Morris Finance Ltd v Brown

Judgment

1. BASTEN JA: I agree with Payne JA.
2. PAYNE JA: The applicant for leave, Morris Finance Ltd, was the lessor under a chattel lease of certain property. The first respondent, Mr Brown, was the lessee of that property under the lease. In addition to the promise to make payments under the lease, Mr Brown provided a charge over his real property to secure his payment obligations. The second respondent, Mrs Brown provided a guarantee to the applicant securing the payment obligations of Mr Brown under the lease, supported by a charge over her real property.
3. In 2013, the first respondent became bankrupt and the third respondent, Mr Free, was appointed as his trustee in bankruptcy. Mr Free was the only active participant on the respondents' side of the record in this appeal. In August 2015, the second respondent became bankrupt and the fourth respondent was appointed as her trustee in bankruptcy. A fifth respondent, Holiday Coast Credit Union, which held a registered first mortgage over the first and second respondents' land at Coopernook was subsequently joined to the proceedings but played no active part before the primary judge or in the application for leave.
4. In November 2015, the applicant commenced proceedings in the Supreme Court. An amended summons was filed in January 2016. The amended summons was not before this Court. It was explained by the applicant that the relief it sought in the amended summons was that: 1. the first and second respondents deliver up vacant possession of freehold land in Coopernook (presumably to a receiver or trustee for sale appointed by the Court); 2. the Coopernook property be sold; and 3. the proceeds of sale be applied to - 1. repayment of the amount owing to the fifth respondent; 2. the payment of the amount due to the applicant (approximately $45,000 at the time of the hearing before the primary judge).
5. On 15 April 2016, the primary judge determined a separate question which had been identified, namely "does the plaintiff require the leave of the Court (within the meaning of the Bankruptcy Act 1966 (Cth)) to commence the proceeding or to take any fresh step in the proceeding". The primary judge answered the separate question "yes".
6. By summons filed on 15 July 2016, the applicant seeks leave to appeal from the whole of the decision below.
7. On 5 September 2016, following an e-mail to the parties from the registry of this Court drawing the parties' attention to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth), a notice of motion was filed by Mr Free seeking to have the application struck out as incompetent.
8. On 17 October 2016, Morris Finance filed a s 78B Judiciary Act 1903 (Cth) notice of a constitutional matter. The constitutional question is the proper construction of the expressions "matter...involving its interpretation" in s 76(i) and "matter...arising under…" in s 76(ii) of the Commonwealth Constitution. Affidavits filed by the solicitors acting for Morris Finance demonstrated that the notice requirements in s 78B were complied with. No Attorney-General sought to intervene in these proceedings.

Relevant legislation

1. Section 58(3)(b) of the Bankruptcy Act provides as follows (emphasis added): (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.
2. It was not controversial that the proceedings were "in respect of a provable debt" within the meaning of s 58(3)(b).
3. It was submitted by the applicant that the proceedings fell within the ambit of s 58(5) of the Bankruptcy Act, which provides: Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his or her security.
4. The primary judge held that leave was required by s 58(3)(b) of the Bankruptcy Act and that the exception in s 58(5) of the Bankruptcy Act did not apply, principally relying on the decisions in Mango Media Pty Ltd v Velingos [2008] NSWSC 202 per Barrett J and the Full Court of the Federal Court in Scott v Bagshaw (2000) 99 FCR 573; [2000] FCA 816.

