FEDERAL COURT OF AUSTRALIA

Morris Finance Ltd v Brown [2017] FCAFC 97

ORDERS

THE COURT ORDERS THAT:

1.    The applicant have leave to appeal the decision of Darke J of the Supreme Court of New South Wales made on 15 April 2016.

2.    The appeal be allowed.

3.    Order 1 of Darke J’s orders of 15 April 2016 be set aside and in lieu thereof it be substituted:

Order that the separate question: “Does the plaintiff require the leave of the Court (within the meaning of s 58 of the Bankruptcy Act 1966 (Cth)) to commence the proceedings or to take any fresh step in the proceeding?”

be answered: “No”.

4.    The first to third respondents pay the applicant’s costs of and incidental to the application for an extension of time, the application for leave to appeal and the appeal, to be taxed in default of agreement.

5.    Any further question of costs in relation to the proceeding in the Supreme Court of New South Wales be reserved for consideration by a judge of that Court.

6.    Liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    The matter before us concerns the question whether a legal proceeding seeking to realize or enforce an equitable charge through judicial process falls within s 58(5) of the Bankruptcy Act 1966 (Cth) (the Act) and therefore does not require leave under s 58(3)(b).

2    Morris Finance Ltd, the applicant before us, claims to be an equitable chargee of land at 16A Petrie Street, Coopernook, New South Wales (the Coopernook property) owned by Mr and Mrs Brown, the first and second respondents, pursuant to a commercial goods lease between Morris Finance and Mr Brown dated 3 January 2012 (the goods lease). Mrs Brown gave a guarantee in favour of Morris Finance to secure the performance of Mr Brown’s obligations to Morris Finance under the goods lease. Morris Finance says that each of them charged all their interest in, inter alia, freehold land including the Coopernook property to secure their respective obligations to Morris Finance and thereby created an equitable charge(s) over such interests.

3    Mr Brown became bankrupt on 17 June 2013 and the third respondent is his trustee in bankruptcy. Mrs Brown became bankrupt on 25 August 2015 and the fourth respondent is her trustee in bankruptcy. As at 27 July 2015, an amount exceeding $45,000 was owed to Morris Finance under the goods lease and has not been paid.

4    On 10 November 2015, Morris Finance, by summons filed in the Supreme Court of New South Wales, commenced proceedings against Mr and Mrs Brown and their respective trustees in bankruptcy seeking relief, inter alia, under s 103(2) of the Conveyancing Act 1919 (NSW) in order to sell the Coopernook property. The summons, which was later amended to add as a party a registered mortgagee of the Coopernook property (the fifth respondent to the proceedings before us), sought, inter alia, the following orders:

Pursuant to section 103(2) of the Conveyancing Act 1919 (NSW) (“CA”):

(a)    the land situated at 16A Petrie Street, Coopernook in the State of New South Wales more particularly described as Lot 25 in Deposited Plan 829139 Parish of Lansdowne County of Macquarie being all that land contained in Title Reference 25/829139 (“Property”) be sold.

(b)    the Third Defendant and the Fourth Defendant deliver up vacant possession of the Property to the Plaintiff within fourteen (14) days.

(c)    the sale of the Property be conducted by public auction.

(d)    the Plaintiff be authorised to engage a qualified real estate agent to advertise the Property and conduct the auction.

(e)    the Plaintiff be at liberty to sell the Property by private treaty prior to the auction.

(f)    the proceeds of the sale of the Property be applied as follows:

(i)    the payment of all costs, charges and expenses properly incurred by the Plaintiff as incident to the sale, any attempted sale or otherwise of the Property including any agent’s commission, advertising expenses and reasonable legal fees and disbursements of and incidental to the conveyance of the Property by the Plaintiff to a purchaser(s);

(ii)    the payment of the amount to discharge registered Mortgage number 8421415;

(iii)    the payment of the amount due to the Plaintiff in discharge of its interest in the Property;

(iv)    the residue (if any) to the person authorised to give receipts for the proceeds of sale of the Property.

(g)    for the purposes of carrying out the sale of the Property, the Plaintiff has power to transfer the Property and all the interests of the First Defendant, the Second Defendant, the Third Defendant and the Fourth Defendant in the Property to a purchaser(s) subject to any prior registered encumbrance.

5    It was successfully contended before the primary judge that as a result of the bankruptcies of Mr and Mrs Brown, Morris Finance required leave under s 58(3)(b) of the Act to proceed with its application to take possession of the Coopernook property, sell it and distribute the proceeds of sale. For the purposes of his determination, the primary judge stipulated and then answered the following separate question:

[Q]uestion: “Does the plaintiff require the leave of the Court (within the meaning of s 58 of the Bankruptcy Act 1966 (Cth)) to commence the proceedings or to take any fresh step in the proceeding?”

Answer: “Yes”.

