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A data breach has been reported and some user data may have been compromised.
Click here to read more about the incident and check if it affected you.
The decision of the Federal Circuit Court in Janezic v Official Receiver & Anor and Davidson v Official Receiver & Anor [2020] FCCA 1153 (14 May 2020) should provide comfort to trustees when dealing with undervalued transactions, uncooperative parties and a looming time limits. The Court confirmed that notices issued pursuant to section 139ZQ of the Bankruptcy Act 1966 (Cth) (“Act”) for claims under section 120 of the Act remain valid and enforceable, even after the expiration of the time limit in section 127 of the Act.
William Stephen Vlahos (Bankrupt) was declared bankrupt on 16 December 2013 by way of sequestration order and Mr Phillip Newman was appointed as his trustee. In administering the estate, Mr Newman determined the Bankrupt made 2 transactions which were voidable against him pursuant to section 120 of the Act. The trustee sought a sum exceeding $1.2 million from Mr Janezic and a sum exceeding$12.5 million from Mr Davidson as a result of these transactions.
The trustee applied to the Official Receiver for the issue of notices pursuant to section 139ZQ of the Act in respect of these transactions. The Official Receiver issued a notice to Mr Davidson on 6 December 2019 and a notice to Mr Janezic on 10 December 2019, both just inside the time limit set by section 127 for commencing claims under section 120.
The Act provides that upon service of the section 139ZQ notice, the amount stated in the notice ispayable. If the sum is not paid within the time period set in the notice (in this particular case, 60 days), the trustee may recover the sum as a debt.
Mr Davidson and Mr Janezic each applied to Federal Circuit Court to have their notices set aside on the basis that:
The application was dismissed.
The court determined that given section 139ZQ operates in respect of the bankruptcy trustee (and not a ‘bankrupt’) notices may be validly issued even if the bankrupt had since been discharged.
Section 127 of the Act provides than an action under section 120 of the Act may only be commenced by the trustee within 6 years from the date of bankruptcy. Given the bankruptcy commenced 16 December 2013, the time limit prescribed under section 127 of the Act expired 16 December 2019. The notices to Mr Davidson and Mr Janezic and were issued 10 and 6 days (respectively) prior to the expiration of the time limit in section 127. However, the notice required compliance after the expiration of the time limit in section 127. The court determined that the limitation period in section 127 created a bar to bringing an action under section 120, but the section did not extinguish the claim itself.
The court highlighted that the time limit under section 127 is not imported into the operation of section 139ZQ. The court expressly provided that issuing a section 139ZQ notice is not itself an action under section 120 of the Act because the issuing of the notice is an administrative step that created a liability (not an action itself).
Accordingly, the trustee could bring an action based upon the section 139ZQ notice (as a debt due) even if the time period in section 127 had expired. Of course, it must be remembered that the trustee may need to defend any challenge to the notice on the basis that the notice did not meet technical requirements.
The court did not consider whether a section 139ZQ notice for a voidable transaction under section 120 of the Act could be issued after the section 127 time limit had expired. We anticipate this decision will be appealed and hope that the appeal court discusses interesting point.
Notices under section 139ZQ may be (naively) disregarded as a mere administrative device. This matter confirms that section 139ZQ notices can be utilised as an effective recovery avenue, including where a bankruptcy trustee has limited funds to commence proceedings or where a time limit is approaching expiration.
We frequently assist private trustees in their application to the Official Receiver for the issue of such notices arising from the application of sections 120 – 122 of the Act. If you would like to discuss the application process throughout the administration of a bankrupt estate, please contact our litigation & insolvency team.