FEDERAL COURT OF AUSTRALIA

Fletcher (Trustee) v Keating [2017] FCA 1050

ORDERS

THE COURT DECLARES THAT:

Funds in the amount of $95,462.08 from settlement of the sale of Unit 3, 1 Hammersford Drive, Currumbin Waters in the State of Queensland and held in Gadens Lawyers’ Trust Account (the Surplus Funds) vest in Mr William John Fletcher as Trustee of the Bankrupt Estate of Mark Eric Keating pursuant to s 58(1) of the Bankruptcy Act 1966 (Cth).

THE COURT ORDERS THAT:

1.    The interim application filed 23 January 2017 be dismissed.

2.    Mr Mark Eric Keating pay the costs incurred by Mr William John Fletcher as Trustee of the Bankrupt Estate of Mark Eric Keating in the interim application filed 23 January 2017, such costs to be taxed if not otherwise agreed.

3.    The Surplus Funds referred to in the above declaration be paid to Mr William John Fletcher as Trustee of the Bankrupt Estate of Mark Eric Keating forthwith.

4.    Mr Mark Eric Keating pay the costs incurred by Mr William John Fletcher as Trustee of the Bankrupt Estate of Mark Eric Keating in the application filed 6 December 2016, such costs to be taxed if not otherwise agreed.

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

REASONS FOR JUDGMENT

COLLIER J:

1    Before me are two applications for consideration, both relating to the bankruptcy of Mr Mark Keating. The first is an interlocutory application filed by Mr Keating concerning a costs order made by this Court on 6 December 2016. In the second, being the substantive application, Mr Fletcher, who was Mr Keating’s trustee in bankruptcy, seeks a declaration pursuant to s 58(1) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) that certain funds be vested in him in his capacity as trustee in bankruptcy.

2    The applications were argued together before me. It is convenient for me to deal with the interim application filed by Mr Keating before turning to Mr Fletcher’s substantive application.

Interim application

Background

3    In his interim application filed 23 January 2017, Mr Keating sought the following orders:

1.    That paragraph 6 of the order of this Court dated the 6 December 2016 be varied so that there be no order as to costs on the applicant’s application for substituted service.

2.    Such further or other order as the Court deems fit.

3.    That the costs of and incidental of this application be the respondent’s costs in the cause.

4    The orders made on 6 December 2016 that Mr Keating sought to vary were ex parte in light of his non-attendance. They were in the following terms:

1.    Personal service of the originating application be dispensed with.

2.    In lieu of personal service, a signed and sealed copy of:

(a)    the originating application;

(b)    the affidavit of William John Fletcher filed 2 November 2016;

(c)    the affidavit of Emily Caroline Whitman filed 2 November 2016;

(d)    the order of Justice Collier dated 29 November 2016;

(e)    this order, (the Documents) be served by:

(i)    sending the documents by prepaid express post to the attention of the respondent at PO Box 314, Currumbin Waters, Qld 4223;

(ii)    Sending the documents by prepaid express post to the attention of the respondent at 27 Jabiluka Drive, Highland Park, Qld 4211;

(iii)    Sending the documents by electronic mail to the attention of the respondent to the email address of acefast@hotmail.com;

(iv)    Sending the documents by electronic mail to the attention of the respondent care of his solicitor, Mr Warwick Chesters of Southside Legal Gold Coast Lawyers at wrcsouthsidelegal.com.au; and

(v)    Sending a text message to the respondent on mobile telephone number 0498 087 157 as follows:

“To Mark Eric Keating: The originating application number QUD 837 of 2016 filed in the Federal Court of Australia, supporting Affidavits and court orders for directions and for substituted service, have been posted by prepaid express post to PO Box 314, Currumbin Waters, Qld 4223, 27 Jabiluka Drive, Highland Park, Qld 4211 and have also been emailed to acefast@hotmail.com and wrcsouthsidelegal.com.au.”

3.    The originating application shall be deemed to be served on the respondent five (5) days after the last step is taken as specified in paragraph 2.

4.    By 4 pm on 14 December 2016 the parties submit to the Chambers of the Judge (and copy to the other party) draft directions to take the originating application to hearing.

5.    The hearing of the originating application be relisted for one day commencing at 10.15 am on 13 March 2017.

6.    The respondent pay the applicant’s costs of and incidental to this application.

(Original emphasis.)

5    I made these orders following an interim application for substituted service filed by Mr Fletcher on 1 December 2016 in which Mr Fletcher sought, substantially, the orders I made on 6 December 2016.

6    At the hearing on 6 December 2016, Mr Fletcher relied on the affidavits of Huey Lee, Terry Herlihy and Emily Caroline Whitman, all sworn on 30 November 2016.

