Re Florance; Ex parte Turimetta Properties Pty Ltd

Re FLORANCE; Ex parte TURIMETTA PROPERTIES PTY. LTD. (1979) 36 FLR 256
Bankruptcy

COURT

FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Bankruptcy - Bankruptcy notice - Validity - Bankruptcy notice claiming sum due pursuant to Supreme Court judgment as varied by Court of Appeal - Omission of reference to interest in order of appeal court - Whether bankruptcy notice claiming interest defective - Incorporation in bankruptcy notice of other documents by reference thereto - Entitlement of court to have regard to documents outside bankruptcy notice.

Bankruptcy - Service of petition - Personal service - Whether petition coming to notice of debtor "personally served" - Relief from noncompliance with rules - Bankruptcy Rules 1968, rr. 15, 195.

Bankruptcy - Secured creditor - Mortgage by third party to petitioning creditor - Debtor guarantor of third party's obligation - Third party holding security on trust for debtor - Petitioning creditor having no knowledge of trust - Whether petitioning creditor a "secured creditor" - Bankruptcy Act 1966 (Cth.), s. 44.

HEADNOTE

In October 1973 the petitioning creditor agreed to sell certain land to Louis John Holdings Pty. Ltd. ("Holdings") for $625,000. On the same day Holdings executed a declaration of trust in favour of K., V. and the debtor ("the beneficiaries") declaring that it held the land for the beneficiaries in equal shares as tenants in common. In June 1974 Holdings executed a memorandum of mortgage over the land in favour of the petitioning creditor to secure repayment of $275,000 together with interest. The obligations of Holdings under the mortgage were guaranteed by K. and the debtor. In November 1976, Holdings having defaulted in payment of interest, the petitioning creditor issued a writ against Holdings, K. and the debtor, and subsequently issued a second writ and consolidated the two sets of proceedings. In the Supreme Court judgment was given in favour of the petitioning creditor from which judgment both parties appealed. The Court of Appeal dismissed the appeal of K. and the debtor and allowed the cross appeal of the petitioning creditor. As a consequence of the non-payment of the judgment debt due to the petitioning creditor a bankruptcy notice was issued in which the petitioning creditor claimed: "The sum of $461,522.73 together with interest thereon at the rate of twenty-two per cent per annum from 15th February, 1978, which at the date of issue of this notice amounts to $93,189.65 making a total $554,712.38 is due by you to it under final judgment obtained by it against you in the Supreme Court of New South Wales on 15th February, 1978, as varied by a final order of the Supreme Court of New South Wales Court of Appeal on 14th December, 1978, being a judgment and a final South Wales Court of Appeal on 14th December, 1978, being a judgment and a final order the execution of both of which have not been stayed."

Subsequently a bankruptcy petition was presented on the grounds that the debtor had failed to comply with the terms of the bankruptcy notice. The petition was served by delivering it to the secretary employed by the debtor who, when asked, informed the process server that she was authorized to accept the documents on behalf of the debtor. The debtor admitted that some three days later the petition was received by him.

Held: (1) In considering the validity of a bankruptcy notice it is proper to look at documents outside the notice but referred to expressly or by implication therein in order to determine whether the bankruptcy notice correctly states the debt alleged to be owed by the debtor to the creditor.

Re Wimborne; Ex parte The Debtor (1979), 24 ALR 494, followed.

(2) If the bankruptcy notice were defective, such defect could be remedied by an order pursuant to s. 306 of the Bankruptcy Act 1966 as the same would constitute an irregularity which had not caused substantial injustice.

(3) The rules relating to service of a bankruptcy petition must be complied with strictly. The fact that a petition came to the notice of a debtor does not mean that he was personally served therewith. In this case the defect in service may be remedied by s. 306 and r. 195.

Pino v. Prosser and Hassan, (1967) VR 835, and Re Woodley; Ex parte Bank of New South Wales, (1971) ALR 155, referred to.

(4) The petitioning creditor was a "secured creditor" within the meaning of the Bankruptcy Act 1966 in that the mortgage granted to it by Holdings conferred upon it the means of satisfying the debt owed to it by the debtor out of property which in equity belonged to the debtor.

