Communicate – without (without) prejudice – Insolvency/Bankruptcy/Restructuring




WHEN NEGOTIATIONS ON REALIZATION OF BANKRUPTCY PROPERTIES END IN COURT.

Many readers will be familiar with the term “without prejudice” in written and verbal communications. For those who have been lucky enough not to encounter this term, communication without prejudice is generally used in settlement negotiations.

When a communication is expressed without prejudice, these communications are inadmissible in court. Its intention is to allow parties to freely discuss issues and genuinely attempt to resolve a dispute without fear that such statements will be repeated in court if negotiations fail.

However, we discovered exceptions to this rule in the following case1.

We were appointed Trustee in Bankruptcy where we and the former bankrupt’s advisers engaged in no-damage communications for approximately 18 months. The communications attempted to resolve the bankrupt’s proposals to purchase the bankrupt estate’s interest in real estate, which had vested in the estate.

As it became clear that a satisfactory position was unworkable, the trustee in bankruptcy accepted the transfer of title to the property and asked the court to obtain vacant possession and sell the property for the benefit of creditors.

One of the bankrupts2 defenses to the bankruptcy trustee’s claim, was that the bankruptcy trustee was prevented (i.e. prevented) from dealing with the property by “his silence and inaction”. The alleged ‘silence and inaction’ referred to bankruptcy trustees failing to deal with the property during the bankruptcy period and throughout the period during which the communications without prejudice took place.

To counter the claim, the trustee in bankruptcy sought to produce (ie admit into evidence) the communications without prejudice.

Section 131 of the Evidence Act 1995 clearly provides that:

131 Exclusion of evidence of settlement negotiations

(1) Proof need not be provided of:

(a) a communication that is made between Disputing Persons, or between one or more Disputing Persons and a third party, in an attempt to negotiate a settlement of the dispute; Where

(b) a document (whether delivered or not) that has been prepared in an attempt to negotiate a settlement of a dispute.

(2) Subsection (1) does not apply if:

(g) evidence that was adduced in the proceeding, or an inference drawn from evidence that was adduced in the proceeding, is likely to mislead the court, unless the evidence of communication or document is provided to contradict or qualify this evidence

It was undisputed that the communications fell within the scope of s. 131(1) so that they attracted the privilege without prejudice. The issue was whether the exception in paragraph 131(2)(g) applied.

The trustee in bankruptcy argued that the bankrupt waived privilege when he alleged silence and inaction by the trustee in bankruptcy, which created the need to submit evidence of these communications so as not to mislead the court on various issues in dispute in the proceeding.

In support of the position of the trustees in bankruptcy, we relied on the reasoning of Bromberg J in Barrett Property Group Pty Ltd v Dennis Family Homes Pty Ltd (No 2) (2011) 193 FCR 479; [2011]CIF 276this:

[s131(2)(g)] responds to the need to ensure that reliance on privilege or protection is not the source or reason for which the court is misled. In other words, the privilege granted by Article 131(1) must not be abused by allowing a party who has produced evidence to use the privilege to conceal the truth and mislead the court. This is the evil towards which the paragraph is directed.

Ultimately, the judge ruled in favor of the trustee in bankruptcy, noting that “the relevance and centrality of the issue on which the court is likely to be misled is critical. To reject the admission into evidence of the privileged communications, the very fact and existence which go to the basis of the case pleaded, would be to allow the court to be misled.”3

Ironically, if the bankrupt had “remained silent” about the alleged silence and inaction, the evidence (which was potentially adverse to the bankrupt’s case) would not have been admitted in the central proceeding.

The key takeaway for readers?

Do not rely on communications without prejudice which are always protected communications. If the circumstances allow it, they can be made admissible in court, whether for or against your interest or that of your client.

We now look forward to the court’s decision on whether, and under what circumstances, there can be an estoppel against the vesting provisions of the Bankruptcy Act.4. Stay tuned!

Related Articles:

What can be taken or sold in the event of bankruptcy?

20 years is a long time to hide property from a trustee in bankruptcy

Footnotes

1 Jess vs. McNiven, in the McNiven case
[2021] FCA53.

2 Who had been discharged from bankruptcy at the time of the opening of the procedure.

3 Jess vs. McNiven, in the McNiven case
[2021] CAF53 [29].

4 Notwithstanding the decision of
O’Brien vs. Sheahan [2002] FCA 1292, the issue of whether there can be estoppel against the application of the vesting provisions of the Bankruptcy Act is not resolved. Although the special leave was refused in O’Brien vs. Sheahanin his application, each of Gummow J (line 74 to [AAB543] and line 179 to [AB545]) and Hayne J (line 135 to [AAB544]) expressed doubts about the application of the doctrine of estoppel in the context of the statute. declared Their Honours.The decision of the Federal Court whose special leave to appeal is sought in both applications depended on the conduct of the particular litigation. JThe decision of the Federal Court should therefore not be interpreted as establishing a principle of generally applicable law relating to estoppel in the administration of the bankruptcy estate. [AAB 549].

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.



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