Nathan Elali (a bankrupt) v Mahrs and Anor

[2013] NSWSC 1883

Supreme Court

New South Wales

Medium Neutral Citation:	Nathan Elali (a bankrupt) v Mahrs and Anor [2013] NSWSC 1883
Hearing dates:	13 December 2013
Decision date:	16 December 2013
Jurisdiction:	Equity Division
Before:	Slattery J
Decision:	Application adjourned to be heard at a final hearing to take place on 19 December 2013.
Catchwords:	PROCEDURE - application to strike out the summons -the defendants leased their house to the plaintiff for 1 year - the plaintiff seeks a declaration that the lease was extended for another year - plaintiff is, and was when the lease was executed, an undischarged bankrupt - the trustee confirmed that he did not consent to the proceedings and did not appear - whether the plaintiff has standing to bring the proceedings - whether the property in the lease vested in the trustee in bankruptcy - whether an urgent trial should be ordered.
Legislation Cited:	Bankruptcy Act 1966, ss 58, 60(2) and 60(3), 116, 126(1), 131 Civil Procedure Act 2005, s 56 Uniform Civil Procedure Rules 2005
Cases Cited:	Cooper v Moloney (No 5) [2012] SASC 211 Dey v Victorian Railways Commissioners (1949) 78 CLR 62 Farrow Mortgage Services Pty Ltd v Winfield [1992] 2 Qd R 282 General Steel Industries v Commissioner for Railways (NSW) (1964) 112 CLR 125 Gough v Fraser [1977] 1 NZLR 279 Inspector-General in Bankruptcy v McGushin [2009] FCA 662 Kison v Papasian (1994) 61 SASR 567 Maher v Commonwealth Bank of Australia (2004) FCA 248 National Australia Bank Ltd v Strik [2009] NSWSC 184 Thistlethwayte v Gender Estates Pty Ltd (1976) 8 ALR 700 Webster v Lampard (1993) 177 CLR 598
Category:	Procedural and other rulings
Parties:	Plaintiff:- Nathan Elali (a bankrupt) First Defendant: Carl Frederik Reinhold Mahrs Second Defendant:- Melinda Mahrs
Representation:	Counsel: Plaintiff - Mr RPV Carey Solicitors: Plaintiff:- D. Massey Defendants:- M. Smith Brander Smith McKnight
File Number(s):	2013/302179
Publication restriction:	No

Judgment

1. The defendants, Carl Frederik Reinhold Mahrs and his wife Melinda wish to move back into their home in Connells Point Sydney before Christmas 2013. They say they have family coming out to Australia from Germany to stay with them in this festive season. They say their present temporary residence will not accommodate them and their extended family.

1. But the occupant of their house, the plaintiff Nathan Elali, does not want to vacate. He was let into possession of the Mahrs' property under a 12-month residential tenancy agreement they signed with him on 10 October 2012 at a rent of $1100 per week. Mr Elali was due to leave the Connells Point property upon expiry of this agreement about two months ago, in October this year. But he says that the Mahrs' agent represented to him in October 2012 that he would be able to stay for two years.

1. Without the intervention of a solicitor, Mr Elali filed these proceedings on 8 October 2013 by Summons, seeking a declaration that "the date on which the residential tenancy agreement between the plaintiff and the defendants entered into on 10 October 2012 in respect of [the Connells Point property] terminates, has been extended to 9 October 2014". He also seeks specific performance of this alleged lease agreement, equitable compensation in the alternative, and costs.

1. But there is a complication: Mr Elali is a bankrupt. Sequestration orders were made against his estate exactly 2 years ago on 16 December 2011. He was a bankrupt when he executed the form of residential tenancy agreement on 10 October 2012. He was a bankrupt when he caused the present proceedings to be filed on 8 October 2013. He is still a bankrupt.

1. Mr and Mrs Mahrs have acted promptly through their solicitor, Mr Smith of Brander Smith McKnight lawyers of Sutherland, to resist Mr Elali's claim. On 31 October 2013 they filed a Defence, pleading: that the plaintiff is a bankrupt; that the residential tenancy agreement only had a term of 52 weeks, which expired on 9 October 2013; and, that they have not entered into any agreement with Mr Elali to extend or vary the terms of the residential tenancy agreement.