6    The application before us seeks leave to appeal the primary judge’s determination under ss 24(1)(c) and 24(1A) of the Federal Court of Australia Act 1976 (Cth). At first instance, the Supreme Court of New South Wales was appropriately exercising federal jurisdiction in dealing with the matter concerning s 58 of the Act, but the leave application and any appeal are not covered by s 7(3) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth). The relevant condition in s 7(3), namely, “the only matters for determination … are matters other than matters arising under an Act specified in the Schedule” has not been satisfied. The leave application and any appeal concern the interpretation and application of s 58 of the Act, which is an Act expressly mentioned in the schedule to the Cross-vesting Act. Accordingly, the leave application and any appeal are covered by s 7(5)(a), rather than s 7(3), of the Cross-vesting Act and as such can only be dealt with by this Court. We note that Morris Finance previously sought leave to appeal from the New South Wales Court of Appeal, but this application was dismissed for want of jurisdiction (Morris Finance Ltd v Brown [2016] NSWCA 343 at [44] per Payne JA with Basten JA at [1] agreeing).

7    Because the primary decision was interlocutory, Morris Finance requires leave to appeal pursuant to s 24(1A) of the Federal Court of Australia Act 1976 (Cth). It also required an extension of time under r 35.14 of the Federal Court Rules 2011 (Cth) within which to seek such leave, but we granted that extension at the commencement of the hearing given that the delay was solely referable to Morris Finance’s misconception that the New South Wales Court of Appeal otherwise had jurisdiction.

8    In summary, we have determined that leave to appeal ought be granted and the appeal allowed. In the circumstances, it is not necessary to elaborate on the leave question save to make the following brief observations. The application of ss 58(3)(b) and 58(5) of the Act to equitable charges such as that claimed by Morris Finance is a matter of some importance. If the decision below had been correct, it would be difficult for a secured creditor whose equitable charge was disputed to seek to enforce it through a State court without first obtaining leave under s 58(3)(b), an unnecessary and disadvantageous impediment to the chargee. We have concluded that it is contrary to the text, context and purpose of s 58(5) to exclude from its operation judicial processes to enforce an equitable charge. Morris Finance has readily satisfied both limbs of the leave to appeal test (Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 398 and 399). We reject the third respondent’s argument that no prejudice would be caused to Morris Finance if leave was refused assuming the decision below to be incorrect. There is no guarantee that Morris Finance would be given leave under s 58(3)(b). Moreover, it should not be put to the trouble and expense that s 58(5) is designed to alleviate.

9    It is convenient to now proceed to, first, identify the key legislative provisions and, second, analyse the principal question before us. No further elaboration on the facts is necessary.

KEY LEGISLATIVE PROVISIONS

10    It is appropriate to set out some of the key provisions of the Act and then to outline some aspects of the legislative history.

11    Section 58 provides:

58 Vesting of property upon bankruptcy—general rule

(1)    Subject to this Act, where a debtor becomes a bankrupt:

(a)    the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and

(b)    after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.

(2)    Where a law of the Commonwealth or of a State or Territory of the Commonwealth requires the transmission of property to be registered and enables the trustee of the estate of a bankrupt to be registered as the owner of any such property that is part of the property of the bankrupt, that property, notwithstanding that it vests in equity in the trustee by virtue of this section, does not so vest at law until the requirements of that law have been complied with.

(3)     Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a)    to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

(b)    except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

(4)    After a debtor has become a bankrupt, distress for rent shall not be levied or proceeded with against the property of the bankrupt, whether or not the bankrupt is a tenant of the landlord by whom the distress is sought to be levied.

(5)    Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his or her security.

(5A)    Nothing in this section shall be taken to prevent a creditor from enforcing any remedy against a bankrupt, or against any property of a bankrupt that is not vested in the trustee of the bankrupt, in respect of any liability of the bankrupt under:

(a)    a maintenance agreement; or

(b)    a maintenance order;

whether entered into or made, as the case may be, before or after the commencement of this subsection.

(6)    In this section, after-acquired property, in relation to a bankrupt, means property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt.

12    Relevantly to s 58, s 5(1) contains the following definitions of “provable debt” and “secured creditor”:

provable debt means a debt or liability that is, under this Act, provable in bankruptcy.

secured creditor, in relation to a debtor, means:

(a)    in the case of a debt secured by a PPSA security interest – the PPSA secured party in relation to the interest, if the interest:

(i)    arose as security for the debt; and

(ii)    is perfected (within the meaning of the Personal Property Securities Act 2009); or

(b)    in the case of any other debt – a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him or her from the debtor.

13    We would also note that s 90 deals with secured creditors in the following terms:

90 Proof of debt by secured creditor

(1)    A secured creditor is entitled to prove the whole or a part of his or her secured debt in the debtor’s bankruptcy in accordance with the succeeding provisions of this Division, and not otherwise.

(2)    A secured creditor who surrenders his or her security to the trustee for the benefit of creditors generally may prove for the whole of his or her debt.

(3)    A secured creditor who realizes his or her security may prove for any balance due to him or her after deducting the net amount realized, unless the trustee is not satisfied that the realization has been effected in good faith and in a proper manner.

(4)    A secured creditor who has not realized or surrendered his or her security may:

(a)    estimate its value; and

(b)    prove for the balance due to him or her after deducting the value so estimated.

(5)    A secured creditor to whom subsection (4) applies shall state particulars of his or her security, and the value at which he or she estimates it, in his or her proof of debt.

14    Section 58(5) of the Act has a long history. A provision in quite similar terms was introduced into the 1869 English bankruptcy legislation. An even earlier version, not in the same terms, was present in the 1825 legislation. Since 1869, provisions in substantially the same terms as the present s 58(5) have been re-enacted in the English bankruptcy legislation of 1883, in the bankruptcy legislation of some of the Australian colonies, in the Commonwealth bankruptcy legislation of 1924, and in the Act. We would note at the outset that the legislative history of the predecessor provisions is consistent with and indeed supportive of the proposition that proceedings which involve a form of judicial realization of an equitable charge fall within the protection afforded to secured creditors by s 58(5). Before elaborating further on the construction and scope of s 58(5), it is convenient to recount some of this history.

