Re Kelly, P.m. v Ex parte Kelly, P.H.

[1985] FCA 560

Re: PAUL MICHAEL KELLY
Ex Parte: PAMELA HELEN KELLY and KEVIN MICHAEL PIPKIN
No. 544 of 1983
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Forster J.

CATCHWORDS

Bankruptcy - Land jointly held by bankrupt and his wife prior to date of bankruptcy - application by wife pursuant to s.178 Bankruptcy Act seeking orders that trustee either disclaim his estate and interest in land or that land vest in or be transferred to wife - whether "just and equitable" to order sale by trustee of his interest to applicant for nominal consideration - relevant considerations.

Bankruptcy Act, ss. 134(1), 178

Holland v. Official Receiver in Bankruptcy - Fisher J. 15 February 1985 (unreported)

In re Tyndall (1977) 30 F.L.R. 6

HEARING

ADELAIDE
#DATE 7:11:1985

ORDER

1. The trustee sell to the applicant his estate and interest in the land comprised in certificate of title register book vol. 4152 fol. 394 for the consideration of $100. 2. There be no order as to costs.

Note: Settlement and entry of orders is dealt with in

Bankruptcy Rule 124.

JUDGE1

This is an application by the wife of the bankrupt seeking orders that the trustee of the bankrupt's estate (Pipkin) do disclaim his estate and interest in the land comprised in certificate of title register book vol. 4152 fol. 394 and that the property so disclaimed vest in the applicant. In the alternative an order is sought that the estate of the trustee in the land vest in or be transferred to the applicant.

1. Prior to his bankruptcy on 1 August 1983 the land in question was owned as joint tenants by the bankrupt and his wife. Pursuant to an application lodged in the Lands Titles Office on 7 September 1983 the estate of the bankrupt in the land was vested in Pipkin. On 3 November 1983 the applicant's solicitors wrote to Pipkin asking that his interest in the land be transferred to her on the basis that the amount owing on a mortgage of the land exceeded the value of the land. This request was not acceded to. On 17 November 1983 the solicitors wrote to Pipkin offering to purchase his interest in the land for $1,000 and on 10 January 1983 they wrote again offering to purchase Pipkin's interest for $2,000. Pipkin replied on 16 January 1983 saying that he would not be prepared to accept the latest offer unless authorised to do so by a meeting of creditors. He also said that he was unable to call a meeting of creditors because the bankrupt had not furnished a proper statement of affairs. A further offer was then made to purchase for $1,000.

2. At a meeting of creditors on 22 February 1984 a proposal was put that Pipkin transfer his interest in the land to the applicant for a consideration of $1,000. All creditors present, except the petitioning creditors, voted in favour of the proposal. Those voting in favour were owed a total of $5,823 and the petitioning creditors were owed $30,806. A motion to approve the proposal was therefore lost and Pipkin declined the applicant's offer.

3. Prior to the making of a sequestration order with respect to the estate of the bankrupt he and the applicant had borrowed $55,000 on the security of a first mortgage on the land. The memorandum of mortgage provided for interest to be paid at seventeen and a half per cent by monthly payments of $802-29. By a clerical mistake the memorandum of mortgage dated 16 February 1983 provided for repayment of the principal sum on 15 February 1983. However this may be the mortgage has been allowed to run on with no reduction of the principal and the applicant has paid all payments of interest from the beginning being a total of $25,408-56. She has also paid council rates and water and sewerage rates. The council rates are now $464-70 in arrears and the water and sewerage rates $1,300-33 in arrears. The applicant is doing her best to reduce these arrears.

4. The land is at Waterfall Gully and has erected on it an old house in very poor repair which probably should be demolished. Nevertheless the applicant, the bankrupt and one of their children live in it and wish to continue to do so and the applicant conducts a small plant nursery on the land.

5. The land and improvements were valued on 31 August 1983 by Steele, an experienced licensed valuer, at $52,500 which of course is less than the amount owing under the mortgage. On 22 February 1984 the property was valued by John Bruce, another licensed valuer, selected by Pipkin, at $55,000. On 17 November 1984 Steele valued the property again, this time at $57,500. On 9 October 1985, the day before the hearing, Steele inspected the property again and now places a value of $67,500 on it. The significant increase in valuation is accounted for by Steele by general increase in values in the period between the valuations. The property had not itself been altered in any way.

6. There is evidence that if the land were sold in the market, commission and advertising expenses to the vendor would approximate $4,750 to which should be added something for the vendor's legal costs should he employ a solicitor or land broker's costs should he employ a broker. The amount of these costs is unknown but it is agreed that I should take them into account in a general way. If the property were sold in the market I accept, because this is the only evidence on the topic, that it would bring $67,500. The mortgage would have to be paid out which would reduce the amount available to the registered proprietors to $12,500. If notional expenses of sale are deducted the sum is further reduced to $7,500. Arrears of rates and taxes would also have to be paid amounting to $1,765. Deducting these sums from $12,500 leaves only $3,235. I appreciate that these calculations are to some extent hypothetical because of course the property might realise on sale a figure smaller or greater than $67,500.

7. These calculations are based on a sale of the whole of the land by the registered proprietors and simply indicate the likelihood that upon such a sale the applicant and Pipkin would each receive a little more than $1,000.