The issue on the motion

1. Mr Free, the applicant on the motion, submits that the question of relief and jurisdiction in this Court is governed by s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act which provides as follows: (5) Subject to subsections (7) and (8), where it appears that a matter for determination in a proceeding by way of an appeal from a decision of a single judge of the Supreme Court of a State or Territory (not being a proceeding to which subsection (6) applies) is a matter arising under an Act specified in the Schedule, that proceeding shall be instituted only in, and shall be determined only by: (a) the Full Court of the Federal Court or of the Family Court, as the case requires; or (b) with special leave of the High Court, the High Court.
2. That section prohibits both the institution and the determination of appeals which include a matter "arising under" an Act specified in the Schedule to the Cross-vesting Act. (It is common ground that the Bankruptcy Act is an Act specified in the Schedule.) It was not suggested that the exceptions provided in ss 7(7) or (8) applied in the present case. The only question is whether the present appeal raises a matter for determination being "a matter arising under the Bankruptcy Act."
3. The dispositive reasoning of the primary judge on the separate question was as follows: [20] The issue raised goes to the extent of the plaintiff's interest in the property and bears upon the relief that might be granted concerning the application of the proceeds of any sale. As far as the bankrupt estate of the third defendant is concerned, the issue goes to whether the plaintiff has any interest at all. The issue is present whether or not the plaintiff seeks declaratory relief. [21] In these circumstances, even accepting that s 58(5) should be construed relatively liberally, I do not think that this is a situation where a secured creditor is merely realising or otherwise dealing with its security. The creditor, in order to obtain the relief it seeks concerning the application of the proceeds of any sale, will need to establish that it is indeed a secured creditor. This case is not like Savieri v Brown (supra), Hanshaw v National Australia Bank Ltd (supra) or Perpetual Trustee v Cuitanovic (supra) where the relief sought was an order for possession. As I have indicated, the relief in this case goes beyond merely an order for sale but goes on to seek orders that the proceeds of any sale be applied in a particular manner. The plaintiff seeks payment of the amount due to it in discharge of its interest in the property. [22] Establishing that it is indeed a secured creditor would involve establishing both the existence of a debt (perhaps not a matter of great controversy in this case) and the existence of a charge that secures the debt. It is a situation similar to that dealt with by Barrett J in Mango Media v Velingos (supra). It seems to me that in this case also a debt lies at the heart of the plaintiff's claim. Moreover, it is a debt that is provable in the third defendant's bankruptcy. [23] Bearing in mind the undoubted width of the expression "in respect of", it is my opinion that these proceedings are a legal proceeding in respect of a provable debt within the meaning of s 58(3)(b) of the Bankruptcy Act. [24] Accordingly, the separate question will be answered "yes".
4. The draft notice of appeal raises for determination by this Court the following matters: 1. In circumstances where the Appellant: (a) claims to be a secured creditor of the First Respondent and the Second Respondent (both bankrupt) by virtue of its possession of an equitable charge over land owned by the First Respondent and Second Respondent, and securing certain debts owed by them; and (b) commenced proceedings seeking orders: (a) for possession of the land; (b) that the land be sold; and (c) that the balance proceeds of the sale be applied (inter alia) in discharge of its secured debt (the Proceeding); the primary judge erred in law in holding that: (i) the Proceeding did not fall within the scope of section 58(5) of the Bankruptcy Act 1966 (Cth) (the Act) and did not involve a secured creditor realising or otherwise dealing with his security; and (ii) the Appellant required the leave of the Court (within the meaning of the Act) to commence the Proceeding or to take a fresh step in the Proceeding.

Applicant's (respondent on the motion) submissions

1. The applicant (respondent on the motion) submitted that the present matter is not one involving a matter "arising under" the Bankruptcy Act within the meaning of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. It was submitted that the words "matter arising under an Act" in s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act pick up s 76(ii) of the Constitution and reflect a distinction between a matter arising under a statute and a matter involving the interpretation of that statute: Felton v Mulligan (1971) 124 CLR 367.
2. In Bramco Electronics Pty Ltd v ATF Mining Electrics Proprietary Ltd (2013) 86 NSWLR 392; [2013] NSWCA 392 Meagher JA said that the expression "arising under" in s 7(5) is to be given the same meaning as it has in Chapter III of the Constitution.
3. The applicant submitted that a matter "arising under" the Bankruptcy Act must involve a substantive issue and not, as was submitted to be the case here, a procedural matter.
4. It was submitted that the Court must first characterise the matter the subject of appeal. It was submitted that the decision of the primary judge should be characterised as a decision limited to the standing of the applicant to bring the proceedings, and thus, the matter the subject of the proposed appeal was to be understood as limited to standing, which was a procedural rather than substantive issue. The applicant submitted that there was no authority which directly addressed the relevant question in the present case but submitted that in addition to the High Court authorities on s 76(ii) of the Constitution three cases provided support, by analogy, for the applicant's position: 1. Meriton Apartments Pty Ltd v Industrial Court of New South Wales (2008) 171 FCR 380; [2008] FCAFC 172; 2. Moss v Eaglestone (2011) 83 NSWLR 476; [2011] NSWCA 404; and 3. Jakimowicz v Jacks [2016] VSCA 42.