15    It is useful to begin with s 108 of An Act to amend the Laws relating to Bankrupts 1825 (Imp) (6 Geo IV, c 16) (the 1825 UK Act), which provided:

And be it enacted, That no Creditor having Security for his Debt, or having made any Attachment in London or in any other Place, by virtue of any Custom there used, of the Goods and Chattels of the Bankrupt, shall receive upon any such Security or Attachment more than a rateable Part of such Debt, except in respect of any Execution or Extent served and levied, by Seizure upon, or any Mortgage of or Lien upon any Part of the Property of such Bankrupt before the Bankruptcy: Provided that no Creditor, though for a valuable Consideration, who shall sue out Execution upon any Judgment obtained by Default, Confession or Nil Dicit, shall avail himself of such Execution to the Prejudice of other fair Creditors, but shall be paid rateable with such Creditors.

(Emphasis added.)

16    The principles underpinning s 108 were remarked upon by the Hon Robert Henley Eden (later Baron Henley) in A Practical Treatise on the Bankrupt Law (John S Littell, 1841) at 221:

Though the general principle of the bankrupt law is to effect an equal division among creditors, yet there are certain cases in which a creditor, having by legal process, or by special agreement, or by a certain natural equity which the law recognizes, obtained a security over any part of the property of the bankrupt, is allowed to pay his demand out of such property.

This principle … [was] expressly regulated by the 9th section of the 21 Jac. 1, c. 19 [ie the statute of James], which, with certain alterations … is contained in the 108th section of the new act [ie the 1825 UK Act]…

The statute of James, specifying those securities which should not be entitled to any priority over other creditors, used the words, “that if any creditor have a security for his debt by judgment, statute, recognizance, specialty, or other security,” &c. The new act merely uses the term “no creditor having security for his debt,” &c. It is unnecessary to observe, that as the general words will necessarily include all the particulars enumerated in the old statute, the law is not altered.

17    In this context, s 108 in essence provided that creditors “having security” (the meaning of which was far broader than the contemporary understanding of this concept) were entitled to no more than a rateable part of their debts except, inter alia, if they possessed a mortgage or lien over the property of the bankrupt.

18    In Cross J, A Treatise on the Law of the Lien, and Stoppage in Transitu (John S Littell, 1841) at 115 to 116, the learned author provides the following summary of the case law which had developed by that time concerning the application of s 108:

Creditors, with whom a bankrupt has deposited the title-deeds of estates as security for their debt, may therefore, upon petition to the court, if it be satisfied of their claims, obtain an order that the commissioners shall ascertain what is due to them in respect of their mortgages—that the property be sold—the produce applied towards payment of expenses, and of what shall be found due to such equitable mortgagees, for principal, interest and costs—and that they shall prove for any balance that may be found due to them.

The court, in general, will not refer it to the commissioners to ascertain the existence of an equitable mortgage, but will itself decide the question; and when the equitable mortgage is established, a reference is made to the commissioners to take an account of what is due upon it.

In case there be a subsequent mortgagee of the equity of redemption, who objects to it, there is no authority, on the petition of an equitable mortgagee, by deposit of deeds, to order a sale of the estate; his proper remedy being by bill.

Nor will the court interfere to order the sale of equitable mortgages, in cases where there is any dispute; nor in the case of adverse claimants—one claiming as equitable mortgagee, and the other under a prior lease, made by the bankrupt of the same property, where the estate of the bankrupt has no interest in the question; nor, where the circumstances are suspicious—as where the mortgage has been created shortly before the bankruptcy, for a very old debt, for which no interest has been paid, or where the transaction appears to have been usurious; nor where it will become necessary to enter into partnership accounts; nor, where deeds have been deposited twelve years, without any memorandum, and the bankrupt is dead; nor, where the deposit is to cover future as well as present bills of cost due to a solicitor.

(Footnotes omitted; emphasis in original.)

19    Subsequent to the 1825 UK Act, ss 25 and 26 of An Act to establish a Court in Bankruptcy 1831 (Imp) (1 & 2 Will 4, c 56) (the 1831 UK Act) introduced the automatic vesting of the bankrupt’s personal and real estate in the Official Assignee or Assignees. Those sections, and s 108 of the 1825 UK Act, were later incorporated into the consolidated bankruptcy legislation passed in 1849, being ss 141 to 142 and 184 respectively of An Act to amend and consolidate the Laws relating to Bankrupts 1849 (Imp) (12 & 13 Vict, c 106).

20    The next significant development in the evolution of what is now s 58(5) of the Act came with the introduction of the Bankruptcy Act 1869 (UK) (the 1869 UK Act). Sections 12 and 13 of that Act (including the marginal notes set out as headings below) provided as follows:

12. Creditors bound by bankruptcy proceedings

Where a debtor shall be adjudicated a bankrupt, no creditor to whom the bankrupt is indebted in respect of any debt provable in the bankruptcy shall have any remedy against the property or person of the bankrupt in respect of such debt except in manner directed by this Act. But this section shall not affect the power of any creditor holding a security upon the property of the bankrupt to realize or otherwise deal with such security in the same manner as he would have been entitled to realize or deal with the same if this section had not been passed.