Harvey v. Commercial Bank of Australia Ltd. (1937), 58 CLR 382, followed.

National Westminster Bank v. Official Receiver, (1967) 2 WLR 1477, referred to.

HEARING

Sydney, 1979, April 30; May 7, 23; June 27; July 10; September 17.

#DATE 17:9:1979

PETITION.

The material facts appear from the judgment.

J. Garnsey and J.M. Stowe, for the petitioning creditor.

G.K. Downes, for the debtor.

Cur. adv. vult.

Solicitors for the petitioning creditor: Clayton Utz & Co.

Solicitors for the debtor: Marler & Co.

D. LEVIN

JUDGE1

September 17.

The following judgment was delivered.

LOCKHART J. This is a petition for sequestration of the estate of James Louis Florance ("the debtor"). (at p257)

The debtor opposes the petition on grounds which may be summarized as follows: 1. The bankruptcy notice upon which the petition is based is invalid by reason of the following: (a) it claims a sum of money in excess of the sum to which the petitioning creditor is entitled pursuant to its judgment in the Supreme Court of New South Wales; and (b) it wrongly states the nature and basis of the petitioning creditor's entitlement to interest on the judgment by stating that the petitioning creditor is entitled to interest on the sum of $461,522.73 at the rate of twenty-two per cent per annum. 2. The petition was not served on the debtor; and 3. The petitioning creditor is a secured creditor of the debtor, and the petition filed by the petitioning creditor is in the form of a petition by an unsecured creditor. The security alleged by the debtor is a mortgage given by Louis John Holdings Pty. Ltd. ("Holdings") to the petitioning creditor to secure the debt claimed in these proceedings. Holdings holds the property the subject of the security upon trust for the debtor and George John Knight absolutely. (at p258)
The notice of intention to oppose the petition filed by the debtor contained another ground of opposition to the petition, namely that the debtor had signed an authority under s. 188 of the Bankruptcy Act 1966 ("the Act"); therefore the petition ought to be adjourned until after a meeting of the creditors of the debtor had been held. As this ground related to adjournments of the petition, it was not pursued at the hearing of the petition. (at p258)
The facts are in a narrow compass. By a contract for sale of land dated 26th October, 1973, the petitioning creditor agreed to sell to Holdings certain land at Mona Vale, New South Wales ("the land") for $625,000. On the same day, Holdings executed a declaration of trust which provides as follows: (His Honour then set out the terms of the deed of trust and continued:) (at p258)
A first mortgage over the land is held by Ampol Finance Ltd. Payment of the mortgage debt secured thereunder has been guaranteed by the debtor, Mr. Knight and Mr. Vukobratovich. (at p258)
Holdings executed a memorandum of mortgage dated 27th June, 1974, over the land in favour of the petitioning creditor as mortgagee to secure the sum of $275,000 together with interest which, in the events which happened, amounted to twenty-two per cent per annum. Interest was payable by equal quarterly instalments on the 27th days of March, June, September and December, the principal being repayable on 27th June, 1977. The obligations of Holdings under the mortgage were guaranteed by the debtor and by Mr. Knight, who joined in the memorandum of mortgage as guarantors. (at p258)
Default occurred in the payment of interest and, by statement of claim filed in the Supreme Court of New South Wales on 19th November, 1976, the petitioning creditor sued Holdings, the debtor and Mr. Knight to recover the principal and interest amounting in all to $366,101. The petitioning creditor treated all interest not paid by Holdings to it at the time provided for payment as an accretion to the principal. (at p258)
In the course of the hearing of the action before Sheppard J. the time passed for the repayment of the principal, and a further statement of claim was filed and consolidated with the earlier statement of claim under which the petitioning creditor claimed the sum of $460,773 together with interest pursuant to cl. 17 of the mortgage. (at p259)
Sheppard J. gave judgment in the consolidated proceedings and on 15th February, 1978, judgment was entered in the following terms: (at p259)
"JUDGMENT THAT: (1) Each defendant pay to the plaintiff the sum of $432,545.50. (2) The sum of $275,000 or so much thereof as remain unpaid from time to time to bear interest from this date until payment at the rate of twenty-two per cent. (3) Interest to run at rate of ten per cent per annum in lieu of twenty-two per cent per annum on the sum of $275,000 or so much there of as shall remain unpaid from time to time provided monthly payments commencing one calendar month from this date are made by the defendants. (4) The defendants pay the plaintiff's costs. (5) Stay of proceedings for twenty-eight days on usual terms. This judgment takes effect on 15th February, 1978." (at p259)
The debtor and Mr. Knight appealed to the Court of Appeal of New South Wales from the decision of Sheppard J. and the petitioning creditor cross appealed. On 14th December, 1978, the Court of Appeal dismissed the appeal and upheld the cross appeal, the order of the Court of Appeal being in these terms: (at p259)
"THE COURT ORDERS THAT: (1) The appeal be dismissed. (2) The cross appeal be allowed. (3) The judgment of the Supreme Court of New South Wales be varied so as to increase the amount of the judgment to the sum of $461,522.73. (4) The appellants to pay the costs of the appeal and cross appeal and to have a certificate under the Suitors Fund Act with respect to the cross appeal." (at p259)
The petitioning creditor applied for the issue of bankruptcy notices against the debtor and Mr. Knight. A notice directed to the debtor was signed on 18th January, 1979, by a deputy registrar in bankruptcy and issued that day. It was served on the debtor on 7th February, 1979.

