FEDERAL COURT OF AUSTRALIA

Lawrence & Hanson Group Pty Ltd, in the matter of Pugliese v Pugliese [2016] FCA 1278

ORDERS

THE COURT ORDERS THAT:

1.    Leave be granted, pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth), to the applicants to commence and prosecute proceedings in the Supreme Court of New South Wales, seeking:

(a)    an order that registered caveat number AI871374 be extended until further order; and

(b)    a declaration that the applicants have an estate or interest in the property located at 3 Lewis Street, Dee Why in the State of New South Wales.

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

REASONS FOR JUDGMENT

GLEESON J:

1    On 11 October 2016, I granted leave to the applicants pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth), to commence proceedings in the Supreme Court of New South Wales (“Supreme Court”) seeking orders extending a caveat and seeking a declaration concerning their asserted equitable interest in the property at 3 Lewis Street, Dee Why in the State of New South Wales (“the land”). The registered proprietors of the land are the first respondent (“Mr Pugliese”) and his wife (“Mrs Pugliese”) as joint tenants.

2    My reasons for the grant of leave are as follows.

Background facts

3    The applicants are the partners of Lawrence & Hanson Group Pty Ltd (“L&H Group”), a limited partnership under the Partnership Act 1958 (Vic).

4    According to the evidence given by L&H Group’s solicitor, Malcolm Murray, on or about 29 March 2012 L&H Group entered into an agreement with The Electrical Group Pty Ltd (“The Electrical Group”) pursuant to which The Electrical Group was entitled to purchase goods on credit from L&H Group.

5    Mr Pugliese, allegedly a director of The Electrical Group, is alleged to have entered into a written guarantee and indemnity on 29 March 2012 pursuant to which Mr Pugliese guaranteed the payment of all debts which The Electrical Group may owe to L&H Group.

6    The guarantee included the following words:

The Guarantors, for the purpose of securing any credit facilities provided to the Applicant, charge all real and personal property owned by them for an amount equal to any amount that the Applicant owes to the Seller from time to time under the credit facility or otherwise and will execute any necessary documents for this purpose.

7    For the purposes of this provision, L&H Group contends that Mr Pugliese is a Guarantor, The Electrical Group is the Applicant and L&H Group is the Seller.

8    Liquidators were appointed to The Electrical Group on 28 August 2014. Mr Murray’s evidence is that, as at 3 September 2014, The Electrical Group was indebted to L&H Group in an amount of $120,682.07. According to Mr Murray, none of this debt has been paid to L&H Group, either by The Electrical Group or by Mr Pugliese pursuant to the guarantee.

9    On 4 September 2014, L&H Group lodged a caveat, dealing number AI871374, on the title of the land (“L&H Group’s caveat”).

10    L&H Group’s caveat identified the registered proprietor as Mr Pugliese. It described the estate or interest in land as “Charge on the registered proprietor’s interest in the land, securing as at 4 September 2014 a debt of $120,682.07”.

11    The caveat elaborated the facts which gave rise to the claimed estate or interest in the land in the following terms:

The registered proprietor executed a Guarantee and Indemnity in favour of Lawrence & Hanson Group Pty Limited and Sonepar Asia Pacific Limited whereby, he charged all his interest in the land to secure any credit facilities provided to The Electrical Group Pty Limited (“the company”) by the Caveators for an amount equal to any amount that the company owes to the Caveators from time to time under the credit facility or otherwise.

12    The caveat is the third ranked security registered on the title to the land. There is a registered mortgage in favour of Suncorp-Metway Ltd and an earlier caveat lodged by Giovanni Pugliese (Mr Pugliese’s father), which seeks to protect an interest that Mr Pugliese senior claims in the land pursuant to loans he made to Mr and Mrs Pugliese.

13    Mr Pugliese was made bankrupt on his own petition on 17 July 2015. The second respondent (“trustee in bankruptcy”) was appointed Mr Pugliese’s trustee in bankruptcy. Mrs Pugliese is not a bankrupt.

14    Upon the sequestration order being made with respect to Mr Pugliese, the joint tenancy over the land was automatically severed and Mr Pugliese’s 50% interest in the land was thereafter held in trust for the trustee in bankruptcy: cf. Sistrom v Urh (1992) 40 FCR 550; Romeo v The Trust Company (PTAL) Ltd [2012] NSWCA 62 at [19]. Mr Pugliese, however, remains as a registered proprietor of the land, along with Mrs Pugliese. As a result, Mr Pugliese’s interest in the land has vested in the trustee in equity only: s 132(3) of the Bankruptcy Act.

15    On 5 August 2016, solicitors acting for Mrs Pugliese wrote to the applicants’ solicitor, enclosing a valuation report for the land dated 29 August 2015. That report valued the land at $1 million. Mrs Pugliese’s solicitors stated that the amount outstanding under the mortgage to Suncorp Metway was $335,178 and the amount owed to Mr Pugliese senior was $750,000. They contended that, given the land was valued at $1 million, there was absolutely no equity in the land from which to satisfy the debt to L&H Group. Mrs Pugliese’s solicitors requested that L&H Group’s caveat be removed so that the trustee in bankruptcy could transfer Mr Pugliese’s interest in the land to Mrs Pugliese.

16    The applicants did not remove their caveat. On Mrs Pugliese’s application, the Registrar-General prepared a lapsing notice for L&H Group’s caveat. The lapsing notice was served on the applicants on 22 September 2016.

