IN THE FRDGRAL COURT OF AUSTRALTA NEW SOUTH WALES DISTRICT REGISTRY } No. G71 of 1977 GENERAL DIVISION ) NA Gey}) ( BETWEEN GEORGE FREDERICK ALLANSON Appellant AND MIDLAND. CREDIT LIMITED =_ ——r, and THE OFFiCTaL Recs VER IN BAWKRUPICY Respondents AND IN THE MATTER OF 411 APPF from the judgment ana oruer the Honourable Mr. Justice Franki dated 16th Sopcenber CORAM: Bowen C.J., Riley and Deane JJ. 22nd September, 1977. JUDGMENT This is an appeal from a decision of Franki J. given on 16th September 1977 in the Bankruptcy Jurisdiction. Midland Credit Limited (hereafter called "Midland Credit") by application joining'as respondents George Frederick Allanson and the Official Receiver of the bankrupt estate of Mr. Allanson, sought an order pursuant to s.58(3) of the Bankruptcy Act 1955 granting leave to continue action No. 5415 of 1975 in the Suprene Court of New South Wales in its comnon law jurisdiction. His Honour held that he had no jurisdiction to make the order and further expressed the view that even if he had jurisdiction, he would, as a matter of discretion, refuse leave. This appeal is brought from that decision by Mr. Allanson. Midland Credit, which made the original application for leave, was represented on the appeal. Its Counsel said that it wished leave to be granted but had not appealed because it was content to accept the decision. Apparently Midland Credit was not anxious to have the action brought on for hearing - at an early date. The Official Receiver was also represented on the appeal. He adopted a neutral attitude. The action at common law was commenced by statement of claim issued by Midland Credit on 14th July 1975 against Hallad Pty. Limited, Gayson Homes Pty. Limited, Michael John Haddad, George Frederick Allanson, Marlene Haddad, /nthony Haddad, Cherry Haddad, Anita Mazuran, Marlene Hille, Gloria Cherote and Lily Caon. The statement of claim alleged the giving of a mortgage, variations of its terms, default in payment of interest, and liabilities under various deeds in the nature of guarantees. It was said that by reason of the variations, interest was payable on the principal sun secured by the mortgage at the rate of twenty~one per centum per annum and the plaintiff claimed $828,168.52 from each of the first four defendants and $60,000.00 from each of the other seven defendants. While this statement of claim was pending and before any statement of defence was filed, a bankruptcy petition was, on 1st July 1976, presented against Mr. Allanson and on 2nd December 1976 a sequestration order was made against him. -. A notice of appeal to the High Court was filed, seeking an order setting aside the sequestration order. Subsequently the sum of {100.00 was voluntarily paid into the High Court by Mr. Allanson as security for the prosecution of the appeal pursuant to Order 70 Rule 10(2) of the High Court Rules, thereby giving rise to a stay pursuant to Rule 12(2), of the judgment appealed from. The appeal to the High Court has not come on for hearing. It was stated fron the Bar table that the petitioning creditor had since been paid. The progress of the appeal therefore rests in the hands of Mr. Allanson. These procedures appear to have encapsulated the sequestration order in a legal vacuum for an indefinite or uncertain period. On 22nd July 1977 Hallad Pty. Limited, Gayson Homes Pty. Limited and Mr. Allanson, the first, second and fourtr defendants, filed a statement of defence in the action. In their statement of defence, various matters were put in issve. It was also alleged that Midland Credit held collateral security over certain property and had received $205,396.82 for which credit had nok been given to the defendants. It was further alleged that Midland Credit had not given credit for about $600,000.00 which it received on sale of the mortgaged property and that 1 had exercised its power of sale under the mortgage recklessly, negligently and otherwise than in good faith and thereby had failed to receive moneys which it otherwise could have received so that the defendants were entitled to credit in the mortgage account for the amount which should have been received. On an unspecified date in July 1977, a statement of cross-claim was filed by Hallad Pty. Limited, Gayson Pty. Limited, Gayson Homes Pty. Limited, Mr. Allanson and the Official Receiver. This cross-claim contained a series of allegations setting out a complex set of facts relating to the mortgage transactions and repeated the allegations of wrongful exercise of the power of sale under the mortgage. A claim was made for various declarations and an enguiry before the Master to delLermine the sum