Proactive creditor saves significant asset for the benefit of creditors of a deceased estate

Michael Jacobs and Michael Chapman | May 2013 | Banking

Recently, the Federal Circuit Court of Australia was presented with an opportunity to firmly restate the factors relevant in identifying and avoiding multiple courts being involved in the administration of deceased estates; see Bendigo & Adelaide Bank Limited v Feldman [2013] FCCA 241.

Facts Mr Feldman, a real estate agent, died on 13 October 2010. He died owning and operating a real estate agency. He had a number of debts including an investment loan assigned to the Bendigo & Adelaide Bank.

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Proactive creditor saves significant asset for the benefit of creditors of a deceased estate

Mr Feldman left no will. Following his death, his widow took advantage of a process under Victoria’s probate law to take immediate control of Mr Feldman’s real estate agency business with a view to bringing its affairs up to date and then selling it and dealing with its creditors. Mrs Feldman’s application was made urgently as an application for Letters of Administration ad colligendum bona which are designed to facilitate the swift disposal of perishable assets - although the passage of time has seen relief of this nature morph into more general asset preservation use.

Importantly, the relief is specific to a particular asset and not the deceased estate generally.

As it emerged, having obtained possession of the real estate agency, Mr Feldman’s widow did not subsequently proceed, as one might have expected her to, to apply for general letters of administration, so as to finalise the whole estate.

Approximately two years after Mrs Feldman obtained possession of the business, the Bank as a creditor, sought orders in the Federal Circuit Court of Australia (‘FCCA’) for an administration order in respect of Mr Feldman’s deceased estate so that a trustee would be appointed to gather the assets and make appropriate distributions to creditors.

In the course of the FCCA proceedings, it emerged that Mrs Feldman had continued to operate the real estate agency under the preservation orders made in the Supreme Court in Victoria. Effectively, Mrs Feldman had

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Proactive creditor saves significant asset for the benefit of creditors of a deceased estate

taken control of the real estate agency and was benefiting from running it in her own interests.

She had little incentive to finalise the deceased estate because to do so would mean to pay out her husband’s creditors. By not finalising her late husband’s affairs, his creditors were left in limbo.

Unsurprisingly, Mrs Feldman opposed the Bank’s FCCA proceedings. She did so on the basis the Bank was prevented from applying for an administration order under the Bankruptcy Act if the estate was being administered under a law of a State of Territory. Mrs Feldman contended that the preservation order she had obtained meant that her husband’s deceased estate was being administered under the Victorian probate law.

The Decision The Court acknowledged the policy rationale to avoid having more than one court administering a deceased estate, insolvent or otherwise, at the same time.

Central to the decision was the need to distinguish between where a Court is administering an estate and where a Court has appointed a person to administer an estate under the grant of letters of administration.

In this case, the Supreme Court of Victoria was not administering Mr Feldman’s estate, to the extent it was being administered at all; the Court had appointed Mrs Feldman to do so.

Consequently, there was no tension between different Court administrations and the Bank did not require leave to commence or prosecute its Federal Circuit Court application.

Finally, although not called upon to do so in the course of arriving at his decision, the Judge reflected on the authorities and appeared satisfied that what was obtained by Mrs Feldman from the Victorian Supreme Court was a limited order granted for the purpose of preserving perishable or precarious assets – it clearly amounted to something less than an order for the administration of the whole of the deceased estate.

The Bank was successful in obtaining an

administration order under the Bankruptcy Act and a trustee was appointed to Mr Feldman’s deceased estate. The Bank’s costs of obtaining the administration order will rank in priority as it was the petitioning creditor.

The effect of the order is that the trustee has taken control of the real estate agency (together with all other assets) and will deal with it for the benefit of Mr Feldman’s creditors.

Lessons While the impact of the decision may be seen to apply in quite limited circumstances, creditors should not simply accept slow moving intestate estates. Rather, creditors would always consider being proactive and forcing a form of administration on the deceased estate especially when there are ongoing operating assets. Being proactive will either force those closest to the deceased to act or will place the estate in the hands of a trustee for the benefit of all of the creditors of the deceased.

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Michael Jacobs and Michael Chapman | May 2013

For more information, please contact: Michael Jacobs Special Counsel T: 03 8600 5025 M: 0407 618 851 michael.jacobs@turkslegal.com.au

Michael Chapman Lawyer T: 03 8600 5001 M: 0408 988 283 michael.chapman@turkslegal.com.au

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