7    In her affidavit, Ms Lee, Manager of Corporate Recovery at Mr Fletcher’s firm Bentleys Corporate Recovery Pty Ltd, deposed that she spoke with Mr Keating on his mobile telephone on 8 November 2016. Ms Lee further deposed that during that conversation Mr Keating:

    advised her that his mailing address was PO Box 314, Currumbin Waters Qld 4223;

    refused to provide her with his residential or street address;

    confirmed that his email address was acefast@hotmail.com; and

    advised her that Southside Legal Gold Coast Lawyers continued to act for him.

8    In her affidavit, Ms Herlihy, a licensed field agent, deposed that she received instructions from process servers engaged by Mr Fletcher to serve documents upon Mr Keating at the address of 27 Jabiluka Drive, Highland Park, Queensland, which she understood to be Mr Keating’s residential address. I understand that the relevant documents for service related to Mr Fletcher’s substantive application currently before the Court. Ms Herlihy further deposed that when she attended 27 Jabiluka Drive on 22 November 2016, she spoke with Ms Debbie Keating, whom she knew to be Mr Keating’s wife. Ms Keating informed her that Mr Keating was not there, that Ms Keating did not know where Mr Keating was, that Ms Herlihy might find Mr Keating at “the shop”, and that the Keatings had “kind of” separated. Ms Keating also informed Ms Herlihy that Mr Keating’s mobile telephone number had not changed. Ms Herlihy deposed that she then rang Mr Keating on a mobile number she understood was his. Ms Herlihy deposed that during that telephone call the person who answered her call identified himself as Mr Keating, but would not supply an address for service or agree to meet her. Ms Herlihy also gave evidence that she called Mr Keating’s telephone number again on 28 November 2016 and he informed her that he was travelling to Cairns for at least one week; thus being unavailable for service.

9    In her affidavit, Ms Whitman, a solicitor with the firm Gadens Lawyers who were representing Mr Fletcher, deposed that on 2 November 2016 Gadens Lawyers sent a copy of Mr Fletcher’s application and supporting affidavits to Southside Legal Gold Coast Lawyers. This communication was on Ms Whitman’s understanding that Southside Legal Gold Coast Lawyers acted for Mr Fletcher. The material was sent by prepaid express post and email. On the same day, Ms Whitman received an email from Mr Warwick Chesters of Southside Legal Gold Coast Lawyers informing her that although he acted for Mr Keating in a general way, he did not have instructions to accept service of this material on behalf of Mr Keating. Ms Whitman further deposed that on 14 November 2016 she received a telephone call from Mr Chesters, during which Mr Chesters:

    informed her that he acted for Mr Keating generally;

    informed her that he did not then hold instructions to accept service of documents in these proceedings;

    discussed Mr Fletcher’s substantive application with Ms Whitman in a general way;

    enquired about the hearing date for Mr Fletcher’s substantive application;

    informed her that he had been talking to Mr Keating about Mr Fletcher’s substantive application, and

    indicated that he was in contact with Mr Keating.

Legislation relevant to service

10    Section 309 of the Bankruptcy Act provides:

Service of notices etc.

…

(2)    Where a notice or other document is required by this Act to be served on or given to a person, the Court may, in a particular case, order that it be given or served in a manner specified by the Court, whether or not any other manner of giving or serving the notice or other document is prescribed.

11    In relation to service of Court process and related materials in the Federal Court, it is also relevant to have regard to r 10.24 of the Federal Court Rules 2011 (Cth) (Rules) which provides:

Substituted service

If it is not practicable to serve a document on a person in a way required by these Rules, a party may apply to the Court without notice for an order:

(a)    substituting another method of service; or

(b)    specifying that, instead of being served, certain steps be taken to bring the document to the attention of the person; or

(c)    specifying that the document is taken to have been served:

(i)    on the happening of a specified event; or

(ii)    at the end of a specified time.

Note: Without notice is defined in the Dictionary.

(Original emphasis.)

12    The orders I made on 6 December 2016 in favour of Mr Fletcher were in circumstances where:

    Mr Keating had, on the unchallenged evidence before to the Court, declined to make himself accessible to Mr Fletcher and to receive personal service of Court process and supporting affidavits;

    I was satisfied that it was not practicable for Mr Fletcher to effect personal service of this material on Mr Keating; and

    The general proposition applied that costs follow the event: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72.

Submissions of Mr Keating

13    In his interim application, Mr Keating did not challenge the orders of 6 December 2016 to the extent that the Court permitted substituted service of Court process and supporting affidavits on him. Rather, sought only that there be no order as to the costs of Mr Fletcher’s interim application filed on 1 December 2016.

