breach of insolvent trading laws under section s588G of the Corporations Act 2001 (Cth) (CA) and for relief under section 588M(2) CA,1 as against:

  1. Mr Tarbotton – if successful, there would be a debt due by Mr Tarbotton to the Company under section 588M(2) of the CA, and the Liquidator could then lodge a proof of debt in the bankrupt estate; and
  2. the Trustee of the Bankrupt Estate of Mr Vieceli – although Mr Vieceli had been personally released from any liability in respect of the provable debt due to his discharge from bankruptcy, by the operation of the release under section 153 of the BA, his bankrupt estate remained liable.

Relevantly, in this case, the Liquidator argued, and the Court accepted, that the factual and legal issues were not issues that should be determined through the proof of debt process in the respective directors' bankruptcies. Instead, the Court determined that a finding of liability by a judgment against the directors or their bankrupt estates was required in order to trigger an insurance policy response under the relevant terms of the policy, the rights under which vested in the bankruptcy trustees under section 117 of the BA.

The relevant factors the Court will generally consider in an application for leave to proceed pursuant to section 58(3) of the BA, and the applicability of those factors in the above-mentioned case, are:

  1. The position of the bankruptcy trustee. In Tarbotton, the trustee did not oppose or propose to be heard in respect of the leave application.
  2. The terms of any insurance policy. In Tarbotton, it was considered necessary to obtain judgment against the insured for the policy to respond.
  3. The nature and merit of the claim. The issues involved in Tarbotton were more appropriate to be dealt with by way of court proceedings following consideration of the Liquidator's evidence rather than through the proof of debt process. The issues included complex factual and legal issues in relation to:
    • the insolvency of the Company;
    • whether the directors suspected insolvency during the relevant period;
    • the availability of any defences; and
    • the construction and application of the insurance policy.
  1. The benefit to creditors. In Tarbotton, it was held that a successful judgment for the insolvent trading claim which enlivened the insurance policy would result in recoveries of $7million to the Company which thereby provided a greater return to unsecured creditors, who were owed an aggregate amount of $40M.
  2. The usual undertaking being provided. The usual undertaking is that the applicant will not take any step to enforce any money judgment made in their favour against the respondent in the proceedings without prior leave of the Court. In Tarbotton, the enforcement of the judgment was to be limited to the policy ceiling.

Other factors which may be relevant, but that did not arise in the Tarbotton case, include:

  • the stage to which the proceedings have progressed;
  • the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt;
  • whether the claim is in the nature of a test case for the interest or large class of potential claimants;
  • whether the grant of leave will result in further litigation;
  • whether the cost of the hearing will be disproportionate to the size of the bankrupt estate;
  • the risk of delay; and
  • whether pre-trial procedures such as discovery and interrogatories are likely to be required or beneficial.2

The Restructuring & Insolvency team at Gilchrist Connell are well versed in advising liquidators, bankruptcy trustees and insurers on applications under section 58(3) of the BA Please do not hesitate to contact us if you would like to discuss the possibility of such an application.

Footnotes

1 A claim for breach of section 588G CA and compensation under section 588M CA has been held to be a claim in respect of a "provable debt" as defined under section 82 BA: Taylor v Rudaks [2007] FCA 1962; (2007) 166 FCR 451 at [34], [36]; Markel Syndicate Management Limited v Taylor as Liquidator of Heading Contractors Pty Ltd (in liq) [2021] FCAFC 198 at [7(6)].
2 Hillig, in the matter of Battaglia [2019] FCA 2191 [8]; Cassegrain v Gerard Cassegrain & Co Pty Limited (in liq) [2012] NSWCA 435 at [33].

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.