1. The same day Mr and Mrs Mahrs filed a motion seeking dismissal of these proceedings and "that the plaintiff pay the defendants' legal costs". That motion came before the Registrar in Equity on 14 November 2013 and was listed before me as applications judge on Friday 13 December 2013. In the meantime the defendants commenced proceedings in the Consumer Trader and Tenancy Tribunal ("CTTT") for recovery of possession of the Connells Point property. The CTTT proceedings await the outcome of these proceedings.

1. At the 13 December 2013 interlocutory hearing solicitors and counsel intervened for the first time on behalf of the plaintiff. With the Court's leave Mr Daniel Massey, solicitor, filed an appearance on behalf of the plaintiff and instructed Mr R.P.V. Carey of counsel. After a short hearing on 13 December 2013 I adjourned the proceedings to consider the matter over the weekend and in order to give judgment today.

A Bankrupt's Allegations, an About Trustee, and a Motion to Strike Out

1. Mr Elali has not sworn an affidavit in these proceedings. Mr Massey swore an affidavit as to his instructions from his client. Mr Elali's case is that in September 2012, when negotiating the original residential tenancy agreement, with the Mahrs' real estate agent, Belle Properties, the agent represented that "the owners were looking to lease the property out for two years" but that "the plaintiff would be given a 12 month lease, which would be renewed at the end of its term". It is claimed that this was said after Mr Elali said to the agent that "he was not interested in entering into a short term tenancy" but "wanted a lease for two years".

1. Mr and Mrs Mahrs would not be able to strike out a Summons based on these allegations if Mr Elali were not a bankrupt. They plainly raise issues of fact and law for trial: (1) whether the Mahrs' real estate agent did say this; and, (2) whether if it was said it could found the relief Mr Elali seeks, of an extended lease period to October 2014.

1. The applicable test the Mahrs must satisfy before striking out the Summons is clear. Mr and Mrs Mahrs move for summary judgment under Uniform Civil Procedure Rules 2005 ("UCPR"), r 13.4 and r. 12.11. They submit that Mr Elali's claims for relief should be dismissed (in accordance with UCPR, r 13.4) because the claims are "so obviously untenable that [they] cannot possibly succeed", or are "manifestly groundless": General Steel Industries v Commissioner for Railways (NSW) (1964) 112 CLR 125. The defendants claim under UCPR, r 12.11 to set aside the originating process does not add anything to reliance upon UCPR, r 13.4. Exceptional caution is required when the ultimate outcome of a case depends upon the resolution of a disputed issue of fact: Webster v Lampard (1993) 177 CLR 598. But here the Mahrs concede this principle. They only seek summary dismissal on the basis of Mr Elali's bankruptcy, not on the basis of the dispute about the length of the lease.

1. Mr Elali's trustee in bankruptcy, Michael Gregory Jones, takes no part in these proceedings. But he has been informed of them. Mr Mahrs explains in his affidavit of 21 November 2013 that "at no time prior to the date of the residential tenancy agreement did the plaintiff advise me that he was an undischarged bankrupt". He alleges that in around August 2013 he was first advised that Mr Elali had become a bankrupt on 16 December 2011. His evidence establishes that on 21 October 2013 Mrs Mahrs provided notice of Mr Elali's Summons in these proceedings to the plaintiff's trustee in bankruptcy, and enquired whether or not the trustee had "consented to these proceedings".

1. On 25 October 2013 Mr Jones replied by letter to Mr Mahrs' notice. In that letter he stated "I confirm that, to date, I have not provided consent to the bankrupt to proceed with the...Summons". The trustee did not appear at the hearing of the proceedings on 13 December 2013. There has been no indication before the Court that the position the trustee expressed on 25 October 2013 of not consenting to these proceedings has changed. Mr Elali concedes that he did not approach the trustee for his consent before commencing these proceedings.

The Defendants' Strike Out Case

1. The defendants advance two main arguments to seek to strike out the plaintiff's Summons. The first is based on Bankruptcy Act 1966, s 60(2) and (3) which provide as follows:-

"(2) An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.

(3) If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action."

1. The Mahrs submit that the trustee has been notified of these proceedings and has not yet made an election in writing to prosecute or discontinue the action and he is now accordingly deemed to have abandoned the action.

1. But this argument is not successful. Section 60(2) only applies to actions commenced "by a person who subsequently becomes a bankrupt". Mr Elali did not become a bankrupt subsequent to the commencement of these proceedings. He was a bankrupt before he entered into the lease the subject of the proceedings. Section 60(2) does not apply and is of no assistance to the defendants.