14    Mr Keating appeared in person at the hearing of the interim application on 13 March 2017, although it appears that he was represented by Mr Chesters of Southside Legal Gold Coast Lawyers until the morning of the hearing when he was granted leave to withdraw. Mr Keating relied on written submissions prepared by Counsel instructed by Southside Legal Gold Coast Lawyers. In summary, Mr Keating submitted:

    Ms Keating informed Ms Herlihy that Mr Keating could be found “at the shop”;

    “the shop” was Mr Keating’s place of business at Hammersford Drive, Currumbin Waters, Queensland;

    There is no evidence that Ms Herlihy made any attempt to effect service of the relevant materials on Mr Keating at his place of business;

    It would have been reasonable and practicable to attempt service on Mr Keating at his place of business; and

    Mr Chesters gave evidence that he had requested an extension of time from Mr Fletcher’s lawyers to allow Mr Keating to raise funds to instruct him to accept service and to act on his behalf.

15    Mr Keating relied on an affidavit sworn by Mr Chesters on 20 January 2017 and an affidavit sworn by him on 23 January 2017. In his affidavit, Mr Chesters deposed, in summary, that during the course of his telephone conversation with Ms Whitman on 14 November 2016:

    He informed Ms Whitman that Mr Keating was in a poor financial position;

    He informed Ms Whitman that, if Mr Fletcher allowed a four week extension to Mr Keating to respond, Mr Chesters expected that he would be able to obtain instructions to accept service of the Court documentation;

    Ms Whitman indicated that Mr Fletcher would not contemplate a four week extension; and

    Ms Whitman did not request that Mr Keating make himself personally available to receive service of documentation.

16    In his affidavit, Mr Keating relevantly deposed:

23.    There should have been no problems for the applicant to have the court documents in this proceedings [sic] served upon me. I have since the mid 1990’s [sic] traded from the same premises. The applicant was aware of my trading address that had been disclosed in the bankruptcy process. I am only now leaving this trading address.

24.    At or about the time of attempted service of the court documents, I was open for business six days a week during usual business hours. Further, there are accommodation facilities within the commercial premises and I was regularly staying at this unit overnight after hours.

25.    No approach to effect service was ever made to me at the business premises.

Submissions of Mr Fletcher

17    At the hearing on 13 March 2017, Counsel for Mr Fletcher submitted, in summary:

    The Court was correct to make an order for substituted service on Mr Keating;

    The evidence before the Court on 6 December 2017 identified measures by which the Court could be satisfied that service would be effected;

    Mr Keating claims that there were other means by which he could have been served, namely at his business address;

    It was not in dispute that the property at which Mr Keating conducted his business had been sold 12 months prior to relevant events, and it was therefore reasonable that Mr Fletcher and his agents should have assumed that Mr Keating no longer operated it;

    There was no reason for Mr Fletcher and his agents to have been aware that Mr Keating was occasionally residing at his business address; and

    Mr Chesters was engaged in the proceedings throughout.

Consideration

18    I consider that the costs order made by me on 6 December 2016 should remain undisturbed.

19    Although he has not directly challenged the order for substituted service made on 6 December 2016, Mr Keating’s fundamental complaint appears to be that there was no need for such an order to be made because service could have been effected on him at his business premises. To that extent, Mr Keating’s position is that it was not impracticable for him to be served other than by way of substituted service.

20    I do not accept this proposition. In particular, I consider that:

    There had clearly been correspondence between Ms Whitman and Mr Chesters for some time prior to the hearing of 6 December 2016, such as to put Mr Keating on notice of the fact that Mr Fletcher intended to seek substantive orders of the type that were the subject of the substantive application before me. I note, for example, Ms Whitman’s affidavit filed 28 October 2016 to which she annexed a copy of a letter sent by her to Mr Chesters referring to funds to which Mr Fletcher claimed entitlement. No compelling explanation has been advanced as to why Mr Chesters, who was acting for Mr Keating “generally” up until the morning of 13 March 2017, was unable to accept service of Mr Fletcher’s application and supporting documentation. Mr Chesters nonetheless refused to do so, thereby eliminating a practical means of effecting ordinary service of documentation on Mr Keating. It appears from Mr Chesters’ evidence of 20 January 2017 that his refusal to accept service of this material was motivated by a desire to gain extra time for Mr Keating to respond to Mr Fletcher’s application. In my view this was a specious justification for refusal to accept service – an approach by Mr Keating to the Court as part of the case management process in these proceedings could potentially have accommodated Mr Keating’s concerns.

    The evidence of both Ms Lee and Ms Herlihy is unchallenged to the extent that they deposed that Mr Keating declined to inform them of his street or residential address. Mr Keating deposed in his affidavit that Ms Herlihy could have found him at “the shop” – there is no evidence before the Court that he had actually told Ms Herlihy this, or that he had told Ms Herlihy where “the shop” was.

