Re Smith, K.A. v Ex parte Wilde, W.J. & Pad Investments Pty Ltd

[1985] FCA 329

Re: KEVIN ARTHUR SMITH
Ex Parte: WILSON JOSEPH WILDE and PAD INVESTMENTS PTY LTD
ESTATE No. 26 of 1984
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
Pincus J.

CATCHWORDS

BANKRUPTCY - execution creditor - payment within six months of petition - trustee's right to recover - no exception in favour of creditor who has become "secured".

Bankruptcy Act, s. 118

HEARING

BRISBANE
#DATE 15:7:1985

ORDER

1. The applicant as trustee of the estate of the bankrupt is entitled to be paid by the respondent the amount by which the sum of $251,370.14 received by the solicitors for the respondent on 4 October 1983, in respect of warrant No. 132 of 1983 issued out of the Supreme Court of Queensland, exceeds the taxed costs of the execution which produced the said sum.

2. The respondent pay to the applicant his costs of and incidental to this application to be taxed.

3. The further hearing of the matter be adjourned to a date to be fixed by the Registrar.
   
   NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is an application by Mr W.J. Wilde, the trustee of the bankrupt estate of Kevin Arthur Smith, to recover monies paid under an execution. Although an elaborate argument, to which more detailed reference is made below, was advanced on behalf of the respondent, both the essential facts and the point involved may be briefly stated. Having obtained a Supreme Court judgment against Mr K.A. Smith in damages for deceit, the respondent caused a writ of execution to be issued and property was sold under the writ. The respondent received $251,370.14 as the proceeds of the execution, on 4 October 1983 and on 18 January 1984 the judgment debtor, Mr K.A. Smith, became bankrupt on his own petition. On the face of it, s. 118(1) of the Bankruptcy Act 1966 makes the proceeds recoverable by the trustee and the question is whether there is an implicit exception in s. 118(1), in favour of an execution creditor who becomes, in that capacity, secured.

So far as relevant, s. 118(1) provides that:-

"(1) Subject to sub-section (2), where -

(a) a creditor has, within 6 months before the presentation of a petition, or after the presentation of a petition, against a debtor -

(i) received monies as a result of execution having been issued by him, or on his behalf, against property of the debtor, being moneys that are the proceeds of the sale of property of the debtor that has been sold in pursuance of the process or that was seized, or paid to avoid seizure or sale of property of the debtor, in pursuance of the process . . .

(b) the debtor subsequently becomes bankrupt on, or by virtue of the presentation of, the petition,

the creditor shall pay to the trustee of the estate of the bankrupt the amount by which the amount of those monies exceeds the taxed costs of the execution or attachment, as the case may be."

The provision was inserted by amendment made in 1980. There is no express exception in favour of an execution creditor who becomes secured, and the first question is whether a literal reading results in such an anomaly as to induce one to doubt that it truly represents the legislative intention. Counsel for the respondent pointed out that money might be received in respect of quite an old execution and that, unless s. 118(1) is read as preserving the position of a secured execution creditor, such a creditor might be affected by the provision although he acquired his security well before the six-month period. Parliament can hardly have intended, it was said, so gross a detraction from his security rights. Reference was made to s. 118(9) which, read with s. 118(12), has the effect that charges upon registration of judgments and charging orders in respect of judgments can be attacked only if made within six months before presentation of the petition; counsel argued that such a sharp discrimination, under s. 118(1), against the general class of execution creditors appeared to be irrational. The inter-relationship between s. 118(1) and s. 118(9) is not very clear, in that a creditor who has obtained a charge or charging order more than six months before presentation of a petition, might still be caught by the words of s. 118(1). It is not necessary, for present purposes, to determine whether s. 118(9) is intended to exhaust the topic of the validity, as against the trustee, of proceedings taken to obtain or enforce a charge, or charging order of the kind there mentioned. I have come to the conclusion that neither the possibility that the rights of a creditor obtaining proceeds under an old execution may be affected, nor the contrast between sub-s. (1) and (9) of s. 118, produces such a strange or impractical outcome as to justify making the implication suggested in s. 118(1). The mere appearance of a degree of injustice, consisting in one class of creditors receiving more favourable treatment than another, similar, class cannot justify reading this legislation down, unless the point is reached at which it becomes clear that the differential treatment produced by adherence to the precise language used cannot possibly have been intended. That is far from being so here.

Senior counsel for the respondent advanced a further argument as follows: firstly, prior to the 1980 amendment, inserting the present s. 118, it was possible for an execution creditor, depending upon the stage to which the process of execution had progressed, to be a "secured creditor" for the purposes of the Bankruptcy Act; secondly, the respondent had attained, or should be deemed to have attained, the status of a secured creditor more than six months before the presentation of the petition in the present case - i.e. by 18 July 1983; thirdly, s. 118 should be read, having regard to its history, as preserving the rights of the respondent as such a secured creditor.

