Terence John Shanahan v Max Christopher Donnelly

Re: TERENCE JOHN SHANAHAN
And: MAX CHRISTOPHER DONNELLY; WAYNE LEONARD LAMB; ANN ELIZABETH LAMB; DAVID
ALEN GOUGE; ALAYNE MARIA GOUGE and CITIBANK SAVINGS LTD
No. N X151 of 1991
FED No. 722
Bankruptcy - Injunctions

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
BANKRUPTCY DIVISION
Foster J.(1)

CATCHWORDS

Bankruptcy - Administration of Property - Part X arrangements - Allegation that property not sold with due regard to obtaining best possible value - matters for court to assess when considering whether to set aside sale.

Bankruptcy - practice and procedure - s 178 Bankruptcy Act - whether section can support application by debtor to have sale of real property by trustee set aside if debtor will not benefit personally in material or financial way from sale.

Injunctions - Interlocutory injunctions - whether serious questions to be tried - where balance of convenience lies.

Bankruptcy Act 1966 (Cth) - s 178, s 188, s 212(a)

Real Property Act 1900 (NSW)

Conveyancing Act 1919 (NSW)

HEARING

SYDNEY

#DATE 18:5:1992

Counsel for the Applicant: Mr C.R.C Newlinds

Instructed by: Kemp, Strang and Chippindall

counsel for the 1st Respondent: Mr A.C. Hogg

Instructed by: Simon Beverly and Associates

Counsel for the 2nd Respondents: Mr I.R. Hughes (Solicitor)

Instructed by: Weaver and Hughes

Counsel for the 3rd Respondent: Mr S.D. Epstein

ORDER

THE COURT ORDERS THAT:

1. the interlocutory injunction granted on 14 May 1992 in the terms specified in paragraphs 2, 4 and 7 of the

Application to the Court is discharged;

2. the applicant pay the costs of the respondents.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

These proceedings have been brought by way of application supported by an affidavit of the applicant. Ex-parte interlocutory relief was sought and granted on 14 May 1992, when I made orders in accordance with certain paragraphs of the application. The orders were limited to expire at 4 pm 18 May 1992. As the proceedings have gone beyond that time I have extended the interlocutory injunctions that I granted on 14 May 1992 until the disposal of this hearing.