which, but for this wilful neglect and default, Midland Credit should have received from the sale of the property. On Ath August 1977 a defence to the cross-claim was filed, putting various matters in issue. It is understood that the defendants to the action, other than the first four Gefendants, have not filed statements of defence and thal judgment has been signed against them. So far as the remaining issues against the first four defendants and the claim under the cross-claims are concerned, the matter appears to be ready for hearing. Mr. Allanson became concerned with -he necessity for urgency. He applied for an expedited hearing stating in an affidavit that interest was accruing, if the plaintiffs' claim were correct, at a rate in excess of $600.00 per day. . A fixture was obtained for a hearing before the Supreme Court on 19th September 1977. Apparently at this stage it was thought by Midland Credit that applications should be made to the Bankruptcy Court pursuant to s.58(3) for leave to proceed. This application was heard as a matter of urgency by Franki J. and on 16th September 1977 he gave ean ex tempore judgment dismissing the application. An appeal against this gudgment was lodged. It was also treated as a matter of urgency. It came on to be heard before us on 719th September, the Supreme Court on that day having adjourned the action before it for one week. In the meantime it is understood that the Officzal Receiver, who claims he had not authorised his being joined 1n any part of the action, had been femoved as a party from those proceedings. An affidavit of the Official Receiver before us shows that'he has no funds in the estate and 1s not aware of any assets of Mr. Allanson which may be realised in the immediate future and brovght to credit 1n the estate. Further he states that five proofs of debt have been lodged in the estate for claims totalling $228,140.26. In addition, he has notice of claims of three creditors who have advised him of their intention of lodging proofs of debt. Of these three creditors, two have notified him of the amount of their claims which total $758,336.18. These two latter creditors would appear to include Midland Credit which has given notice of claim including the amount which is the subject of its action in the Supreme Court. The first question which arises is whether the Bankruptcy Court has jurisdiction to grant the leave sought pursuant to the provisions of s.58(3). For present purposes, s.58(3) is as follovs:- *. "(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor ~ (a) .... (b) except with the leave of the Court and on such terrs as the Court thinks fit, to comnence any legal proceeding in resvect of a provable debt or take any fresh step in such a proceeding." The answer to the question depends upon whether Mr. Allanson is a bankrupt and, in a secondary way, upon whether, if he is, the Court's power to give leave is inhibited or avoided by the stay of the judgment under the High Court rules. It is clear that, prior to the commencement of the stay, Mr. Allanson was a bankrupt. 'This was dve to two factc First, the making of the sequestration order on 2nd December 197€ and second, the operation of s.43(2) of the Bankruptcy Act under which, upon the making of a sequestration order, the debter becor a bankrupt and continues to be a bankrupt until the happening of certain events specified in the section, none of which has occurred, Was Mr. Allanson a bankrupt at the time the application for leave to proceed was heard? The learned Judge at first instance refused to make a finding that he was then a bankrupt. His Honour took the view that this would be to take a step which depended upon the sequestration order for its effectiuync and that the stay precluded him from doing this. Order 70 Rule 12(2) is as follows:- « *. "12.(2). Except in a criminal proceeding and except in the case of an appeal from an order made under this rule, when security has been given pursuant to rule 9 or rule 10 of this Order, then, untess the Court or a Justice in the meantime has otherwise ordered, there shall be a stay of the judgment appeal- ed from, and of all process in execution of tne judg- ment or to compel] obedience to it, until the dcter- mination of the appeal or until an order to th.c contrary 1s made under the power conferred by this rule by the High Court or a Justice, or by the Supreme Court of a State or a Judge of the Supreme Court of a State". The form of stay under Rule 12(2) may be contrasted with the form of stay under Rule 22 of Section III of Part II of the earlier High Court Rules. The earlier rule was considered by the High