1. The real contest between the parties took place on the defendants' alternative argument. The Mahrs argue that all of Mr Elali's property, both at the time of his bankruptcy and any property he acquired afer his bankruptcy, including his interest in the subject lease of the Mahrs property vested in his trustee in bankruptcy under Bankruptcy Act, s 58(1)(a) and (b) and that as a result of the application of Bankruptcy Act, s 116 that the bankrupt has no capacity to take proceedings or exercise powers in respect of that property.

1. The provisions of the Bankruptcy Act that the Mahrs deploy in their argument are the following. Bankruptcy Act, s 58(1)(a) and (b), which provide as follows:

"(1) Subject to this Act, where a debtor becomes a bankrupt:

(a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and

(b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee."

1. Bankruptcy Act, s 116(1)(a) and (b) provides as follows:

"(1) Subject to this Act:

(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and

(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and...

is property divisible among the creditors of the bankrupt..."

1. Bankruptcy Act, s 116(2) provides for a number of exceptions to s 116(1). Different species of property such as the bankrupt's household property, property of the bankrupt with sentimental value, property used by the bankrupt, and any income from the bankrupt's personal exertion (all limited by values prescribed in the regulations) are recognised exceptions. But none of these exceptions apply here.

1. The Mahrs argue that the effect of s 116 is that Mr Elali's trustee in bankruptcy, Mr Michael Jones, not Mr Elali, is the only person with a right to bring these proceedings.

1. But the plaintiff deploys an effective-counter argument. Upon analysis this counter-argument means that these proceedings cannot be struck out. Although they cannot be struck out, I propose to make directions for their rapid disposal.

1. Mr Carey submits on behalf of Mr Elali that even if it is conceded that the property in the 2012 residential tenancy agreement vested in the trustee that Mr Elali nevertheless retains the right to sue to enforce it under Bankruptcy Act, s 126(1). He submits that the decision of Bowen CJ in Eq in Thistlethwayte v Gender Estates Pty Ltd (1976) 8 ALR 700 ("Thistlethwayte") is authority for the proposition that until an official trustee intervenes in litigation brought by a bankrupt in respect of after acquired property, a bankrupt has power to deal with such property and to bring proceedings in respect of it. Mr Carey also points to Bankruptcy Act, s 126(1) which he says provide a statutory basis for his submission. Bankruptcy Act, s 126(1) provides as follows:-

"(1) A transaction by a bankrupt with a person dealing with him or her in good faith and for valuable consideration in respect of property acquired by the bankrupt on or after the day on which he or she became a bankrupt is, if completed before any intervention by the trustee, valid against the trustee, and any estate or interest in that property which, by virtue of this Act, is vested in the trustee shall determine and pass in such manner and to such extent as is necessary for giving effect to the transaction."

1. In Thistlethwayte Bowen CJ in Eq explained (at 703) that s 126(1) "has two aspects". In its principal aspect "it looks to the rights of the person dealing with the bankrupt". But in its other aspect "it looks to the acquisition of property by the bankrupt after he became bankrupt, and his capacity to transfer a title to the property".

1. In Thistlethwayte Bowen CJ in Eq was considering the second of these aspects of Bankruptcy Act, s 126(1). His Honour was required to decide whether a bankrupt was able to bring proceedings for an account in respect of a partnership entered into after he had become a bankrupt. The plaintiff bankrupt alleged that in a partnership at will the defendant had failed to account to him. The defendant moved to dismiss the suit, arguing that the bankrupt was not competent to bring the proceedings. The case was rather like the present one, in that the official receiver had been informed of the proceedings but had declined to take them over or to be represented. The bankrupt in Thistlethwayte in part relied upon the then Bankruptcy Act, s 131 which makes clear that a bankrupt is entitled to "income" after the bankruptcy, and the bankrupt is entitled to take proceedings to recover it. Bankruptcy Act, s 131 as it appeared at the time of Thistlethwayte's case was repealed in 1992 and replaced at that time by the more complex provisions of Bankruptcy Act, Pt VI, Division 4B which still nevertheless reinforces the concept that income of the bankrupt does not vest in the trustee: Inspector-General in Bankruptcy v McGushin [2009] FCA 662, see especially [11] and [19].

