Consent of trustee in bankruptcy required in order to seek positive relief, but not to raise a defence

13 November 2009

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The Victorian Supreme Court recently in Tulip Investments Pty Ltd v Edwards [2009] VSC 492 held that a bankrupt cannot take action to protect, enhance or add to the property that is controlled by his/her trustee in bankruptcy, without the consent of the trustee. However the court also held that a bankrupt does not require the trustee's consent to take certain action in defence of claims if that action does not seek financial relief against another party.

The facts

The plaintiffs commenced proceedings against Edwards. Some time later, Edwards became bankrupt. The plaintiffs wished to continue the proceedings against Edwards (because, as the court inferred, he was insured) and accordingly sought and obtained necessary leave to do so.

Edwards wanted to argue that the plaintiffs' claim was an "apportionable claim" and that a third party, Michael Kyriackou, was a "concurrent wrongdoer" within the meaning of the statutory proportionate liability regime. He commenced a third party claim against Kyriackou claiming indemnity or contribution.

Kyriackou sought the dismissal of the third party claim on the basis that Edwards' trustee in bankruptcy had not consented to it.

The decision

Hargrave J held that:

“the third party proceeding was a proceeding by [Edwards] to protect, enhance or add to the property of which he was divested upon his bankruptcy. The plaintiffs' claims against him are in respect of debts provable in his bankruptcy. By the third party proceeding, [Edwards] was seeking to limit the amount of any liability his bankrupt estate may have to the plaintiffs, or to add to his bankrupt estate in the event that he was found liable to the plaintiffs for the full amount. In the absence of consent from the trustee in bankruptcy, [Edwards] had no standing to bring or continue that proceeding”.

However, rather than being the basis of a third party claim, the proportionate liability regime can also be used as a statutory defence by essentially specifying that a defendant’s liability is limited to the extent of that defendant's share of responsibility for the loss suffered by the plaintiff. Hargrave J ruled that Edwards could take advantage of the proportionate liability regime in this form without the trustee’s consent, although the proper procedure was by way of defence rather than in a third party claim.

Accordingly, the court dismissed the third party claim but permitted the proportionate liability issues to be raised against Kyriackou as part of Edwards’ defence to the plaintiffs' claim.

Significance

Justice Hargrave's decision confirms that a bankrupt requires the consent of his/her trustee in order to make any positive claim for relief against another party. However, such consent is not be required if the bankrupt only seeks to limit his/her liability by way of defence.

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