Secure Funding Pty Ltd v Bettini
[2011] NSWSC 557
•10 June 2011
Supreme Court
New South Wales
Medium Neutral Citation: Secure Funding Pty Ltd v Bettini [2011] NSWSC 557 Hearing dates: 24 May 2011 Decision date: 10 June 2011 Jurisdiction: Common Law Before: Harrison J Decision: Plaintiff's notice of motion dismissed with costs
Catchwords: BANKRUPTCY - control of persons and property of bankrupt - s 124 Civil Procedure Act 2004 - whether garnishee order a security for the purposes of s 58(5) of the Bankruptcy Act 1966 - plaintiff not entitled to relief - garnishee order not a security within the meaning of s 58(5) Legislation Cited: Bankruptcy Act 1966
Civil Procedure Act 2005Cases Cited: Blacktown Concrete Services Pty Ltd v Ultra Refurbishing & Construction Pty Ltd (in liq) (1998) 43 NSWLR 484
Channel Seven Sydney Pty Ltd v Mahommed [2010] NSWCA 335
Chatterton v Watney (1881) 17 Ch D 259
Deputy Commissioner of Taxation (NSW) v Donnelly (1989) 25 FCR 432
Hall v Richards [1961] HCA 34; (1961) 108 CLR 84
Mahommed v Channel Seven Sydney Pty Ltd [2009] NSWSC 631
Melsom v Vanpress Pty Ltd (1990) 2 ACSR 38
Re Barrier Reef Finance and Land Pty Ltd (1989) 1 Qd R 252
Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197Category: Interlocutory applications Parties: Secure Funding Pty Ltd (Plaintiff)
Peter Shan Mohammed (Third Defendant)Representation: - Counsel:
A Greinke (Third Defendant)
- Solicitors:
Norton Rose (Plaintiff)
Morgan Conley Solicitors (Third Defendant)
File Number(s): 2009/295872
Judgment
HIS HONOUR : Peter Mahommed was defamed in the current affairs program "Today Tonight" broadcast by a Sydney television station. He successfully sued and recovered $225,000 damages: see Mahommed v Channel Seven Sydney Pty Ltd [2009] NSWSC 631; Channel Seven Sydney Pty Ltd v Mahommed [2010] NSWCA 335.
The Court of Appeal decision was published on 7 December 2010. Before then, on 24 November 2010, Secure Funding Pty Ltd had obtained judgment against Mr Mahommed for $272,215.56 in these proceedings. On 21 December 2010, on the application of Secure Funding, a garnishee order was made against Channel Seven and served upon it on 24 December 2010. The garnishee order attached any debt owed by Channel Seven to Mr Mahommed in respect of the damages awarded to him in the defamation proceedings. The garnishee order was made in accordance with Division 4 of UCPR 39. It took effect on 24 December 2010 in accordance with UCPR 39.39. On 20 January 2011 the Official Receiver accepted a debtor's petition presented by Mr Mahommed and trustees of his estate in bankruptcy were appointed.
Secure Funding seeks a declaration in these proceedings that Channel Seven is liable to pay it the amount attached by the garnishee order in accordance with s 124 of the Civil Procedure Act 2005 . That section is as follows:
" 124 Procedure where garnishee order not complied with
(1) On the application of a judgment creditor who considers that a garnishee order has not been complied with, the court:
(a) may hear and determine any question as to the liability of the garnishee to pay the debt, wage or salary sought to be attached by the garnishee order, and
(b) if satisfied that the garnishee is so liable, may give judgment in favour of the judgment creditor against the garnishee:
(i) for the amount of that debt, wage or salary, or
(ii) for the unpaid amount of the judgment debt,
whichever is the lesser.
(2) The court may refuse to give such a judgment if it is of the opinion that such a judgment should not be given.
(3) Without limiting subsection (2), the reasons that may lead the court to form such an opinion may include:
(a) the smallness of the amount outstanding under the judgment, and
(b) the smallness of the debt, wage or salary to be attached.
(4) As between the garnishee and the judgment debtor, an amount paid to the judgment creditor by the garnishee under a judgment given under this section is taken to have been paid to the judgment debtor."
Channel Seven has not paid any of the damages awarded to Mr Mahommed, either to him or to Secure Funding, and has indicated that it will abide the outcome of these proceedings.