Court in Pearson v. The Arcadia Stores, Guyra, Limited (Wo. 2) (1935) 53 C.L.R. 587. There the stay was a stay o£ execution on the judgment. Where a stay is in that form, the judgment or order stands, although executionupon it is stayed. Rule 12(2} which was inserted in 1953, appears to change this position deliberately. It operates as a stay of all process in execution of the judgment or to compel obedience to the judgment. But this is not all that it does. It also provides there shall be a stay of the judgment. The stay under Rule 12(2) operates until the determination of the appeal or until an order to the contrary is made. The question whether, in a context where the judgment itself, in pursuance of which the sequestration order was made, "y . . is stayed, it can properly be said, for the purposes of bringing the provisions of s.58(3) into operation, that Mr. Allanson "has become a bankrupt" is a @difficult one. We have not been referred to any case directly in point and there is obviously » : a room for differences of opinion as to the correct answer to 1t. One view may be that the stay of the judgment itself under Rule 12(2) blocks it at source so as to render it completely ineffective for all purposes, except the hearing of the appeal. On this view, neither the judgment nor the seques-— tration order made in pursuance of 1t can, while the stay operates, be used as the basis for satisfying one of the statut- ory conditions precedent ("debtor has become a bankrupt") to the operation of s.58(3). Such a situation could be compared with that whach exists after the grant of a perpetual stay of a winding up order under the Companies Act which operates to terminate the liquidation. . Another view may be that the effect of the stay does not prevent the judgment and sequestration order remaining as a fact but that no step which depends for its effective- ness upon the judgment can be taken. If this view be correct, it might be argued that Mr. Allanson still had the status of a bankrupt, but that no step in which 1t was necessary to rely upon the order of sequestration could be taken. Subject to the interpretation of s.58(3), at might then be argued that an application for leave to proceed was such a step. Whatever be the correct view of the effect of the stay brought about by the operation of Rule 12(2), the ultimate answer to the question must depend upon the operation, in the light of thet view, of ss.43(2) and 58(3) of the Act. Section 43(2) fastens upon "the making of the sequestration order" to give the debtor the status of a bankrupt. There is no doubt a sequestration order was made. Section 43(2) goes on to provide that he "continues to be a bankrupt" until Gischarge or annulment, neither of which events has occurred. Unless the view is taken that the stay under Rule 12(2) hes the effect of eliminating the fact of the sequestration order, it may be argued that Mr. Allanson became and continued to be a bankrupt by force of the Bankruptcy Act regardless of the view taken of the precise effect of the stay under Rule 12(2). If Mr. Allanson did continue to be a bankrupt, then s.58(3) clearly operates to prevent the commencement of proceedings against him in respect of a provable debt or the taking of any fresh step in such a proceeding, without the leave of the Court. It as not in dispute that the action by Midland Credit was in respect of a provable debt. If s.58(3) operates 1n this way, can the Court give leave to proceed, or is it precluded from doing so by the operation of the stay? It might be argued that the Court was prevented from giving leave because this would be the taking of a step based upon the judgment, which was stayed. This would be a particularly odd result. To grant leave to proceed against Mr. Allanson would not be to enforce or to give effect to the judgment or sequestration crder. It would rather be to ameliorate the effect of the judgment or order and to permit Midland Credit to procecd as if it were not effective. Indeed, we think it is incorrect to argue that, because Mr. Allanson has the status of a bankrupt, s.58(3) applies, but that the Court is prevented by the stay from granting leave. Section 58(3) operates because of the "making of the sequestration order" and the consequence which s.43(2) fastens upon that fact. It operates on the basis Mr, Allanson is a bankrupt to prevent the commencement of proceedings or the taking of a step in such proceedings without the leave of the Court. The Court's power to relieve against this restriction arises with the application of the restriction and is commensurate with it. To make an order for leave to