Application Of Official Trustee in Bankruptcy in the Matter Of the Bankrupt Estate Of David Austin Kelly

This matter concerned an application by the Official Trustee in Bankruptcy (the applicant) for directions regarding the distribution of funds held by the respondent, a solicitor, which were derived from the sale of a property owned by the bankrupt, David Austin Kelly. The dispute arose because the solicitor held the sale proceeds subject to competing claims from the applicant and a secured creditor, Westpac Banking Corporation. The applicant sought to have the funds distributed in accordance with the priorities established by the *Bankruptcy Act 1966* (Cth), while Westpac asserted its right to the funds by virtue of its registered mortgage over the property. The application was heard in the Federal Court of Australia.

The primary legal issue before the Court was to determine the priority of claims between the Official Trustee in Bankruptcy and Westpac Banking Corporation over the proceeds of the sale of the bankrupt's property. Specifically, the Court had to consider whether Westpac's registered mortgage over the property gave it a proprietary right to the sale proceeds that took precedence over the claims of the Official Trustee under the *Bankruptcy Act 1966* (Cth).

Judge Manousaridis reasoned that a registered mortgage creates a proprietary interest in the land, which, upon sale, attaches to the proceeds of that sale. The Court applied the principle that a secured creditor's proprietary right, established by a registered mortgage, is not extinguished by the mortgagor's bankruptcy. Therefore, Westpac's security interest in the property extended to the proceeds of its sale, giving it priority over the claims of the Official Trustee in Bankruptcy, who stood in the position of an unsecured creditor to the extent of any shortfall after the secured debt was satisfied. The Court noted that the *Bankruptcy Act 1966* (Cth) prioritises secured creditors over unsecured creditors in the distribution of a bankrupt's property.

The Court ordered that the solicitor was entitled to retain from the sale proceeds the amount owing to Westpac Banking Corporation under its mortgage, together with any reasonable costs and expenses associated with the sale and the discharge of the mortgage. The balance of the sale proceeds was to be paid to the Official Trustee in Bankruptcy.