    In his affidavit sworn 23 January 2017, Mr Keating deposed that the property at Hammersford Drive, Currumbin Waters, previously owned by the Keating Investment Trust (of which Mr and Ms Keating were trustees), was sold by contract of sale dated 11 August 2015. As is apparent from the affidavit of Mr Fletcher filed 28 October 2016, this was also Mr Fletcher’s understanding. No evidence was advanced by Mr Keating to explain why, as at December 2016, if “the shop” was the same property at Hammersford Drive which had previously been owned by the Keating Investment Trust, how it was the case that Mr Keating continued to operate out of premises which he had sold, and how he continued to be entitled to reside in the accommodation attached to that property. To that extent I am not persuaded that Mr Fletcher or his agents ought to have realised that Mr Keating could be found, and served personally, at premises at Hammersford Drive.

21    The expression “not practicable” within the meaning of r 10.24 of the Rules was considered relatively recently by this Court in Electrolux Home Products Pty Ltd v Delap Impex Ltd [2013] FCA 600 at [76] per Katzmann J and Titan Enterprises (Qld) Pty Ltd v Cross [2016] FCA 664 at [17] per Edelman J. In essence, “not practicable” for the purposes of this rule does not equate to impossible or futile. According to the Macquarie Dictionary (5th ed, 2009), “practicable” means:

1.    capable of being put into practice, done, or effected, especially with the available means or with reason or prudence; feasible.

2.    capable of being used or traversed, or admitting of passage: a practicable road.

(Original emphasis.)

22    In summary, I am satisfied that it was impracticable for Mr Keating to be served other than by substituted service, and that it was reasonable that he be served in the manner I ordered in circumstances where:

    Mr Keating refused to inform either Ms Lee or Ms Herlihy of his residential or street address, or an alternative address where he could be served;

    Mr Keating refused to offer an alternative method of service upon him;

    Mr Keating’s legal representative would not accept service on his behalf;

    Ms Keating told Ms Herlihy that she did not know where Mr Keating, was although he could be at “the shop”;

    “[T]he shop” was apparently not identified by Ms Keating to Ms Herlihy;

    There was no apparent reason why Mr Fletcher or his agents should have expected to find Mr Keating at premises he had previously sold;

    Mr Keating told neither Ms Lee nor Ms Herlihy that he could be found at an address on Hammersford Drive;

    I infer from evidence on the file that Mr Keating was on notice that Mr Fletcher intended to file an application in the terms of the substantive application currently before the Court; and

    Reasonable steps had been taken by Mr Fletcher and his agents to attempt to serve the documents personally upon Mr Keating.

23    As a general proposition, costs follow the event: Oshlack [1998] HCA 11; (1998) 193 CLR 72. Further, in circumstances where Mr Fletcher was required to seek an order for substituted service because personal service was impracticable, and indeed Mr Keating had apparently made himself unavailable for personal service, no reason of substance has been advanced to me to warrant any order other than that Mr Keating should pay Mr Fletcher’s costs of the application for substituted service.

24    Mr Keating’s interim application filed 23 January 2017 should be dismissed, with costs.

Substantive application

25    The substantive application before the Court was filed by Mr Fletcher on 6 December 2016. In that application Mr Fletcher sought the following relief:

1.    A declaration that the surplus funds in the amount of $95,462.08 from settlement of the sale of Unit 3, 1 Hammersford Drive, Currumbin Waters in the State of Queensland and held in Gadens Lawyers’ Trust Account vested [sic] in the Applicant pursuant to 58(1) [sic] of the Bankruptcy Act;

2.    A direction that funds be paid to the Applicant forthwith; and

3.    Costs.

Background

26    The background facts to this application can be gleaned from the affidavit of Mr Fletcher filed on 28 October 2016 and the affidavit of Mr Keating filed on 23 January 2017. In summary:

    Mr Keating, in his own right, was the sole registered proprietor of a property described as Lot 11 on Registered Plan 17759, Title Reference 16137068 located at 4 Jutland Place, Currumbin Waters (the Jutland Place Property). The Jutland Place Property was the residential home of Mr Keating and Ms Keating;

    Mr Keating – together with Ms Keating – was one of the trustees of the Keating Investment Trust, established by way of deed dated 8 December 1997 between Mr and Ms Keating in their own capacities, and Mr and Ms Keating as trustees of the Keating Family Superannuation Fund;

    On 28 February 2008 Mr and Ms Keating entered into a home loan agreement (the Home Loan Agreement) with Australia and New Zealand Banking Group Ltd (ANZ Bank). The Home Loan Agreement was secured by registered mortgage 713085496 over the Jutland Place Property owned by Mr Keating;

