NWC Finance Pty Ltd v Borsellino

Consideration

1. Section 58 of the Bankruptcy Act provides: (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. (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. …
2. In Sistrom v Urh (1992) 40 FCR 550; (1992) 117 ALR 528 the Full Court of the Federal Court said (at 556): When the land is registered under the Torrens system, the position is different insofar as the legal title and the equitable ownership must be distinguished. The effect of s.58 of the Bankruptcy Act, where a bankrupt and his wife are the registered proprietors of Torrens title land as joint tenants is to operate in equity to sever the joint tenancy and to impose an obligation upon the registered proprietors to hold the land in trust for the trustee in bankruptcy and for the wife of the bankrupt as tenants in common in equal shares. Thus, s.58(2) specifically provides that "property ... vests in equity in the trustee, by virtue of this section, [but] does not so vest at law until the requirements of that law have been complied with."
3. To similar effect was what was said by Young JA in Romeo v The Trust Company (PTAL) Ltd [2012] NSWCA 62 at [19].
4. The Trustee's submission should be accepted that upon the making of the sequestration order in the present case the joint tenancy was severed, a tenancy in common in equity was created between Mrs Borsellino and the Official Trustee, and Mr Borsellino's half interest in the property was vested in equity in the Official Trustee. Although Mr Borsellino remained as the legal owner of the land he held that land on trust for the Official Trustee. He had no remaining equitable interest in the land: Bagshaw v Scott (2002) 126 FCR 27; [2002] FCAFC 362. No equity of redemption remained in Mr Borsellino (Spragg v Binkes (1800) 5 Ves 583 at 590; 31 ER 751 at 754). He retained no equitable interest in the land that could be disposed of by way of the charge given to NWC. The result is that no equity was ever created in NWC for any priority issue to arise.
5. NWC's submission that the Trustee's equitable interest obtained by virtue of s 58 was subject to the swords and shields which equity provides is no answer to this. NWC submitted that the Trustee had clothed Mr Borsellino with the power to continue to deal with the property because the Trustee did not move to become registered as the legal owner as well as the equitable owner (echoing, perhaps, what was said by the Privy Council in Abigail v Lapin [1934] AC 491 at 505, and see also Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326 at 339).
6. I am not at all convinced that the Trustee clothed Mr Borsellino with anything to enable him to deal with the property. Section 58(1) and (2) brought about the result that Mr Borsellino came to hold the land as a bare legal trustee. This submission of NWC simply raises in a different guise the submission it makes about postponement of the Trustee's prior equity through disentitling conduct. Here the disentitling conduct would have to be said to be failing to become registered on the title before NWC took its mortgage. Although for the reasons given above at [22] I do not consider that any charge was created, the further answer to NWC's submission is found in what follows.
7. In case I am wrong in the conclusion that no charge was created it is necessary to consider the issue of competing equities and whether the Official Trustee's equity is postponed by reason of disentitling conduct.
8. In Latec Investments Kitto J said (at 276): … In all cases where a claim to enforce an equitable interest in property is opposed on the ground that after the interest is said to have arisen a third party innocently acquired an equitable interest in the same property, the problem, if the facts relied upon as having given rise to the interests be established, is to determine where the better equity lies. If the merits are equal, priority in time of creation is considered to give the better equity. This is the true meaning of the maxim qui prior est tempore potior est jure: Rice v. Rice [1853] EngR 1102; (1853) 2 Drew 73, at p 78 [1853] EngR 1102; (61 ER 646, at p 648). But where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest. In the present case it seems to me that there is much to be said for holding that, since during the long period of the mortgagor's delay in setting up the invalidity of the purchaser's title persons were induced to lend money on debentures in the belief that an unencumbered fee simple in the subject property formed part of the security under the trustee's floating charge, the mortgagor ought not to be allowed to insist upon its equity of redemption as against the equitable interest of the trustee.
9. It seems clear that the investigation involves an examination of the conduct of both parties. In Heid v Reliance Finance Mason and Deane JJ said (at 341-2): [7] For our part we consider it preferable to avoid the contortions and convolutions associated with basing the postponement of the first to the second equity exclusively on the doctrine of estoppel and to accept a more general and flexible principle that preference should be given to what is the better equity in an examination of the relevant circumstances. It will always be necessary to characterize the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest. Thus in Latec Investments (1965) 113 CLR, at p 276 Kitto J. said that the case where the conduct of the prior owner leads the later owner to acquire his interest on the supposition that the earlier interest does not exist - the test stated by Dixon J. in Lapin v. Abigail (1930) 44 CLR, at p 204 - was just one "instance" of a case when the merits are unequal: see also Lapin v. Abigail (1930) 44 CLR, at pp 185-186 , per Isaacs J.; General Finance Agency, etc., Co. (In liq.) v. Perpetual Executors and Trustees Association, etc. [1902] VicLawRp 121; (1902) 27 VLR 739, at pp 742-744 . To say that the question involves general considerations of fairness and justice acknowledges that, in whatever form the relevant test be stated, the overriding question is ". . . whose is the better equity, bearing in mind the conduct of both parties, the question of any negligence on the part of the prior claimant, the effect of any representation as possibly raising an estoppel and whether it can be said that the conduct of the first or prior owner has enabled such a representation to be made. . . .": Sykes, Law of Securities, 3rd ed. (1978), p. 336; see also Dixon v. Muckleston (1872) LR 8 Ch App, at p 160 ; Latec Investments (1965) 113 CLR, at p 276 . Thus elements of both negligence and estoppel will often be found in