Morris Finance Ltd v Brown

BASTEN JA: I agree with Payne JA.

PAYNE JA: The applicant for leave, Morris Finance Ltd, was the lessor under a chattel lease of certain property. The first respondent, Mr Brown, was the lessee of that property under the lease. In addition to the promise to make payments under the lease, Mr Brown provided a charge over his real property to secure his payment obligations. The second respondent, Mrs Brown provided a guarantee to the applicant securing the payment obligations of Mr Brown under the lease, supported by a charge over her real property.

In 2013, the first respondent became bankrupt and the third respondent, Mr Free, was appointed as his trustee in bankruptcy. Mr Free was the only active participant on the respondents’ side of the record in this appeal. In August 2015, the second respondent became bankrupt and the fourth respondent was appointed as her trustee in bankruptcy. A fifth respondent, Holiday Coast Credit Union, which held a registered first mortgage over the first and second respondents’ land at Coopernook was subsequently joined to the proceedings but played no active part before the primary judge or in the application for leave.

In November 2015, the applicant commenced proceedings in the Supreme Court. An amended summons was filed in January 2016. The amended summons was not before this Court. It was explained by the applicant that the relief it sought in the amended summons was that:

On 15 April 2016, the primary judge determined a separate question which had been identified, namely “does the plaintiff require the leave of the Court (within the meaning of the Bankruptcy Act 1966 (Cth)) to commence the proceeding or to take any fresh step in the proceeding”. The primary judge answered the separate question “yes”.

By summons filed on 15 July 2016, the applicant seeks leave to appeal from the whole of the decision below.

On 5 September 2016, following an e-mail to the parties from the registry of this Court drawing the parties’ attention to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth), a notice of motion was filed by Mr Free seeking to have the application struck out as incompetent.

On 17 October 2016, Morris Finance filed a s 78B Judiciary Act 1903 (Cth) notice of a constitutional matter. The constitutional question is the proper construction of the expressions “matter...involving its interpretation” in s 76(i) and “matter...arising under…” in s 76(ii) of the Commonwealth Constitution. Affidavits filed by the solicitors acting for Morris Finance demonstrated that the notice requirements in s 78B were complied with. No Attorney-General sought to intervene in these proceedings.

Section 58(3)(b) of the Bankruptcy Act provides as follows (emphasis added):

It was not controversial that the proceedings were “in respect of a provable debt” within the meaning of s 58(3)(b).

It was submitted by the applicant that the proceedings fell within the ambit of s 58(5) of the Bankruptcy Act, which provides:

The primary judge held that leave was required by s 58(3)(b) of the Bankruptcy Act and that the exception in s 58(5) of the Bankruptcy Act did not apply, principally relying on the decisions in Mango Media Pty Ltd v Velingos [2008] NSWSC 202 per Barrett J and the Full Court of the Federal Court in Scott v Bagshaw (2000) 99 FCR 573; [2000] FCA 816.

Mr Free, the applicant on the motion, submits that the question of relief and jurisdiction in this Court is governed by s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act which provides as follows:

That section prohibits both the institution and the determination of appeals which include a matter “arising under” an Act specified in the Schedule to the Cross-vesting Act. (It is common ground that the Bankruptcy Act is an Act specified in the Schedule.) It was not suggested that the exceptions provided in ss 7(7) or (8) applied in the present case. The only question is whether the present appeal raises a matter for determination being “a matter arising under the Bankruptcy Act.”

The dispositive reasoning of the primary judge on the separate question was as follows:

The draft notice of appeal raises for determination by this Court the following matters:

The applicant (respondent on the motion) submitted that the present matter is not one involving a matter “arising under” the Bankruptcy Act within the meaning of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. It was submitted that the words “matter arising under an Act” in s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act pick up s 76(ii) of the Constitution and reflect a distinction between a matter arising under a statute and a matter involving the interpretation of that statute: Felton v Mulligan (1971) 124 CLR 367.

In Bramco Electronics Pty Ltd v ATF Mining Electrics Proprietary Ltd (2013) 86 NSWLR 392; [2013] NSWCA 392 Meagher JA said that the expression “arising under” in s 7(5) is to be given the same meaning as it has in Chapter III of the Constitution.

The applicant submitted that a matter “arising under” the Bankruptcy Act must involve a substantive issue and not, as was submitted to be the case here, a procedural matter.

