Re Skender; ex parte Trevor

[1996] FCA 556

IN THE FEDERAL COURT OF AUSTRALIA     )
GENERAL DIVISION  )

BANKRUPTCY DISTRICT OF THE           )  No. WX2 of 1996
STATE OF WESTERN AUSTRALIA           )

RE:MOMCILO SKENDER

Debtor

EX PARTE:GARRY JOHN TREVOR and ALDEN JON HALSE as TRUSTEES OF THE PROPERTY OF MOMCILO SKENDER, A DEBTOR

Applicants

CORAM:    HILL J
PLACE:    PERTH
DATED:    25 JUNE 1996

REASONS FOR JUDGMENT

Mr Garry John Trevor and Mr Alden Jon Halse ("the trustees") are the trustees of the property of Momcilo Skender, a debtor, appointed as such pursuant to s188 of the Bankruptcy Act 1966 (Cth) ("the Act") on 21 December 1995. That appointment was perfected when a meeting of the debtor's creditors was held on 31 January 1996 and it was resolved by special resolution that the debtor execute a deed of assignment under Part X of the Act.

The property the subject of that deed included land being Lot 287 Broome Road, Broome, Western Australia, a parcel of 15 hectares of which the debtor was the registered proprietor.  That land was subject to a mortgage to the Bank of Western Australia Limited securing as at 13 May 1996
$192,086.14.  The land itself has a value of $300,000 and the equity in the land is thus approximately $108,000.

The debtor also farms an adjoining parcel of land known as Lot 288 comprising a further 15 hectares of land.  He had, prior to the deed of assignment, made several improvements to Lot 288 including clearing the land and establishing a bore.  As a result of having made those improvements, he was offered by the Department of Land Administration the ability to acquire Lot 288 at a price substantially below its market value.  That offer is available for acceptance only by a person who is the owner of Lot 287.

The Department of Land Administration, as a result of correspondence with the trustees, then offered to sell Lot 288 to the trustees for $29,000, subject to the approval of the Minister for Lands.  That offer remains open until 18 September 1996 and is subject to the trustees agreeing to amalgamate Lots 287 and 288.  It seems on the evidence that the true value of Lot 288 is $80,000.  In the result, for an outlay of less than $30,000, the trustees have the ability to acquire a property which, if sold, should realise $80,000.  Finance costs and registration fees are not thought to be likely to be greater than $3000.  If the transaction is entered into, the amount available for distribution to creditors would be increased, so that instead of an estimated
divided of 15.1 cents, the trustee anticipates that creditors would receive an estimated dividend of 25.4 cents.

The trustees have had discussions with the National Australia Bank Limited which has agreed to finance the purchase, making available an overdraft limit of $32,000. The trustees have sought legal advice as to whether they have power to enter into the transaction. The advice they have received is equivocal. Accordingly, the trustees have approached the Court for a declaration that they have power to carry out the transaction of mortgage purchase amalgamation and sale or, in the alternative, for orders that leave be given to them, pursuant to s135(1)(d) of the Act, to carry out the transaction.

It is not hard to see why the advice the trustees have received is equivocal. Section 134 of the Act empowers the trustees, inter alia, to:

"... (da) mortgage or charge any of the property of the bankrupt having a net value not exceeding the prescribed amount for the purpose of raising money for the payment of the debts provable in the bankruptcy; ..."

The section also permits the trustee to sell all or any part of the property of the bankrupt but not to sell by private contract any property having a net value exceeding a prescribed amount being $20,000. It confers upon the trustee the right to use his or her own discretion in the administration of the estate. No specific power is conferred by s134 to acquire property. The expression "property" in the Act is defined in s5 in the following terms:

"`property' means real or personal property of every description, whether situated in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property."

The expression "the property of the bankrupt" is defined as including, inter alia:

"...

(a)(ii) any rights and powers in relation to [the property divisible among the bankrupt's creditors] that would have been exercisable by the bankrupt if he or she had not become a bankrupt..."

The definition of "property" and, a fortiori, the definition of "the property of the bankrupt" are both wide definitions although, as the decision of the High Court in Cummings v Claremont Petroleum NL; Fuller v Claremont Petroleum NL (unreported, 20 June 1996) indicates, some limits must be given to the expression in that it does not cover a right on the part of the bankrupt to appeal against a judgment against that person.

The expression "`net value' in relation to property" is likewise defined in s5 of the Act in relation to property as meaning:

"(a)if the property is unencumbered - the value of the property;

(b)if the property is encumbered and the unencumbered value of the property exceeds the amount or value of the encumbrances - the amount of the excess; or

(c) in any other case - a nil amount."

Literally, s134(1)(da) prohibits a mortgage or charge of the property of a bankrupt if that mortgage or charge is of property which if encumbered leaves an equity greater than $50,000. That would be the case here, although it is difficult to understand precisely the policy behind s134(1)(da) as it literally prohibits the trustees in the present case from proceeding with the arrangement they have in mind. That being the case, I am unable to make a declaration in the form requested.

