Midland Credit Ltd v Offical Trustee in Bankruptcy

[1982] FCA 263

Re: MIDLAND CREDIT LIMITED
And: OFFICIAL TRUSTEE IN BANKRUPTCY AND GEORGE FREDERICK ALLANSON
(1982) 68 FLR 53
No. 602 of 1976
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Ellicott J.(1)

CATCHWORDS

Bankruptcy - Leave to prove debt - Permission granted to continue proceedings against bankrupt in Supreme Court - Subject to condition that proof in bankruptcy on judgment subject to leave of Court - Whether leave should be granted - No crystallised judgment debt - Judgment of Judge but inquiries before Master ordered by Judge not held.

Bankruptcy Act, s.58

Bankruptcy - Application for leave to prove debt - Sequestration order having been made - Judgment in Supreme Court ordering inquiries before Master in Equity - No crystallised judgment debt - No inquiries before Master - Whether leave should be granted - Bankruptcy Act 1966 (Cth), s. 58(3).

HEADNOTE

A sequestration order was made against a Mr Allanson (the second respondent) on 2 December 1976. Before that an action had been instituted by the applicant in the Supreme Court of New South Wales in which it was claimed that Mr Allanson was liable to the applicant (Midland Credit Ltd) under a guarantee in respect of moneys advanced to Hallad Pty Ltd. An application was made by the applicant to the Federal Court of Australia by reason of the provisions of s. 58(3) of the Bankruptcy Act 1966 (Cth) for an order granting leave to continue in the bankruptcy proceedings. Leave having been refused in the first instance the applicant appealed to the Full Court of the Federal Court of Australia. The court held that the applicant should have leave upon certain terms which included that the applicant "shall not, without prior leave, prove in respect of any such judgment in the bankruptcy of the said . . . Allanson . . . ". Some six weeks after the Full Court's decision (November 1977) the Supreme Court of New South Wales (Hutley J.A.) gave judgment which included orders that the applicant had made valid advances to Hallad Pty Ltd up to $770,000, that the applicant as mortgagee had gone into possession of the property, the subject of its security, and remained in possession for some thirteen months until the completion of the sale of that property, that the matter should be referred to the Master in Equity to inquire what additional sum the applicant would have received from the sale of that property but for the applicant's wilful default, and to inquire also what sums had been reasonably expended by the applicant on improvements etc. while in possession of the subject property.

The applicant sought an order from the Federal Court of Australia that it have leave to prove in the bankruptcy of Mr Allanson the amount owing to it, no steps having been taken to refer to the Master in Equity any issues in the order contained in the judgment of Hutley J.A. The application was concerned only with the question whether leave should be granted to the applicant to prove debt in respect of that judgment.

Held, that leave should not be granted to the applicant because at the present stage the judgment of the Supreme Court of New South Wales involved further inquiries within that court to identify the amount to which the applicant was entitled.

General Credits (Finance) Pty Ltd v. Stoyakovich (1975) Qd R 352; Commonwealth of Australia v. H.C.F. (1982) 56 ALJR 588, referred to.

National Bank of Australasia v. The United Hand-in-Hand and Band of Hope Company (1879) 4 AC 391, considered.

HEARING

Sydney, 1982, September 20, 28; October 11; November 25; December 3.

#DATE 3:12:1982

APPLICATION.

Application to the Federal Court of Australia arising from the provisions of s. 58(3) of the Bankruptcy Act 1966 (Cth) for leave to prove debt in the bankruptcy of one Allanson.

R.C. McDougall, for the applicant.

P. Urquhart, for the respondents.

Cur. adv. vult.

Solicitors for the applicant: Currie & Currie.

Solicitor for the respondents: P. Urquhart.

E.F.F.

ORDER

(1) The application be dismissed.

(2) The applicant pay the costs of the Official Trustee. Application dismissed.

Applicant to pay costs.

JUDGE1

This is an application by Midland Credit Limited (the applicant) seeking an order that it have leave to prove in the bankruptcy of George Frederick Allanson for an amount, as at 23 September 1982, of $841,339.82.

A sequestration order was made against George Frederick Allanson on 2 December 1976. Prior to that, proceedings had been commenced in the Supreme Court of New South Wales by the applicant against Hallad Pty. Limited, Mr Allanson and others in which it was claimed (inter alia) that Mr Allanson was liable to the applicant under a guarantee in respect of moneys advanced by the applicant to Hallad Pty. Limited. By reason of the making of the sequestration order it was thought that leave might be necessary by reason of the provisions of s.58(3) of the Bankruptcy Act 1966 ("the Act") to continue and take fresh steps in those proceedings.