    At an unidentified time, Mr and Ms Keating as trustees for the Keating Investment Trust acquired commercial premises at Hammersford Drive, Currumbin Waters. On 1 February 2010, Mr and Ms Keating as trustees for the Keating Investment Trust entered into a business loan agreement with ANZ Bank (the Business Loan Agreement). The Business Loan Agreement was secured by:

○    a guarantee and indemnity provided by Mr Keating in his own right;

○    the mortgage over the Jutland Place Property; and

○    mortgage number 703026341 granted by Mr and Ms Keating as trustees of the Keating Investment Trust over the property at Unit 3, 1 Hammersford Drive, Currumbin Waters, also described as Lot 3 on BUP 10894, title reference 18132088 (the Hammersford Drive Property);

    It appears that “the shop” to which Ms Keating referred in her conversation with Ms Herlihy, and the commercial premises at Hammersford Drive, Currumbin Waters to which Mr Keating referred in his affidavit, is the Hammersford Drive Property;

    Mr and Ms Keating operated a business known as “Ace Fasteners” from the Hammersford Drive Property;

    The Jutland Place Property was sold by Mr Keating on 30 March 2012 for $865,000. On that date, ANZ Bank received the amount of $837,125.67 in exchange for release of the mortgage. Of that amount, surplus funds of $123,310.40 were retained by ANZ Bank as security for payment of the indebtedness of Mr Keating under the guarantee securing the Business Loan Agreement;

    Mr Fletcher was appointed trustee in bankruptcy of Mr Keating on 11 April 2012 by way of sequestration order;

    Mr Fletcher was discharged from bankruptcy on 11 July 2015;

    On or about 8 October 2015 Mr Fletcher was informed that Mr Keating was in the process of selling the Hammersford Drive Property. Based on his understanding that, after the remaining debt to ANZ Bank under the Business Loan Agreement had been fully repaid, there would be an excess of approximately $125,000 available, Mr Fletcher instructed Gadens Lawyers to lodge a caveat over the Hammersford Drive Property claiming an equitable right of subrogation, or otherwise an equitable right to marshal the securities of ANZ Bank (including the mortgage of the Hammersford Drive Property) for Mr Fletcher’s benefit;

    Mr Fletcher’s entitlement to the surplus funds of $123,310.40 was disputed by Mr Keating. As a result, and in order to allow settlement to proceed, it was agreed between the parties that the excess funds following satisfaction of amounts owing to ANZ Bank would be paid into the trust account of Gadens Lawyers; and

    Settlement of the sale of the Hammersford Drive Property occurred on 30 November 2015. After discharge of the debt to ANZ Bank, a balance in the amount of $95,462.08 was collected at settlement and deposited into the trust account of Gadens Lawyers.

Submissions of Mr Fletcher

27    In summary, Mr Fletcher submitted as follows:

    After the sale of the Jutland Place Property and following notification of Mr Keating’s bankruptcy, the only basis on which the surplus funds of $123,310.40 from that sale were retained by ANZ Bank was by reference to Mr Keating’s guarantee for the debt owing to ANZ Bank under the Business Loan Agreement.

    In addition to the surplus funds of $123,310.40, ANZ Bank continued to hold security for the Business Loan Agreement by way of the mortgage over the Hammersford Drive Property.

    After the settlement of the sale of the Hammersford Drive Property and application of those settlement funds, and the surplus funds of $123,310.40 to the debt owing under the Business Loan Agreement, the balance amount outstanding and otherwise unencumbered was $95,462.08.

    Were it not for the liability of Mr Keating under the guarantee, ANZ Bank could not have had recourse to monies subject to the mortgage of the Jutland Place Property in relation to the Business Loan Agreement, because that agreement was in the name of the Keating Investment Trust.

    There was no evidence of any agreement between Mr Keating and ANZ Bank for the substitution of security in relation to the surplus funds of $123,310.40 and the Business Loan Agreement. At most there was a proposal advanced by ANZ Bank on or about 15 March 2012, however it appeared to go no further.

    This case is analogous to Bofinger v Kingsway Group Limited [2009] HCA 44; (2009) 239 CLR 269.

    Mr Keating’s submission that the surplus funds of $123,310.40 were superannuation monies is incorrect – the Hammersford Drive Property was not owned by the Keating Family Superannuation Fund, but rather by Mr and Ms Keating as trustees of the Keating Investment Trust.