There is no issue that the damages otherwise payable to Mr Mahommed by Channel Seven fall within the exception of "divisible property" in s 116(2)(g) of the Bankruptcy Act 1966 . The single issue for determination by me is whether in the circumstances of this case, s 58 of the Bankruptcy Act creates a general stay on any outstanding proceedings or enforcement action by Secure Funding against Mr Mahommed, or whether Secure Funding is a "secured creditor" within the meaning of s 58(5) of the Act.
Section 58 of the Act is in the following relevant terms:
" 58 Vesting of property upon bankruptcy--general rule
(1)...
(3) Except as provided by t h is Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
(4) ...
(5) Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his or her security."
Secure Funding contends that a garnishee order is a security for the purposes of s 58 of the Act. Mr Mahommed says that it is not. For the reasons that follow, I consider that Secure Funding is not a secured creditor and is not entitled to the relief that it seeks.
In Blacktown Concrete Services Pty Ltd v Ultra Refurbishing & Construction Pty Ltd (in liq) (1998) 43 NSWLR 484 at 496-502, Santow J described a number of "matters of significance" relating to the effect of a garnishee order within the context of a company winding up:
"Thus the only right the judgment creditor obtains from the making of the garnishee order is a statutory right, which may be described as a lien conferring the right to prevent the garnishee from paying over the debt to the judgment debtor ( Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197 at 199-200 per McPherson SPJ). I do not consider Cotton LJ in Re Combined Weighing & Advertising (supra) at 104 should be understood as equating 'lien' with an equitable security. With respect, I prefer the view of McPherson SPJ to Derrington J (at 204) in so concluding. McPherson SPJ impliedly recants from his earlier view that the garnishor 'acquires the status of a secured creditor' on service of the garnishee order - which he expressed extrajudicially in 1987 in McPherson, 'The Law of Company Liquidation (LBC 1987) at 194 .
*****
However, the garnishor attaching debts owed to the judgment debtor remains subject to such rights and equities as - pre-attachment - existed over the particular debt owed to the judgment debtor: see Norton v Yates [1906] 1 KB 112 following Re Combined Weighing & Advertising Machine Co . An example of such an equity would be a pre-existing fixed charge over property of the judgment debtor where it covered the debt owed by the garnishee to the judgment debtor: Norton v Yates (supra); Badeley v Consolidated Bank (1888) 38 ChD 238 at 257 per Cotton LJ, CA; Re London Pressed Hinge Co Ltd; Campbell v London Pressed Hinge Co Ltd [1905] 1 Ch 576 at 581 per Buckley J, CA; Cairney v Back [1906] 2 KB 746 and Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) (supra) .
*****
It is true that in Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) , as also more recently in D M & B P Wiskich Pty Ltd v Drivehard Pty Ltd (supra) nothing turned on whether garnishee rights were or were not proprietary rights, or constituted a security interest. Whatever they were, such a prior charge given by the judgment debtor must prevail. In the present case, we are not however concerned with competition between a prior chargee and the judgment creditor/garnishor, but with competition between a liquidator and judgment creditor/garnishor. In order to resolve the outcome of that competition, it is necessary to look more closely at the rights conferred by a served garnishee order, against the foregoing background.
*****
Whatever its precise juridical taxonomy, it is said that a garnishee order operates as ' merely an order that a sum equal to the original debt shall be paid by the garnishee to the judgment creditor ' ; Edward I Sykes & Sally Walker, The Law of Securities (LBC, 1993) at 25. The garnishee order prevents payment of the debt to the judgment debtor. This means that when the garnishee pays to the garnishor, directly or via the registrar, it is paying neither the amount garnisheed nor the judgment debt, but an amount equal to the latter by reference to the former; it is the statutory consequence of that step which in effect deems the amount garnisheed to be satisfied and discharged pro tanto by force of s 54.
*****
The better view is that the statutory indebtedness does not give rise to a proprietary right on the part of the garnishor. But, whether it does or not, that obligation of the garnishee to make payment to the garnishor is the creation of statute rather than the product of any deemed assignment of the attached debt or realisation of security.
*****
Even if the judgment creditor were to obtain what could be characterised as a proprietary interest in the relevant garnished debt or debts - contrary to my conclusion in (3) above - the right of the garnishor is a statutory right against the garnishee. It depends only upon an effective attachment of relevant debts. That requires that there be no pre-existing equities which would prevail over the statutory rights of the garnishor. Liquidation which follows service of the garnishee order does not pre-exist attachment. It is not therefore analogous to a pre-existing equity."