13. Power of Court, after presentation of petition, to restrain suits &c., and appoint receiver

The Court may, at any time after the presentation of a bankruptcy petition against the debtor, restrain further proceedings in any action, suit, execution, or other legal process against the debtor in respect of any debt provable in bankruptcy, or it may allow such proceedings, whether in progress at the commencement of the bankruptcy or commenced during its continuance, to proceed upon such terms as the Court may think just. The Court may also at any time after the presentation of such petition appoint a receiver or manager of the property or business of the debtor against whom the petition is presented, or of any part thereof, and may direct immediate possession to be taken of such property or business, or any part thereof.

(Emphasis added.)

21    It is apparent from the text of these provisions that s 12 of the 1869 UK Act is the predecessor to ss 58(3)(a) and 58(5) of the Act. However, the leave requirement for proceedings in respect of a provable debt in the current s 58(3)(b), was yet to be introduced. It is also apparent from the second sentence of s 12 that the 1869 UK Act did not seek to alter or affect the rights of secured creditors to “realize” or “deal” with their security over the property of a bankrupt from the otherwise status quo position accepted at the time.

22    Further, s 72 of the 1869 UK Act provided as follows:

72. General power of bankruptcy courts

Subject to the provisions of this Act, every Court having jurisdiction in bankruptcy under this Act shall have full power to decide all questions of priorities, and all other questions whatsoever, whether of law or fact, arising in any case of bankruptcy coming within the cognizance of such Court, or which the Court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case …

23    This section was the source of considerable controversy at the time concerning whether, in circumstances of bankruptcy, the Court of Chancery had jurisdiction to deal with claims by secured creditors to realize or deal with their security, particularly in circumstances where proceedings were already on foot in a court of bankruptcy. In a series of cases concerning mortgagees, the Court of Chancery held that the mortgagee “stands outside the bankruptcy” and, while he or she “may come in under the bankruptcy if he [or she] chooses”, there was no obligation to do so. Consequently, the mortgagee was not “precluded from proceeding in equity to enforce his [or her] security” (White v Simmons (1871) LR 6 Ch App 555 at 557 to 558 per Lord Hatherley LC; see also In re England; Ex parte Pannell (1877) 6 Ch D 335 at 338 per James LJ and In re Wherly; Ex parte Hirst (1879) 11 Ch D 278 at 282 to 283 per Bacon CJ).

24    To exemplify the point, it is convenient to elaborate on one of the cases. The facts of In re Wherly; Ex parte Hirst, shortly put, were as follows. Mr Wherly engaged Hirst & Son to build three houses for him in Tynemouth for £1,660, with each property mortgaged to Tynemouth Permanent Building Society. In response to Mr Hirst’s request for security, Mr Wherly promised to: (a) arrange for the Society to pay directly to Mr Hirst all of the mortgage advances that he was entitled to receive until full payment was made; and (b) not transfer any of the properties to any purchaser until such time. On 11 June 1877, Mr Wherly wrote to the solicitor for the Society, Mr Fenwick, to inform him of these matters and initial payments were made by Mr Fenwick to Mr Hirst in accordance with the agreement. Subsequently, the Society encountered financial difficulties and entered into liquidation. Mr Wherly also filed a liquidation petition. But Mr Hirst was still owed amounts for his building services.

25    Faced with this predicament, Mr Hirst and his son issued proceedings against Mr Wherly’s liquidation trustee and the trustees of the Society seeking the following:

A declaration that the Plaintiffs were entitled to an equitable charge upon the houses for the unpaid balance of their contract price for building the houses, less the cost for fixing the fixtures above mentioned; redemption as against the building society trustees as mortgagees under the deeds of September, 1877; payment by the liquidation trustee of the moneys owing on the equitable charge and the three mortgages respectively, and costs; in default, foreclosure against the liquidation trustee; an injunction; a receiver; accounts and inquiries; and further relief.

26    Following this, an order was made in the County Court (being a court of bankruptcy) that Mr Hirst and his son be restrained from taking any further steps in the proceeding. In support of the application for the order, Mr Wherly had deposed that “he was advised and believed that the promise contained in the letter of 11th June, 1877, did not amount to a charge on the property”. On the hearing of the appeal from the order made, Bacon CJ, noting that Mr Hirst was a mortgagee in the second degree and notwithstanding the affidavit of Mr Wherly, held at 283:

… the equitable mortgagee has a clear right to bring his action; and that this Court has no authority to restrain the Plaintiff in that action from suing the trustee in bankruptcy and the building society in order to establish his right to redeem and foreclose, if he can.

27    The effect of In re Wherly and other authorities was to establish that secured creditors, in possession of a mortgage, charge or lien over the property of the bankrupt, prior to the time of the bankruptcy, stood outside the bankruptcy and remained free to realize and deal with their security in the same manner, and in the same courts, as they would have been able to do if the bankruptcy had not occurred. But in some instances where the claimant possessed no more than an inchoate licence to seize the debtor’s property, which had not crystallised at the time of bankruptcy (see Thompson v Cohen (1872) LR 7 QB 527), the position was different.

