Morris Finance Limited v Free, Trustee of the Property of Neil Warren Brown, a Bankrupt

These proceedings were commenced by Summons on 10 November 2015. The plaintiff sought relief under s 103(2) of the Conveyancing Act 1919 (NSW) to be able to sell a certain property in Coopernook, being Lot 25 in Deposited Plan 829139, and apply the proceeds of such sale in a particular manner. The property is land under the Real Property Act 1900 (NSW). The registered proprietors of the land are the third defendant Neil Brown and the fourth defendant Caroline Brown. They are both bankrupt. Their respective trustees in bankruptcy are the first and second defendants.

The plaintiff claims to be an equitable chargee of the land. In January 2012 it entered into a commercial lease agreement with the third defendant in respect of certain goods. The fourth defendant provided a guarantee of the third defendant's obligations. The lease agreement provided in clause 18 for a charge in favour of the plaintiff over the third defendant's interest in "the charged property" and all property hereafter to be held or acquired by him in addition to the charged property specified in item 7 of the schedule to the lease. Item 7 of the schedule merely contains the words “As above”. Various matters appear above item 7 in the schedule. These include a description of the goods to be supplied. The Coopernook property is mentioned as the location of the goods during the term of the lease, and also as the address of the lessee. On one view the charged property consists of or includes the Coopernook property. The guarantee given by the fourth defendant provides for a charge in favour of the plaintiff over the fourth defendant's interest in any freehold land in Australia.

An amount of about $45,000 is claimed by the plaintiff to be due to it under the lease agreement.

The Summons came before the Court on 11 December 2015 and was stood over to 17 December 2015. On that occasion I indicated that a number of fundamental difficulties stood in the way of the plaintiff obtaining the relief it sought. Amongst those were that s 103(2) of the Conveyancing Act does not apply to Real Property Act land, and even if the Court was to consider exercising its general law jurisdiction to order a sale at the suit of an equitable chargee, it would not be appropriate to do so in circumstances where there is a registered first mortgagee who is not a party to the proceedings, and where there was no evidence of the value of the property or the amount owed to the mortgagee.

The proceedings were adjourned until 12 February 2016. Directions were made for the plaintiff to file and serve an Amended Summons and to serve further evidence. On 12 February 2016 directions were made for the defendants to serve evidence including as to the value of the property. The matter was adjourned to 4 March 2016. I should note that submitting appearances have been filed by the second defendant (the trustee for Mrs Brown) and the fifth defendant (Holiday Coast Credit Union the first mortgagee joined to the proceedings pursuant to the Amended Summons).

On 4 March 2016 counsel for Mr and Mrs Brown, Mr T Flaherty, raised an issue as to whether leave was required under s 58(3)(b) of the Bankruptcy Act 1966 (Cth) for the commencement of the proceedings. Section 58(3) provides:

It was submitted by Mr Flaherty that the proceedings were "in respect of a provable debt" within the meaning of s 58(3)(b). This was disputed by the plaintiff. It was submitted by Mr Yam on behalf of the plaintiff that the proceedings fell within the ambit of s 58(5), which provides: "Nothing in this section affects the right of a secured creditor to realise or otherwise deal with his or her security".

Following some discussion between Bench and Bar table on that occasion, an order was made for the determination of a separate question, 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". Directions were made for the provision of written submissions on the question, and the matter was adjourned to today, 15 April 2016.

Before turning to those submissions, which were elaborated upon in Court today, I note that the relief claimed in the Amended Summons remains an order pursuant to s 103(2) of the Conveyancing Act for the sale of the property and the application of the proceeds in a particular manner. That includes "payment of the amount due to the plaintiff in discharge of its interest in the property".

Mr Flaherty submitted that the essence of the plaintiff's claim is that the third defendant is a debtor of the plaintiff under a lease agreement, that the fourth defendant provided a guarantee for the alleged debt and, furthermore, that both the third and fourth defendants have created an equitable charge over the property. It is further submitted that the Court would have to determine and make findings as to the existence of the claimed debt and the claimed charges over the property. It is put that the substance of the proceedings must be considered, and that the mere fact that the plaintiff does not seek declaratory relief or judgment for a sum is not conclusive that the proceedings are not in respect of a provable debt.

Reference was made to the decision of Barrett J in Mango Media Pty Ltd v Velingos [2008] NSWSC 202. In that case the plaintiff sought declaratory relief recognising a security interest in the nature of a charge which it claimed to have over the defendant's land. The plaintiff also sought an order for the extension of the operation of a caveat it lodged over such land. His Honour considered the question whether the proceedings were "in respect of a provable debt" within the meaning of s 58(3)(b) of the Bankruptcy Act. His Honour continued:

His Honour concluded that leave under s 58(3)(b) of the Bankruptcy Act was required in respect of those proceedings. As noted, his Honour referred in the course of his judgment to the decision of the Full Court of the Federal Court of Australia in Scott v Bagshaw (2000) 99 FCR 573, particularly at 574 and 578.