Section 5 of the Bankruptcy Act defines a "secured creditor" as a "person holding a mortgage, charge, or lien on property of the debtor as a security for a debt due to him or her from the debtor". Secure Funding contends that a garnishee order creates such a charge, lien or other right over the debt that it must be paid to it as the judgment creditor rather than to Mr Mahommed as the judgment debtor and that in the absence of payment, it may enforce its rights pursuant to the garnishee order.
In Hall v Richards [1961] HCA 34 ; (1961) 108 CLR 84, a fter considering a number of cases involving garnishee orders, Kitto J said at 92:
"The analogy in the case of a garnishee order is obvious. Such an order, though not working an assignment or giving the judgment creditor any proprietary interest in the debt, yet gives him positive rights with respect to it which a creditor having no more than a judgment does not possess; not merely a negative right to prevent the judgment debtor from accepting payment of the debt or disposing of it, but positive rights for the recovery of what is owing on the judgment, namely a right to give a valid receipt and discharge for the money, and a right in case on non-payment to obtain execution against the garnishee: In re Combined Weighing and Advertising Machine Co. (1889) 43 Ch D 99, at pp 105, 106 . "
Hill J reached similar conclusions in Deputy Commissioner of Taxation (NSW) v Donnelly (1989) 25 FCR 432 . His Honour referred to Kitto J's remarks in Hall v Richards and continued at 456 as follows:
"The case of Re Combined Weighing & Advertising Machine Co to which Kitto J referred made it clear that the service of a garnishee order did not create as between the garnishor and garnishee any debt either at law or in equity entitling that person to petition for the winding-up of the company against which the garnishee order was obtained. The nature of the rights obtained under a garnishee order were however discussed by Cotton LJ (at104):
'Now, what does the garnishee order do? It is no assignment to any extent of the debt due by the garnishee to the debtor of the garnishor; it merely gives the garnishor a lien upon that debt.'
Further in his Lordship's view a mere garnishee order attaching a debt and enabling the person who has obtained the order to give a good discharge did not work an equitable assignment. Bowen LJ described the effect of a garnishee order at 105 in the following terms:
'There is no assignment in equity, and I cannot see that there is any legal debt. There is an order of a court of common law that a sum equal to the original debt shall be paid by the garnishee to the judgment creditor, or as an alternative that execution may issue; but I think that the relation which is created by that section and the orders made under it does not create a debt at all; it creates an attachment of a portion of the debt, and in case of non-payment confers the right of issuing execution and nothing more.'"
Re Barrier Reef Finance and Land Pty Ltd (1989) 1 Qd R 252 involved an unfair preference action in relation to a company. Ultimately this case decided that the service of the relevant garnishee order was made after the commencement of the winding up of the company and was therefore ineffective. Whilst the facts in that case were different, the Court set out at 253-4 the following general principles in relation to garnishee orders before coming to that conclusion:
"A garnishee order nisi when served creates an attachment of the debt owing by the garnishee and, in the case of non-payment, confers the right of issuing execution: Re Combined Weighing and Advertising Machine Co (1889) 43 Ch D 99 at 105 per Bowen LJ. True it is that it creates no debt as between garnishor and garnishee: ibid. It is not an assignment at law or in equity: ibid at 104 per Cotton LJ; Chatterton v Watney (1881) 17 Ch D 259, so that the garnishee cannot, for example, present a petition for winding up or take garnishee proceedings against a debtor of the garnishee: McKenzie & Co v Walker (1891) 17 VLR 221. It does however 'bind the debt' so that the garnishee may not pay his creditor and the garnishor may give a good discharge and, if the debt be not paid, may execute.
In Re Stanhope Silkstone Collieries Co (1879) 11 Ch D 160 Sir George Jessel MR at 161 observed:
'The attachment or garnishee order is a mode of enforcing by execution the payment of the debt in the original action; and the order that the debt be attached and that the garnishee, that is, the debtor of the original judgment debtor, shall appear to show cause why he should not pay the debt, does not operate to give the plaintiff in the original action any security until it is served.'
This statement has long been accepted as authority for the proposition that on service of the garnishee order nisi, the garnishor obtains a security; and in Combined Weighing at 104 Cotton LJ said:
'Now, what does the garnishee order do? It is no assignment to any extent of the debt due by the garnishee to the debtor of the garnishor; it merely gives the garnishor a lien upon that debt.'