28    We would also note the philosophical themes of James LJ in In re England; Ex parte Pannell at 337 to 338 reflecting the reluctance of a court of bankruptcy to interfere in Chancery proceedings involving an equitable mortgagee seeking to enforce his security rights.

29    The next major legislative development was the introduction of the Bankruptcy Act 1883 (UK) (the 1883 UK Act), which contained the following section (with the marginal note set out as a heading):

9.     Effect of receiving order

(1)     On the making of a receiving order an official receiver shall be thereby constituted receiver of the property of the debtor, and thereafter, except as directed by this Act, no creditor to whom the debtor is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the debtor in respect of the debt, or shall commence any action or other legal proceedings unless with the leave of the Court, and on such terms as the Court may impose.

(2)     But this section shall not affect the power of any secured creditor to realise or otherwise deal with his security in the same manner as he would have been entitled to realise or deal with it if this section had not been passed.

(Notes omitted; emphasis added.)

30    In contrast with s 12 of the 1869 UK Act, s 9(2) of the 1883 UK Act employed the language of any “secured creditor”. This term was defined in s 168 as “a person holding a mortgage charge or lien on the property of the debtor, or any part thereof, as a security for a debt due to him from the debtor”. This definition did little more than to confirm the pre-existing understanding of those creditors “holding a security” who were entitled, under s 12 of the 1869 UK Act, to realize and deal with their security in the same way as if that section had not been passed. The 1883 UK Act was later substantially reproduced in and by the Bankruptcy Act 1914 (UK) (the 1914 UK Act).

31    As for the Australian legislative history, prior to Federation each of the Australian colonies had their own bankruptcy laws. Provisions corresponding to s 58 of the Act were to be found in: s 10 of the Bankruptcy Act 1898 (NSW); s 59 of the Insolvency Act 1890 (Vic); s 75 of the Insolvency Act 1874 (Qld); ss 126 and 220 of The Insolvent Act 1886 (SA); s 9 of The Bankruptcy Act 1892 (WA); and s 11 of The Bankruptcy Act 1870 (Tas). During this period, Queensland’s and Tasmania’s colonial legislation were based primarily on the 1869 UK Act, whilst the bankruptcy laws of the other colonies were more aligned with the 1883 UK Act: see Meiklejohn C (ed), Officially Receiving: A History of Australia’s Bankruptcy Law and Administration (Insolvency and Trustee Service Australia, 2010) at 10; see also the analysis of Allsop JLB and Dargan L, “The History of Bankruptcy and Insolvency Law in England and Australia” in the informative compendium edited by Gleeson JT et al, Historical Foundations of Australian Law, Volume II, Chapter 16 (Federation Press, 2013).

32    The first Commonwealth bankruptcy legislation was the Bankruptcy Act 1924 (Cth). It was substantially based upon the 1883 UK Act (and the later 1914 UK Act) although it incorporated some aspects of the then State legislation. Relevantly, s 60 of the Bankruptcy Act 1924 (with the marginal note set out as a heading) provided as follows:

60.     Effect of sequestration order

(1)     Upon sequestration the property of the bankrupt shall vest in the official receiver named in the order, and shall be divisible among the creditors of the bankrupt in accordance with the provisions of this Act.

(2)     After sequestration, except as directed by this Act, no creditor to whom the bankrupt is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the bankrupt in respect of the debt, or shall commence or take any fresh step in any action or other legal proceeding, unless with the leave of the Court and on such terms as the Court imposes.

(3)     This section shall not affect the power of any secured creditor to realize or otherwise deal with his security.

(Emphasis added.)

33    Unlike the various iterations of bankruptcy legislation that we have identified above, s 60(3) of the Bankruptcy Act 1924 did not contain the words “in the same manner as he would have been entitled to realise or deal with it if this section had not been passed”. But commentary on s 60(3) indicates that the absence of these words did not serve to and was not intended to change that position. In Rogers G and Wardle H, A Guide to Bankruptcy Law in Australia (Butterworth & Co. (Australia) Ltd, 1948), it was noted (at 60 to 61) in respect of s 60(3) of the Bankruptcy Act 1924 that:

… s. 60(3) makes it clear that a secured creditor is not prevented from realizing or otherwise dealing with his security in the same manner as he would have been entitled to do if no bankruptcy proceedings had been taken. To hold otherwise would completely upset all recognized rules and the practice of lending money on recognized securities. Thus, the mortgagee who has advanced a sum of money on the security of real estate possessed by the bankrupt, will be allowed to realize or deal with his security in the same way as he would have been entitled to do if there had been no bankruptcy.

34    This position is consistent with the case law concerning s 12 of the 1869 UK Act and s 9 of the 1883 UK Act. For completeness, we note that the Bankruptcy Act 1924 was amended from time to time up to the enactment of the Act, which implemented the 1962 recommendations of the Committee to Review the Bankruptcy Law of the Commonwealth chaired by Sir Thomas Clyne. But the amendments to the Bankruptcy Act 1924 do not affect the present question. As for the Act, s 60 of the Bankruptcy Act 1924 was re-enacted as s 58 of the Act. No intention was manifested to make any change concerning the position of secured creditors and the Clyne Committee Report was silent on the matter.

