Mango Media Pty Ltd v Velingos [2008] NSWSC 202 | Case summary

1 By summons filed in court on 4 March 2008, in respect of which time for service was abridged, the plaintiff seeks declaratory relief recognising a security interest it claims to have in the defendant's land plus, in a more immediate sense, an order under s 74K of the Real Property Act 1900 extending the operation of a caveat lodged by the plaintiff and affecting that land. 2 Upon the return of the summons this morning, Mr Mullette announced an appearance for the Official Receiver and produced evidence that the Official Receiver became the trustee of the bankrupt estate of the defendant on 20 February 2008. 3 There was then debate before me about the impact of s 58(3) of the Bankruptcy Act 1966 (Cth) which is as follows: "(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 think fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding." 4 The facts, as they appear at this point, are straightforward. The plaintiff says that it was retained by the defendant to procure loan finance for the defendant and that the defendant undertook to pay certain fees to the plaintiff in connection with the procuration services to be rendered by the plaintiff. The loan did not proceed but the plaintiff says that the defendant remains indebted to it for fees. There was an agreement in writing between them which, according to the plaintiff, caused to arise an equitable charge over the defendant's land to secure his indebtedness for the fees. It was in respect of the interest in the land said to arise from this agreement that the plaintiff lodged the caveat. All relevant events happened before the defendant became bankrupt, so that any indebtedness of the kind the plaintiff claims pre-dated the bankruptcy. 5 The present proceedings seeking declaratory relief as to the existence of the security interest the plaintiff asserts and also seeking extension of the caveat and are not, in my view, caught by s 58(3)(a) of the Bankruptcy Act. Recognising a security interest in land and its status as security and does not entail enforcement of any "remedy against" the land. It is not in any sense analogous with an order for sale or attachment. Nor does the existence of a caveat affecting the land have that effect. The caveat is not a "remedy against" the affected land. It is a means of giving notice. There is no concept of "enforcing" a caveat. 6 The more pertinent question is whether s 58(3)(b) applies so that these proceedings cannot be prosecuted without leave. The present proceedings are unquestionably "legal proceedings"; but are they "in respect of a provable debt"? 7 A debt or alleged debt lies at the heart of the plaintiff's claim. I refer, of course, to the alleged debt for fees arising from the written agreement. The plaintiff says that it has an equitable interest by way of charge over the defendant's land because of the defendant's promise that the land should stand as security for the fees. It is that interest that the plaintiff seeks to establish by the claim for declaratory relief and it is in reliance on that interest that the plaintiff seeks to sustain the caveat that it has lodged under the Real Property Act. 8 In Da Fonte v Street (NSWSC, 27 April 1995, unreported), Young J made a declaration crystallising the indebtedness of a bankrupt defendant to a plaintiff. The possibility that leave under s 58(3)(b) might be needed was discussed but rejected. Young J took the view that the mere making of a declaration as to the amount owing in no way affected the administration of the bankrupt estate. His Honour also said that the same approach had been taken by Hodgson J shortly beforehand in Sandtara Pty Ltd v Abigroup Ltd a decision of 9 March 1995. That was a case of a company in liquidation. 9 Whatever may be the position with the mere making of a declaration of the existence and amount of a debt (which, on one view, might be seen to circumvent the proof of debt process), that is not the position before me in the present case. Rather, the situation is one that was addressed by the Full Federal Court in Scott v Bagshaw [2000] FCA 816; (2000) 99 FCR 573, where a plaintiff claimed, first, a declaration that each of three properties was charged in his favour with the payment of moneys due under a particular loan agreement; and, second, an order appointing a receiver to sell the properties. The Full Federal Court (Drummond J, Nicholson J and Katz J) held (at [25]) that leave was required under s 58(3)(b) but did not distinguish between the two orders sought. 