In Galbraith v Grimshaw [1910] 1 KB 339 Farwell LJ at 343 after citing the passage from Stanhope Silkstone Collieries Co which I have set out went on to say:
'It is plain that Jessel MR means that as soon as the order is served it does give the judgment creditor some security. It does not, it is true, operate as a transfer of the property in the debt, but it is an equitable charge on it, and the garnishee cannot pay the debt to anyone but the garnishor without incurring the risk of having to pay it over again to the creditor.'
His Lordship cited as authority for that statement the case of Rogers v Whiteley [1892] AC 118 Galbraith v Grimshaw was affirmed by the House of Lords [1910] AC 508. The case was one of bankruptcy. The speeches all emphasised the importance of the fact that the attachment of the debt, which occurred on service of the garnishee order nisi, was earlier than the making of the sequestration order. See Lord Loreburn LC at 510; Lord Macnaghten at 511. At 512 Lord Dunedin observed:
'I think that the general principle which underlies any bankruptcy system is that after bankruptcy the bankrupt is no longer really the owner of his own property, but holds his own property as trustee for the whole of his creditors for equal division.'"
Further, in Melsom v Vanpress Pty Ltd (1990) 2 ACSR 38 , Malcolm CJ made the point at 116 that:
"A garnishee order, as the learned trial judge pointed out, does not create the relationship of debtor and creditor between the garnishee and the garnishor. It merely gives the garnishor a lien upon the identified debt: see Re Combined Weighing and Advertising Machine Company (1890) 43 Ch D 99; Norton v Yates [1906] 1 KB 112. "
In the bankruptcy context, there has been some debate concerning the scope of what amounts to security. In Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197 (a case relating to the priority claims between a creditor holding a garnishee order and a creditor holding a floating charge) McPherson SPJ made the following point at 200:
"The reference to 'security' is apt to mislead unless one bears in mind the statutory context in which the courts in this and other contemporary cases were speaking. There are decisions recognizing that at the stage of seizure under fi. fa. an execution creditor became 'secured'. The decisions in question arose, however, out of contests with trustees or assignees in bankruptcy of execution debtors."
In holding that the rights of the floating charge holder should prevail, McPherson SPJ at 200-1 quoted with approval from Chatterton v Watney (1881) 17 Ch D 259 at 262:
" The effect of a garnishee order is to bind the debt attached and to prevent the creditor from receiving it; and when it is made absolute it gives the judgment creditor a right to recover payment from the garnishee, and by rule 8 it is provided that payment made by the garnishee under the proceeding shall be a valid discharge to him as against the judgment debtor. There is nothing in the terms of the General Order to affect any security for the debt, it only takes away the right of the judgment debtor to receive the money and gives the judgment creditor a right to receive it. It has not the effect of transferring the security, nor does it give the person who obtained the garnishee order any right to the security or any claim against the land comprised in it."
McPherson SPJ then stated:
" After that, the decision in Ex parte Joselyne ceased to be authoritative on this point, thus opening the way for the Court of Appeal in Re Combined Weighing and Advertising Machine Company (1889) 43 Ch.D. 99 to hold that a garnishee order absolute effects no assignment either at law or in equity of the debt attached.
Not without an occasional backward glance (as in Pritchett v. English & Colonial Syndicate [1899] 2 Q.B. 428, 436), later decisions have remained faithful to this principle. In the same way as the execution debtor cannot sell goods after seizure under fi. fa. , so neither he nor the garnishee can dispose of the debt after the order is served. That is primarily what is meant by the ' binding ' effect of the execution process: Bond v. McClay [1903] St.R.Qd. 1, 6-7; McQuarrie v. Jaques (1954) 92 C.L.R. 262, 272-273, per Dixon C.J. The debt is attached in the hands of the garnishee to be dealt with as the court allows. The judgment creditor can give a valid receipt for the money and, in the event of non-payment, can have execution against the garnishee; but until the money is paid over no proprietary interest in the debt passes. See Hall v. Richards (1961) 108 C.L.R. 84, 92, per Kitto J. (with whom Dixon C.J. agreed); Clyne v. Deputy Commissioner of Taxation (1981) 150 C.L.R. 1, 27, per Brennan J."
Secure Funding submitted that these passages support the following propositions:
(a) A garnishee order does not effect an assignment at law or in equity.
(b) The service of a garnishee order means that the debtor cannot dispose of or otherwise deal with the debt after the garnishee order is served.
(c) The judgment creditor is able to give a valid receipt for the payment.