35    To complete this description of the legislative history, we note that ss 58(3) and 58(5) of the Act as originally enacted were in the same form as their present form. The definition of “secured creditor” in s 5(1), as originally enacted, was substantially the same as paragraph (b) of the current definition. It is to be observed that s 58(5) uses the word “right” (“the right of a secured creditor”) instead of the word “power” as used in the predecessor legislation discussed earlier. It is not clear why this change was made. But if anything, the word “right” more readily embraces the invocation of judicial processes for realization than perhaps the word “power”.

ANALYSIS

36    As is apparent, s 58(5) deals with “the right of a secured creditor to realize or otherwise deal with his or her security”. The Act does not define “security”, but does define “secured creditor” in s 5(1) in the terms that we have set out earlier. Limb (b) of that definition is relevant to the present case given that the equitable charge is said to concern real property. It will be appreciated that limb (b) is expressed in broad terms, namely, “a person holding a mortgage, charge or lien on property of the debtor as a security…”. In terms of textual analysis, there is no good reason to confine any of these types of securities to legal interests as opposed to equitable interests. The breadth of the text of the definition of “secured creditor” and the context in which it is used in s 58(5) do not provide any textual or contextual basis for excluding from the operation of s 58(5) the holder of an equitable charge and the right of that holder to “realize or otherwise deal with” its equitable charge. Indeed, at the time ss 5 and 58 were enacted, charges and liens were well-recognised species of equitable interests. And many of the earlier authorities discussed equitable interests, for example, equitable mortgages.

37    The more difficult question concerns the phrase “realize or otherwise deal with” and its scope when one is considering an equitable charge. But before addressing that question directly, it is convenient to discuss the nature of such an interest.

38    Apart from statutory charges, charges are creatures of equity and enforceable only in equity (see Young PW, Croft C and Smith M, On Equity (Lawbook Co, 2009) at [9.180]). An equitable charge usually arises by agreement between the parties under which the property charged is made liable for or is “appropriated” to securing the performance or discharge of the relevant contractual obligation. In relation to the charged property, there is no transfer of title or any possessory interest conferred by an equitable charge, although an order for possession may be a necessary adjunct to an order for sale if the equitable charge is sought to be enforced. Moreover, unlike a mortgage, there is no right or power of foreclosure (Tennant v Trenchard (1869) LR 4 Ch App 537 at 542 per Lord Hatherley LC). The principal right or remedy of the chargee to enforce its equitable charge is by a judicial order for sale (with an ancillary order for possession) or the appointment of a receiver (Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 595 per Buckley LJ). The chargee has no self-help remedy (see The Melbourne Tramways Trust v The Melbourne Tramway and Omnibus Company Limited (1887) 13 VLR 487 at 490) but must obtain the assistance of a court of equity to realize or enforce the charge. Usually, upon default a chargee is entitled to an order for sale, although given that an equitable jurisdiction is being invoked there may be discretionary aspects to the exercise of that jurisdiction. We have described a court’s power to order a sale (including any ancillary orders) to enforce an equitable charge as being in the court’s equitable jurisdiction, although such a jurisdiction may be supplemented by the conferral of other statutory powers.

39    It is apparent that an equitable charge can only be enforced by judicial order for sale or receivership of the charged property. Is a proceeding seeking such orders a step to “realize” or “otherwise deal with” such a security within the meaning of s 58(5)? If so, no leave is required under s 58(3)(b).

40    In the present case, Morris Finance has sought the relief in its summons that we have set out earlier. Orders for possession and sale of the Coopernook property are sought, with other ancillary orders to deal with the proceeds of any sale. But in terms, no declarations are sought dealing with the existence of its equitable charge(s). Moreover, there is no claim in debt against any of the respondents.

41    Before we address s 58(5), which operates as an exception to, inter alia, s 58(3)(b), it must be first determined whether s 58(3)(b) otherwise applies to Morris Finance’s proceeding absent the carve out. Clearly the amounts due by Mr and Mrs Brown under the goods lease and the guarantee as at the date of bankruptcy were provable debts, even if secured. The question is whether Morris Finance’s proceeding is “in respect of a provable debt”. Given the breadth of the expression “in respect of”, which has a “chameleon-like” quality reflecting the context in which it is used, and where only a “discernible and rational link” may be necessary between the proceeding and the provable debt (Technical Products Pty Ltd v State Government Insurance Office (Qld) (1989) 167 CLR 45 at 47 per Brennan, Deane and Gaudron JJ), we consider that there is the necessary link, as the primary judge correctly found (see at [23]). The proceeding seeks to enforce the equitable charge(s) which itself secures payment of the provable debt. As s 90 indicates, a secured debt is provable, although a secured creditor may not seek to prove or may only prove for any balance owing after the security has been realized (s 90(3)). Put another way, a necessary underpinning of the security interest that is sought to be enforced is the provable debt, without which there would be no security interest (see Mango Media Pty Ltd v Velingos [2008] NSWSC 202 at [14] and [15] per Barrett J and Scott v Bagshaw (2000) 99 FCR 573 at [25] per Drummond, RD Nicholson and Katz JJ).

42    Accordingly, if s 58(5) did not apply, then Morris Finance needed leave under s 58(3)(b). The question then is whether s 58(5) applies. In our view it does and we respectfully differ from the primary judge who took the contrary view. We will discuss aspects of his Honour’s reasons, but there is no need to address any specific grounds of appeal as Morris Finance’s draft notice of appeal identifies only the principal question of law that we have identified and on which it is said his Honour erred. It is appropriate to elaborate on why we have taken a different view to his Honour.