10 Having referred to the earlier decision of the Full Federal Court in Fraser v Commissioner of Taxation (1996) 69 FCR 99, their Honours said: "By parity of reasoning, the orders sought here by the appellant must also be held to be 'in respect of' the provable debt, even though the pleadings are not in terms directed to a provable debt. 11 Their Honours also referred to s 90 of the Bankruptcy Act which makes special provision about a secured creditor's debt and recognises it as a provable debt. 12 The treatment of s 58(3)(b) in Scott v Bagshaw was brief. It is possible that the conclusion was dictated by the existence of the second leg of the application, that is, the prayer for the appointment of a receiver. That that aspect was seen as relevant is borne out by the reference to a passage in Fraser's case about the need to preserve the trustee in bankruptcy as the dominus litis, something that would be upset by the appointment of a receiver. 13 I come back, therefore, to the objective of s 58(3)(b) which is, is clearly enough, to ensure that the bankrupt estate and the provable claims upon it remain under the control and supervision of the courts having jurisdiction in bankruptcy. The legislation as a whole is aimed at marshalling assets, ascertaining debts and claims and applying the former towards satisfaction of the latter. The procedures by which the process is to be conducted and the objective is to be achieved are set out in the Bankruptcy Act and administered by those courts to which exclusive jurisdiction in bankruptcy is given by Parliament. To the extent that an attempt is made to resort to any other process of dealing with debts and claims, particularly if resort is to be had to courts other than the bankruptcy courts, there must first be screening by a bankruptcy court. 14 In the present case, this court is asked to make a binding declaration of right under s 75 of the Supreme Court Act 1970 recognising the existence of an interest in property of a bankrupt by way of security for a debt of the bankrupt. Given that the phrase "in respect of" only requires "some discernible and rational link" between the matters in question (Technical Products Pty Ltd v State Government Insurance Office (Q) [1989] HCA 24; (1989) 167 CLR 45 at CLR 47), the proceedings advancing the claim to have the court recognise the security for the debt seem to me clearly to be proceedings "in respect of" the debt claimed to be secured by the security. The security interest cannot be found to exist unless the debt is found to exist. 15 The claim for an order extending the caveat stands in the same light. It is a claim based on not only the existence of the interest in the property that is asserted by the plaintiff but also the existence of the debt for which the interest is said to stand as security. If there were no debt, there would be no basis for asserting an interest in the property and, therefore, no basis for attempting to obtain the declaratory relief or seeking to sustain the caveat. 16 It was submitted by Mr Stitt of counsel, who appeared for the plaintiff, that the present case is taken outside s 58(3)(b) by s 58(5): "Nothing in this section affects the right of a secured creditor to realise or otherwise deal with his or her security." 17 I am not satisfied that the plaintiff, by commencing and prosecuting these proceedings, is doing anything within the scope of s 58(5). The plaintiff is not exercising a right "to realise or otherwise deal with" its "security", where that is understood as a reference to the property interest claimed in the proceedings and in respect of which a caveat has been lodged. Realisation of security entails some step by way of resort to the property over which the security exists, such as by exercise of the power of sale. Nor does a holder of security "deal with" his or her security by seeking a declaratory order as to its existence or an order for the extension of a caveat predicated upon its existence. The making and pursuit of an application for either order does not entail a "dealing" with anything. 18 I am of the opinion that leave under s 58(3)(b) of the Bankruptcy Act is required in respect of the present proceedings. This court is not a court empowered by Parliament to exercise bankruptcy jurisdiction. It is not a court that can grant leave under s 58(3)(b): Green v Schneller [2001] NSWSC 897; (2001) 189 ALR 464; Gertig v Davies [2003] SASC 86; (2003) 85 SASR 226. 19 The appropriate course will be to stand the summons over so that the plaintiff, if minded to do so, may make an appropriate application to a court exercising bankruptcy jurisdiction. 20 I should add, in conclusion, the observation that, as Mr Mullette pointed out, the bankruptcy in a real sense protects the position of the plaintiff by putting the power to deal with the property to the plaintiff's detriment beyond the ability of the defendant. What more a caveat could do in a practical sense is not clear. **********

Mango Media Pty Ltd v Velingos

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