Consideration

1. As this Court reiterated in Eberstaller v Poulos (2014) 87 NSWLR 394; [2014] NSWCA 211 at [20], it is critical to determine at the outset whether a court whose jurisdiction is sought to be invoked in fact has jurisdiction.
2. In a case materially indistinguishable from the present, Boensch v Pascoe [2016] NSWCA 191, Leeming JA determined that this Court did not have jurisdiction in a matter arising under the Bankruptcy Act by reason of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. I agree with his Honour's reasons for so concluding. As will become apparent, there is no material difference between a case where s 58 of the Bankruptcy Act provides the basis for a claim (for example to support a caveat) and where it provides the basis for a defence or immunity to a claim against a trustee in bankruptcy.
3. It should be accepted that a matter "arising under an Act" in s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act should be construed in the same way as the same term appearing in s 76(ii) of the Constitution: Felton v Mulligan; Bramco Electronics Pty Ltd v ATF Mining Electrics Proprietary Ltd at [5] per Meagher JA.
4. Where a party seeks to bring an appeal from a decision of a single judge of the Supreme Court of a State or Territory where the litigation involves the federal statutes identified in the Schedule to the Jurisdiction of Courts (Cross-vesting) Act (which includes the Bankruptcy Act) it is essential to bear in mind the provisions of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. That provision presupposes that an appeal may contain a number of matters for determination. If it appears that the "only matters for determination" are matters which do not arise under an Act in the Schedule an appeal from a decision of a single judge lies to the relevant State or Territory appellate court.
5. However, where it appears that "a matter for determination" in an appeal is a matter arising under an Act specified in the Schedule then the prohibition in s 7(5) applies. The applicant in such a case is prohibited from instituting an appeal other than in an appropriate Federal court. A State or Territory court is prohibited from determining an appeal, should the appeal be instituted in a non-Federal court in contravention of the first prohibition. In the seminal authority concerning the interpretation of s 76(ii) of the Constitution, Latham CJ in R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141 said at 154: Paragraph (ii) is limited to matters arising under federal statutes, and does not extend to matters involving the interpretation of such statutes if they do not arise thereunder ... the inquiry to be made is not whether the determination of the matter involves the interpretation of a federal law. The relevant inquiry is whether the matter arises under the law.
6. In Felton v Mulligan each of the members of the Court addressed the differences in language between a "matter...involving its interpretation" in s 76(i) and "matter...arising under…" in s 76(ii) of the Constitution. Barwick CJ (part of the majority in that case), at 374, explained: The point at which interpretation of the federal statute, prima facie an apparently incidental consideration, may give rise to a matter arising under the statute is not readily expressed in universally valid terms. But the distinction between the two situations must be maintained.
7. In CGU Insurance Limited v Blakeley [2016] HCA 2 at [29] the High Court per French CJ, Kiefel, Bell and Keane JJ elaborated on the statement of Latham CJ in R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett about the words "arising under" in s 76(ii) of the Constitution: [28] By virtue of s 76(ii) of the Constitution the matters in respect of which jurisdiction may be conferred upon the High Court include "any matter ... arising under any laws made by the Parliament". In addition to the general jurisdiction conferred by s 39(2) of the Judiciary Act, s 1337B of the Act invests the Supreme Courts of the States with jurisdiction "with respect to civil matters arising under the Corporations legislation." The term "civil matter" is defined in s 9 of the Act as "a matter other than a criminal matter." The term "criminal matter" is not defined. The use of the constitutional term "matter" in the statutory investing of Supreme Courts with general and specific federal jurisdiction directs attention to the frequently quoted observation of Latham CJ in R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett: "a matter may properly be said to arise under a Federal law if the right or duty in question in the matter owes its existence to Federal law or depends upon Federal law for its enforcement, whether or not the determination of the controversy involves the interpretation (or validity) of the law." [29] It is a particular application of that general statement to say that a matter will arise under a federal law if it involves a claim at common law or equity or under a law of a State where the claim is "in respect of a right or property which is the creation of federal law". If the source of a defence to a claim at common law or equity or under a law of a State is a law of the Commonwealth, then on that account also the matter may be said to arise under federal law. The existence of such a claim in a proceeding will meet the subject matter condition necessary to enliven the federal jurisdiction invested in a court of a State pursuant to s 77(iii) of the Constitution, read with s 76(ii)…
8. The three cases relied upon by the applicant by way of analogy are each distinguishable.
9. In Meriton Apartments Pty Ltd v Industrial Court of New South Wales the Full Court of the Federal Court was addressing the jurisdiction of the Full Bench of the Industrial Court of NSW to decide the application of s 60 of the Bankruptcy Act to proceedings commenced before it. That question turned on the meaning of the "jurisdiction in bankruptcy" conferred exclusively upon federal courts by s 27 of the Bankruptcy Act. "Bankruptcy" was defined in s 5 of the Bankruptcy Act as follows: Bankruptcy, in relation to jurisdiction or proceedings, means any jurisdiction or proceedings under or by virtue of this Act.
10. Branson J made the point at [2] that the Full Court in Meriton was exercising the original jurisdiction of the Federal Court. Although the Full Bench of the Industrial Court was exercising appellate jurisdiction from a decision of Marks J, the question of the application of the Jurisdiction of Courts (Cross-vesting) Act was not raised.
11. Greenwood J held, at [117]: … when a State court determines whether a proceeding can properly be commenced or maintained before it or whether the plaintiff has standing to engage the jurisdiction of the Court, by reason of any impediment going to the operation or application of a provision of the Bankruptcy Act, such an application is not one under or by virtue of the Bankruptcy Act. The Commission in Court Session was not exercising a jurisdiction in bankruptcy by determining the motions before it brought by Meriton and Owners.