1. But Bowen CJ in Eq's reasoning in Thistlethwayte does not depend on characterising the relevant after acquired property as income of the bankrupt. He based his reasons more broadly on s 126 as follows:

"The effect of such provisions has been variously described in the cases. Perhaps the best account in England was given in Re Pascoe [1944] 1 All ER 218 ; [1944] 1 Ch 219. As Lord Greene MR (All ER at 285; Ch at 227 - citing Lord Cozens-Hardy MR in Hill v Settle [1917] 1 Ch 319 at 324 there pointed out: "Then, by a long series of autorities which it is quite impossible, I think, for this court, or any court, to review, it was held that that vesting could not be regarded as operating in the strict and full sense of the term. As long as the trustee did not intervene, the bankrupt himself had power to enter into transactions for value with persons dealing with him bona fide in relation to his after-acquired property. That is dealt with in so many cases that I do not think it is necessary for me to refer to any more than Cohen v Mitchell (1890) 25 QBD 262." At p 285 (All ER); p 228 (Ch) his Lordship comments: "It is to be noticed that the thing which

8 ALR 700 at 704is valid is the transaction, and to validate a transaction by an undischarged bankrupt comes nowhere near saying that the title to after-acquired property remains in the bankrupt."

His Lordship went on to point out that the observations of Lawrence J in Dyster v Randall & Sons [1926] 1 Ch 932 at 939 ; [1926] All ER Rep 151 at 155, where he spoke of after-acquired property remaining in the bankrupt until the trustee intervened should not be interpreted in a sense inconsistent with these remarks. He did not suggest that Dyster v Randall & Sons, where a bankrupt was held to be entitled, in the absence of intervention by the trustee, to sue for specific performance of a contract entered into after the bankruptcy, was wrongly decided.

It seems that unless and until the official receiver intervenes, a bankrupt, whether it be correct or not to describe him as a factor or agent for the official receiver, has power to deal with after-acquired property and to bring proceedings in respect of it, notwithstanding it is vested in the official receiver. If in the course of proceedings by the bankrupt the official receiver does intervene, the bankrupt's proceedings may be brought to nothing (Montgomery v Scott (1907) 24 WN (NSW) 160).

In the present case the proceedings are for the dissolution and winding up of a partnership entered into after bankruptcy and for the taking of accounts. Can such an action be maintained by a bankrupt, in the absence of intervention by the official receiver? The cases I have discussed would suggest that it can. Indeed, in Buchan v Hill [1888] WN (Eng) 233, North J had to consider a claim for accounts brought by a bankrupt in respect of two partnership agreements between himself and three defendants entered into since the date of his bankruptcy. The brief report records: "North J held that the plaintiff could sue without his trustee unless the trustee intervened, and in the absence of any suggestion that the trustee was the real plaintiff, he would not be required to give security for costs."

In view of the attitude which the court takes regarding the possibility of multiplicity of proceedings, the question of estoppel raised in relation to the official receiver is not without importance. However, having regard to the fact that the official receiver is not represented and would not be bound by a decision on this question, and having regard to the cases I have mentioned and the conclusion at which I have arrived, I do not think I should deal with this question.

I conclude that in the absence of intervention by the official receiver the plaintiff is entitled to prosecute these proceedings."

1. The principle in Thistlethwayte and its construction of Bankruptcy Act, s 126 have been reaffirmed in recent authority: see for example: Kison v Papasian (1994) 61 SASR 567; (1994) SASC 4476 and Cooper v Moloney (No 5) [2012] SASC 211, at [39] and [40]. The principle has also been applied in New Zealand: see Gough v Fraser [1977] 1 NZLR 279. In my view it is arguable that a bankrupt such as Mr Elali may have a right to bring proceedings in respect of after acquired property even though title to it is vested in his official trustee by Bankruptcy Act, s 58(1)(b).

1. The Court has been referred to a number of other cases that do not seem to be directly in point. The plaintiff relied on National Australia Bank Ltd v Strik [2009] NSWSC 184 ("Strik"). But this case merely reaffirms the well established proposition that a bankrupt has no interest in proceedings brought against him for possession of property and has no standing to be heard in defence of a claim for possession: Farrow Mortgage Services Pty Ltd v Winfield [1992] 2 Qd R 282 ("Farrow") at 285 and Bendigo Bank Ltd v Demaria [2001] VSC 218 ("Bendigo") at [18].

