The debtor appealed to the High Court to have the sequestration order set aside, and the judgment appealed from, upon which the sequestration order was based, was stayed pending appeal, pursuant to O. 70, r. 12 (2) of the High Court Rules, which provides, inter alia, that: "there shall be a stay of the judgment appealed from, and of all process in execution of the judgment or to compel obedience to it, until the determination of the appeal or until an order to the contrary is made."

Subsequently, the debtor applied for and was granted an expedited hearing of the action in the Supreme Court. Before the hearing of that action, however, the creditor applied to the Bankruptcy Court pursuant to s. 58 (3) of the Bankruptcy Act 1966 for leave to proceed with the action. Section 58 (3) provides, inter alia, as follows: "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 proceedings in respect of a provable debt or take any fresh step in such a proceeding".

At that stage the debtor's appeal to the High Court was still pending, although the petitioning creditor in that matter had been paid since the filing of that appeal. The creditor's application to the Bankruptcy Court was dismissed; the debtor appealed to the Federal Court against the decision.

Held: (1) Prior to the stay of proceedings by the High Court the debtor was a bankrupt.

(2) Order 70, r. 12 (2) of the High Court Rules operates not only as a stay on all process in and of a judgment, but as a stay of the judgment itself.

Pearson v. Arcadia Stores, Guyra, Ltd. (No. 2) [1935] HCA 42; (1935), 53 CLR 587, referred to.

(3) Order 70, r. 12 (2) should not be read as purporting to operate so as to cut down the jurisdiction conferred by the Bankruptcy Act 1966, and if s. 58 (3) applies to the instant facts, the court has jurisdiction to grant leave to proceed.

(4) Where a court is given power to grant leave to perform a particular act or pursue a particular course of action, and the question whether the need for such leave has arisen involves difficult and complex questions of law or fact, it is permissible, in an appropriate case, to proceed on the basis that such leave is necessary rather than involve the parties in the futile exercise of determining, possibly after a series of appeals, whether the need for such leave has arisen. It is therefore unnecessary to express a final view on the effect of the stay on the operation of s. 58 (3).

Talga Ltd. v. M.B.C. International Ltd. [1976] HCA 22; (1956), 133 CLR 622, referred to.

(5) In all the circumstances, including the urgency of the matter, leave to proceed ought to be granted.

Observations on the operation of s. 58 of the Bankruptcy Act 1966 and of the effect of O. 70, r. 12 of the High Court Rules on s. 58.

K. R. Handley Q.C., B. W. Rayment and E. Joseph, for the appellant.

D. H. Hodgson, for the second-named respondent, the Official Receiver.

Cur. adv. vult.

Solicitors for the appellant: Hermann & Allanson.

Solicitors for the first-named respondent: Lobban, McNally & Harney.

Solicitors for the second-named respondent: Currie & Currie.

(Reported by R. L. Crisp Esq., Barrister-at-Law.)

THE COURT delivered the following judgment.

This is an appeal from a decision of Franki J. given on 16th September,

1977, in the bankruptcy jurisdiction. Midland Credit Ltd. (hereafter called "Midland Credit") by application joining as respondents George Frederick Allanson and the official receiver of the bankrupt estate of Mr. Allanson, sought an order pursuant to s. 58 (3) of the Bankruptcy Act 1966 granting leave to continue action No. 5415 of 1975 in the Supreme Court of New South Wales in its common law jurisdiction. (at p109)

2. His Honour held that he had no jurisdiction to make the order and further expressed the view that even if he had jurisdiction, he would, as a matter of discretion, refuse leave. This appeal is brought from that decision by Mr. Allanson. Midland Credit, which made the original application for leave, was represented on the appeal. Its counsel said that it wished leave to be granted but had not appealed because it was content to accept the decision. Apparently Midland Credit was not anxious to have the action brought on for hearing at an early date. (at p109)

3. The official receiver was also represented on the appeal. He adopted a neutral attitude. (at p109)

4. The action at common law was commenced by statement of claim issued by Midland Credit on 14th July, 1975, against Hallad Pty. Ltd., Gayson Homes Pty. Ltd., Michael John Haddad, George Frederick Allanson, Marlene Haddad, Anthony Haddad, Cherry Haddad, Anita Mazuran, Marlene Hille, Gloria Cherote and Lily Caon. The statement of claim alleged the giving of a mortgage, variations of its terms, default in payment of interest, and liabilities under various deeds in the nature of guarantees. It was said that by reason of the variations, interest was payable on the principal sum secured by the mortgage at the rate of twenty-one per centum per annum and the plaintiff claimed $828,168.52 from each of the first four defendants and $60,000 from each of the other seven defendants. (at p110)

