On 15 December 2025, the Federal Court handed down its decision of Kambouris v Paule; in the matter of Paule [2025] FCA 1590 which provides clarity on when a court will exercise its discretion pursuant to section 208 of the Bankruptcy Act 1966 (Cth) (“Act”).
Background
The decision follows a long running commercial dispute between the first respondent and the applicants. In 2024, the first respondent was found to have breached his fiduciary obligations owed to the first applicant through a commercial venture. The applicants were successful in obtaining judgment against him. Subsequently, the first respondent failed to pay the judgment debts.
As a result, the applicants served bankruptcy notices on the first respondent. The first respondent ultimately failed to comply with the bankruptcy notices, and the applicants served creditors’ petitions.
Before the creditors’ petitions were heard, the first respondent appointed the second respondent as a controlling trustee of his estate pursuant to section 188 of the Act. As a result, the creditors’ petitions were stayed.
Key Legal Issue
The court was asked whether it should exercise its discretion pursuant to section 208 of the Act to release the first respondent’s property from the control of the controlling trustee on the basis of special circumstances.
Section 208 of the Act provides that the Court may make an order releasing the debtor’s property from control if:
an interested person applies to the Court for such an order; and
the Court is satisfied that special circumstances justify it making the order.
Findings
The Court granted the application and ordered that:
the first respondent’s property was to be released from the control of the controlling trustee under section 208 of the Act; and
relisted the creditors’ petition proceedings for hearing.
In reaching the above finding, the Honourable Justice Burley was satisfied that special circumstances existed.
He highlighted that what will constitute special circumstances requires the existence of circumstances which are out of the ordinary and bear upon the question of whether the Court should exercise its power. Importantly, the meaning of special circumstances must be understood in light of the context it appears.
Justice Burley identified the following factual matters which formed the basis of the special circumstances in this case:
The first respondent’s affairs involved significant complexity with family proceedings on foot and interests in numerous companies and trusts. Relevantly, the Court noted that this alone would not constitute special circumstances.
The processes contained within Part X of the Act are intended to provide a simple and flexible process for debtors and creditors to reach an agreement. However, due to the complexity of the first respondent’s affairs, a creditor would be required to conduct detailed investigations to satisfy themselves as to the true position.
The Court was not satisfied that the statement of affairs provided full and reliable information as is required by section 188B of the Act and that the statement of affairs would require careful scrutiny.
The statement of affairs identified various creditors who were closely related to the first respondent. The effect of the additional creditors reduced the applicants’ interest as creditors to only 7% of the alleged indebtedness. The additional creditors had not previously been identified by the first respondent.
Justice Burley found that when these factors were considered in light of the time constraints imposed by the controlling trustee, the circumstances of the present case were special or unusual and did not have the character of what is reasonably expected in the application of Part X of the Act.
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