The relevant part of the bankruptcy notice states: (at p259)
"To: JAMES LOUIS FLORANCE of Kalianna Crescent, Beacon Hill, solicitor, WHEREAS TURIMETTA PROPERTIES PTY. LTD. having its registered office at 46 Prince Alfred Parade, Newport, in the State of New South Wales, (hereinafter referred to as "the judgment creditor") has claimed that the sum of $461,522.73 together with interest thereon at the rate of twenty-two per cent per annum from 15th February, 1978, which at the date of issue of this notice amounts to $93,189.65 making a total of $554,712.38 is due by you to it under a final judgment obtained by it against you in the Supreme Court of New South Wales on 15th February, 1978, as varied by a final order of the Supreme Court of New South Wales Court of Appeal on 14th December, 1978, being a judgment and a final order the execution of both of which have not been stayed: (at p259)
THEREFORE TAKE NOTICE that within fourteen (14) days after service of this notice on you, excluding the day on which this notice is served on you, you are required: (a) to pay the sum of $554,712.38 so claimed by the judgment creditor to the judgment creditor, or (b) to secure the payment of the sum referred to in the last preceding paragraph to the satisfaction of the Federal Court of Australia or the judgment creditor (or its agent whose name and address are Glenn David Eggleton of Clayton, Utz & Company, Level 23, Tower Building, Australia Square, Sydney) or compound the sum so specified to the satisfaction of the judgment creditor (or its agent): . . ." (at p260)
Mr. Downes, who appeared for the debtor, submitted that, although the order of the Court of Appeal varied the order of Sheppard J. by increasing the sum of $432,545.50 to $461,522.73, it said nothing about the amount on which interest is to be paid, and, as the bankruptcy notice claims interest at the rate of twenty-two per cent per annum on the sum of $461,522.73, it is invalid. He submitted that the bankruptcy notice should have claimed interest on the sum of $275,000 as it is the sum specified by Sheppard J. on which interest is to be paid at that rate as no provision for the payment of interest is made by the order of the Court of Appeal. (at p260)
Mr. Stowe, who appeared for the petitioning creditor, submitted that the bankruptcy notice correctly states the interest due notwithstanding that the order of the Court of Appeal did not specifically deal with interest. (at p260)
He submitted that to properly construe those orders it is necessary to refer to other documents which are incorporated by reference. The first order of the Court of Appeal dismissed the appeal, hence it is necessary to refer to the notice of appeal to see what is being dealt with. The second order allowed the cross appeal, thus requiring reference to the terms of the notice of cross appeal. The third order varied the judgment of the Supreme Court which necessarily requires reference to the terms of that judgment. (at p260)
The cross appeal sought two orders: first, that the judgment against the debtor and Mr. Knight be varied by increasing the amount thereof of $491,517, and second that the amount of the judgment carry interest at the rate of twenty-two per cent per annum, reducible to twenty per cent per annum on prompt monthly payments. (at p260)
Mr. Stowe submitted that the provision for the reduction of interest to twenty per cent was inoperative as default had already occurred before the date of the making of the order of the Court of Appeal so there was no prospect of the interest rate being otherwise than twenty-two per cent. (at p260)
In my opinion Mr. Stowe's submissions are well founded. It is obviously necessary to look at the judgment of the Supreme Court itself so that one can see what the judgment of the Supreme Court is that the Court of Appeal varied. By allowing the cross appeal (order 2) in my opinion it is permissible, indeed necessary, to look at the notice of cross appeal to see what is being allowed. (at p261)
A reading of the first three orders of the Court of Appeal together with the notice of cross appeal and the terms of the order of Sheppard J. leads to the conclusion that the bankruptcy notice correctly states the amount of interest due by the debtor. It is not a case of looking at documents extraneous to the order of the Court of Appeal as an aid to construction of that order; rather the task is necessary to identify the subject matter of the order itself. (at p261)
In Re Wimbourne; Ex parte the Debtor (1979) 24 ALR 494 I dealt with a case somewhat similar to this so far as the present point is concerned in that the High Court varied an order of the Supreme Court of New South Wales. I said: "It is well established that to determine whether the debtor served with the bankruptcy notice could be misled the court may look at facts extraneous to the notice itself. (at p261)