It was submitted that the Court must first characterise the matter the subject of appeal. It was submitted that the decision of the primary judge should be characterised as a decision limited to the standing of the applicant to bring the proceedings, and thus, the matter the subject of the proposed appeal was to be understood as limited to standing, which was a procedural rather than substantive issue. The applicant submitted that there was no authority which directly addressed the relevant question in the present case but submitted that in addition to the High Court authorities on s 76(ii) of the Constitution three cases provided support, by analogy, for the applicant’s position:

As this Court reiterated in Eberstaller v Poulos (2014) 87 NSWLR 394; [2014] NSWCA 211 at [20], it is critical to determine at the outset whether a court whose jurisdiction is sought to be invoked in fact has jurisdiction.

In a case materially indistinguishable from the present, Boensch v Pascoe [2016] NSWCA 191, Leeming JA determined that this Court did not have jurisdiction in a matter arising under the Bankruptcy Act by reason of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. I agree with his Honour’s reasons for so concluding. As will become apparent, there is no material difference between a case where s 58 of the Bankruptcy Act provides the basis for a claim (for example to support a caveat) and where it provides the basis for a defence or immunity to a claim against a trustee in bankruptcy.

It should be accepted that a matter “arising under an Act” in s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act should be construed in the same way as the same term appearing in s 76(ii) of the Constitution: Felton v Mulligan; Bramco Electronics Pty Ltd v ATF Mining Electrics Proprietary Ltd at [5] per Meagher JA.

Where a party seeks to bring an appeal from a decision of a single judge of the Supreme Court of a State or Territory where the litigation involves the federal statutes identified in the Schedule to the Jurisdiction of Courts (Cross-vesting) Act (which includes the Bankruptcy Act) it is essential to bear in mind the provisions of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. That provision presupposes that an appeal may contain a number of matters for determination. If it appears that the “only matters for determination” are matters which do not arise under an Act in the Schedule an appeal from a decision of a single judge lies to the relevant State or Territory appellate court.

However, where it appears that “a matter for determination” in an appeal is a matter arising under an Act specified in the Schedule then the prohibition in s 7(5) applies. The applicant in such a case is prohibited from instituting an appeal other than in an appropriate Federal court. A State or Territory court is prohibited from determining an appeal, should the appeal be instituted in a non-Federal court in contravention of the first prohibition. In the seminal authority concerning the interpretation of s 76(ii) of the Constitution, Latham CJ in R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141 said at 154:

In Felton v Mulligan each of the members of the Court addressed the differences in language between a “matter...involving its interpretation” in s 76(i) and “matter...arising under…” in s 76(ii) of the Constitution. Barwick CJ (part of the majority in that case), at 374, explained:

In CGU Insurance Limited v Blakeley [2016] HCA 2 at [29] the High Court per French CJ, Kiefel, Bell and Keane JJ elaborated on the statement of Latham CJ in R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett about the words “arising under” in s 76(ii) of the Constitution:

The three cases relied upon by the applicant by way of analogy are each distinguishable.

In Meriton Apartments Pty Ltd v Industrial Court of New South Wales the Full Court of the Federal Court was addressing the jurisdiction of the Full Bench of the Industrial Court of NSW to decide the application of s 60 of the Bankruptcy Act to proceedings commenced before it. That question turned on the meaning of the “jurisdiction in bankruptcy” conferred exclusively upon federal courts by s 27 of the Bankruptcy Act. “Bankruptcy” was defined in s 5 of the Bankruptcy Act as follows:

Branson J made the point at [2] that the Full Court in Meriton was exercising the original jurisdiction of the Federal Court. Although the Full Bench of the Industrial Court was exercising appellate jurisdiction from a decision of Marks J, the question of the application of the Jurisdiction of Courts (Cross-vesting) Act was not raised.

Greenwood J held, at [117]:

Despite the reliance by the applicant in the present case on this passage, it is clear that Greenwood J was there addressing the jurisdiction question posed by s 27 of the Bankruptcy Act and the composite phrase “under or by virtue of the Bankruptcy Act.” That this was the issue in Meriton is made clear in the judgment of Perram J who found at [172] that:

In the present case the question posed by s 27 of the Bankruptcy Act did not arise as there was no challenge to the exercise by the primary judge of jurisdiction to deal with the questions arising under ss 58(3) and 58(5) of the Bankruptcy Act. The question sought to be agitated on the present appeal is not the same as the question of whether the underlying proceeding could properly be maintained or commenced in the Supreme Court. Although Meriton concerned an appellate court, the decision only addressed the latter question.

