Flying Fighters Pty Ltd v Official Trustee in Bankruptcy

In this matter, two aircraft and a charge to which they were subject had been forfeited to the Commonwealth under the Proceeds of Crimes Act 2002 (Cth). The applicant later obtained orders from the Court of Appeal declaring that it had legal ownership of the aircraft prior to forfeiture subject to the charge, and requiring the Commonwealth to transfer ownership and deliver possession. A delegate of the Commonwealth purported to appoint receivers to the aircraft under the charge. The question for Brown J was whether that appointment was valid. With respect to the issue considered in this note, Brown J held that upon forfeiture there was a merger of the legal interest in the aircraft and security interest under the charge, with the result that the right to appoint a receiver did not remain. As such, the appointment was invalid.

Brown J

10 May 2019

Background

Flying Fighters Pty Ltd (“Flying Fighters”) owned two aircraft. [2]. Merrell Associates Ltd (“Merrell”) held a charge over the aircraft (“the Merrell charge”). [2]. In April 2005, the aircraft and the Merrell charge were forfeited to the Commonwealth under the Proceeds of Crime Act 2002 (Cth) (“the POCA”). [5]. In October 2006, five companies, including Flying Fighters, made an application seeking orders under s 102 of the POCA in respect of various property forfeited to the Commonwealth, including the aircraft. [6]. Ultimately, Flying Fighters obtained orders from the Court of Appeal declaring that it had legal ownership of the aircraft subject to the Merrell charge immediately prior to the forfeiture of those aircraft to the Commonwealth, and an order that the Commonwealth transfer its interest in the aircraft to Flying Fighters and deliver possession of the aircraft. [11].

In February 2018, the third and fourth respondents were appointed as receivers in respect of the aircraft at the instigation of the Official Trustee in Bankruptcy, as a delegate of the Commonwealth of Australia, pursuant to the Merrell charge forfeited to the Commonwealth. [12]. On the day that the aircraft were due to be delivered to Flying Fighters, the Official Trustee wrote to the solicitors for Flying Fighters informing them that receivers had been appointed pursuant to the Merrell charge and that compliance with the order requiring the Commonwealth to transfer ownership and deliver possession would be effected by delivering the aircraft to the receivers. [13]. Flying Fighters disputed this. [13].

Supreme Court

Flying Fighters applied to the Supreme Court, challenging the appointment of the receivers by the Official Trustee exercising powers under the Merrell charge. [1]. Flying Fighters contended that the Commonwealth did not have the right to appoint the receivers and that their appointment was invalid. [15]. The application was opposed by the respondents (“the Commonwealth parties”). The question for Brown J was whether the appointment of the receivers in respect of the aircraft was valid. [14]. A number of issues arose for decision. [15]. Only the first issue is considered in this note: whether, upon forfeiture of the aircraft to the Commonwealth pursuant to s 96 of the POCA, the charge ceased to operate because there had been forfeiture to the Commonwealth of both the asset and the charge, as a result of which the charge was extinguished. [15]. Other issues, relating to estoppel and limitation periods, are not considered in this note.

Submissions

Under s 96 of the POCA, the aircraft and the charge “vest[ed] absolutely” in the Commonwealth on forfeiture. [5]. Flying Fighters argued that upon forfeiture of the aircraft and the charge to the Commonwealth there was a merger of interests and the charge was extinguished, given that the Commonwealth became the legal owner of the aircraft as well the beneficiary of the charge. [56]. The Commonwealth parties submitted that no merger was effected and relied on s 17 of the Property Law Act 1974 and the operation of equity. [62]. Section 17 provides that “[a]n estate does not merge by operation of law only if the beneficial interest in the estate would not be merged or extinguished in equity”. [62]. One of the arguments advanced by the Commonwealth parties was that as there was no statement of the parties' intentions or conduct from which such intention could be inferred or implied, equity in the present case required the Court to apply the most advantageous position to the Commonwealth as the party acquiring both estates. [62].

Decision

Brown J held that upon forfeiture there was a coincidence of interests that vested absolutely in the Commonwealth, such that the doctrine of merger could apply to extinguish the lesser interest. [67]. In the present case, the lesser interest was the security interest under the Merrell charge. [67]. Her Honour explained the operation of the doctrine of merger at law and in equity in the following way (paragraph break omitted):

“A merger may occur when the two estates which are supposed to coalesce become vested in the same person at the same time and in the same right. At common law merger occurred by operation of law and ... where a person entitled to land acquires a charge over it, extinguishment is presumed irrespective of the parties’ intentions unless the party acquiring the property acquires them in different capacities. In equity, however, merger was a matter of the intentions of the parties such that it did not occur unless intended by the person who acquired the two estates. If no intention is expressed the court considers what is most advantageous for the person acquiring the interest and orders accordingly. The Court would presume that the security would be kept alive if it was for the benefit of the acquirer of the interest.” [68]–[69].

Her Honour held that given the terms of the POCA and its automatic operation to vest property “absolutely” in the Commonwealth, to the extent that the principles of equity have any application, they could only apply to determine whether or not the most advantageous position to the Commonwealth would be for a merger not to occur. [73]. The Commonwealth parties submitted that the most advantageous position for the Commonwealth was to keep the estates alive so that any requirement to divest one or the other, for example, pursuant to an order under s 102, preserved the other for the benefit of the Commonwealth. [62]. Brown J rejected this argument:

“The most advantageous position for the Commonwealth, given the purpose of the forfeiture of the property is to enable the Commonwealth to dispose of property from the proceeds of crime and for the proceeds to be paid to the Commonwealth after the disposal, is for it to have absolute title to the property in order for it to dispose of the property unencumbered by any security interest. The Commonwealth’s argument that the most advantageous position for it is for the interests to remain separate in case it is ordered to transfer the interest back is unpersuasive, given that if the Commonwealth has not retained the interest, the Court may order that the Commonwealth pay the equivalent value to the interest under s 102(d)(ii) of the POCA.” [76].

Her Honour also rejected a number of other reasons which were said to preclude the operation of the doctrine of merger. [77]–[79]. Several other issues were also considered by her Honour. [95]–[106]. Ultimately, she concluded that a merger of interests occurred when the Commonwealth was vested with both the legal and security interests under the charge absolutely in the same capacity. [92]. As a result, the right to appoint a receiver in respect of that equitable interest under the terms of the charge did not remain. [93]. Accordingly, the purported appointment by the Official Trustee of receivers of the aircraft under the charge was invalid. [93].

M J Hafeez-Baig