5. While this statement of claim was pending and before any statement of defence was filed, a bankruptcy petition was, on 1st July, 1976, presented against Mr. Allanson and on 2nd December, 1976, a sequestration order was made against him. (at p110)

6. A notice of appeal to the High Court was filed, seeding an order setting aside the sequestration order. Subsequently the sum of $100 was voluntarily paid into the High Court by Mr. Allanson as security for the prosecution of the appeal pursuant to O. 70, r. 10 (2) of the High Court Rules, thereby giving rise to a stay pursuant to r. 12 (2) of the judgment appealed from. The appeal to the High Court has not come on for hearing. It was stated from the bar table that the petitioning creditor had since been paid. The progress of the appeal therefore rests in the hands of Mr. Allanson. These procedures appear to have encapsulated the sequestration order in a legal vacuum for an indefinite or uncertain period. (at p110)

7. On 22nd July, 1977, Hallad Pty. Ltd., Gayson Homes Pty. Ltd. and Mr. Allanson, the first, second and fourth defendants, filed a statement of defence in the action. In their statement of defence, various matters were put in issue. It was also alleged that Midland Credit held collateral security over certain property and had received $205,396.82 for which credit had not been given to the defendants. It was further alleged that Midland Credit had not given credit for about $600,000 which it received on sale of the mortgaged property and that it had exercised its power of sale under the mortgage recklessly, negligently and otherwise than in good faith and thereby had failed to receive moneys which it otherwise could have received so that the defendants were entitled to credit in the mortgage account for the amount which should have been received. (at p110)

8. On an unspecified date in July 1977, a statement of cross-claim was filed by Hallad Pty. Ltd., Gayson Pty. Ltd., Gayson Homes Pty. Ltd., Mr. Allanson and the official receiver. This cross-claim contained a series of allegations setting out a complex set of facts relating to the mortgage transactions and repeated the allegations of wrongful exercise of the power of sale under the mortgage. A claim was made for various declarations and an inquiry before the master to determine the sum which, but for this wilful neglect and default, Midland Credit should have received from the sale of the property. (at p111)

9. On 4th August, 1977, a defence to the cross-claim was filed, putting various matters in issue. It is understood that the defendants to the action, other than the first four defendants, have not filed statements of defence and that judgment has been signed against them. So far as the remaining issues against the first four defendants and the claim under the cross-claims are concerned, the matter appears to be ready for hearing. Mr. Allanson became concerned with the necessity for urgency. He applied for an expedited hearing stating in an affidavit that interest was accruing, if the plaintiffs' claim were correct, at a rate in excess of $600 per day. (at p111)

10. A fixture was obtained for a hearing before the Supreme Court on 19th September, 1977. (at p111)

11. Apparently at this stage it was thought by Midland Credit that applications should be made to the Bankruptcy Court pursuant to s. 58 (3) for leave to proceed. This application was heard as a matter of urgency by Franki J. and on 16th September, 1977, he gave an ex tempore judgment dismissing the application. An appeal against this judgment was lodged. It was also treated as a matter of urgency. It came on to be heard before us on 19th September, the Supreme Court on that day having adjourned the action before it for one week. (at p111)

12. In the meantime it is understood that the official receiver, who claims he had not authorized his being joined in any part of the action, had been removed as a party from those proceedings. An affidavit of the official receiver before us shows that he has no funds in the estate and is not aware of any assets of Mr. Allanson which may be realized in the immediate future and brought to credit in the estate. Further he states that five proofs of debt have been lodged in the estate for claims totalling $228,140.26. In addition, he has notice of claims of three creditors who have advised him of their intention of lodging proofs of debt. Of these three creditors, two have notified him of the amount of their claims which total $758,336.18. These two latter creditors would appear to include Midland Credit which has given notice of claim including the amount which is the subject of its action in the Supreme Court. (at p111)

13. The first question which arises is whether the Bankruptcy Court has jurisdiction to grant the leave sought pursuant to the provisions of s. 58 (3). For present purposes, s. 58 (3) is as follows: "(3) 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". The answer to the question depends upon whether Mr. Allanson is a bankrupt and, in a secondary way, upon whether, if he is, the court's power to give leave is inhibited or avoided by the stay of the judgment under the High Court Rules. (at p112)

