Abstract

Bankruptcy - Preferential Allocation of Insurance Moneys

Bankruptcy - Effect of Discharge

Article

Bankruptcy – Effect of Discharge on Claimant’s Priority to Insurance Moneys

The discharge of an insured from bankruptcy pursuant to the Act does not affect any right of indemnity pursuant to the insurance which is vested in the Trustee pursuant to s 117 of the Act, the right to seek indemnity from the insurer, and the claimants’ entitlement to its benefits. It does not affect a claimant’s rights as creditor to prove in the administration of assets vested in the trustee, but unrealised at the time of discharge.  The mere release of the debtor from a debt does not mean that the debt did not remain a provable debt in the bankruptcy that has been discharged. A creditor can lodge a proof of debt after the discharge as the administration may not have ended then, particularly if it arose by operation of the Act at the expiration of three years: Tarea Management (North Shore) Pty Limited (In liq) v Glass (1991) 28 FCR 93.

Further, if, after the discharge additional assets that vested in the trustee by the Act came into the trustee’s hands, a discharged debt is a liability of the estate that is payable out of it because the release operates only to release the bankrupt and does not release the estate:  Re Kavich;  Kavich v Official Trustee in Bankruptcy (1995) 58 FCR 82. Accordingly, if the bankrupt has a cause of action that vested in the trustee and on which judgment has not been obtained at the time of discharge under s 153, the trustee may pursue the action, and any money or assets recovered must then be distributed among the creditors with provable debts. The intervening discharge and release of the bankrupt cannot affect the existing rights of the trustee and creditors in respect of, at least, the property that vested before the discharge: Tapp v LawCover Insurance Pty Ltd [2013] FCA 35.

 

Preferential Allocation of Insurance Moneys in Bankruptcy

Section 117 of the Bankruptcy Act 1966 (Cth) creates a preferential treatment for the third party creditor over all other creditors segregating the proceeds of the policy from amenability to distribution among the general body of the bankrupt’s creditors and obliges the trustee to pay those proceeds to the creditor whose claim against the bankrupt was insured: AssetInsure Pty Limited v New Cap Reinsurance Corporation Limited (In liq) (2006) 225 CLR 331. It is a separate and distinct provision that vests property of the bankrupt in the trustee in a way derogating from the general principle that the property of the bankrupt be equally distributed to the general body of creditors. The trustee has power to deal with a right to indemnity under insurance policies to which the setion applies only to pay the particular creditor in preference to all other creditors: Anthony Hordern & Sons Limited v The Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1; Plaintiff M70/2011 v Minister for Immigration and Citizenship (2011) 244 CLR 144. He or she is an officer of the Court and must bring reasonable skill to the performance of his or her duties: Adsett v Berlouis (1992) 37 FCR 201; Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 560D-G.

The general law relating to trustees applies, save to the extent that the Act modifies it:  Adsett 37 FCR at 209. A trustee must exercise judgment, so as to save the estate unnecessary expenditure of money, but must also discharge the public duty imposed by the Act conformably with the obligation to administer the estate, to maximise satisfaction of the creditors’ claims and any possible surplus for the bankrupt: Citicorp  at 560.  

If a trustee is asked to assign a claim or cause of action vested in him or her, he or she must take a practical approach,  and unless the claim is frivolous, vexatious, an abuse of process, or has no reasonable prospect of success, if the bankrupt or a third party is willing to prosecute the action and the trustee is not, the trustee ordinarily will assign or sell the right to bring the proceedings, perhaps on terms of receiving some of the proceeds.  Citicorp  at 562B-565E, the trustee; Re Nguyen;  Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320. The trustee should act in a way that avoids unnecessary costs and delay unless there are serious controversial issues, as to which the trustee should apply to the court for directions: Tapp v LawCover Insurance Pty Ltd [2013] FCA 35.