The orders sought in the application all relate to a property which was purchased by the applicant, jointly with his wife, on 27 August 1985. The property is a rural property situated at Blayney and now known as "The Pines". When the property was purchased by the applicant in this way it was done so as a result of finance provided by the French Australian Financial Corporation Limited which has been referred to in the argument before me as the "French Bank". I shall adopt that terminology for ease of reference. The property consisted of three parcels of land under the Real Property Act 1900 (NSW) (the "Real Property Act") and one parcel under Old System Title. As a result of that fact, two separate mortgages were granted by Mr Shanahan and his wife to the French Bank to secure the loan obtained to enable purchase of the property. One mortgage was a Real Property Act mortgage over the three Real Property Act parcels and the other was an Old System common law mortgage.
From time-to-time after the property was purchased on 30 September 1985, further loans were made by the French Bank with the result that by mid-1989 an amount of approximately $300,000 was owing to the bank. On 14 June 1989, as a result of a desire to re-finance the property which was then being operated as a horse stud, Mr Shanahan and his wife approached and obtained approval from Citibank Savings Limited ("Citibank"), the third respondent in these proceedings, for re-financing. The re-financing obviously required that the French Bank be paid out in respect of the amounts of its loans and that it discharge its mortgage securities over the property "The Pines" so that fresh mortgages could be given by the Mr and Mrs Shanahan to Citibank, who was to become the new mortgagee.
It also appears that Citibank took other security at the time, the details of which are of no importance for these proceedings. What is of importance, however, is that for some reason or other, which does not matter for present purposes, despite the intention of the parties to the contrary the mortgage in respect of the Old System land was not discharged and a fresh mortgage was not taken out over that land in favour of Citibank. Clearly, this was against the intentions of the parties. There is no doubt expressed whatsoever in any of the material put before me, that Citibank was to become the first mortgagee over the whole of the property, "The Pines", which would have necessitated it becoming the mortgagee over the Old System parcel of that horse stud property.
It is clear that the Real Property Act mortgages were entered into effectively and that the mortgage over the Old System property was not entered into. It seems that the mortgagee over that property continued to be the French Bank, despite it being quite obviously no part of the intentions of all concerned that that should occur.
Notwithstanding the re-financing of the property and the horse stud business in this way, financial problems overtook it to an even greater extent. Mr Shanahan, in his affidavit, indicates that severe financial problems had occurred by September 1991. The horse breeding business was not being conducted at a satisfactory financial level and Mr Shanahan's other business which was necessary, obviously, for his overall financial health was also in considerable financial difficulties. The details of these matters are set out in his affidavit and I need not set them out again here.
The result of these problems was that in 1991 Mr Shanahan approached the first respondent, an accountant well versed in matters of insolvency, to seek advice as to what should best be done. He received and accepted advice that he should approach his creditors which a view to entering into an arrangement under Pt X of the Bankruptcy Act (1966) (Cth) (the "Act"). On 6 September 1991 he signed an authority under s 188 of the Act, whereby the first respondent was appointed as his controlling trustee under that section. The preliminary step having been taken, Mr Donnelly, as the trustee, took the other steps required under Pt X to advance the intended scheme of arrangement. These matters are set out in Mr Shanahan's affidavit which annexes the relevant documentation which came into existence and insofar as it may be necessary, those matters are supplemented by the affidavit of Mr Donnelly which has been filed in these proceedings.
The relevant creditors' meetings were held after the necessary documentation had been sent to them. The necessary resolutions were passed at those meetings. The significant feature of this material, which has been placed before the Court, is that throughout that documentation and at the meeting that was held, the situation in relation to the property "The Pines" was put forward as being simply that it was under first mortgage in its entirety to the third respondent, Citibank Savings Limited.
It was not suggested that only a portion of the property was, in fact, so mortgaged. Indeed, it is a totally reasonable inference from what has been put before the Court, that all parties at that point in time were under a mis-apprehension as to the problem that existed in relation to the mortgage of the Old System parcel.
The resolutions were, as I have said, fully and properly passed. They constituted Mr Donnelly the trustee of the divisible property of the applicant. A Deed of Assignment was duly entered into as a result of the resolutions. That deed is part of the evidence before the Court. The property of the applicant and indeed of his wife that passed under that deed to Mr Donnelly included, of course, the interest that they had in the property "The Pines". Having regard to the existence of the first mortgage, that property consisted of an interest generally described as an equity of redemption. Mr Donnelly, therefore, had as part of the property under his control and in respect of which he could exercise control to the full extent allowed by the relevant sections of the Act, the equity of redemption which existed in respect of the Old System property. This was an equity to redeem in relation to a mortgage which at that point of time was in favour of the French Bank.
It is clear from the material before me that at some point of time it became obvious that the problem to which I have adverted in respect of this mortgage in fact existed. Citibank sought to exercise its power of sale under the mortgage that it understood itself to have over the entirety of the property. It gave notices under the Real Property Act in relation to the non-payment of amounts owing under the mortgage and it then took proceedings to put the property up for auction. In relation to that auction Mr Shanahan has made complaints. These complaints amount to, in relation to the auction itself, a general complaint that the property was not sold with due regard to obtaining the best possible value.
The auction was first set up for 6 September 1991. It was abandoned because by that time it had become obvious that there was a problem in relation to Citibank's title. A further auction was held on 13 December 1991. The reserve price was not reached and thereafter, as a result of negotiations after the auction, a contract of sale was entered into between Citibank and the second respondents as purchasers. Citibank was, of course, purporting to sell the property under its power of sale. These proceedings have essentially been brought to restrain the completion of that contract of sale. The interlocutory relief granted last Thursday had the effect of preventing the contract being completed until the matter came before the Court, as it has done today.
Various submissions have been put to me on behalf of the applicant pointing to problems that relate to the situation at the time of the auction and potentially as at present in relation to the ability of Citibank Savings Limited to provide title to the purchasers as a result of the problems relating to the mortgage to The French Bank. It is fairly clear to me that those problems have not yet been fully sorted out. It is quite clear that the French Bank is seeking to co-operate. I am told it has provided to Citibank the deeds. However, Citibank has not yet, as I see the situation on the facts before me, as a matter of conveyancing been put into the position of being the mortgagee and being in a position to exercise the power of sale.
There is an outstanding problem as to whether a power of sale could have been exercised at the time of the auction because no appropriate notice under the Conveyancing Act 1919 (NSW) has been given in respect of the Old System mortgage. It could hardly have been given because it would seem that Citibank is not yet the mortgagee of the Old System land. I have no doubt, however, on what has been put before me, that it is well within its power, if co-operation is not otherwise obtained, for it to call upon the relevant parties to execute the necessary documents to put it in that position. That situation, however, probably is of no real relevance because at a point of time in the history of the proceedings which I have been relating, the first respondent took the position, not unreasonably one would think, that in the interests of the creditors he should resist a simple request on the part of the third respondent that, in effect, he hand over this parcel of land so that it could be sold by the third respondent in order to defray the amounts owing under the mortgage.
I am told, and there is no dispute about this, that this attitude led to the institution of proceedings in the Supreme Court of New South Wales by Citibank, against the first respondent as trustee under this deed of arrangement. Those proceedings were compromised and although the compromise has not been implemented, the situation is that Mr Donnelly on behalf of the creditors is to receive the amount of $20,000 and he is to take all necessary steps to put Citibank in the situation of being able to dispose of the whole of the property on the basis that he might otherwise have been impelled to do so but, nevertheless, within the area of totally legitimate compromise of those proceedings in the Supreme Court it could appear quite likely that the creditors have, in fact, done better as a result of these transactions than they might otherwise have done.
The proceedings brought by Mr Shanahan have been brought, I am quite satisfied, for the most altruistic of reasons. He wishes to see that the creditors receive as much as is possible from his financial problems. He has brought these proceedings, obviously, in the hope that the contractual arrangements entered into between Citibank and the purchasers may be set aside and a fresh auction brought about with the result he hopes of a larger and more appropriate price being achieved.
I have, however, to consider at this point of time whether the injunction which has been previously granted, restraining those matters proceeding, should, in effect, be continued. In this context I note, although it is not completely clear from the application that it is intended under paragraph 6(b) that the applicant seek orders that the trustee seek some appropriate amount of damages from the third respondent in the event that the third respondent has shown to have acted improperly as a mortgagee in relation to this sale. In other words, under that aspect of the application it is intended to seek that the amount available for creditors be augmented by some appropriate award of damages if that can be otherwise established.
It was put to me very forcefully on behalf of Mr Shanahan that an injunction should be continued in these proceedings, up to the hearing, because the situation is one where it would be virtually impossible to arrive satisfactorily at an appropriate award of damages if liability could be established pursuant to this application. I am not satisfied that that is the position. If, indeed, the question of this property having been disposed of at an undervalue was to be resolved in favour of the applicant I do not think there would be grave and certainly not disabling problems in arriving at a just award of damages through the assistance of appropriate valuation evidence.
The other matter which has been raised in opposition to the continuance of this injunction is the standing of Mr Shanahan to be an applicant at all. It is put to me that the only proper applicant in proceedings of this kind, having regard to the existence at appropriate times of the deed of assignment, would be the first respondent as trustee of the divisible property of the applicant. It has been brought to my attention of course that the deed, itself, has come to an end by virtue of clause 8. However, it is apparent that, notwithstanding the provisions of that clause, the rights and powers of the trustee continue after the termination of the deed. This is provided for in cl 14 and that power goes to the getting in, realising and distributing of the divisible property of the debtors. That power does not come to an end until final distribution has been made.
Mr Newlinds, who has argued the case for his client with great skill, has founded submissions as to the standing of the applicant, upon s 178 of the Act. I have allowed an amendment of the application to substitute s 178 for s 212(a), where it appears in paragraph 6 of the statement of claim. Section 178 provides that:

