Re Patsellis, Ignatio Ex Parte Australia & New Zealand Banking Group Ltd [1995] FCA 1146

Federal Court of Australia|1995-12-05|Before: Lockhart J

IN THE FEDERAL COURT OF AUSTRALIA) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE ) No. NP 1791 of 1995 STATE OF NEW SOUTH WALES ) RE: IGNATIO PATSELLIS Debtor EX PARTE: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED Creditor

REASONS FOR JUDGMENT LOCKHART J. This is a petition for sequestration of the estate of Ignatio Patsellis. The petitioning creditor is Australia and New Zealand Banking Group Limited. It claims to be a creditor of the debtor in the sum of approximately $270,000. That is a rounded-off figure which has been accepted in argument by the legal representatives of the parties to be the figure on which the Court is entitled to adjudicate. The debt of the debtor to the petitioning creditor has arisen out of accommodation provided by the petitioning creditor to the debtor and his wife. She is not a party to this proceeding. The petition as originally filed asserts in paragraph 3 that the petitioning creditor does not, nor does any person on its behalf, hold any security over the property of the debtor, or any part of it, for the payment of the amount due to the petitioning creditor. That paragraph is erroneous, and there is evidence explaining fully how the error occurred which I accept. Today the petitioning creditor seeks to amend paragraph 3 of the petition so that it reads as follows: 'The said company holds security for the amount claimed in paragraph 2 by way of two registered mortgages numbered V644215 and V644216 over the property of the debtor in the land and improvements contained in Folio Identifier 173/709553 and known as 3 Valda Street, Bexley ("the Property"). The value of these securities is estimated to be $170,000 being the value of the debtor's half interest in the Property and the said company is deemed to be an unsecured creditor for the balance of the sum claimed in paragraph 2, being $99,638.73.'

The application to amend paragraph 3 of the petition is opposed by the debtor. On 31 August 1993, Master Malpass of the Supreme Court of New South Wales made certain orders by consent of the debtor and the petitioning creditor, including an order that the petitioning creditor was to have judgment against the debtor for possession of the property, 3 Valda Street, Bexley, and leave to enter judgment against him for a sum which, together with interest and subsequent interest, is the amount asserted to be owing by the debtor to the petitioning creditor in paragraph 2 of the petition. Certain other orders which it is unnecessary for me to recite were made by Master Malpass by consent. Litigation is still on foot in the Supreme Court of New South Wales between the debtor, the debtor's wife and the petitioning creditor. Challenges are made in one form or another either to the petitioning creditor's security or its right to realise it. The details are unimportant for present purposes. The petitioning creditor says that it is entitled to value its security for the purposes of s. 44 of the Bankruptcy Act 1966 as half the estimated realisable value of the property, that is half of $340,000, namely $170,000, because it is said that is the value of the debtor's half interest in the property. A copy of one of the two mortgages over which the petitioning creditor holds security is in evidence and it is a memorandum of mortgage in usual form under the Real Property Act in which the mortgagors are described as the debtor and his wife and the two of them have mortgaged their respective interests in the property to the petitioning creditor. The other memorandum of mortgage is not in evidence but it is accepted that I should assume that it is, in all material respects, the same as the mortgage to which I have just referred. Counsel for the petitioning creditor says that as the debtor and his wife own the property as joint tenants, the petitioning creditor is entitled to assert that the value of its security as against the debtor is $170,000, not $340,000, either because the property is owned by the debtor and his wife as joint tenants or because the joint tenancy has been severed. The debtor asserts through his solicitor that the argument is fallacious, that the petitioning creditor holds its security over the whole of the property, and that the proper estimate of the value of the security must be $340,000. Bankruptcy law does not close the gates to a secured creditor seeking to restrain the estate of a debtor. But because a secured creditor is secured, that is, holds security, a secured creditor is required to take one of two courses in presenting a petition to sequestrate a debtor's estate. Either the secured creditor may value the security and be treated for the purposes of bankruptcy law, in presenting a petition, as an unsecured creditor to the extent, if any, by which the amount of the debt owing to him exceeds the value of his security. Alternatively, the petitioning creditor, if secured, may surrender his security, and s. 44 of the Bankruptcy Act contains provisions as to what is thereafter to happen, particularly, s. 44(5) and 44(6). The purpose of those two provisions - estimating the value of security or of surrounding security - exists as it does because bankruptcy is a means of distributing the property of bankrupt persons amongst the unsecured creditors, and for its purposes a secured creditor is to be treated as if unsecured to the extent that the debt exceeds the value of the security. Hence, in the normal course a petitioning creditor would not surrender his security unless the security was, in his view, worthless. There are exceptions to that; but that is generally the approach that is adopted, because the security otherwise becomes available upon bankruptcy to the creditors as a whole. Here the petitioning creditor has not surrendered its security, but has estimated its value for the purposes of s. 44(2) of the Bankruptcy Act which provides as follows: 'Subject to subsection (3) [That is the surrender provision], a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him exceeds the value of his security.'

Section 44(1) simply provides that: 'A creditor's petition shall not be presented against a debtor unless: (a) there is owing by the debtor to the petitioning creditor a debt that amounts to $1500 or 2 or more debts that amount in the aggregate to $1500 ...' In my opinion, in the present case the evidence establishes that the petitioning creditor is a secured creditor and that its security subsists over the whole of the property at Bexley. Thus, it is entitled to have recourse to either or both of the mortgagors, that is the debtor and his wife, and it can realise the security to the extent of the whole of its value, that is $340,000 on the figures before the Court. So discharging the indebtedness, a surplus would be left in the hands of the mortgagors. It is not to the point in law, for the purposes of s. 44, that the property being held by the mortgagors as joint tenants is one which may in some circumstances result in, and possibly has already resulted in, a severance of the joint tenancy. The security is one and indivisible and it is a security over the whole of the property. Accordingly, in my view, any assessment or estimate of the value of the security by the petitioning creditor would necessarily have to value it at $340,000, which is a sum substantially in excess of the amount owed to the petitioning creditor by the debtor. It would therefore be futile to allow the amendment to paragraph 3 of the petition; accordingly, I refuse the application for amendment. The petitioning creditor seeks to adjourn the petition, rather than to have it dismissed, because the Supreme Court proceedings between the parties and Mrs Patsellis are due to be heard in that court on 13 February. Four days have been set aside for the hearing. It has been submitted that if the petitioning creditors should succeed in that proceeding, then it may mean that its petition here would still have life. I am not persuaded that this is correct. In my view, in view of the ruling I have made with respect to the proposed amendment to paragraph 3, the appropriate course is to dismiss the petition. Accordingly, the petition is dismissed. I order the petitioning creditor to pay the debtor's costs of the petition, including reserved costs if any. I certify that this and the preceding six (6) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart. Associate Dated: 5 December 1995 Counsel for the Debtor : D R Wright Solicitors for the Debtor: Tzovaras & Co Counsel for the Creditor : B Debuse Solicitors for the Creditor: Dowe Xenos Date of Hearing : 5 December 1995 Date of Judgment : 5 December 1995

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Judgment (4 paragraphs)