14. It is clear that, prior to the commencement of the stay, Mr. Allanson was a bankrupt. This was due to two factors: First, the making of the sequestration order on 2nd December, 1976; and second, the operation of s. 43 (2) of the Bankruptcy Act under which, upon the making of a sequestration order, the debtor becomes a bankrupt and continues to be a bankrupt until the happening of certain events specified in the section, none of which has occurred. (at p112)

15. Was Mr. Allanson a bankrupt at the time the application for leave to proceed was heard? The learned judge at first instance refused to make a finding that he was then a bankrupt. His Honour took the view that this would be to take a step which depended upon the sequestration order for its effectiveness and that the stay precluded him from doing this. (at p112)

16. Order 70, r. 12 (2) is as follows: "Except in a criminal proceeding and except in the case of an appeal from an order made under this rule, when security has been given pursuant to rule 9 or rule 10 of this Order, then, unless the Court or a Justice in the meantime has otherwise ordered, there shall be a stay of the judgment appealed from, and of all process in execution of the judgment or to compel obedience to it, until the determination of the appeal or until an order to the contrary is made under the power conferred by this rule by the High Court or a Justice, or by the Supreme Court of a State or a Judge of the Supreme Court of a State". (at p112)

17. The form of stay under r. 12 (2) may be contrasted with the form of stay under r. 22 of s. 111 of Pt II of the earlier High Court Rules. The earlier rule was considered by the High Court in Pearson v. Arcadia Stores, Guyra, Ltd. (No. 2) [1935] HCA 42; (1935) 53 CLR 587 . There the stay was a stay of execution on the judgment. Where a stay is in that form, the judgment or order stands, although execution upon it is stayed. Rule 12 (2) which was inserted in 1953, appears to change this position deliberately. It operates as a stay of all process in execution of the judgment or to compel obedience to the judgment. But this is not all that it does. It also provides there shall be a stay of the judgment. The stay under r. 12 (2) operates until the determination of the appeal or until an order to the contrary is made. (at p112)

18. The question whether, in a context where the judgment itself, in pursuance of which the sequestration order was made, is stayed, it can properly be said, for the purposes of bringing the provisions of s. 58 (3) into operation, that Mr. Allanson "has become a bankrupt" is a difficult one. We have not been referred to any case directly in point and there is obviously room for differences of opinion as to the correct answer to it. (at p113)

19. One view may be that the stay of the judgment itself under r. 12 (2) blocks it at source so as to render it completely ineffective for all purposes, except the hearing of the appeal. On this view, neither the judgment nor the sequestration order made in pursuance of it can, while the stay operates, be used as the basis for satisfying one of the statutory conditions precedent ("debtor has become a bankrupt") to the operation of s. 58 (3). Such a situation could be compared with that which exists after the grant of a perpetual stay of a winding-up order under the Companies Act which operates to terminate the liquidation. (at p113)

20. Another view may be that the effect of the stay does not prevent the judgment and sequestration order remaining as a fact but that no step which depends for its effectiveness upon the judgment can be taken. If this view be correct, it might be argued that Mr. Allanson still had the status of a bankrupt, but that no step in which it was necessary to rely upon the order of sequestration could be taken. Subject to the interpretation of s. 58 (3), it might then be argued that an application for leave to proceed was such a step. (at p113)

21. Whatever be the correct view of the effect of the stay brought about by the operation of r. 12 (2), the ultimate answer to the question must depend upon the operation, in the light of that view, of ss. 43 (2) and 58 (3) of the Act. Section 43 (2) fastens upon "the making of the sequestration order" to give the debtor the status of a bankrupt. There is no doubt a sequestration order was made. Section 43 (2) goes on to provide that he "continues to be a bankrupt" until discharge or annulment, neither of which events has occurred. Unless the view is taken that the stay under r. 12 (2) has the effect of eliminating the fact of the sequestration order, it may be argued that Mr. Allanson became and continued to be a bankrupt by force of the Bankruptcy Act regardless of the view taken of the precise effect of the stay under r. 12 (2). (at p113)

