HBSY Pty Ltd v Lewis

HBSY Pty Ltd sought to recover money from Lewis, who had acted as a trustee of HBSY’s funds, following his bankruptcy. The Federal Court of Australia was tasked with determining whether HBSY’s claim against Lewis was subject to a set-off against the amount owed by Lewis to HBSY. The dispute centred on the equitable principles of set-off, specifically the rule in Cherry v Boultbee, and whether Lewis, as a defaulting trustee, was entitled to rely on equitable maxims that protect him from personal liability. The Court had to consider the principles in Re Dacre and Morris v Livie, as well as the effect of Lewis’s assignment of his interest in the trust fund.

The central legal issues were whether the equitable principle of set-off applied to allow Lewis to offset his debt to HBSY against the sum owed by him as a defaulting trustee, and whether Lewis could benefit from the equitable maxims that protect trustees from personal liability despite his default. The Court also had to determine the extent to which an assignee of a trust fund could be bound by prior equities attaching to the trust fund and the meaning of ‘fraudulent’ in section 153(2)(b) of the Bankruptcy Act 1966 (Cth).

The Court held that the equitable principle of set-off did not apply in this context, as the rule in Cherry v Boultbee only operates in cases where both parties are equally at fault. The Court emphasised that Lewis, as a defaulting trustee, could not rely on equitable maxims to protect himself from personal liability. The Court further held that an assignee of a trust fund takes the fund subject to any prior equities, and that Lewis’s assignment of his interest in the trust fund did not release him from his personal liability to HBSY. Finally, the Court clarified that the term ‘fraudulent’ in section 153(2)(b) of the Bankruptcy Act 1966 (Cth) does not require actual dishonesty but rather conduct that is contrary to the principles of natural justice and equity.

The Court ordered that Lewis was personally liable to HBSY for the amount owed by him as a defaulting trustee and that this sum could not be set off against the debt owed by HBSY to Lewis. The Court also held that Lewis’s assignment of his interest in the trust fund did not affect his personal liability to HBSY. Finally, the Court clarified that conduct that is contrary to the principles of natural justice and equity is sufficient to constitute ‘fraudulent’ for the purposes of section 153(2)(b) of the Bankruptcy Act 1966 (Cth).