Family Ties – Family Provision Claims in Bankruptcy

When a person becomes bankrupt, his or her property vests in their trustee in bankruptcy. Property of a bankrupt generally extends to a bankrupt's right to commence litigation. However, specific carve outs exist for certain types of litigation which is personal in nature, such as the right of the bankrupt to claim damages for personal injury. In such cases, the bankrupt's right to sue, is property of the bankrupt and does not vest in their trustee in bankruptcy.

A question which often arises, is whether a family provision claim is sufficiently personal to a bankrupt to be excluded from the property which vests in a trustee in bankruptcy?

Our article, What happens to a family provision claim in bankruptcy?, looked at the NSW Supreme Court's consideration of this question. However, the question has recently arisen again in the South Australian case of Pergoleto v Chandler & Ors [2021] SASC 30.

Background

In this case the applicant, Francesco Pergoleto, sought to make a claim for provision out of his late mother's estate pursuant to the Inheritance (Family Provision) Act 1972 (SA) (IFP Act). However, by the time Mr Pergoleto sought to commence the proceedings, six months had passed since the grant of probate had been granted, meaning that the claim was brought outside of the time limits imposed by the IFP Act. Further, the estate had already been distributed by the time the proceedings were brought. Accordingly, Mr Pergoleto applied to the Court for an extension of time within which to commence the proceedings, arguing that his siblings had misled him about the progress of the grant of probate, and the status of the distribution of the estate.

Unbeknownst to Mr Pergoleto's siblings until after the proceedings were commenced, was the fact that Mr Pergoleto was an undischarged bankrupt.

Accordingly, the issue for the Court was whether to grant Mr Pergoleto an extension of time to commence the proceedings.

Family Provision Claims in Bankruptcy

The Court held that as final distribution of the estate had already occurred, Mr Pergoleto could not be granted an extension of time.

Notwithstanding, the Court went on to consider the effect of Mr Pergoleto's bankruptcy on his claim for provision from his late mother's estate.

Pursuant to section 116(g) of the Bankruptcy Act 1966 (Cth) (Act) the following property will not be property which is available to a bankrupt's creditors:

(g)  any right of the bankrupt to recover damages or compensation:

(i)  for personal injury or wrong done to the bankrupt, the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt; or

(ii)  in respect of the death of the spouse or de facto partner of the bankrupt or a member of the family of the bankrupt;

and any damages or compensation recovered by the bankrupt (whether before or after he or she became a bankrupt) in respect of such an injury or wrong or the death of such a person;
Dart J considered that as the matter was not a claim for damages or compensation for personal injury or wrong done to Mr Pergoleto, it would not fall within the exclusions in s 116(g) of the Act.

Dart J also recognised that, historically, there were a number of authorities which suggested that family provision claims did not vest with a bankrupt's trustee in bankruptcy. However, these authorities relate to a repealed version of the Bankruptcy Act which did not contain an equivalent to section 116(g) above, which now restricts the types of actions that do not vest with the trustee in bankruptcy. His Honour also noted that:

  1. even if a bankrupt was able to successfully litigate a claim for family provision, the proceeds from the litigation would likely immediately vest in their trustee in bankruptcy as "after-acquired property"; and
  2. that some authorities cast doubt as to the appropriateness of making family provision orders in circumstances where the provision went to the bankrupt's creditors and not his or her own proper maintenance and support.
Accordingly, while not specifically deciding the issue because the claim was out of time, Dart J noted that the question of whether a bankrupt retains the right to bring a claim under the IFP Act may largely be academic.

Takeaways

There appears to be a conflict in the authorities when it comes to family provision claims brought by a bankrupt. Even if one were to overcome the hurdle of establishing that a family provision claim is a personal right and does not vest in the trustee in bankruptcy, there are other hurdles to overcome, such as the stay of proceedings under section 60(2) of the Bankruptcy Act discussed in our earlier article here, and the practical consideration of the fact that any proceeds from the litigation will vest in the trustee.

Ultimately, each case must be considered on its own facts, having regard to multiple factors such as the nature of the claim, timing of the claim, size of the estate, amount owed to creditors in the bankruptcy and many others. Early advice is crucial.

Contributors

Danyal Ibrahim​ Senior Associate
Samantha Beattie Lawyer