Accordingly an application was made to the Federal Court for such leave. The matter came before Franki J. on 16 September 1977 who held that he had no jurisdiction to make an order. On 22 September 1977 an appeal from his judgment came before a Full Court of the Federal Court which allowed the appeal and ordered that to the extent that such leave was necessary by reason of s.58(3), the applicant should have that leave upon certain terms. These included the following:-
"Midland Credit Limited shall not, without such prior leave, prove in respect of the whole or any part of any such judgment in the bankruptcy of the said George Frederick Allanson if the sequestration order is not set aside".

At the time this order was made the decision to make a sequestration order was subject to an appeal to the High Court which, by reason of the lodging of a deposit, had stayed the judgment appealed from pursuant to Order 70 Rule 12(2) of the High Court Rules.

In the course of its judgment the Full Court, (Bowen C.J. Riley and Deane J.J.) said:-
"Before proceeding further with the question of the effect of the stay and the operation of s.58(3), it is convenient to consider the second question which arises. That is, whether the Court, if it has jurisdiction, should grant leave in the present case. Franki J., while indicating that as then advised he would not have answered this question in the affirmative, never reached the stage where it was necessary to decide it. The facts are complex. The claim of Midland Credit is not only against Mr Allanson, but against other current defendants who, in some respects, may be jointly and severally liable with him. There is also the question of the defences, some of which form the basis of the cross-claim. It would seem that all of these issues would be better and more comprehensively dealt with by a contested trial of the action in the Supreme Court than could possibly be the case if Midland Credit were required to lodge a proof of debt in respect of its claim against Mr Allanson alone. Such a proof of debt would be in the form of an affidavit and determined by the Official Receiver at such time as the stay ceased to operate. If the Official Receiver disallowed the claim in whole or in part, an appeal on this isolated issue could be brought to the Bankruptcy Court. But in these circumstances, the issues would have been determined in a less satisfactory way and questions between Mr Allanson and the other parties to the action would not be resolved."

The action in the Supreme Court of New South Wales came on for hearing before Hutley J.A. After a lengthy hearing he gave judgment on 11 November 1977. It is agreed that he made the following orders:-
"1. declare that advances purported to be made by the plaintiff to Hallad up to the sum of $770,000 were validly made to it, leave being reserved to the cross-claimants to surcharge and falsify, at their own risk as to costs, particular advances shown in the mortgage account;

2. declare that the plaintiff as mortgagee went into possession of the property at 55-59 Goulburn Street, Liverpool, the subject of its security, on 8th May 1975 and remained in possession thereof until completion of the sale of the property to Mount Royal Estates Pty. Limited on 28th June 1976;

3. refer to the Master in Equity to enquire what sums were reasonably and properly expended by the plaintiff while in possession of the subject property on permanent improvements to the property, and on its maintenance, repair and security, and the times at which such sums were spent;

4. declare that the plaintiff did obtain a proper price on the sale of the building to Mount Royal Estates Pty. Limited on 28th June 1976 for $646,000 plus certain insurances;

5. refer to the Master in Equity to enquire what additional sum or sums, if any, the plaintiff would but for its wilful default and neglect have received from the sale of the property in addition to the sum of $646,000 plus certain insurances, and at what time or times such additional sums could have been received;

6. refer to the Master in Equity to certify the proper balance of the mortgage account;

7. order that the plaintiff receive the general costs of the proceedings, the cross-claimants the costs of issues 2. and 3. above, costs to be set off;

8. transfer further proceedings to Equity Division."

One of the issues in the case was whether the applicant, as mortgagee in possession, had been guilty of wilful neglect or default. On this issue Hutley J.A. said (inter alia:-
"It goes without saying that the mortgagee must act bona fide, the construction must be a genuine effort to complete the building in a proper and economical way. Dishonesty on the part of some employees may be an incident of any large business operation. The mere proof that defalcations have occurred or shoddy work and materials went into the building would not permit a finding that the plaintiff had been guilty of gross or wilful negligence if steps to anticipate and prevent these occurring had been taken. In this case the plaintiff has been guilty of wilful neglect by its adoption of a system of doing business which invited dishonesty, and by its lack of proper supervision by top management facilitating its continuance.

