Setting aside sequestration order - Trustee’s costs

Date: Nov 16, 2015
Document Type: Article

Quite often, a sequestration order is made by the Registrar of the Court in the absence of the debtor.  As a result of the sequestration order, a trustee is appointed to the Bankrupt Estate of the debtor.

Sometimes after a sequestration order is made the debtor decides to challenge that sequestration order. It is usually done by lodging an application to the Court to set the sequestration order aside.

Under Rule 16.05 of the Federal Circuit Court Rules, the Court order can be varied or set aside if it is made in the absence of a party. However, that application in the bankruptcy jurisdiction must be made within 21 days of the order. There are Court rules that prescribe the procedure to review the decision of the Registrar to make a Sequestration Order.

Often the debtor comes to realise the consequences of the bankruptcy and the effect on his or her property well after the prescribed 21 days have passed. The bankrupt then may decide to obtain legal advice and decides to commence the set aside proceedings.

Notwithstanding the lateness of the application, the application will usually be accepted by the Registry, and the hearing date allocated.

The Trustee should be served with the application. What happens to the administration of that Estate and what should the Trustees do in that case?

A trustee should exercise caution in expending further fees in the administration of the Estate. In the case of Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338, the Federal Court, in setting aside the sequestration order, awarded costs to the appellant and was not persuaded by the Official Trustee’s arguments that the Official Trustee simply carried out his duties as ordered by the Registrar and as required by the Act, and will be therefore left out of pocket if the sequestration order was set aside through no fault of the Official Trustee.

However, the trustee should not just cease administrating the estate without carefully considering the consequences. This is certainly the time to consider seeking specialist legal advice. There are a number of different results that could transpire.

For example, the lateness of the application or the debtor’s non-compliance with required procedure could be relied on in seeking to dismiss the application altogether. The costs of the trustee in that case would in the ordinary course be met out of the Bankrupt Estate.

Further, the facts of the matter might be such as to persuade the Court to annul the bankruptcy under s153(B) of the Bankruptcy Act 1966 instead of setting aside the sequestration order. In that case, the trustee’s fees are covered under the legislation.

A trustee might also argue for costs to be awarded notwithstanding the possible success of the debtor in relation to setting aside the sequestration order. One of our lawyers succeeded doing this in the matter of Porter & Anor v Smedley [2014] FCCA 1257 (19 June 2014).

Taking appropriate and timely action is a good way to ensure that a trustee’s costs are protected should he/she be faced with the application to set aside the sequestration order.

One of the considerations on an application to set aside a sequestration order is that the bankrupt should be in a position to prove solvency.  

From a debtor’s perspective, taking timely action will increase the chances of a successful application and will minimise the trustee’s costs, costs which will usually have to be met by the estate.  The further the administration progresses, the higher will be the trustee’s fees and costs. Delay in making the application may make a payout of the trustee and creditors prohibitive for a debtor (if that is what is proposed).

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