Is leave required to enforce an equitable charge against a bankrupt?

At issue in these proceedings determined by the Full Court of the Federal Court of Australia (Beach, Markovic and Moshinsky JJ) on 19 June 2017 was whether proceedings seeking to realize or enforce an equitable charge through judicial process falls within s 58(5) of the Bankruptcy Act 1966 (Cth) (the Act) and therefore does not require leave under s 58(3)(b).

The applicant, Morris Finance Ltd, claimed to be an equitable chargee of land at Coopernook, New South Wales owned by the first and second respondents, Mr & Mrs Brown, pursuant to a commercial goods lease.  Both respondents were bankrupt at the time that enforcement proceedings were commenced.

By summons filed in the Supreme Court of New South Wales, Morris Finance commenced proceedings against Mr and Mrs Brown and their respective trustees in bankruptcy seeking relief, inter alia, under s 103(2) of the Conveyancing Act 1919 (NSW) to sell the Coopernook property.

It was successfully contended before the primary judge that as a result of the bankruptcies of Mr and Mrs Brown, Morris Finance required leave under s 58(3)(b) of the Act to proceed with its application to take possession of the Coopernook property, sell it and distribute the proceeds of sale. 

An application was subsequently made to the Full Court of the Federal Court of Australia seeking leave to appeal the primary judge’s determination under ss 24(1)(c) and 24(1A) of the Federal Court of Australia Act 1976 (Cth) (as, at first instance, the Supreme Court of New South Wales was appropriately exercising federal jurisdiction in dealing with the matter concerning s 58 of the Act, but the leave application and any appeal are not covered by s 7(3) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) and so any appeal necessarily lay to the Federal Court).

The Full Court found that the text, context and purpose of s 58(5) of the Act excludes from its operation judicial processes to enforce an equitable charge and that if the decision below had been correct, it would be difficult for a secured creditor whose equitable charge was disputed to seek to enforce it through a State court without first obtaining leave under s 58(3)(b), an unnecessary and disadvantageous impediment to the chargee.

Section 58(5) deals with “the right of a secured creditor to realize or otherwise deal with his or her security”.  The Court found that “…in terms of textual analysis, there is no good reason to confine any of these types of securities to legal interests as opposed to equitable interests. The breadth of the text of the definition of “secured creditor” and the context in which it is used in s 58(5) do not provide any textual or contextual basis for excluding from the operation of s 58(5) the holder of an equitable charge and the right of that holder to “realize or otherwise deal with” its equitable charge. Indeed, at the time ss 5 and 58 were enacted, charges and liens were well-recognised species of equitable interests. And many of the earlier authorities discussed equitable interests, for example, equitable mortgages.” [at 36]

 

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