As Baird was top management for the Hallad account, the work was not done bona fide, it was done for the private enrichment of Baird, and his crony Roberts, and the plaintiff failed in its responsibilities by any test.

The plaintiff when in possession employed another contractor to seal the roof. The evidence suggests that he was allowed by Baird to escape his responsibility for defective work. There may be many other aspects of its performance as mortgagee in possession which merit criticism. I stopped the evidence, as more than enough had been proved to justify an enquiry on the basis of wilful neglect and default during the whole period."

Subsequently, his Honour said:-
"Later in the hearing counsel for the cross-claimants attempted to resile from this position in contending that I should determine the extent to which the price obtained by the plaintiff fell short of what it should have obtained if it had properly performed its responsibilities as mortgagee in possession. I declined to accede to this submission for the reason that it contradicted the basis upon which the trial had been conducted after the necessity for the enquiry above referred to had been conceded. The cross-claimants had gone on to contend that the plaintiff had failed in its duty having regard to the state of the building when it decided it should sell it in one line. The case had been conducted at all stages on the basis that whatever may have been the correct description of the state of the building, the plaintiff should not have sold it in one line and even if it properly sold it in one line it sold it at so gross an undervalue and in a manner which made its exercise of its power indefensible. I ruled that the manner of the exercise of the power of sale having regard to the state of the building at the time at which the plaintiff decided that it would sell it in one line was an independent issue upon which I should rule separately. The cross-claimants thereupon abandoned all their attacks as to the exercise of the power of sale except one, which I will deal with below. What the building, if completed by the plaintiff as mortgagee in possession in a proper manner could have been sold for and in particular whether if so completed it should have been sold not in one line but by individual units is an issue which is reserved to the Master because one of the consequences of the breaches of duty may be that the opportunity to sell the units individually had been lost."

Another issue was whether sums in excess of $770,000 were secured by a mortgage from Hallad Pty. Limited to the applicant and guaranteed by Mr Allanson and another company. The guarantee in question contained the following clause:-
"The guarantor will pay to the lender upon request by the lender all moneys which are now due or which may hereafter become due to the lender by the borrower under the said security or any renewal variation extension or assignment thereof."

It was submitted on behalf of Mr Allanson in those proceedings that the limit of the secured liability in relation to him was $770,000 but it was not disputed that to this sum had to be added interest at the appropriate rates and the proper expenditure effected by the mortgagee after going into possession. His Honour appears to have agreed with Mr Allanson's submission in framing the orders numbered 1 and 3.

No steps were taken after Hutley J.A. gave judgment in November 1977 to refer any of the issues in his orders to the Master in Equity. In particular, no steps have been taken to hold the enquiries referred to in paragraphs 3 and 5 thereof. Nor has any explanation been given except a suggestion that this would be an expensive step to take.

It is in these circumstances that the application is made to this court. It is said that leave to the applicant to prove a debt in relation to the particular transaction is not necessary. However this application is made because of the judgment of the Full Court and is concerned only with the question whether leave should now be granted to the applicant to prove in respect of the whole or any part of the judgment made by Hutley J.A. as a result of the condition imposed by the Full Court order. I am not in these proceedings concerned with the broader question whether, in any event, the applicant can, without leave, lodge a proof of debt in Mr Allanson's bankruptcy. Nothing I say in this judgment should be taken to express any view on that question. Nor am I concerned with the operation or effect, if any, as between these parties of s.86 relating to mutual credits and set-off.

In giving leave to the applicant to continue the proceedings against Mr Allanson, the Full Court made it clear in the passage I have quoted that the relevant issues would be better and more comprehensively dealt with if the proceedings were allowed to continue. If they were dealt with in the Federal Court exercising the bankruptcy jurisdiction the issues would be determined, as their Honours said, "in a less satisfactory way".

What the applicant now seeks to do is to lodge a proof of debt based on the judgment but at a stage when the rights and liabilities of the estate of the bankrupt in relation to that judgment have not been crystallised in a monetary amount. Questions still remain outstanding, for example as to the amount the applicant would be entitled to claim as a result of reasonable and proper expenditure on the property whilst mortgagee in possession (order 3) and the amount it is bound to allow in relation to wilful neglect or default (order 5). A consideration of the passages I have quoted from the judgment of Hutley J.A. will quickly indicate that the question of wilful neglect or default raises some difficult issues of fact but issues of a nature with which the Master in Equity is familiar. Until these issues are determined the precise amount to which the applicant is entitled, under the judgment of Hutley J.A., will not be known.