8. However, the applicant is entirely unwilling to join in such a sale. It seems clear that upon a sequestration order being made with respect to the bankrupt's estate the joint tenancy between the applicant and him was severed in equity and that upon registration of the vesting of Pipkin's interest upon the Register Book the joint tenancy was severed in law and the applicant and Pipkin became tenants- in- common (see Holland v. Official Receiver in Bankruptcy per Fisher J. 15 February 1985 (unreported)). This being so the trustee has the capacity to sell his estate as tenant-in-common and could do so provided he could find a buyer. There is no evidence on this topic but I think that the trustee would have great difficulty in finding a buyer who, quite apart from the presence on the land of a house, albeit somewhat deprepit, would be put to the trouble and expense of partition proceedings if he wished to gain exclusive possession of his share of the land. There is no evidence that partition would be either possible or practicable. Even if it were I should think that the trustee's estate in the land would, because of the problems, bring considerably less than half of the value of the land as a whole. The trustee has no money in the estate so that it would be impracticable for him to bring partition proceedings and even if he did have the necessary resources the expense of the proceedings would diminish the estate of the bankrupt.

9. The mortgagee has already made one unsuccessful attempt to sell the whole of the land which failed because of some informality. The applicant said and I accept that the mortgagee is impatient to recover the money lent and is not prepared to wait much longer before making another attempt to sell the land. Should the trustee not sell his estate in the land to the applicant which, as I mention later would enable the mortgagee to be paid out, I would expect that quite soon the mortgagee will move to enforce his security. If he does so a mortgagee sale of the land would follow. It is notorious that very frequently the price gained at a mortgagee sale is below the true value of the property sold. If this be right then there would probably be little or no surplus to be shared between the trustee and the applicant.

10. A further matter which should be mentioned is that the applicant has been obliged to work very hard in order to keep up the mortgage payments and pay so much of the rates and taxes as she has paid. She was at one time for instance working at three jobs. It should also be noted that if the applicant had not kept up the interest payments on the mortgage the land would no doubt have been sold by the mortgagee at a time when the sale proceeds would probably have been less than the amount owing on the mortgage. Her counsel submitted that it would be unfair if the property having been preserved by the efforts of the applicant which he described as "Herculean" any small hypothetical surplus after repayment of the mortgage money and other expenses and debts should fall into the hands of the creditors who have done nothing to preserve the property. It should however be said that the applicant and her husband the bankrupt and one of their children have lived in the property all this time and that the payments made by them could be regarded as rent, albeit a very high rent, for the property.

11. If the applicant should in some way succeed to an estate in fee simple in the whole of the land she has been assured that she could borrow sufficient to pay out the mortgage, the arrears of rates and taxes and any expenses attendant upon her succeeding to that estate. She is confident that she would be able to meet the liabilities consequent upon that borrowing, a good deal of which would be at a lower rate of interest.

12. The application before me is made under s.178 of the Bankruptcy Act which is as follows -
    
    

"178. If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable."

1. In re Tyndall (1977) 30 FLR 6 Deane J. when he was a member of this Court said at pp 9 and 10 -
   
   

"The critical differences in wording between s.148 of the 1924 Act and s.178 of the present Act are that the present Act does not require that the applicant be a person 'aggrieved' as did the previous Act and the English bankruptcy legislation and that the present Act does not make the focal point of the jurisdiction the confirming, reversing or modifying of 'the act or decision complained of'. Under s.178, the bankrupt, a creditor or any other person affected by an act, omission or decision of the trustee is empowered to apply to the court. The express requirement that the applicant be a person 'aggrieved' no longer exists. Nor is the court, in express terms, required to approach the matter on the basis that the appropriate question is whether 'the act or decision complained of' should be confirmed, reversed or modified. Once the matter is properly before the court, the court is empowered - and obliged - to make such order in the matter 'as it thinks just and equitable'.

It was strongly submitted by Mr. Urquhart for the official receiver that, notwithstanding the variation in wording, the authorities on the English legislation and the statements by Clyne J. to the effect that those authorities were applicable to the provisions of s.148 of the Bankruptcy Act 1924, should lead me to conclude that, in an application under s.178, the court should only interfere with the relevant act, omission or decision of the trustee if it appeared that the trustee had acted absurdly or unreasonably or in bad faith. I have reached the conclusion that this submission cannot be accepted. In my view, the wording of s.178 of the Act is such as to confer upon the court the widest possible discretion as to the appropriate order which should be made in the particular case and is quite inconsistent with the approach that, upon an application made pursuant to the section by a bankrupt, creditor or other person affected by an act, omission or decision of the trustee, the court is only empowered to interfere with the trustee's act, omission or decision if it is of the view that the trustee has acted absurdly or unreasonably or in bad faith. Once the matter is properly before the court, the court is, by the express words of s.178, empowered (and, as I have said, obliged) to make such order in the matter as it thinks just and equitable."

1. I accept with great respect what his Honour there said and I also accept what counsel for the applicant submitted that the court, when hearing an application under s.178, slips into the shoes of the trustee and may do and should do whatever it considers is "just and equitable". In all the circumstances it seems to me that it is just and equitable that the trustee should sell to the applicant his interest in the land for a fairly nominal sum which he has power to do under s.134(1)(a) of the Bankruptcy Act. I have said that he should sell for a fairly nominal sum because of the small amount of notional residual value in the land once the amount owing on mortgage for rates and taxes and the expenses of sale in the market are deducted because of the difficulties associated with partition and a sale to anyone else and because of the contributions of the applicant towards the preservation of the land and because of the fact that if her first offer had been accepted the market value of the land at the time would have been considerably less. Finally I have in mind general considerations of equity and fairness. I fix a sale price at $100. Because I have come to the conclusion that the trustee should sell his interest in the land to the applicant I do not deal with the matter of disclaimer and its consequences.

2. I order that the trustee sell to the applicant his estate and interest in the land comprised in certificate of title register book vol. 4152 fol. 394 for the consideration of $100.

3. The trustee has informed me that there are no other assets in the estate of the bankrupt and I therefore make no order as to costs.