"There are many cases where bankruptcy notices have been held to be invalid as they require payment of part of a judgment debt, leaving any balance that may be due to be subsequently claimed. (at p261)
"The very ground of invalidity necessarily presupposes that the true facts as to the amount of the judgment debt have been considered by the court and measured against the facts stated in the bankruptcy notice: see for instance Re Jack; Ex parte C.V. Holland (Holdings) Ltd. (1959) 19 ABC 268 Re Munson; Ex parte Deputy Commissioner of Taxation (1977) 29 FLR 479 ; Re Schierholter; Ex parte Geis (1978) 32 FLR 22 " (1979) 24 ALR, at p 499 (at p261)
Accordingly this ground of attack on the bankruptcy notice fails. (at p261)
Mr. Stowe submitted that if, contrary to his first submission, the bankruptcy notice was held to be defective, it was saved from invalidity by s. 306 of the Act on the ground that it constitutes an "irregularity" within the meaning of sub-s. (1) of s. 306 and substantial injustice has not been caused by the irregularity and, if there is any injustice, it can be remedied by an order of this Court. (at p261)
It was submitted on behalf of the petitioning creditor that, following the delivery of judgment by the Court of Appeal, but before the making of orders, the court requested counsel for the parties to settle the terms of appropriate short minutes to embody the reasons for judgment. (at p261)
Mr. G. D. Eggleton, solicitor for the petitioning creditor, informed the debtor of his calculation of the amount due under the judgment, namely $461,522.73. The calculations were based upon the premise that the rate of twenty-two per cent per annum interest applied to the whole of the judgment and was not merely limited to the sum of $275,000 as the principal. Short minutes of order prepared by Mr. Eggleton were sent to the debtor. Mr. Eggleton deposed to the fact that the short minutes were signed for or on behalf of all parties and tendered to the Court of Appeal on 14th December, 1978, which then made orders in accordance with the short minutes submitted. (at p262)
I have already mentioned that the notice of cross appeal sought an order that the judgment carry interest at the rate of twentytwo per cent reducible to twenty per cent on prompt monthly payments. One of the grounds of the cross appeal was that Sheppard J. erred in ordering that only part of the judgment debt carry interest and that there was no sound ground for depriving the petitioning creditor of interest on the balance of the judgment debt. The cross appeal was allowed. I have read the reasons for judgment of Hutley J. A. and Mahoney J. A., with whom Moffitt P. agreed, and in my opinion it is clear from those reasons that the court intended interest to run on the whole of the judgment debt and not part thereof, namely $275,000. (at p262)
The tests that determine whether s. 306 can apply were referred to by me in Wimbourne's case (1979) 24 ALR 494 and I need not refer to them further. (at p262)
The debtor, who is himself a solicitor, played an active role in the proceedings before Sheppard J. and the Court of Appeal. He was represented by counsel on the hearing before Sheppard J. and before the Court of Appeal. Also, he was present in court when the appeal was argued. In my opinion it has not been established that the debtor could have been perplexed or misled by the bankruptcy notice appearing in the form in which it did, assuming for present purposes that it was defective. Hence, if the bankruptcy notice is defective it is a proper case for the application of s. 306. (at p262)
This is the point relied on by the debtor to support grounds 1 (a) and (b) in the notice of intention to oppose the petition. For the reasons I have given it fails. (at p262)
It was contended by Mr. Downes that the petition was not served on the debtor in accordance with the Bankruptcy Rules 1968, although it is not disputed that he received the petition some three days after it is alleged by the petitioning creditor that he was served with the petition. (at p262)
Clarice Irene Ward swore an affidavit in which she deposed to the following: "1. On Friday 23rd March, 1979, at 3.30 in the afternoon I served James Louis Florance with the within petition by delivering to a female employee, Miss Lumsky, apparently over the age of sixteen years, an official copy there . . . 2. At the time of service I said to the person served, 'Are you authorized to accept service of these documents on behalf of James Louis Florance?' She replied 'Yes, I am his secretary and I am authorized to accept these documents on behalf of James Louis Florance-He is in conference at the present time . . . '" (at p263)

