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What Happens to the Deposit when a Buyer is Declared Bankrupt?

It is surprising how many people become insolvent overnight. Sometimes this can be due to matters out of their control but it appears to be happening more frequently due to the economic conditions.

A recent decision of the Qld Supreme Court had to deal with the issue of whether a deposit could be forfeited under the Contract in circumstances where the buyer was declared bankrupt prior to settlement (Majet and Anor v Goggin and Miller As Trustees [2015] QSC 38).

The Contract was for a sale price of $1.39M and the 10% deposit was held in the trust account of the solicitors acting for the vendors.

The buyer was declared bankrupt prior to settlement and his trustees disclaimed the Contract in accordance with the provisions of the Bankruptcy Act 1966 (Cth). It is usual practice for trustees to disclaim any agreements that they do not wish to complete on behalf of the bankrupt. This can lead to fairly harsh consequences for the parties on the other side of the Contract and there is usually little hope of recovering any damages or monies that might be owing due to the Contract being cancelled.

In this case the trustees attempted to argue that the deposit should not be forfeited under the Contract and that the above section of the Bankruptcy Act entitled them to a refund. The sellers, quite correctly, argued that the anticipatory breach and/or repudiation of the Contract by the trustees entitled the sellers to terminate the Contract and forfeit the deposit in accordance with clause 2.4(1) of the Contract. The crucial issue before the Court was whether the disclaimer by the trustees constituted a default under the Contract.

The Court held that the sellers were entitled to the deposit. Although it was accepted that the relevant legislation under the Bankruptcy Act entitled the buyer to terminate the Contract, this did not extinguish the seller’s rights under the Contract and these rights were specifically preserved in accordance with the standard conditions of the Contract resulting from the buyer’s default.

This decision is a significant issue for agents who may be holding deposits in relation to sales of properties. If an agent was holding the deposit in this matter and was entitled to commission, the forfeiture of the deposit to the vendor would have entitled the agent to recover their commission.

NSW contracts are different. They usually have a standard special condition which allows either party to rescind the contract in the event of insolvency and standard clause 19 allows the deposit to be refunded.

If you require any legal assistance with contractual issues or litigious matters, please do not hesitate to contact our commercial litigation department manager Amanda Heather, direct line 07 5506 8245 or email aheather@attwoodmarshall.com.au

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Charles Lethbridge

Charles Lethbridge

  • Senior Associate
  • Commercial Litigation
  • Direct line: 07 5506 8240
  • Mobile: 0421 885 195