Bankrupt’s outstanding claim comes back to haunt family business

Bankrupt’s outstanding claim comes back to haunt family business
Wednesday August 15, 2012

Generally speaking, when an insolvent person is declared bankrupt all of their assets, including any claims that they may have against someone else, become the property of the Official Assignee (“OA”) for administration of the bankrupt’s estate. In a recent appeal case (Glynbrook 2001 Ors v The Official Assignee for New Zealand and Anor [2012] NZCA 289) the Court of Appeal upheld the OA’s decision to give back to a former bankrupt, Mr Lawrence, the right to sue some of his family members and their farming companies.  Mr Lawrence wished to sue them claiming they had oppressed him as majority shareholders in the farming companies in which he had an interest prior to his bankruptcy. The family members were opposed to the OA giving the right to sue them back to Mr Lawrence.  They raised four arguments: that there had not been a meeting of Mr Lawrence’s creditors to approve the assignment; that Mr Lawrence was not a bona fide purchaser of the right to sue; that Mr Lawrence did not pay anything to the OA for the right to sue; and finally that the OA’s decision to assign the right to sue back to Mr Lawrence lacked merit. The Court decided that the OA was not obliged to hold a meeting of creditors; that Mr Lawrence did acquire good title to the right to sue; that Mr Lawrence had paid for the assignment by agreeing to pay to the OA a portion of any sum received through the law suit; and that the OA’s decision to assign the claim back to Mr Lawrence was a sound one.  The Court also decided that the family members did not have standing to bring the appeal (because they did not meet certain criteria under the Insolvency Act). This decision shows that a claim or potential claim by a formerly bankrupt party is not necessarily extinguished upon bankruptcy.  Such a claim might come back to haunt defendants later on.

 

By Chris Patterson