ex parte

[1979] FCA 182

I

Bankruptcy - application to be substituted as petitioning creditor - applicant holding security over debtor's property -

whether applicant obliged to both value security and include in the petition the statement as to willingness to surrender

' security - requirements not cumulative, -

RE: D. YTGGINS (male3 EX PARTE: CREDIT .2SSTSTAICS PTY. LTlrl?Pq

26 SEPTEMBER 1979

P 3b8 17)

FEDERAL COURT OF

I N TTIE FEDERATJ COURT OF AUST~LILI!L

GENERLL DIVTSION BAITICRUPTCY DISTRICT

NO. P 368 of 1979

OF TEE STATE OF lTE1'rJ SOUTH W.!-LES ' 1411D

THE AUSTRALIAN CAPITAL TERRITORY

RE:	D. WIGGTITS (male)
EX PARTE:	CREDIT ASSISTANCE PTY. LfY\:T.'?Z

ORDER

JUDGE MAKIIJG ORDER:

WHERE MADE:	SYDNEY
DATE OF ORDER:	26 SEPTEMBER 1979
THE COURT OXDERS TIUT:

1 . Cred i t Ass is tance Pty. Limited be s u b s t i t u t e d as

p e t i t i o n i n g c r e d i t o r .

2. The hea r ing of t h e p e t i t i o n be adjourned t o 5 Xovembcr

Should Cred i t Ass is tance Pty. Limited ob ta ix a

' 3 .

s e q u e s t r a t i o n order , t h e o r i g i n a l p e t i t i o n i n g c r e d i t o r ' s

c o s t s a r e t o t a k e p r i o r i t y t o t h e c o s t s of Cred i t Assis tance

Pty. Limited. Should Cred i t Ass is tance Dty. Limited n o t

o b t a i n a s e q u e s t r a t i o n order , then t h e debtor i s t o pay

t h e o r i g i n a l pe t i - t ion ing c r e d i t o r ' s c o s t s inc ludl .~ :g reserved

c o s t s .

4. Costs o f both p a r t i c s of this a p p l i c a t i o n be ~ c s e r u c d ,

IN THE FEDERAL COURT OF AUSTRALIA	1
\

GENERAL DIVISION BANKRUPTCY DISTRICT I No. P368 of 1979	OF THE STATE OF NEW SOUTH WALES AND
THE AUSTR4LIAN CAPITAL TERRITORY 1

RE: D. WIGGINS (male)

EX PARTE: CREDIT ASSISTANCE PTY. LIMITED

REASONS FOR JUDGMENT

CORAM : LOCKHART J. 26 September 1979.

This is an application by a creditor of the debtor

for an order that it be substituted as petitioning creditor.

The petitioning creditor is Tooheys Limited. The petition was presented on 73 March 1979 and listed for hearing on 8

May 1979. The petition has since been adjourned on a number

of occasions.

On 20 August 1979 the petitioning creditor informec

the court that he did not seek to prosecute the petition

further, and was excused from further attendance. The debtor

consented to an order that he pay the petitioning creditor's

costs including reserved costs. Credit Assistance Pty. Limitcc

("the applicant") appeared or1 that occasion and was given leavi

to file an application for substitution returnable on 4

September 19'79. The petition and the application were

adjourned on 4 Septen~bcr to 24 S e p t e n ~ b e r T I T ~ C ? I ~ L I co~!~rrlence:ld thc

hearing of the application for substitution. The applicatio~l

is opposed by the debtor.

-2-

On 30 June 1978 the applicant lent $3,000.00

to the debtor and his wife, H'elen Mavis Wiggins. Repayment

of the loan was secured by a memorandum of mortgage dated

30 June 1978 granted by the debtor and his wife to the

applicant over the security of land in New South Wales.

The mortgage provides for repayment of the principal sum

on 30 June 1979 and for payment of interest in the meantime

at the rate of 18 percentum p e r m u m reducible to 14 percenturn

per annum on prompt payment. Only two small payments of

interest were made by the debtor and his wife under the

mortgage. They are in default thereunder both as to the

payment of principal and interest.

It is not disputed that on 5 February 1979 the sum

of $3,169.30 was payable by the debtor and his wife to the

applicant under the mortgage, the principal having become

payable before 30 June 1979 pursuant to clause 7 of the

memorandum of mortgage. The significance of 5 February 1979

is that it is the date on which the debtor committed the act

of bankruptcy alleged in the petition. As to that being the relevant date, see McNamara v. ~an~ford(l9'jl) 45 C.L.H. 267; Hyams v. Elder-Smith G. M. Limited (1974-1975) 133 C.L.R. 637.