Rule 15 provides, that unless otherwise ordered by the court under sub-s. (2) of s. 309 of the Act: "(b) service of a creditor's petition shall be effected on a debtor by delivering to the debtor personally an official copy of the petition and a copy of the affidavit or of each affidavit verifying the petition . . ." Mr. Stowe submitted that the debtor had in fact been served personally in accordance with r. 15, if not by the process server, then by Mr. Florance's secretary on 26th March. (at p263)
He contended that this satisfied the requirements of the rules as the petition was delivered to the debtor personally, albeit by his own secretary. He submitted that the petition must end up by being physically delivered to the debtor, as it was in this case. (at p263)
The requirements of the rules as to service of bankruptcy petitions must be strictly complied with. The fact that the debtor's secretary handed him the petition some three days after she had received it from the process server engaged by the petitioning creditor does not constitute personal service of the petition upon the debtor. The fact that the petition came to his notice and into his hands does not mean that he was served personally with the petition. (at p263)
Mr. Stowe referred me to a number of authorities to support his submission especially Pino v. Prosser and Hassan (1967) VR 835 and Re Woodley; Ex parte Bank of New South Wales (1971) ALR 155 . (at p263)
In Pino v. Prosser and Hassan McInerney J. considered a motion to set aside a writ. It is sufficient to say that his Honour was considering a different question to the one before me and different rules, namely the Supreme Court Rules (Vic.) relating to service of initiating process. (at p263)
Re Woodley; Ex parte Bank of New South Wales was a case where a bankruptcy notice and a bankruptcy petition each came to the attention of the debtor. The petitioning creditor failed to prove compliance with r. 121 of the Bankruptcy Rules, namely that the notice had been served on a person over sixteen years, and r. 16(b) namely that the affidavit of service of the petition did not annex a copy of the petition. Lucas J. held that these were technical defects which could be cured under r. 195. (at p263)
In my opinion neither of these cases supports Mr. Stowe's submission that the petition was served personally on the debtor. (at p263)
Mr. Stowe submitted that if it were held that the debtor had not been served personally with the petition, r. 195 or s. 306 operated to excuse noncompliance with the requirements as to service. (at p263)
The petition did come to the attention of the debtor on 26th March. He has appeared in these proceedings and was represented by counsel. There is no evidence of prejudice or injustice suffered by him because of the defective service. In my opinion this is an appropriate case to relieve the petitioning creditor from the consequences of noncompliance with the rules as to service of the petition: see r. 195. If s. 306 were applicable, and in my opinion r. 195 is the more appropriate vehicle for granting relief, the section would operate to prevent any relevant invalidity. (at p264)
Mr. Stowe contended that the debtor ought not to be allowed to submit that service of the petition was defective whilst at the same time arguing the case on its merits. (at p264)
In my opinion this submission fails. The debtor is entitled to come to the court and contend on the hearing of the petition that service of the petition was defective, although there doubtless are some cases when this course ought not to be countenanced. (at p264)
Accordingly I am satisfied that, although the petition was not duly served upon the debtor, the defect is curable and does not vitiate the proceedings. (at p264)
The third ground on which the debtor opposes the petition is that the petitioning creditor is a secured creditor of the debtor and is precluded from proceeding in bankruptcy without giving up or valuing its security. The petition alleges in par. 3 that the petitioning creditor does not, nor does any person on its behalf, hold any security over the debtor's property for the payment of the judgment debt. (at p264)
Accordingly, if the petitioning creditor is in fact a secured creditor of the debtor, either the petition must be dismissed or the petitioning creditor must seek leave to amend the petition to comply with the requirements of the Act and the rules relating to the presentation of petitions by secured creditors including the requirements of s. 44 (3) and (4). (at p264)