the statements of general principle: see, for example, Lapin v. Abigail (1930) 44 CLR, at p 204, per Dixon J. [8] It may be that an equitable interest will not be postponed to an equitable interest created later in time merely because there is a causal nexus between an act or omission on the part of the prior equitable owner and an assumption on the part of the later equitable owner as to the non-existence of the prior equity. Fairness and justice demand that we be primarily concerned with acts of a certain kind - those acts during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest. [9] Thus, the mere failure of the holder of a prior equitable interest in land to lodge a caveat does not in itself involve the loss of priority which the time of the creation of the equitable interest would otherwise give (J. & H. Just (Holdings) Pty. Ltd. v. Bank of N.S.W. [1971] HCA 57; (1971) 125 CLR 546 ), notwithstanding that the person acquiring the later interest had, before acquiring that interest, searched the register book and ascertained that no caveat had been lodged. It is just one of the circumstances to be considered in determining whether it is inequitable that the prior equitable owner should retain his priority.
10. The principal matter relied upon by NWC to point to disentitling conduct is the failure of the Trustee to lodge a caveat on the properties at an earlier time than it did and, in particular, prior to the taking of the mortgage on 25 March 2013. If that was all that the Trustee failed to do it would be difficult to suggest that its equity should be postponed to that of NWC's equity. That is the more so when the Trustee did not have any knowledge that Mr Borsellino owned properties over which caveats could be placed. There is no basis for the suggestion that, because the Trustee found out that Mr Borsellino had changed addresses, the Trustee should have carried out further enquiries to see what, if any, real property he owned. It is not said on what basis such enquiries could or should have been carried out.
11. The high point of NWC's case must be that the Official Trustee did not search the LPI in the name Steven as well as Stephen. In my opinion, the Trustee was under no duty to do so. It was entitled to rely on the spelling of his name contained in the sequestration order. It had no basis for thinking that Mr Borsellino might have been trying to mislead his creditors or anybody else by spelling his name in different ways. Moreover, if the Trustee can be criticised for not having searched under both spellings NWC can equally be criticised for not having searched the Insolvency Index under both spellings. In saying that, I do not suggest that it ought to be criticised. NWC did almost everything it reasonably could to ensure that the person from whom it was taking the charge was the person it believed to be Mr Borsellino. Except for doing a credit search it did all the appropriate searches and obtained all the appropriate identification documents.
12. In my opinion there is nothing to distinguish the conduct of the Trustee and NWC in the circumstances. Even if the failure to lodge a caveat had been sufficient to postpone a prior equity, the reason for the non-lodgment of the caveat is well explained.
13. Those conclusions apply equally to answer NWC's submission regarding the effect of s 58 on the ability of Mr Borsellino to create a charge. The Trustee did not become registered on the titles to the properties because it did not know of them and was not negligent nor guilty of disentitling conduct in not knowing.
14. In any event, I have considerable doubts that the principle from Latec Investments operates in the present circumstances where the equity in the properties acquired by the Trustee was acquired by force of statute. What the Court in Latec was concerned with, and what the cases have followed it were concerned with were equities created as a result of contractual arrangements between parties. It is difficult to see how what amounts to an equitable interest given by the statute which vests the property in the Trustee can be lost by the principles considered in those cases whether it be characterised as negligence or estoppel or even some form of constructive fraud. The answer may be as I noted earlier that at the time Mr Borsellino purported to grant a charge or a mortgage over his real estate he had nothing to charge. In that way it can be seen that nothing that the Official Trustee does or fails to do can divest the Trustee of the interest that s 58 vests in the Trustee.
15. The Official Trustee also relied for his priority on the principle from Shropshire Union Railways and Canal Company v R (1875) LR 7 HL 496; 45 LJQB 31; 32 LT 283 which held that usually cestuis que trust are entitled to rely on their trustee and claim immunity from the consequences of his unauthorised dealings, no matter what statements, express or implied, he makes, no matter how reasonably the subsequent equity holder has acted to his detriment, and no matter how negligent the trustee was in his conduct or the cestuis que trust in permitting his conduct to exist or continue (Meagher, Gummow & Lehane, Equity Doctrines and Remedies (4th ed., Lexis Nexis 2002) at [8-050]). The application of such a principle here was said to mean that the Trustee's prior equity could not be postponed by failure on his part otherwise adjudged to be disentitling conduct.
16. For the reasons already given it is not necessary to decide if that principle would apply in the present case.

Conclusion

1. In my opinion, at the time Mr Borsellino purported to give a charge or a mortgage to NWC he had no equitable estate to do so. The charge was ineffective because the whole of the equitable estate had been vested by virtue of s 58 of the Bankruptcy Act in the Official Trustee. Even if NWC acquired an equitable interest in the properties the Trustee's interest was not postponed to that of NWC.
2. The result is that the Official Trustee is entitled to Mr Borsellino's 50% share of the funds in Court.
3. I make the following orders: 1. Declare that the Official Trustee is entitled to 50% of the funds in Court including interest; 2. Declare that NWC is entitled to 50% of the funds in Court including interest; (3) Direct payment to each of the parties of 50% of the funds in Court including interest; (4) Dismiss the Notice of Motion filed by NWC on 22 July 2016; and (5) NWC is to pay the Official Trustee's costs of the Motion filed by NWC on 22 July 2016 and the Motion filed by the Official Trustee in Bankruptcy on 24 August 2016.

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: 23 September 2016