43    First, there is cogent authority to support the proposition that legal proceedings brought by a mortgagee seeking an order for possession of mortgaged property fall within s 58(5) (see Hanshaw v National Australia Bank [2012] NSWCA 100 at [35] to [43] per Young JA, Perpetual Trustee Company Ltd v Daniel Cuitanovic as Trustee of the Bankrupt Estate of Dimitrovski [2013] NSWSC 722 at [15] to [19] per Slattery J and, by parity of reasoning, Savieri v Brown [2008] NSWSC 1210 at [29] to [33] per White J). In such cases, the claimant is seeking to enforce a remedy being a right to possession. To enforce a right of possession for the purposes of sale is treated as an act of realization of the relevant security, whether by self-help or through judicial process.

44    By parity of reasoning, Morris Finance’s proceeding is in substance the exercise of a “right of realisation by judicial process” to use Heenan J’s phrase in Evenwood Pty Ltd v Conway [1997] WASC 14. It seeks orders for sale, possession and the distribution of proceeds by way of judicial enforcement of its equitable charge. There is no reason to treat this security interest differently from a registered mortgage where a mortgagee approaches a court seeking an order for possession. Indeed, to do so would be inconsistent with construing s 58(5) “relatively liberally” as Young JA described in Hanshaw at [42].

45    Now true it is that a mortgage might contain express terms conferring an entitlement to possession and a power of sale (in addition, perhaps, to any statutory rights), so that it may be said that the legal proceedings are merely ancillary to enforcing otherwise conferred rights. Contrastingly, in the present case, it may be said that the equitable charge(s) contains no terms conferring such rights and that all the chargee has is a right to approach a court of equity to seek orders for sale and ancillary orders to enforce the charge. But it seems to us that this is not a relevant difference. The breadth of “secured creditor” and “security” embrace an equitable charge. And if an equitable charge can only be enforced and realized through judicial process, in our view the words in s 58(5) “to realize” are sufficiently broad to embrace the invocation of judicial process to seek an order for sale and consequential orders, that being the only way to enforce an equitable charge. Otherwise holders of equitable charges would for all practical purposes not be able to rely on the benefit of s 58(5), which would contradict the premise, namely, that s 58(5) is sufficiently broad to embrace equitable charges. We also consider that the steps of seeking an order for sale (and consequential orders) are within the expression “otherwise deal” construed broadly.

46    The third respondent submitted that an equitable chargee is not entitled to an order for possession. We do not agree with that proposition in the generality with which it has been expressed. In order to achieve a sale, vacant possession may be required to facilitate any sale and the settlement thereof. Accordingly, there is no reason why an order for possession cannot be made as an ancillary order to enforce the charge by way of an order for sale.

47    Relatedly, the third respondent also sought to draw a distinction between, on the one hand, Hanshaw and Savieri which sought orders for possession and, on the other hand, the present case where the principal relief was an order for sale. More generally, a distinction was sought to be drawn between an equitable mortgagee and the exercise of its rights and the position of an equitable chargee. But we do not consider that to be a relevant distinction for the purposes of s 58(5). Proceedings seeking either possession or sale or both can come within the phrase “realize or otherwise deal with his or her security”.

48    Second, the legislative history that we have set out earlier is not incompatible with the proposition that s 58(5) can embrace judicial realization of an equitable charge. Indeed, it also supports the position that s 58(5) is to be construed “relatively liberally”.

49    Third, it is also to be recalled that s 58(3) operates in aid of s 58(1) with the purpose of ensuring that the property of a bankrupt “is not depleted to the advantage of individual creditors and the disadvantage of creditors generally” and to prevent one creditor obtaining an unfair advantage over another (Talacko v Bennett [2017] HCA 15 at [37], albeit that Talacko was concerned more with the interaction between s 58(3) of the Act and s 15(2) of the Foreign Judgments Act 1991 (Cth)). We make this observation to emphasise the point that a liberal reading of s 58(5), which itself operates as a carve out to inter alia s 58(3)(b), such that s 58(5) embraces the realization by judicial process of an equitable charge, is quite consistent with that purpose. There is no unfair advantage in favour of an equitable chargee resorting to such a process asserting its entitlement to an order for sale and any ancillary orders or any inappropriate depletion in the bankrupt’s estate as a result of pursuing that course.

50    Fourth, in our view the present case is not of a type dealt with in Mango Media, contrary to the primary judge’s analysis at [22]. In that case, Barrett J held that the proceedings before him fell outside s 58(5) because all that was sought was a declaration as to the existence of the security interest and an order for the extension of a caveat predicated upon the existence of that interest. He considered that such relief and the seeking thereof did not involve exercising a right “to realize”. The declaration per se and the caveat extension did not realize or seek to realize anything. Nor did the proceeding seeking such orders fall within “otherwise deal”. Mango Media was followed in Lawrence & Hanson Group Pty Ltd, in the matter of Pugliese v Pugliese [2016] FCA 1278 at [24] and [25] per Gleeson J. But the relief sought by Morris Finance in the present case is distinguishable. Orders for sale and ancillary orders are sought.