proceed appears to us to be to take a step based upon the circumstances brought about by ,s.58(3) af it applies. It does not appear to us that it is correctly described as taking a step based upon the judgment or sequestration order. £ it were, a serious question might arise, whether a stay brought about by a rule of the High Court covld operate so as to cut down the jurisdiction confebred by the Bankruptcy Act. Indeed, we do not consider that Rule 12(2) should be read as purporting to do so. Before proceeding further with the question of the effect of the stay and the operation of s.58(3), it is convenient to consider the second question which arises. That 1s, whether the Court, if i¢ has jurisdiction, should grant leave in the present case. Franki J., while indicating that as then advised he would not have answered this question in the affirmative, never reached the stage where it was . necessary to decide it. The facts are complex. The claim of Midland Credit is not only against Mr. Allanson, bul against other current defendants who, in some respects, may be jointly and severally liable with him. There is also the question of the defences, some of which form the basis of the cross-clain. It would seem that all of these issues would be better and more comprehensively dealt with by a contested trial of the action in the Supreme Court than covld possibly be the case if Midland Credit were required to lodge a proof of debt in respect of its claim against Mr. Allanson alone. Such a proof of debt would be in the form of an affidavit and determined by the Official Receiver at such time as the stay ceased to operate. If the Official Receiver disallowed tiie claim in whole or in part, an appeal on this isolated issue could be brought to the Bankruptcy Court. But in these circumstances, the issues would have been determined in a less satisfactory way and quescions betwéen Mr. Allanson . and the other parties to the action would not be resolved. * ae It is nol suggested that if leave be granted, the bankrupt estate will suffer financially in any way. In the circumstances, we have formed the view that, if s.58(3) applies, the Court has jurisdiction to grant leave to proceed and such leave should be granted. We consider that it 1s unnecessary in the circumstances for us to express a final view of the effect of the stay on the operation of s.58(3). Where a Court 1s given power to grant leave to perform a particular act or pursue a particular course of action and the question whether the need for such leave has arisen involves difficult and complicated questions of law or fact, it is permissible, 'in an appropriate case, to proceed on the basis that such leave is necessary rather than involve the parties in the futile exercise of dotermining, possibly after a series of appeals, whether the need for such leave has arisen. In all the circumstances including the urgency of the matter, we consider thet that is the appropriate course to adopt in this case and that we should, to the extent necessary, grant leave to Midland Credit to continue and take fresh steps in the proceedings in the Supreme Court of New South Wales. This approach would, 1% seems totus, be consistent with that adopted by the High Court in Talga Limited v. M.B.C. International Limited & Ors. (1976) 50 A.L.J.R. 619. It is an approach which was raised before us in the course of argument but not before the learned Judge below. The orders that we make are: 4. Appeal allowed. 2. ORDER that to the extent that such leave is necessary by reason of the provisions of s.58(3) of the Bankruptcy Act 1966 and the making of a sequestration order on 2nd December, 1976 1n respect of the estate of George Frederick Allanson, Midland Credit Limited have leave to continue and take fresh steps in proceedings instituted by 1t in the Common Law Davision . of the Supreme Court of New South Wales against the said George Frederick Allanson and others being proceedings No. 5415 of 1975 ain that Court upon the following terms: .* (a) Such leave does not extend to the taking of any step to enforce any judgment obtained in such proceedings against the person or property of the said Georse Frederick Allanscn without the prior leave of the Federal Court of Australia in its bankruptcy jurisdiction; and (b) Midland Credit Limited shall not, without such prior leave prove in respect of the whole or any part of any such judgment in the bankruptcy x of the said George Frederick Allanson if the sequestration order is not set aside. %. Confirm the order of Franki J., that Midland Credit Linited pay the Official Receiver's costs of the proceedings before his Honour.