HBSY Pty Ltd v Lewis (No 2)

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FEDERAL COURT OF AUSTRALIA

HBSY Pty Ltd v Lewis (No 2) [2025] FCAFC 44

Appeal from: HBSY Pty Ltd v Lewis [2022] NSWSC 841
File number(s): NSD 726 of 2022
Judgment of: MARKOVIC, DOWNES AND KENNETT JJ
Date of judgment: 3 April 2025
Catchwords:

BANKRUPTCY AND INSOLVENCY – effect of discharge – where an intermeddling executor-beneficiary misappropriates estate funds – where the executor-beneficiary is discharged from bankruptcy – whether the executor-beneficiary’s obligation to make good their breach is a “debt…provable in…bankruptcy” for the purposes of s 153(1) of the Bankruptcy Act 1966 (Cth) (the Act) – whether the estate’s right of retainer is a “debt…provable in…bankruptcy” for the purposes of s 153(1) of the Act – whether the meaning of “fraudulent breach of trust” in s 153(2)(b) of the Act requires an impugned breach to involve actual fraud – whether the executor-beneficiary’s breaching of fiduciary duties amounts to a “fraudulent breach of trust” for the purposes of s 153(2)(b) the Act

EQUITY – where an executor-beneficiary misappropriates estate funds – where the executor-beneficiary assigns their interest for value – whether the assignee takes the assignment subject to equities

TRUSTS AND TRUSTEES – right of retainer – where a trustee-beneficiary is an intermeddling executor – where the trustee-beneficiary misappropriates trust funds – whether the trustee-beneficiary is taken to have already received part of their interest in the misappropriated funds – whether the amount misappropriated by the trustee-beneficiary is treated as a qualification on their rights under the trust rather than a separate debt

Legislation:

Bankruptcy Act 1924 (Cth) s 121(1)(b)

Bankruptcy Act 1966 (Cth) ss 82, 86, 116, 153

Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) s 7(5)

Federal Court Rules 2011 (Cth) rr 36.03, 36.05

Limitation Act 1969 (NSW) s 47(1)(a)

Bankruptcy Act 1869 (UK) s 49

Bankruptcy Act 1883 (UK) s 30(1)

Insolvency Act 1986 (UK) s 281(3)

Limitation Act 1980 (UK) s 21(1)(a)
Cases cited:

Armitage v Nurse [1998] Ch 241

Bell Lawyers Pty Ltd v Pentelow [2019] HCA 29; 269 CLR 333

Brisbane City Council v Amos [2019] HCA 27; 266 CLR 593

Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171

Chittick v Maxwell (1993) 118 ALR 728

Cock v Aitken(No 2) (1912) 15 CLR 373

Cooper v Prichard (1883) 11 QBD 351

Cornelius v Barewa Oil & Mining (NL) (in liq) [1982] WAR 311

Coulton v Holcombe (1986) 162 CLR 1

CSR Ltd v Eddy [2005] HCA 64; 226 CLR 1

Cumming v Austin (1903) 28 VLR 622

Doering v Doering (1889) 42 Ch D 203

Derry v Peek (1889) 14 App Cas 377

Emma Silver Mining Company v Grant (1880) 17 Ch D 122

Gray v Guardian Trust Australia [2002] NSWSC 1218

HBSY Pty Ltd v Lewis [2023] FCAFC 109; 298 FCR 303

HBSY v Lewis [2024] HCA 35; 98 ALJR 1211

Hill v Zuda Pty Ltd [2022] HCA 21; 275 CLR 24

Mander v Evans [2001] 1 WLR 2378

Maxwell v…

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Details
Case
[2025] FCAFC 44
Decision Date

CaseChat Overview and Summary

HBSY Pty Ltd, a trustee of the estate of the late Geoffrey Lewis, brought an action against the executor of the estate, Anthony Lewis, and his wife, alleging misappropriation of estate funds by Anthony. The case was heard in the Federal Court of Australia, where the primary judge dismissed the claim. The central issue was whether the obligation of Anthony to make good the misappropriated funds was a provable debt under section 153(1) of the Bankruptcy Act 1966 (Cth). A secondary issue was whether the estate's right of retainer, as an equitable remedy, was a provable debt under the same section. The appeal raised further questions regarding the interpretation of "fraud or fraudulent breach of trust" under section 153(2)(b) of the Act.

