Enforcement of an Equitable Charge and Bankruptcy Act 1966 (Cth)

Enforcement Of An Equitable Charge And Bankruptcy Act 1966 (Cth)

Section 58(5) of the Bankruptcy Act 1966 (Cth) applies to legal proceeding to enforce an equitable charge by judicial sale/process. Leave not required under section 58(3)(b) of the Bankruptcy Act 1966 (Cth)

Christopher Yam, Special Counsel
13 July 2017

In Morris Finance Ltd v Brown [2017] FCAFC 97, the Full Court of the Federal Court of Australia determined that while proceeding for orders for sale, possession and distribution of proceeds to enforce an equitable charge (Proceeding) is in respect of a provable debt, section 58(5) of the Bankruptcy Act 1966 (Cth) applies, whether or not the Proceeding is contested, and accordingly, leave is not required under section 58(3)(b) of the Bankruptcy Act 1966 (Cth) to commence or take any fresh step in the Proceeding.

Background

Pursuant to a Lease Agreement dated 3 January 2012 (Lease Agreement), Morris Finance Ltd (Morris Finance) leased goods to Neil Warren Brown (Mr Brown).

Pursuant to a Guarantee dated 3 January 2012 (Guarantee), Caroline Elsie Brown (Ms Brown) guaranteed Mr Brown’s obligations to Morris Finance under the Lease Agreement.

Morris Finance claims that:

(a) pursuant to the Lease Agreement and the Guarantee, it is an equitable chargee of a parcel of land situated at Coopernook in the State of New South Wales (Land) owned by Mr Brown and Ms Brown.

(b) as at 27 July 2015, it was owed an amount exceeding $45,000.00.

Mr Brown became bankrupt on 17 June 2013. The trustee of Mr Brown’s bankrupt estate is Stewart William Free (Free).

Ms Brown became bankrupt on 25 August 2015. The trustee of Ms Brown’s bankrupt estate is Official Trustee in Bankruptcy.

Decision of the Supreme Court of New South Wales

Morris Finance commenced legal proceedings in the Supreme Court of New South Wales for orders for sale, possession and distribution of the proceeds of sale of the Land (Proceedings).

In Morris Finance Limited v Free, Trustee of the Property of Neil Warren Brown, a Bankrupt [2016] NSWSC 516, the Supreme Court of New South Wales determined that the Proceedings were in respect of a provable debt and accordingly, Morris Finance required leave pursuant to section 58(3)(b) of the Bankruptcy Act 1966 (Cth) to commence the Proceedings or take any fresh step in the Proceedings.

In the Proceedings, Free contested Morris Finance’s claim that it is an equitable chargee of Mr Brown’s interest in the Land.

The primary judge considered that section 58(5) of the Bankruptcy Act 1966 (Cth) did not apply to the Proceedings because:

1 Morris Finance’s claim that it is an equitable chargee of Mr Brown’s interest in the Land is contested.

2 a secured creditor seeking relief concerning the application of the proceeds of any sale:

 (a) will need to establish that it is indeed a secured creditor;

 (b) is not realizing or otherwise dealing with his or her security.

3 establishing that a secured creditor is indeed a secured creditor would involve establishing both the existence of a debt and the existence of a charge that secures the debt similar to that dealt with by Barrett J in Mango Media Pty Ltd v Velingos [2008] NSWSC 202.

Decision of the Full Court of the Federal Court of Australia

The Full Court of the Federal Court of Australia reversed the decision of the Supreme Court of New South Wales and found that:

1 the breadth of the text of the definition of “secured creditor” in section 5(1) of the Bankruptcy Act 1966 (Cth) and the context in which it is used in section 58(5) of the Bankruptcy Act 1966 (Cth) do not provide any textual or contextual basis for excluding from the operation of section 58(5) of the Bankruptcy Act 1966 (Cth) the holder of an equitable charge and the right of that holder to “realize or otherwise deal with” its equitable charge.

2 the words in section 58(5) of the Bankruptcy Act 1966 (Cth) “to realize” are sufficiently broad to embrace the invocation of judicial process to seek an order for sale and consequential orders.

3 the steps of seeking an order for sale and consequential orders are within the expression “otherwise deal” in in section 58(5) of the Bankruptcy Act 1966 (Cth) construed broadly.

4 proceedings seeking either possession or sale or both come within the phrase “realize or otherwise deal with his or her security”.

5 a secured creditor realizing or otherwise dealing with his or her security by legal proceeding is not required to establish his or her security for section 58(5) of the Bankruptcy Act 1966 (Cth) to apply.

Conclusion

The decision of the Full Court of the Federal Court of Australia in Morris Finance Ltd v Brown [2017] FCAFC 97 confirms that:

1 an equitable chargee is a secured creditor under the Bankruptcy Act 1966 (Cth).

2 legal proceeding by an equitable chargee for orders for sale, possession and distribution of proceeds to enforce an equitable charge is not affected by section 58 of the Bankruptcy Act 1966 (Cth).

Disclaimer

The content of this publication is intended only to provide a summary and general overview of matters of interest. You should not rely upon the content of this publication as legal advice. You should obtain legal advice regarding the facts and circumstances of your matter before acting or relying upon the content of this publication.

For more information

Christopher Yam

Special Counsel
Melbourne
+61 3 9909 3304
cyam@slflawyers.com.au

Practice Area

Litigation and Dispute Resolution
Restructuring and Insolvency
Banking and Finance
Recoveries

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