In relation to s 58(5), Mr Flaherty referred to three decisions, namely, Savieri v Brown [2008] NSWSC 1210; Hanshaw v National Australia Bank Ltd [2012] NSWCA 100 and Perpetual Trustee Co Ltd v Cuitanovic [2013] NSWSC 722. Mr Flaherty submitted that those cases are distinguishable from the present case which involves an equitable chargee seeking a judicial sale. I note that each of those three cases concerned orders for possession.

Mr Behman, solicitor for the first defendant, broadly supported the submissions made by the third and fourth defendants. In addition he submitted that the first defendant would be opposing the making of the order sought by the plaintiff concerning the application of the proceeds of any sale of the property.

The first defendant puts in issue the plaintiff's claim that it has a charge over the third defendant's property (which property is now vested in the first defendant as his trustee in bankruptcy). The manner in which the charged property is described in the lease agreement forms the basis of the argument that the Coopernook property is not part of the charged property and that therefore the plaintiff does not have any charge in respect of the interest formerly held by the third defendant. It was put that the plaintiff, who does not have a registered interest or the benefit of a judicial determination that it holds a charge, is merely in the position of a creditor asserting that it holds a charge. It was submitted that in those circumstances the case is outside the ambit of s 58(5).

Mr Yam for the plaintiff submitted that it is not in dispute that the third defendant entered into the commercial lease agreement with the plaintiff, and that the fourth defendant provided a guarantee of the third defendant's obligations.

Mr Yam submitted that the plaintiff is a secured creditor within the meaning of s 58(5) of the Bankruptcy Act and that all the plaintiff is seeking to do in the proceedings is to realise or otherwise deal with its security. It is pursuing the remedy of an equitable chargee, namely, the seeking of an order for sale of the charged property. Mr Yam also referred to Savieri v Brown (supra), Hanshaw v National Australia Bank Ltd (supra) and Perpetual Trustee v Cuitanovic (supra) and submitted that they dealt with a situation analogous to the present case, namely, a situation where a secured creditor is merely taking steps to realise its security.

Finally, Mr Yam submitted that there was no need for the plaintiff to seek declaratory relief because there are no legal controversies to be determined by the Court and hence the authorities cited by the third and fourth defendants, notably Mango Media Pty Ltd v Velingos (supra) and Scott v Bagshaw (supra), which concerned proceedings for declaratory relief, do not govern the present case.

It seems to me that this final submission overlooks the fact that the first defendant at least challenges the proposition that the plaintiff obtained a charge over the third defendant's interest in the property. Despite a submission made by Mr Yam to the contrary, I do not consider that this is the occasion to consider the merits of that challenge. However, it does appear that a real issue is raised in the proceedings for consideration.

The issue raised goes to the extent of the plaintiff's interest in the property and bears upon the relief that might be granted concerning the application of the proceeds of any sale. As far as the bankrupt estate of the third defendant is concerned, the issue goes to whether the plaintiff has any interest at all. The issue is present whether or not the plaintiff seeks declaratory relief.

In these circumstances, even accepting that s 58(5) should be construed relatively liberally, I do not think that this is a situation where a secured creditor is merely realising or otherwise dealing with its security. The creditor, in order to obtain the relief it seeks concerning the application of the proceeds of any sale, will need to establish that it is indeed a secured creditor. This case is not like Savieri v Brown (supra), Hanshaw v National Australia Bank Ltd (supra) or Perpetual Trustee v Cuitanovic (supra) where the relief sought was an order for possession. As I have indicated, the relief in this case goes beyond merely an order for sale but goes on to seek orders that the proceeds of any sale be applied in a particular manner. The plaintiff seeks payment of the amount due to it in discharge of its interest in the property.

Establishing that it is indeed a secured creditor would involve establishing both the existence of a debt (perhaps not a matter of great controversy in this case) and the existence of a charge that secures the debt. It is a situation similar to that dealt with by Barrett J in Mango Media v Velingos (supra). It seems to me that in this case also a debt lies at the heart of the plaintiff's claim. Moreover, it is a debt that is provable in the third defendant's bankruptcy.

Bearing in mind the undoubted width of the expression "in respect of", it is my opinion that these proceedings are a legal proceeding in respect of a provable debt within the meaning of s 58(3)(b) of the Bankruptcy Act.

Accordingly, the separate question will be answered "yes".