"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."

This is of course a very wide section. Mr Newlinds submits to me, that allowing for the interpolation of debtor for bankrupt in the section which is provided for in Pt X of the Act, the section is wide enough to enable the applicant to be relevantly regarded as a person affected by the act or decision of the trustee sufficient to enable him to come to this Court and seek the orders that he does. As against this, it has been put on behalf of all the respondents that a person seeking to rely upon this section must necessarily be affected in some material or financial way and not simply be affected by being thwarted in a legitimate desire to see that his creditors are paid as much as possible.
I do not think there is any evidence before me which could significantly suggest that there would be any prospect of the applicant sharing in the proceeds of the sale of "The Pines" property by the third respondent even if the current contract were not to be proceeded with and the property re-submitted to auction. There is nothing before me which suggests that a price could be realised which would provide any material or financial benefit to the applicant on his own account.
It is not necessary for me to come to any final decision as to the meaning of this section. I am inclined, however, very much to the view that wide as it is in its expression, it is not wide enough to encompass within its terms Mr Shanahan as being a person relevantly affected within its terms. That is not a matter upon which, however, it is necessary for me in these proceedings to come to any final decision. It does, however, affect the view that I must form as to whether there is a serious issue to be tried. On balance, and having given full consideration to all the arguments that have been put before me and the material that has been put before me, I do not find that there is relevantly a serious issue to be tried. This does not, of course, bring these proceedings to an end.
The claim remains on foot. It does, however, have a significant bearing upon whether I should continue the interlocutory relief. Even if I had not come to that conclusion I would not be satisfied, having regard to the views I have formed, as to the availability of damages if the claim can be established that the balance of convenience has been shown to weigh in favour of the applicant. On both counts, relevant to be considered in relation to the continuance of interlocutory relief, I have come to the conclusion that I should find against the applicant. The result is, that in the circumstances of my having continued the injunction, I should now simply discharge it.
In the circumstances I feel that costs must follow the event and I accordingly order that the applicant pay the costs of the respondents.

[1992] FCA 722

18 MAY 1992