The first of these propositions is plainly right, and is illustrated by the remarks of the judges in the three High Court cases to which counsel made reference: MacQuarrie v. Jaques (1954) 92 C.L.R. 262, Hall v. Richards (1961) 108 C.L.R. 84 and Rae v. Samuel Taylor Pty. Ltd. (1963) 110 C.L.R. 517. The second proposition appears to me somewhat doubtful, but I do not find it necessary to determine its correctness, nor to set out the facts or contentions relevant to it. The third proposition is based on the view that the history of s. 118 supports the existence of an intention to preserve the assumed right of the respondent as a secured execution creditor; that is, in my opinion, incorrect. In MacQuarrie v. Jaques at pp. 306-308 Kitto J. explained that prior to 1849, where the debtor's goods were bound in execution before the act of bankruptcy to which the trustee's title related back, the trustee took title under the then English bankruptcy legislation subject to the security, but that was qualified by a statute of that year "which provided that no creditor having security for his debt should receive more than a rateable part of the debt, except in respect of, inter alia, any execution levied by seizure and sale before the date of the fiat or the filing of the petition". By 1883, in England, legislative change had arrived at a position substantially the same, in this respect, as that created by s. 92 of the Australian Bankruptcy Act 1924. That section, his Honour said, made the security "acquired by a creditor by delivering his fi. fa. to the sheriff for execution . . . of no avail against the trustee in bankruptcy unless the conditions laid down are fulfilled". In the second case, Hall v. Richards, Kitto J., with whom two of the other judges agreed, said at pp. 91-92 that a seizure by the sheriff under a fi. fa. produced a binding effect:-

". . . that is enough to constitute a 'charge' and make the creditor a 'secured creditor' within the definition, so that if it were not for such provisions as those of s. 92 of the Australian Act he might realise his security (under s. 60(3)) by completion of the execution (MacQuarrie v. Jaques)."

Again, it is clear enough from this statement that the 1924 analogue of s. 118, which was s. 92, did not preserve the rights of execution creditors who had become "secured creditors" within the bankruptcy definition, unless they complied with the conditions of the section. The third case, Rae v. Samuel Taylor Pty. Ltd. was again on the 1924 Act. As was explained by Menzies J. at p. 526, insofar as s. 92 operated with respect to a judgment creditor who had obtained security, that was to his disadvantage:-

"Where, however, a judgment creditor has obtained security by seizure under a writ, he may be deprived of the advantage of the security unless completion precedes each of the three events mentioned so that, for instance, if sequestration intervenes between seizure and sale, the judgment creditor may not be entitled to the benefit of the execution, i.e., his security."

In my view, so far from this history supporting the notion that s. 118 should be read as subject to an implied exception in favour of secured execution creditors, so to read the section would be to assume the existence of a considerable change in the policy which has underlain provisions of this sort for a century or more. Instead of making the rights of execution creditors who have become "secured creditors" for the purposes of the Bankruptcy Act subject (as they had long been) to fulfilment of the conditions in provisions such as s. 118, the contention advanced by the respondent would make them not so subject - and that, without a word in the 1980 amendment pointing to an intention to do so. Further, it should be noted that the draftsman has, in s. 118(3), been careful to say that a creditor who has complied with sub-s. (1) may prove "as an unsecured creditor", the plain implication being that he must do so even if he had previously been secured.

Although I feel considerable sympathy for the respondent, s. 118(1) appears, in my respectful opinion, quite clearly to catch the payment in question. The only other contention advanced on behalf of the respondent was the half-hearted suggestion that part of the money represented trust funds, the respondent being the cestui que trust; it is enough to say that there is no possible basis in the material for a finding to that effect.

In summary, an execution creditor is not beyond the reach of s. 118(1) by reason of his having, at any time, attained the status of a "secured creditor" for bankruptcy purposes.

The applicant is therefore entitled to the amount specified in s. 118(1), namely the amount by which the sum received as a result of the execution exceeds "the taxed costs of the execution . . ." It does not appear from the material that the respondent ever taxed those costs and I do not know whether it now desires to do so. It will therefore be declared, pursuant to s. 30(1)(b) of the Bankruptcy Act, that the applicant as trustee of the estate of the bankrupt is entitled to be paid by the respondent the amount by which the sum of $251,370.14 received by the solicitors for the respondent on 4 October 1983, in respect of warrant No. 132 of 1983 issued out of the Supreme Court of Queensland, exceeds the taxed costs of the execution which produced the said sum. There will also be an order that the respondent pay to the applicant his costs of and incidental to this application to be taxed. In case any further order is desired, in view of the entitlement of the respondent to deduct the taxed costs of the execution, it will be directed that the further hearing of the matter be adjourned to a date to be fixed by the Registrar.