Make Haste! Trustee obtains extension of time to elect to continue Bankrupt’s class action

Introduction

On 6 June 2022, the Federal Court handed down its decision in Official Trustee in Bankruptcy, in the matter of the bankrupt estate of Crawford [2022] FCA 657 (“Crawford“).  The case concerned an application by the Official Trustee for an extension of time of the period within which it could make an election to prosecute or discontinue the bankrupt’s court action.  In this case, the relevant action was a class action in which the bankrupt happened to be the lead plaintiff.

Background

Daniel O’Brien has now replaced Steele Crawford, the bankrupt, as the lead plaintiff in the ‘flex commission’ class action commenced in the Supreme Court of Victoria against ANZ and Macquarie Bank (“VSC Proceeding“).  The VSC proceeding is a group proceeding commenced under Part 4A of the Supreme Court Act 1986 (Vic).

From the date of appointment, the Official Trustee had 28 days, that is until 7 June 2022, to elect whether to prosecute or discontinue the VSC Proceeding by operation of section 60(2) – (3) of the Bankruptcy Act 1966 (Cth) (“Act“).  If an election is not made within 28 days, the Act deems a trustee to have abandoned the court action.

On 10 May 2022, ANZ and Macquarie Bank informed the Official Trustee of the bankrupt’s status as lead plaintiff in the VSC Proceeding.

It appears the Official Trustee quickly concluded that 28 days would not be sufficient to allow it to properly consider making an election.  Accordingly, the Official Trustee made an urgent application to the Federal Court’s general duty judge, then Justice Snaden, for a 2-month extension of time,  which came on for hearing on 6 June 2022.

Interested Parties

ANZ and Macquarie Bank, as well as other class plaintiffs in the VSC Proceeding (who were represented by plaintiff firm, Maurice Blackburn), appeared as interested parties.  They neither consented to nor opposed the Official Trustee’s application.

Obtaining the Extension of Time

The Court usefully summarised the principles applying to an application made under section 33(1)(c) of the Act for an extension of time as follows:-

1. The Court’s discretion to extend time is wide and should be used to achieve “flexibility often necessary to achieve fairness in particular circumstances” (Abeyratne v Trkulja (1998) 90 FCR 253 at 258C);
2. In respect of an extension of time to make an election:
   • the extent of the trustee’s delay in seeking the extension and if there is a satisfactory explanation for the delay;
   • the prejudice to a defendant if an extension is granted;
   • the prejudice to a trustee if an extension is not granted;
   • a reasonable expectation that there should be some degree of finality in the decision-making by a trustee; and
   • the merits of the action in respect of which an election is to be made, (Newman v Bain (2013) 213 FCR 370 at [59]-[64]).

The Official Trustee, at the hearing, focussed on the uncertainty which it faced by the VSC proceeding. It expressed that it was supportive of the VSC proceeding continuing with another plaintiff acting as ‘lead’. However, and justifiably, the Official Trustee was concerned that it would be taking on an unacceptable risk of liability for costs if it made an election to continue.

Importantly, the Official Trustee described in precise terms what it proposed to do during the 2-month extended period, namely:

1. take solicitors’ advice on the prospects of success of the VSC Proceeding;
2. potentially negotiate a costs indemnity in respect of the VSC Proceeding;
3. seek a direction from the Supreme Court of Victoria as to whether another class member might be substituted as plaintiff before an election is made; and/or
4. await any other development in the VSC Proceeding concerning the substitution of a new lead plaintiff.

Decision

The Court granted the Official Trustee’s application for the extension of time. The Court was particularly motivated to grant the application because of:

1. the Official Trustee’s speediness in making the application;
2. the short duration of the extension, that is, 2 months (which should be instructive to insolvency practitioners);
3. the lack of material prejudice to ANZ and Macquarie Bank; and
4. a concern that, without an extension, the Official Trustee would be rushed into making a complex decision without the benefit of consideration and advice.

Take Aways

Trustees should be alive to the strict 28-day deadline applying to election, especially where a bankrupt is involved in complex or mass litigation (such as a class action). While it may be tempting to elect to discontinue, trustees should take steps to inform themselves of the merits of a bankrupt’s action. Failure to do so can expose trustees to liability, investigation and costs.  The Federal Court appears to be willing to give insolvency practitioners the time they need, especially if an application is made expeditiously.

Insolvency practitioners should be aware that urgent applications in the Federal Court made as:

1. trustees of a regulated debtor’s estate – must be made to the General Duty Judge; and
2. made as external administrators of a company – must be made to the Commercial & Corporations Duty Judge.

~ with Mark Pennini, Associate