51    The existence of the equitable charge(s), particularly that purportedly given by Mr Brown, may be in issue in the New South Wales proceedings. But that is a different question. The proceeding and the relief sought involve more than seeking a declaration of the existence of the security interest. True it is that Barrett J said in Mango Media at [17] that “[r]ealisation of security entails some step by way of resort to the property over which the security exists…”, but that statement was more definitive than it needed to be given his principal conclusion. We would agree with that proposition if it was to be epexegetically enhanced to read “… by way of resort, including through the use of judicial processes, to the property…”. But if that statement could not be so construed and if it was intended to be exhaustive of the possibilities such that it impliedly excluded a right of realization by judicial process, the only recourse open to an equitable chargee, we would respectfully disagree. Clearly, resort to a judicial process can fall within s 58(5). After all, s 58(5) operates as a carve out to, inter alia, s 58(3)(b), the very subject matter of which concerns judicial processes.

52    Fifth, the proceeding is not a claim in debt against Mr and Mrs Brown. While some of the orders deal with the distribution of any proceeds of sale, that is merely ancillary to the realization orders. To the extent that the third respondent submitted otherwise, we would reject the third respondent’s characterisation.

53    Sixth, it was suggested by the third respondent that as the existence of the equitable charge(s), particularly that said to have been given by Mr Brown, was in issue, and to be litigated in the New South Wales proceeding, the proceeding necessarily fell outside s 58(5). His Honour in substance also so reasoned (see at [19] to [21]). We would respectfully disagree. A number of points can be made against such a proposition.

54    The first point is that if proceedings, say, by a mortgagee seeking an order for possession are within s 58(5), it cannot be right to say that they fall outside it once a defence has been filed. The act of bringing the proceeding is an act falling within s 58(5). It does not lose that status by a later contest as to the existence of the security interest. By parity of reasoning, the same position applies in relation to the proceedings brought by Morris Finance. Otherwise there would be considerable uncertainty.

55    The second and related point is that s 58(5) does not first require that the security interest be established. If otherwise, that would entail an anterior proceeding for which leave would be required under s 58(3)(b), which would defeat or frustrate the operation of s 58(5) to the extent that it embraces the taking of legal proceedings. As we have said, mortgagees seeking orders for possession are within s 58(5). But a mortgagee may have to establish by evidence the existence of its security interest. No case suggests that such a circumstance takes the mortgagee outside s 58(5); to the extent that part of his Honour’s reasons in [21] suggest otherwise, we would disagree.

56    The third point is that if there is a contest as to the existence of the security interest, nothing that we have said concerning s 58(5) prevents that dispute from being properly litigated, in this case in the Supreme Court of New South Wales. All that our construction of s 58(5) entails is that the security holder does not first need leave under s 58(3)(b) before bringing the proceedings. If the existence of the security is in issue, then it will need to be established, as it would be in contested proceedings brought by a mortgagee seeking an order for possession.

57    Further on this aspect, the third respondent made reference to a number of problems identified by the primary judge at [4] that stood in the way of Morris Finance obtaining relief, including whether s 103(2) of the Conveyancing Act 1919 (NSW) applied. Before us, Morris Finance advanced a number of answers to these perceived difficulties. But we do not need to descend into the detail. These merits questions going to the entitlement to relief or the grant of the remedy do not result in the asserted right of realization of the equitable charge by judicial process falling outside of s 58(5).

58    Seventh, his Honour seems to have suggested at [21] that because orders dealing with proceeds of sale are sought, this therefore takes Morris Finance’s proceeding outside of s 58(5). We disagree and see such orders merely as ancillary to the order for sale. Moreover, the orders do not seek adjudication on the quantum of the amounts but rather an endorsement of the general protocol for distribution.

59    Eighth, we do not consider that Scott v Bagshaw assists in terms of the scope and operation of s 58(5). The Court did not refer to s 58(5), but only discussed s 58(3)(b) (see at [24] to [26]). If it is necessary to say so, and consistently with what we have said earlier, the principal proceeding in that case to the extent that it sought an order for the appointment of a receiver to sell property the subject of an asserted equitable charge, we would have thought fell within s 58(5).

60    Finally, the third respondent made reference to Hall v Richards (1961) 108 CLR 84 and Taylor J’s discussion at 101, but we do not consider that case to be on point. That case concerned a judgment creditor levying execution on a judgment debtor’s interest in land by the use of a caveat. The question was whether that made the judgment creditor a “secured creditor” under the relevant bankruptcy legislation and conferred a “lien” or “charge”. It was held that it did not. It was in that context that Taylor J observed that levy by execution was not equivalent to a realization by an encumbrancee of his security. In the present case we are concerned with the enforcement of an equitable security over land, not an unsecured judgment creditor levying execution facilitated by a caveat permitted under relevant legislation associated with the potential use of a writ of fieri facias.

CONCLUSION

61    In summary, leave to appeal should be granted and the appeal allowed. We will set aside his Honour’s answer to the separate question and answer it “No”.

62    In our view, the costs of the proceedings before us should follow the event save that we will make no order for costs against the fourth respondent as none was sought or against the fifth respondent who filed a submitting notice. We see no reason to make any indemnity costs order, but we will give the parties an opportunity to address us further on that question if they so choose. Finally, the costs of the proceedings in the Supreme Court of New South Wales will be left for that Court to determine.

Associate:

Dated: 19 June 2017

SCHEDULE OF PARTIES