Submissions of Mr Keating

28    Mr Keating appeared at the hearing in person. He relied, however, on written submissions previously settled by Counsel. In summary, he submitted:

    There was never any right of subrogation in Mr Fletcher to the surplus funds of $123,310.40 following the sale of the Jutland Place Property. A first registered mortgage was given over the Jutland Place Property as primary security for the Business Loan Agreement. Clause 8.5 of the Business Loan Agreement provided for the application of funds received under the mortgage over Jutland Place Property. There is no evidence that ANZ Bank used those surplus funds of $123,310.40 or made any election to use them to reduce Mr Keating’s indebtedness under the guarantee.

    Alternatively, the arrangement between Mr Keating and ANZ Bank to replace the security was one which necessarily excluded any right of subrogation as is apparent from such cases as Bofinger [2009] HCA 44; (2009) 239 CLR 269.

    Mr Fletcher’s application sought funds from a regulated superannuation fund within the meaning of s 19 of the “Superannuation Guarantee Act (Supervision) Act 1993 (Cth)” (I understand the correct reference is Superannuation Industry (Supervision) Act 1993 (Cth)) which are not divisible funds by virtue of ss 116(2)(a) and 116(2)(d)(iii)(A) of the Bankruptcy Act.

Consideration

29    Mr Keating was previously a bankrupt, having been discharged on 11 July 2015. Section 153 of the Bankruptcy Act provides that where a bankrupt is discharged from bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy. Relevantly, s 116 of the Bankruptcy Act defines “property divisible amongst the creditors of the bankrupt” as including:

(1)    Subject to this Act:

(a)    all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and

(b)    the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and

…

(Emphasis added.)

30    Property acquired by a bankrupt during his or her bankruptcy, which is divisible among creditors, vests in the trustee in bankruptcy at the time of acquisition: s 58(1)(b) of the Bankruptcy Act. Section 153 of the Bankruptcy Act does not affect any rights to the bankrupt’s property which passed to the trustee by reason of the provisions of ss 58 and 116 of the Bankruptcy Act: see for example Re Pevsner, ex parte Trustee in Bankruptcy [1983] FCA 119; (1983) 68 FLR 254; Silvia v Thomson [1989] FCA 394; (1989) 87 ALR 695; Official Receiver in Bankruptcy v Schultz [1990] HCA 45; (1990) 170 CLR 306.

31    The critical question before the Court concerns the entitlement to the amount of $95,462.08 from settlement of the sale of the Hammersford Drive Property on 30 November 2015 after Mr Keating was discharged from bankruptcy.

32    I have set out, in some detail, the key facts that were the subject of evidence of both Mr Fletcher and Mr Keating. In particular I note the following points.

33    ANZ Bank held a mortgage over the Jutland Place Property, which was owned solely by Mr Keating. It does not appear to be in dispute that Mr Keating’s interest in the surplus funds of $123,310.40, being part of the proceeds of sale of the Jutland Place Property, vested in Mr Fletcher on account of Mr Keating’s bankruptcy.

34    Upon settlement of the Jutland Place Property, ANZ Bank retained the entire net proceeds of $837,125.67. The rationale for this retention was that ANZ Bank had:

    a loan account with Mr and Ms Keating, being a home loan;

    a loan account under the Business Loan Agreement with Mr and Ms Keating in their capacities as trustees for the Keating Investment Trust; and

    an overdraft account with Mr and Ms Keating in their capacity as trustees for the Keating Investment Trust.

35    All three of those accounts were secured by first registered mortgages over the Jutland Place Property (given by Mr Keating), the Hammersford Drive Property (given by Mr and Ms Keating as trustees) and a property at Palm Beach on the Gold Coast (given by Mr and Ms Keating as trustees). The three accounts were also secured by a guarantee and indemnity from Mr Keating on account of Mr and Ms Keating as trustees. This guarantee and indemnity was further supported by the mortgages over the Jutland Place Property and the Hammersford Drive Property. This is plain from the terms of the letter of offer from ANZ Bank to Mr and Ms Keating dated 29 January 2010, wherein ANZ Bank set out terms of the guarantee it required from both Mr and Ms Keating as security for the Business Loan Agreement.

36    When the sale of the Jutland Place Property settled, the proceeds were applied as follows:

(1)    $601,822.26 in full payment of the Home Loan Agreement;

(2)    $83,495.66 in full payment of the overdraft;

(3)    $28,177.35 in payment of the arrears owing on the Business Loan Agreement;

(4)    $320 for discharge/production fees; and

(5)    $123,310.40 to the Home Loan Agreement.

37    As I have already noted, ANZ Bank retained the surplus funds of $123,310.40 as security for the remaining indebtedness under the Business Loan Agreement.

38    It is clear that the only basis on which ANZ Bank could apply the proceeds of sale of the Jutland Place Property (which was owned by Mr Keating in his own right) to the Business Loan Agreement (which was between ANZ Bank on the one hand, and Mr and Ms Keating in their capacity as trustees of the Keating Investment Trust on the other), was because Mr Keating had personally guaranteed to ANZ Bank the indebtedness of himself and Ms Keating as trustees under the Business Loan Agreement. It is similarly clear that, through their personal guarantees, ANZ Bank could satisfy Mr and Ms Keating’s indebtedness in their capacities as trustees by reference to first registered mortgages over (relevantly) the Jutland Place Property and the Hammersford Drive Property.

39    It is further apparent that the surplus funds of $123,310.40 that remained following the discharge of the mortgage of the Jutland Place Property were retained by ANZ Bank in accordance with the guarantee provided by Mr Keating as security for the remaining indebtedness of himself and Ms Keating as trustees under the Business Loan Agreement. In this respect I note internal ANZ Bank correspondence from Ms Helen Torriero to Mr David Zrobek on 9 October 2012 concerning a complaint from Mr and Ms Keating, indicating that, pursuant to agreements between ANZ Bank and the Keatings, the Jutland Place Property had been held as security for the business lending. The sale of the Jutland Place Property affected the security used for the business facilities, and as a condition of release by ANZ Bank of the surplus funds of $123,310.40, ANZ Bank requested full clearance of all business facility arrears as well as up to date financials and new valuations on properties still held as remaining security for the business facilities (including the Hammersford Drive Property and the property at Palm Beach). It appears from that correspondence that, as at 9 October 2012, the ANZ Bank had not received the requested financial information, and therefore did not release the surplus funds of $123,310.40.

40    Mr Keating submitted that an agreement had been reached between himself and ANZ Bank whereby ANZ Bank agreed to release the mortgage over the Jutland Place Property to the extent that it secured the Business Loan Agreement, in exchange for ANZ Bank securing the surplus funds of $123,310.40 by way of charge. In particular, Mr Keating points to an email of 15 March 2012 from Mr John Vis of ANZ Bank to Mr Keating, whereby Mr Vis proposed a “partial security swap being, release the mortgage in exchange for a charge over (remaining) funds placed in a term deposit.” There is no evidence, however, that this facility was activated at any time, or progressed beyond Mr Vis’ proposal.

41    The sale of the Hammersford Drive Property settled after Mr Keating’s discharge from bankruptcy on 30 November 2015. At settlement, in exchange for a release of the mortgage over that property, ANZ Bank:

    applied the surplus funds of $123,310.40 to the Business Loan Agreement through Mr Keating’s guarantee; and

    collected the remaining balance owing under the Business Loan Agreement.

42    A balance amount of $95.462.08 remained, which is the subject of Mr Fletcher’s application.

43    Mr Keating submits that there was no evidence that ANZ Bank made any call on Mr Keating’s guarantee, or that ANZ Bank elected to apply them in relation to Mr Keating’s guarantee. It is not obvious to me why it would have been necessary for ANZ Bank to have made such a call or election in these circumstances. As a general proposition, a creditor’s right to enforce a guarantee arises when the principal debtor defaults in the performance of the principal obligation, and unless on the terms of the guarantee there is a requirement for notice or for a demand to be made, it is not necessary for a demand or notice to be given before a guarantor becomes liable under a guarantee, as the guarantor’s obligation to pay arises on the debtor’s failure to fulfil its guaranteed obligations: Matouk v The Entrance Seabreeze Pty Ltd [2010] NSWSC 649 at [75] per Ward J; see also Sunbird Plaza Proprietary Ltd v Maloney [1988] HCA 11; (1989) 166 CLR 245 at [8] per Mason CJ; Palindrome Holdings Pty Ltd v Wass [2009] NSWSC 797 at [87]; O’Donovan, J and Phillips, J, The Modern Contract of Guarantee (Thomson Lawbook Co, subscription service) at [10.300] (update 72). There is no evidence before the Court that such a demand on or notice to Mr Keating was required before ANZ Bank was entitled to act to enforce Mr Keating’s guarantee.

44    Mr Fletcher submits that, in these circumstances, the principle of subrogation as explained by the High Court in Bofinger [2009] HCA 44; (2009) 239 CLR 269 applies. In Bofinger [2009] HCA 44; (2009) 239 CLR 269, the appellants were husband and wife. The husband was a director of a company which borrowed consecutively from three lenders. The three loans were secured by first, second and third ranked mortgages over the same property. The appellants gave guarantees to each mortgagee, and the guarantees were supported in each case by a mortgage over real property of the appellants. In order to discharge their liability under their guarantees to the first mortgagee, the appellants sold the properties and applied the proceeds of sale in reduction of the indebtedness of the company to the first mortgagee. It appeared that, at the same time, the appellants separately paid monies towards and transferred property to the second mortgagee. The High Court noted that in any event, the discharges of mortgage over relevant properties were registered with the consent of the second and third mortgagees. After the first mortgagee received the proceeds of sale of the properties, and satisfied the balance of the indebtedness of the companies to it, the first mortgagee accounted to the second mortgagee by payment of the excess sale proceeds and delivery of the certificates of title and discharges of the first mortgages over two unsold properties. The appellants contended that the first mortgagee should have accounted to them for the excess sale proceeds, so that they could recoup what they had paid off the indebtedness of the company.

45    The proceedings in Bofinger [2009] HCA 44; (2009) 239 CLR 269 were complicated by the prospect of the application of ss 57(1) and 58 of the Real Property Act 1900 (NSW) which is not relevant here. Of primary relevance to this case is the consideration by the High Court of the right of subrogation in favour of a guarantor.

46    As the High Court observed:

4    The right of subrogation in favour of a surety recently was described by Sir Andrew Morritt V-C as follows:

“The right operates so as to confer on the surety who has paid the debt in full the rights against the debtor formerly enjoyed by the creditor or by imposing on the creditor the obligation to account to the surety for any recovery in excess of the full amount of his debt.” (emphasis added)

    That statement is important for this case because the indebtedness to the first mortgagee had been paid in full and the securities held by the first mortgagee discharged. The remedies equity provides must, as will appear, found upon the obligation of the first mortgagee to account.

(Original emphasis. Footnotes omitted.)

47    Later their Honours continued:

8    This notion of the ultimate liability of the principal provides a foundation for the application of subrogation in aid of the surety. Thus, where a claim to the benefit of securities held by the creditor is made by a surety, it was said by Turner V-C that the equity for subrogation is derived from the obligation of the principal debtor to indemnify the surety. There is “nothing hard” in the act of a court of equity in placing the surety in exactly the situation of the creditor with respect to those securities, because it would be unconscientious for the debtor to recover back the securities from the creditor while the debtor was obliged to indemnify the surety.

(Footnotes omitted.)

48    In summary, in the circumstances of the case, the High Court held that the first mortgagee was required to account to the appellants for the excess moneys and securities it held, following satisfaction of its mortgage debt, and that that obligation was fiduciary in nature.

49    Mr Keating accepts these general principles, however submits that they do not apply to the circumstances of this case. This is because in Bofinger [2009] HCA 44; (2009) 239 CLR 269, the High Court recognised that the right of a surety to claim subrogation can be excluded by agreement or the surety’s conduct, and in the case currently before the Court, ANZ Bank and Mr Keating had entered an agreement that any surplus funds arising from the sale of the Jutland Place Property must be held by ANZ Bank as security rather than being accounted to Mr Keating as guarantor.

50    As I have already found, there was no agreement between ANZ Bank and Mr Keating in substitution of the guarantees and securities provided in respect of the Business Loan Agreement in 2010. ANZ Bank, as creditor in respect of the Business Loan Agreement and in respect of which it held guarantees from Mr Keating, was contractually entitled in accordance with the guarantee to apply the excess funds arising from the sale of the Jutland Place Property to the indebtedness of Mr and Ms Keating under the Business Loan Agreement. However, Mr Keating (and through him, his trustee in bankruptcy) is entitled to look to the debtors in respect of the Business Loan Agreement – namely Mr and Ms Keating as trustees of the Keating Investment Trust – to indemnify him in respect of the application of the surplus funds of $123,310.40 to the guaranteed debt under the Business Loan Agreement. To that extent, Mr Keating (and through him, his trustee in bankruptcy) are entitled to claim the balance amount of $95,462.08 following the sale by Mr and Ms Keating as trustees of the Keating Investment Trust of the Hammersford Drive Property.

51    In my view, the principles explained by the High Court in Bofinger [2009] HCA 44; (2009) 239 CLR 269 are precisely on point in this case.

52    Finally, Mr Keating submitted that the Keating Investment Trust was established by Mr and Ms Keating in their own capacity and as trustees for the Keating Family Superannuation Fund. Accordingly, Mr Keating submits that the proceeds of sale of the Hammersford Drive Property fell within s 116(2)(d)(iii)(A) of the Bankruptcy Act and were not divisible property available to Mr Fletcher. I reject this contention. There is no evidence before the Court that the Hammersford Drive Property was owned by Keating Family Superannuation Fund. Rather, it was clearly owned by Mr and Ms Keating as Trustees of the Keating Investment Trust.

53    It follows that Mr Fletcher is entitled to the relief he seeks.

Associate:

Dated:    5 September 2017