High Court considers whether trust property vests in trustee in bankruptcy

Boensch v Pascoe [2019] HCA 49

The High Court has recently considered the question of whether, and in what circumstances, property held by a bankrupt on trust for a third party vests in the trustee in bankruptcy pursuant to s 58 of the Bankruptcy Act 1966 (Cth): Boensch v Pascoe [2019] HCA 49. The decision was handed down late last year, providing further guidance for trustees following Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 93 ALJR 807.

Mr Boensch held land on trust for his children and subsequently became a bankrupt. The trustee in bankruptcy lodged a caveat claiming a legal interest in this property, on the basis that whatever beneficial interest the bankrupt might have in the property would vest in him as trustee in bankruptcy and that was enough to support a caveat.

Mr Boensch claimed compensation against the trustee in bankruptcy under s 74P(1) of the Real Property Act 1900 (NSW) for lodging or maintaining a caveat without reasonable cause.

High Court decision

The High Court unanimously dismissed the former bankrupt’s appeal from the Full Court of the Federal Court and held that his right of indemnity as trustee was a sufficient interest such that the property held by the bankrupt on trust for third parties vested in the trustee in bankruptcy. That is, provided the bankrupt has a valid beneficial interest in the trust property, the trust property will vest in the trustee in bankruptcy subject to the equities to which it is subject in the hands of the bankrupt.

For these purposes, a valid beneficial interest means a vested or (subject to applicable laws as to remoteness of vesting) contingent right or power to obtain some personal benefit from the trust property. In this case, Mr Boensch’s right to retain the property as security for satisfaction of his right of indemnity as trustee was a sufficient beneficial interest in the trust property.

Conversely, the property may not pass where the bankrupt has no valid beneficial interest in the property. Ordinarily, the burden of proving the absence of such a beneficial interest is on the bankrupt. On the evidence, Mr Boensch failed to discharge this onus that any beneficial interest would be set off against any benefit he obtained from living in the property free of rent.

Practically, the trustee in bankruptcy was entitled to be registered as proprietor of the property and there was a sufficient basis to sustain a caveat. The trustee in bankruptcy was warranted in lodging a caveat, provided that the caveat was lodged on the basis of an honest belief on reasonable grounds that the bankrupt had an extant beneficial interest in the property, including a beneficial interest by way of right of indemnity. Thus the former bankrupt was not entitled to damages for a caveat lodged without reasonable cause.

Consideration of other issues

In relation to the description of the caveat, Bell, Nettle, Gordon and Edelman JJ doubted that the expression “Legal Interest pursuant to the Bankruptcy Act 1966” was adequate to describe an equitable estate vested in bankruptcy pursuant to s 58(2) by reason of the bankrupt’s right of indemnity. Their Honours considered that the use of the word “legal” in this context was apt to mislead and the expression as a whole did not afford sufficient information to determine whether any dealing with the property would adversely affect the interest claimed.

However, this deficiency did not of itself demonstrate the absence of reasonable cause to lodge and not withdraw the caveat, at least where the caveat did not overstate the interest sought to be protected.

Kiefel CJ, Gageler and Keane JJ reflected on the Full Court’s decision not to determine the issue of whether Mr Boensch had, at the time of his bankruptcy, an entitlement in equity to be indemnified. Their Honours considered the principle sometimes referred to as “judicial economy” that an appellate court should confine itself to determining only those issues which it considers to be dispositive of the justiciable controversy raised by the appeal before it. Their Honours stressed that intermediate courts of appeal should not feel compelled to treat determination of non-dispositive issues in appeals before them as the norm. This promotes judicial efficiency by narrowing the scope of issues for determination and ensuring pronouncements by appellate courts on contested issues of law are limited to those that have the status of precedent.

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