I agree with Perram J in Meriton Apartments that there is no precise overlap between jurisdiction exercised in respect of matter “arising under” the Bankruptcy Act and the exercise of jurisdiction “in bankruptcy”, although in practice there may tend to be some degree of coincidence between the two concepts. Although dissenting on the outcome, I do not regard this statement as inconsistent with anything decided in that case. The proposition identified by Perram J has been referred to with approval in a leading text: Leeming M J, Authority to Decide, (2012, The Federation Press) at 166.

The second case relied upon by the applicant, Moss v Eaglestone, simply did not address s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. In that case Allsop P noted, at [2]:

The third case relied upon by the applicant was Jakimowicz v Jacks. The appellant, Ms Jakimowicz entered into a property arrangement with Mr Jacks. Ultimately, Mr Jacks sued Ms Jakimowicz in the County Court of Victoria for breach of trust. Ms Jakimowicz objected to Mr Jacks’ standing to bring the claim, as it was alleged that Mr Jacks had become bankrupt and his rights as pleaded had vested in his trustee in bankruptcy. Ms Jakimowicz was unsuccessful and appealed. The Victorian Court of Appeal’s attention was not drawn to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act.

The Court held:

The Court concluded that the position would be different if, as in the present case, it was claimed that the property the subject of the dispute had vested in the trustee who was a party to the litigation and thus an issue would be one affecting the divisible property of the bankrupt estate under s 116 of the Bankruptcy Act. The Victorian Court of Appeal held that in that circumstance, “the question is not just one of standing”: [40]. That is not, of course, to state a test in place of the statutory test in s 7(5), which the Court did not address.

The Court continued at [41]:

Accordingly, Jakimowicz v Jacks is distinguishable by reason of the fact that the attention of the Court was not drawn to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act and the fact that the trustee, Mr Free, is a party to the present proceeding and makes a claim to the land the subject matter of the proceeding.

Returning then to the present case, the correct approach to s 7(5) is that identified by Leeming JA in Boensch v Pascoe at [18] ‑ [20]. The question whether a matter for determination in an appeal is a matter arising under the Bankruptcy Act turns on the nature of the appellant’s claims in that appeal.

The challenge to the dispositive reasoning of the primary judge set out at [16] above means that there is in the present case a matter for determination in the appeal which is a matter arising under the Bankruptcy Act because the source of the trustee in bankruptcy’s defence to the applicant’s claim at common law or in equity is a law of the Commonwealth: s 58(3) of the Bankruptcy Act. Unless and until the requirements of that section are met, the applicant cannot succeed in its claim. According to CGU Insurance Limited v Blakeley, on that account the matter arises under federal law.

Further, the applicant’s assertion to be entitled to proceed with its claim is based upon s 58(5) of the Bankruptcy Act. This would have the effect, if such an order were made against the Trustee, Mr Free, of permitting the applicant to exercise a property interest over the land which Mr Free claims is vested in him as trustee. This would affect the divisible property of the bankrupt estate. Accordingly, this is a case where the questions on this appeal arise under the Bankruptcy Act. This is not a case where the Bankruptcy Act is merely “working in the background”.

By reason of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act, this Court does not have jurisdiction to deal with this appeal.

Mr Free submitted that he was entitled to an award of indemnity costs in the event that the relief sought in the motion was granted. Morris Finance submitted that, as the Court first identified the jurisdictional issue the subject of the motion, each party should pay their own costs of the motion.

Exhibit A on the motion, tendered by Mr Free in support of his costs application, consisted of correspondence between Mr Free’s solicitors and representatives of Morris Finance which Mr Free submitted should be understood as comprising a Calderbank offer. In my view, acceptance of the offer made by Mr Free would have amounted, in effect, to a capitulation by Morris Finance. For this reason, the offer comprised in Exhibit A, assuming it met the requirements of a Calderbank offer, does not provide a sufficient basis for the award of indemnity costs.

Mr Free only filed the motion on 5 September 2016, following an e-mail to the parties from the registry of this Court drawing the parties’ attention to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. Nonetheless, after that time Morris Finance opposed the relief sought.

Whilst the proposition that the parties should bear their own costs prior to 5 September 2016 has some attraction, the fact is that Morris Finance was wholly unsuccessful before the primary judge and its purported application for leave to appeal was incompetent. Costs should follow the event in relation to the third respondent, Mr Free. The other parties, who played no active part in the proceedings, should bear their own costs.

For the foregoing reasons I propose the following orders: