FEDERAL COURT OF AUSTRALIA

Penson v Palmer [2018] FCA 1202

ORDERS

THE COURT ORDERS THAT:

1.    The application is dismissed.

2.    Ms Penson must pay Mr Palmer’s and Mr Leroy’s costs as agreed or taxed.

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

REASONS FOR JUDGMENT

FARRELL J

1    Ms Penson, a bankrupt, applied to this Court, as a federal court invested with jurisdiction in bankruptcy matters under the Bankruptcy Act 1966 (Cth), to make declarations concerning the effect of orders made in the Supreme Court of New South Wales on 20 April 2016 (by Kunc J) and on 27 June 2018 (by Fullerton J): see In the matter of Aquaqueen International Pty Ltd [2016] NSWSC 508 and Palmer v Penson (No 2) [2018] NSWSC 987.

2    The application to this Court was dismissed with costs on the basis that Ms Penson was not competent to bring it. These are the reasons for making those orders.

3    The application arises out of an unusual set of facts. It raises some difficult legal issues of where the line falls between the federal courts invested with bankruptcy jurisdiction and other courts. It also raises the practical issues faced by unfunded insolvency practitioners in the face of those legal issues. The Court is grateful to the Inspector General in Bankruptcy for instructing Mr McNally of LM Lawyers to appear as amicus curiae and to Mr McNally for his highly useful contributions.

Background

4    There is a long history of litigation between Titan National Pty Limited/Kathryn Wood-Weber and Ms Penson/Aquaqueen International Pty Limited: see [2016] NSWSC 508 at [4]. At a hearing before Kunc J in the Supreme Court of New South Wales on 20 April 2016, Titan and Ms Wood-Weber sought the appointment of the first respondent (Mr Palmer) as receiver and manager for sale of an apartment in Gillespie Avenue, Alexandria in which Ms Penson had resided for a number of years and of which she was then the registered proprietor (Property). This was said to be “by way of equitable execution of various judgments for costs” made against Ms Penson: see [2016] NSWSC 508 at [1].

5    Relevantly to this application, Kunc J made the following orders on 20 April 2016 (among others):

2.    Pursuant to s.67 of the Supreme Court Act and the inherent jurisdiction of this Court, an order that Christopher John Palmer of O’Brien Palmer be appointed as receiver and manager of the property described as [redacted] Alexandria NSW 2015 being the whole of the property in Folio Identifier [redacted] (the “Property”) with such Property to vest in the Receiver and Manager for the purposes of sale of the Property and distribution of the net proceeds of sale as follows:

(a)    payment of the first registered mortgage to Australia and New Zealand Banking Group Ltd in discharge of Mortgage No [redacted];

(b)    payment of the Judgments and Orders annexed and marked “A” plus interest thereon to Kathryn Wood-Weber or as she may direct;

(c)    any surplus funds to be paid into court.

…

4.    An order that Christopher John Palmer be indemnified by way of first ranking priority for his remuneration costs and expenses as Receiver and Manager at the rates notified to the Court.

5.    A direction that third party expenses incurred by the Receiver and Manager comprising:

[insurance premiums, advertising fees, real estate agent’s commission, legal fees, postage and couriers, phone, fax and internet, bank fees, cleaning fees, printing and stationery and sundry expenses]

be paid as a cost of the receivership and that such sum be paid from the funds received by the Receiver and Manager.

6.    The Receiver and Manager is vested with the powers set out in section 420 of the Corporations Act 2001 as though the Respondent is a corporation.

7.    Orders in paragraphs 2 to 7 be stayed for a period of 14 days or until such further order of the Court or Court of Appeal.

6    In her application to this Court, Ms Penson sought a declaration that, at the time her trustee in bankruptcy (the second respondent, Mr Leroy) was appointed on her debtor’s petition on 4 May 2016, a stay had not yet been lifted on the orders made by Kunc J “vesting” the Property in Mr Palmer. Ms Penson says that the Property vested in Mr Leroy, not Mr Palmer, contrary to findings made by Fullerton J in [2018] NSWSC 987.

7    Ms Penson also contended that these orders take no account of a caveat lodged by her son, whom she has named as a respondent (Mr Penson), in support of his claim to have an equitable mortgage over the Property. Searches indicate that the caveat was recorded on 5 November 2015, however, Kunc J’s orders took no account of it. Ms Perry, Mr Palmer’s legal representative, explained that that was because a search in evidence before Kunc J had been undertaken before the caveat was recorded. It was unnecessary to test Mr Penson’s claim in these proceedings, but in any event it is not one which Ms Penson was competent to bring, given that her evidence is that her son is not a minor nor does it suggest that he is under any form of legal disability.

8    On 26 February 2018, Mr Palmer filed a statement of claim in the Supreme Court of New South Wales seeking an order for possession of the Property and leave to issue a writ of possession: see [2018] NSWSC 987 at [1]. On 27 June 2018, following a hearing at which Mr Beazley appeared for Ms Penson, Fullerton J gave judgment for Mr Palmer for possession of the Property, leave to issue a writ of possession (such writ not to be executed before 25 July 2018) and costs.

9    In the course of her reasons, Fullerton J found (at [9]) that as a bankrupt, Ms Penson had no legal interest in the Property and therefore had no standing in the proceedings, and that the right to appear vested in Mr Leroy and then only to the extent that an equitable interest in the Property was asserted. Her Honour noted (at [10]) that by a letter dated 29 July 2016, Mr Leroy advised that he did not oppose Mr Palmer’s application to obtain vacant possession of the Property for the purpose of sale, preserving any rights to residual funds after sale of the Property. Mr Leroy filed no notice of appearance nor did he seek to be heard.

10    In [2018] NSWSC 987 at [13], Fullerton J recorded Mr Beazley’s submission that Mr Palmer’s claim was incompetent as the property did not vest in him pursuant to Kunc J’s orders but rather in Mr Leroy upon his appointment on 4 May 2016 so that Mr Palmer was unable to proceed to enforce a legal remedy against Ms Penson without leave of a competent court (being the Federal Court of Australia or the Federal Circuit Court of Australia) under s 58(3) of the Bankruptcy Act.

11    Justice Fullerton rejected Mr Beazley’s arguments on two bases; first, the stay expired before the order appointing Mr Leroy as trustee in bankruptcy was made on 4 May 2018 having regard to the calculation of time under r 1.11 of the Uniform Civil Procedure Rules 2005 (NSW); and second, because Kunc J’s order was entered on 20 April 2016 and pursuant to r 36.4 of the Uniform Civil Procedure Rules the order took effect on that day vesting the Property in Mr Palmer so that the stay operated only to prevent enforcement. Accordingly even if Mr Leroy had been appointed during the 14 days in which the stay was in operation, the Property would not have vested in Mr Leroy because it had already vested in Mr Palmer: [2018] NSWSC 987 at [15]-[16]. For completeness, searches indicate that Kunc J’s orders were recorded on the title of the Property on 22 April 2016.

12    Ms Penson also sought a declaration from this Court that the orders made by Fullerton J on 27 June 2018 had no effect because no leave was sought from this Court or the Federal Circuit Court pursuant to s 58(3) of the Bankruptcy Act.

13    The matters of concern to this Court were that:

(1)    Enforcement of Kunc J’s orders made on 20 April 2016 according to their terms would result in Titan and Ms Wood-Weber, receiving a priority over other unsecured creditors.

(2)    Whether the approach taken by Mr Leroy and Mr Palmer by reason of the correspondence between them, and in particular the letter dated 29 July 2016, had the effect of inappropriately circumventing the jurisdiction of this Court conferred under the Bankruptcy Act. This was particularly the case in the absence of evidence of the exact terms of the arrangements.

Section 58 of the Bankruptcy Act

14    Section 58 of the Bankruptcy Act relevantly to this application provides as follows:

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.

Note 1: ...

Note 2: …

(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)    …

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

Consideration

15    It is clear that Ms Penson has no standing to bring this application: see Cummings v Claremont Petroleum NL (1996) 185 CLR 124. She does not hold the legal title to the Property; Mr Palmer became the registered proprietor on 19 December 2016. Any equitable title vested in Mr Leroy upon his appointment on 4 May 2016. Ms Perry advised the Court that Mr Palmer will not disperse proceeds of sale of the Property (other than to the secured creditor, ANZ, and in payment of remuneration and costs of sale) until Mr Leroy’s claims to the balance of the proceeds have been adjudicated. Mr Leroy’s legal representative advised that Mr Leroy was aware of the undertaking and agreed with the course of action proposed by Mr Palmer. That is enough to dispose of this application.

16    There were a number of issues raised by this application on which it may be useful to comment without making findings.

17    If Mr Leroy had sought to assert title to the Property in any proceedings brought by Mr Palmer in the Supreme Court of New South Wales, that proceeding would be one which should be dealt with by this Court or the Federal Circuit Court under ss 27 and 31(f) of the Bankruptcy Act. However, Mr Leroy did not prosecute a claim to title to the Property in the proceedings before Fullerton J, but rather made an indication by the letter of 29 July 2016 that he had no objection to Mr Palmer seeking orders for possession and executing writs of possession. In those circumstances, it is not apparent that her Honour erred in entertaining the application and making the orders made on 27 June 2018.

18    Further, Mr McNally has submitted that as Mr Palmer is a court appointed receiver, he acts as an officer of the court and is not a “creditor” to whom s 58(3) applies to prohibit enforcement action being taken against the person or property of the bankrupt without leave of this Court or the Federal Circuit Court of Australia. That submission has force.

19    Further still, even if it were the case that Fullerton J’s orders did exceed the jurisdiction of the Supreme Court of New South Wales having regard to s 27 of the Bankruptcy Act and on the basis that it is a “special federal matter” (as defined in s 3(1) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth)) which should have been transferred to this Court or the Federal Circuit Court, it is likely that those orders remain valid having regard to s 6(9) of that Act: see Truthful Endeavour Pty Ltd v Condon (2015) 233 FCR 174; [2015] FCAFC 70 at [23].

20    It is easy to see why, in a case where both Mr Leroy and Mr Palmer are unfunded, the course Mr Leroy took appeared expedient. It remains moot as to whether or not that is the most efficient way to proceed in the long term. It is likely to have been at least as expedient to take steps (by approaching the Supreme Court of New South Wales) to discharge Mr Palmer’s appointment and arrange for the transfer of title to the Property to Mr Leroy upon his appointment.

21    This is for two reasons: first, continued conduct of the matter by Mr Palmer gives rise to opportunities for tactical litigation designed to defer Ms Penson being deprived of possession of the Property and its sale having regard to the fact that federal courts have supervision of bankruptcy matters. This application is an example of that.

22    Second, it remains necessary for the issue of title to any proceeds of sale to be determined, since if Mr Palmer were to pay out creditors in the order provided by order 2 made on 20 April 2016, that would have the effect of preferring Titan and Ms Wood-Weber over other unsecured creditors and over the claims of Mr Penson to an equitable mortgage. That would be inconsistent with the scheme provided by the Bankruptcy Act. As Mr McNally submitted, it is likely that any such payment would be void against Mr Leroy as trustee of the bankrupt estate: see s 118 of the Bankruptcy Act. It is also for this reason that I am not inclined to accept the argument that the “vesting” of property in Mr Palmer on 20 April 2016 was as critical as argument presented to Fullerton J might have suggested: the order made on 20 April 2016 only put Mr Palmer in a position to confer good title to the Property on a bona fide purchaser; it did not defeat the interests of the trustee in bankruptcy or the body of creditors in the proceeds of sale after the secured creditor had been satisfied and the receiver’s remuneration and costs of sale had been met. In saying this, I accept that it will be necessary for Mr Palmer and Mr Leroy to approach the Supreme Court in order to have order 2 made on 20 April 2016 discharged insofar as it provides for payment to Titan and Ms Wood-Weber.

23    The question of the validity of Mr Penson’s caveat will also need to be determined. It will be necessary, at a later date, to determine in which jurisdiction those claims must be heard having regard to whether or not Mr Leroy seeks to assert title to the Property inconsistent with Mr Penson’s claims.

Associate

Dated:    10 August 2018