(d) The cases have used references to "liens" and "security" to describe the nature of the rights enjoyed by a judgment creditor who has served a garnishee order. Whether "security" is an apt label, the service of a garnishee order creates additional rights:
(i) requiring the garnishee to pay the creditor direct unless the debt is subject to some pre existing equity precluding such effective attachment;
(ii) preventing the debtor from disposing of or otherwise dealing with the debt after service of the garnishee order;
(iii) creating a statutory right by the creditor directly against the garnishee; and
(iv) enabling the creditor to give the garnishee a receipt for the payment of the debt.
(e) Those rights should be available unless there is some reason to deny them. For example, the earlier rights available to creditors granted a security before the service of the garnishee order or some specific statutory provision to the contrary.
In summary, Secure Funding submitted that s 58 did not prevent either direct action being taken by it against Mr Mahommed to realise its rights, or action taken against him indirectly by the issue of a garnishee order to Channel Seven.
Mr Mahommed contested these contentions. He also referred to Relwood but made the following submissions. That case held that a garnishee order had no effect on the property in a debt until it was actually paid. A garnishee order is a process for execution, which is equivalent in effect to execution by means of a writ of fi fa. It is a matter of settled law that neither the delivery of a writ of fi fa nor seizure of the goods under it conferred any property in the goods on an execution creditor. References in the authorities to an executing creditor being somehow "secured" were instances of special definitions in earlier iterations of the bankruptcy legislation, which are no longer applicable under the present Act. The "attachment" effected by a garnishee order does not create any proprietary interest in the debt, but only confers rights on an execution creditor to prevent the debtor from accepting payment or disposing of the debt, and to give a valid receipt and discharge for the money when received.
Conclusion
Santow J in Blacktown Concrete Services adopted the reasoning of McPherson SPJ in Relwood . His Honour found that the view that a garnishee created an equitable charge was "inconsistent with the trend of authority", and that the only rights a judgment creditor obtained by a garnishee order were statutory rights. Santow J held that a garnishee order does not render the garnishor a secured creditor in relation to the attached debt: at 496F and 497D. I respectfully agree. In my view, Secure Funding is not a secured creditor for the purposes of s 58(5) of the Bankruptcy Act .
However, further provisions of the Act indicate that a garnishee does not create a security in this case. Section 118 of the Bankruptcy Act provides relevantly as follows:
" 118 Execution by creditor against property of debtor who becomes a bankrupt etc.
(1) Subject to subsection (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 moneys as a result of execution having been issued by him or her, or on his or her 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 were seized, or paid to avoid seizure or sale of property of the debtor, in pursuance of the process; or
(ii) received moneys as a result of the attachment by him or her, or on his or her behalf, of a debt due to the debtor; and
(b) the debtor subsequently becomes a 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 moneys exceeds the taxed costs of the execution or attachment, as the case may be.
(2)...
(4) Where:
(a) a creditor has, in pursuance of subsection (1), paid to the trustee of the estate of a bankrupt the proceeds of the sale of property or other moneys that were received as a result of execution having been issued by him or her, or on his or her behalf, against property of the bankrupt or of the attachment by him or her, or on his or her behalf, of a debt due to the bankrupt; and
(b) that property or debt would not have been property divisible amongst the creditors of the bankrupt if the bankrupt had become a bankrupt immediately before the execution was issued or the debt was attached, as the case may be;
the trustee shall pay those proceeds or other moneys to the bankrupt or to a person authorized by the bankrupt in writing for the purpose."
Under these provisions, a creditor, who within six months before or following presentation of a petition has received monies "as a result of the attachment by him...of a debt due to the debtor", must pay those monies to the trustee in bankruptcy. "Attachment" refers to the curial attachment of debts of which a garnishee order is one form. If the curial attachment of debts, whether by writ of fi fa , by garnishee or otherwise, created an equitable charge in favour of the creditor, then such a creditor would be secured and take priority over other creditors. Instead, s 118 requires a creditor receiving monies by attachment to pay those monies to the trustee in bankruptcy, and to rank pari passu with the bankrupt's unsecured creditors.
That is what should happen here. Any monies that Secure Funding might receive from Channel Seven would be payable to Mr Mahommed's trustee. As the monies are not property divisible amongst his creditors by virtue of s 116(2)(g) of the Act, they are payable by the trustee to Mr Mahommed. Secure Funding's application for a declaration is therefore ill conceived. Its notice of motion filed on 18 April 2011 should be dismissed with costs.
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Decision last updated: 10 June 2011
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