The case of Jess v McNiven in the matter of McNiven (No 2) [2022] FCA 446 has set an important legal precedent in the realm of bankruptcy law, especially regarding trustee’s interests in bankrupt estates. In particular, Anastassiou J concluded that there could be no estoppel against the vesting provisions of the Bankruptcy Act 1996 (Cth) (‘Bankruptcy Act’) and that the claim for equitable estoppel based on alleged representations by trustees cannot be utilised.
Firstly, what is ‘estoppel’?
Simply put, the concept of estoppel is a judicial doctrine which prevents (estops) a party from going back on their promise. Estoppel is usually argued when one party has relied upon a promise made by the other party to their own detriment. In this case, the McNivens argued that they relied on representations made by the trustees that they would not realise their property, and hence tried to ‘estop’ them from doing so.
Facts of the case
Mr and Mrs McNiven (McNivens) jointly owned two properties, residing in one and renting out the other. In 2005 Mr McNiven invested in a Timbercorp Projects Package and then in 2007 invested in a failed joint venture agreement with Anylock to develop property. The McNivens financial problems culminated in 2008 and 2009 where they fell into arrears on their loans and investments and received multiple letters of default from creditors.
Start of financial troubles
In early 2009, the McNivens entered into another agreement with Anylock where they would borrow $750,000 for their repayments and Anylock would receive a mortgage over the properties. In accordance with these terms, Anylock lodged a caveat over the properties in July 2009. The McNivens financial situation deteriorated further with increasing frequency of default letters and repayments. As a result, they each lodged a debtor’s petition which was accepted on 25 November 2010 (Mrs McNiven) and 24 December 2010 (Mr McNiven). The trustees then registered caveats over both the properties. The Anylock transactions created an assumption that there was no equity in the properties.
Proposal of estoppel argument
The McNivens allege that the Trustees did not take any steps to realise the Properties – and thereby made representations to that effect by conduct, silence and inaction – from December 2010 to March 2018 when the trustees asked the McNivens to vacate their properties. This came after the trustees tried investigating the validity of the Anylock transactions which seemed to suggest limited equity available in the properties. Following this, Mr and Mrs McNiven were discharged from bankruptcy on 25 December 2013 and 6 March 2014 respectively on the basis that they failed to provide information on their property transactions with Anylock. The trustees sent advice to the McNivens where (from their understanding) it seemed the trustees would not be selling their properties and the McNivens relied on this as an express representation by the trustees that they would not seek to realise their properties.
Anylock settlement
Over the subsequent years, the trustees continued to investigate the Anylock mortgage however, they did not discover any evidence upon which to challenge the validity of, or set aside, those transactions. Following some public examinations made by liquidators of Timbercorp wherein the Anylock mortgage was further investigated, there was a settlement of Anylock’s claims and Anylock agreed to withdraw its caveats over the Properties on 1 April 2016.
Meanwhile, the McNivens contested that they had no idea of the settlement, however
Anastassiou J contested this through analysing the without prejudice communications. Following these unsuccessful negotiations between the trustees and the McNivens, the trustees then became the registered proprietors of the properties on 21 December 2017. On 7 December 2018 the trustees commenced proceedings against the McNivens after they refused to vacate their properties, rather using the estoppel defence for their support.
Legal issues
- The estoppel claim: whether the Trustees are estopped from realising the
Properties, including the threshold question of whether there can be an estoppel in the face of the provisions of the Bankruptcy Act. - The constructive trust claim: whether the McNivens are beneficiaries of a
constructive trust over the Properties - The unjust enrichment claim: Third, if the estoppel and constructive trust claims fail, whether the McNivens are entitled to any interest in, or the proceeds of sale from, the Properties as a result of the equity payments and their personal efforts having regard to the principles of unjust enrichment.
Decision
Estoppel claim
The main question of consideration was simple: whether there can be an estoppel which operates to prevent the Trustees from realising their interests in the Properties under the Bankruptcy Act.
In determining whether there can be an estoppel against the operation of a statute,
Anastassiou J cited the approach taken by Hargrave J in Equuscorp Pty Ltd v Belperio [2006]. His Honour stated that “not all statutes which declare a transaction to be unenforceable or void will operate so as to preclude the establishment of an estoppel against a party seeking to rely upon the statutory invalidity”.
In particular, Anastassiou J concluded that whether the estoppel in the face of a statute can succeed will depend on the
- nature of the statute
- the underlying social policy it seeks to achieve, and
- the purpose of the relevant provisions against which the estoppel purports to
operate.
The McNivens relied heavily on O’Brien v Sheahan where Carr J held that representations gave rise to an estoppel against the trustee, such that the trustee was estopped from realising a property registered in the name of the bankrupt. However, Anastassiou J stated that this decision did not establish any generally applicable principle of law relating to the availability of a claim in estoppel in the face of the statutory provisions.
His Honour concluded that there can be no estoppel against the operation of the relevant provisions of the Bankruptcy Act because it would have the "effect of contradicting what the Bankruptcy Act specifically requires a trustee to do; namely to realise the assets of the bankrupt estate for the benefit of unsecured creditors". Furthermore, His Honour contended the extensive nature of the Bankruptcy Act which covered issues ranging from duties and powers of trustees to the realisation of property for the benefit of creditors.
Anastassiou J concluded that the estoppel claim the McNivens were contending would be inimical to the objects of the Bankruptcy Act, especially in regard to creditors trying to realise assets, and thus should not apply as their defence.
Constructive trust claim
The McNivens contended that it would be inequitable for the Trustees to assert beneficial ownership of the Properties. In particular, the McNivens say that by reason of them having made all the loan repayments in relation to the mortgages registered over the Properties and otherwise repairing, maintaining and improving the Properties, they have acquired a beneficial interest in the Properties.
However, Anastassiou J held that having already reached a view that the conduct of the Trustees was not unconscionable, and that since the estoppel claimed failed on this basis, so too must this constructive trust claim.
Unjust enrichment claim
His Honour held that any contributions made by the McNivens towards their properties should be offset by the rental income earned by the McNivens and that the trustees are not obligated to make contributions to the McNivens out of the sale proceeds.
This decision has major implications regarding the role of the bankruptcy lawyer in matters surrounding the availability of estoppel of properties belonging to the bankrupt. In particular, it seems to provide more powers for creditors (and the lawyers representing them) in realising assets given the overarching power the Bankruptcy Act now has following this decision. For more expert legal advice surrounding the implications of this decision, please do not hesitate to contact Roser Lawyers for a confidential consultation.