It is common ground that, if I should find in favour of the debtor on this point, I should adjourn the matter to a date to be fixed so that counsel can consider my reasons for judgment and address on the question whether leave to amend the petition, if it is sought, should be granted or the petition dismissed. (at p264)
The basis of the claim of the debtor that the petitioning creditor is a secured creditor is that, although the mortgage was granted by Holdings to the petitioning creditor to secure payment of part of the purchase price of the land, and although the debtor and Mr. Knight joined in the mortgage as guarantors, Holdings holds the land, pursuant to the declaration of trust of 26th October, 1973, upon trust for the debtor and Mr. Knight. Hence, so the argument goes, the very security to which the petitioning creditor can look, in the event of non payment of the debt secured by the mortgage by the company is the land owned beneficially by the debtor and Mr. Knight. (at p265)
Mr. Downes relied in support of his contention upon the decision of the High Court in Harvey v. Commercial Bank of Australia Ltd. (1937) 58 CLR 382 . (at p265)
In Harvey's case a company, P. Bird Pty. Ltd., was indebted to the bank. Philip Bird, who was the registered proprietor of certain land, had executed an indenture declaring that he held the land upon trust for the company. Subsequently he executed a mortgage of the same land to the bank to secure the moneys owing by the company to the bank. The mortgage to the bank was registered, but the bank did not know of the declaration of trust in favour of the company. The bank in its proof of debt in the subsequent liquidation of the company did not give up or give credit for the value of its security. The liquidator rejected the proof of debt; but on appeal to the Supreme Court of Victoria it was held that the fact that the company was the beneficial owner of the land the subject of the security in favour of the bank did not make the mortgage a specific security on the property of the company within the meaning of s. 194 of the Insolvency Act 1928 (Vic.). It was held that the bank's proof of debt should be admitted by the liquidators. (at p265)
On appeal to the High Court the decision of the Supreme Court was reversed. (at p265)
The researches of counsel did not disclose any case in which the decision of the High Court in Harvey's case (1937) 58 CLR 382 had been referred to. (at p265)
Mr. Stowe sought to distinguish Harvey's case on various grounds. He submitted first that the facts of Harvey's case and those of the present case are materially different as in Harvey's case the mortgage was granted by a guarantor to secure repayment of the principal debtor's obligation, whereas in the present case the mortgage was granted by the principal debtor to secure the principal debt which was "secured" by the guarantee of the debtor whose obligation under the guarantee constituted a debt upon which the petitioning creditor relies. He referred to the definition of "secured creditor" in s. 5 of the Act which defines that expression as "in relation to a debtor, means a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him from the debtor". (at p265)
Mr. Stowe submitted that payment by the debtor or the enforcement of the mortgage against the assets of the debtor, they being acknowledged to be in equity the assets of the debtor and Mr. Knight, would not finally discharge the obligation owed to the petitioning creditor as was the case in Harvey's case. The debt would not be finally discharged as, having paid the petitioning creditor or, having suffered a diminution of his assets through the enforcement of the mortgage in favour of the petitioning creditor, the debtor would be entitled to enforce the principal debt against Holdings by right of subrogation. (at p266)
He submitted also that the debtor's assets would not, on an accounting basis, be diminished by the taking of the mortgaged property by the petitioning creditor in satisfaction of the principal debt. Any such diminution in the debtor's assets caused by the taking of that property by the petitioning creditor would be immediately balanced, albeit by a different form of asset, by reason of the debtor's right of subrogation against the principal debtor, so that on a net basis the debtor's assets would remain unchanged. (at p266)
Mr. Stowe submitted that Harvey's case could be distinguished on another basis namely that, whilst both cases have in common the fact that the passing of the equitable interest in the mortgaged property was unknown to the petitioning creditor, in Harvey's case the court was considering the matter in the context of the admission of the creditor's proof of debt, whereas in the present case the point at which the matter is being considered is the validity of the petition itself. He submitted that in the present case there is, on the hearing of the petition, no question of considering whether the rules of bankruptcy as to the due administration of a bankrupt's property apply; but the question is whether the petition ought to be regarded as not complying with the provisions of the Act. (at p266)