12. Despite the reliance by the applicant in the present case on this passage, it is clear that Greenwood J was there addressing the jurisdiction question posed by s 27 of the Bankruptcy Act and the composite phrase "under or by virtue of the Bankruptcy Act." That this was the issue in Meriton is made clear in the judgment of Perram J who found at [172] that: There is no precise overlap between jurisdiction exercised in respect of matters "arising under" the Bankruptcy Act 1966 (Cth) and the exercise of jurisdiction "in bankruptcy", although in practice there may tend to be some degree of coincidence between the two concepts.
13. In the present case the question posed by s 27 of the Bankruptcy Act did not arise as there was no challenge to the exercise by the primary judge of jurisdiction to deal with the questions arising under ss 58(3) and 58(5) of the Bankruptcy Act. The question sought to be agitated on the present appeal is not the same as the question of whether the underlying proceeding could properly be maintained or commenced in the Supreme Court. Although Meriton concerned an appellate court, the decision only addressed the latter question.
14. I agree with Perram J in Meriton Apartments that there is no precise overlap between jurisdiction exercised in respect of matter "arising under" the Bankruptcy Act and the exercise of jurisdiction "in bankruptcy", although in practice there may tend to be some degree of coincidence between the two concepts. Although dissenting on the outcome, I do not regard this statement as inconsistent with anything decided in that case. The proposition identified by Perram J has been referred to with approval in a leading text: Leeming M J, Authority to Decide, (2012, The Federation Press) at 166.
15. The second case relied upon by the applicant, Moss v Eaglestone, simply did not address s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. In that case Allsop P noted, at [2]: This Court has jurisdiction to hear the matter. It is not the exercise of "jurisdiction in bankruptcy" for the purposes of s 27(1) of the Act: Meriton Apartments Pty Limited v Industrial Court of New South Wales [2008] FCAFC 172; 171 FCR 380. No objection was taken to the standing of the appellant to bring the appeal.
16. The third case relied upon by the applicant was Jakimowicz v Jacks. The appellant, Ms Jakimowicz entered into a property arrangement with Mr Jacks. Ultimately, Mr Jacks sued Ms Jakimowicz in the County Court of Victoria for breach of trust. Ms Jakimowicz objected to Mr Jacks' standing to bring the claim, as it was alleged that Mr Jacks had become bankrupt and his rights as pleaded had vested in his trustee in bankruptcy. Ms Jakimowicz was unsuccessful and appealed. The Victorian Court of Appeal's attention was not drawn to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act.
17. The Court held: [38] In our view, both the County Court and this Court have jurisdiction to determine whether or not Mr Jacks has standing to bring his claim for compensation for breach of Ms Jakimowicz's duties as trustee. Standing is a threshold issue. That is so even where, as here, it is determined at trial rather than at an interlocutory stage. Courts must be in a position to determine whether parties before them have standing to bring any claim. Were it not so, courts would not be able to control their own processes and the proceedings before them. In this regard, if a plaintiff does not have standing in a State court because the property in question has vested in the trustee in bankruptcy, then the proceeding is liable to be dismissed or at least stayed. In such situations, a court is simply giving effect to the provisions of the Act when considering the question of standing. As was pointed out by Branson J in the Federal Court in Meriton Apartments, there is no difficulty with that. [39] The alternative would be that all questions of the standing of undischarged bankrupts and third parties to a bankruptcy to pursue claims commenced in State courts would have to be determined by the Federal Court or the Federal Circuit Court. That would fly in the face of courts controlling their own proceedings. It would involve an impermissible interference by those federal courts which do not have jurisdiction over, nor a supervisory role in respect of, State courts.
18. The Court concluded that the position would be different if, as in the present case, it was claimed that the property the subject of the dispute had vested in the trustee who was a party to the litigation and thus an issue would be one affecting the divisible property of the bankrupt estate under s 116 of the Bankruptcy Act. The Victorian Court of Appeal held that in that circumstance, "the question is not just one of standing": [40]. That is not, of course, to state a test in place of the statutory test in s 7(5), which the Court did not address.
19. The Court continued at [41]: Consequently, while it is necessary in determining the sole issue of standing to consider whether the property is divisible property and has vested in the trustee in bankruptcy, all that a court is doing in that situation is applying the Act. It is not determining for or against the title of the trustee to the property, as it must of necessity do if the trustee is a party and makes a claim to the property or if the trustee claims the right to bring the action instead of the bankrupt. Where the trustee makes no claim to the property and does not claim that the cause of action has vested, a court is not exercising jurisdiction in bankruptcy. (italics added)
20. Accordingly, Jakimowicz v Jacks is distinguishable by reason of the fact that the attention of the Court was not drawn to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act and the fact that the trustee, Mr Free, is a party to the present proceeding and makes a claim to the land the subject matter of the proceeding.
21. Returning then to the present case, the correct approach to s 7(5) is that identified by Leeming JA in Boensch v Pascoe at [18] ‑ [20]. The question whether a matter for determination in an appeal is a matter arising under the Bankruptcy Act turns on the nature of the appellant's claims in that appeal.
22. The challenge to the dispositive reasoning of the primary judge set out at [16] above means that there is in the present case a matter for determination in the appeal which is a matter arising under the Bankruptcy Act because the source of the trustee in bankruptcy's defence to the applicant's claim at common law or in equity is a law of the Commonwealth: s 58(3) of the Bankruptcy Act. Unless and until the requirements of that section are met, the applicant cannot succeed in its claim. According to CGU Insurance Limited v Blakeley, on that account the matter arises under federal law.
23. Further, the applicant's assertion to be entitled to proceed with its claim is based upon s 58(5) of the Bankruptcy Act. This would have the effect, if such an order were made against the Trustee, Mr Free, of permitting the applicant to exercise a property interest over the land which Mr Free claims is vested in him as trustee. This would affect the divisible property of the bankrupt estate. Accordingly, this is a case where the questions on this appeal arise under the Bankruptcy Act. This is not a case where the Bankruptcy Act is merely "working in the background".
24. By reason of s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act, this Court does not have jurisdiction to deal with this appeal.