17    The applicants contended that under s 74J of the Real Property Act 1900 (NSW), L&H Group’s caveat would lapse unless, before the expiry of 21 days after the service of the lapsing notice, the applicants obtained an order from the Supreme Court extending the operation of the caveat. The 21 day period to obtain that order expired on 12 or 13 October 2016.

18    The applicants complained that they have not been permitted to undertake their own full valuation of the land. However, they asserted, a “kerbside” valuation undertaken on 10 October 2016 indicated that the land at present has a value of $1.3 million. That is sufficient value to secure not only the registered mortgage and Mr Pugliese’s equitable charge but also the applicants’ equitable charge over the land.

19    Accordingly, the applicants wished to apply to the Supreme Court urgently to seek an order extending the caveat and also seeking a declaration as to their equitable interest in the land.

20    The applicants commenced this proceeding on 10 October 2016 and sought leave to proceed under s 58(3) ex parte. On their case, they required a grant of leave in order to approach the Supreme Court for an extension of the caveat by 12 October 2016. I listed the application for hearing on 11 October 2016, and made orders for short service of the originating application and supporting affidavit of Malcolm Murray sworn 10 October 2016 on the trustee in bankruptcy and Mrs Pugliese. Service was not required to be effected on Mr Pugliese. After receiving the originating application and supporting affidavit, Mrs Pugliese and the trustee in bankruptcy did not oppose the grant of leave.

Legal Framework

21    Section 58(3)(b) of the Bankruptcy Act provides:

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

…

(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.

22    Section 58(5) of the Bankruptcy Act provides:

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

23    On the facts presented to this Court, the debt which underlies the applicants’ asserted caveatable interest is a debt provable in Mr Pugliese’s bankruptcy within the meaning of s 82 of the Bankruptcy Act.

24    In Mango Media Pty Limited v Velingos [2008] NSWSC 202; (2008) 216 FLR 176 (“Mango Media”), Barrett J held that where a caveat is based on an equitable charge to secure a debt, then an application to extend that caveat is a legal proceeding “in respect of a provable debt” within the meaning of s 58(3)(b) and hence requires leave. Barrett J also held that any proceeding in which a declaration is sought recognising the existence of an equitable charge requires leave pursuant to s 58(3)(b). His Honour expressly rejected, at [17], an argument that such applications come within the terms of s 58(5) and hence are exempt from the requirement of obtaining leave. Mango Media was recently followed by Darke J in Morris Finance Ltd v Free [2016] NSWSC 516.

25    Applying these decisions, any proceeding which the applicants may commence in the Supreme Court seeking to extend the caveat would be incompetent unless the necessary leave had been obtained.

26    It is well established that it is permissible for the Court to grant leave pursuant to s 58(3)(b) without finally determining whether, as a matter of fact or law, the need for such leave has arisen: Allanson v Midland Credit Ltd [1977] FCA 14; (1977) 30 FLR 108.

27    As to whether leave should be granted, the Court must bear in mind the policy of the bankruptcy legislation in not permitting proceedings by creditors to be commenced or maintained without leave. There is an obvious policy in allowing the Court to control proceedings with respect to provable debts, so as to protect the bankrupt and the bankrupt’s property against creditors seeking to enforce remedies, to ensure the assets of the estate are available to be divided pro rata among creditors and to allow for the proper conduct of the bankruptcy by the trustee: 7Steel Building Solutions Pty Ltd v Wright [2011] FCA 328 (“7Steel”) at [10]. Other factors which are relevant to the question of whether to grant leave include the complexity of the facts and issues, the number of parties involved and whether the issues could be better and more comprehensively dealt with through contested proceedings than by adjudication of a proof of debt by the bankruptcy trustee: see 7 Steel at [11]-[12].

Consideration

28    I was satisfied that it was appropriate to grant leave for the following reasons:

(1)    L&H Group’s caveat presently protects its claimed equitable interest in the land. That caveat would lapse on 12 or 13 October 2016 unless leave was given to commence the proposed proceeding. It was proposed, as between the trustee in bankruptcy and Mrs Pugliese, that Mr Pugliese’s interest in the land would be transferred to Mrs Pugliese. Should that transfer occur, then the applicants’ asserted equitable interest in the land would be defeated.

(2)    The applicants’ underlying claim seeks to assert an equitable proprietary interest in the land. That is a matter that may be appropriately adjudicated by the Supreme Court. Section 74K of the Real Property Act makes provision for interested parties to be heard in opposition to an application for an extension of the operation of a caveat and the applicants were on notice that the trustee in bankruptcy and Mrs Pugliese may wish to be heard on the application.

(3)    If the applicants are successful in the Supreme Court then they will be confirmed as secured creditors. On the other hand, should leave not be given and the applicants lodge a proof of debt, then they would arguably have surrendered their equitable charge under s 90 of the Bankruptcy Act.

(4)    The proposed proceedings seek to establish and protect the applicants’ asserted equitable charge. Leave is not sought for any enforcement action with respect to the equitable charge: cf Pedersen v Delaveris [2010] FCA 536 at [20].

(5)    In my view, a grant of leave was not contrary to the policy of the Bankruptcy Act. The applicants did not seek any advantage over other creditors, save to the extent that they may obtain a declaration that they are secured creditors. That secured interest (should it be found to exist) is an interest to which the bankrupt’s estate is presently subject which might otherwise be defeated by the actions proposed by the trustee in bankruptcy.

(6)    There was nothing to suggest that the proper conduct of the bankruptcy by the trustee in bankruptcy, including the distribution of property among the bankrupt’s creditors, would be prejudiced by the grant of leave.

Associate:    

Dated:    1 November 2016