In my opinion the distinctions which Mr. Stowe has sought to draw between Harvey's case (1937) 58 CLR 382 and the present case are not material. The petitioning creditor holds its mortgage over the land which is in law the property of Holdings but in equity the property of the debtor and Mr. Knight thus satisfying the first part of the definition of "secured creditor" in s. 5, namely that the petitioning creditor holds a mortgage on property of the debtor. It is true that the petitioning creditor took the mortgage from Holdings as security for its debt without knowledge of the declaration of trust; but as both Holdings and the debtor have defaulted in their respective obligations to the petitioning creditor, it holds the mortgage as security for the debt due by the debtor as well as the debt due by Holdings, the former being the ancillary and the latter the principal obligation. If the petitioning creditor were, for example, to exercise its power of sale, sell the land and recover the whole of the principal and interest due under the mortgage, the debt of both Holdings and the debtor would be discharged. If the petitioning creditor recovered only half of the moneys due to it upon sale of the land, it would be entitled to sue the debtor, Mr. Knight and Holdings or any of them for the whole of the unpaid balance provided it did not recover more than 100 cents in the dollar. These and other examples serve to illustrate the point that the mortgage is in truth held by the petitioning creditor as security for the debt due to it by the debtor. (at p267)
In Harvey's case Starke J. said: "Further, the mortgage is security for the debt which the bank sought to prove. The debt due to the bank was the sum owing to it by the company on current account and otherwise. It was no doubt secured by the guarantee and collateral mortgage given to it by Philip Bird, but it was in truth a single sum of money the payment of which by either the company or Philip Bird, the surety, satisfied the obligation to the bank. (See Stock Motor Ploughs Ltd. v. Forsyth (1932) 48 CLR 128, at p 134 " (1937) 58 CLR, at p 387 . Dixon J. said: "He gave the mortgage with the concurrence of the company. But the officers of the bank say that they were unaware that Philip Bird was not the beneficial owner of the land. The consequence of this transaction is that the company's debt to the bank is guaranteed by Philip Bird and the guarantee is secured by a mortgage to the bank over property of which he is the owner at law and the company is the owner in equity. If the bank have recourse to the guarantee and the mortgage by which it is secured, so that the liability is satisfied out of the mortgaged property, then because the company is the beneficial owner of the property the debt owing by the company will be discharged finally, and Philip Bird will not have the surety's usual right to claim over against the company as principal debtor. In other words, the mortgage operates to confer upon the bank the means of satisfying the debt owing by the company out of what in fact is the property of the company" (1937) 58 CLR, at p 389 . See also National Westminster Bank v. Official Receiver (1971) 2 WLR 1477 . (at p267)
Thus in the present case there is a single sum of money the payment of which by either Holdings or the debtor as surety will satisfy the obligation to the petitioning creditor. (at p267)
The critical fact is that the mortgage confers upon the petitioning creditor the means of satisfying the debt owing by the debtor out of what is in truth the property of the debtor. (at p267)
For these reasons in my opinion Harvey's case applies to the present case so that the petitioning creditor is a secured creditor of the debtor. (at p267)
I shall stand over the further hearing of the petition to a date to be fixed by arrangement with counsel so that the petitioning creditor may consider whether it wishes to apply to amend the petition to comply with the provisions of the Act relating to the presentation of petitions by secured creditors. (at p267)

ORDER

Accordingly the petition is adjourned to a date to be fixed by arrangement between counsel and my associate for the purpose of hearing any application by the petitioning creditor to amend the petition following delivery of my reasons for judgment.

[1979] FCA 94

17 SEPTEMBER 1979