The court considered whether Anthony's obligation to compensate the estate was a debt provable in bankruptcy under section 153(1). It found that the obligation was indeed a provable debt, regardless of the application of section 153(2)(b). The court also examined whether the estate's right of retainer, as an equitable remedy, qualified as a provable debt. The court concluded that it did not. In relation to section 153(2)(b), the court found that the phrase "fraud or fraudulent breach of trust" did not necessarily require actual fraud or a specific state of mind on the part of the former bankrupt. The court held that the breach of fiduciary duties by Anthony amounted to a "fraudulent breach of trust" for the purposes of the Act, allowing Geoffrey to succeed on this basis.

The court dismissed the appeal and clarified that Anthony's obligation to compensate the estate was a provable debt under section 153(1), while the estate's right of retainer was not. The court also concluded that the phrase "fraud or fraudulent breach of trust" in section 153(2)(b) could apply without proving a particular state of mind on the part of the former bankrupt. The primary judge's decision to allow the argument based on section 153(2)(b) was found to be within their discretion and not an error of principle. The appeal was dismissed, and the orders of the primary judge were affirmed.

ORDERS:
1. The appeal be dismissed.

Orders

Orders of the court

1. The appeal be dismissed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

The facts of Re Sewell involved defaulting trustees (although as Derham observes, Parker J did not approach the case by reference to their obligations as trustees). For reasons outlined above, we do not think the statement in Re Sewell concerning the effect of a release under bankruptcy legislation can be fully accepted even in respect of Cherry v Boultbee. It is more clearly incorrect, with respect, in so far as it purports to qualify the Re Dacre and Morris v Livie formulations; although (as noted above) the actual decision in Re Sewell appears supportable on other grounds. As we have also noted above, Re Hurburgh did not concern a defaulting trustee. It therefore does not stand in the way of the conclusion we have reached concerning the application of s 153(1) in such a case.Conclusion The declaratory relief sought by Geoffrey was not precluded by Anthony having been released from “debts … provable in the bankruptcy” pursuant to s 153(1), regardless of whether s 153(2)(b) applies. Geoffrey is entitled to succeed on this basis.The application of s 153(2)(b) The conclusion we have reached on s 153(1) makes it strictly unnecessary to reach a conclusion on s 153(2)(b). However, it is appropriate that we set out our views on the issue. In its defence to Geoffrey’s amended cross-claim, HBSY pleaded that any liability of Anthony to the estate was “extinguished by his discharge from bankruptcy pursuant to s 153 Bankruptcy Act 1966 (Cth)”. Geoffrey’s reply did not plead s 153(2)(b) in response to that allegation. Section 153(2)(b) was raised in Geoffrey’s written submissions in the court below and HBSY objected that it had not been pleaded. Ultimately the primary judge allowed an argument based on s 153(2)(b) to be put only if it was confined to equitable fraud (in the sense that any conflict of interest on the part of a fiduciary gives rise to a fraud in equity) and involved no consideration of Anthony’s state of mind. Ground 5 in the notice of appeal alleges that the primary judge erred in allowing s 153(2)(b) to be raised on this basis. This was in substance an issue of case management, and as such was within the discretion of the primary judge. Although there were clearly arguments in favour of holding Geoffrey strictly to the pleaded case, the course that his Honour took effectively reduced the issue to one of law and minimised the prejudice to HBSY. We do not consider that this course involved any error of principle. We therefore turn to the substantive issue (which is agitated by grounds 6 to 8). As a result of the limited basis on which s 153(2)(b) was permitted to be raised, no case was run to the effect that Anthony had (for example) made any statement he knew to be false or engaged in conscious wrongdoing. Geoffrey can succeed under s 153(2)(b) only if “fraud or fraudulent breach of trust” can be established without proving that the conduct giving rise to the liability involved any particular state of mind on the part of the former bankrupt. The construction of the phrase “fraud or fraudulent breach of trust” is therefore critical in this part of the case.

Ratio Decidendi

Legal Principle Established

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