The memorandum of mortgage granted to the

applicant is a second mortgage. A first mortgage over the same land was granted by the debtor and his wife in favour of General Credits Limited on 7 January 197'7 to secure a loan

of $23,800.00. On 6 April 1979 General Credits Limited

assigned to the applicant all its interest in the moneys

. secured by the mortgage of 7 January 1977 and all its interest in the land. The sum owing under the first mortgage is

* / 3

The applicant is taking steps to sell the

property comprising the security under the two mortgages.

The applicant estimates that the proceeds of sale of that property will be insufficient to pay the amount secured

by the first mortgage. Accordingly, the applicant values

the security of the second mortgage at nil and is willing to surrender it for the benefit of creditors generally in the event of a sequestration order being made against the debtor. It is not disputed that this value and willingness

to su,rrender the security of the second mortgage existed on

i

5 ~ e b r u a r ~	1979.
In these circumstances the applicant seeks to

be substituted. The basis of the application, which is not

disputed, is that the petition has not been prosecuted with

due diligence by the petitioning creditor within the meaning

of S. 49 of the Bankruptcy Act 1966 (!(the ~ct"). It is agreed

by the parties that the provisions of S. 44 of the Act

relating to the conditions governing the presentation of

petitions by secured creditors apply, mutatis mutarldis, to the

substitution of creditors as petitioning creditors.

Mr. Ireland, who appeared for the appli.cant, sub-

mitted that if it is permitted to be substituted as

petitioning creditor, it has the option of either valuing

its security and claiming to prosecute the petition as if it

were an unsecured credi-tor to the extent by which the amount

of the debt owing to it exceeds that yalue (S. 44 (2) ) , or of

including in the petition a statement that it is willing to

surrender its security for the benefit of creditors . . . / 4

generally in the event of a sequestration order being made

against the debtor (S. 44 (3) )

It is agreed that the questions raised in this

application should be determined by me now and not cn the

hearing of the petition if the applicant is permitted to be

substituted.

The debtor submits that ss. (2) and (3) of S, 44

are cumulative so that a petitioning creditor must both value

his security and include in the petition the statement as to

trillingness to surrender it. The ile5tor relies on the

language of S. 44, in particular the fact that ss. (2) and (3)

are not expressed as alternatives, Under s. 55 of the

1

Bankruptcy Act 1924, which is the predecessor of S. 44 of the

Act, if the petitioning creditor was a secured creditor, he was

required in his petition to state either that he was

willing to give up his security for the benefit of the

creditors in the event of a sequestration order being made

sgainst the debtor or to give estimate of the value of his

security, in which case he could be admitted as a petitioning

creditor to the extent of the balance of the debt due to him

after deducting the value so estimated in the same manner as if

. he was an unsecured creditor.

The same section required the petitioning creditcr, upon

application being made by the trustee or the Official Receiver within the prescr ibed time ~ f t e r the c?aki:~g ol a seq:les.tm t i o r , order and upon payment of the estimated value stated in the

pe-ti.tion, to give up hi.s securi- ty f o r the benefit of the c r e d i t o r

m e 31.77 t311 3cnL:?rn~-tcy Lc'i 1313, 3. 4 (2) , also

gave the petitioning creditor the alternative in his

petition of stating his willingness to give up his security

or of giving an estimate of the value of his security. The

consequences are not the same as in the Australian Act of 1924

or the Act, but the existence of the alternative is common to

&e English Act and the Australian Act of 1924. The language

of the present Act is not so clear; but.1 see nothing

inconsistent between the three Acts in this respect. Lxdeed,

the language of S. 44 of the Act, when viewed in the light of

its history including its predecessor section in the 1924 ~ c t ,

suggests to me that the Act has removed a restriction in

relation to a petitioning secured creditor in that he is no

L ,

longer bound by the estimate he has given, if any, in his

petition when he seeks to prove his debt and in this respect

is in the same position as other secured creditors:	seesecfYi~ll!
90, 91 and 92.

The construction of S. 44 contended for by the

debtor would impose more restrictions on a peti.tioning

secured creditor than applied under the earlier Act. If the

language of section 44 leads to this result, so be it; but I

do not think it does. In my opinion S. 44 means that a

.

petitioning secured creditor may in his petition estimate the

value of his security or state that he is willing to surrender

his securityfor the benefit of creditors generally in the event

of a sequestration order being made against the debtor.

