Colefax & Ors v National Australia Bank Ltd

This decision concerned debts owed to a bank which were secured by mortgages over properties which the debtor held on trust. The debtor became bankrupt. This note addresses two issues which were dealt with by the Court of Appeal. The first was whether the bank was unable to enforce the mortgages because it had lodged a proof of debt in the debtor's bankruptcy and received a dividend from the debtor's estate. The second was whether the debts were discharged upon the discharge from bankruptcy of the debtor.

Fraser and Gotterson and Morrison JJA

28 September 2018

Background

Robert Colefax ("Robert") was the registered owner of land known as the "Seven Springs Farm" as trustee of "Trust No 1". [2]. He was also the registered owner of land known as the "Jumrum Properties" as trustee of “Trust No 2”. [2]. In his capacity as trustee he executed mortgages over the properties which secured obligations to NAB ("the bank"). [2]. The mortgages and the facilities were secured by guarantees and indemnities executed by Robert as trustee of the trusts. [2]. In March 2011, Robert was replaced by Irene Colefax (“Irene”) as the trustee of both trusts, but Robert remained registered as owner of both properties. [3]. In April 2011, Robert was declared bankrupt. [3]. It was an agreed fact that the properties were not included as assets in the bankrupt estate of Robert. [3]. In July 2011, Robert transferred the Jumrum Properties to Irene. [3].

In November 2012, the bank submitted a proof of debt in Robert's bankruptcy, which included amounts claimed by the bank to be owing under the mortgage facilities. [3]. In the proof of debt, the bank answered “No” to the question, “do you hold any security?”. [3]. The proof of debt was admitted in full, and the bank received distributions from the trustee in bankruptcy, which the bank applied against the amounts owing. [3]. Robert was discharged from bankruptcy in April 2014. [3]. The bank later demanded payment from Robert of amounts claimed to be owing under the facilities and amounts claimed to be owing by Robert in his capacity as trustee of the trusts under the guarantees securing those facilities and the mortgages. [4]. In October 2016, Irene was replaced by Christopher Colefax ("Christopher") as trustee of Trust No 2. [4]. Irene remained the registered owner of the Jumrum Properties and Robert remained the registered owner of the Seven Springs Farm. [4].

The bank applied to the Supreme Court for orders that it recover possession of the properties pursuant to its mortgages. [1]. The trial judge (Mullins J) made the orders sought. [1], [5].

Legislation

Section 90 of the Bankruptcy Act 1966 (Cth) ("the Act") relevantly provides:

"(1)  A secured creditor is entitled to prove the whole or a part of his or her secured debt in the debtor's bankruptcy in accordance with the succeeding provisions of this Division, and not otherwise.

(2) A secured creditor who surrenders his or her security to the trustee for the benefit of creditors generally may prove for the whole of his or her debt.

(3) A secured creditor who realizes his or her security may prove for any balance due to him or her after deducting the net amount realized, unless the trustee is not satisfied that the realization has been effected in good faith and in a proper manner.

(4)  A secured creditor who has not realized or surrendered his or her security may:

(a)  estimate its value; and

(b)  prove for the balance due to him or her after deducting the value so estimated."

Section 5(1) defines "secured creditor, in relation to a debtor" to mean "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".

Section 153 relevantly provides:

"(1) Subject to this section, where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally.

...

(3)  The discharge of a bankrupt from a bankruptcy does not affect the right of a secured creditor, or any person claiming through or under him or her, to realize or otherwise deal with his or her security:

(a)  if the secured creditor has not proved in the bankruptcy for any part of the secured debt--for the purpose of obtaining payment of the secured debt; or

(b) if the secured creditor has proved in the bankruptcy for part of the secured debt--for the purpose of obtaining payment of the part of the secured debt for which he or she has not proved in the bankruptcy…"

Court of Appeal

Fraser JA (with whom Gotterson and Morrison JJA agreed) rejected arguments made by Robert, Irene and Chris ("the appellants"), and in the result dismissed the appeal. [46].

Bank surrendered/abandoned mortgages over the properties

The appellants argued that the bank's conduct in proving in the bankruptcy for the full amount of Robert's debt, and accepting a dividend, amounted to an election to give up its security. [14]. They submitted that, under s 90, a secured creditor is entitled to prove for the whole of the secured debt only upon surrendering the security. [14]. If a secured creditor wishes to avoid surrender, they must either not lodge a proof of debt or adopt one of the other available courses of action under s 90. [14].

Fraser JA held that in s 90, the undefined expression "property of the debtor" in the definition of "secured creditor" does not comprehend property held by the debtor on trust for another person. [23], [30]. Accordingly, as Robert did not hold a beneficial interest in the trusts upon which either of the properties were held, they were not "property of the debtor". [21]. The bank therefore was not a "secured creditor" in relation to the properties within the meaning of that term in s 90. [21], [30]. As a result, there was no election by the bank in relation to either of its mortgages. [16].

Debts discharged by virtue of s 153 of the Act

The appellants argued that because the bank did not fall within the exception in s 153(3) of the Act, s 153(1) operated to release Robert from the debts secured by the mortgages. [35]. The appellants submitted that it followed that there was no extant default of either mortgage with reference to which the bank was entitled to claim possession of either secured property. [35].

Fraser JA held that the term "secured creditor" bears the same meaning in ss 90 and 153(3). [36]. His Honour held that because the term does not comprehend a creditor whose debt is secured over property held by the bankrupt on trust for another person, no implication arises from s 153(3) that the discharge of the bankrupt has any effect upon such a security. [36]. He held that in the context of a bankrupt’s debt secured by a mortgage over property held by the bankrupt on trust, subject to contrary provision in the mortgage itself the release of the debt owed by the bankrupt by operation of s 153(1) ordinarily would have no effect upon the secured creditor's rights to realise or deal with the security. [36]–[37].

His Honour held that the bank's mortgages "[did] not contain any provision from which it might be inferred that the security is unenforceable if the mortgagor is made bankrupt or the mortgagor’s personal liability is discharged upon release from bankruptcy". [37]. He held that s 153(1) should be construed "as operating to release the bankrupt from his or her personal liability whilst leaving intact the entitlement of the creditor to enforce its property rights according to the tenor of the mortgage". [40]. Accordingly, the appellants' argument failed. [40].

M J Hafeez-Baig