22. If Mr. Allanson did continue to be a bankrupt, then s. 58 (3) clearly operates to prevent the commencement of proceedings against him in respect of a provable debt or the taking of any fresh step in such a proceeding, without the leave of the court. It is not in dispute that the action by Midland Credit was in respect of a provable debt. If s. 58 (3) operates in this way, can the court give leave to proceed, or is it precluded from doing so by the operation of the stay? It might be argued that the court was prevented from giving leave because this would be the taking of a step based upon the judgment, which was stayed. This would be a particularly odd result. To grant leave to proceed against Mr. Allanson would not be to enforce or to give effect to the judgment or sequestration order. It would rather be to ameliorate the effect of the judgment or order and to permit Midland Credit to proceed as if it were not effective. Indeed, we think it is incorrect to argue that, because Mr. Allanson has the status of a bankrupt, s. 58 (3) applies, but that the court is prevented by the stay from granting leave. Section 58 (3) operates because of the "making of the sequestration order" and the consequence which s. 43 (2) fastens upon that fact. It operates on the basis Mr. Allanson is a bankrupt to prevent the commencement of proceedings or the taking of a step in such proceedings without the leave of the court. The court's power to relieve against this restriction arises with the application of the restriction and is commensurate with it. (at p114)

23. To make an order for leave to proceed appears to us to be to take a step based upon the circumstances brought about by s. 58 (3) if it applies. It does not appear to us that it is correctly described as taking a step based upon the judgment or sequestration order. If it were, a serious question might arise, whether a stay brought about by a rule of the High Court could operate so as to cut down the jurisdiction conferred by the Bankruptcy Act. Indeed, we do not consider that r. 12 (2) should be read as purporting to do so. (at p114)

24. Before proceeding further with the question of the effect of the stay and the operation of s. 58 (3), it is convenient to consider the second question which arises. That is, whether the court, if it has jurisdiction, should grant leave in the present case. Franki J., while indicating that as then advised he would not have answered this question in the affirmative, never reached the stage where it was necessary to decide it. The facts are complex. The claim of Midland Credit is not only against Mr. Allanson, but against other defendants who, in some respects, may be jointly and severally liable with him. There is also the question of the defences, some of which form the basis of the cross-claim. It would seem that all of these issues would be better and more comprehensively dealt with by a contested trial of the action in the Supreme Court than could possibly be the case if Midland Credit were required to lodge a proof of debt in respect of its claim against Mr. Allanson alone. Such a proof of debt would be in the form of an affidavit and determined by the official receiver at such time as the stay ceased to operate. If the official receiver disallowed the claim in whole or in part, an appeal on this isolated issue could be brought to the Bankruptcy Court. But in these circumstances, the issues would have been determined in a less satisfactory way and questions between Mr. Allanson and the other parties to the action would not be resolved. (at p114)

25. It is not suggested that if leave be granted, the bankrupt estate will suffer financially in any way. (at p114)

26. In the circumstances, we have formed the view that, if s. 58 (3) applies, the court has jurisdiction to grant leave to proceed and such leave should be granted. (at p114)

27. We consider that it is unnecessary in the circumstances for us to express a final view of the effect of the stay on the operation of s. 58 (3). Where a court is given power to grant leave to perform a particular act or pursue a particular course of action and the question whether the need for such leave has arisen involves difficult and complicated questions of law or fact, it is permissible, in an appropriate case, to proceed on the basis that such leave is necessary rather than involve the parties in the futile exercise of determining, possibly after a series of appeals, whether the need for such leave has arisen. In all the circumstances including the urgency of the matter, we consider that that is the appropriate course to adopt in this case and that we should, to the extent necessary, grant leave to Midland Credit to continue and take fresh steps in the proceedings in the Supreme Court of New South Wales. This approach would, it seems to us, be consistent with that adopted by the High Court in Talga Ltd. v. M. B. C. International Ltd. [1976] HCA 22; (1976) 133 CLR 622 . It is an approach which was raised before us in the course of argument but not before the learned judge below. (at p115)

28. The orders that we make are: (1) Appeal allowed; (2) ORDER that to the extent that such leave is necessary by reason of the provisions of s. 58 (3) of the Bankruptcy Act 1966 and the making of a sequestration order on 2nd December, 1976, in respect of the estate of George Frederick Allanson, Midland Credit Ltd. have leave to continue and take fresh steps in proceedings instituted by it in the common law division of the Supreme Court of New South Wales against the said George Frederick Allanson and others being proceedings No. 5415 of 1975 in that court upon the following terms: (a) such leave does not extend to the taking of any step to enforce any judgment obtained in such proceedings against the person or property of the said George Frederick Allanson without the prior leave of the Federal Court of Australia in its bankruptcy jurisdiction; and (b) Midland Credit Ltd. shall not, without such prior leave prove in respect of the whole or any part of any such judgment in the bankruptcy of the said George Frederick Allanson if the sequestration order is not set aside. (3) Confirm the order of Franki J., that Midland Credit Ltd. pay the official receiver's costs of the proceedings before his Honour. (at p115)