I turn now to consider the application made by the trustees to the Court for leave under s135. Section 135(1)(d) permits the trustee, with leave of the Court, to:

"mortgage or charge all or any part of the property of the bankrupt which having a net value exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134, for the purpose
of raising money for the payment of the debts provable in the bankruptcy."

This is provided therefore the mortgage or charge is for the relevant purpose.  There would be power in the trustee with leave of the Court to enter into the mortgage.

No case has apparently considered the words "the purpose of raising money".  Where legislation confers a power for "the purpose", that power may be conferred for the sole purpose or alternatively for the dominant purpose. Telling against a construction of s135(1)(d) of sole purpose is the fact that the section refers to raising money rather than borrowing it so that, bearing in mind that some flexibility needs to be given to trustees in bankruptcy and the Act not given a narrow operation, s135(1)(d) should be construed as permitting a trustee, with leave of the court, to enter into a transaction involving a mortgage of property having a net value of the requisite amount. This is provided that overall, the dominant purpose of the mortgage transaction is to raise money for the payments of the debts provable in the bankruptcy.

There is no doubt in the present case, on the facts, that the trustees' purpose is to do just that, although if the section were construed narrowly, its purpose may be said to be merely to mortgage the property for the purposes of acquiring a new property.

The next question of difficulty, though, is whether the trustees would have power to acquire property, namely Lot 288 from the Department of Land Administration. It is noteworthy that there is no provision in the Act which authorises a trustee in bankruptcy, or for that matter since the powers extend also to trustees of deeds of arrangement, a trustee under such a deed, to enter into a contract of purchase of property.

I was referred to the decision of Fullagar J in the Supreme Court of Victoria in Re Bairnsdale Food Products Limited (In liquidation) (1948) VLR 264. In that case a company, which ultimately went into liquidation, had leased land from the Commonwealth in circumstances where the Commonwealth had undertaken not to sell that land without giving the company the first option to purchase. The generally accepted view on the authorities is that a right of first refusal, such as was conferred upon the company, does not create any interest in property. After the company had gone into liquidation, the Commonwealth offered the liquidator the opportunity to purchase the land and a question arose as to whether the liquidator was authorised to do so under the then provisions of the Companies Act 1938.  Two powers were relied upon.  The first was s191(2)(c), which authorised the liquidator to sell the real and personal property and things of action of the company.  The second was s191(2)(l), which authorised a liquidator to do such other things as were necessary for winding up the affairs of the company and distributing its assets.

Fullagar J (at 268) asked rhetorically whether the double transaction into which the liquidator entered really differed in substance from the sale of a right.  The right could not have been sold without the consent of the Commonwealth.  The Commonwealth would not have been bound to sell to any assignee of the right. If the liquidator could buy and sell the subject matter of the right so as to realise for the company the value of the right and proceeded to do so, then it was the view of Fullagar J that what the liquidator was doing was in truth authorised by s191(2)(c), that is to say, as pursuant to the power of sale.

His Honour did, however, add in the passage from which the above is extracted, that:

"... at least that [the liquidator] was doing was something which could reasonably be considered necessary for the winding-up of the company."

His Honour added that the liquidator had made the purchase:

"... only for the purpose of re-sale and, in my opinion, he was really doing no more than selling an asset of the company.  The ancient axiom that equity regards the substance rather than the form has been misunderstood and misapplied, but I think that it fairly covers the present case."

So it is submitted here that the present case is analogous.  The property of the bankrupt includes the chose of action being the right offered by the Commonwealth to the trustee (and formerly offered to the debtor) to purchase Lot 288 at a favourable price.  It is then said that in substance, what the trustee is seeking to do is to realise by sale this right, by adopting the only mechanism available, namely, purchase of the underlying asset (Lot 288), amalgamation of it and subsequent sale.

Although the alternative relied upon by Fullagar J of s191(2)(l) is not available to be utilised in the present case, I think that the submissions of the applicant are correct and that the present case is one which can fall within s135(1) if by private contract, or s134(1)(a) if not. Accordingly, I would propose, while not making the declaration sought, to give leave to the trustees to take the following action.

(1)mortgage land of which the debtor is the registered proprietor being Dampier Lot 287, the whole of the land comprises the certificate of title 2010, folio 894 to borrow $32,000 to expend in the purchase of the land adjoining Lot 287, being Dampier Lot 288, and pay associated costs;

(2)to purchase Lot 288 at the price of $29,000 and amalgamate it with Lot 287; and

(3)sell Lot 287 as amalgamated with Lot 288, paying out all prior encumbrances and applying the net proceeds of the sale in payment of debts provable in the debtor's estate.

I direct that the costs of and incidental to the application be taxed and paid from the estate.

I certify that this and the
preceding nine (9) pages
are a true copy of the Reasons
for Judgment herein of his Honour
Justice Hill.

Associate:

Date: 

Counsel and Solicitors      J C Vaughan instructed by

for Applicant:              Phillips Fox

Counsel and Solicitors      ) no appearance - matter heard

for Respondent:             ) ex parte

Date of Hearing:            25 June 1996

Date Judgment Delivered:         25 June 1996