Australia: What happens to a family provision claim in bankruptcy?

Upon bankruptcy, section 60(2) of the Bankruptcy Act 1966 (Cth) (Act) operates to protect those whom the bankrupt was suing, by staying the proceedings until such time as the trustee in bankruptcy elects whether to continue to prosecute the action or to abandon it. That election must be made within 28 days after the Trustee is put on notice of the proceedings. The rationale behind the section is to prevent the scenario wherein a costs order made against a party to the proceedings is rendered unenforceable by virtue of that party becoming bankrupt. As always, there are some exceptions, such as an action relating to personal injury, or the death of the bankrupt's spouse, de facto partner or family member. In these circumstances, the bankrupt may continue to prosecute those claims in their own name. In the recent case of Muir v Angeles [2020] NSWSC 1056, the Supreme Court of NSW was faced with the question of whether a family provision claim made by a bankrupt prior to his bankruptcy should be stayed under section 60(2) of the Act.

Background

In December 2018, the plaintiff, Ms Muir, made a family provision claim against the estate of her late father in the Supreme Court of NSW. As part of her claim, she sought a declaration that half of the proceeds of sale of a property owned by the defendant, Mr Angeles, were part of the notional estate of her father. Mr Angeles, filed a defence and a cross-summons in July and August 2019 respectively, wherein he made a family provision claim of his own, asserting that he had been the spouse of the deceased at the time of death. During the course of the proceedings, Mr Angeles filed a debtor's petition and declared bankruptcy. He then filed a submitting appearance to the Court, noting that he would "not take part in any future proceedings and [would submit] to the making of all orders sought, and the giving or entry of judgment in respect of all claims made."

On 28 February 2020, the Trustee in Bankruptcy wrote to Ms Muir noting that he was aware that the bankrupt was involved in the proceedings, and that pursuant to section 60 of the Act, the proceedings would be stayed until such time as he elected to pursue or discontinue them. On 16 April 2020, Ms Muir wrote to the Trustee contending that since 28 days had passed since the Trustee was made aware of the proceedings, and no such election had been made in this time, that the Trustee was deemed to have abandoned the claim. No response was received in relation to this letter. Accordingly, Ms Muir applied to the Court for an order that the proceedings had been abandoned by the Trustee pursuant to section 60(3), judgment in her favour, and an order dismissing Mr Angeles' family provision claim.

Issues for the Court

In determining the matter, the Court was required to relevantly decide:

1. Whether a claim for family provision could be considered an "action" within section 60(2) of the Act thereby requiring a stay?
2. What was the requisite form of notice which had to be given to the Trustee in Bankruptcy before they could elect to prosecute or discontinue the bankrupt's proceedings?

Is a family provision claim an "action" pursuant to section 60(2) of the Act?

Section 60(2) of the Act relevantly provides:

Section 60(5) defines "action" within the section to mean "any civil proceeding, whether at law or in equity".

"Civil proceedings" is defined in section 3(1) of the Civil Procedure Act 2005 (NSW) as "any proceedings other than criminal proceedings".

In determining the issue, Hallen J first considered whether the scope of section 60(2) was confined to an action which vests in a Trustee in Bankruptcy by virtue of section 58 of the Act. Section 58(1) of the Act provides that all property of the bankrupt vests with the Official Trustee when a debtor becomes a bankrupt. Property ordinarily includes a "chose in action", that is, the right of a bankrupt to pursue an action.

His Honour held, citing a body of authorities, that a bankrupt's claim for family provision is a personal, bare/non-assignable right of the bankrupt, and accordingly will not vest in the trustee in bankruptcy under section 58 of the Act. That is, it is not a type of claim that is taken away from the bankrupt and put into the hands of the Trustee, as is the case with, for example, a commercial dispute or debt recovery proceedings.

Notwithstanding this conclusion, Hallen J held that the application of section 60(2) operated independently from section 58, and accordingly:

Accordingly, as none of the exceptions provided for in section 60(4) of the Act applied to permit Mr Angeles to continue to litigate the claim in his own name (because the family provision claim was not an action for personal injury or in relation to the death of a partner), a statutory stay of the proceedings came into operation upon Mr Angeles' bankruptcy. It was therefore necessary for the Trustee to elect to either take over the family provision claim or to abandon it.

Notice requirements

Having determined that the family provision proceedings were stayed under section 60(2), the Court then considered whether the Trustee in Bankruptcy had abandoned the claim.

Under section 60(3) a Trustee has 28 days "after notice of the action is served upon him or her by a…party to the action" to make an election to prosecute or discontinue an action. If a Trustee fails to make an election within this time, they will be considered to have abandoned the action.

Hallen J outlined at [104] that any notice to the Trustee must include the following:

1. a statement to the effect that the notice is given pursuant to section 60 of the Act;
2. a recitation of the existence of the action involving the bankrupt;
3. a statement identifying the party giving the notice as a party to the legal proceedings; and
4. a statement requiring the Trustee to make a written election within the 28-day time period, noting that failure to provide such an election will result in the Trustee being deemed to have abandoned the action.

Whilst in this case, no such formal notice was given to the Trustee, the Court held that the letter from Ms Muir to the Trustee dated 16 April 2020, was sufficient to alert the Trustee of the need to make such an election. Accordingly, and given that the Trustee in Bankruptcy was afforded "ample opportunity" to make the election, the Court held that the family provision claim had been abandoned by the Trustee and dismissed the claim.

Takeaways

There are at least four key takeaways from this case.

1. The definition of "action" in section 60(2) of the Act will be interpreted broadly to encompass any civil proceedings commenced by a bankrupt prior to their bankruptcy, and a bankrupt will lose the right to continue to prosecute a family provision claim.
2. There are very limited exceptions as to which types of claims a bankrupt may continue to prosecute in their own name.
3. Trustees in Bankruptcy need to make a timely and informed assessment of the merits of continuing any claims brought a bankrupt prior to their bankruptcy. They also need to ensure that they respond to any notice issued by another party within the 28-day time period at the risk of being deemed to have abandoned the claim.
4. Conversely, if you are involved in proceedings commenced by a party who later becomes bankrupt, you should ensure that you issue an appropriate notice on the Trustee in Bankruptcy as soon as possible, to ensure that you do not incur further costs in litigating a claim which a Trustee may later abandon.

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.