Mr Allanson was sued as guarantor of a mortgage and is bound to pay what is due "under the security". This, it seems to me, is the amount of $770,000 determined by Hutley J.A. plus or minus, as the case may be, the other items to which I have referred. It seems that when, as here, a mortgagee enters into possession and excludes the mortgagor from control of it, the mortgagee is bound to account not only for the rents and profits which he actually receives but also for the rents and profits which but for his wilful default or neglect, he might have received; that is for everything which he has received, or might or ought to have received, while he continued in possession. (See Halsbury Laws of England 4th Edn. Vol. 32 para 698). Thus an account against a mortgagee in possession who has sold the mortgaged property is on the footing of wilful default (ibid). This is so even though wilful default may not have been charged in the pleadings or proved at the trial. It is part of his contract that he be diligent in recovering his principal and interest if he goes into possession. If he sells, he is bound to account on this basis. (See Mayer v. Murray (1878) 8 Ch. D. 424). Sir James Colvile in delivering the judgment of the Privy Council in National Bank of Australasia v. The United Hand-in-hand and Band of Hope Company & Anor (1879) 4 A.C. 391 at 409 expressed the principle in these terms:-
"As mortgagees in possession they were admittedly accountable, not only for their actual receipts but for what but for their wilful default they might have received."

I do not want, nor do I need, to express a final view on the applicability of these principles in this case. They were not referred to in argument. However, they do support the notion that what a mortgagee in possession is entitled to if he sells the property, both from the mortgagor and a guarantor who guarantees the secured debt, is a net amount after allowing for any wilful default or neglect. It supports the view I have formed that under the judgment in question the rights of the applicant have not yet crystallised in a specific amount. (Cf. General Credits (Finance) Pty. Limited v. Stoyakovich (1975) Qd. R. 352). Further, that amount can only be ascertained after issues are determined which, in my view, the Full Court thought were better dealt with by the Supreme Court. Obviously, the Master is an important officer of that Court. He constitutes the Court for the exercise of the powers conferred on him. His orders if not set aside or varied, take effect as the orders of the Court. (See Commonwealth v. H.C.F. & Ors. (1982) 56 A.L.J.R. 588).

I do not think that the Full Court in making its order intended to draw a distinction between the functions of a Judge constituting the Court and that of the Master in Equity. The proceeding in question was obviously one which could lead to an inquiry before the Master. In my view, having regard to the passage quoted from its judgment, the Full Court, in requiring leave to prove a debt based on any judgment at least had in mind the desirability of the relevant issues being determined by the Supreme Court. As they have not, in my view, been determined, I think it is proper for me, in the exercise of my discretion, to refuse leave until those issues are determined.

Counsel for the applicant submitted that leave should be granted as this would enable the Official Trustee pursuant to the Act, to consider whether he would admit the debt or dispute it. If it was disputed it could then be dealt with under the processes available in this Court in relation to bankruptcy proceedings.

As I have said, I am not concerned here with a proof of debt based simply on the transactions between the parties. I am concerned with the question whether, in pursuance of the order of the Full Court, I should now grant leave to lodge a proof based in whole or part on the judgment. At a stage when, for the reasons I have discussed, the judgment of that Court involves further inquiries within the Court to identify the amount the applicant is entitled to, I do not think I should grant the application. Quite properly, the applicant chose as its forum the Supreme Court. The case was contested and the processes of that court are, so far as I am aware, still available to determine finally the rights and claims of the parties. The procedure by way of enquiry before the Master seems to me to be an essential part of that Court's decision and I do not think it would be appropriate to grant leave to prove a judgment debt until those processes have been completed and the amounts crystallised.

In the course of argument, I raised for consideration whether I should grant leave subject to a condition that if the Official Trustee and the applicant could not agree on the undetermined items it would then be left to the Supreme Court and the Master in Equity to determine the amounts. I have rejected this course because the same result could be achieved if the applicant pursued the inquiries ordered by the Supreme Court. The Official Trustee, having regard to the interests of all creditors, would obviously have an interest in those inquiries and could make concessions on the estate's behalf, if so advised, in the course thereof.

The application is therefore dismissed. The applicant should pay the costs of the Official Trustee.