1. In the proceedings before the Consumer Trader Tenancy Tribunal ("CTTT") cases such as Strik, Farrow and Bendigo may well mean that Mr Elali has no standing to oppose the Mahrs claim for possession. But the CTTT has understandably taken the view that since these proceedings have been commenced in the Supreme Court that it should await their outcome first.

1. But it seems to me that the plaintiff's claim cannot be struck out. Of course, on an application under UCPR, r 13.4 the Court is able to decide questions of law even of some complexity: Dey v Victorian Railways Commissioners (1949) 78 CLR 62. But there are circumstances here, in which, depending on how the facts emerge at trial it may be able to be said that Mr Elali's claim can be dismissed, but others in which that cannot be said. For example it is not clear from the scant affidavit sworn by Mr Massey on information and belief and filed on Mr Elali's behalf, just what is founding the specific performance suit. If Mr Elali is saying that there was in substance an option to renew the lease which he exercised, then he may well fail on the basis that the option was not his to exercise but was his trustee's option: see Maher v Commonwealth Bank of Australia [2004] FCA 248. But he may seek to put his case a different way based on the representations allegedly made to him. It seems to me that I cannot decide this on a strike out application and the matter must go to trial.

1. But when is that trial to take place? It seems to me that the best course here, rather than dismissing the motion, is to adjourn it to a final hearing which should take place this week. I have decided that I will provisionally list these proceedings for final hearing before me at 10am on Thursday, 19 December 2013. Such a decision serves the objectives of the Civil Procedure Act 2005, s 56 for the "just, quick and cheap" resolution of these proceedings.

1. I take this course for the following main reasons. First, the hearing is not likely to take much more than about 2 hours and short affidavits on each side should be sufficient to get the matter ready. I have had a settlement of other proceedings this week and I have the time available for a short hearing.

1. Secondly, justice requires a hearing now rather than later. Mr Elali claims only a 12 month lease. In February next year almost one third of that lease period would have expired. Both parties need to know as soon as possible whether there is a residential tenancy agreement on foot in respect of this property, or not.

1. Thirdly, now listing the proceedings for final hearing will immediately reduce the period of time during which legal costs would have been spent on the proceedings before which the trustee could then take the proceedings over and decide to settle them. It is not in the plaintiff's or the defendants' interests for legal costs to be spent over a considerable period of time and to then have the trustee intervene and take a different course in the proceedings from the present plaintiff. It is also appropriate, in my view, for the plaintiff to serve notice on the trustee by 2pm today of these orders and to seek the trustee's decision by midday tomorrow whether or not he wishes to take over these proceedings.

1. Whether the plaintiff or the trustee in bankruptcy is in charge of these proceedings after 12 noon tomorrow it may be possible to have the proceedings mediated by the Registrar of the Court before the hearing on Thursday.

1. Fourthly, a hearing on Thursday should certainly be able to decide the issues of a specific performance of the residential tenancy agreement, even if all damages questions are not decided. For example one of the issues which the defendants have already deployed in their affidavit evidence is that they allege Mr Elali did not tell them or their agent that he was an undischarged bankrupt. If this allegation is made out it may provide a discretionary defence to the claim for specific performance. There may be other discretionary factors in play.

1. The Court will therefore make the following orders and directions in the matter.

Orders

1. Accordingly, I make the following orders and directions:

1. Adjourn the defendant's motion to the final hearing.

2. Fix the final hearing before me at 10am on Thursday, 19 December 2013.

3. Direct the plaintiff to provide a copy of these reasons to his trustee in bankruptcy by 2pm today, with a view to the trustee deciding by 12.00 noon tomorrow whether or not he intends to take over the conduct of these proceedings.

4. Reserve costs.

5. Direct the parties to agree on directions for the final hearing.

Parties provide short minutes of order, which I also make:

6. The plaintiff is to serve all affidavits upon which he proposes to rely at hearing by 1pm on 17 December 2013.

7. The defendants are to serve all affidavits upon which they propose to rely at hearing by 1pm on 18 December 2013.

8. The parties are to serve written outlines of submissions, and provide copies to the Associate to his Honour Justice Slattery by 5pm on 18 December 2013.

9. The proceedings are fixed for urgent final hearing at 10am on 19 December 2013 before his Honour Justice Slattery together with the defendant's Notice of Motion filed on 4 November 2013.

10. Grant liberty to apply.

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Decision last updated: 16 December 2013