Costs

1. Mr Free submitted that he was entitled to an award of indemnity costs in the event that the relief sought in the motion was granted. Morris Finance submitted that, as the Court first identified the jurisdictional issue the subject of the motion, each party should pay their own costs of the motion.
2. Exhibit A on the motion, tendered by Mr Free in support of his costs application, consisted of correspondence between Mr Free's solicitors and representatives of Morris Finance which Mr Free submitted should be understood as comprising a Calderbank offer. In my view, acceptance of the offer made by Mr Free would have amounted, in effect, to a capitulation by Morris Finance. For this reason, the offer comprised in Exhibit A, assuming it met the requirements of a Calderbank offer, does not provide a sufficient basis for the award of indemnity costs.
3. Mr Free only filed the motion on 5 September 2016, following an e-mail to the parties from the registry of this Court drawing the parties' attention to s 7(5) of the Jurisdiction of Courts (Cross-vesting) Act. Nonetheless, after that time Morris Finance opposed the relief sought.
4. Whilst the proposition that the parties should bear their own costs prior to 5 September 2016 has some attraction, the fact is that Morris Finance was wholly unsuccessful before the primary judge and its purported application for leave to appeal was incompetent. Costs should follow the event in relation to the third respondent, Mr Free. The other parties, who played no active part in the proceedings, should bear their own costs.

Conclusion and orders

1. For the foregoing reasons I propose the following orders: 1. Dismiss the summons seeking leave to appeal for want of jurisdiction. 2. Order that the applicant, Morris Finance Ltd, pay the third respondent, Mr Free's, costs of the summons for leave to appeal and the motion as agreed or assessed.

Amendments 08 December 2016 - Hyperlink removed 08 December 2016 - Typographical errors corrected DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 December 2016