If he takes the former course he is not bound

by the estimate when he seeks to prove his debt. If he takes

the latter cvurse he is obliged, upon secluest by the trustee, to surrender his security after the making of a seqeustration

order, tlle sanction for non-compliance being conterrlpt of court :

. . . / G

see S . 44 (6).

. I do not think that this construction of S. 44

would enable an unscrupulous petitioning creditor to value his

security at a deliberately low figure for the purpose of

obtaining a sequestration order against the debtor and later

either rely solely on his security or proye in the bankruptcy

with a higher estimate of the value of his security. I x those

circumstances the sequestration order may be rescinded, unless

the order has been taken out, in which case the appropriate

remedy is the annulment of the bankruptcy under S. 154 (1) (a);

see Re Deriu (1970) 16 F.L.R. 420.	,
l

It was submitted by Mr. Ireland that, whichever

alternative the applicant adopts, it is not required to take

into account the first mortgage, the benefit of which was

assigned to i.t by Geral Credits Limited; and that the relevant

security is the second mortgage only. The first mortgage,

the benefit of which was assigned by General Credits Limited

to the applicant, is to secure a loan of $23,800.00 by General

Credits Limited to the debtor and his wife. It was not submittc

that, by its terms or otherwise, it operated to include the

.

debt due by the debtor and his wife to the applicant under the

second mortgage. The position may be different as to the seconc

mortgage itself, the terms of which may include the debt

assigned by General Credits Limited to the applicant: see claus~

6 of the second mortgage.

In my opinion the security held by the applicant

pursuant; to the assignment to it of the interest of General

,

Credits Limited in the first mortgage is, so far as is relevant

to this application, separate from and independent of the

security afforded by the second mortgage. The relevant

security is the second mortgage. It secures the debt of

$39169.30.

The first mortgage does not.

I was referred to the decision of the English Court

of Appeal in In Re a Debtor (1922) 2 K.B. 109, as possibly

supporting the argument that the first mortgage was security

for the indebtedness of the debtor. In that case the

petitioning creditor inadvertently omitted to state in his

petition that he held a security on the debtor's property,

which he in fact held, but which had been given many years befo! he presented his petition arid was admittedly valueless. Howeve:

the security did in fact cover the particular debt. That is

the vital difference between that and the present case.

It was submitted also by Mr. Ireland that, as the

assignment of General Credits Limited's interest in the debt

due to it by the debtor and his wife was made after the act

of bankruptcy, narnely 5 February 1979, this provides another

and separate reason why that debt and the first mortgage which

secures its repayment are not to be taken into account for the

purposes of S. 44. In view of my earlier findings and 'the fact

that this question was not fully argued it is not necessary for

me to decide it.

Mr. Perry, who appeared for the debtor, subrnitt'ed

that a petitioning creditor is requir~ld to state in his pcti t i o l

not his estimate of the value of his security, but the actual

value thereof. He relied on the language of S. 44 (2) which

is different from the clear terms of its predecessor section

in the 1925 Act: S. 55 (2) (b). The language of S. 44 (2) is

not as clear as it might be; but in my opinion its intention

is the same as was achieved by its predecessor and by S. 4	(2)
of the English Act of 1914.

For these reasons, in my opinion the applicant

is entitled to be substituted as petitiorling creditor. It may

value its security afforded by the second mortgage and be

deemed to be an unsecured creditor of the'debtor only to the	l
l

extent by which the amount of the debt exceeds the value of

that security; or it niay state that it is willing to surrende:

its security for the benefit of the creditors generally in th-e

event of a sequestration order being made against the debtor.

The first mortgage"is irrelevant for either purpose.

I order that Credit Assistance Pty. Limited be

substituted as petitioning creditor. I adjourn the hearing

of the petition to 5 November 1979. Should Credit Assistance

Pty. Limited obtain a sequestration order, the original

petitioning creditor's costs are to take priority to the cost:

of Credit Assistance Pty. Limited. Should Credlt Assistance

Pty. Limif;ed not obtain a sequestration order, then the debto.

is to pay the original petitioning credj torr S costs inc iud i r lg

reserved costs. I reserve the costs of both parties of this

t h e prece:;i,-; S L ? ~ (7.) ~ ) a g r s

herein arc a t r u e c o ~ v of the

reasoils f o r judgnenJ~-kf h i s Iionour

ni7 L.Z. J ' ~ ~ t i ~ i - 5 L0~1;h;irt;. A